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Modern Trader Issue 534 August 2017

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Buys From
5 Power
6 Whisky
27 Timely
45th Anniversary
The Scotch Guy
Trade Ideas
Beating death and taxes since 1972
Heavy Lifting
on Capitol Hill:
GOP Takes On
Tax Reform
Paris, Politics
& Partisans
08.17 • issue 534
“Best Business Magazine”
— Niche Media Awards 2017
The Roundtable:
Austan Goolsbee
Stephen Moore
Grover Norquist
William Gale
Laurence Kotlikoff
Dan Johnson
Steve Forbes
On Politics,
Media &
The Markets
JC Parets
On This New
Bull Market
Our Readers
Obama & Trump
J. Peterman
Is Pitching
This IPO
Straddles To
An Options Trader
Table Tennis
In this insiders club...
are traders or
professional investors
are over the
age of 30
are owners, partners
or directors of an
investment firm
have a Master’s
Degree or PhD
watch CNBC during
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the volume on, but...
Subscribe to the monthly print magazine at
“Best Business Magazine”
— Niche Media Awards 2017
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08.17 • Issue 534
Heavy Lifting on Capitol Hill:
Republicans Turn to Tax Reform
Seven prominent economists
participate in Modern Trader’s
roundtable on the prospects and
politics of tax reform
Bid & Ask
Steve Forbes on politics,
media and the markets
Trend Following
JC Parets is technically
bullish on the new bull market
Risk Factors
J Peterman is pitching this IPO
Wisdom of the Crowd
Our readers grade Obama and Trump
and weigh in on tax reform
A profile of long-time, short-term,
trading legend Toby Crabel
Closing Tick
Face it, Paris partisans, the climate
agreement was a shakedown
Cover Illustration by David Compton Wolff
Min’s Magazine Media Award: Best Single Magazine Issue (January
2017—Cannabis) Nominee • Min’s Magazine Media Award: Best
Cover Design Portfolio, Nominee • Nichee Award: Best BusinessTo-Business Magazine Of The Year 2016 • American Society Of
Magazine Editors People’s Choice Award: Best Political Campaign
Cover Of 2016 • Min’s Magazine Media Award: Best Feature Article
(July 2015-Sell Stocks Now) Nominee & Honorable Mention • Folio
Eddie Award: Best Editorial Full Issue Business, Banking & Finance (July
2015—Premiere Issue) Nominee & Honorable Mention
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08.17 • Issue 534
Daniel P. Collins
Managing &
Digital Editor
Yesenia Duran
Features Editor
Garrett Baldwin
RGEN: Healthcare’s
best technical play
GS: Anticipating
the swamp bump
Pulse Bioscience:
High-voltage hype set
to short circuit
Rail Play
Banks to reverse
Trump trade;
High vol ahead
Bond bull
won’t go away
The sidewinder
trading method
Chart Patterns
Trading head and
shoulders reversals
Trading with envelopes
Algo Trading
Predictive market
in R language
Trump bump or dump
Paper Trade
Options strategies for
trading soybeans
Liquid Markets
Imbibing & investing
with The Scotch Guy
Bar Charts
Dewar’s releases of
The Last Great Malts
Game Theory
From straddles to
paddles: An options
trader tackles
table tennis
Record High &
Book Value
New book,
music & media reviews
Opening Bell
Editor’s comments
on this issue & key
industry trends
Short Interest
Real talk on business,
finance & politics
Using word clouds to
predict FX moves
Corporate tax reform;
Winners & losers
Tracking Stock
Modern Trader
gets it right!
Buy this, not that:
Emerging markets
August’s dog days
of the Dow
MF Global is gone, but
Corzine may return
Steven Lord
Murray A. Ruggiero, Jr.
Assistant Editor
Tamarah Webb
Creative Director
Nicholas E. Torello
Advertising Sales
Barry Weinberg
Financial Ad Solutions
Richard Holcomb
Non-Endemic Ad
Chief Content
Officer & Publisher
Jeff Joseph
Modern Trader
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August 2017
M o d e r nTr a d e r. c o m
Issue and industry insights
from 28-year trading industry veteran
Dan Collins, editor in chief.
Throughout the post-2016 Presidential
election equity rally there was a theme that
the new Presidentail Administration’s focus
on cutting corporate taxes and regulation
and repatriating corporate profits held
overseas would sustain the bull market.
