April 4, 2012

Predictable Outcomes

It was 85 degrees Sunday in Denver when Karen and I rode up local landmark Lookout Mountain on bikes to pay respects at Buffalo Bill’s grave. We woke to snow Tuesday.

Speaking of hot and cold, we told clients to expect a good start Monday for the new quarter, followed by the strong likelihood of a big move Tuesday or Wednesday as imbalances from the quarter exited broker-dealers. The Dow was down more than 100 points intraday Tuesday.

Why are these outcomes predictable?

In answer, ever heard of Mexican film maker Alejandro Gonzalez Inarritu and writer Guillermo Arriaga? The duo sadly parted ways after making Babel (Brad Pitt, Cate Blanchett), the third film following Amores Perros (Benicio del Toro) and 21 Grams (Naomi Watts, Sean Penn) with disparate threads woven into haunting themes on life and meaning.

Markets have recently given us disparate threads that can be loomed into predictive thematic raiment. Rumblings continue about the dramatic BATS Exchange IPO debacle March 23. The market-structure bugs at Zero Hedge advanced a theory that a deliberate algorithmic tactic torpedoed the IPO.

We wrote last month on the dramatic moves in the Credit Suisse-backed exchange-traded note (ETN) called TVIX. Last week, the Wall Street Journal was among many observers including the SEC to pick up the theme. TVIX leverages returns on the VIX, the implied volatility of the S&P 500. While the VIX stayed placid, the TVIX screamed to such heights that Credit Suisse stopped creating new units. It then cratered after VIX futures expired Mar 21.

And finally, disparate thread number three: On Tuesday Apr 3 (an earlier version incorrectly said Mar 3) at precisely 2pm ET, when the Federal Reserve released notes from last month’s Open Market Committee meeting, the US dollar jumped in value and stocks plunged about 100 points.

What meaning lies in this weave that tells us how markets will behave? Nothing less than truth: Mathematics drive outcomes. The pursuit of divergence in such markets can have extreme consequences, and the foible isn’t the pursuit but the fact that math has replaced human color. And third, if the market marches so publicly to the beat of the Fed drum one day…how do you know that it’s not doing so the rest of the time?

Which is why if you’re doing IR the old way, on guesses and hunches, you really, really need to join the 21st century, where we have predictive analytics that warn of tornadoes on the horizon or rich fields ahead.

Coming full circle, my grandmother told me before she died about waving as a very young girl to Buffalo Bill Cody as he drove through Hastings, NE in his shiny new automobile, bound back home to Denver. He died in January 1917. And there we stood Sunday at Buffalo Bill’s grave.

Sunday I deep-watered trees in shorts and flip flops. Tuesday we walked to a meeting down the street with coats and gloves on.

Beware fleeting reality.

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