gasem

U.S. vs. China: Has Trade War Begun?

This is Union vs Union. In order for GM to become profitable REQUIRES sales into China. So basically in order to protect Union jobs at GT, GM is thrown under the bus. This is what our trade policy will be driven by, Union vs Union and in the end Chaos will reign.

What a Maroon

Is 5% of Emerging Markets Too Little?

US stocks represent only about 35% of the total world wide market, yet people have 95% of their stocks in US markets and 5% in foreign. How can you look yourself in the mirror and call that diversified? Yes you can quack on and on about how owning GM is diversified since they sell cars overseas....OPPS did I say GM?

Health Care Bill: Prescription for Disaster

This is how health care really works

There is government care presently called medicare and medicaid. These government options exist based on cost shifting. The cost of these programs is funded through taxes and by shifting costs to the private sector. The reason is they pay a fixed rate well below market average. In my practice I see about 20 cents on the dollar from every medicare patient I take care of. What allows me to see medicare patients at this low rate is the fact that other insurance pays better, so on the average I make a good enough living to see medicare patients. If health care costs go up however medicare reimbursement does not. What that means is the private insurer MUST make up the difference for their own increased cost AND they must make up part of the difference for the increase for medicare because medicare does not behave in a market fashion it just sucks services at a fixed low rate regardless of the "cost". Medicaid is even worse. Medicaid care is virtually free care when you take into account turn key costs. So this is the other place in this equation where the cost gets shifted. I get to do the work, take on the liability, pay my employees, and pay the taxes and my reimbursement is essentially negative. So the 2 centers of free market action in this scenario is the cost paid by the insurance company and my ability to absorb a reduction in my profit margin. The government just sits there sucking up services and shifting the cost. This is basically the Ponzy scheme that you often hear quoted.

The problem with Obama care is that he will accelerate this cost shifting until there is NO free market action left. As he accelerates the "public option" costs will rise in the private sector so quickly that private insurance will go out of existence. As you evaluate his various enrollment options just ask yourself what will that option do to the free market portion of medical care. What you will find, in every case is that is will further promote the demise of the private option. You will be able to "keep your doctor and keep your plan" but it will take all your money to pay for that privledge

Government care accounts for about 50% of the care. When I first started practice 20 years ago it was about 30% as a result the. I'm sure in the next 5 years it will dwindle to a very small percentage. That percentage left will be the government itself and unions which will be exempted. government like the senate and congress will not tolerate anything less than the absolute best. The unions will not tolerate the extra tax burden One this to be aware of is that the cost of the government plan is not capped, but you better believe the "care" provided will be capped.

I saw a book TV interview with Ezekiel Emmanual Rohm Emmanuals brother. Zeke is a big wig ivory tower NIH oncologist who wrote a book on how to destroy (err save) health care. Here was his example

Lets say you have prostate cancer and are 55 years old. There are 4 treatments for prostate cancer

1 surgery
2 radioactive seed implant
3 Radiation beam therapy
3 Another form of radiation therapy

The cost

1 11,000
2 15,000
3 30,000
4 80,000

What he said is the "government plan" would pay for the cheapest option, if you want another option you get to pay the difference. He failed to mention however the side effect profile of these treatments The side effect? Impotence

1 >60%
2 >50%
3 10%
4 5%

So the government will give you care that will yield virtual certainty of impotence for the rest of your sorry life. You see in this model the government gets to choose the criteria for treatment outcomes that "matter"

Another example (mine not his) You have coronary artery disease bad enough that you need some kind of intervention. The options

1 Nitroglycerine and medical management
2 stents
3 coronary bypass surgery

The cost

1 1000 per year
2 35,000
3 75,000

The government will pay the 1000 per year because it determines the outcome is "longevity" which means the average number of months until you die. All of these treatments share a similar longevity. This is why they are so interested in this electronic medical record. They can do a met analysis of treatments and find the criteria that matches their desired outcome and choose that as the criteria to on which to judge a treatment

The outcomes from above

1 You have good enough coronary blood flow that you can sit in a rocking chair the rest of your life

2,3 you have good enough coronary blood flow to go climb a mountain or ski the Rockies.