However, as winter to turned to spring,
and spring into summer, there was some
doubt creeping into the outlook of equity
analysts. That doubt was based on the fact
that the market would not continue to rally
on positive expectations; at some point the
Trump Administration had to put wins on
the board. And despite a slew of executive
orders that did not focus on tax policy, the
Trump Administration has not produced
any substantive legislation. Even the “tax
plan” often touted by supporters is simply
a one-page wish list, with very little meat.
Economic advisors who helped shape
President Trump’s campaign have been
pushing to make tax reform a priority above
all else. In our 2017 economic roundtable
(see “Heavy lifting on Capitol Hill:
Republicans turn to tax reform,” page
26) we convene a panel of economists to
discuss tax reform.
While what constitutes real tax reform
versus a reflexive supply side style tax cut
is a matter for debate — as highlighted by
the points-of-view of our panelists — there
is a consensus that our tax structure is
broken and in need of reform. Surprisingly,
members of our panel thought that
Republican control of both Houses of
Congress and the White House may be
an obstacle to comprehensive tax reform.
Several pointed out that the last major
overhaul of our tax code came in 1986
with Ronald Reagan in the White House
and with Democrats holding a solid
majority in the House. That came six years
into his presidency, and while our panel
does not think it will take that long, there
is pessimism on whether broad tax reform
will happen this year.
While our panel presented various ideas
on what form tax reform should take, Steve
Forbes (see “Steve Forbes: The medium
and the message,” page 40) still favors
the flat tax he first proposed when running for
president in 1996.
While many analysts say some form of
tax reform needs to be passed to maintain
the equity market’s current momentum, JC
Parets questions the assumption by many
market observers that we are in a longterm bull market in desperate need of a
correction (see “JC Parets is technically
very bullish on the new bull market,”
page 42). Parets argues that downturns
in the markets since the 2009 credit crisis
bottom were more than mere corrections
and that the current bull market is newer
and more robust.
Finally, as you can see we have been
very busy redesigning Modern Trader.
Hopefully there is more logic to the flow
of our features and departments and an
easier to read format.
Tax reform
now… or
perhaps later
“There is a consensus
that our tax structure is
broken and in need of
Daniel P. Collins
Modern Trader
Send your comments, criticisms and suggestions to
August 2017
M o d e r nTr a d e r. c o m
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Real talk on business, finance, politics & alternative investments.
Powered by the Daily Alpha at
“Given the inherent changes
to Marissa Mayer’s role with Yahoo!
resulting from the closing of the
transaction, Mayer has chosen
to resign from Yahoo! Verizon wishes
Mayer well in her future endeavors.”
Last summer, Modern Trader took a deep dive into the compensation practices of
Fortune 500 CEOs. The primary conclusion: The CEO market for pay is one of the most
irrational and illiquid markets on the planet with a limited supply and increasing demand.
So, when Marissa Mayer walked away from her tenure at Yahoo! (YHOO) with
$23 million in her pocket today, who could be surprised, despite the failure of the company
to become a reasonable competitor to Google (GOOG) or Microsoft (MSFT).
We were surprised, actually, because in July 2016, chatter emerged that Meyer was
eligible for a severance package worth up to $55 billion. At the time, Starboard Value
founder Jeffrey Smith dismissed such payment as, “Just math. It’s just contractual.”
One of the more interesting parts of our dive into Yahoo! and CEO compensation
was our brief conversation with Mark Cuban, the Internet billionaire who once sold his business to Yahoo! for a king’s ransom. Cuban suggested at the 2016 SALT
Conference that Yahoo!’s culture was one of – if not its greatest – weaknesses. When
Meyer took over the company, she faced a pretty stacked deck. It wasn’t clear if she would
be able to turnaround the company. Now – she’s riding a Zamboni off into the sunset.
“[The] McGuire
‘plan’ to create
value for Borders
was unsuccessful
and Borders was
eventually liquidated in
a bankruptcy process.”
Is that the sound of crashing glass?
Of men gnashing their teeth? Of such
unspeakable horrors that if they were
described properly, you would flee from
this room? Or is the sound of a company
snapping back at an activist investor?
Buffalo Wild Wings (BWLD) roasted
activist hedge fund Marcato after the
latter called for board changes at the
director level. Last month, Marcato urged
shareholders to get behind a number of
initiatives and changes in leadership.
Buffalo Wild Wings responded
by attacking Marcato founder Mick
McGuire and his experiences with NCR
and Border’s (BGP).
August 2017
“The next time I get a phone
call to run a major political
party, I’m going to hang up.”
