THE BUBBA REPORTthebubbashow.org/wp-content/uploads/2015/08/THE-BUBBA...2015/09/06 · buying in...

THE BUBBA REPORT THE BUBBA REPORT VOLUME 1, NUMBER 6 SEPTEMBER 2015

1

Each month the Bubba Report centers on a variety of topics from our panel of experts.

This exclusive report gives our subscribers a background of what is shaping the world’s

economy, and the geo political events that are determining foreign policy decisions. The

report will begin with my proprietary composite indexes of the U.S. Financial markets,

Currencies, Energy, Precious metals and Commodities. The propriety indexes will help

our subscribers to take advantage of long term price patterns that constantly repeat in

the market. I hope that you enjoy the letter and take advantage of the advice that come

from experts that have over 125 years of experience trading and investing in the

markets that are presented.

Todd “Bubba” Horwitz

BUBBA EQUITY COMPOSITE INDEX

BLOWOFF

The congestion ended its eight month run with a massive blowoff to the downside in the

last week of August. At this point it is hard to determine if the big double bottom from

last October will hold or we are starting a new down trend. This market should be

observed until there is more information from the price movement.


2

BUBBA BANKSHARE COMPOSITE INDEX

BLOWOFF The financial index followed the general market and the BBI had a blowoff to the

downside in the last week of August. The index made new lows and it is now trying to

recover. This index should also be observed until a new direction can be found.

BUBBA TECH COMPOSITE INDEX

BLOWOFF After leading the way higher for the past year the BTCI collapsed in the last week of

August. It is difficult to tell at this time if the blowoff was the bottom of the market or it

was a one day phenomena. This market should also be observed in the near term.


3

BUBBA DURATION WEIGHTED INTEREST INDEX

CONGESTION The duration weighted interest index combines the U.S. yield curve from two thru 30

years. In March the thirty year bond was re indexed causing the “kink”. The index

continues in a broad congestion pattern. Traders should continue to buy double bottoms

and sell double tops.

BUBBA DOLLAR COMPOSITE INDEX

CONGESTION The Bubba dollar composite index BDCI measures a basket of currencies against the

dollar. It is an inverse index so a declining market indicates strength in the dollar.

Since the long downtrend ended in March the BDCI continues to be in congestion. It

had quick move to the upside when he equities collapsed, but has now returned to the

pattern that has been in place for the past six months.


4

BUBBA PRECIOUS METALS INDEX

DOWNTREND Precious metals have bounced off of the bottom but have not been able to make any

head roads to the upside. Until they can breakout above the current high double tops

should be sold and double bottoms bought.


5

BUBBA US ENERGY INDEX

DOWNTREND The downtrend in energy prices was reversed when Crude oil staged a spectacular rally

in the last week of August. Energy appears to be in a bear market and all rallies should

be sold until it can be proven that the bottoms are in.

BUBBA GRAIN INDEX

DOWNTREND The Bubba Grain Index made a blowoff top the first week in July and quickly reversed

course. The BGI is now on six year lows. The world needs food and this downturn

should be a buying opportunity. Trade the Grains from the long side only.


6

BUBBA REPORT ARTICLES SEPTEMBER 2015

THE VIEW FROM THE FLOOR

By Keith Bliss

What traders are talking about at the NYSE

IS VOLATILITY HERE TO STAY?

THAT IS ALMOST IMPOSSIBLE TO ANSWER AT THIS TIME.

The title to my piece this month speaks to the confusion that all of us -- profession and

amateur alike – feel right now. I cannot determine whether the events of the last full

week in August portend a greater volatility in the markets, or whether this was just a

“one off” that will work its way out only to see the markets regain a boring posture. I

must admit, given the trading action of the last month, and particularly the week of

August 24th-28th, it’s hard to argue that this is not the beginning of a secular increase in

market volatility. However, we must focus on what is driving the markets, and who are

the real players calling the shots and moving the markets around. For that, we need to

look beyond the noise and pay attention to what is being said, and what is being moved.

And those that are calling the shots, and those that are doing the saying and moving,

don’t really want volatility. That’s bad for their politics and bad for their markets. So, as

long as they are in charge, I cannot join the crowd that believes volatility is here to stay.

Let’s look at August 2015….

Oh, what a difference a month makes. I have been saying that to myself a lot the last

two years as the markets have grown extraordinarily capricious and unpredictable. One


7

month has rarely looked like the prior month and even predictable seasonal patterns

have become….not so predictable.

In July, we watched as the major averages trade back near the all-time highs set in May

and June only to see everyone get skittish the moment we got to those levels and

started selling with both hands. If you recall, I wrote about the growing influence on the

markets by the central planners and the true manipulation that was occurring whether

they be from the United States, China, or Europe. The markets were in a complete

trance as it took its cues from the policy makers of those regions. Predictably, as policy

makers attempt to get things right for the greater good (yes, I still believe that), they

rarely realize that for every action, there is an opposite and equal reaction. As we are

observing….the law of unintended consequences.

Then August arrived. August is typically a flattish and boring month as everyone gets in

their last vacation and tries to think about what little Johnny or Susie will want to wear

on their first day of school. On the floor, the dog days of August are usually spent

discussing the mundane things of life and how the rest of the year will play out. We

usually use August to catch up with old friends, get in long overdue dinners with clients,

and think about how we will position our businesses for the chaotic adventures that

often accompany September and October.

Not this year….

