Archive for the ‘Time Triads’ category

Interview

Cred că viața trecută am fost un transilvănean

When I first met him, I had the feeling that a movie star was in front of me. He looks like a movie star, but he thinks like a visionary. He comes from India, the largest democracy in the world, a country with an incredible past, and a bright future; a land of choices, a country with as many Gods as you can count, and a wonderful cuisine. Not to mention the incredible philosophical, religious, and cultural traditions and also the amazing scientific discoveries. That’s why it was not very clear to me, at the beginning, what he was doing here, in Romania, in Cluj. After a while, I understood.

Besides learning Romanian, Mukul Pal is doing a great work. He is the founder of Orpheus Capitals, a company that provides business solutions, and has conferences all over the world. He can choose to live in any city in the world, but he prefers to consider himself “un transilvănean”. He will tell us why.

M.G.: Who is Mukul Pal?

Mukul Pal: A signature of TIME. Like anything else that ever lived or will live. Or anything else that will die or decay. I always believed that this signature, which we are, is about a (not THE) fire is us. We have a choice to let it burn fast, burn slow, extinguish, reignite, create new flames or just let it flow. We all create something, even if we use the flame to destroy. I am doing my bit of creation and destruction, creating new ideas, while disrupting some old ones.

M.G.: From Delhi to Cluj is a very long way… What made you choose Cluj-Napoca?

Mukul Pal: Cluj; I could not even pronounce it. Now I can. Cluj happened to me. Was it love at first sight? Maybe. What matter’s is that the love is going strong. I love the city and it loves me back. It’s strange how this Pygmalion effect panned out. I came with no expectations, dreamt of building a business, creating an idea. Cluj helped me think, nurture, groom, test, fail, reinvent and evolve. It was like a sapling in a nursery. You incubate it and then you take it to the world and it blossoms everywhere. Many things can’t be explained. Loving a city is a strange emotion, the more you resist it, the more it grips you. How else can you explain love despite all odds? Maybe it’s what you put in that comes back to you. I came here searching for something, a part of what I found is still with me, as a creation that accompanied my journey and ofcourse great memories, lifelong friendships, goodwill which keeps pushing and taking me ahead.

M.G.: Mukul, tell us more about your Romania.

Mukul Pal: My Romania is the land of good people, with good heart, a non-corrupted soul that knows that’s it about being human first. This is not only because there is enough for everybody, but because corruption of character did not reach Romania yet. Maybe it’s not that rampant. I think this intrinsic character is what makes it like a cohesive village. My Romania is the land of self-sustainability, where there can never be a food crisis. There could be another round of hyperinflation, because like everyone else, My Romania sometime believes that the grass is greener outside. But it’s the opposite. The power is inside not outside. Take any powerful nation, the strength comes from innovation inside not from borrowing innovation, strength comes from conservation rather than consumption. So My Romania is capable of virtue, as it has all it needs to shine. But cyclically values prevail over virtues and every nation gets an opportunity to build back a nation back to greatness.

Another of my projects which I am working with a close friend is called “it’s neither mine, nor yours”. The project starts as a book to explain the virtuosity that we should show with common assets. My Romania does not belong to you or to me; it belongs to both of us. Just like My India, is not just mine, it’s yours too. The time we start thinking of the world as a common asset, we can avoid the tragedy linked with commons. Not that the virtuous utopia is normal, but that virtue fights relentlessly with viciousness of the economic or moral life. So sooner or later despite the stronger bad, the weaker good persists, prevails and sustains moral growth, which drives the economic and political fiber of a great nation. My Romania and My India have everything they need to become great nations.

M.G.: At one moment you said that “Cred că viata trecută am fost un transilvănean”. How come?

