Afternoon Letter

The Newsroom - Quick Snaps of the New Dow Jones Newsroom

I was at the Newsroom earlier today to talk about data for our algorithmic products. I took these quick snaps of the newsroom. It really is a cool place, as newsrooms go; much quieter than most of the trading floors I've been on. All I can say is nice job to the designers.

Enjoy!

Dow Jones Economic Sentiment Indicator

From the impending release:

On April 30th at 9:45AM EST, we will be releasing a new indicator based on sentiment from news stories. Here are the details:

·         The Dow Jones Economic Sentiment Indicator (ESI) is a monthly measure of the relative tone of references to the U. S. economy in 15 major daily newspapers using a proprietary text mining and analysis algorithm through Dow Jones Insight, a media tracking and analysis tool.

·         The ESI is expressed on a numerical scale from 0 to 100, with 0 representing no positive economic references and 100 representing no negative economic references.

So what is it -- a short hand metric to look at economic sentiment using qualitative data. An abundance of words tells you many things either good or bad. Look for it...

Marx Quote Is Bogus, Thanks Pimm, But This Hayek One is Real

OK -- I listened to Bloomberg's Pimm Fox and I got some bad mojo. I should have read the IHT first:

A banker in China recently forwarded this quote to me: "Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism. (Das Kapital, 1867)"

"How prescient Karl Marx was," my friend marveled.

The problem is, Marx never said it - it's a bogus quote that has made its way to Beijing from Wall Street. But the fact that people would look to the father of communism at this time of financial upheaval offers an interesting insight on the state of minds today.
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Whether Marx said it or not, is not muy importante. The fact that it is being relayed at all through a news organization can tell you much about the state of the world and the behavior of market participants. It is constructive of the current state of the market's psychology and mood. As someone who looks at and appreciates the qualitative side of data -- the words, frequency and meaning -- I find this all fascinating and luckily, it is something I get to work on regularly. Numbers are important(understatement of the century for financials, etc.) but in most cases for finance they are backward looking. Language I believe is becoming very important and can be forward looking and in a growing number of cases predictive.

So if we begin with pseudo-Marx, let's end with some Friedrich von Hayek - from a Meets the Press Interview in 1975

Will:

"Dr. von Hayek, capitalism and particularly American capitalism would seem to have a good record at giving people a rising standard of living. Why are so many intellectuals, and particularly so many economists, skeptical about and even hostile to capitalism?"

Hayek:

"Well, I've been puzzling about it for a long time, particularly about the economists who ought to understand better. It's very difficult to know why they don't. I think it's the intellectual attraction of a system you can deliberately control, which is fascinating to the intellectual."

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Think on the language of that for a while. Hopefully it starts to make some rounds...

What Are Equity Markets Trading On? Every Piece of Information You Can Imagine...

I am pretty lucky these days. All day long I get a chance to talk to some sharp people on both sides of the market, both buy and sell. In my conversations the most common topic that gets batted around is, what is this market trading off of? Yesterday it really struck me while having a great chat with some of the guys at Encima Global - they are former Bear Stearns analysts headed by David Malpass. We talked about the different ways in which institutions are trying to trade this market. Encima is an economics shop and provides clients research and viewpoints, so the talk drifted to trading economic releases.

So what do firms do in trading economic releases? Many things. Some institutions are in the speed game, especially when trading off of major numbers like jobless claims or unemployment; the timescale from announcement to execution is down to milliseconds these days. By trading off the headline number they are looking to beat everyone else by pre-setting trade conditions for a given range of values. Others, in this market, have decided to trade off the context of the story as written by the journalist. Looking for the deeper story as the trading day develops. They trade with a longer horizon(days, months) using the backstory and viewpoints of both journalists and analysts to understand a longer pattern as part of a strategy. Both styles are valid for highly skilled players. Then again if a ouija board worked that would be valid too ;-) Trading off of earnings news or company releases works in a similar fashion.

All of the accumulated knowledge about a topic or number usually comes into play in what we think of as consensus. But given the situation we are in today -- the traditional view of consensus is all out of whack. Paraphrasing an analyst friend of mine's rant about consensus "How can you look at that when there is no new normal and established existing story lines change from minute to minute, people use to have time to digest" This goes to something I wrote about in last October for O'Reilly Radar - Games & Markets: Rules Matter

Right now the market is trading off of emotion, speculation, and government statements. Every one of those factors is multiplied by email, conversations, TV business news, government press releases, newspapers, blogs, and newswires. By monitoring these sources and keeping up with the market context, trading institutions are learning the new rhythm of the market. For example just yesterday the buzz in financials was a WSJ story on Citigroup, quoting former Fed officials as referring to Citi as the "Death Star"

Former federal officials have dubbed Citigroup the "Death Star," comparing the bank's threat to the financial system with the planet-destroying super weapon in the "Star Wars" movies. Privately, in the words of one official, they regard the banking giant as "unmanageable."

Combine that quote with a release of the banking stress test parameters and you have a couple of hours worth of thought that needs to be done in order to understand the catalysts for the financial sector. With the torrent of story flow, dialog, and commentary and not to mention regular news - if you're not watching, at a minimum, the tape, even in terms of Algo models, you're flying blind. So you're watching the tape, reading longer stories and digesting research while trading is happening realtime and on top of it you need idea generation, whew! - pretty crazy five years ago, totally atomic captain insane-o today.

So as I sit here this morning on February 26th with DJ futures in positive territory, even after an historic continued unemployment claims number that reached 5.1 million, I know that an Obama administration budget due today may cause some gyrations. The markets direction is all about the accompanying examinations, explanations, pronouncements, and of course the emerging context. As the dialog plays out, between the Government and the Market we're all ears. Before this crisis we traded, to a degree, off of fundamentals and understood common context - now it seems we only trade off of the latest movement in news or events. And the news is coming from everywhere.