In my nearly 30 years in the financial markets, I have never witnessed an August such

as the 2015 edition. There is always something new to see and witness in the market,

and we got one this year. What should have been another end of summer bore

session; this past month has been the most exciting in the market since October of last

year, and as I wrote above, it was totally unexpected. During the month, the S&P 500

lost 11.7% when it hit its near term low on August 24th. The Dow fared even worse as it

lost 13.6% during that same time. Many were saying that this was the 20% correction

that we have been waiting for while others (including your humble writer) were saying

that the selling was entirely overdone and a snapback would take place that would get

the S&P back into the 2075-2080 region. This is not the correction unfolding.

Even though I believe that a rebound will get us back to high levels. It’s still difficult as to

say when this will occur. Let’s take a look at the charts of the major indexes to add

some context.


8

S&P 500

This is the 5 year chart of the S&P 500. We will see similar charts for all of the major

indexes in the following pages. As you can see, despite some gyrations in 2012, 2013,

and 2014 the market never came close to breaching the intermediate trend line that was

established with the 2011 lows. That all changed this month as the S&P traded

substantially through that level to one of the most oversold postures that I have ever

recorded. Interestingly, given that the market was so oversold in such a short period of

time, the S&P was able to fight its way back above the 2011 line. If it can stay up there

for the next few sessions, then I believe that 2075 is in the cards and this latest pullback

will go down as one of the greatest trading opportunities of a lifetime.


9

DJIA

The Dow has a slightly different story. Not only did it breach its 2011 trend line, but the

longer term, and very solid, 2009 trend line support got taken out in the August 21,

August 24 washout. I am less concerned about this picture as some of my colleagues

are for the following:

1. It is vastly oversold and trading back to a neutral level will see the index get back above the 2009 and 2011 line (I believe this will happen).

2. The Dow is such a narrow index with constituents that have acted as stores of value, it only make sense that a lot selling would occur in these names as people panicked. As they see that a correction is not taking shape, you will likely see buying in the blue chips.

3. While the Dow Transports foretold this sell off, they have not breached their major trend line support levels (see below), therefore until that happens, I believe that the Dow will get back in a positive attitude.


10

Russell 2000

A very similar chart to the S&P 500 but it shows to be much more constructive once

buyers came back into the market on August 26th. I trust the RUT the most because it

is the broadest index and represents most companies that play in the US economy.

It successfully climbed back above the 2011 level on August 27th and held in there the

following session. It is still short term oversold and should continue to trade higher.


11

NASDAQ

Composite

I love this chart the most because of all the major indexes, it demonstrates how strong

the 2011 trend line has been in influencing the price action. Look at that!....just

beautiful! The Naz has traded around that line and continues to do so despite the steep

sell off of the 21st and 24th.

Similar to the RUT and the S&P, the Naz successfully fought its way back above the

2011 line on the 27th and stayed there. The combination of the S&P, RUT, and Naz all

performing well -- in the face of naysayers – and still has some oversold work off to

occur, gives me the greatest confidence that the market will move higher in the short

term.


12

Dow Transports

For me, this is the most interesting and the most compelling from a directional prediction

standpoint. The transports clearly signaled that something was awry back in March.

True to Dow Theory, the transports led the Industrials down. What is compelling about

this chart, and what gives me belief that the full correction is not afoot, is that this index

is far, far away from its 2011 and 2009 trend lines. More importantly, we see the

substantial bounce like the other indexes at the end of August.

Despite this indexes change in trend, as long as it stays above the intermediate (2011)

and longer term (2009) trend lines, then this will provide support to the industrials…and

the market at large.

THE BOTTOM LINE….

We have some critical macro and political issues buffeting the market over the month of

September with the Fed meeting, China trying to regain control of its market and

economy, and Greek turmoil rearing its ugly head again.

Even still, despite the noises from all manner of market participant, I expect the markets

to trade higher getting the S&P back into the 2075-2080 region as it continues to snap

back from its deeply oversold levels of August 24th. Expect a bumpy ride as we get

there. In spite of my forecast that we will not see an outsized level of volatility in the

long term, the next few weeks could be interesting!

Pay attention, ask questions, and think before pulling the trigger. And always keep

some powder dry, and keep those stops tight! Until next month.


13

THE VALUE OF EDUCATION

By Anthem Blanchard

I often find myself reflecting on those who may feel pressured by family, friends and society to go to college even if they may not, like my computer friend, be deriving practical value from it. Regrettably from a very early age, we are all pushed down this narrow trajectory which suggests that higher education is the ‘be all and end all’ route to achievement.

My life and that of my brother certainly swung into this jet stream, compliments of parental influence and other mitigating factors. In 1986, I received my Bachelor’s Degree in Sociology–an achievement that elicited that oft heard refrain from others of “So what are you going to do with that?” Comments from the peanut gallery aside, I did go on to a successful career as a health care human resources executive before graduating from a west coast university twenty years later with a Masters of Public Administration in Health Services Administration.

My brother, with a couple of Masters Degrees under his belt, has been pursuing credits towards an interdisciplinary PhD…. even though he is in the enviable position of already having a secure future as a result of his ongoing stint in the military.

Bucking the Traditional Education Paradigm

Despite having received a job offer three days after getting my Bachelor’s Degree, my father made a startling comment and quasi ultimatum. “Son, you should always have a backup plan. So even though you have an offer on the table, I strongly suggest that you go and apply at Sears Roebuck.”

Sears Roebuck!

After my initial shock at this statement, I began to recognize that his underlying message could best be summed up as “Find a stable company where you can work for 30 years so you can retire to the comfort of a lazy boy recliner, proudly wearing your gold watch.”

