One currency pair that many traders watch is the $EURJPY.  It’s historically been correlated with equity markets and is a good proxy on risk taking in the marketplace.

Back in March, two weeks before equity markets rallied, the $EURJPY started moving up, perhaps signaling the rally.  Since then the two have moved pretty much in lockstep – until recently.

Below is a chart (click to enlarge) showing how recently the two have diverged.  The $EURJPY is selling off whereas the market has been trading in a range off the year’s highs

Surely, the $EURJPY can play catchup, and since the dollar has become the carry trade currency of choice old relationships may not hold.  Regardless, this is a relationship to watch.

Most think that the last decade was characterized by excessive risk-taking in the economy.  While I do admit that as an economy we took on tons of debt, I think our problem was that we tried to avoid all risk whatsoever.  The increasing desire to be completely hedged of all risk has resulted in a economy that essentially believes in nothing – and that’s a bad thing.

Exhibit A - Output Price Hedging

Today Barricks Gold announced that it has reduced its hedges and now is fully levered to the price of gold.  Well that’s nice considering it’s a fucking GOLD miner.  If you decide to get in the Gold mining business, one would think that you have some belief that Gold is something that people would want and you would want exposure to such a thing – or else why mine for the shit to begin with?

“Oh we don’t want our business to experience the volatility in Gold prices”, they will say.  Fuck that you pussy, you’re a Gold company not a hedge fund (and we will get to them later)

Exhibit B – Credit “Enhancement”

One of the first shoes to drop was the the bond insurers such as Ambac and MBIA and climaxed with the CDS mess known as AIG.   Why did this all happen?  Because investors were too pussy to take credit risk without someone holding their hand and telling them it is safe.  A good capitalist economy has investors that believe in the investment or project he is funding.  An economy scared of its own shadow uses credit “enhancement”, instead of taking good old-fashioned risk.  Ironically enough, we ended up holding a bag of blown hedges.

Exhibit C – Market Neutral Investing

Market Neutral Investing is to risk taking as John Mayer is to Rock Music.

While I hate all the “bubble-calling” going on I’m going to say that the next bubble to pop is something I call the market-neutral asset class.  This isn’t a real asset class, but basically a bunch of hedge fund strategies that seek to avoid market risk.  It’s my belief that many of the obscure, derivative products designed over the last few years have been invented to meet the demand for this asset class, as traditional, underlying assets couldn’t support the volume needed for its existence.  Need to conduct convertible arbitrage? Not enough convertible debt out there? Fuck it – here’s a CDS.

All this market-neutral investing, by definition is a belief in nothing.  We have thrown tons of money after these supposedly risk-free arbitrage strategies rather into entrepreneurs who actually want to put money at risk in the market.  And while I guess there are some positive externalities, such as liquidity (and its effect on ability to raise capital), there are positive externalities to sports gambling as well.  Put all our capital to work in strategies that hedge spreads at various sportsbooks across the countries and you’ll see tons of bookmakers and some new sports leagues sprout up and small economies develop around them, but it is certainly not the best use of our capital.

A hedged economy is an economy that believes in nothing.  Although we have failed, what has crushed us has been our desire to invest capital in a fantasy land where risk does not exist instead of investing it using good old fashioned risk taking.

Today, while browsing through StockTwits I came to the realization that financial “new media” is pretty fucking disruptive.  In no other vertical have you seen new media gain more traction and be taken more seriously than in the financial community (besides perhaps Tech but the tech world has never had a mainstream media heavyweight).   Heck, Geithner must think so, since the Treasury invited a slew of bloggers to talk with them about issues.

These days, I consume mostly financial new media.  I let my twitter stream and especially gatekeepers like Abnormal Returns filter out the news and bring me the relevant information.  I don’t visit the mainstream news websites (besides maybe Bloomberg) directly, only indirectly through links.    I don’t read sell-side research but I have an giant decentralized research desk at StockTwits at my disposal.  When I’m in the mood for entertaining and awesome market and economic analysis, I don’t turn on Jim Cramer but read The Fly, Epicurean Dealmaker, Clusterstock, or Reformed Broker.

And I am not alone.

But why?

