Steam Catapult - Launching Innovation

A few thoughts and links, but first, if you haven’t had a chance to vote for the Portfolio Armor iPhone app in the Thomson Reuters StreetApps Challenge, please take a few seconds to do so here. Thanks a lot.

– Batesian Mimicry Explanation of Business Cycles. Fascinating post by Eric Falkenstein. Worth reading in full, but here’s the heart of it:

My argument is that business cycles are best understood though the framework of Batesian mimicry, an endogenous mechanism for booms and busts thru a misallocation in the horizontal structure of production. In ecosystems, Batesian mimicry is typified by a situation where a harmless species (the mimic) evolves to imitate the warning signals of a harmful species (the model) directed at a common predator (the dupe). For example, venomous coral snakes have red, yellow, and black bands, while the non-venomous scarlet king snake has the same colors in a different order.

[...]

In an expansion investors are constantly looking for better places to invest their capital, while entrepreneurs are always overconfident, hoping to get capital to fund their restless ambition. Sometimes, the investors (dupes) think a certain set of key characteristics are sufficient statistics of a quality investment because historically they were. Mimic investors seize upon these key characteristics that will allow them to garner funds from the duped investors. The mimic entrepreneurs then have a classic option value, which however low in expected value to the investor, has positive value to the entrepreneur. The mimicry itself may involve conscious fraud, or it may be more benign, such as naïve hope that they will learn what works once they get their funding, or sincere delusion that the characteristics are the essence of the seemingly promising activity. The mimicking entrepreneurs are a consequence of investing based on insufficient information that is thought sufficient, but they make things worse because they misallocate resources that eventually, painfully, must be reallocated.

Once the number of mimics is sufficiently high, their valueless enterprises become too conspicuous and they no longer pass off as legitimate investments. Failures caused by insufficient cash create a tipping point, notifying investors that some of their material assumptions were vastly incorrect. Areas that for decades were very productive, are found to contain exceptional levels of fraud, or operate with no conceivable expectation of a profit. Everyone outside the industry with excessive mimics marvels at how such people—investors, entrepreneurs, and their middlemen–could be so short-sighted, but the key is that the mimics and duped investors chose those business models that seemed most solid based on objective, identifiable characteristics that were, historically, correlated with success. An econometric analysis would have found these ventures a good bet, which is why investors did not thoroughly vet their business models (banks, up through 2007, were one of the best performing industries since industry data has been available in the US, and performed well in the 2001 recession).

– John Hussman’s latest. Late to this. Hussman still sees stocks as overvalued, but thinks technicals may continue to prop the market up in the short-term. He reiterates his view that we’re heading for a double dip recession, based in part on ECRI data. And, Dr. Hussman endorses NJ Congressman Scott Garrett:

Having discussed economic policy before with Congressman Garrett, it’s clear that he has a strong understanding of the economic challenges we are facing. As a political independent, I rarely inject electoral politics into these weekly comments, but I have no stronger endorsement for the coming election cycle.

– A few items from Short Screen this week: I got blown out of the short side of my short TRGL / long EGY pairs trade yesterday, for an 18.2% loss on the short side (was using a 20% trailing stop). Tightened up my stop on EGY. I picked up a few puts in AIB in lieu of shorting it, on its post-stress test bounce Monday. As I mentioned on the message boards,

Among the European banks that passed the stress test, AIB had one of the weakest sets of results (http://www.screencast…. ). And bear in mind that these stress tests didn’t test for the effects of a sovereign default ( http://www.bloomberg.c… ).

I picked up a few puts on another (domestic) bank today as well, CPF. This bank was rated “outstanding” by the FDIC for its CRA compliance and has a zero star rating from Bauer Financial.

More details at the links.

Votes are open in the Thompson Reuters Street Apps Challenge. Here is the gallery of competing apps, and below is my entry in the contest, the Portfolio Armor iPhone app. If you like it, I’d be grateful if you clicked here and voted for it (if you’re not a Facebook user, you’ll have to take 30 seconds to register a user name and an e-mail address with ChallengePost first).

Big money, big prizes.

