How unusual are this market's intraday bounces?

The W survives to live another day.   While Tuesday's equity market weakness looked set to continue for reasons that weren't entirely obvious (yeah, the Markit services PMI was weak, but so were stocks before the release), just before mid-day Spooz turned tail and chugged higher for reasons that also weren't entirely obvious.   To be sure, the failure of oil to sell off after inventory data was a relief, but it probably doesn't explain the magnitude of the recovery in stocks.

Cue the usual allegations of manipulation and other chicanery from the tin-foil hat crowd, to whom Occam's Razor is as much an alien concept as the mundane variety was to W.G. Grace.  Having had a go at investigating official central bank buying of equities last month, Macro Man decided to take a crack at determining whether the degree of intraday rallies recently observed in stock markets really is that unusual.

At first blush, it seems as if the conspiracy theorists have a point.   Macro Man looked at the daily difference between the SPX cash close and the intraday low; the data is understandably noisy, so some smoothing is required.  Lo and behold, when we look at a 30 day moving average of this "rip factor", we see a sharp uptick over the last six months or so.


OK, but what if we put this measure into context against a larger sample, while also accounting for the general level of volatility?  It turns out that the tendency to bounce off of the lows this hard isn't unusual, and is largely a function of the general volatility environment.  It's remarkable:  higher close-to-close vol begets higher intraday volatility!

If there were truly something unusual going on to push equities higher whenever they fall, we should expect to see the blue line above rise relative to the red line, i.e. the magnitude of bounces off the lows should be disproportionate relative to the level of close-to-close volatility.  Macro Man calculated this ratio going back to 1982; the chart is pretty noisy so he doubled the observation window to 60 days.


As you can see, the ratio exhibits a strong tendency to mean-revert, with a long-term average ratio of 0.71.  The latest datapoint in the chart above is 0.67, which actually represents a below average magnitude of intraday bounces relative to the general level of vol.  In fairness, the shorter 30 day window does register an above average level of 0.77, but that is well within the bounds of normality as you can see above.

An argument can be made, however, that while intraday volatility is a function of the general vol environment, using the latter in the denominator can distort the signal lower in high vol environments.  This is most easily observed in the sharp blip lower in 1987, which of course represents the volatility engendered by Black Monday.  Macro Man solved this problem by calculating the intraday rip (i.e., difference between the close and the low) as a proportion of the intraday trading range (the high minus the low).  Macro Man can honestly say that he learned something after performing this study.


It turns out that the SPX generally closes closer to the high of the day than the low of the day, a tendency that has persisted for at least the last 30 years.  Without giving it much thought, Macro Man would have supposed that the average close would be right in the middle of the daily range rather than skewed towards the highs.   Upon further reflection, this could reflect the tendency of asset managers to trade disproportionately high volumes in the last hour of the day.   Regardless, it's an interesting phenomenon: since 1982 the SPX has on average closed in the 55th percentile of the day's trading range.

What about recently?   Again, it's difficult to discern much in the way of sinister behaviour.   The 60 day moving average of the indicator is below the historical average, registering 0.52.   The 30 day moving average is above the historical average by roughly the same magnitude, posting 0.58.  Either way, it's difficult to suggest that recent intraday price patterns are in any way unusual.

So there you have it.   Over the very recent past intraday bounces have been very slightly larger than normal, but nothing to excite interest.   Indeed, over a slightly longer window of time the bounces have been smaller than normal.  The answer to the question posed in this post's title, therefore, is pretty clearly "not very".


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Polemic
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February 25, 2016 at 7:12 AM ×

That was a really interesting delve MM, thank you. On your last point, the surprise at finding the closing price on avereage above the mid point of the days trading range.. could this be due to markets now being a lot higher than where they were 30 years ago so there is a natural small up bias to be applied across the whole data set? If you take off 'total rise/total days' for each sample does the up skew still exist?

Cheers Pol.

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Anonymous
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February 25, 2016 at 7:24 AM ×

Facebook now have like 5 types of likes and Macro Man still none?! Big like on this one though.