Mainstream financial media is mostly spam, and can’t be consumed from a centralized news source if you are looking for an informed opinion.  It has to be consumed as a portfolio of news sources to be the most valuable.  This would make sense because the stock market basically spams us with a whole bunch of useless information and its so easy to report the noise.   Money has no time for spam.

Another reason it is so popular is because of low barriers to enter. Pretty much everyone has exclusive access to “the story”. The story is the market and everyone has a front row seat to the show.  It makes it very easy for bright minds to report on it.  There are no exclusive interviews with the market, and its assumed that most market participants interviewed are talking their book – which essentially devalues whatever access large news orgs have.

Financial New Media also has had an enormous amount of investment.  Heck, Motley Fool, a horrible news outlet company that is borderline new media raised $25 million, which  is about 2% of NYT’s market cap.  That’s pretty big.   No other vertical has had more investment.  This makes sense, because financial information is tied to capital and should throw off more money, and because of this financial new media is a bit more evolved.

I believe that with financial new media we can see the future of some of the other types of media.  And, to all those who scream the death of newspaper – the future looks good.

With banks reporting record bonuses this year off of billions in taxpayer bailouts, there has been much populist outrage over banker compensation.   The main argument that is being spewed by the masses is that they wouldn’t have made that money hadn’t it been for the bailouts.  Banks, on the other hand, argue that if they don’t pay this compensation they will face a talent drain.

The problem with the populist argument is that it is fueled by outrage.  It is intellectually hollow and doesn’t really beg the question are the individuals getting paid what they’re worth. I will take this argument to another level though, more classic logic.

The banks who are claiming that their employees are worth what they are being paid are also claiming that the losses were exogenous to the business model that they employ – a systemic crisis.  It was a system that failed that they happened to be a part of.  Fair enough.

So now that the system is back under way, and banks are starting to earn money again, they claim that it is the individuals themselves who are making the money.  A bonus is by nature a reward for an individual for work performed, and thus it is fair for that individual to be rewarded for his contribution to the success.

This is where I see a logical fallacy.

A bank or any institution can not credit failure to macro and success to the micro.  If the system dictates your failure, then it must also dictate your success.  Surely they wouldn’t argue that homeowners in New Orleans should be getting huge premium reductions on their insurance because they were smart enough to avoid a hurricane the past 3 years.  That would be asinine to suggest as everyone knows a complex weather system dictates the profit/loss on the insurance not the homeowner itself.  Thus, if banks are to recognize the system for their failure they must also recognize it for its success.

If you take the other side of the argument and say that banks don’t credit the system for their failures, then it implies that the employees were responsible and, well, the argument for bonuses is much more flimsy.

I could care less whether a Goldman Sachs banker is buying with his money, but I do care about having a banking system that is well capitalized.  Goldman Sachs is set to give over $20 billion in bonuses this year.  Their “conduit” bailout through AIG was $12 billion.  While I realize not all of that is in cash, if they recognized that the same system that gave them that wealth in the good times could fail, exercised some thrift and socked away some money, bailouts would not be necessary.

If we have a cartel of banks that is given systemic advantage and ability to literally print money, we must refrain from the temptation to “capitalize” labor in this money factory.   They are given free money at a time when it is scarce, of course they will make money.   While there is some talent, for the most part this is serendipity. The system’s ability to make or lose money is far beyond the talent of the individual and until we recognize this, we will allow the workers in our money factory to take all of the profits it needs in order to keep operating when the rainy day does indeed come.

In the training program at Smith Barney they give you a reading list.  Most of them were complete bullshit but one of them really stuck with me , “Never Eat Alone”.  This book was about the power of networking and, as it title suggests, the author urges the reader to always be out there meeting people and when encountering the all-to-often predicament of eating by oneself to find the other person who is doing the same, and talk to them.  The author spent his life building a network simply for the sake of building it.  This was something I really took to heart and decided to do so myself

Today, Phil Pearlman while discussing the StockTwits community started talking about how little things go a long way in engaging the community, and its completely true.  Those that don’t understand Twitter only see it as a one-way street.   They spend time talking to themselves, 20 self-proclaimed Social Media Guru’s, a few self-proclaimed SEO Mavens, and about a dozen hot, naked, chicks that want to have sex immediately.