Mukul Pal: Cause and explanation has come under attack more now than ever. Like many big names in the past like Joseph Schumpeter, Samuel Benner, Vilfredo Pareto, Herbert Simon, Karl Lamprecht and many more my work explains mathematically how it’s not just above cause and explanation but an order. Though this is more about my scientific work for the current historical times and systems, metaphysically speaking why the order of one life could not continue from a previous life, assuming a previous life existed? This is why I assumed that my being here could have been linked to some previous life order. Talking about previous life I want to give myself more thinking space, the old Transylvania at 100,000 square kilometer could have done just that.

M.G.: What is Orpheus Capitals and why this company is so important for business solutions area?

Mukul Pal: Orpheus Capitals is based out of Cluj. The company is built on an idea that geometry, patterns, order and structure that we see in nature are really not in nature but in the underlying time on which natural systems grow and decay. And since understanding TIME can be only done through data, data has a commonality, a universal character. We call this ‘Data Universality’ at Orpheus. Simply putting this means, a set of data from a natural system or variable can tell you everything about the future growth and evolution of the natural system or variable.

M.G.: You were invited to conferences, all over the world, from Delhi to Dubai, San Francisco, Chicago or Budapest. You were also invited at the famous TEDxCluj conferences. How is the public interacting with your ideas?

Mukul Pal: Today’s audience is open to new ideas. The society is consuming information like other economic goods. Moreover the society is in a state of flux as new ideas replace old ideas. We are in experimenting times and even the avant-garde is appreciated and criticized. It takes very little for an idea to traverse the globe today. We have had a good reception to our ideas and this is why these invitations, we have not reached to the criticism stage yet, as we just started talking about our idea and sharing it. The idea is disruptive, and disruptive inventions, leading to innovations, leading to a business use usually takes some time. The best part is that because our idea is scalable we have a cross industry usage. We are already implementing these usages in real cases. This also makes it easier for us to illustrate the workability of the idea. We are positive going ahead that we will get more traction and global acceptability.

M.G.: You just published a book, Risk Management Indices. Tell us something about it.

Mukul Pal: Indexing in this case is a financial term, which refers to as a benchmark. Markets of all goods need benchmarks to follow, as they are expected to be superior, popular, and well-constructed to represent the universe. There are few original indexing innovations over the last 150 years. Most indexing innovations have come from United States of America. The reason there are a few indexing innovations is because it’s hard to better the existing innovations and improve the popular benchmarks. Based on our data universality approach, we have been able to improve and enhance the current global financial indexing innovations. The book is planned for a year end release and will be available to purchase on Amazon.

M.G.: Are there any similarities between Indians and Romanians?

Mukul Pal: Yes, generally speaking family is an important part in both cultures. Both of the cultures I find have an intrinsic simplicity and God fearing nature. Both of them i.e. Indian cities and Romanian cities have an English speaking youth. The level of technology skill is also comparable, the reason a lot of overlapping technology businesses. Both places I found the youth to be very forward thinking, up to date and support a risk taking spirit.

M.G.: People often say that “what doesn’t kill us makes us stronger”, or that “things happen the way they are supposed to”. What do you think? Is there a Destiny, out there, for every one of us, or we are our own destiny creators?

Mukul Pal: Darwin said, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.” And adapting is about overcoming what can kill you. Many times what can kill us lies within us, so it’s not just the war outside but the war inside. Mastering the mind is a very powerful way to survive. As I said there is a structure to everything natural, so I believe things are happening as they should, what we need to do as individuals to adapt to the changing times. If in the process we can understand ourselves and master the mind, we create our own destinies.

M.G.: If you could change one thing in your life, what would you change?

Mukul Pal: My life has been a relatively extreme expression till now. I could not have been happy if I would not have lived it, the way I did. I think I was lucky. I think I will never know if I would like to change anything or re-live it. I guess my opinion does not matter. But it’s good to feel that you matter, so I will make myself feel important revisiting this question after another 40 years, hopefully nearing another round of joyful expression, meaningful! Only time will tell.

M.G.: Where do you see yourself in 10 years? Is Romania on the list?

