20 Questions

Macro Man has little to add to yesterday's market comments, as the SPX exhibited classic back and fill price aciton as it waltzed with the 200d moving average. It therefore seems to be an appropriate time to play another game of 20 questions:

1) Which will trade first: SPX 1000, or SPX 800?

2) Will the Fed do more than re-introducing a "considerable period"-type phraseology to next week's statement?

3) Just how big will the demand be for next week's one-year ECB tender at the policy rate?

4) Will the dollar "playa haters" who bought EUR/USD after the Fed introduced QE in March take the same attitude towards the euro if the answer to #3 is huge?

5) How concerned should the green shoots crowd be about the big downward guidance rom FedEx?

6) When will the fiscal penny drop in China?

7) What in the world is the SNB trying to do?

8) Which trades first in front contract crude: $50 or $100?

9) When will Macro Man's beloved Pittsburgh Pirates next win more games than they lose?

10) Is it safe to get back into the LIBOR-contract carry trades?

11) Who will be the first G4 central bank to raise interest rates?

12) When will they do it?

13) When oh when will cross-market correlations normalize?

14) Is it just Macro Man, or have UK commuter train services been drastically cut back over the last few months?

15) When and where will the US household savings rate peak?

16) Has everyone forgotten about the impending avalanche of ARM resets in the US in 2010 and 2011?

17) Was this month's Merrill Lynch Fund Manager Survey written in Pamplona?

18) Surely this marks the top in gold?

19) Will the CNY ever move again?

20) Why oh why do London cyclists seem to think that the rules of the road apply to everybody but them?
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June 18, 2009 at 9:56 AM × This comment has been removed by the author.
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June 18, 2009 at 10:02 AM ×

Viz the CNY the rationale for revaluation might not be that crazy now:

1) Welfare effects: Would screw coastal export sector but lets face it they are screwed anyway and trying to reorient production inwards. Would be a huge improvement in welfare especially for farmers who are still most of the population (potash, capital inputs all much cheaper).
2) Would mean no incremental demand for treasuries for FX sterilization and would allow Chinese companies to go bananas M&A wise with their revalued cash.
3) Would seriously piss off USA and undermine the dollar silly, always a plus.


Does not solve any of their other problems (crappy SOEs, screwy banking system etc) but might not be as nuts as it was when exports were hot.

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June 18, 2009 at 10:06 AM ×

Oh, and viz China fiscal issues it will surprise some of the Taurine crowd that China has its own busted munis coming down the pike.

http://business.theage.com.au/business/chinas-cities-on-the-brink-20090518-bcuh.html

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Cortex
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June 18, 2009 at 10:14 AM ×

Not sure if its true since I haven't read it myself but apparently Morgan Stanley's latest prediction is that SPX will be rangebound for the foreseeable future with the range being 600-1200. They must have realised that this is a bit on the vague side and added that there is a 53% likelyhood of a sudden drop exceeding 5%.

There you have it, gentlemen, take you positions!

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Anonymous
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June 18, 2009 at 10:20 AM ×

He is about as anonymous as...well I can't think of anything witty to say....but he isn't anonymous. Little upside to him from posting positions so a few punks can copy them on a spread betting account while other meaningful players might use them to their advantage, or MMs disadvantage. Having same debate on strip flatteners...the collapse in OI over past couple of weeks must give some confidence they are 'cleaner'.....but it is called the widowmaker for good reason. Perhaps cheaper to play volatility in the back months through OTM mid/curves, not cheap but you won't get taken out on a stretcher.

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H(oratio)
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June 18, 2009 at 10:27 AM ×

I am a product of the American education system, as you are yourself. Therefore I would appreciate the consideration of pre-formatted multiple choice tests.

1 800, the Tiny one is running out of money.

2 The Fed will obfuscate, I would watch their commitments, especially the ones for C and BAC

3 The Sphynx is tricky and provides no answers, though one would think that they would give the five teen countries in Eastern Europe a little break with the exchange.