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Bill Luby
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February 25, 2016 at 7:47 AM ×

Exceptional work, MM. I will use some of your research as a jumping off point for some additional research and link back if I make any traction.

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Stark Staring Bonkers
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February 25, 2016 at 8:19 AM ×

NO! It's the PPT, I tell you. The BoJ was in the market. ECB, BoE, RBA, PBoC, RBNZ, Bank of Mars. They're all at it.

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Anonymous
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February 25, 2016 at 9:13 AM ×

I have no idea/data of the relative impact of leveraged ETFs on SPX but they may fuel (but obviously not trigger and effect works both ways) a reversal pretty heavily if they prehedge through the day like they do on Nikkei.

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Nico G
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February 25, 2016 at 9:21 AM ×

selling all EUR for GBP here - a 26% premium for the world most liberal economy (UK) vs. the most crippled, technocratic panier de crabes is quite a cheap entry

lots ot volatility to expect but 1) don't believe UK will exit and 2) if it were it would be GREAT for everything British and 3) don't believe we will ever see late 2008 low (at almost parity) for all the reasons aforementioned

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Leftback
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February 25, 2016 at 9:51 AM ×

Interesting analysis, MM. Of course there are always going to be those who don't like the data to get in the way of their thesis...

On that note, we are starting to get a lot of commentary on a variety of blogs and web sites about how various asset classes (spoos, oil, etc.) "should" be going down here. That's usually a sign of slowly bleeding bears, and typically presages a period of choppy price action and a slow low volume grind higher in the Spoos. Just sayin'.. this current move probably will not approach exhaustion until all the bears have sloped off back into the woods, and even the sheep have grown horns again.

We are short the long bond here, for a short-term punt. Actually paying the Japanese government for the privilege of owning their 10 year debt denominated in JPY seems to reflect an investing philosophy that might perhaps be questioned, and as such the current enthusiasm for govies in general is vulnerable to a little bout of mean reversion....

Agree with Nico G that UK equities represent a bargain buy these days, and since most Brexit campaigners are members of the Monster Raving Loony Party that risk is currently over-estimated. LB has enjoyed spending and exerting the power of King Dollar this week, though, while visiting his homeland.

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'Ouses, 'Ouses, 'Ouses
admin
February 25, 2016 at 10:41 AM ×

Great post, and that WG Grace line was worth the ticket price alone.

At risk of stating the bleedin' obvious, those who've been following markets for 20, 30 or 40 years (err, speak for yourself) have a far greater window of experience to draw upon than the (seemingly) many members of the short pants brigade whose window apparently opened post-GFC and consequently view all market action through a specific, but illusional, prism. These guys should relax a little, perhaps relinquish some of their egos and contain their desire to appear "right" in front of the peanut gallery. The market will be available next week, next year, next decade & beyond (our machine overlords permitting...), and it, like the peanut gallery, could not care less about your egos. Recognise how fortunate you (we) are to have a resource like this (MM blog) and all for the bargain price of SFA - rather than abusing it with repetitive CB one-liners, toast the host instead.

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Leftback
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February 25, 2016 at 10:44 AM ×

Hear, hear, as they say in Westminster. A few more highly unfashionable thoughts, based on recent price action in EMs. The CGDF (commodities going down forever) mind-set is quite well cemented at this point, along with concerns about China, and would lead one to suspect that all EM investing vehicles continue to be beaten senseless, but data suggest otherwise:

Mike Gayed: The Most Unexpected Bullish Trade?

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washedup
admin
February 25, 2016 at 11:04 AM ×

MM - you get the Palm Civet award for turning conspiracy theory garbage in to Kopi luwak (or as nico calls it, everyday coffee!)

Left yes I am not quite sure this is THE time to make a move on all things EM, but we are getting like, really, really, close - so close that if one had the testicular fortitude to survive the bear raids for the next few months, it could be a 5-6 bagger over the next decade - problem is of course the usual one,the trade-off between missing the first 30% rally and conserving powder etc.