Fortunately, I declined his advice and followed my own path. Others? Well, many have not been so lucky since they followed the desires of others, versus their own heart. We all know people who went to college because their whole family went to college;


14

attended law school because daddy went to law school; want to pursue medical school because of the promise of serving others and making big bucks. Ninety-nine times out of a hundred there is some sort of DNA imperative which aligns ones career pursuit with that of a family member or a major influencer in one’s life.

Despite my inherent belief in a college education, I profess a deep reverence for those who chose to run counter to what the collective masses think and simply pursue life on their own terms without feeling tethered to a college degree—-Bill Gates, Mark Zuckerberg, Richard Branson and Steve Jobs are among those who immediately come to mind. And then there is the heroic protagonist Howard Roark, who in Ayn Rand’s book The Fountainhead gets kicked out of architecture school for boldly deciding to conform to his own values versus those of the school. His architectural contemporary, Peter Keating, relented to the masses and ultimately suffered the consequences.

My message here: That the real winners in life are those who have the courage to think for themselves and to embrace their own authentic path. And in some cases that might involve saying no to college.

Below, I’ve listed 7 reasons why you, too, may want to pursue an alternative path that doesn’t include pursuing a diploma. Sure, there’s no denying that having that piece of paper is still widely regarded as an entry point to opportunity, akin to having a basic pair of shoes in which to step out into the world. So be forewarned that those who run counter to what the collective masses think can expect to encounter a raised eyebrow out there, or worse.

Reason 1: Autodidactic Learning ROCKS!

Autodidactic as in self-learning. As Mark Twain said, “I’ve never let my schooling interfere with my education.” For example, I’ve found that those who drop out or delay their education to travel the world are some of the sharpest people I know. Through this route they often acquire a richer, more contextual orientation to the world than an academic textbook or a college lecture could ever provide. Much like the message articulated in Warren Berger’s book A More Beautiful Question, autodidacts discover that live experiences embedded with curiosity, inquiry and imagination are the proverbial gold standard of a well-educated person. Being broadminded allows one to converse thoughtfully and intelligently with all suitors. Moreover, the argument can be made that we digest more when we feel engaged and excited about the learning experiences we encounter.

Formal education aside, the preponderance of what I’ve grown to know over the years comes from my commitment to lifetime learning. I am a voracious reader who digests dump truck volumes of books each year. Today, I am engaged in learning Spanish


15

through an app called Duolingo. And later this year, I’ll be enrolling in one of the free online courses available through Coursera. It’s an emerging learning site that’s garnering a lot of attention, as growing numbers of employers seek out top talent for open positions there. All this despite the fact that Coursera does not offer any formal degrees.

Reason 2: Student Loan Burdens Suck!

Obtaining a Graduate Degree was one of the most rewarding and intellectually stimulating experiences of my life. But was it worth the $40,000 student loan debt that I am still paying off?

Well, I’m not so sure.

In a way though, I consider myself lucky when compared to those pursuing an Undergraduate Degree. Total student loan debt and average per student debt levels among this demographic are at an all-time high. So is the percentage of student loan defaults, at 15%. So it begs the question as to whether an Undergraduate Degree is worth it when you emerge from the fray with $30,000 to $50,000 in debt obligations.

Even worse, are professional degrees in medicine and law that can leave one trapped with six-figure levels of debt? That’s one of the reasons why a retired pediatrician friend of mine is encouraging those who salivate at the prospect of becoming a doctor not to do it. I think he may have a point there.

Reason 3: Fewer Jobs Require Degrees

I know of a man in Northern California who owns a glass installation firm, specializing in commercial high-rise buildings. He was lamenting the struggles he faced in recruiting qualified glaziers; artisans who select, cut, install and replace glass for these buildings. What’s interesting here is that these jobs do not require a degree. And the starting salary is a sweet $65,000.

This is a prevailing trend that shows no signs of abating, due to a shortage of blue collar workers. Perhaps most notably, half of all university graduates are currently working in jobs that don’t even require a college degree. According to a Career Builder survey, since 2001 the percentage of recent college grads in jobs that don’t require a degree skyrocketed from 34% in 2001 to 44% in 2012. Stories abound of young graduates who end up working as baristas, bartenders and taking mail delivery service jobs to pay for rent, food and those ballooning college loans.


16

So you might be asking, where do I think all of this is headed? Well, check out Reason 5 in this article for more of my thoughts.

Reason 4: Luck May Trump a College Degree

In addition to a college degree, hard work and preparation are often cited as keys to life success. Imagine then the surprise of many when Presidential hopeful Donald Trump recently remarked that “everything in life is luck.”

I’m certainly not sipping Trump’s Kool-Aid, but I do think he is spot-on with this comment.

At 24, three years into my freshly minted career as an HR Generalist right out of college, I accepted the top HR position at a small rural hospital in Indiana. While it could be argued that my B.A. in Sociology was a factor, an even larger one was the reputation of my mentor who provided me with a stellar recommendation. It should also be noted that this job opportunity came to my attention via a chance encounter with a staff member at the American Society for Healthcare Human Resources Administration who was also kind enough to recommend me. Ultimately, she was the catalyst for not just this, but also a second senior level position in Chicago.

Years later, I recommended the Human Resources Generalist who worked for me at a community health center in California for a Director of Human Resources position at a nonprofit. Despite having 20 years of experience in the HR field, she has no degree.

Reason 5: Apprenticeships Are Emerging As the New ‘Career Normal’

The apprenticeship movement harkens back to the colonial days of blacksmiths and shoe cobblers who learned a trade from a master in the field. Fast forward to present times, where I believe that the quickest and most effective entry point will not be a degree but an apprenticeship program. To be trained by a mentor or a master is rapidly becoming the best way to build up a body of expertise in a specialized field. And a growing number of these opportunities are in areas that don’t require a degree.