Mukul Pal: Even if we know a lot about TIME structures and order, societies understanding of nature will always be empirical, limited, the rationality like Herbert Simon said is bounded. It’s hard to predict tomorrow. And sometimes your friends know more about you than you do about yourself. With all the forecasting I have done, I appreciate and acknowledge uncertainty. India gave me a personality, Romania gave me a platform to think and it seems USA would give us the breakthrough. So I guess one of them will know, what will happen to my journey tomorrow.

Thank you, Mukul.
Multumesc frumos, M.G.


The Chicago Quant

 

I was invited to speak at the Princeton - UChicago quant conference on Nov 8 by Illinois Institute of Technology, Stuart School of Business.  Chicago was a bit sunny when I arrived (a week later came the tornadoes). Confused between south and north, using Starbucks as reference points we moved around the city hopping business meetings and figuring out how to reach party ground in the evening. Moving from Barnes & Noble book readings to sitting through the Chicago music studios at Kildare, the city was bustling with activity. Two days were definitely less but the skyline, CBOT, CBOE, the L, and flying over Lake Michigan to cross over to Toronto gave little time to appreciate how cultures thronged across a water body.

All this co-existence of social, economic and natural systems somehow were on the same temporal scale as the quant strategies. Every natural system was temporal then strategy and risk associated to these systems had to be temporal. This is how Citadel’s Peng Zhao explained the quant strategies on a scale of holding period ranging from 3 months holding to high frequency (macro, stat arb etc.).

If the holding period could classify a quant strategy, extending quant strategies beyond 3 months could redefine the whole investing industry from active to passive and even redefine the indexing business. The smart betas, dividend indices, custom hybrids on one side and news based analytics on the others, the quants were transforming fundamentals, technicals, sentiment, economics, news into data and the analytics around it. No wonder three of the speakers at the conference talked about news analytics. Then ofcourse there were Options, efficient portfolios and a talk on greed, intuition and systems, and how markets could play the role of both a competitor and a friend.

My talk on “extreme reversion” explained how there were many universal laws, but few or none were used to understand markets. Stock markets were natural systems expressing universal laws. It was not easy to build a framework using such laws, as failure or noise affected universality too. Mean reversion was a universal law, which also suffered from failure and noise. The patterns and noise in mean reversion has been witnessed across subjects like Behavioral Finance, Intermarket Analysis, fundamentals and Statistics etc. However, little has been done to understand the failure of mean reversion. My talk focused on comprehending the failures of mean reversion and how it could be redefined into a better statistical and universal risk management framework, have cross sector application like investment management and predicting trends etc.

The talk also explained how active vs. passive debate was redundant as both investing styles shared common temporal scale and active had no business to be, if it could not beat passive styles consistently. The very fact that active style has floundered was because of a lack of framework, lack of stock market science, which is why market participants see investing (trading) on a piece meal rather than on a continuum.

We needed to find our context in a framework. Context is defining a relevant universe for a special stock market problem. This universe could not be the 100,000 traded underlying and or the 1 million top traded derivative instruments. If computing was the answer, we would have found it by now. Computing could crunch big data faster; but markets needed data universality; common rules, which simplifies the problem rather than complicates it. If computing power had the answer, we should have found the framework by now.

Why was the context so essential to define any stock market problem? First; because it’s easy to give the stock market problem a causal explanation. Second; the agents (variables) have increased; and many variables can claim to have a causal relationship to the behavior. Third; despite the seemingly working causal relations active performance was dismal. Fourth; there was no objectivity regarding which cause was better than the other; was psychology more objective or was it sentiment data or was it fundamentals, statistics or technicals. We could just see causal patterns, but not measure them or understand what drives those causal reasoning. This is why the need for a framework which could encompass, explain, classify available investment approaches. Once the framework fell in place, quants could really take over and extend the work done by the UChicago laureates Fama and Hansen. The conference ended with a Sears (Willis) tower feast at the 66th floor.


The Data Universality

A worst performers’ portfolio delivers more than a best winners’ portfolio over longer terms of investing.

