Ho John Lee's Weblog

These are my links for May 5th through May 6th:

• Coding Horror: I Just Logged In As You: How It Happened – On good password management, why forums should mostly not be storing user passwords in general, and how re-use of passwords on multiple sites can lead to vulnerability on other sites.
• Arc Forum | Arc – Arc is a version of Lisp. Among other things it is used to implement Hacker News.
• John Graham-Cumming: Can you trust Paul Graham with your password? – On best practices for storing password hashes to avoid attacks on compromised password files and the use of rainbow files, in a look at Hacker News implementation of passwords
• Deliberate Ambiguity: How *not* to rate a search engine – Search engines have very simple user interfaces, but are used in many different contexts, most of which don't resemble the way people often try out a new search engine.
• The Slow Erosion of Google Search – Bokardo – On changes in internet user behaviors over time, more social media (ask your Twitter friends) vs directed search (send a keyword query) etc.
• Brynn Marie Evans » Why social search won’t topple Google (anytime soon) – On differences between searching through social media such as Twitter, Facebook etc, vs Google etc.
• The Financial Services Club’s Blog: Stock picking with real-time news – Looking at real time social media trends for trading ideas.
• Lisp’s reputation is so bad that many people don’t even take a look at Lisp | International Lisp Conference 2009 – I haven't touched Lisp in years, except maybe for configuring emacs. A list of possible reasons why Lisp is not more widely used, e.g. "Lisp is old and moldy. It must be primitive by today's standards.", "The exciting languages to learn now are Python, Ruby, Groovy, etc."
• Peering into North Korea – The Big Picture – Boston.com – A collection of recent photos of scenes from North Korea.

Didn’t attend ETech this week, but thanks to a Twitter pointer from Gene Becker,  I did take a few breaks to participate in a collaborative future forecasting experiment at the event, organized by Institute For the Future / Signtific Labs. The general idea is to enlist game players to offer Twitter-like short notes with outlier ideas regarding a scenario under discussion, in this case the consequences of inexpensive ($100) 1kg microsatellites (“CubeSats”) capable of high speed networking and remote sensing. The same game framework could be used for any scenario, though. Bonus points are awarded to “Super-Interesting” ideas and ideas that result in additional discussion, which helped me out on the scoreboard.

Gene (“ubik“) won a “Feynman” award on the first day, and I managed to end up with a high score at ETech, thus winning a lab coat to go with my “Genius” label.

Some of my favorite future forecast contributions from “What will you do when space is as cheap and accessible as the Web is today?” (slide summary here):

Jurisdiction-free data haven built with csats full of rad-hard flash memory, hbase-style distributed replication across multiple nodes. Subpoena-proof anonymizers, for better or worse. Alternative, universal internet currency evolves, outside any government’s central bank control. Following forced disclosure of banking client list, Swiss government recognizes anonymous cSat net IDs, followed by Cayman, Bermuda etc.

CSats deorbited in vacant areas of oceans as impulse input to passive sonar imaging. Oceanographers get great maps, submarines lose stealth. Depending on how accurately you can drop a CSat, you can effectively “ping” a region and listen to the return signal through existing arrays. This really messes with strategic deterrence since now subs are vulnerable to first strike. But CSat deorbit is cheap WMD for all. On the positive side, detailed acoustic propagation data leads to new insights on ocean dynamics – bathymetrics, thermoclines, currents, etc. A similar version of dropping CSats on land might yield useful seismic imaging. But these would all be surface impulse, not at depth.

Csat data networks circumvent the Great Firewall of China and other govt access controls, leading to broader/safer citizen engagement online

CSat operating interface is marketed as a toy, like Tamagochi. Recharge, collect interesting data, avoid mean csats, team with friends. Organizations might post cash prize/rewards for things like locating missing ships, oil/trash dumping at sea, smokestack emissions, etc

Commodity traders are early adopters of CSat operator networks. Looking for crop yield data, mine production volumes, freight shipments etc. Among other things, CSat observations could give a more accurate estimate of “floating” oil parked in tankers as well as ongoing demand. Similarly, you’d get a decent idea of iron ore production by watching BHP’s railway in Australia, and the demand side in China, Korea etc. CSat data could improve the market visbility into supply/demand. But one might start creating Potemkin mining/farming operations etc… Sadly, credit derivative risk is not observable via CSat.

