Taleb Avoids Randomness

Several weeks ago I purchased Nicholas Taleb's  "Fooled by Randomness" book as an iTunes audio book, and have listened to it several times through.  My blog editor asked for a book review, and perhaps the conversational style is the most appropriate (from chat the other day):


MM: did you finish your book?
TS: yes, a couple of times. I guess I said I'd do a book report?? :-)
TS: I just downloaded audio version of Black Swan this morning...
MM: well, I was just wondering what were the main points....just for my experience
TS: hmmm main points. his primary point is its foolish to follow the day to day markets, that you're better off reading poetry and totally ignoring the day to day markets...
TS: (I'm totally serious - that's his main point).   should I post that as a book-review-in-a-sentence? :-)
MM: I've actually thought about that, its just if you do that, you need a totally mechanical system that can tell you what is going on in the world
TS: when he goes to a trading room, he'd rather talk to the mathematicians and secretaries...
MM: the markets tell you what is going on in the world....but I think that's naive because you don't really know what is influencing you then... you need to know the news, but have a jaundice eye to filter it out correctly. IMHO
MM: you know, the music in the background in a grocery store is going to influence you, unless you know to combat it....
TS: he says to ignore the news. reading the news, quotes etc., leaves you susceptible to being fooled by randomness. Poetry is a type of randomness he can be fooled by without being otherwise harmed...
MM: being aware of the news, lets you combat it    it must work for him, though
TS: he does not want to combat it. he wants to be totally cut off from it. combatting it assumes you know what is fooling you...  (I disagree with him, I love exposing myself to the random flow, but he's made his millions, so who cares?)
MM: that's my point, if one's not aware of it, how do you know its not fooling you.
TS: if you're not exposed to it (like a jury) you can make decisions about life in general outside of the stream of news...

..TS.

[NB: after listening to the first sev chapters of Black Swan, I now understand Taleb's reticence to follow the news - he's seeking a philosophical angle, but is taking time to provide his views on history and markets, so the alienness of his outlook is actually refreshing, rather than disturbing.  ..TS.]

$CROCS Has Bite

You may hate the shoes, but you cannot possibly hate the news.

Before the report:
"Wall Street Analysts consensus calls for a profit of $0.43 a share on $281.64 million revenue."

After the report:
"Crocs Q2 beats estimates"
"Crocs Inc. posts 72% profit gain"
"Crocs (CROX) Flys Higher On 'Beat and Raise' Q2"

How should you take advantage of this news at 9:30 am tomorrow?  Here're my suggestions, which comprise buying call options for maximum bang for the buck:

buy the Aug 2011 $32's,
buy the Sep 2011 $40's,
buy the Dec 2011 $40's, and
buy the Jan 2012 $40's.

..TS.

High-Frequency Trading manipulations and the SEC

http://www.wealthdaily.com

Jim Cramer July 8th, 2011
"Until you get the SEC to start looking at the markets through the prism of your IRA or 401k or 529 plans instead of through a prism of market manipulators, don’t be surprised by any outrage or flash crash. It can happen again."

Michael Mauboussin video on Power of Counterintuition

James Surowiecki speaks with Michael Mauboussin, the Chief Investment Strategist at Legg Mason Capital Management and the author of “Think Twice: Harnessing the Power of Counterintuition,” about common investment mistakes, how to improve decision-making, and what investors can learn from the recent stock-market woes. They met last week in New York City.

Read more http://www.newyorker.com/online/blogs/jamessurowiecki/2010/03/video-michael-mauboussin.html#ixzz1Sg9Xstk8

$CTRN's Perfectly Good Balance Sheet...

...does not necessarily translate into a company with a happening Income Statement.  Apple is the epitome of a company: reporting down and later blowing analysts out of the water, as in yesterday's quarterly report.  Citi Trends, while well positioned in a niche industry segment and targeting growth with 50+ new stores, seems to be at the other end of the spectrum.  I've run into this before: find a company with a fairly stellar balance sheet, and what seems to be a good business model, but then stumble into near term earnings misses.  This occurred ten years ago with a company now called Woodstock Financial Group (originally Raike Financial Group).  I still hold shares in the severely-underperforming member of the independent brokerage industry--perhaps they'll poke their head above water at some point this century.