The power of Twitter is in interacting and creating a two-way street. If someone @replies or talks to me I usually tend to follow them, check them out and in doing so have built a network of once complete strangers into something special – interesting people discussing interesting things.

It’s amazing what simple, genuine @reply can do to expand your network and help build relationships so I urge you to never tweet alone.  We’re all in this together.

Lately I’ve been thinking a bit about the market for labor. All this thinking has led me to wonder whether the liquidity in the labor market is a good thing for organizations and the economy as a whole.

Over the past 50 years, the length of service for a specific company has been going down.  Gone are the days where you started at a company in your 20’s and received a gold watch when you retired at 55.  While I unfortunately couldn’t track down the data to illustrate this (let me know if you have it), the days of a lifetime of service in the corporate world are gone.

Within a given industry or field there are two types of raises, vertical and horizontal.  Vertical raises are the more traditional type of advancement – up within the organization   Horizontal raises  occur between companies.

The rise of the internet and sites like Craigslist,  Monster, and Careerbuilder have made the horizontal raise much easier to get for those who are not getting vertical raises.  These sites, in essence, have created a market for labor that didn’t exist and effectively added liquidity to the labor market.  By making it cheaper and easier to advertise for positions, there is an active and constant bid in the market for labor that didn’t exist before.

As we saw in the stock market in the 90’s, increases in the amount and speed of information flow in a market tends to increase liquidity and result in overtrading – and we are starting to see that in the labor markets as well.  This trading has resulted in economy-wide market where labor is being rewarded horizontally rather than vertically.

There is a major information asymmetry problem with such a market design.  When labor moves up the ladder vertically there is complete information.  The employer knows the employee quite well and vice versa.  Horizontal raises, on the other hand, have incomplete information.  The prospective employer only knows what is on the the prospective employee’s resume and has incomplete information about the person.  Often times someone who is unhappy that they didn’t get a raise vertically move up horizontally (and many times there are good reasons why the vertical raise was not given).

This “empowerment” of labor will be lauded by many but overall I don’t believe it is good for the economy or business in general, and in the long run labor itself.

Imagine for a minute if you had a stock that was conscious of the fact that it was being traded and needed to be traded for higher values to survive.  What would it do? It would act deceptively, spread rumors about other stocks, and trick you into holding it (in fact this happens in many companies now).

Labor does the same thing.   This liquidity for the labor market is resulting in many of the organizational issues problems in companies today.

When an overvalued worker is misallocated to middle management they promote incompetence to protect their “value”.  Horizontal promotion increases these odds.

Why are CEO’s salaries so high?  Because horizontal promotion has taken hold and a CEO has a bid in the market to be CEO of another company (sometimes in a unrelated field).

Let me know your thoughts.  This was a bit of a ramble, so hopefully I got the idea out there and across.

As I’m sure you can tell by the my blog posts, lately I’ve been thinking about the social web an awful lot.   Part of it has to do with working at StockTwits but another part of it is that I see it as very disruptive and thus, interesting.

Social platforms such as Facebook and Twitter combined with mobile phones are allowing the global conversation that started with the internet to turn into something faster,  easier, and more ingrained in the day to day life.  Poeople are beginning to live their lives both on and offline  simultaneously and seamlessly.

Many companies see this as an enormous marketing oppurtunity, and it is, but now how they think.

For the last 50 years or so, going back to the days of Don Draper, marketing has been primarily focused outward – as a one way street from the company to the consumer.  In The Cluetrain Manifesto, they likened the modern day form of marketing to war where companies are in battle with their customers – constantly trying to force a huge supply of messages to a market with absolutely no demand for them.

On the internet however, this tactic doesn’t work.  On the internet, what works is not what the companies telling you that you should want, but you telling the companies what you do want.  Think about Google.  Search is the most successful type of advertising on the web.   This is because when someone performs a search, they are explicitly looking for something that they want.  Thus, the ads aren’t that intrusive.  In fact, they can be quite helpful.  Search ads are pretty much the only ads I click on online.

On the social web, this is no different.  There is very low tolerance for spam, and most traditional corporations have basically turned to spamming.  The other day I tweeted about the movie Halloween II, and the next thing I know I had two Halloween costume websites following me.  Bluntly put, like the traditional web, most companies don’t know what the fuck they’re doing on the social web.