UNIVERSALITY

 

Building my case from last time (the fortune index), where I suggested databases should talk to themselves and if natural systems express universal laws like patterns, divergences, seasonality and constants then the data generated or derived from these natural systems should also express this universality. And if the data also express this universality then the question to be asked here is whether the universality character lies in something common to data rather than to a natural system.

This is what we refer to as data universality. Universality can be defined as “The aspects of a system’s behaviour which are independent of the behaviour of its components. And even systems whose elements differ widely may nevertheless have common emergent features”, then Data universality can be defined as the “common universal behaviour of any data set irrespective of its organic source of generation or derivation.” Assuming data universality is a science. What does it bring down? The elephant blows away the blind folds and finally psychologists, technicians, fundamentalists, statisticians, mathematicians, scientists, etc. talk the same language. What is the problem we solve? Apart from pushing stock market into the scientific domain, we could address the problem linked with all complex systems and, we could understand complexity at a unit level. Why could we not do it till now? Interdisciplinary science is relatively new. An economist or physicist never thought their paths could meet, till one physicist jumped the ship and created Econophysics.

There is a key fundamental idea of value and growth cycles and that the premium markets give to growth over value. Robert Arnott has researched extensively on the subject and has built a novel fundamental indexing approach around it. We recreated the similar value and growth divergence using derived ranking rather than using pure price or fundamental data.

We took the top composite indices of India, Japan, Austria, UK, Australia and US, ranked their components using our data innovation approach and created two portfolios, a worst losers’ portfolio and a best winners’ portfolio. Barring Austria and US where the worst losers matched in performance with the best winners’ portfolio, the worst losers’ portfolio beat their respective benchmark performance over a five-year rolling return for all the markets.

What does this suggest? This suggests a few things. First; a worst performers’ portfolio delivers more than a best winners’ portfolio over longer terms of investing. Second; Worst performers’ portfolio generally does better than the market i.e. value is superior to growth over the longer term. Third; fundamental behaviour between value and growth does not need just fundamental data, the same value and growth divergence can be illustrated in ranking data from any group of market assets. The question arises yet again, is the value and growth divergence owing to fundamentals or owing to data universality?

Another paper written in 2004 by “Universality in multi agent systems”, Parunak, Brueckner, Savit on Universality talks about universal behaviour of natural systems. The three stages consist of randomness, order and herding. Call it coincidence but stock markets have a similar three system behaviour (previous article). The extreme reversion universal system explained in chapter IV ranks performance over three broad segments; worst and best (below 20 and above 80 percentile ranking), near 50 percentile, and rest of the region. The universal behaviour expresses itself in rankings. Again the data representation prevails despite different group characteristics.

The universality paper also suggests that the reason agents don’t optimise our decision making is owing to time constraints. The gap here is that the authors don’t connect seasonality with universal behaviour, or in other words they don’t connect and study the confluence of universalities.

Extreme reversion comes from a confluence of universalities. Because seasonality is an essential component of extreme reversion (best becomes worst and vice versa) there is a focus on understanding timing constraints (The question of when? is addressed). Which stage is more likely after randomness, order or herding? The performance cyclicality (extreme reversion systems) is also connected to multiple holding periods. Performance is growing or decaying differently for different periods. This is why any system that assumes timing aspect to be inherent to the decision making process could be a better model for understanding universality and hence comprehending risk better.


Nobel’s Interdisciplinary Connections

NOBEL PRIZE

Somehow my Interdisciplinary mind registered Eugene faster than Fama. After all Eugene Stanley the father of Econophysics could also get a Nobel. If Psychologists could get the biggest award for Economics, a physicist could have been there too. But then the surprise became bigger, not because it was Fama not Stanley but because Robert Shiller shared the award.