Another example

Your 55 you have diabetes and your kidneys fail.

The Obama response You LIVED a good life please accept your death with dignity.

As to the recent tonsil comment

Children come to pediatricians with inflamed throats and fevers. They miss school. They come month after month. Eventually they meet the criteria for tonsillectomy. The last thing their insurance company wants to do is pass on them getting surgery (cost cutting) but they finally meet the criteria. They are sick 9 months out of the year with these crappy tonsils

You heard Obama's solution Diagnosis them with allergies pat them on the ass and let them suffer. You will notice not once did the surgeon consult his "fee schedule" Not once. You have to remember we do not stand on the street with a hook hooking kids into our waiting rooms so we can greedily yank their tonsils out. What happens is parents bring their sick kids to us and together we try to find the best all around solution. That is how American medicine is practiced. So if for one minute you think you are going to get better care in a plan where the outcome is based on a government chosen mandate, you better think again.

Did you know the government considers ketchup a veggie? PS they will not provide free KY. You will be expected to provide your own.

Health Care Bill: Prescription for Disaster

You know what cracks me up? The poor in this country typically have cars and TV's and computers and air conditioning. They have health care. They have health care running out their noses. Take a look at people in central and south America if you want to see someone truly poor. They don't even have potable water.

Personally I think this is not about saving the country but about Obama's legacy. Like Roosevelt and his "New Deal" and Johnson and his "Great Society" and Kennedy and his "Man on the Moon" Obama is just another democratic jamoke who is hell bent on a legacy.

His legacy in reality will be he lived an illusion, he was a legend in his own mind, and we are just extra's on the stage. It's assured passing this nonsense will doom the US to 2nd tier non relavance in the world's economy. Another "world consumer" will arise and that country or brace of regional countries will take center stage. The citizens of SE Asia will become middle class of that you can rest assured They will NOT be denied and that is the engine that will pull the train. Your value is based on your willingness to work and innovate, and I have never seen a people so driven to work hard and innovate to get ahead. The poor in the US? They're watching American Idol.

Dow up -.37% for the year compared to FXI up 33.02% and EEM up 30.06% is all you need to know about where this teleprompter reading buffoon is taking us. This is like some joker on the Titanic reading his teleprompter and saying "It's working!! It's working!! The bailing out is working!! Stay the course!!!.... Wanna see me flap my ears???".

Next time you watch him reading his teleprompter ask yourself "Shades of Dumbo!! I wonder if he flapped them hard enough if he could fly???"

Oh, So Now There Are No Green Shoots?

The VIX is just under 30, normal is 15. What this means is this market is still quite volatile, the same as aftershocks following an earth quake. The real issue is how poorly the S&P has performed compared to foreign markets. When all arrows were pointing into the ground there was no decoupling, (since all arrows were pointing in the same direction), HOWEVER that is no longer the case. My analysis is if you seek alpha, simply look outside the US.

What is interesting is the thing that will continue to force decoupling is not the market itself, but the political interference of this government in terms of tax policy and regulation.

Opportunities in Options Markets, Summer 2009

How do you use QPP to generate the above table?

thanks

Stress Testing Your Portfolio

The problem is that 2008-2009 is likely not going to turn out to be the worst case. Its just a case with over active PR as in public relations and political realities.

My point at bringing up the idea of correlations is if you have a given normal amount of diversification in a portfolio it looks to me like mapping changes in diversity for that given portfolio in a distribution gives you a way to kind of "stick a antenna" into the market. Each security in the portfolio has a correlation AND a magnitude in terms of its percent of the portfolio hence each security can define a vector with the direction defined by the correlation and the magnitude defined by its relative percent as a part of the whole. If you place the vectors all starting at the same point all the vectors in the plane will define a shape being able to watch that shape over time I think will tell you a lot about a portfolio's behavior.

