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High View Landscape

A 35,000 feet view of the crisis

Sep 2009/in , /by

Guest author: Dave Frankel, VP Business Development

I am writing this post from my American Airlines flight over Rapid City, South Dakota right now – connected to the internet via GoGo wifi . While I am generally a creature of habit when I get on my flights to and from CA (which almost always includes catching up on sleep), this time I figured I would try something new to see if it would improve the experience. I must say – I am hooked. I’ve already updated my Facebook status, participated in an email thread pertaining to a partner meeting I have tomorrow, got up to date on football news, checked in with my family via instant messaging (interrupting homework time), AND learned everything I needed to know about the our in-flight movie “Son of Rambow”. Who knew life could be this good?

It is a nice respite from what has been going on in the industry over the past week and half. As I was explaining to our Silicon Valley colleagues (who agreed with Penny’s post last week about how the financial meltdown hasn’t quite registered yet in sunny CA), there has been a dark cloud hanging over NYC since Lehman went down. The market swings, the daily debates about the proposed bailout, the questions about how the institutional investment industry is going to rebound, and the opportunities opening up to research providers are all regular topics of conversation for us in FirstRain’s NY office and in the field.

The truth is, no one REALLY knows what is going to happen next to this industry. As one of our Board members pointed out yesterday, there is not a person alive on the buyside that has ever traded through a phenomenon remotely close to this. Brokerage relationships are quickly being shifted, the availability of broker produced research is now in question, and consolidation and increased regulation appears to be on the horizon for investment managers, especially hedge funds. What this means is anyone’s guess – pundits, hedge fund managers, and common folk alike. One point on which we all can agree however: the art of institutional investing is going to be IRREVOCABLY CHANGED when the dust settles.

Despite reports of surging ratings for CNBC, I am personally finding the most thought provoking insights and opinions coming from the following: 1) sources I have already previously vetted from the web, like the daily updates from my friend Keith McCullough at Research Edge, the Integrity Research blog, Paul Kedrosky or John Mauldin’s Outside the Box, 2) sources published on the web that are forwarded to me from people that I respect and trust like colleagues or friends, or 3) of course, stories from the deep web that I might not regularly follow but that I uncover throughout the day from FirstRain. As I sit here at 35,000 feet reflecting on this, I realize that I have not felt the need to pick up the WSJ once in the past few weeks, and I certainly cannot remember seeing anything new and provocative on broadcast news about the financial industry meltdown. And, dare I ask, has anyone come across any market moving sell side research on the topic in the past two weeks?

Back to my decision to connect to the web via in-flight wifi. I must say, having tried it, I can’t see myself going back to transcontinental flights without being connected. Sure, I had to alter a routine that was working for me (and I definitely didn’t catch any zzz’s), and I am not quite sure about how much the option will allow me to accomplish in the future, but I see that the change is coming whether or not I embrace it. It’s probably better to be figuring out how to make the technology work for me (maybe download Skype before the next trip) than to think it’s just going to be a passing fad.

Next time, however, someone remind me to pack another laptop battery – my computer died before I was able to finish this post. With new opportunities come new challenges I guess.

old book

When religious law pays off

Jul 2008/in /by

Our system has been picking up an interesting counter-cyclical trend on an investment approach that has been buffered from the credit crunch recently – Sharia or Islamic compliant investing.

This is a practise that started in Malaysia three decades ago and it has been growing as the assets available have been growing in the Middle Eastern oil rich nations. New funds are being started – like the first of several new sharia-compliant hedge funds being started by Dubai based Millennium . As Reuters reports

The S&P global shariah index returned 3.61 percent in the second quarter, while the equivalent world index fell by 1.49 percent.

Banking stocks have been hammered by the credit crunch and exposure to the U.S. mortgage market. But as Islamic law prohibits the paying of interest, shariah investors — most from Gulf states which are reaping the benefit of record oil prices — cannot hold such stocks and have therefore been immune.

breakfast meal

Neurons and Alpha Bits

Jul 2008/in /by

Guest post from Keith McCullough CEO/Chief Investment Officer at ResearchEdge

I posted on Keith’s interesting new transparency model a few days ago – here’s his thinking on the interaction of your brain and alpha in this bear market.

Mathematically speaking, “edge” is often alluded to in the investment community as “alpha”. We like alpha. Our team eats it for breakfast and washes it down with criticism and compliments alike. We know that as long as its taste remains in our bellies, we have something that will drive us toward getting up tomorrow morning.

This morning, and on those of the past few weeks, I have been waking up to increasing confirmation that we have had the “macro call” right. It’s been nine months since I left Wall Street, and while I sincerely hope that you don’t interpret my recent work as “I told you so”, I realize full well that hope is not an investment model. I have zero control over the dopamine and serotonin levels in your brain, particularly when it comes to colliding with the emotions associated with your making, saving, or losing money.