When Behavioural Finance got the Nobel for Economics in 2005, the economist magazine carried an article pointing out how a new theory had junked 200 year old classical economics. It was not just media, but even the psychologists who were bent on burying the classical economist. Efficient market hypothesis was presumed dead. It was considered deficient. I indulged in it too (early 2007). But over years, defending the underdog changed to understanding the new theories and then finally even questioning them (Shiller’s exuberance, End of behavioral finance). It’s a fight between perception and reality at a certain point of time, which ofcourse is dynamic, leading to new perceptions and new realities at new points in time.

Now that Fama has been acknowledged yet again, his tough stand against Behavioural finance as stories of anomalies can be seen in a milder light. After all standing there with Shiller, would definitely make him believe, “even together we don’t know all the truth”. The blind men and the elephant metaphor remains a strong theme. My elephant is efficient, while yours is inefficient has been overruled by the Nobel committee which believes that the elephant is both efficient and inefficient sometime. The failure of Behavioural finance to take it from the fundamentalists can be viewed as a victory of sorts, but it’s still an illusion. The Nobel Prize bashers like Taleb also won’t enjoy this as there randomness theories get weaker by the day.

The committee needed Lars Peter Hansen to balance. What did Hansen do? Hansen says that both efficient and inefficient schools could be understood better with more testing as the economic system is not static, it’s a dynamic system with multiple moments. Is this not a step ahead toward assuming markets as natural systems? Are the laureates not struggling to understand divergence, why are markets not predictable on short term and why are they predictable on long term? Where does the predictive element vanish and reappear? Is the question for the Nobel Prize winners not about understanding error in context of time? Which is what Hansen is saying, we need to look at the fluctuations, errors and divergences over multiple moments before we start to understand what works and why it works.

We may call it conflict resolution or Hansen’s way to explain why interconnected variables fail and succeed but at the end of the day the objective is to understand complexity and risk. So the 2013 Nobel concluded a few things. First markets are natural dynamic systems with coexisting efficiency and inefficiency. And we may use psychology case to explain the effects, but we are still far away from determining the underlying laws driving risk, growth, and decay in all natural systems.

Do the answers still lie in understanding the framework for universal laws, their confluences and interactions and the macrocosm in which they operate and influence the multitude of groups creating the deterministic disordered chaos. The 2013 Nobel has forced us further in the interdisciplinary path where fundamentalist, statisticians, psychologists, physicists must work hand in hand to find new universal laws which can select, invest and predict trends.


The Fortune Index

googly

Data models should work across regions, across nature, across data sets. This means “Data Universality”. If natural phenomenon exhibit universal patterns like geometry, outliers, 80-20 principle, mean reversion, fat tails etc. then the data these natural phenomena generate should also express a similar behavior; actually they do. But we still consider data sets as religious, the stock market data is for financial analyst, while the sub atomic data is for physicists, the social network data is for marketers.

We see similar trends in all data sets but we don’t mix and match sub atomic, social and stock market data. Why? Because it would be kind of blasphemy when Higgs particle would illustrate a high correlation with a high frequency dollar signal. The objective thought would be that stock market data can’t be reconciled with sub atomic data as the respective elements vibrate at a different frequency. Yes, that’s true, but social data has a workable frequency with stock markets. This is the reason twitter forecasting is in vogue, and companies are relying on the sentiment today to under consumers and market trends. It would not shock me if there are market systems out there using twitter data to trade.

What’s the problem? The problem is like Charles Handy mentioned paraphernalia. Calling a seamstress a designer does not change her real role. In the process of finding and worshiping big data tools, we claim to have moved to the next stage without acknowledging the elephant in the room. It’s the same elephant but we call it something else. We chose to ignore that the answer to tomorrow’s problems is not in a discipline, but between disciplines.

It was about 36 months back we started compiling small non capital market exercise. We took Google search data for Fortune 500 companies, various emotions (fear, greed, happiness etc.) and ran our data algorithms on the same. Just like gold, oil, dollar we could create cycles of growth and decay for simple web data. We could predict which Fortune 500 companies would be searched more and which will be see decay in search. Last week we went a step ahead. We actually benchmarked it to the google search data. Assuming Fortune 500 search date to be a set of time series like that of stocks, we applied the ORMI (Orpheus Risk Management Index) Active methodology to select which of the top Fortune 500 companies will be searched more, assuming we made money if our portfolio of 10 selected companies were searched more. This is what the companies actually need to know, are they going to be searched more or searched less (assuming positive search is positive bandwidth).