Now it's happened again, but with a company that trades more than once a week, and in fact has decent daily volume: Citi Trends, an urban clothing store.  A stellar balance sheet--cash which has grown to $80M over the past 8 quarters, no debt--and a YoY improving income statement...but near term misses and new forecasts that point even lower is deep-sixing any recent investments in the company.  The following shows the dangers in buying calls in such a company... fortunately the calls have expiration dates far enough out that the value could come back (Nassim Taleb's warnings about such thought processes nag in my mind...).

-CTRN 111119 C17.5	CALL (CTRN) CITI TRENDS INC NOV 19 11 $17.5 (100 SHS)	30	$1.05	$0.05	$3,150.00	$150.00	-$3,000.00	-95.24%
-CTRN 111119 C20	CALL (CTRN) CITI TRENDS INC NOV 19 11 $20 (100 SHS)	90	$0.45	$0.45	$4,050.00	$4,050.00	$0.00	0.00%
-CTRN 120218 C17.5	CALL (CTRN) CITI TRENDS INC FEB 18 12 $17.5 (100 SHS)	25	$1.60	$0.35	$4,000.00	$875.00	-$3,125.00	-78.13%

The only reason to get out now is to retain some capital, and the only reason to stay in is to see how the August and November earnings reports for Citi Trends affects the pricing of the underlying and these calls.  Will the underlying price come back up enough to make these phenomenal investments?  Probably not (phenomenal in my mind is 300-500% return, which is attainable with call options), but probably will come back up to break even.  While fundamentally sound, the performance of this company could be something of a clarion call for investors to be wary of lower-income-targeted clothing store industry... while the run-up from 2009 to 2011 may have helped, the recent languid performance of the US economy is reflected here.

A note about sell or trading rules:  Taleb talks in "Fooled by Randomness" about the star traders who crash their accounts by hubristically shunning stop-losses and other sell rules, "knowing" that their chosen direction will win, and then it doesn't.  I've developed just two loss-limiting rules: I sell only when I have another direction to go in which needs funding, and I only buy and sell with limits; too often a retail investor gets caught up in making "market" buys or sells...with the likes of AAPL or CITI it's a no-brainer, but then the investor accidentally does that on weak volume, and gets an atrocious price.

..TS.

Definition of Risk

Investopedia defines risk as "The chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. A high standard deviations indicates a high degree of risk."

It explains Volatility as "the amount of uncertainty or risk about the size of changes in a security's value."

I want to express risk and volatility as the collection of all the investors' foibles and ambitions into one price at one instance in time. Its the fear of not paying your bills on time this month. Its the dream of buying your girlfriend an engagement ring or planning your wedding day. Its the hope of sending your children to college, or retiring and being independently wealthy. Its where supply meets demand on our hopes and dreams, fears and greed. Its the accumulation of all emotions we hide from the world and ourselves. Its a point in time plotting sentiment on how the economy is expanding or contracting. Its a list of long-term & short-Term goals; Fear, greed and all other human emotions combined into one.

Even if we remove and detach our emotional states or biases from the equation it will be a focal point of society's aggregate value of the security.

Couple of Biz Stone, Co-Founder of Twitter Interviews

Biz Stone is co-founder and Creative Director of Twitter.

Mr. STONE: It turns out it has a lot of different facets, because while there's many people doing stupid narcissistic things, that gets you to use it on a regular basis and it gets you familiar with it. But then when you see an accident, you're trained to tweet that you've just seen an accident, and suddenly that's a useful piece of information. Whereas, if we told you that this was a program only for reporting accidents, you'd never think of it.

Dustin Diaz/Twitter

On how Biz Stone uses Twitter

"I definitely spend way more time reading tweets than writing tweets. The first thing I do in the morning when I'm waking up is, I reach over and grab my iPhone and I just start scanning through tweets. What it does for me — I know right away that if something big is going on, in the world or in my area, someone will have tweeted about it. If nothing big is going on, at the very least I'm being reminded that people are up and doing things. For me, looking at tweets first thing in the morning is kind of like caffeine. It sort of makes me realize other co-workers are up, getting coffee, driving to work, etc. I better get out of bed. All through the day, I'm checking Twitter and seeing what people are saying about certain things. I'm clicking on the trends and the sidebar to figure out why this particular celebrity or phrase is in the trends right now. And then I'm tweeting maybe once a day, maybe every couple of days. I'm an infrequent tweeter. I'm more of a consumer of the information that's coursing through the system."