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Nico G
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February 25, 2016 at 11:09 AM ×

but then again washed, what do you do with all those bags

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Anonymous
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February 25, 2016 at 11:28 AM ×

Hi MM- great work this.
as somebody who has traded equity derivatives for close to two decades might add my 2 bits..
during the 08 period variance swaps were a huge part of flow index books...much less now.thus in the high vol environment all flow books would be the same way to hedge on the close thus any moves got exaggerated- if we had a good up day there was acceleration near close and pushed prices higher and on down days the reverse happened. there is nowhere the same amount of inventory now ..

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washedup
admin
February 25, 2016 at 11:30 AM ×

@Nico some ideas - let it be noted MM is not the only one who can turn lemons to lemonade.
http://lifestyle.allwomenstalk.com/creative-ways-to-repurpose-coffee-sacks

MM - as I think more about your findings, it would actually be strange for the market to close below the 50th percentile intraday while exhibiting a positive drift over long periods of time,partly to Pol's point. I took an unscientific look at the 2007-2009 bear market and as you would expect, more red candles than green in a downward drift.
Maybe the more subtle point here is that if we are still hovering at 58 percentile, this market is not yet in the 07-09 mode?

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jbtfd
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February 25, 2016 at 12:03 PM ×

As with all stats if you measure the wrong thing, you get the wrong result. Many statisticians can "prove" EMH and how all financial markets are random. Others can "prove" otherwise. So take your pick.

I also ran some stats on yesterdays's price action in spoos. I was not measuring intra-day volatility compared to an historic average, but rather certain statistical properties in price action. The results were v interesting. Yesterday and the previous Wednesday exhibited statistical properties only found in ~0.5% of the trading days in my multi-year sample. So quite unusual.

There is also the "common sense test"... when poor data from EZ and US drives the Dow futures down -300 points, and then they are reversed higher to close +350 in a couple of hours with non-stop algorithmic buying, one can detect somewhat unusual behavior.

As a result of yesterday's price action, the -6% drop in China has been ignored, and US indexes are holding their highs on Globex as EZ indexes are pushing higher (Stoxx up +1.8% today). Again, a little unusual compared to the last 2-3 months.

Meanwhile we continue to make profits.

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Nico G
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February 25, 2016 at 12:13 PM ×

in light of anon11:28 input i would beg to differ there is an immense amount of short vol sellers. Less proprietary desk it's true, but a lot more retail this time around which makes it worse. I am talking friends who are still in college, replicating the 'winning martingale' used by their fathers who have sold VXX the last 4 years and proclaimed themselves wizzardo genius.

suddenly you get emails from them last August, or last month when they feel the heat. The horrid complacency on US equities and consequently on equity derivatives makes the global picture awfully fragile, do not kid yourself, the world has every reason to want to floor the spoos at 1800, but it seems a little too 'cosmeto perfect' to me. If you want higher highs, you need to flush all the leveraged scum.

if you don't flush well we won't go anywhere and it's the realm of immensely profitable range trading on that side of the screen.

meanwhile... lower highs in Europe which already functions and performs like a true bear market.

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Anonymous
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February 25, 2016 at 12:14 PM ×

Bullard on CNBC for next 2 hours. Watch your 6!

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Anonymous
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February 25, 2016 at 12:20 PM ×

With Dax up +100 (on bad news) it just ramped another +50 in 5 mins (cue the Bullard). I'm glad CBs have no effect on equities.

Also loving Nico's "bear market", where "bear market" = equity indexes rise +300 points a day. Imagine if we had a bull market? ES would be at 4000 in a week.

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Macro Man
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February 25, 2016 at 12:38 PM ×

1) @ Pol, etc. I am not sure if you can use the positive drift of the SPX to explain price action. In the sample size captured here, the average daily return of the SPX was 2.6 bps. The daily hit ratio was 52.5%, with the average winning day rising 72 bps and the average loser falling 74 bps. You don't need stocks to close closer to the highs every day with this profile to explain historical price action. Also note that gaps are not covered in my study, which is another explanatory variable to historical returns. Perhaps gaps are skewed to the downside, which would then "require" upside daily drift to explain historical price action. I dunno.