By way of example, we are in the midst of a tech boom here in Denver which has resulted in a massive shortage of programmers and coders. The good news, for those seeking great paying work in a field of high demand, is that there are plenty of opportunities available that don’t require a 2 or 4-year degree. Certification programs such as Turing and the G School combined with an apprenticeship can provide quick access to a career that doesn’t require a lengthy and costly college matriculation.


17

Reason 6: Higher Education’s Questionable ROI (Return on Investment)

For years, all the buzz concerning a college degree has centered on the boost it can provide to your earning potential. However, many graduates are shocked to discover they experience slow pay growth combined with expanding cost-of-living expenses.

In particular, many 4-year colleges remain wedded to curriculums that are theoretical in their orientation. This runs contrary to what college graduates actually need in order to be successful: real world skills that are valued in the employment marketplace.

To this point, I recently had a coffee meeting with a Professor of Management from a major Denver area university, a conversation that ended up being excruciatingly painful. Having sought him out for his advice, I was shocked at the lack of practical insights he was able to deliver in response to my questions. While trying to decipher his theoretical pontifications, I couldn’t help but sympathize with the hundreds of students he instructs every year, poor souls who are clueless about the lack of depth they’re receiving through his teaching. Tragically, many professors who dwell behind the hallowed walls of academia are unable to convey the distinction between the theoretical and practical, leaving so many students with a return on investment that doesn’t translate into meaningful employment. A friend of mine, a former University Dean was in full accord with my assessment here, noting that at the university at which he worked, computer science students were unknowingly subjected to courses involving archaic software like Cobol and Fortran.

This dearth in return on investment is perhaps most prominently apparent at our nation’s law schools where law school enrollments have been on a steady decline due to tuition increases, a decline in graduate salaries, and an overall contraction in the legal industry. It has been widely reported that law school enrollment at our nation’s 204 ABA-approved law schools took a precipitous fall to 199,775 in 2014, down nearly 7% from 2013 and about 18.5% since 2010, according to the Section of Legal Education. Indicative of sentiments regarding this ROI decline, there has been a spate of class action suits initiated by former law students over the past several years, alleging that their schools hoodwinked them with misleading reports of their graduates’ successes. As a result, many found themselves trying to keep their head above water at low wage restaurant server jobs and department store positions, while attempting to repay hundreds of thousands of dollars of student loans.


18

Reason 7: Entrepreneurial Options Abound

The seventh and final reason I offer here is that there is no better time to jump into the entrepreneurial fray, if you have the inclination to do so. Pursuing a college degree can not only delay an idea whose timing is white hot, but it can put you massively in debt, gobbling up resources that could have been directed towards your new venture.

On this front, I LOVE what the Thiel Fellowship is doing for students under Scott is a wr22 years of age who have a dream they want to move towards, versus spending 4 years of college on a potentially worthless degree. This foundation, the baby of Peter Thiel, former co-founder of PayPal, offers a total of $100,000 over two years, as well as guidance and resources so the recipient can drop out of school to pursue other work, whether it be scientific research, creating a startup, or even working with a purposeful social movement. The ultimate goal of the program is to align kids with the funding and mentorship support necessary to successfully execute their idea.

The argument over raising the minimum wage rages on, especially as cities are now

looking at increasing the minimum wage above the federal level, with New York

City being one of the most recent examples. This is a contentious topic for workers and

employers; the issue has historically been a big yawn for economists. Previously, it was

almost unanimously agreed upon by economists that higher minimum wage laws result

in increased unemployment. But they are now changing their tune. Unfortunately, this

isn’t because the economic profession was wrong on the minimum wage issue. It is

because economics today is erroneously being treated like a natural science, rather

than a science of logic and deduction.

In 1976, a survey by the American Economic Association found 90% of its members

agreed that “increasing the minimum wage raises unemployment among young and

unskilled workers.” Fast-forward to 1992 and only 79% agreed; by 2000 only 73.5%

agreed and, of this subset, only 45.6% fully agreed with the statement. In a recent

debate at FreedomFest, New York Times columnist and economist Paul Krugman

stated he has changed his position on the minimum wage issue, noting “…looking at

what are very clear experiments, you cannot find evidence that raising the minimum

wage reduces unemployment.”

Krugman is just one example of economists increasingly relying on empirical studies to

come to conclusions about the implications of public policies like the minimum wage.


19

These empirical studies attempt to look at the unemployment data where the minimum

wage was increased and then compare it to a similar or nearby area where it was not

increased. While this may seem simple and intuitive at first, this is not how economic

studies should be performed.

Economics is certainly a science. By this we mean the conclusions of economic study

are not merely opinions. The principles of economics are truths that are universal

through time and geographic location. Further, these principles are arrived at through

logical deduction and reasoning. Many times, people refer to this as ‘the economic way

of thinking.’

While there is certainly room for empirical analysis in economics, logical principles and

theories need to come first. This is where economics as a science differs from other

sciences that we are familiar with. In the natural sciences, such as physics or chemistry,

scientists can perform repeated experiments with control groups and make

observations; from there, they can form theories or laws. But since economics is the

study of human interaction and exchange, there is rarely, if ever, any way to perform an

experiment in this way.

An example helps to make this distinction clear. In fields such as mathematics, a

formula, equation or relationship can be proven to always be true. These ‘proofs’ show

a logical step-by-step deduction by which you can arrive at this truth. A classic example

would be the Pythagorean Theorem. You do not need to sample hundreds of triangles

to know that the Pythagorean Theorem is true. Instead, you can see the logical

deduction of why it must be true and be confident in the result.