Dissemination of News from Lake Wobegon

I started out writing this post about how to do extensive research into an equity. It occurred to me that it would be disrespectful or rude to think that I knew the best way to research stocks. Did  you know there was a "Due Diligence Framework"? How can you top that....

So I want to switch gears and let you imagine a cross-section of a tree. I do my research working from the bottom up when I am looking for a company. Imagine that your focusing at the center of such a cross-section, each ring with its meandering path representing news and information about a company. Each news article you read or nugget of information you gather adds another ring around the core. A younger company, just like a tree, will have less rings, less information available. An older company has more rings, more information and popularity. Now take a cross-section across a truncating branch. Seeing the knot and its rings symbolize news generated from outside the company, or how you react to the company. News comes from the company itself. News comes from outside the company and information comes from our personal impact and reaction to the company.

Game theory 
Know Your Opponent. In the first three chapters of Seth Klarman in Margin of Safety he writes about the constraints the institutional investor is under. Adding into this mixed market are the latest social media sites that allow the amateurs, professionals, and ex-prop traders to share their resources.

What are the known facts? At what level is the information really understood. What does the average person think your going to do with that information? Not all participants are thinking at the same level.

Game theory teaches us that in any encounter most people only think about 2 steps into this process of what will the other contestant do. The game of gaming information.....

Disseminating the news for an equity
"In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made."

level 0 - Efficient-Market Hypothesis (EMH) theory
no research is done because market is efficient
level 1 - reaching this stock through any investing style, screening or event source
biases,ambiguity and controversy
level 2 - gathering data from company, from second sources or personal impact
...
...
...
level X - lateral thinking, Second Level thinking, Creative Flow

Level X thinking
I have borrowed excessively from Michael Bigger, Howard Marks & other authors, but my interpretation of X level thinking boils down to the ability to identify probable outcomes from connections and correlations that can occur between companies. How does information gathered from bottom up investigation fit into top down information? How can one company affect others? What actions by one source affect others?

Can you equate levels of research to levels of game theory?
I have a bad habit of finding information and assuming that I am the only one who has this data. The SEC goes to extreme lengths to assure that all investors have the same public information. Howard Marks states that data should be "something that should be assumed to be true until proven otherwise" and describes EMH as a sense of "speedy, quick to incorporate information" not "right".

Lake Wobegon is characterized as the town where "all the women are strong, all the men are good looking, and all the children are above average." The Lake Wobegon effect, a natural human tendency to overestimate one's capabilities, is named after the town. When gathering data one should ask who else knows the information or reasoning? If your data or idea is truly actionable, other people will find it too.

Omega is another fair value play

Omega Protein Corp fair value target is $15.50, using Benjamin Graham's magic formula.

In the news last month, OME was selected to join the Russell 3000 Index on June 24th.

According to 10K

Omega Protein’s principal raw material is menhaden, a species of fish that inhabits coastal and inland tidal waters in the United States. Menhaden usually school in large, tight clusters and are commonly found in warm, shallow waters.

Omega Protein is the only fully-integrated fish oil processing operation in the United States that both directly conducts fishing operations and also manufactures highly refined EPA and DHA from these marine resources. Omega Protein can control the purity and quality of its product from harvesting all the way through manufacturing and shipment.

Menhaden oil currently is the only marine source of long-chain Omega-3’s directly affirmed by the FDA as a Generally Recognized As Safe (or “GRAS”) food ingredient for direct human consumption. The FDA has approved menhaden oil use in 29 different food categories such as margarine, salad dressings, condiments, yogurt, ice cream, cheese, prepared meats, sauces, soups, crackers, cookies, cereals and bakery products.

According to 10Q

A finding by the ASMFC that overfishing occurred in the Atlantic menhaden fishery in 2008 may result in additional restrictions on Omega Protein’s menhaden harvest, which could have a material adverse effect on the Company’s business, financial condition or results of operations.
The Atlantic State Marine Fisheries Commission ("ASMFC") manages the menhaden fishery throughout the stock’s Atlantic coast-wide range.... 