4 eur/usd is going skiing. Not cross country.

5 Depends on how much money the Tiny one will give his puppetmasters. It is hard not to oblige when there is a big hand up your unmentionable parts though.

6 China is hating Tehran now. And they thought they had a good deal there. Not much time left.

7 SNB does not want 1.5 euros.

8 50, watch BAC

9 When they move to Philly

10 Watch BAC, what would you carry though?

11 The Swerve, today's retail may help with the decision a few months from now.

12 ibid

13 When the Tiny one runs dry with BAC

14 NA talk Amtrak to me

15 Very very far into the future. Think no SS.

16 2010? WE discoed that one already. Who is trading more than three months out.

17 Meryl Whitmer passed out the questionnaires?

18 Do not disco the fervor of the religious.

19 To Tehran.

20 Try Amsterdam.

HOw about them retail sales though?

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H(oratio)
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June 18, 2009 at 10:31 AM ×

My question is , how long does the sterling do the face plant?

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SteveH
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June 18, 2009 at 12:27 PM ×

1. SPX800
2. Maybe, but we'll be none-the-wiser
3. Bigger-than-expected
4. Nah - dollar-hating is in the genes
5. Very.
6. When somebody decides the bubble-du-jour is big enough
7. Keep us all guessing
8. $50
9. Somali Pirates have a better chance
10. 'Safe'? Rings a bell.
11. Hint: based in Europe. Ah yes, but....
12. Too early.
13. Maybe this IS normal
14. Thought you guys all had chauffered limos
15. 10-13%.
16. The Blogosphere hasn't, but MSM don't think that far ahead (and some don't think at all)
17. Possibly, but it will come back to horn-t them
18. Not a chance (if only because I reduced my long position last week)
19. You mean, like into the SDR?
20. Try living in Oxford.

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Anonymous
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June 18, 2009 at 12:48 PM ×

"a few punks can copy them on a spread betting account"

give me a break. anyone is entitled to do what they like. if MM posts some directional positions and some "punk" puts on the same on a spread bet, so what?

1) 800
2) no
3) I will wait and see
4) probably. it is another reason to short the ccy
5) Fedex is a good leading indicator.
6) Has to be soon. Imagine base metal prices when the tap turns off.
7) CHF has a great deflationary story. It will be hard to weaken it, especially against the EUR which is probably the next short story for the ccy market.
8) $50
9) no idea
10) you would think with the amount of government backing in the system that a serious banking liquidity crisis would not occur again. The fact that we had such a bad one last year means to me the probability of it being repeated is low, so LIBOR benchmarked carry trades should not cause too many issues again.
11) I think that is a long way off.
12) as above
13) no idea
14) no idea
15) I think it is several years down the line
16) Certainly not! This is the "eye" of the reset storm. Given that LIBOR is so low, any neg am mortgages will have sharply increased repayments. This is another big deflationary force.
17) they are muppets in aggregate.
18) doesn't feel like a top. although the Telegraph Finance section "Gold investing" is a bit disquieting. Junior and senior gold stocks don't exhibit bubble characteristics IMHO, yet.
19) that is one overpriced ccy
20) because they are all miserable c*nts!

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June 18, 2009 at 1:08 PM × This comment has been removed by the author.
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June 18, 2009 at 1:10 PM × This comment has been removed by the author.
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Anonymous
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June 18, 2009 at 1:14 PM ×

also, i should add, that anyone copying positions gets less mental benefit that putting on their own.

i.e. a gain, in the back of your mind you copied it, so you dont feel amazing

a loss, you feel even worse, because you copied it

personally, I don;t see the point in disclosing a portfolio. Frankly, there are enough themes discussed here to generate enough trade ideas in your mind. It is up to you to know the tape and the instrument on how best to express that view....