In a short period of 24 months (search data has limited history) our ORMI Fortune Index moved up from 100 points to 120 while an equal weighted google search data of Fortune 500 fell by a negative 10%. ORMI Fortune Index outperformed its respective universe by 30% over 24 months. This outperformance was a proof of predictiveness, which is where data mining should head rather than subjective extrapolation, which can’t be quantified. How much is your data-mining adding to your bottom-line is quantifiable. The top 10 potential search growth companies on google search lead to six selections viz. AMGEN, DOW CHEMICAL, HALLIBURTON, MCKENSSON, DANAHER, CHEVRON, four components in the model were cash. How we integrate this model to stock market forecasting is another step. But the current work proves how lacking the current data tools are. We illustrated more such non capital market or social mood cases over the last few years. When Spain came from the negative outlier to end of winning the world cup; Long Football-Short Baseball illustrated how time series for sports can be dissected like any other stock market time series.

We explained the problem with current web search in ‘Jazz and Trading’.  Despite all the current search tools, I can’t find the American jazz singer I heard a few years back. The search is not cognitive or semantic yet. Google could not help me reach the singer because I needed related search parameters. What was her age? Was she an African-American? What was her net worth? Suddenly, something so relevant for me got lost in the deluge of information. The problem with search is lack of smart catalogued databases, which can understand each other. Only when databases are able to understand each other can data come alive and make search smarter. In the article ‘Researching Google Search’, we explained how everything from the number of searches to what we search is connected with time, and any predictive cycle tool that can measure and anticipate emotion can help researchers understand where a society is headed and where it was when hope was rising and where will it go when hope shall fall.

DOW.CHEMICAL

The age of big data accompanies numerous data types like web date, social data, and consumer data. Hence it has become essential to lay down a framework for data universality. This means commonality of behavior, commonality of patterns and data character. Such guidelines could make data visualization, transformation and interpretation easier. The natural universalities leading to data universality can harmonize big data classification and improve predictive model.

What does real data seasonality tell us? Variable growth and decay for multiple periods (e.g. intraday, weekly, quarterly, or for the decade ahead). Why is it important? Because nature is not just about growth, it’s also about decay. Extrapolation of a trend is incomplete science, understanding when that extrapolation will peak is as important. What is missing today and where is the need for value addition? The society is missing the connection of growth with decay (seasonality), the temporal element of growth and decay, the lack of data universality, the lack of acceptance of interconnectedness of everything with everything, the lack of anticipation whether it’s really the butterfly creating the tornado or did the role switch to the tortoise from the butterfly last week as the butterfly decided not to flutter. What does this mean in business terms? Everything, if you can’t anticipate, you can’t recreate past or construct future, you don’t understand the data set. What is the secret sauce? The secret sauce is universality. If all data sets exhibit a universal behavior, data manipulation should be based on these universalities and seeks, identify and enhance the respective natural patterns. Tomorrow’s data should know that google and googly are two different things.

ORMI.GOOGLE

Related Links

Jazz and Trading
Researching Google Search
How did Spain reach that far?
Long Football, Short Baseball
Forecasting stock markets with Twitter
Economist
Predicting the Future With Social Media
The Pulse of News in Social Media
Forecasting with Twitter Data
Twitter mood predicts the stock market
Fortune Index 09.09.2013


Stock Market Science

photo

Why stock market is not a science? Today many elements of our life have a degree of predictability, consumption patterns, social behaviour, earthquakes, etc. However the predictive measure is lacking when it comes to stock markets. Behavioural finance highlighted this lacking measure and accountability. Even statisticians limit themselves to prediction of stock market volatility rather than stock market direction.