In March 2011, the ASMFC initiated a review regulatory process which if enacted would: (1) require annual updates on menhaden recruits, or the numbers of fish in their first year of life, currently reviewed only every three years; (2) begin a process of developing management reference points for identifying the relative status of the stock using broad ecosystem indicators; and (3) establish interim management targets and consider regulatory tools to assist managers in achieving these targets. The interim management reference point target will be based on achieving 15% of the spawning potential the Atlantic menhaden stock would have if such stock were unfished. By comparison, in 2008, the estimate of this so-called “spawning potential ratio” was estimated to be 9%; however, those numbers have not been estimated for 2009 and 2010. The Company expects that such reassessment will not occur until the next stock assessment in 2012. 

Conclusion 
Adding this equity to the index gave it a pop of 5%-10%. I am going to put this on a watchlist to see if there are any minor unanticipated setbacks.  Historically, the 2nd and 3rd quarters are seasonally the best for them.

This document supports the recommendation of the Assessment Team that the stock status

determination is “not overfished” and there is “no overfishing”. But if there are any adverse judgement from ASMFC this equity could incur they will not be assessed until 2012.

$LSCG and $VUOC Will Save the Planet

As can be seen from headlines decrying government legislation and from discussions with your peers, technologies which purport to "save the planet" or "reduce reliance on foreign oil" are using push-button issues which are sensitive to both sides of the aisle to generate buzz and funding.  The hullabaloo surrounding incandescent light bulbs has been swirling since the 2007, when the Energy Independence and Security Act of 2007 put into law bulb efficiency improvement requirements of 25% by 2014 and equivalency of 200% improvement by 2020.  Note, this law, signed by George W. Bush, also requires tighter automobile CAFE standards, raising fleetwide economy to 35 mpg, but of course the issue couldn't possibly be about this multi-billion-dollar industry, could it?

In any event, Republicans tried yesterday to deep-six the law proposed four years ago by the Democrats, and failed.  Rising from the ashes of this failure, Lighting Sciences Group (LSCG), an LED-bulb-only company pushing several families of consumer and commercial LED lighting solutions, and Vu1 Corporation (VUOC) with a new non-LED, non-CFL bulb in development and nearing UL-approval and distribution, both have a chance to surge into the marketplace with their alternatives to CFL.  Whether they can compete is a long-shot, but LSCG's LED and VUOC's Electron Stimulated Luminescence (ESL) are viable alternatives, and the companies could also be buy-out opportunities for someone looking to get into an industry with a truly global market.

Do these companies have a snow-balls chance?  I believe that they do.

..TS.

$GOOG at $250?

[guest post by TS]

Will Google+ drive Google's price higher, as it's still 30% shy of it's 2007 high, or will surface virtues of a whole new social paradigm turn out to be hidden tragedies when people realize that Google is enticing people into categorizing their email contacts more precisely so that Google's ad engines can target them more effectively?  I'd been adding people fluidly to circles within in my Google+ account, when the thought struck me: what if this is just the way that Google has determined that for free they can improve the quality of their data mines, with well-categorized email addresses/contacts?

I know this is crazy talk, a la Mel Gibson's Conspiracy Theory (a great movie--but is it just that??), but how would one target this kind of event-arbitrage idea with a long-term trade (assuming Google+'s true identity isn't immediately revealed)?  I suggest something like the GOOG 2013 $260 Puts, which are roughly 1/2 the current price, at this moment selling at an Ask of about $2.90/contract.  If you've more cash in your account that I do (and I don't do margin), you may consider something closer to in-the-money like the GOOG 2013 $460 Puts, currently asking $42.10 per contract.

I personally think this is a crazy idea... but given the trend of Google slightly stepping away from it's original "do no evil" mantra, it's certainly not out of the realm of possibilities.

..TS.

Rimm is fair value play

I am very intrigued by the assumptions in the current market that Google's android and Apple's Iphone are going to monopolize the smart phone sector.

Research in Motion (RIMM) has fallen quit a bit lately. Their fair value target is $50.92, using Benjamin Graham's magic formula.

In the news today, RIMM is having their annual meeting to determine whether to replace the current chairmen & co-CEO's, Jim Balsillie and Mike Lazaridis.