Ubiquitous, near real time satellite surveillance. No more privacy outdoors. But really good Google Maps. Ultra high resolution terrain maps of the world synthesized from multiple satellite passes/viewing aspects. Long term studies of effects of erosion, farming, development, earthquakes, flooding, drought, etc. Insurgents, militias, and terrorists get real time tactical data feeds, make use of homebrew UAVs, sensors, and in-field dispatch from afar. Turf wars among poppy and marijuana growers who now know where each other’s fields are. All vehicles – car, truck, rail, container, airplanes, etc – get a sky-facing ID plate. Maybe these should just be really big QR codes with an authoritative registry to foil car thieves from painting on bogus “plates”.

Now I need to figure out how to collect that lab coat.

These are my links for February 16th through February 17th:

• Top 100 Network Security Tools – Many many security testing and hacking tools.
• FRONTLINE: inside the meltdown: watch the full program – "On Thursday, Sept. 18, 2008, the astonished leadership of the U.S. Congress was told in a private session by the chairman of the Federal Reserve that the American economy was in grave danger of a complete meltdown within a matter of days. "There was literally a pause in that room where the oxygen left," says Sen. Christopher Dodd"
• The Dark Matter of a Startup – "Every successful startup that I have seen has someone within their ranks that just kinda “does stuff.” No one really knows specifically what they do, but its vital to the success of the startup."
• Why I Hate Frameworks – "A hammer?" he asks. "Nobody really buys hammers anymore. They're kind of old fashioned…we started selling schematic diagrams for hammer factories, enabling our clients to build their own hammer factories, custom engineered to manufacture only the kinds of hammers that they would actually need."
• Mining The Thought Stream – Lots of comments around what is Twitter good for and how will it make money, revolving around real/near-time search, analytics, marketing, etc.
• Understanding Web Operations Culture – the Graph & Data Obsession … – Comparison of traffic at Flickr, Google, Twitter, last.fm during the Obama inauguration. "One of the most interesting parts of running a large website is watching the effects of unrelated events affecting user traffic in aggregate."

…start with a large one.

This weekend’s news that JP Morgan will take over Bear Stearns for around $2/share is astonishing. Last Friday BSC closed at around 30. A week ago it was around 60. A year ago it was around $150/share. So in a year the shares are down by 99%, and even the bargain shoppers who got in on Friday are down by something like 85%, based on today’s close.

A cautionary tale gets added to market lore. This is going to make a good movie at some point…

In one of the banking world’s most unsettling recent disclosures, France’s Société Générale SA said Mr. Kerviel had cost the bank €4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers. The combined trading positions he built up over recent months, say people close to the situation, totaled some €50 billion, or $73 billion.

Mr. Kerviel is no trading legend who let a transaction get out of hand. He was a low-level trader in the bank’s “Delta One” desk in western Paris, earning about €100,000 ($145,000) a year. His job was to make bets on how large European stock indexes would move, according to bank officials. His expertise was trading baskets of stocks such as the Euro Stoxx 50.

At $7.2 billion, this loss is larger than than the estimated 2006 GDP of 65 of the 183 countries tracked by the World Bank. It’s just about the entire output of Cambodia ($7.193 billion), and greater than the combined output of Seychelles, Liberia, Grenada, Gambia, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Samoa, Comoros, Vanuatu, East Timor, Solomon Islands, Guinea-Bissau, Dominica, Micronesia, Tonga, Palau, Marshall Islands, São Tomé and Príncipe, and Kiribati ($6.846 billion).

I’ve noticed that the news coverage keep reporting “fraud”, which is apparently true (he made up fictitious trades with outside partners of the bank), but it mostly sounds like internal risk controls failed in more than one place.

