Month: October 2015

My everyday life in the age of super long and unnecessary titles and the future sticky impact on icecream

On By Chen Yu YanIn Environment, Futures, TradingLeave a comment

Among my work and research, somehow summer crept in without me noticing. The cool winds of winter replaced by the fiery sun is a nice change of pace. Although this year, summer arrived a little too quickly (even by Australian standards). I recall merely a week or two back when people were complaining about the harsh wind and rain and pretty much sacrificing their first-born just to get some sun. I’m pretty sure it went above 40 C (104 F) yesterday. The immense heat struck me as I was lazing about thinking about what to write, which in turn made me want to write about the heat. (It’s worth noting that I don’t necessarily write all of this in one sitting so the day I publish it, in this case today, can be a completely miserable day)

Irregularities in temperature has been all the crazy for a while now. A notable changing point, for me at least, is when I saw Al Gore’s An Inconvenient Truth. How does this affect trading? You ask as you lower your sunglasses ever so slightly while enjoying the last of the Mediterranean sunset (once again… I don’t always have the best grasp on what my reader demographic is like) . Well, that’s a fair question. If you actually read till the end of my title, you’d know that it’s about icecream (which everybody loves… apart from those with allergies, but even then). If you happened to be eating an icecream while reading my title, apologies if the length made it melt away…

Before I am accused of unsound research, let’s grab some figures first ( I am going to go by my favourite icecreams because they’re delicious). June 1996, a Golden Gaytime (fuck you if you laugh at the name, it’s one of the best icecream I’ve ever had) cost $1 AUD in just about any supermarket you go to if you just buy one block (Sydney prices). A Golden Gaytime today in a similar store would cost $2.70 (if you’re lucky enough to find it. For a while, these things were impossible to find). That’s a 170% increase in the span of 20 years! If you annualize it compounded, some simple math would yield you the sweet sweet 8.5% return per annum not adjusting for inflation. If we calculate the returns on the S&P500 index between June 1996 and September 2015, we get an annualized return of 7.67% (this is with reinvested dividends. Without is only 5.77%). So basically, the icecream is outgrowing the benchmark by almost 1%! Scoops of icecreams at the same time in Australia were $1 AUD, today, you can easily expect $3 AUD. When you consider the inflation in Australia over the past decade has never gone above 4% on an annualized basis, the price is crazy!

Now, you’d question my argument and say that the S&P index is well diversified while icecream holds a lot of idiosyncratic risk. You can also argue that my research is incomplete as I only used one icecream in my sample. That is correct. Feel free to complete my research in your own time (if you can bothered digging through the internet for prices of icecream two decades ago). Regardless, what I want to discuss next is my main purpose.

In case you didn’t know, basic ingredients of icecream are milk, butter, sugar, and probably a huge freezer. The freezer aside, milk, butter, and sugar are all available to trade on the futures market (I don’t know what you call a basket of the three but I’m going to call it the icecream basket… or as a friend calls it, the ‘icecream tub’ because who really stores icecream in baskets). Let’s just leave the world of trading for a minute and come into the real world where the graphics are good but the game play and story sucks. Who eats icecream? Mainly children, and parents who steals a bite or two and end up eating everything anyway while their child watches leaving them traumatized and not knowing how to feel because they’re only 5 and can hardly pull together a coherent sentence to express their thoughts. What about when? Well, I know that summer is a big season for icecream (citation required). And I’m also fairly sure that they’d sell in spring and autumn (the name of the season that comes after summer for those who uses ‘fall’ as if the season is purely based on falling leaves. By that logic, falling rain, falling snow, everything is going to be fall!). Heck, when I went to Europe with friends in December, I ate gelato almost everyday while in Italy (I ate other stuff too, not just gelato). Geography? Well, anywhere that has electricity would store icecream right after beer is stored to an acceptable level. Basically my point is the demand will be there. It almost always will be there since it is somewhat a ‘luxury’ good. And cheap luxury goods will always be in demand (look at the Daniel Wellington watches. Tasteless? Yes. Overpriced? Yes? But it takes advantage of human weakness in that it creates an illusion of elegance, and via clever marketing fools its audience into buying it because hey, paying $200 for a piece of shit that is luxury is worth it! Mainly because you can afford it. Which is also why you don’t see everyone just go around in that sweet Vacheron Constantin. All just my opinion… if you like DW watches, good for you… and please stay away from me). The demand in affordable luxury will not wane because of human psyche. Hence icecream will always be around. That or because it’s delicious…

Looking as the icecream tub, climate change does have its subtle effects. The price for processing butter, cream, milk, sugar, flavouring etc. has far exceeded inflation (citation required). After a bit of digging through the archives of the International Trade Centre (ITC) website,  when developed countries such as the US and Germany (I’ll just group the rest of the EU under Germany for simplicity), it causes problems. Both the US and the EU has tariffs and subsidies protecting its agricultural sectors. Hence, the sensitivity to policy changes can only be described as substantial. Given the current financial situation in the EU (the US’s contributions towards milk exports is fairly small next to the EU’s, with the EU contributing around 1/3 of the total production with their top 3 countries alone and the US making up around $4 billion of the $60 billion market). Any negative externalities to the environment becomes a global problem and hence key ingredient prices will be driven upwards because damn it, icecream demand isn’t gonna go down. That’s not how icecream price elasticity works, or as I mentioned, it’s not how the price elasticity for low-end luxury item works. As for the diversification risk? Well, if you want safe money, diversify by all means. If you want to make some money, concentrate your investments (citation required).