Stress Testing Your Portfolio

In terms of stress testing how do you view changes in a portfolios diversification metric and auto-correlation metric

As I watch things evolve I saw diversity nose dive and auto correlation explode

Stress Testing Your Portfolio

So what you're saying is buy high sell low doesn't work so good

Good advice

Stress Testing Your Portfolio

I don't see how using QPP implies a "buy and hold" strategy. In fact Bob's problem was he didn't use QPP to good effect.

1. His portfolio only had about 25% diversification

2 His draw was way too much for the assets he held.

By making a few changes to the asset mix the diversity of Bob's assets could have been raised to 45% and Bob's "losses" over the three years from 6/06 to 6/09 would actually have been slightly positive. In other words he would have made a tiny bit of money.

By stress testing his draw, and adjusting it for something safer, the longevity of his portfolio was dramatically improved. He didn't live quite as luxuriously, but he had money well into his 90's even with higher inflation. Making these changes are form of active management, they just aren't trading.

In fact a program like QPP merely attaches some kind of risk analysis to a gain and a draw. Many of the so called "active managers" just watch Cramer and call that risk analysis.

Stress Testing Your Portfolio

I like the idea of stress testing. I would stress test as above and I would in a different way. In the recent crash most "losers" were likely invested in equities, with bonds or cash being the "safe" position. However using QPP you can "what if" inflation. In that case bonds and cash are the unsafe investment, (also in the case where the market is about to explode I think beta auto-correlation and diversification metric say something about that) Thirdly you can "what if" your draw. The way I did that is to bring the draw down until all the top 8 "ages of failure" were equal except for the worst case, the 10% failure rate, which I allowed to come off the the max level. In doing the above 2 tests you can use QPP to predict well I think a very robust retirement. You can double inflation and still not break the bank for example. This analyzes risk in a diversified way for the true black swan. This past downturn in my opinion although painful is not a black swan event.

My guess is the "failure" of monte carlo engines is not in the engine but in the suppositions that are too rosey. The risk that is focused on is the risk of market failure, but the more real risk that tends to be ignored is the risk of taking out too much money too soon. This is the true value of this kind of analysis. If you understand the risks or your advisor helps you to understand the risks I still believe this "tool" to be the best we have. The fact the paper reported the engine didn't "save" you merely means you mis-used the tool and chose too much risk in the draw.

Probably the way to do this also is to re-evaluate every so many years and see how much money you have left and then project your future viability the way it was done above with re-evaluating for a new (older) age, also as was done on Milevsky’s article I read something by Stein and DeMuth that looked at this periodic reevaluation strategy and I think its sound. Its kind of like doing integration by Riemann sums. The smaller you make the period the less error in the integral.

So to recap a tool like QPP can help you determine what is a rational "draw" for a given nest egg, or it can help you determine what the needed nest egg is for a given draw stress tested against catastrophic loss in the market and catastrophic inflation, or a true black swan like changing the reserve currency from $ to Yuan or from $ to oil.

Some examples: if you double inflation you need to double the size of your nest egg to not go bust especially if the market is sluggish and you want to keep your draw the same. The effect of doubling taxes is similar to doubling inflation. If you ask yourself what pot of money has yet to be taxed the answer is retirement funds. Hence the tax rate on retirement funds could be an area of undefined risk. After all we MUST do our "patriotic part". I think QPP is still the best bet as a tool to help protect yourself, you just have to be far more creative in investigating scenarios that could kill you. Certainly all the arrows pointing into the ground can do it. But so can someone taking your money either by running the printing press or by the IRS or by bond yields up to Carter's level.

Maybe others can see other scenarios which QPP might help predict success. The way we protect ourselves from new paper criticism is to have money on our accounts when every one else has IOU's

Did Portfolio Planning Tools Fail Investors in 2008?

Geoff

Engineers do stress test the concrete to prove the model. They take some concrete and put it in a press and stress it till it breaks. It is that test that quantifies the risk.