2) @jbtfd In my long experience (which I suspect is greater than yours), there is a strong inverse correlation between the amount of gloating a trader does and the actual P/L that he generates. As such, I am unsurprised that you brag so much.

3) @ Anon 12.20. 12m high in SX5E ~ 3800. 12m low ~2650. Current price ~2850. Drawdown from high of 25%. Bear market. QED.

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Anonymous
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February 25, 2016 at 12:41 PM ×

Em is contrarian ? Citi and Goldman just put out overweight for that.

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Anonymous
admin
February 25, 2016 at 1:01 PM ×

Pimco too

http://www.bloomberg.com/news/articles/2016-02-24/pimco-adviser-sees-the-trade-of-a-decade-in-emerging-markets

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Anonymous
admin
February 25, 2016 at 1:03 PM ×

re nico: what i was saying was there are just not that many var swaps on books now...yes vol sellers have shot up( just see vol efts or vix futures) but vars had an impact on end of day hedging thus exacerbating moves ...vol product on their own will lead to higher vol and vol of vol...
BTW specs are long vix futures now so more likely vol headed lower

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Anonymous
admin
February 25, 2016 at 1:07 PM ×

jbtfd & Anon don't understand bear market rallies shocker.

And asfor this:
"There is also the "common sense test"... when poor data from EZ and US drives the Dow futures down -300 points, and then they are reversed higher to close +350 in a couple of hours with non-stop algorithmic buying, one can detect somewhat unusual behavior."

If algo buyers popped it 350, who sent it low in the first place? If this happens every time, what position do you think algo has at the end of the day? If flat,where does it cut? Right at the top?

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Nico G
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February 25, 2016 at 1:23 PM ×

anon1220 & co

you are the reason why i spend much less time on this admirable forum and i will say for the nth time, you lot add no value to the discussion and are wasting everybody's time with your 12 year-oldish verbal incontinence. You are really working against MM right now.

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Anonymous
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February 25, 2016 at 1:41 PM ×

Dont feed the troll guys, just skip over their comments... There is a reason y they disappear during down days...

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abee crombie
admin
February 25, 2016 at 2:15 PM ×

Nico welcome back and cheers for the thoughts on Cable... I am not an expert on it but the chart looks crap. Well sometimes when the chart looks crappy thats the best time to buy (along with a surprise), like in the CAD, wow what a move, and nice call. Now if only the MXN would follow ;-)

Interesting thoughts from JPM quant team a last week I only go to now

Global profit expectations are in free-fall and the backdrop remains
unhelpful and challenging for equity prices. Over the past month, sell-side
analysts’ 3-month global EPS revisions have now hit levels that were last
seen in Q4-2011. It is worth noting that over the past twenty years, global
EPS revisions have only been lower on 3 separate occasions (LTCM, Post
Tech. bubble, and GFC). Simply put, for EPS revisions to decline sharply
from here, a major event has historically occurred leading to a profits
recession.....
we think there is more value in highlighting signs that
often precede a potential trough/ bottom in the EPS revisions cycle. History
suggests when EPS revisions stabilise, often 1) falling price momentum
stocks will outperform rising price momentum stocks, 2) manufacturing
orders rise faster than inventories, and 3) usually this has occurred during
Q1 and Q2, when seasonality supports rising stock prices and EPS revisions.

So here we are in equity land, with a nice bounce in the US (some beaten down value names leading, along with some more defensive sectors like utilities and staples) yet as Nico pointed out, EU making lower lows as well as Japan. Though it should be noted, both those markets have high exposure to financials and autos, which are not performing well.

But as JPM pointed out, some "greenshoots" are here in terms of market action but yet eco releases are not surprising (yet?) . Very very tough to make a macro equity call here, imo

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Short trouser militia
admin
February 25, 2016 at 4:15 PM ×

I think we should no platform anon

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February 25, 2016 at 5:02 PM ×

Something serious happening on rates world... it's going out of control...
it's scaring... swap curve to 5 yr negative in euro or Jpy?

someone will be let out in the cold...