Can scientists include stock market as a part of the scientific framework? If you think scientists have more important things to do than stock markets. Believe me this is not all true, you will be surprised how interested physicists can be in stock markets. It’s just that the stock market science is indeed in its early stages.

What will happen if a framework for stock markets is established? Nothing will dramatically change, first the argument between behavioural finance, economists, mathematicians and physicists will get more colourful and then it may take years for some new accepted norms to win over and emerge from the debate. Stock market science just like societal learning is a gradual process.

How will stock market science help? Apart from the fact that it could help understand risk (other name for creating and conserving wealth), could stock market science somehow complete science itself? Could understanding stock markets help us understand nature? Well nothing is impossible when you search for universal rules. If stock markets are natural; stock market science could help us understand nature.

Was it random? I met Professor János Kertész in Budapest. Though I was connected to the professor through an acquaintance at MSCI Budapest, we found that we were also connected through Boston University top global physicist Eugene Stanley (I have a paper with Prof. Stanley written in the early 2000). Janos had worked with Laszlo Barabasi (another leading physicist) while Laszlo did his doctorate under Eugene Stanley. In crux Bombay Stock Exchange was the reason I got randomly connected to three giants of Physics.

Network and knowledge. Laszlo has been featured as the man who could change the world. His work can predict network behaviour, map, comprehend and control a complex system. In his top selling “Bursts” Laszlo explains numerous natural systems. But just like Mlodinow (The Drunkard’s Walk), he does not refer to stock market systems. Networks today are a big data domain issue. Stock market is a database, a network and hence a part of the same big data domain. If there is order within networks starting from Hollywood to proteins to consumer behaviour and today we can treat callers as particles and predict their location with 93 per cent accuracy, then stock market predictably cannot be anathema.

In Bursts, Laszlo explains how natural events portray a statistical Poisson distribution but when we assign weights and priorities to events (tasks) the distribution changes to levy flight, which expresses outliers better. When we create a stock market portfolio consisting of a composite index, a sector, an asset, we are talking about preferences (priorities) leading to weightages (equal or unequal). Even stock market performance, regional performance is owing to the weight global money assigns to the various regions. This is why stock markets universally exhibit the levy flight or the power law behaviour. If physicists would frame the stock market problem differently, we could understand performance (underperformance), comprehend groups (portfolios), improve our selection systems and end up laying a framework for stock market science.

What if? If Pareto would have met Benner, or if Einstein would have met Pareto, interdisciplinary science would be a generation old and the stock market science may already have been in place and space time geometry could look different. Even if we assume to be born in this great time when stock markets could redefine science and vice versa, the network would have to attain critical mass, before we wonder how we did not see it.

Mukul Pal


Banking Special

BANKING

In this special Banking issue we have reviewed the NSE BANK sector index. The monthly prices are retesting 2007 highs near 9,000 levels. The RSI momentum is also heading to historical key supports at 40. This is a double oversold situation accompanied by price and momentum support. To expect prices to just slide below 9,000 and RSI to break a decade low support seems unlikely. We think Banking Sector Index will sustain at the respective lows and eventually lead to a reversal which will take Banking Sector back above previous historical highs at 13,000. Globally OIL has no follow through buying as momentum has got overbought. This suggests that OIL could ease from current levels and face some resistance ahead. Gold also has an over reactive momentum. The current up move seems a counter-trend that should resolve lower. The current update carries some key banking stock perspective also.

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Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


The Smart Beta

 

beta

 

Passive products like exchange traded funds are a relatively new sector to India. It can increase market size and enhance financial infrastructure.

In case you missed it, the Bloomberg Businessweek cover leveraged the male anatomy to make a statement about hedge-fund returns. Though catchy and good for sales, the cover evoked a mixed response and a few considered it was in bad taste. The social mood is so much about jailing bankers that hedge funds should be happy being just derided on covers. The society, like nature, is about extremes, it goes all the way from praising to trashing. We can now draw a four-stage product cycle for hedge-fund success and failure, but active money management also goes through seasonality.