The 2017 SALT Conference hosted a
morning session of leading political pundits
and thought leaders to discuss the current
state of Washington and the months after
the 2016 election. Participants included
former Democratic National Committee
Chair Donna Brazille, Trump Deputy
Campaign Manager David Bossie, former
White House Press Secretary Josh Earnest
and former Bush advisor and Deputy Chief
of Staff Karl Rove.
The panel started with a quick question
for Donna Brazille, who called 2017 a
difficult political year and said that she has
spent the last few weeks fishing.
Brazille said that she was fighting for
resources during the last week of the
campaign just to get a basic “get out the
vote” effort, and that the Clinton campaign
was built around “data and analytics” and
not around people and strong messaging.
“Amazon is
damaging lots of
retail business,
but Costco seems
safe because
people mostly go
there for food.”
That’s from Barron’s on
April 21. In fact, this has been
the attitude of Barron’s toward
speculation over Amazon’s efforts
to enter to the grocery space for
a few years. It wasn’t long ago
that Barron’s called the grocery
business Amazon-proof on the
argument that people like going
to the grocery store. Who are
those people? Where?
More important, how are we
feeling as Costco investors
after Amazon bid $13.7 billion
in Whole Foods (WFM) and
grocery companies lost $28
billion in market capitalization in
one day?
Does Barron’s headline “Why
Amazon Can’t Kill Costco” make
you feel any better? Or are
you paying attention now that
Amazon is going to continue to
eat everything in its path. Home
Depot (HD), Sysco (SYY)
-- you’re next. Amazon chose
the buy model over build, and
now it’ll start to implement its
technologies that have made its
entry into grocery exciting. More
important, it will be fascinating
to watch them build upon Whole
Foods’ supply chain.
Exit question: Did anyone
notice that Wal-Mart (WMT)
thought that announcing that it
had purchased Bonobos would
somehow help the company win
the day? Seriously, its response
to Amazon’s blockbuster was
to tell everyone that they just
bought pants.
M o d e r nTr a d e r. c o m
“On Snap, we saw a lot of interest
immediately following the IPO.
Now we don’t see as much trading
in Snap. Millennials seem to be
holding Snap stock.”
Wall Street is a place where smart people come up with
ways to take away money from dumb people. This year’s
prime example of this exercise was the Snapchat (SNAP)
IPO. And there was no dumber money than that of millennials,
who were suckered into buying this overpriced, unprofitable,
poorly managed, cavalier organization that is getting its butt
kicked by Facebook (FB). TD Ameritrade’s J.J. Kinahan said
that millennial investors were signing up in droves so they
could purchase SNAP stock. Robinhood, a platform that
caters more to millennial investors, lists SNAP as its third
most popular stock. We tried to warn them in our April issue
of Modern Trader (see Tracking Stock, page 76).
They didn’t listen... They didn’t listen.
“Nothing, I keep other
people awake at night.”
Secretary of Defense James Mattis was asked on
CBS’ “Face the Nation,” about what keeps him up at night.
“[Purported hedge fund manager
Tamer] Moumen encouraged
dozens of clients, including
many who were nearing
retirement age, to liquidate
their other investments and
retirement accounts, and invest
with him. Moumen did not tell
investors that he actually had no
experience managing a hedge
fund, had a history of losing
money in the securities market,
and was relying on investor
money to support his lifestyle
and pay for personal expenses.”
Advisor News reports that a terrible person
masquerading as a hedge fund manager stole money from
retirees and gave them fake statements. Tamer Moumen,
39, stole retirement savings from more than 50 people and
bought a $1 million home and a Tesla (TSLA) – with virtually
no fear that he would get caught. In the post-Madoff era, this
is the prime example of where any proposed self-regulation
of the money management industry should include the word
“defenestration” in all of its punishments.
M o d e r nTr a d e r. c o m
Letters from Our Readers
Best financial publication I read…I dig the format, and
flow of the articles, and enjoy that there are diverse opinions,
topics and commentaries. I’m a portfolio manager for Hyperion
Helios Fund, a systematic/quantitative long/short equity
fund. I really like that there is a focus on tech and trading
advancements, as our fund has self-evolving algos. The trading
and options pieces are detailed, readable, actionable and
well written. I actually could go on, but have to get back to
Chris Sullivan, CMT, AWMA
Winter Park, Fla.