Of course, if it had gone the other way and turned a profit, we never would have heard about it.

Here’s a graph of the open interest in Sep07 SPX options. Unlike your typical equity option which settle based on opex Friday’s close, most index options settle based on the opening value of the S&P 500 index on expiration Friday.

This leads to interesting dynamics like last month, when Ben Bernanke cut the discount rate just before the market open on Friday. A lot of fund managers went to bed Thursday with good looking option positions that got crushed Friday morning when S&P 500 components gapped up at the open.

Thursday SPX cash closed at 1518.75. I come up with around 1490 for max pain. (“Max Pain” is the settlement value that will result in the lowest aggregate value for the open contracts at expiration.) This, and the big run up since the unexpected 50bps rate cut on Thursday, suggest a lower bias going into tomorrow’s open, which we would see in the futures. ESZ7 (December S&P futures contract) closed Thursday at 1531.75.

Part of what makes the index options settlement interesting is that the settlement value is based on the opening trades in each of the components, and they don’t all open at the same time. It takes a huge amount of money to move the entire market around, but you can jack the futures up or down, along with selected issues in thin premarket sessions to induce a higher or lower opening cross in your preferred direction. I don’t generally attempt to take a trade based on max pain alone, but it can be useful to know where some pricing anomalies may occur. On SPX, the institutional-sized interest tends to fall at multiples of 25, i.e. 1475, 1500, 1525, which is easily visible on the graph. If the opening price gets moved to a strike, there can also be an opportunity to fade the gap, as the trade gets unwound.

The rate cut on Tuesday resulted in a lot of excitement and probably an overdone level of buying. So there are some other reasons we might see prices come in on Friday. However, it looks like the “Bin Laden Trade” (many, many Sep07 SPX 700 puts) isn’t going to expire in the money.

I take a week or so away from the markets and look at what happens…

The preface to Oscar’s e-mail this morning summarizes the current sentiment pretty well.

“Caution: This Next Trade is Not for Widows or Orphans”

Bear in mind that he’s a short term futures trader, so if you’re a buy-and-hold investor, none of this matters to you. You might enjoy his daily video commentary though.

I don’t usually track options closely, but the volume in Garmin (GRMN) calls caught my eye this afternoon. The December 35 and 40 and January 17.50 through 35 calls had volume 10x the prior open interest today.

The December 40’s did 25492 contracts at roughly 8.75, while the January 35’s did 17699 contracts at roughly 13.75. Yesterday there were only 2557 Dec 40 and 2523 Jan 35 contracts open. There’s comparatively little volume in the December/January put contracts.

This is around $46 million for these two strikes alone, and unusual new contracts volume in the other strikes today represent nearly $100 million, so it’s not likely to be a bunch of retail investors on OptionsExpress.

A few possible explanations:

1. Someone thinks GRMN is going up a lot between now and January (perhaps anticipating a good holiday season and/or announcements at CES in January?) and purchased a lot of calls.

2. Someone thinks GRMN is going down a lot between now and January and sold a lot of calls to effectively go short and also collect the time premium.

3. Someone holds a lot of GRMN shares and wants to lock in returns for the end of the year by selling covered calls. The shares are up around 45% for the year, someone’s bonus may depend on keeping the gains through December, and the past couple of days could easily raise some concern.

GRMN has been a favorite among short sellers and traders all year and goes on and off the Reg SHO (naked short) list regularly. It often trades erratically and often shows unusual affinity for strike prices at options expiration, which makes it worthwhile for Garmin investors to keep an eye on the options. Today’s volume in Dec 40 and Jan 35s alone correpond to 4.3M shares which the option counterparty will probably be wanting to hedge, compared with today’s relatively light volume of 1.6M shares.

Along these lines, there’s an interesting research paper on options volume versus future stock prices.

Nothing directly actionable here, but worth keeping an eye on.

Disclosure: currently long GRMN.