TLTR? Well, allow me to sum it up, mainly because I’m actually tired of writing.

Make less pollution, eat more icecream.

A brief history of the gaming industry in my mind

On By Chen Yu YanIn Gaming, Technology1 Comment

I’ve been a gamer since I was little. I recall it started with the scrolling bullet hell styled games as well as the Pokemon series. Nothing was really quite like that initial experience of holding a Gameboy (and I’m talking about the original black and white brick, none of that coloured crap). And thus begins my boring story of my video gaming history (I swear to god, Pokemon is just a gateway drug). I will get to how this affects money very soon but allow me to indulge myself with the story of my ‘addiction’ first. Final Fantasy, Visual Novels (technically not a series of games but I’ve played far too many for me to name by series), Silent Hill, Dragon Quest, Tower Defence (a lot of different ones), Dota 2, Starcraft, Warcraft, L4D (it’s around this point where I wonder if I possibly overdone it in my last 24 years on Earth), Pokemon, Warhammer, Super Mario, CS, Red Alert, Half Life, and I honestly can go on for a lot more but I’d rather not give any more since my high school will probably want to ask questions (like where I was for an entire year or two rather than in class).

Regardless, the video game industry is huge nowadays. And the industry is not simply just producing games alone now. Derivative products like streaming (where you broadcast yourself playing a game), commentary (often done over streams where you comment on professionals or just simply others playing a game) are also massively popular. Sponsorships from both hardware and software companies allow professional gamers to live in relative comfort while doing something for a living that would make a teenager roll around in envy. Let’s start from the top though.

Games, in the traditional sense, simply makes money for a company from the revenue they generate through their sales numbers. If you think about it, it is similar to how movies are made nowadays. You have research into new technology, you have story writing, scripting, casting (for voice actors, or maybe actors for cut scenes in game), developing, and the sales it self. Of course I’ve given an incredibly brief overview, but you should get the idea by now. So you sit at home, in your soft yet supportive chair, leaning back, taking a quick sip of your dry red, and thinking about what this all means (please correct me if I’m wrong about how I imagine you guys). Quite simply, the size of this industry is starting an exponential growth. I like trends, and I sense a strong trend.

Skipping ahead a little, Dota 2’s The International (pretty much the international championships) had a total prize pool of a little over $17m. By comparison, Wimbledon (something we should all be fairly familiar with) has a total prize pool of approximately $42m. Now, this is a lot more than $17m, but I should also note that the total Wimbledon prize pool reflects both singles men, doubles men, singles women, doubles women, and the singles and doubles wheelchair etc. Not to mention that the winner takes home around $1.6m whereas the winner of TI took home $6.5m (so when divided among the 5 on the team, that’s around $1.3m each… EACH). This is a mind numbing amount of money from just one tournament. Now, Dota 2 has implemented seasonal multimillion dollar tournaments, spanning different continents generating millions for the company each time. How you ask? Quite easily. By selling hats!

Black top-hat
You jest but in some cases, actual hats like these… except not real

I’ll get to the hats very soon.

So back to the original discussion. The concept of computer gaming has evolved past simply buying and playing. There are ‘freemium’ games where it is technically free to play but you can pay to enhance your experience (I’ll expand on it with the hats concept), and subscription games where you have to pay a fee periodically to continue playing, a good example would be World of Warcraft. Other notable ways they make money (other than selling hats) would be DLCs (downloadable contents) where they pretty much don’t release the full game and only a part of it and make you pay for the rest (I understand that I sound bitter but you’d be too if you’ve been where I’ve been… and why are things fundamentally essential to the game in a DLC anyways? Aren’t I essentially paying $100 for a $70 game? What is wrong with you?).