In the previous post on this, I wrote,

I had an idea to develop something like this, a year ago or so, but I couldn’t think of a solution to the problem of the vacuum noise.

It looks like the Shed Vac folks haven’t either. As soon as I switched the motor on, Cheryl’s cats fled in terror. The animals in the video below must have been sedated.

I have an idea for a potential solution though. I have to see how much it costs these days to get a provisional patent on it, to see if it’s worth pursuing at all.

We made a trip to the farm Sunday and saw the dog. He’s a good looking and friendly animal, but he might not be a purebred Lab. There’s some speculation that he might have some pit bull in him, but he’s going to get a DNA test to check. He won’t get sent back on account of this (my mother likes him), but if the test confirms he’s a mix, he will have turned out to be an expensive one no discount (~$380 to offset vet and transport fees).

In a post Thursday (“Road to Nowhere”), Tim Knight wrote,

With the exception of commissions-based brokers, it’s hard to believe there’s anyone out there who has really enjoyed the stock market over the past few months. I mean, just look at the ES [S&P e-mini futures] below.

Tim Knight still thinks the S&P’s going to decline to 925 or 930 within the next couple of months, informed by his 1937-1942 historical analogue, so he’s positioning himself accordingly.

Tim’s racked up some spectacular returns in the last few years, which lends weight to his analysis. Another point in favor of further market declines in the near future is the reversion inherent in a secular bear market. But, ultimately, even if you are confident we are in a secular bear market (as I am), timing the cyclical market trends is difficult. Which reinforces a thought I’ve had that a good default position during a secular bear market is to be market neutral (perhaps leaning a more to the short side as a cyclical bull rally starts to look long in the tooth, and leaning more to the long side after a cyclical bear rally looks like it’s running out of steam). So I plan to put more money to work in pairs trades going forward.

That title overstates the case a little, but I doubt I made a friend of Matt Miller after quickly dashing off to him the e-mail below, in response to his Washington Post op/ed earlier this week (“How to Preserve Our Standard of Living”):

Dear Mr. Miller:

How can you write a whole column on our educational and economic challenges without once mentioning the impact our immigration policy has had on both?

It was nice to see you refer to Michael Spence and Andy Grove, and acknowledge the need for more manufacturing jobs, but you (and Michael Lind) were advocating something completely different and less plausible last year: that a return to broad-based prosperity could be built on “in-person service jobs – such as teaching, home health services or hospice care,” as you put it in your April, 2009 FT column (which I blogged about at the time (“How not to create broad-based prosperity”).

Finally, “U.S. Elites” includes you, as an Ivy League alumnus, former White House fellow, and current fellow of a center-left think tank. You have been part of the problem. As I noted in the blog post I linked to,

Liberal think tanks such as the Center for American Progress — although they support the goal of a strong middle class in the abstract — advocate policies that work against this goal in reality. They oppose most manufacturing and natural resource industries out of concerns about carbon and global warming; they advocate policies that will make energy (and thus energy-intensive industries such as manufacturing) more expensive, for similar reasons; they oppose the vocational tracking that would support a strong manufacturing base, out of egalitarian educational ideals; and they support unskilled immigration, which lowers the wages of blue collar workers in industries such as construction.

The part of your WaPo column were you wrote about the importance of manufacturing jobs was a step in the right direction. Here’s hoping you use that as a starting point to re-assess some of your other positions, and use your connections to influence policy in a more constructive direction.

More generally, it’s disconcerting how bereft the center left in this country seems to be of actionable, constructive policies to address the mess we’re in. I get the sense that they have long taken for granted the creative power of the U.S. economy, and concerned themselves more with how to slice up the economic pie rather than keep the economy growing. Granted, this may be true, to an extent, of some of those on the center right as well, though at least they are less likely to advocate policies that would further hobble the economy.

My mother was in the market for a black Lab for the farm, so she found one via Labs4rescue. You have to pay a few hundred dollars to offset vet bills and transport costs (this dog is coming from Texas), but it’s a lot cheaper than buying a purebred from a breeder. The first dog in the video below is the one my mother got. I think this video was recorded in Texas yesterday; the dog is scheduled to arrive in New Jersey on Saturday.