An example of personal finance failure

One would think that after all the recent financial turmoil that families would educate themselves regarding the basics of personal finance and stop spending more than they make. Unfortunately example after example shows this is not true. Here is the latest.

After bankruptcy filing, couple's spending continued
http://articles.latimes.com/2011/feb/20/business/la-fi-money-makeover-furry-20110220

Lisa and Stephen Furry splurged on a getaway at a four-star hotel but haven't paid the mortgage on their North Hollywood home since September. A financial planner helps them with a reality check.

The EU disintegration

When Humpty falls off the wall, it does not look like all of the EU's politicians, lawyers, economists, and businesses will be able to put the pieces back together. The shadow is rocking and only a short time remains before a mess is splattered across the entire continent.

An earlier post discussed possible outcomes to the EU currency default crisis. An excellent summary of the new awareness growing across Europe can be found in the Telegraph article - The horrible truth starts to dawn on Europe's leaders.

Favorite EE Video Blog

One of my favorite Electrical Engineering Video Blogs is from Dave Jones on YouTube. When I get a moment I listen to recent episodes. He covers topics from Product Teardowns (a recent episode had the new Kindle) to design, testing, test equipment evaluation, and Dilbert marketing experiences. Of course YouTube tries to come up with the best "suggestions" for people who view the EEV Blog. See the red rectangle on the screen shot below. :)

What is the future price?

Cisco closes below $20 today and my inbox gets inundated with emails asking, “How low it will go?” I pulled up the spread sheets to run my pricing probability indicators, which performs analysis based on a number of statistical indicators, volatility information, frontier calculations, and Monte Carlo probability runs. Keep in mind that historically this method is fairly accurate for 30 day and under periods and not very useful for 90 days or more in predicting price probabilities.

CSCO is showing that it has a 17% probability of hitting $18 in the next 30 market days and a 28% chance of hitting this price in the next 90 market days.

Flash Crash – Algorithms Gone Mad

Sometimes it is worthwhile to revisit the past; especially when trying to avoid the same fiasco in the future. High Frequency Trading has now reached levels representing over 80% of the trades on most market days. The common depiction put forward by these firms is that they provide liquidity that helps the markets. The harsh reality is that their trades are actually cutting in front of line of retail orders causing investors to get cheated when they buy or sell.

The details of High Frequency Trading has been shrouded in mystery; now the curtain is being pulled back thanks to firms like Nanex; a company that captures market data. Nanex has posted an extensive analysis of the Flash Crash of May 6th.

Not content to limit the information to May 6th, the Crop Circle of the Day by Nanex is an interesting graphical chart of HFT algorithms at work each day. Some of the charts are fascinating and simply make you ask “what is going on and why”. Are these the key algorithms at work or are they simply making noise to cover up other trades? Are these a type of coded communication between firms to manipulate the market? Are some of these algorithms simply bugs? Should Quote Stuffing be banned? And does the SEC ever look at this activity? An endless train of questions can be arrived at.

Maybe the key to winning in the markets is decoding what these algorithms are attempting to do. Many simply swing at hyper speed spewing thousands of quotes per second across various price ranges switching between bid and ask. Should the new fantasy of an individual trader be creating a software bot that will “go to war” with these algorithms and steal profits from the HFT firms.

Probably by the time that any retail trader figures out the magic, the government regulatory authorities will come down on the HFT firms and limit their activities. It is becoming clear that hyper trading activity accounting for the vast majority of the trades does not lead to orderly markets and easily can cause more Flash Crash scenarios when all the computers pull their bids simultaneously.

Quick News - Structured Finance

Structured finance came to the front in the press today as more hedge funds disclosed trading losses relating to CDO bets in the market.