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June 18, 2009 at 1:21 PM × This comment has been removed by the author.
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June 18, 2009 at 1:23 PM × This comment has been removed by the author.
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June 18, 2009 at 1:24 PM × This comment has been removed by the author.
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Anonymous
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June 18, 2009 at 1:44 PM ×

Well, I don't understand why anyone would want to trade without understanding (i) what the market is for/why it exists, (ii) what fundamental forces could move the clearing price and (iii) what changes in the clearing price tell you about the position of the market at that point.

So I don;t recommend you sit in a room and figure it out like an amateur.

The first couple of points are a study of history and economics. Teh last point, as you say, someone like MM could show a current portfolio. I dont think that is particularly useful.

I do concede that what may be useful is analysing some histroic trades and showing the fundamnetal story and the reason for the trade execution at the price.

I do recall that MM stated he was small long copper. Now, he is bearish so I doubt there was any fundamental story involved (apart from China buying as part of stimulus??). However, the price action from Nov 08 suggested it could retrace a sginfiicant part of the loss in 2008. The volume expansion, the "roudning bottom", the succession of small flags formed on the rally, the divergent RSI and price action in Nov/Dec 08, etc. Maybe he could share those thoughts with us...

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Macro Man
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June 18, 2009 at 1:48 PM ×

Nemo, re: China- the local government borrowing spree (and forthcoming threat of bankrputcy) is exactly what I was referring to. It's remarkable how the market is obsessed with fiscal eficits in the US and UK, and yet happily assumes that China can conjure Y4 trillion out of thin air....

Evaluation: per the FAQs, the primary reason that I don't post positions is that it would require quite a bit more work than it used to because of the improved systems at my current shop. Having my brokers know my positions is a secondary consideration, but really, it's about not wanting to do extra work.

There is still plenty of opportunity to discuss the implementation of given themes here in the comments section.

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Macro Man
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June 18, 2009 at 1:51 PM ×

Anon @ 13.24, that copper trade was a punt based on a) the market's green shoot mania at the time of trade, and b)the technical set up. It only lasted about three days and is now long forgotten...

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Anonymous
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June 18, 2009 at 1:55 PM ×

effort side is understandable. But I do find the great traders are better at selection and timing than the good ones so I would like to know your thought process behind tardes if you would be so good. do you have any definite rules that have to exist before you enter a directional rates or fx position? ie ... like always trade with a trend (already moved 5% or what ever that way). Second. what do you think is the best way to evaluate if you are getting better at selecting trades?...its not always just prrofits....do you prefer to look at any particular statistic about your historical trades to see if you are improving?

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Anonymous
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June 18, 2009 at 2:47 PM ×

1)SPX 800
2)Unlikely, but backup in mortgage rates should warrant something.
4)Yes, see us hovering here then to 1.35
6)There needs to be a lot more questioning of China bulltards going on!
7)Not even sure they know. Perhaps they have a prop book?
8)Tricky but would say 50.
11)Close call BoE/ECB, think latter due to inflationary obsessions, not greeeen shoots.
12)Jun11?
13)When its safe to do LIBOR carry.
15)Personal saving rate 10% peak and poss permanent shift
16)ARMs, like CRE and jumbo issues, are lurking
18)Top in retail gold but not in the market price / USD deval / inflation hedge story. Still...

Oh, Anon & Evaluation 30-31, please let up, one request is enough.
Would like to hear more from the bulls. mpm any care?
Cheers, JL

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Anonymous
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June 18, 2009 at 3:13 PM ×

Would like to add question 21. Is it safe to sell fx vol over the summer? The DNT calculators have been dusted off and my bookies are sending a plethora of 2-3m ideas.

DC

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Macro Man
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June 18, 2009 at 3:13 PM ×

Anon @ 1.55, what you ask for could either be a very long or a very short answer. The former would be the subject of a post in and of itself, so I'll opt for the latter.