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Anonymous
admin
February 25, 2016 at 5:39 PM ×

I actually agree with jbtfd's second point: even with EM and China's weakness, spoo still keeps flat, it is very likely that spoo is going to move up first, which is not that different from LB's observation.

Regarding GBP, it is an event trade and the voting is set in June. Is it too early to jump in and bet on the reversal?

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Anonymous
admin
February 25, 2016 at 5:41 PM ×

@TheBondStrategist,

Could you pls discuss in more details for us bond rookies?

Thank you

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abee crombie
admin
February 25, 2016 at 5:42 PM ×

was just talking to a friend in Canada. House prices just going nutty. Bidding wars and no inventory.... like cramer says, there's always a bull market somewhere. Crazy thing is that this type of behaviour has been going on for at least 5 years already. And I thought prices were expensive in 07.. lol

http://www.cbc.ca/news/business/housing-crea-january-1.3449838

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Polemic
admin
February 25, 2016 at 5:59 PM ×

First non correlation day in a while. DM eqs up, oil down, USDJPY up , China Down. bunds up, etc .. directionless noise?
revving up for the next big direction? I really don't know which way from here so waiting for resolution but people feel overall bearish ( jbtfd doing his best to average them out but not enough to cancel them) But fear and loathing story recycling still rife.
I wonder whether bunds are stupid bid not only on ECB to the rescue ( in which case disappointment will result - it always does when the market counts on CB action) or on Brexit. if brexit happens the strains on rest of europe will be even more intense so safe haven bund buying.

Narrative on GBP seems to have dried up, probably because it isn't falling. Waiting for the short squeeze to pick up a pace.

Still think Cameron should be seen to be talking to Putin - that would scare the hell out of Germany !

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Hotairmail
admin
February 25, 2016 at 6:17 PM ×

Nice one. Re Pol's comment - plus, does the market tend to open with a gap down versus up?


Lastly, is that THE Bill Luby? Your famous!!


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jbtfd
admin
February 25, 2016 at 6:56 PM ×

Momentum ignition algos push crude up $1 in less than 30 mins, Dow Jones up over +100 points due to same algo. Ofc there is no news and it's lunchtime in the US (lol). Anyway imagine if I'd told you in advance that we'd see US indexes push higher? Oh wait, I did...

This is easy money people. However, going forwards I'm going to ask the bears here to just wire me their funds directly - it'll save us all this bother.

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Anonymous
admin
February 25, 2016 at 7:01 PM ×

Here's a shiny quarter. Now will you STFU?

jbtfd's theme song

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Anonymous
admin
February 25, 2016 at 8:33 PM ×

http://www.zerohedge.com/news/2016-02-25/intraday-market-rescue-team-most-active-2011

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Macro Man
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February 25, 2016 at 8:42 PM ×

Haha, ripped off and mis interpreted. How very ZH

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Polemic
admin
February 25, 2016 at 9:09 PM ×

You are getting riffed everywhere today MM. well deserved.
I'll have fiver on the next conspiracy theory to tie together the Chines o/n dump and US rally is that the Chinese are allocating all their wealth out of china. PBOC and have given it to the US algos to manage. .. 3...2...1..

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Celeriac1972
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February 25, 2016 at 9:14 PM ×

I'd go for imitation as the highest form of flattery....

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Anonymous
admin
February 26, 2016 at 12:56 AM ×

From Josh Brown...from an article entitled "Abundance"

"Here’s the perfect business idea for this environment: Open a Hundred Dollar Bill Store™. You sell hundred dollar bills for ninety dollars each. You’ll lose ten dollars per transaction but you’ll do a trillion in revenues in year one. Maybe you show an ad to everyone who walks into the store and you break even. User growth with be on the order of 1000% per month. A billion users. You’ll be the biggest IPO of all time when Goldman’s underwriters get wind of that growth rate. Go public and let someone else worry about a competitor selling hundred dollar bills for eighty-five."

http://thereformedbroker.com/2016/02/25/abundance/

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Nico G
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February 26, 2016 at 1:33 AM ×

brilliant Josh as usual

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