Economics as a science is similar. Economists know by using the basic building blocks

of supply and demand that if a government imposes a minimum wage (a ‘price floor’ in

econo-speak), there will be too much supply and not enough demand. With a minimum

wage, the supply of labor will increase as more people will be willing to work at the

higher wage and the demand will decrease as companies will not be able to afford all of

the labor they previously did, resulting in a mismatch and unemployment.

Economists do not need empirical studies to arrive at this conclusion. Of course,

empirical studies could confirm this, and despite Krugman’s claim that there is no

evidence, there are many studies that indeed do provide evidence. But this is missing

the point of how to perform economics well. The problem with empirical studies in


20

economics is that they cannot hold all other factors equal, so we shouldn’t be surprised

when a few studies may find no change in unemployment, despite an increase in the

minimum wage in some areas. This is because there could be a host of other underlying

factors that cannot be controlled or accounted for.

It is always good in any scientific field or profession to continue to question and debate

ideas and theories, even long-held ones. But at the same time, economists cannot just

ignore economic laws of supply, demand or incentives in the face of a few seemingly

contradictory empirical studies. Proponents of the minimum wage should therefore not

be trying to argue their point with more statistical studies, but instead should be arguing

why they believe economic laws do not apply.

CURRENCIES AND CROPS

By Scott Shelady

In 2008, the US went through a forced restructuring with our financial crisis putting a

halt to our growth. Over indulgence in many parts of the economy left investors holding

the bag for bad government policy and their own personal decisions. The government

then took some unprecedented steps to lift us out of our hole with programs like TARP,

HARP, and Cash for Clunkers and obviously QE.

Quantitative Easing (QE) is a program where the Fed buys bonds to in essence keep

our interest rates low and cash flowing into the economy. It is basically a place holder,

used by the government, in the hopes that we have some sort of true economic growth

coming around the corner. We have seen QE1, QE2, and QE3 but more importantly we

have seen no real growth. Essentially it has not done the job. Who would have guessed,

with interest rates at 0% for 6 years, that the US economy could not stoke any real

inflation? That has got to have the policy makers very nervous. Fundamentally it tells

me things are not as good as the 'talking heads' would like us to believe.

When we had our crisis, we were able to lean on China to help us out, buy our bonds

and flood our markets/economy with cheap cash. China was growing at a good pace

and had close to a double digit GDP. The key here is that there was another large

economy (China) , that was healthy and could help the US try and inflate its way out of


21

its problems. With interest rates near or at zero, the US dollar weakened and made our

goods and services cheaper abroad. That renewed export business was to help boost

our own internal economy and start to fan the inflation flames. On paper it looks like a

good idea but in practice it only found the 'cheap cash' flowing to the stock market for

those looking to get a return on their investments that was better than the current rate of

interest (0%) or the 10 year treasury not at roughly 2%. Stocks soared on this thesis

and more and more money found its way to the equity market. The problem is that the

only inflation that we saw was in the equity market and with only roughly 15% of

Americans owning significant stock holdings only served to drive the gap between rich

and poor even wider. The intended consequence of trickle down wealth has not really

happened.

Which brings us to China/Currencies/Commodities and Crops.

Now that we know that China has slowed they have embarked upon a program of

cheapening their currency and cutting interest rates. Sound a lot like QE to me. QE has

shown not to work here in the US but governments that don't want to be seen to be

doing nothing, opt for QE. So now the Chinese currency is weaker and they expect to

stoke inflation within their borders. At its core, QE basically borrows or imports inflation

today and exports deflation to other trading partners. The key to this is that you need

strong trading partners to export deflation to and import inflation from. And there are no

strong trading partners or economies in the world right. There is nowhere for this to go.

What we get is a race to zero interest rates and declining GDP's until we actually find

true growth. That is the only answer. Until this happens we will continue to be in our

own internal malaise.

How does this affect us and our crops? Obviously in the short term it makes us less

competitive. The real worry is that with all commodities across the globe trading lower

(Oil, Copper, Iron Ore, etc.) with a slowing China has a knock on affect here in the US.

Apple sells 27% of their iPhones in China. GM sells 35% in China as well. While the US

is looking a little more stable, China is a large part of the global GDP. There is no place

to hide. So what we have to keep in mind is as the Chinese move on interest rates and

devaluations it will slowly find its way over the ocean to us here in the US. The first big

input will always be the weather but now I believe that you have to pay attention to

macro currency movements because the world is a much smaller place than it used to

be. Don't forget that China owns a ton of our debt (and has been selling a lot of it as of

late) so we are somewhat beholden to how they perform economically.

Devaluations, interest rate cuts and QE will all have an effect on currencies. These

currencies will then have an effect on imports and exports. That is how it will affect us. It

may take a little while but there is no doubt it will. It pays to pay attention on how strong

the dollar may or may not be.


22

THE TRADERS BOOK SUMMARY

By Damon Verial

The Handbook of High-Frequency Trading

Author: Greg Gregoriou

Introduction I picked up this book after reading a book on artificial intelligence that contained a small

quip: 60% of the trading performed on the stock market is high frequency trading (HFT)

performed by algorithms. This statement worried me as a trader. Am I competing with

machines that have much faster calculation and order speeds than I?

The quick answer to that is “no.” Primarily because I used the word “compete,” more on

this later.