Bought the $FARM

[guest post by TS]

Last Friday afternoon and over the weekend I was thinking about penning a somewhat derisive article about the coffee patch, about how JVA, CBOU, GMCR, SBUX, and PEET can fly so high, while the ho-hum performance of FARM just peters along a low level at about 0.25 sales.  While Farmer Brother Company's sales have been rising steadily YoY, they have yet to have a profitable quarter in at least the past four--clearly the fact that investors were ignoring them was quite warranted.

Then, this afternoon I was tracking the anti-negative-market antics of JVA and CBOU, when I saw this article NASDAQ stock posting largest percentage increases, I was floored by the first company listed:

"A look at the 10 biggest percentage gainers on Nasdaq at 1 p.m.:
Farmer Brothers Co. rose 21.0 percent to $11.68.
Vitacost.com Inc. rose 13.1 percent to $5.97.
Donegal Group B rose 12.2 percent to $19.53.
Quantum Fuel Systems Technologies Worldwide Inc. rose 10.4 percent to $5.26.
GSV Capital Corp. rose 9.0 percent to $17.65.
PDL BioPharma Inc. rose 8.1 percent to $6.22.
Coffee Holding Co. rose 8.0 percent to $28.90.
Caribou Coffee Company Inc. rose 7.6 percent to $14.63.
Vasco Data Security International Inc. rose 6.4 percent to $13.70.
Fst Savings Fncl rose 6.0 percent to $16.48."

I got in, then, at just over $12.  I could kick myself for not doing anything about FARM on Friday.  Of course investors would see JVA jump, see the apparently under-value of FARM (despite lack of earnings), and similarly pounce.  FARM was deservedly priced around $9 on Friday, and it serves me right that it should be at $12 this afternoon, and will probably close at $11.50 after I bought in  (somebody must be selling if I'm buying, right?). Alan Elliott posted for Investors.com last Thursday that "...dealing in coffee is no pledge of success. Coffee distributor Farmer Brothers (FARM) has only logged one profitable quarter since 2007. The stock is down 45% so far this year."

Have I just bought the FARM, or will this misbegotten company follow the other coffee companies to more than just a caffeine high?

..TS.

More than One Possible Setup

In the book One Good Trade by Mike Bellafiore there are several sections on expanding  your arsenal of trading setups. Read the book to find these extremely good examples.

up market[ support plays/pull backs ]
range market[ momentum ]
down market[ resistance, bounces ]

If you were to stay in a trade longer than a day would the setups change? It made me start thinking if there were not more plays for all the different trading styles. Each discipline seems to have several of its own unique time and setup plays....

Predefined Scans
The easiest examples are found in the charts, candlesticks, points & figures or technical analysis fields.

www.stockcharts.com has many of these captured with predefined scans. I use the search feature to find specific scans that other traders might be using on my stocks each day. For example, on Friday, Skechers (SKX)  search came up with

Results for SKX
Moved Above Upper Bollinger Band
New CCI Buy Signals
Elder Bar Turned Green

This Monday morning has been a volatile market start so the results came out a little different.

Results for SKX
Bearish Harami
Elder Bar Turned Blue

Caveats - Of Course this is not the exhaustive list of possible setups or investing styles
StockCharts continues:

Philosophic Accuracy:
Scans are designed with a particular investing philosophy in mind. Value investors use scans that try to find weak stocks that are showing signs of a turnaround. Growth investors use scans that try to find stocks that have recently moved higher on strong volume. Short-term traders use quick, volatile indicators in their scans technical formulas while longer-term investors may use slower, less jittery indicators. And so on.

I assume they are using the default values for the technical indicators to achieve these results. If traders are using their own unique settings the search results would change. But it gives you an idea of  which stocks are on someones watchlist. If you change the time period you are changing the bars. The sensitivity will vary with the addition or subtraction of bars. This will affect the consistency and accuracy of the indicator. As a general rule if you want more sensitivity then
 - add more bars
- shorten the time period
- use EMA over SMA

Conclusion on Investing Styles
A good long-term investor uses technical indicators to get a good entry point. A good short-term trader uses fundamentals to get a solid stock to trade with. No matter what style of investing, your mood can vary from day to day; Good traders use what fits their personality/mood and what fits the market at the time to make money.