Essentially, I try to run my book as a portfolio rather than a series of trades. At any point I will have a given number of themes that I'll be following, and will scale into positions as they gain traction and scale out as they mature. I also try and use options where possible to mitigate the peaks and valleys of short term price action.

I like to use technicals to initiate a position (i.e., where there is a point in reasonably close proximity where I feel the market is telling me I am wrong) and/or to get out. I also do a few tactical technical trades with modest results.

I also always like to have cheap hedges in place that will perform disproportinately well if my underlying themes are proven wrong.

Basically, I view portfolio construction as half art and half science. I think it's important to know the limits of contructs like VaR and correlation matrices; as it is, I am generally exposed to the risks posed by changing correlations.

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Anonymous
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June 18, 2009 at 3:33 PM ×

MM,

very interesting insight into your position management. How do you size each position in terms of percent of portfolio risked per trade or correlated trade?

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Anonymous
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June 18, 2009 at 3:36 PM ×

I second that. Thanks for insight. At a reasonable risk fund with 15% returns expected and 12% vol or so what do you think is the max percentage you should risk on a full sized trade. assume just 1 trade in portfolio at time to avoid issue of correlation which is a second question if you care to answer (how do you factor in correclation in total portfolio risk?)risk

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Macro Man
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June 18, 2009 at 3:37 PM ×

It really depends on the market environment, strength of conviction, what my exisiting portfolio looks like, etc. I don't use hard and fast rules...sizing the trade for me is more art than science.

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thetrader
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June 18, 2009 at 3:52 PM ×

Again, very interesting. I guess it can be great when you are right and you have your max position on, but quite destabilizing when you are wrong and you have your max position on. I suppose the scaling in and out takes care of that, in some ways. I wonder if an equal position size method would be any use - kind of hurts the ego a little bit though! But it does stop one from being too emotionally invested in a particular trade and acknowledges the possibility of being wrong.

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Anonymous
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June 18, 2009 at 3:58 PM ×

1) SPX 1000
2) No
3) As big as expected
4) No
5) Very
6) Not soon enough
7) They are in league with the Devil
8) 100
9) When the Somali Pirates get of prison ;))
10) No
11) ECB
12) 2010
13) I wasn't aware there are any :)
14) Just macro man
15) 2010
16) No
17) No
18) Nowhere near toppy in gold, just positioning cleanout
19) yes, very soon
20) because they are immortal, didn't you get the memo?? :)

-Ivanovski

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Macro Man
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June 18, 2009 at 3:58 PM ×

Anon @ 3.36, I really have no idea in your example, because I don't manage money in that way (i.e., having only one trade.) I know from experience that averaging certain level of portfolio VaR usually translates into a certain level of portfolio level volatility given the way I construct portfolios (in which the sum of the individual position VaRs can be say 3 or 4 times the portfolio level VaR.)

I can count on one hand the number of times I have had a limit-sized position in any one trade over the past five years, because for me to do so requires a confluence of factors that is extremely rare.

As for correlation risk, that has been the source of most of my worst days in managing money...I construct a portfolio of un- or negatively-correlated trades, but then the correlations change and my ex-post risk ends up much higher than my ex-ante.

I find that there are usually signs that this is in the offing, so I just try and keep a close eye on my book to see if realized starts ticking up without me adding new risk.

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Anonymous
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June 18, 2009 at 4:04 PM ×

would you mind if i asked do you have a volatility limit or target at least where you work?

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Macro Man
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June 18, 2009 at 4:06 PM ×

Yeah, we have daily VaR limits (ex-ante) and also drawdown limits (ex-post.)

However, I have also managed money in the same why in places that just hav nominal position limits and desired risk targets, but nothing more binding than that.

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Anonymous
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June 18, 2009 at 4:59 PM ×

really loving this 10yr reversal

mpm

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wcw
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June 18, 2009 at 5:07 PM ×

I know nobody asked me, but in re: position sizing, I am a fan of always keeping the Kelly Criterion in the back of your head. Kelly is limited, since it presumes equally perfect certainty in all estimates, but it's the best guidepost I know.