This is because the future of marketing on the social web is not the outward form – from the company to the consumer.  Instead, it is the inward form – from the consumer to the company. In the past it was a marketing department trying to predict its customer’s tastes and preferences and craft a message accordingly.  On the social web the customer tells the company their tastes and preferences and the marketing departments role to relay it to the company.  In fact, you know that customer service department you outsourced to India – you may be need them again.

The social web provides a real time minable conversation for companies to peruse.  Today I saw the following two tweets from someone I follow, @christopherhuff:

At this point he is marketing himself to banks.  He’s telling banks, specifically Bank Of America, that he’s looking for service that he isn’t getting.  He is also marketing Bank of America to his followers, letting them know that BofA service blows.  If Bank of America was smart they would at least use this information to improve their customer service, if they were really smart they would have @replied him and gotten the information, apologized and then took care of it.  If they did that, I’d ReTweet them in a second – cuz that’s awesome.

The future of marketing on the social web is inward, towards the company.  I call this marketing inversion.

Companies should fire the marketing departments hired to craft images of some contrived reality, and instead hire people who can wade into the actual reality of the social web to help craft a better company.  This means monitoring what people are saying, and reaching out and talking to them in a human voice.   It also means simply listening, a very important characteristic to a good salesman.  Companies must simply sit back and listen to what people are saying about their products and service and then relay that message to the operating arms of the company so that they can improve.

In the past, it was companies sending out a ton of messages.  Now its the customer – and now there should be a huge demand for the message.  On the social web, customer service is the (new) marketing.

Today, Barry Ritholtz wrote a small piece where he wonders if Twitter will make us all dumber.  He writes,

I occasionally use it. I appreciate the instantaneous communication of micro bursts of info, but cannot help but wonder if its part of a culture of dumbing everything down. All nuance, all subtlety, all fine lines of discussion get lost in 140 characters.

Barry is someone whom I have tremendous respect for, and having seen him lecture on technology, think he understands the web, but I believe that he is wrong on this.

One characteristic that is unique to human intelligence is writing.  Many animals talk, but only humans write.   Compared to verbal communication, written communication requires an extra layer of thought and contemplation.  The written word has shown over time as a superior medium through which to pass information and knowledge.  From the printing press to the internet, it has been a catalyst for the evolution of intelligence.

So while a tweet is not the same thing as a blog post or essay, it still is written communication and allows for a deeper level of thought beyond its verbal equivalent.  Moreover, Twitter is more accessible to the masses as it takes less time and is more conversational.

While he is correct that there are some levels of knowledge and understanding that cannot fit in 140 characters, Twitter gets more people writing (thus thinking) and in the long run I believe that makes us smarter.

Lately I’ve been thinking about the web from an economics standpoint.  Instead of trying to think about “what should be”, I have been trying to discern “what is”.   I think someone who really understands the web in this context is JP Rangaswami.  In his post a little while back, “The Customer is the Scarcity” he writes,

We are fast approaching an age when many analogue things will become virtual, digital, easily copied.

We can choose to invest time and effort in making digital things harder to copy: we can choose to create artificial scarcity, and lose.

Or we can choose to invest time and effort in making digital things easier to consume, to share, to enrich. And to pay for.

The customer is willing to pay. If we get the consumption model, the paying model, the sharing model, right.

The customer is the scarcity. Let’s focus on valuing that scarcity, on giving the customer what she wants when, where and how she wants it. With the right consumption and payment and sharing models.

Nowhere do you see the this “customer is the scarcity” concept than with Google.  Google makes money by selling a scarce asset, our searches, to advertisers.  While we are their customer we are also the product that is sold to advertisers.  We are a scarce asset that is auctioned off and valued to the market.   This concept, while not new by any means, is very important.  As long as we’re content hanging out over at Google, they have a monopoly on the production of searches, and there is really nothing anyone can do about it.

Right now, Microsoft is spending millions of dollars to try to persuade us to come hang out at Bing.  While they are gaining some traction, the truth is that we’re happy at Google, we’re comfortable there and we’re not going anywhere anytime soon.  Even more interesting is that Microsoft can’t “Wal-mart” Google.   They can’t go and undercut Google on the price of ad space, because the price of ad space is completely independent from the volume of searches.  This is a tough position to be in and really illustrates what the scarce asset is on the web, us.