But the main point of my diving into this book and reporting it to readers of the Bubba

Report is to bang out an answer as to whether you should be concerned with HFT and

its growth in the stock market – and into other markets (e.g., Forex). In this summary, I

will mainly focus on this question because the book I am reviewing is simply way too

large to summarize all its main points. It is my hope that by the end of reading this, you

find a satisfactory answer to the question as to whether we should be concerned about

HFT.

An Introduction to HFT HFT wasn’t originally intended by the creators of the stock market (e.g., Alexander

Hamilton, one of my heroes). But it now finds itself as the main user of the stock market.

At its very essence, HFT is a set of algorithms entering trades as quickly as possible

and at large volumes so as to reap a fraction of a penny of profit on each trade.

How do HFT firms profit? That is, an HFT trading algorithm is run by a superfast computer, often built close to

New York, Chicago, Tokyo, or other trading centers, that moves in and out of positions

in nano seconds, profiting from the tiniest of changes in stock or ETF price. HFT is a

relatively new phenomenon but a successful one, as evidenced by its spread outside

Wall Street and into the foreign exchange markets. In many ways, HFT is much like

what day traders do, only sped up a million-fold.

One key aspect of an HFT algorithm is its ability to predict the actions of big, non-HFT

firms. HFT will “cut line” and buy stocks that non-HFT firms intend to buy ahead of time.


23

Likewise, they sell and short stocks before non-HFT firms, ensuring that they gain profit

after the non-HFT firms enter their orders.

Second, HFT firms spend massive amounts of money to access soon-to-be-public

knowledge before the public hears about it. For example, an HFT firm will pay a certain

company to gain access to earnings reports a dozen milliseconds before the press gets

hold of them. In this way, HFT firms can react before any other firms, giving them the

best position.

Are We Computing against Machines? The main question a trader typically has when he learns of HFT is whether HFT firms

have an unfair advantage as compared to himself. According to The Handbook of High-

Frequency Trading, the answer is “no.” The main reason is that HFT firms are built to

compete with other HFT firms, not with individual traders.

The profit from an HFT is either by being the market-maker and thereby gaining money

by buying and selling at a spread or by arbitrage. Individual traders possess neither of

these opportunities and are therefore not in competition with HFT.

Recall the idea of HFT firms jumping in front of non-HFT firms in the order flow. This is

something you cannot do without (1) adding to your stock analysis predictions about

what big firms are going to buy/sell/short (2) huge funds (sometimes as much as $300

million) to gain the fastest connection to Wall Street. If you’re honest with yourself, you’ll

find that this is a game you don’t want to play anyway; you’re better off with pure

fundamental and/or technical analysis (many a trader has made it rich without

supercomputers or pages of equations and coding).

Is HFT Helpful to the Market and Traders? Exploring this question, again you will find that HFT is actually beneficial, not harmful, to

individual traders. The existence of HFT makes for tighter spreads. As any day-trader or

swing-trader knows, a tighter spread is a good thing.

Moreover, with over 50% of trades coming from HFT firms, the market is much more

liquid. Imagine all HFT firms stopping their trades – liquidity would tumble, and big-ask

spreads would more than double! As an options trader, nothing bothers me more than a

bid-ask spread that’s hundreds of dollars wide – we are already wide enough in my

opinion!

Then there is the issue of arbitrage, which sounds bad on the surface but is actually

good for investors. When an HFT firm makes money via arbitrage, it is simultaneously

correcting the mispriced securities. For example, HFT helps ETFs stay on track with the

bundled securities they follow. This should give confidence to investors of ETFs (except

for that piece of junk called the VXX).


24

What Are the Negative Aspects of HFT Though the book is clearly biased in favor of HFT (I believe that the bias is a result of,

not in anticipation of, the research performed on this topic), in my opinion, HFT do have

some problems. The main problem in my point of view is that HFT firms gain early

access to companies’ earnings and other pertinent data. While this is not illegal, it

certainly isn’t fair, and it certainly hurts my confidence in the stock market in general.

In addition, HFT creates overreactions. Depending on what type of trader you are, this

might be a good thing. Imagine an earnings report for a $70 stock causing the stock to

jump to $200. It happens, and it’s often fueled by HFT. While changes due to earnings

reports are based on changes in the company’s fundamentals, HFT completely ignores

the fundamentals and simply buys stock because its algorithms expect others to buy

stock. It shoots stock to higher highs and lower lows that would occur naturally, causing

the true market price of a stock to be significantly incorrect after news events.

There are some trading strategies here for individual investors such as ourselves. But if

you’re a fair trader or an academic, you might feel taken aback by the mispricing of

stocks due to HFT, especially if you’re on the wrong end. However, knowing this very

fact can help you recognize overpriced and underpriced stocks. But there’s more: Even

if you know that a stock’s true price was “overshot” (as a result of HFT firms) after a

news event and want to short the stock, you’re going to be shorting after the HFT. The

HFT buys before earnings, causes an overshoot, sells, shorts at the top, waits for the

price to converge to its market value, buys to cover, and ends up making profit in both

directions. It’s something we all want to do as traders but also something that only HFTs

have the ability to do consistently.

As you can imagine, HFT leads to increased market volatility. For swing traders such as

myself, increased volatility is desirable. But for investors – especially risk-averse

investors – volatility is bad news. Overall, an increased volatility in a stock hurts a

company’s desirability to investors, making the company appear more risky as an

investment than it actually is.

Finally, HFT allows for three additional strategies that the individual investor cannot

access – and should not be able to access, as these strategies are highly unethical.

These strategies are all centered on market manipulation. First are wash sales, in which

an HFT firm submits large quantities of buy and sell orders for a single security, giving

the illusion to the general public that interest in that security has spiked, which in turn

rises the security’s price. The HFT firm can then short the stock and profit off the non-

HFT firm and individual investors who bought the stock merely because of the

increased volume.