So what about hats? What are hats? If you meant something other than the $300 fedoras you wear, or the ridiculous lighthouse looking things that some women wear to horse races, then it must certainly be in game cosmetics. In game cosmetics are referred to ‘hats’ due to the fact that one of the most famous cases is from a red hat. Possibly the first time people realised that hats are worth hundreds of dollars. Then there are things worth thousands, and even tens of thousands of dollars (rare couriers in Dota 2). What drives people to these purchases? Well, apart from showing off your enormous e-penis and fat wallet, it is pretty much conditioning. Conditioning in the sense that you start with smaller purchases and then splurge big time once you pretty much lose sense of money within the game. I have personally spent a few hundred in it (every last cent was worth it I tell you!). Apparently, making around 50 million is pretty easy that way. They kept 75% of the money from selling hats and only 25% went towards the prize pool for TI. Well, by ‘they’, I meant Steam. Go check it out if you play a lot of games.

I should go back to the trend I mentioned earlier. That exponential trend that is. Using Dota 2 as an example again (I can use things like League of Legends but no), the very first TI only had a total prize pool of $1m. Doesn’t seem like much? It was the largest prize pool in video gaming history at the time (2011). In the next year, 1.6, then 3.8, then 11, and all of a sudden, 17. The growth is unexpected.

Rather, the growth expected.

Here is the issue, this trend is not only with Dota 2. LOL, Starcraft, CS, you only have to go to twitch.tv (no seriously, go there to check it out. The gaming society is amazing) to really understand the scope of gaming. Over 250,000 viewers are watching the streams at almost any time of the day. During large tournaments, there are over 1 million viewers. If we extrapolate to other platforms like Youtube, and we look at videos from famous streamers like PewDiePie (I’m using him because he’s the most famous who reportedly makes over $4m from Youtube revenue alone in a year, check Forbes if you doubt me), the advertisement revenue, the investment opportunities are substantial.

And only now do I realise that my word count is well over what is acceptable… So I’ll end this here. I will write more in a later article when I feel like digging through the endless pages of the secondary hats market (which I indubitably will). So I’ll just wrap this up ASAP.

Newer games, better technology, faster computer processing, it seems that the only way this can possibly go is up…

But… my wallet…

Technical Analysis: In the Beginning, there was Price!

On By Chen Yu YanIn Technical Analysis, Trading1 Comment

Most people who know me in a professional environment would know that I am very technical heavy with my analysis. Not that I have anything against fundamental analysis, it’s simply the fact that I don’t enjoy spending an entire day looking at the accounting figures and growth potential etc. Technical analysis to me is, as Kanye would put it, harder, better, faster, stronger. So if you want to read charts, and you can’t wait much longer, stick with technical analysis, else you can’t get stronger… and this is why I should never write anything while listening to Youtube mixes. Back on topic now!

I suppose since I am going to spend multiple posts diving into the intricacies of TA, I should really start at the… err… start…

TA, from a academic perspective, describes the type of analysis used by market participants who tries to generate abnormal returns using only past information. The ‘blasphemous’ theories implies a complete lack of market efficiency (and thereby pissed off thousands of academics, or so I would like to think) and is pretty much the modern equivalent of witchcraft and alchemy. Many attempt to disprove it via the inclusion of taxation, backtesting different strategies and showing fairly conclusively that they don’t work over the long term, by tossing coins and then spinning in a circle and throwing a dart, by diving into a pool and picking out a random marble hidden at the bottom of every tile (but behind every prime numbered tile, there is a golden one. Also, the latter two may or may not have happened. I can’t prove that they haven’t so……). However, some swear by it and one of the most famous trader of all time, Jesse Lauriston Livermore, the great bear of Wall St, made it big using TA. So why is that? How can something disproved make so much money for some while bankrupting others?

I guess I’ll describe the general logic behind why some believe that TA works before I go into the specifics. The first trader, even if by random chance would buy something because the price went up a little. Soon after, a different participant would look at it and think “Hey, I just saw this, and this is crazy, but I like this stock, so I’ll buy some maybe”. The price would go up further because of additional demand from other technical traders. Finally, the traders who missed the run then looks at the chart and thinks “Hmm… I missed it, I missed it so bad, I missed it so so bad”.

I’m sorry, I’ll turn off the music.

My favourite analogy for TA (I read it on a research paper but I forgot which one… if any of you know where this analogy came from, please refer it to me as I’d like to cite it) is if you throw 10,000 people into a small city and ask them to meet up. You don’t tell them when and where but some may assume that around noon in front of the town hall on a Saturday would be a nice time. In fact, I dare say that more than one would think that. So some people gather, and then the rest looks in awe at a sudden gathering reminiscent of flash dancing. So they group up too. Who knows, maybe they’ll even be starred in a viral Youtube video! Wouldn’t that be neat? Then the crowd attracts others and suddenly it’s massive. This is essentially what will happen in the market. It’s all about the stock price (no, I’m not listening to ‘It’s all about the Bass’) which makes sense as its arguable the most important element for stocks. We quote price before anything else (though the only other thing that comes to mind would be volume) and base a lot of calculations off of it regardless of using TA or FA.

So why does that skewer of demand and supply dictate what traders do? Well, that’s where cognitive dissonance kicks in. That’s where greed and fear kicks in. That’s where the next post in my technical analysis series kicks in.