Update 11-29-2006 10:41PDT – Tuesday’s high volume in Dec 40s and Jan 35s is not showing up in the overnight update of open interest, so it looks like the trade was closed out yesterday.

My daughter and I sometimes watch Jim Cramer’s Mad Money show on CNBC. It’s great entertainment with the crazy camera angles, the chair throwing, and random literary references. She likes the sound effects (moo!), keeps asking if we can call in to “The Lightning Round!”, and occasionally asks if we can get some stock because Cramer said “Buy-buy-buy!”.

As the most popular show on CNBC, there is a significant phenomenon of excited viewers rushing out and buying whatever stock gets mentioned on each day’s program. If you watch after hours, there is usually a significant price spike, especially in thinly traded names.

The transient demand from Mad Money viewers creates two high percentage trading opportunities due to pricing inefficiencies, one hard to exploit, and one easy.

1. The hard way is to jump on the trade after hours, trying to buy a few lots before the price spikes.
2. The easy way is to wait for the opening price run up the following day, and sell short against the recommendation.

A recent paper by Joseph Engelberg, Caroline Sasseville, and Jared Williams at Kellogg School of Management examines the specifics of the Mad Money effect on market action in names that are mentioned. The tactic of short term trading against Mad Money recommendations is clearly visible in some of the illustrations.

Taken together, our results suggest that the aggregate losers in our event study are the Mad Money viewers who decide to buy the recommended securities when the markets open the following day, and that the winners are the market makers and arbitraguers [sic] who sell the overpriced recommended stocks on day 1, as well as the traders who sell the recommended stocks on days 2 through 12.

Individual investors who watch Mad Money would be wise to wait before purchasing the small stocks Cramer recommends, as these stocks tend to fall to their original levels following the overnight price spike caused by his recommendation.

I didn’t watch the show when it first came on, as it took me a while to get past all the yelling. I’ve come to think of Cramer as something like Howard Stern-meets-Louis Rukeyser, in that he has gotten a lot of people to watch by behaving strangely but also says some interesting things about investing as well. I still find it easier to read the transcripts than to watch the show.

There are a lot of people who have gotten interested in investing after watching Cramer on television. Hopefully they won’t lose their shirt before they figure out how to think before clicking. It’s probably been less disastrous for viewers in the past year, while markets have been generally going up.I’ve noticed he seems to be doing more basic investor education lately, specifically warning people not to run out and buy after hours or at the open.

Is the Market Mad? Evidence from Mad Money by Joseph Engelberg, Caroline Sasseville, Jared Williams
via Seeking Alpha

See also: Mad Money site at TheStreet.com, ShortCramersPicks,

Corante has a podcast interview with the founders of Zopa. The idea is to build an eBay-style marketplace for individuals to participate in lending and borrowing, using eBay-style reputation scoring.

Some of this seems like a good idea, possibly in matching up people who want to provide funds to communities that don’t have a pool of loans available to them, but would otherwise be a reasonable credit risk. (Something like Grameen Bank’s microcredit program.)

For other situations, this seems likely to end up with many of the same reputation-gaming problems that turned up on eBay. From a risk-management viewpoint, it might be useful to find a way to build credit pools rather than individual loans. This is essentially what the banks do already, but the reputation scoring system might allow a better handle on the creditworthiness of the borrowers, and turn the individual loans into a portfolio, so a bad loan doesn’t become a disaster for the creditor.

There does seem to be a need for something in this space. The ongoing consolidation of banks in the US has generally eliminated local control of most banks, meaning that individual branches don’t usually know their customers well enough to know if they would be a good credit, other than looking at a credit score, and don’t usually have the discretion or interest in making a loan to someone that doesn’t exactly fit their loan profile. If you want to do something creative, you probably need to work with a private banker, or have wealthy friends.

This might also provide a mechanism to form relatively small pools of capital for niche markets. An eBay-style model implies a huge amount of effort on the part of the participants, compared with what consumer banks would typically do. This might make smaller loans more interesting. Otherwise, why not stick with writing super jumbo mortgages at $1 million each for the same amount of work.