As the social web starts to take hold, this concept will never be more important.  As people settle down into communities to talk, play and solve problems, those who can effectively engage and foster the growth of loyal customer – raving fans will benefit.  These communities are scarce markets of people that can be auctioned off to advertisers, matched up with other markets, and monetized in ways we can’t even comprehend right now.

While training in sales at Smith Barney, I was taught that we buy from people we know, love, and trust.  Since “knowing”, “loving”, and “trusting” are all characteristics associated with a social network, I will rephrase that to say “we buy from within our network”.  Thus, not only is the customer the scarcity, but the network is as well.  Those who can build the strongest and deepest networks, will also hold the most valuable assets on the web going forward.

The market maker serves a very important role in the market.  The market maker provides liquidity to the market by posting a bid or ask and earns the spread for taking that risk and providing that role.

The manner in which the market maker adjusts his/her bid-ask spread as information presents itself is crucial to success.  Over the course of the day the market maker will get a ton of order flow and must discern which orders are contain no information (ie “noise trades”) and which trades contain relevant information (ie “informed trades”).  For example, if an informed trader hits the market maker’s offer, he/she knows to raise his bid/ask to adjust his inventory appropriately.  In general, the best market makers are the ones who can filter through the noise and obtain the best information (and most informed bid-ask spread) at the lowest cost.

On StockTwits we are all market makers in ideas.  The key is to separate the informed trades from the noise and get a nice stream of informed idea flow on your screen.

How to be a Market Maker in Ideas on StockTwits

1. Identify and Follow a Group of Informed Traders

This shouldn’t be difficult.  There is a ton of talent and informed traders on StockTwits.  The hard part is matching them up to your time-frame, risk tolerance, and trading frequency.  If you are someone who doesn’t have the time to daytrade you may not want to include someone like @TodayTrader, @WeeklyTA, or @AnneMarie2006 in your group of informed traders.  This is not because they aren’t awesome traders (they are!), but they often hold positions for a short period of time and sometimes go both long and short the same position in the course of a day.  Instead, you may be better suited following someone like @ToddSullivan who usually holds a position for a bit longer than a day.  Identify what type of trading style you are comfortable with and find good, informed traders that match up with that style.

The best way to filter out the noise is to physically do it and the great thing about StockTwits is that we have the features that allow you to follow a stream of just your friends:

• To add someone to your friends stream, all you have to do is follow them on Twitter.
• To access the stream on the StockTwits homepage, log in, then open up the “Select a Stream” drop down menu (which is located under the tweet box and above “The Human Ticker” banner) and select “Friends”.
• To access the stream on Tweetdeck, just click on the StockTwits “$” icon on the upper left-hand corner and select “Friends”, and the stream should pop up.
• This feature (amongst many others) will also be available in StockTwits Desktop.

2.  Evaluate and Value the Ideas

Once you have a nice stream of ideas coming from informed traders then you want to evaluate the information contained in the ideas.  This means checking charts, fundamentals, the lunar cycles, or whatever it is you use to evaluate an idea.  More importantly, you need to value the information in pure dollar terms.  If @upsidetrader tweets an entry on $ACAD at $5.82 and now the stock is at $6.00, you need to see if there is enough value left in that entry information.  This is not an easy task, and can vary depending on the type of trader it comes from and the type of stock/trade it is.   It is something that you get better with over time.

3. Act Accordingly and Monitor

After you have identified, evaluated, and valued an actionable idea, the next step is to take action.  When you take action, make sure you include all the information given within the idea.  This includes stops and targets.  You also must follow the idea, and the source of the idea closely.  Many traders are constantly updating their stops/targets, as well as adding to and reducing positions in real time.  You must understand that an entry is only part of the information from an informed trader, and there is a ton of value in the dynamic evolution of an idea.  Please don’t underestimate this.  Once you have committed to an idea, stay with it and extract as much value as you can from the information that is available.

While this may seem somewhat straightforward to some, we hope it is an interesting way to look at how to use the StockTwits Human Ticker to synthesize ideas and information.  It is our belief that if you think like a well-disciplined market maker in ideas, there is a ton of value in StockTwits to be unlocked.