 

So… time for Bitcoin Futures?

On By Chen Yu YanIn Bitcoin, Technology1 Comment

Recently, the US Commodity Futures Trading Commission (CFTC) has pretty much settled the argument on whether or not Bitcoin, the popular virtual currency, can be regulated. They filed charges against Coinflip Inc but did not impose any penalties and apparently was settled without anything being confirmed or denied. I am not saying that I expect to see Bitcoin futures any time soon but trading Bitcoin contracts on the CME would be pretty sweet (albeit unlikely). For more information on that, please go research with a few keywords on any search engine and you will pretty much find all the articles that are useful in this regard. I am not writing this to provide any insights and to argue whether or not the CFTC was correct in their decision making, rather, I wish to highlight the more prominent and less discussed (nowadays at least) topic of why Bitcoin is worth anything at all!

Though… I should just state my opinion, just for the record. I do agree that it is a commodity. Bitcoin is used more for investment than purchases. Most of the people either trade it or buy and hold similar to investment in equity or gold. Technically, you can also buy goods and services using gold at whichever store that finds it acceptable to take gold as payment (I dare say most would if you give them enough) but most regard it as something to hold (or wear, I don’t judge). This property is congruent to what we can observe for Bitcoins. Some very specific stores accept it as payment, while most prefer to buy it simply to hold (I have yet to hear of anybody wearing Bitcoin as bling so please inform me if you find some photographic evidence). All in all, I agree that it should not be considered as a currency due to (and I’m gonna give a few other examples that I’m too lazy to flesh out but should be fairly obvious. It is a certainly failure as a research student but I prefer to see it as a win for my laziness) the lack of liquidity, relative focus in investment purpose, and the small net value (calculated in the billions rather than trillions like mainstream currencies).

A lot of people marvel at how Bitcoin went from practically worthless to over $1000 to the now $200 per coin commodity (and I use that word in a very general sense). Ooh, I should mention that those values above are in US dollars. I live in Australia but I’m gonna try to give everything in terms of a better (read: more useful finance-wise) currency. It seems that people nowadays have all axiomatically accepted that Bitcoin is worth something. Where that comes from no longer seem to matter, or at least discussed in as much frequency as it once was.

Popular opinions include the underlying technology of the Bitcoin itself, the idea and innovative method and how much people treasure a cryptocurrency that gives anonymity in the current age of big data. This is one that I personally support as I believe that these all give value. A fundamental principle of business is that it must create value for its customers and clients. In the usual sense, this value can be reflected by the generation, or aid in generating wealth. However, Bitcoin offers something totally different. it doesn’t generate wealth, but allows wealth to be distributed anonymously and safely. Arguments for illegal uses aside, this makes a very interesting and very handy way for businesses to conduct transactions. Recently, 14 banking organisations (including Lloyds, Barclays, UBS, Commbank, Goldman etc.) are looking to invest in Bitcoin application and technology.

Some argue that the technology of Bitcoin can be applied to replace the current central clearing system of markets. This could be true given that the participants who now also have a new duty do not increase their prices to cover the additional cost, or raise prices simply because they’re providing a new service. Block chain and crowd verification is useful perhaps to fool HFTs, but that doesn’t seem likely either as the market requires transparency to function more efficiently (my PhD research may make me a bit biased in this regard but the evidence for this is too strong to simply ignore) so purely from the perspective of increased costs to the market, we cannot justify the block chain applications.

Alternative currency? What about using it as an alternative currency for places with political instability or high inflation? Well, Bitcoin isn’t really known for stability. There are also other currencies more suitable for these situations, like using the US Dollar for example. It is stable, it is big, and it is trusted by anyone who knows where the US is on an atlas. So this argument also breaks down right from the start.

“But wait!” You exclaim as you take a sip of scotch and readjusts your tablet and sitting position due to the fire from your fireplace starting to get a bit too warm (this is how I picture my audience…) “If Bitcoin can’t be used in the secondary market, and can’t be used as a currency, and is an unstable commodity, what on earth is it good for?”

A good question (as expected from my reader!). Well, it is the concept that decentralizes a clearing system that makes it so useful. The ability to remain anonymous while clearing transactions based on a general consensus (OK… I know I didn’t sell that well) is something that we can really use soon in the future where all our purchases will be recorded in the ‘big data’ one way or another. When supermarkets are emailing me discounts on feminine hygiene products because I went shopping with my girlfriend once or twice, it really makes you think. Maybe if I paid for her stuff with bitcoins rather than my card that is linked with my rewards card, I won’t get all the ads. Anonymity is, to borrow the slogan from Mastercard, Priceless. On the other hand… if we all use Bitcoins, think of the value that we miss out from the reward points and the chance to save 20% on tampons…

Think of the points people!