According to The Economist, Smart Beta is a new passive investing approach with more than a 100 billion tracking it compared to about two trillion tracking other passive styles. The Smart Beta’s idea is to enhance returns tracking an asset. Skill and judgment come under test as quants take over. This is the new age of indexing, the commoditisation of alpha and beating the index.

This is some innovation, but why did this take 150 years for passive indexing to wake up. The key reason is the competing active versus passive broad styles. Markets have gone through a succession of crises, in 2000, 2002 and 2008. Investor and consequently regulatory perception has gone through a sea change. Investor psychology judges the worth of active money management differently. Active could not outperform passive as the markets whipsawed, delivered negative returns for a decade. There was a lot of anger against active money managers as they failed to match expectations.

To read the complete article visit Business Standard or subscribe to the Time Triads Newsletter

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


The New Active 2

the new age

We can connect cause to an effect retrospectively now. What happened to India? Are we going to NIFTY 4,500 or is Nifty at 8,000 still running? Apart from the ongoing payment crisis that dampens confidence, the rupee scare, the falling Nifty; there are actually job losses and downsizing. So the ongoing seasonality could be serious.

Can you be insulated? If you thought you were out, currency does it for you. If you thought that also did not matter, it was a job loss. If you still overcome it than it could be onions. You are basically trapped with nowhere to go. We are in difficult times and there are no two opinions about that. Ultimately it’s a concerted effort (polycentricism) that can take us from point A to point B. But this is still cause and effect. Excesses happen because humans extrapolate a trend (run after winners and shun losers), build in capacities and this prices the whole industry out, forcing a balancing decay. However, just like growth all decay and difficult times end, so this will end too. The idea is what different should we do now, which makes us better prepared next time.

From an investor perspective, there is a jargon you should understand. If you are not diversified (multi assets), if you are not looking at more than a few years of holding, if you are worried now about NIFTY (down 12% for the year), and you will be more worried if NIFTY reaches 4,500 you are an active investor who has low tolerance for a loss. There is nothing wrong in being an active investor, majority of us don’t look beyond a year. A few who looked beyond a year got trapped in the 2000-2010 decade and refuse to go passive again. So the passive-active make up changes depending on how the markets surprise us. I have met a few passive investors, who don’t feel trapped, but understand the game and risk that comes with it.

To read the complete article visit Business Standard or subscribe to the Time Triads Newsletter

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


Killing the Insider

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Now with SAC Capital Advisors, a multi-billion dollar hedge fund under attack and potentially ready to shut shop, one wonders what is getting destroyed or created in this process? Who should be excited? Who should feel distraught?

Is it destruction? Rajat Gupta’s wiki page labels him as a corporate criminal before talking about his philanthropist activities. Bad is stronger than good (Nov 1, 2012). Corporate criminal evokes a stronger context than philanthropy. Markets are ruthless. Steven A Cohen’s wiki page does not indicate him as a criminal of insider trading yet. George Zimmerman on the other hand has no wiki page and has been acquitted him from second degree murder. On the face of it, it seems that financial crime is worse than a probable homicide. But it’s the society which has decided to punish the industry and its poster boys. And since negative mood does not know balance, the forces tend to exaggerate and will continue to have a “jail the bankers” approach.

What are we creating? Well because markets are alive, the inefficient is pushed aside and efficient take its place till the cycle repeats. Who survives? The underdog, the underperformer, the inactive, the small size, the big size is cut down either by the society (antitrust) or proactively by the entity itself (downsizing). A girl complained at school about a mischief done by the boys. There were many boys. The girl could remember the few who were leading the mischief. Not everyone from the group came to attention and hence escaped the punishment; availability bias. Society always creates opportunities for the underdog even if he is a part of the same industry under attack, a level playing field for David against Goliath.

To read the complete article visit Business Standard or subscribe to the Time Triads Newsletter

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.