Subscriber since 2011
I would like to compliment you on the magazine’s
graphics and layout. Very well done! I receive about six
financial magazines and yours is among the very best. It
gives credibility to the content…it’s very obvious to me that
the issues continue to improve, with advice and insight
from experts that goes far beyond what one can pick up
in an expensive book or online course. Case in point: The
September 2016 issue on options is a perfect example of how
a magazine style presentation can be far more effective as
an educational tool than most other options available without
spending thousands. I suspect the demographics of your
readers is changing dramatically with the explosion of options
and futures trading, professional trading platforms, online
education and trading systems, etc. Aligning your magazine’s
content, editorial style and top quality visuals to meet the more
demanding expectations of new readers was a smart move.
Amy Boyd
Cotati, Calif.
Subscriber since 2012
Thanks, Amy. Your comments are particularly timely
in that you will notice that this issue of Modern Trader
introduces a brand new look. It has been two years
since we introduced the Modern Trader format -- we
were due for a refresh. Thanks for reading!
Jeff Joseph
Send your comments and suggestions to
Issue 534
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High conviction ideas from top traders, analysts & insiders
RGEN: Healthcare’s
best technical play
Q By Doug Busch
Repligen Corporation
(RGEN) is a healthcare
stock that has risen 27%
year-to-date and 57% over
the last 12 months. It has
good earnings momentum
with back-to-back strong
quarterly gains of 6.2% and
6%. The stock has risen
consistently with minor corrections throughout 2017.
Source: Chartsmarter
Healthcare corporation RGEN higher by 30%
YTD and 61% over last one-year period.
Stock is higher 13 of the last 18 weeks,
which is a bit misleading as none of the down
weeks lost more than 2.6% with some strong
Good earnings momentum with
volume weekly gains of 8.4 and 4.9% ending
back-to-back strong gains of 6.2
3/17 and 4/28. Look to enter above long
and 6% on 5/4 and 2/22, and losses weekly cup base trigger of 42.58 that began
of 5.7 and 1% on 11/3 and 6/4
the week ending 7/13/15.
Go long RGEN with a buy
stop above round $40 number at $40.25 and add to
you long at the weekly cup
base trigger of $42.58 that
began July 2015. (Breakout
above cup would achieve
all-time highs.) RGEN has
demonstrated superior relative strength and once the
pharma sector establishes
itself as a leader once again
this name should be well positioned to outperform.
Doug Busch has been
trading the U.S. equity
markets for two decades
using traditional technical
analysis, as a trend
follower, with an emphasis
on Japanese candlesticks.
M o d e r nTr a d e r. c o m
RGEN: Healthcare’s
best technical play
GS: Anticipating
the swamp bump?
Pulse Bioscience:
High-voltage hype
set to short circuit
Trump bump or dump?
Banks to reverse Trump
trade; high vol ahead
Bond bulls
won’t go away
23% upside
Rail play
Using word clouds to
predict FX moves
Corporate tax reform;
winners & losers
Buy this, not that:
emerging markets
Issue 534
GS: Anticipating
the swamp bump
Q By Joseph Parnes
The Goldman Sachs Group Inc.,
founded in 1869, continues to offer longterm growth and upside potential, despite
recent political interference and intermittent
plunges. Goldman’s recent volatility should
be construed as a golden fleece, without a
tragic ending, providing strategic timing for
investors/traders seeking long-term growth
on equities within the banking sector.
New York-based Goldman offers its
worldwide investment banking, securities
and investment management company
through four segments: investment banking, institutional client services, investing
and lending and investment management.
Goldman’s primary year-to-date income —
more than 70% — stems from trading and
investments, specifically lending to institutional clients such as hedge funds and
high-frequency traders.
Unlike its competitors, it has limited its
exposure to investment financing within energy-based entities and sectors. This intrinsic
insulation, which has been a hallmark of Goldman’s growth power and previously recommended as a long holding, has continued to
keep it in a position worthy of accumulation.
Goldman had been in a strong ascending
pattern since President Donald Trump’s
election. Passing through resistance levels
at $219 and $232 before settling on a continued base-building area between $237
and $242 during March 2017.
Following a correction and retraction with
a plunge to $235 and then $227, Goldman
stock reversed higher through its 50-day
moving average around $232 and rallied to
a new high of $255.15. Shares have since
plunged 20% from that high set in early
March, as promised tax cuts and regulatory
relief have stalled. The stock began crossing
its neckline set in early May at $226, which
was reflective of a bearish “head-and-shoulders” signal, subsequently followed by a
plunge to an intraday low of $214.08.