25

Second is spoofing in which HFT firms attempt to trick traders into changing their

orders. Imagine you have a sell order on a penny stock for $0.22. An HFT firm might

see that and put in many sell orders at $0.21. Seeing this, you believe that you’ve

overpriced your sell order and drop it to $0.21. The HFT firm then cancels its sell orders

and buys your penny stock for $0.21. Essentially, the HFT firm tricked you into selling

the penny stock for less than what you thought it was really worth.

Finally is quote stuffing, which is akin to a DOS attack, if you’re familiar with hacking

terminology. Because of the computational power HFT firms have, they are able to send

in massive quantities of unfillable orders, which slow down the exchange and delay the

orders of individual investors and non-HFT firms. It’s manipulative and adds nothing of

value to the market.

Conclusion This book, written by HFT experts, isn’t surprising in its bias toward HFT. But I found

through my reading both bad and good. Unfortunately, I don’t have a definitive answer

as to whether HFT is bad or good.

My ultimate conclusion is that HFT is beneficial to individual traders by narrowing

spreads and increasing volatility. However the firms employing HFT tend to use

practices that are unfair and unethical. In the end, if you’re an individual trader, you do

not have much to fear in terms of competing with HFT firms, so carry on trading…


26

TRADING VS. INVESTING

By Mike Brown, Brown Capital

Volatility is back and back with a vengeance over the last several weeks. Given the

dramatic swings we have seen in August I think it is a good time to review the

differences between trading and investing as strategies. Investopedia states: Investing

and trading are two very different methods of attempting to profit in the financial

markets. Let’s examine the differences between the two and then discuss which may

be appropriate for the average retail investor.

Investing is a longer term approach, based on fundamental analysis designed to

gradually build wealth over an extended period of time by buying and holding a portfolio

of diversified investment vehicles. Trading is a shorter term approach, based on

technical analysis with the intent of taking advantage of flashing technical indicators or

technical momentum in the market indexes or individual securities. In layman terms the

main difference is the timeframe of the positions and the frequency of trading in the

portfolio.

So which one is right for you? The answer to that is going to be dictated as much by

what your goals and timeframe are as what your risk tolerance is. Risk tolerance in this

age of technology where we can all watch our balances fluctuate in real time has taken

on heightened status in my experience. Prior to the internet, clients saw their

statements on a monthly basis and it was easier to take a longer term view when wild

gyrations in indexes and values were not in front of you on a daily basis. Discipline

now has to be exercised daily, rather than monthly with panic only the click of a button

away. The vast majority of average investors should be just that “investors” not

“traders”. Trading on a daily basis should be left to or hired out to professionals who

have both expertise and the ability to be dispassionate about their holdings. For most of

us this is very difficult to do when watching our nest egg gyrating wildly before our eyes

in times of extreme volatility like the last few weeks. Emotion creeps in and causes us

to act with emotion at the exact wrong time. The emotion that volatility brings is what

makes trading as a strategy for the average guy so difficult. For these reasons I believe

it should be eschewed by the average retail investor.

Sir John Templeton the famed value investor said “For those prepared in advance, a

bear market in stocks is not a calamity, but an opportunity.” Is the volatility of late a

precursor to a new bear market or just a normal correction in a bull market, there will be

plenty of banter on the wires arguing both sides and for our purposes today it really


27

doesn’t matter. Long term investors are looking for opportunistic entry points in

investments where the long term fundamentals are intact but for whatever reason the

market has placed it on sale at this moment in time. As we enter a period of greater

volatility investors can be prepared by doing their research and deciding at what price

they are comfortable holding an investment for the long term…in my opinion this should

be a minimum of 3 years on the short end. Once this is done then any correction or full

on bear market can be viewed as what it is to the long term investor, an opportunity not

a calamity.

IRS 1031 TAX FREE EXCHANGE OF PROPERTY

By Bonnie Pittenger

The past couple of months I have been writing about the real estate market in general. I

commented on areas where I believe some opportunities exist, and what areas are

becoming overheated with the amount of money that the rich have been converting into

hard assets to diversify their holdings in the equity markets.

For the next couple of months I am going to concentrate on a specific real estate trade

that is known as 1031 tax free exchange of property.

It is called a 1031 tax free exchange because it is the section of the IRS code that deals

with the exchange of the property. Since you are dealing with the IRS it is important to

understand the benefits and also the liabilities of dealing with the service.

The first step in doing a 1031 exchange is to identify the property to be exchanged. In

IRS Section 1031that means that the exchanger must describe, in writing, the property

or properties that they intend to purchase as replacement property in the exchange. The

Treasury Regulations governing exchanges set forth specific rules for identification.

Here is what the core of the regulation is:

1) Notice in writing

2) Agreement signed by all exchangers and must be dated. The exchanger cannot

substitute a broker, an agent or any other party to the transaction.

3) There is a 45 day time limit on the sale of the property relinquished for the exchange.


28

Here is a list of parties that qualify for identification:

1) A qualified intermediary (Title Company etc.)

2) The seller of the replacement property.

3) The escrow company.

The following parties may not be used as your identification:

1) Any agent of the taxpayer at the time of the transaction (i.e. any person who acted as

an employee, attorney, accountant, investment banker or broker, or real estate agent or

broker within a 2-year period ending on the date of the transfer of the first relinquished

property are deemed to be an agent of the taxpayer.

2) Parties related to the taxpayer (as defined in IRS Section 267 (b) or 707 (b).