When it comes to money, the emotional impact on your brain is well researched. Richard Peterson wrote a fantastic book last year titled “Inside The Investor’s Brain – The Power Of Mind Over Money”, and I highly recommend it to anyone who is serious about trading this bear market actively. One of my favorite chapters is called “Overconfidence & Hubris”, and there you’ll find a discussion on the neurochemical balance of your investment thought processes. If you’ve already studied this, at a very basic level you know that there is a decrease in your brain’s dopamine levels at the exact time you thought you were going to be right, and weren’t. Yes, this is why some people do “dope”, it takes those worries away in the immediate term.

There is, of course, a legal solution to upping your dopamine levels – be right! As Peterson points out, “when a reward is found dopamine neurons reinforce the reward producing behavior… this is a process of learning via the dopamine pathway.” However he goes on to explain that the music of you’re being right can effectively stop, and “if a behavior is no longer rewarding, then norepinephrine levels increase in the brain. Norepinephrine stimulates scanning for new opportunities.”

These psychological facts should make perfect sense. If they don’t, you may be blessed with some Mr. Spock like “Vulcan” attributes that Peterson has some fun with. Most of us are human however, and should be very much aware that we are all going to be right and wrong over the span of an investment career. All the while, the art in making (or saving) money when others can’t lies in respecting that there are sciences at work within this complex global market ecosystem.

This morning for breakfast, as we scour the world and our respective models for those elusive “Alpha” bits, I wish you the best of luck. Our cumulative knowledge is more powerful than our individual emotions. Given that the 1st Nobel Prize in Economics was not awarded until 1969, there is plenty of creative destruction to look forward to. The evolution of investing is a process, not a point.

KM

investorside

Joining the board of Investorside

Jun 2008/in /by

As we announced today – I’ve joined the board of the non-profit group Investorside. This is a trade association with a mission to “increase investor and pensioner trust in the U.S. capital markets system through the promotion and use of investment research that is financially aligned with investor interests”.

The need for a group like Investorside grew out of the mistrust investors felt for research after the research/banking conflicts became visible in 2001. Sellside researchers were promoting stocks long after they knew they were a bad investment, in order to keep the investment banking fees, and so their own fees going.

Today the group’s members are investment research firms “providing research that works purely for investors”.

FirstRain is used by investors and by corporations today – both when the goal is to do institutional grade research from the web. When I was approached to get involved in Investorside, and to serve on the board, I thought it was a very good fit. It’s an opportunity for me to help the research community using my experience in web 2.0 and growing markets, and it’s an opportunity for me (and FirstRain) to continue to grow in our understanding of the research needs of the investment community.

Here’s the expanded mission:
The Investorside Research Association serves its members through three primary functions:
Certifying Research Providers — Investorside certifies that its members are free of investment banking, consulting, and research-for-hire conflicts and provides certified member firms with the trademarked Investorside Seal.

Promoting the Growth of Independent Research — Through Investorside.org, annual conferences and regular media communication, Investorside markets its member firms to individual and institutional investors.

Promoting Government Policy that Encourages the Use of Independent Research — Investorside represents its members’ interests before regulators, law-makers and members-of-industry, promoting the use of investment research that is aligned with investor interests.

spikes

Detecting blog spikes and market moves

Jun 2008/in /by

We announced some important new capabilities to our service today: FirstRain Blog Impact Reports and Capital Market Reports. The key breakthrough is that we can now detect spikes in blogs – which are based on normalized trends over time so you can see when there is truly a change in posting volume – and so quickly see what the blog chatter is that may be impacting the market.

This is an enormous time savings for our users. No more need to set up thousands of RSS readers and troll through them. No more wondering if you are missing rare posts on quiet companies. We’ve determined the most influential blogs at the time, based on our MarketScore algorithms which consider prominence, authority and reach to figure out which blogs to include in your report – and then they are tightly presented as lists linked to the original posts and the FirstRain system.

It’s the first time there is an automated way to systematically include blogs into the investment research process!

The second set of reports are about the capital markets themselves and their interaction with the web. We correlate web results with hedge fund trends, market movers and the short interest – presenting web results directly tied to one of these effects – and in an automated, thorough but prioritized way so our users don’t have to look anywhere else and can quickly see what’s being reported on the web related to the trend.

From our press release:

“… today announced the release of two new qualitative analytics packages-FirstRain Blog Monitor and FirstRain Capital Markets Monitor-that report on the interaction between web results and the market to enable better decisions. These products build on FirstRain’s cutting-edge qualitative analytics technology which distills unstructured data from across the vast web into concise data points and trends that matter to professionals.

“The investing and management communities have largely been without a comprehensive strategy when it comes to understanding and exploiting rich information from the web, particularly the impact that blogs have on the markets,” said Sean O’Dowd, capital markets senior analyst at IDC Financial Insights. “FirstRain’s reports are an important step to bridging this gap in the research process, allowing the analysis of qualitative data on the web beyond just tactical means of tracking names at the peak of market focus.”"

We’re headed to SIFMA in New York this week and very excited to show this new way of using the web as a research database to our users and prospects.

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