Goldman’s recent weakness stemmed from
August 2017
international bond purchases positioning Goldman in the middle of a political storm when
it was revealed that its asset-management
division acquired $2.8 billion of 2022 October
bonds issued by Venezuela’s oil Co. PDVSA
on the secondary market, rather than directly
from the Venezuelan government. Goldman’s
activity, which has been similarly enacted with
other discounted sovereign bonds including
those from Greece, was met with opposition
from anti-Venezuelan U.S. Congress members
accusing Goldman of aiding and abetting the
country’s dictatorial regime.
This was a primary culprit for Goldman’s
stock sinking to $212. Keeping in mind
that Goldman is not alone in this practice,
operating with sound business judgment
May low of
$211.26 could
serve as a longterm bottom.”
abiding by “ex fida
bona,” as other
Symbol: GS
discounted deals
Market cap:
have been derived
$87.66 billion
by similar global
52-week high/low:
asset management
EPS: 18.79
firms, most notably
P/E: 11.40
Nomura Securities
Buying Range:
purchasing $100
million of VenezuNear Term
elan government
Objective: $238
Objective: $259
With exposure to
Stop Loss: $199
Venezuela no longer
*Price as of June 2, 2017
a serious threat,
investors have an
opportunity to take
advantage of these momentary dips in
Goldman stock as its price-to-earnings ratio
has fallen way below its peers. Goldman’s
May low of $211.26 could serve as a longterm bottom (see “GS technicals looking
up”). The stock faces primary resistance at
$224 and secondary resistance at $232.
Base-building and short covering could
challenge its upper-head resistance at
$239. Though technicals still appear weak,
it is not a good idea to bet against Goldman
as it has friends in high places.
Joseph Parnes is an Independent
Registered Investment Advisor with more
than 30 years experience who specializes
in short selling. @joseph_parnes
Despite the 2017 weakness, Goldman has remained above the long-term bullish
trendline, which dates back to a three-year double-bottom set in June 2016. It is
finding support above $210, which is where it consolidated following the election
spike and also just above its 200-day moving average.
Source: eSignal
M o d e r nTr a d e r. c o m
Pulse Bioscience:
High-voltage hype
set to short circuit
Q By Sahm Adrangi
Pulse Biosciences (PLSE) is a $400
million medical-device company with 13
employees, zero revenue and one focus: Developing and commercializing a technology
it calls Nano-Pulse Stimulation (NPS). This
technology exposes cells to strong electrical
fields for brief periods of time in hopes of
killing them. Pulse claims that this method
of killing cells constitutes a “novel therapeutic tissue treatment platform” with the
potential not only to destroy tumors directly
but also to “essentially transform [them] into
vaccines to direct the immune system to
destroy them,” according to the company’s
chief scientific officer. On the basis of this
— as opposed to significant commercial or
technical progress — Pulse’s stock price has
increased six-fold since its May 2016 initial
public offering (see “Too far, too fast”).
This run-up is senseless. Contrary to
Pulse’s highly selective narrative, even if
NPS one day performs as advertised, it
would still have little value from a clinical
perspective. Worse still, our review of
published NPS results reveals that the
technology doesn’t perform as advertised.
In the only formal NPS clinical trial published
to date, Pulse researchers treated three
patients with skin cancer and in an outcome
far worse than standard surgery, left two
with residual cancer
and a third with
discolored and
Symbol: PLSE
benign lesions.
Market cap:
Very recently, new
$445 million
research funded by
52-week high/low:
Pulse concluded
that “even after
Short range:
the most intense
treatments” a sizable
90% retracement
fraction of human
M o d e r nTr a d e r. c o m
cancer cells across a range of cancer types
simply cannot be killed by NPS.
Pulse’s technology, barely off the drawing
board, has shown itself to be weak,
unreliable, and undifferentiated. Investors
with high expectations are in for a shock.
Investment Highlights
Pulse’s NPS technology is far less special
than it claims. Similar technologies have repeatedly fallen short of expectations. Pulse’s
technology, barely
off the drawing
board, has shown
itself to be weak,
unreliable, and
marketing message closely resembles that
of NanoKnife, manufactured by AngioDynamics (ANGO). However, NanoKnife has
been a disappointment both clinically and
commercially. A decade after launching,
NanoKnife still produces less than $20
million of annual revenue – a small part of
a relatively small, yet crowded market for
nonsurgical tumor ablation.