FAILURE TO SEND A WRITTEN IDENTIFICATION NOTICE TO A QUALIFIED

RECEIPENT ON OR BEFORE THE 45TH DAY IS FATAL TO YOUR EXCHANGE

You are restricted to the number of properties that can be identified. This is also very

important if you identify more than the allowable asset value the IRS can void the

transaction.

The properties must have a combination of one of three different rules.

1) Three properties of any value known as The Three Property Rule or

2) Any number of properties as long as their combined fair market value (at the time of

identification) does not exceed 200% of the value of the properties or property sold in

exchange.

3) Any number of properties as long as you complete the acquisition of 95% of the value

of the properties identified known as the 95% exception rule.

If you are considering a 1031 exchange the information I have given you is important to

make sure the IRS doesn’t disqualify your identification.

Next month I will go into more parts of section 1031 code. It is very long and

complicated and it is best to go step by step to make sure that you have a though

understanding of the law!


29

GEOPOLITICAL HOTSPOTS

By Robert J. Seifert

The game never changes only the names and numbers. Your friends come and go;

your enemies stay and multiply. They are trite sayings, but if you study history and the

geopolitical world, there is a good chance that a nation’s enemies of 100 years ago are

now their allies and vice versa. As a geographical area get more volatile the greater the

chance that a nations role will change. Each month I will talk about the current hotspots

who the players are, and where their adversaries stand.

MILITANT JIHADISTS AND THE REST OF THE CIVILIZED WORLD

August featured the usual terrorist acts kidnapping, extortion, murder, rape, suicide

bombings. However in addition the Thugs have started using gas warfare to eliminate

their enemies. Three brave Americans stopped an attack on French train that would

have surely ended in a massive killing. The terrorist lawyer claimed that it was not an

attack; his client had intended to rob passengers on the bullet train. What was he going

to do to escape, jump off the train going 150 miles an hour? On Tuesday August 25, Isis

militants took credit for blowing up the Baalshamin Temple in Palmyra Syria a 2000 year

old Roman city and one of the most significant archaeological areas in the Middle East.

They have vowed to destroy Western civilization and every time they get their hands on

any prize they are quick to destroy it. Eventually the Vermin will stage an attack that

even the Obama administration won’t be able to ignore and that will be the fuse to light

the powder keg to end their reign of terror.

ISRAEL AND IRAN

Since the Obama administration caved into the Iranians there has been a period of

relative calm. Most likely the area will heat up again as soon as Congress returns from

the summer break and the debate begins whether or not to ratify the treaty. It will create

some headlines in the U.S. and Iran and Israel are sure to start the sword rattling. The

biggest issue will be if the treaty is ratified what will be Israel’s reaction? They surely will

threaten to take action if they feel threatened but will they back it up with an air strike or

leave that option on the table? The feeling here is that they will make threats but will not

attack at the present time.

MR. PUTIN AND THE BALTICS

It has been another quiet month in the Baltics. Putin has done nothing whatsoever

except criticize the U.S. for causing the FIFA scandal. He conveniently ignored the fact


30

that some of the accused officials didn’t bother to be extradited, they immediately plea

bargained out and took the fine and in most cases the probation. Ukraine finally was

able to cut a financial deal with Western bankers in which they took a twenty percent

haircut on their bonds extended the maturities and in turn got a higher coupon. No one

knows how Ukraine can possible pay them off but that doesn’t seem to matter now. The

banks will continue to fool themselves in believing that buy creating a new Ponzi

scheme that it will only be that much worse on the next default.

CHINA JAPAN, THE U.S.

The major issue here has shifted from the Senkaku/Diaoyu Islands to economic issues.

China is having severe problems that stem from three areas. First is the massive debt

they have accrued, second is a real estate bubble and finally an equity bubble that has

burst. To counteract these problems the Central bank has flooded the economy with

currency and cut interest rates. They have allowed pension funds to purchase equities

to stimulate demand. The problems have flowed over into Japan and their economy is

not recovering as predicted by “Abeonmics” which is a QE. The sword rattling has

lessened in the past month but the tension is still very high. If the economies of Japan

and China go into recession or even worse you can be sure that the tensions will

reignite.

NORTH AND SOUTH KOREA

Kim Jong-Un couldn’t stay out of the spotlight for long. He must have gone off of his

meds and decided it was a good idea to mine the demilitarized zone. North and South

Korea have been at war for over sixty years. The countries have a cease fire in place

but are still technically at war. When two South Korean soldiers were seriously injured

by the mines the South Koreans turned on the loud speakers to hurl propaganda at the

North. Kim Jong-Un responded by saying that he would wage all out war if they were

not turned off. When they were not turned off he launched missiles at the loudspeaker

sights. The South then shot at the spot the missiles were launched from. After more

saber rattling they agreed to sit down and talk it over. Kim Jong-Un said he apologized

for the mines. The South said that they would turn of the speakers and they both agreed

to more “productive dialogue”. Talk about a dysfunctional family!

CONCLUSION

Except for some economic problems and new terror tactics by the ISIS it was a pretty

quiet month. China is now the Elephant in the room and after major selloffs in the equity

markets around the world they stabilized at the end of the month. Economics are at

least as dangerous as politics, they caused WWII. Now that the summer is over and

politicians are back at work it will be an interesting fall. We remain at DEFCON three.

THE BUBBA REPORTthebubbashow.org/wp-content/uploads/2015/08/THE-BUBBA...2015/09/06 · buying in...

Documents

Transcript of THE BUBBA REPORTthebubbashow.org/wp-content/uploads/2015/08/THE-BUBBA...2015/09/06 · buying in...