Certainly there will be any number of frauds (rating a bond AAA when it is well below that for example). My point is if you invested and stayed invested in Madoff, you had a 100% chance of failure, while the statistical engine would have I'm sure come in well below a 100% chance of failure.

The way I see it is here is the kind of test you must design: You must design a test that looks at the probability that 1,000,000 cabies who buy million dollar mortgages on houses worth 500,000 dollars will be able to pay for that, or what is the probability that a government that has promised its citizens all the money in the world in 30 years can make good on that promise. That is precisely what the engineer tests when he puts the concrete in the press.

I do not see that just putting in the equation that along the course of time there will be some event like the great depression is enough to improve the reliability of the outcome. For example you could score the great depression as 1 event or 2 events or 3 events that occurred in lets say 3 years 10 years or 16 years and how you score it will make a big difference in what your model calls a "catastrophe". You could as well call this present "catastrophe" as the ongoing result of several events going all the way back to Carter and ongoing through the next crash in 5 years we will experience due to the "government debt" bubble we are now entering.

By this I do NOT mean in any way I am against the monte carlo model or stress testing that model. I'm fully invested according to the risk analysis this model provides I think its the best we have till we make it better and that is why I take the side I do. You can aggressively test stresses if you aggressively frame the boundaries. Planning for the 100 year flood is a good thing, but your bridge won't stand if you forgot to plan for the earth quake. To test for the earth quake engineers shake the heck out of the model to see when it will break. Testing the concrete is testing the assumptions of the model. Shaking the heck out of it is testing the modes of failure within the model.

www.youtube.com/watch?...

How many times have you heard "if they hadn't let Lehman fail!!" Lehman was a long time dead already. It just hadn't started yet to stinketh.

On Jun 09 11:01 AM Geoff Considine wrote:

> Gasem:
>
> I like your examples but I also suggest that you read Milevsky's
> paper. You raise a number of important issues. First, the cycle
> in volatility. Volatility was very low, so people took bigger risks--and
> this led directly to the crash. This process is well documented
> in Minsky's instability hypothesis. Quantext Portfolio Planner clearly
> docuemented this risk well before the crash--and I have written many
> articles on it here at SeekingAlpha.
>
> Second, Monte Carlo models are attempting to capture a series of
> unknown future factors in terms of cumulative risks. We do not need
> to know specifically what these are. I disagree that the recent
> market crash is beyond the realm of statistics to capture (bad cement
> vs. 100 year flood). We cannot predict what will happen in terms
> of the extreme events but we can stress test our plans to see if
> they will hold up in extreme events--thats the point of my article.
>

Did Portfolio Planning Tools Fail Investors in 2008?

The issue of the past melt down IS UNRELATED to a probabilistic thing. The melt down was due to systemic risk. In effect the market was rigged. AAA bonds were NOT AAA loans were being made to people who HAD NO ABILITY TO EVER PAY THEM BACK. Government policy was such that there was a bias to do financially unsound things. Everyone knew this was going on EVERYONE. Because there was a huge amount of money to be made the bet was "I'll play the game make my huge amount of money AND I'll be smart enough to get out before it crashes." Virtually no one was smart enough, so the market unwound all at once.

In my opinion the thing in the monte carlo engine that should have given this away was was the ever declining S&P volatility during the period following the burst of the tech bubble. We went through recession and we went through 2 wars yet the volatility declined. THAT decline was due to the systemic bias that was added by the government which gave us the sandbox where the Tech bubble was turned into the real estate bubble, and that is now being turned into the currency/credit/govern... bailout bubble Another systemic risk, and another reason to NOT invest in America

To blame monte carlo for government violation of the rule of randomization is to absolutely NOT understand what a monte carlo engine does. The example of engineering a bridge for the 100 year flood is the perfect example. You can engineer for that probablility, but if you systematically undermine the quality of your concrete (as in adding systemic risk) your bridge is built on a fraud that is not the fault of the model.