The Smartest Audience in the World

Photo by http://starwars.wikia.com/wiki/Yoda

We have created more than 100 posts now. This milepost gives me an chance to stop and reflect. I have been given the opportunity to talk & learn from practitioners with financial knowledge way out of my league. These guys have been trading in the trenches every day. And I may have been talking/writing too much instead of listening...

So from now on, I will try not to be the smartest guy in the room, but listen and learn the most from the smartest audience in the world.

Have You Had Your Shot of $JVA Today?

[guest post by TS]

Last weekend I was listening to the usual podcast excerpts of Bloomberg's Taking Stock radio program, and came across a July 1 interview with Scott Rothbort of Lakeview Asset Management discussing the upcoming Dunkin' Donuts IPO.  In this discussion Scott mentions Caribou Coffee ($CBOU), which is the 3rd largest publicly traded coffee chain in the US.  Caribou was trading around 10 when Rothbort met earlier with Pimm Fox, host of Taking Stock, and is now up around 13.  Rothbort says that someone is accumulating stock, as the shares are trading higher on significantly higher volume.

Buy points:

• Michael Tattersfield, former CEO of Lululemon, is running the ship;
• Caribou in midwest, and has expansion potential as Dunkin Donuts is primarily in the Northeast and Starbucks & Peets are in the Northwest;
• Caribou is a take-over possibility, selling at only 0.9 times sales;

Risk is, as we approach August 4th earnings release, that momentum traders are buying and will dump the shares; Rothbort feels the action is not from momo traders but probably deeper pockets, like private equity, etc.

So, go out and buy Caribou (I'm long both equity and calls at the moment).

Is that it for coffee?  No, way.  Many people are looking all around the coffee patch.  Minyanville put together this very nice overview of the industry...and the big little name that jumps out?  While Green Mountain Coffee Roasters ($GMCR), with it's Keurig instant coffee, and Starbucks ($SBUX) with it's global presence (and Keurig connection) are the elephants in the room, the real darling (if you're interested in capital appreciation) is Coffee Holding Co. ($JVA).  Minyanville doesn't spend much time on JVA, but look at their chart in the article.  Up some 450% this year.  WTH???

This week, as I jumped on what looks like a very foolish bandwagon, JVA went from 16 to 26, and no apparent desire to back down, right through Friday's jobs report debacle.  The company started the week at about 0.8 times sales and finished at 1.17.  The caveat emptor, aside from such a stultifying run-up, is the very thin float: about 2.15M shares.  Sure, they may split a few times... but how many institutions can buy in such a shallow pond?  Also, no options are trading on JVA yet.

Where is JVA going?  Let us know here at Black Swans.

..TS.

implied default probability

Photo by http://pauldunay.com

Funny what you can find on the Internet. I found a white-paper written in 2003 about Skechers (SKX) and it contained the same concerns then as there are today. Eight years later we are still starting another debate of where this company is in its life cycle. Is Skechers a badly managed mature company close to dying?

In valuation, there are several ways to determine how risky an asset is and the implied probability of default.

Looking at the market's interpretation of current sentiment and pricing
The easiest way is to look at the CDS, Futures & Swaps instruments for SKX. I couldn't find a free site and don't have access to asset-backed CDS Markit.com equities information. If someone knows of one, please tell me.
[edit: a good website to gather information on equity default swaps is  here
The whole idea of these swaps are to hedge. If you knew that Ford was undervalued and Chrysler is overbought; you want to bet only on that, not the rest of the economy, etc. So you want to hedge the relationship of Ford to Chrysler not the rest of the world; Therefore special dynamic swaps are borne and only their creators'  imagination limit these models...don't ask me how they do it....I'm just figuring it out as I go here. ]

The alternative is to do it by hand. Wikipedia describes backward induction as the following:

Backward induction is the process of reasoning backwards in time, from the end of a problem or situation, to determine a sequence of optimal actions. It proceeds by first considering the last time a decision might be made and choosing what to do in any situation at that time. Using this information, one can then determine what to do at the second-to-last time of decision. This process continues backwards until one has determined the best action for every possible situation.

Using backward induction you can establish the present value of current equity prices and interest rates. That is how futures and swaps estimate their value and quantify uncertainty and risk. Dr. Geanakoplos has a free Yale University course on YouTube about this.