Also, I'd like to echo MM's note on changing correlations. Whether you're programming a black box or, like we, constructing portfolios by hand, unexpected correlation changes will blow you up better than anything I know.

FD: I have never blown up, but every 10+% drawdown sure feels like a blowup.

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Anonymous
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June 18, 2009 at 5:12 PM ×

Kelly? that'll kill you in the real world, way too aggressive

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Anonymous
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June 18, 2009 at 5:24 PM ×

macroman --

chinese banks entered into the crisis with a very low loan to deposit ratio, so they don't to conjure up funds out of thin air -- only to lend out deposits they already have.

of course, the net effect is a very strong monetary stimulus ...

china -- b/c of a liquid state banking system that is subject to administrative guidance -- has some policy tools other countries don't have.

bsetser

bsetser

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Greg
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June 18, 2009 at 5:36 PM ×

Question #21: Is a guy swatting a fly really news? Is a guy taking his wife out to dinner really news?

Good leaders are not surrounded by armies of yes-men. The news media in the States and Europe look at Obama like giddy school girls drooling over the boy band du jour.

With no scepticism and no one playing devils advocate to his ideas -- Obama is destined to make terrible decisions

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Anonymous
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June 18, 2009 at 6:30 PM ×

Typo, meant Jun10 on rate inc.

Good point Greg, would have thought that a more streamlined regulatory system would have been top of the agenda in trying to prevent a build of systemic issues, instead we get more silos.

Interesting points and moves today. But I always worry when the market gets overly focused on a single month's data.

TGIFish, JL

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wcw
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June 18, 2009 at 7:47 PM ×

If a real-world implementation or your back-of-the-envelope intuition of deservedly seminal game-theory-class Kelly is too aggressive, you might be too confident in your win-probability or payoff estimates. Probably both.

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thetrader
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June 19, 2009 at 9:32 AM ×

wcw,

As a trader, the problem I have with Kelly is you can never really know with absolute certainty whether your next trade will be a win or a loss. Nor can you know if you may have a string of losses in a row. Kelly, applied correctly, could take you out of the game before your positive expectation has time to work itself out. That is the problem I have with Kelly in real-world implementation. Also, you cannot guarantee size of payoff either. These mathematical risk management criterion look great on paper but are difficult to apply in the face of uncertainty. It is a similar problem to the correlation one. Correlations work great until there is an exogenous event and everything moves together. Better to assume the worst and position size accordingly. Anyone who has traded for an extended period of time will tell you something similar, I would guess.

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wcw
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June 19, 2009 at 3:43 PM ×

I think we're saying exactly the same thing. My confusion stems, I posit, from the fact that I said it first ("Kelly is limited, since it presumes equally perfect certainty in all estimates... unexpected correlation changes will blow you up better than anything I know"). Perhaps you saw the phrase "Kelly criterion," assumed I was a twenty-year-old with a math degree, and stopped reading.

Fuller disclosure: my never-blown-up track record starts before the 1997 Asian currency crisis. However, I do have a math degree.

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thetrader
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June 19, 2009 at 4:36 PM ×

Ok, let me put it this way. For my style of trading, I would say Kelly is too aggressive and not even close to being a guidepost to anything. I certainly did not mean to suggest that you were a twenty year old with a maths degree and meant no offence at all. You don't have to be a twenty year old with a math degree to make unfounded assumptions about how markets play out in practice. Just think of all the short vol hedge funds that get a regular hosing and the funds containing Nobel prize winners (LTCM) which got caught in compromising positions. Anyway, no offence was meant and I hope none taken, just giving my opinion.

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Andrea
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June 20, 2009 at 7:02 AM ×

No. 20 - Because it has been statistically proven that a cyclist is more likely to die stopping at a red light than riding through it.

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