On to easier methods....

Looking at valuation methods 
Dr. Damodararian has many free spreadsheets that can give a valuation of the company.
-evaluation of debt/equity ratios to create a synthetic beta (implied equity risk premium)
-evaluation of debt bond ratings to create a synthetic credit rating

A little bit easier....

The quick calculation method
The Altman Z-score is an insolvency predictor. It can be viewed at several website, usually in their premium sections. I did find it for free here. There also is a Z-score calculator I used to generate historical scores. There are five financial ratios used in the Z-Score with different weight factors.

An article from Armand Lucarelli

"No model predicts precisely when failure will occur, but the Z-Score has indicated that failure is likely up to two years before a company declares bankruptcy. The Z-Score should be reviewed over time rather than at any one point in time. The trend is important. The most serious changes in the ratios occur between the third and second years prior to bankruptcy."

The Interpretation of Z Score

Using Yahoo finance data and the calculator above I generated the following historical Z-Scores:

For 2010 annual data SKX was 3.60
For 2009 annual data SKX was 3.99
For 2008 annual data SKX was 4.08

With a Z-Score above 3.0, a company is considered safe based on their financial ratios.

Armand Lucarelli continues

"The lower the Z-Score is, the greater the odds are of failure. For publicly owned companies, scores between 1.81 and 2.99 are in the gray area — a company may survive if corrective actions are taken — while scores of less than 1.81 indicate that failure is a real possibility. For privately owned companies, the range for the gray area is lower — 1.23 to 2.90 — to account for the differences between book value and market value."

Series 56 Exam Not Needed to Buy $CROX

[guest post by TS]

My brother in blogging crime wondered whether we needed to take this Series 56 Exam everyone was talking about: "can't enter orders after september if you don't take the series 56 exam?"

Relax, bro', methinks this is not for the retail investor:

Specifically, CBOE Rule 3.6A provides that individual Trading Permit Holders and individual associated persons that are engaged or to be engaged in the securities business of a Trading Permit Holder or TPH organization shall be registered with the Exchange in the category of registration appropriate to the function to be performed as prescribed by the Exchange."

"Trading Permit Holders and associated persons", in my estimation (correct me if I'm wrong) would be trading houses constituted specifically for the purpose of making money off of house and/or client's assets, in a professional securities organization.  As retail investors generally have an unrelated day job, this would not impact them.  Many of us bloggers (though, certainly not all), reside in that camp.

So, go out and buy more $CROX equities, calls, etc.  :-)

..TS.

But we wish everyone luck that must take it..... MM

XBRL spells fleet of foot

I am an outsider. So to me this topic is new. I just found something this weekend that I think is a White Crow, disruptive technology. Maybe the fact that I have seen a white paper on XBRL is an indication that it is reaching acceptance.

The SEC mandate for XBRL took effect on June 15, 2009. The Securities and Exchange Commission has officially adopted a rule requiring public companies to begin filing their financial statements in an interactive data format.

Wikipedia describes XBRL as

XBRL (eXtensible Business Reporting Language) is a freely available, market-driven, open, and global standard for exchanging business information. XBRL allows information modeling and the expression of semantic meaning commonly required in business reporting. XBRL is XML-based."

Freely available, not free. Edgar (EDGR) on-line has several products called I-metrix  and I-metrix professional that shows the power of this information modeling.

From the trader's perspective, new information took a day before it was assimilated into all the different financial databases. Financial processing required a manual entry of the financials data into separate proprietary systems, like Thomson Reuters. These feeds sent information to other financial websites.  Now it will be available almost instantly. It will be scanned by a computer on receipt by Edgar and entered into their database. Analysts can then compare the financial information, using information modeling, of two companies as the news hits the wires.

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For those that have the resources and expertise you can access the database directly. I'm not sure of the fee. There is an API and sample code to build your own access into this Edgar database. There is even an Open source analyzer version built in RUBY.

To get a good overview of the technology read this article.

News Information dissemination has just gotten even faster....

Have a nice holiday weekend

Have a good long holiday weekend, guys.
For some amongst you, Happy Canada Day. For others Happy 4th of July.

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For me and my family, it's my birthday on the 4th July, so Happy Birthday to me.