If the NPS technology were as good as it
claimed, it would still struggle in a saturated market. With so much evidence quickly
stacking up against NPS, we believe it’s
dead on arrival.
After an uneventful launch with its stock
ranging between $4 and $6, on Feb. 10,
Pulse announced that Pharmacyclics COO
Maky Zanganeh and Robert Duggan, who
became a billionaire after selling Pharmacyclics, bought significant stakes in Pulse.
Investors, acting on this shift in ownership,
drove the stock dramatically higher. The
price has become so frothy that underwriter
MDB Capital had waived lock-up provisions
a month early for pre-IPO holders of 28% of
the company’s shares.
While the past successes of Pulse’s new
minority shareholders deserve respect, they
can’t change what the technology is or how
well it works. NPS is still very early in its development, having been used on only limited
clinical trials, but, with no meaningful edge
over competitors and an accumulating weak
and inconsistent body of evidence,
Pulse exploded six-fold on hot money chasing the hot investors.
It could go down just as quickly.
Source: eSignal
Issue 534
Pulse cannot justify its current valuation.
With only weak and equivocal clinical data to support them, novel ablation
modalities akin to Pulse’s haven’t gained
significant market share. The most relevant
example is the NanoKnife IRE technology,
purchased in 2008 for just $25 million,
a small fraction of Pulse’s current market
cap. If Pulse somehow merited the same
valuation as NanoKnife, its shares would
have 92% downside. Of course, such a
valuation is absurdly generous. Pulse has
13 employees and no commercial products. It is years from earning significant
revenue. NanoKnife, by contrast, is actually
in use today. There is simply nothing about
Pulse’s prototype technology that deserves
a 1,200% premium to its closest comparable. If a healthcare provider wasn’t swayed
by NanoKnife’s selling points, then Pulse’s
pitch will also fall on deaf ears.
Approached from any angle, Pulse is massively overvalued even if NPS technology
is all it’s cracked up to be. At best, NPS is
a close cousin to NanoKnife, an obscure,
poor-selling product frowned on by insurers,
and unable to gain a commercial foothold
beyond a handful of users. The features that
Pulse claims distinguish NPS from all other
cancer treatments and ablation modalities
– its ability to foster apoptosis and spark an
immune response – are commonplace yet
have done little to drum up sales.
Pulse is a tiny company that has made
virtually no progress toward commercializing a technology that barely seems to work
in the first place, yet the market is pricing it
as if it were already 13x more valuable than
its closest peer. In the years to come, Pulse
will need to repeatedly raise capital to cover
its cash outflows as it attempts to inch closer to becoming a real business. We believe
this money will be wasted: These nanosecond pulses deserve a nanocap valuation of
90% lower than where it trades today.
Hedge fund Kerrisdale Capital Management is short PLSE.
Sahm Adrangi is founder and CIO of
Kerrisdale Capital Management, a private
investment manager that focuses on
value and special situations.
August 2017
or dump?
Q By Dan Keegan
able with the status quo and Hillary Clinton
representative it in this election. Trump was
clearly the candidate of change.
The panic subsided and SPY actually
closed up 0.54 from the previous day’s
close. From that time to May 31, 2017, the
market actually gained 11.63%. This is
what is known as the Trump bump. Why
the bump? Trump’s tax plan proposed
lowering the corporate tax rate from 35%
to 15% as well as a pledge to reduce regulations. If that tax pledge went into effect
the profitability of publicly traded companies would increase dramatically. Does
this mean that if the tax reform passed
both houses of Congress that the market
would explode or was tax
reform already baked into the
market? That’s hard to tell. It
would seem logical, however,
The P&L chart shows the results of the 13-20
VIX call spread based on where the VIX futures
that failure to pass legislation
regarding tax reform would
send the market reeling.
There are a number of
positions that would protect a
trader or investor from a market
downturn: they could liquidate
their holdings into cash, short
shares of SPY or use an options
overlay strategy to hedge their
position. We are going to look at
two different options strategies.
Both of these strategies
exploit the negative correlation
between the implied volatility of
options and market direction.
On Oct. 24, 2016 the exchanged-traded
fund based on the S&P 500 Index (SPY)
closed at 214.89. Less than two weeks
later, Nov. 4, 2016, SPY closed at 208.55.
What happened? Federal Bureau of Investigation Director James Comey announced
the FBI was looking further into Democratic
nominee and former Secretary of State Hillary Clinton’s e-mail situation. The markets
were clearly spooked by the possibility of a
Donald Trump presidency.
On the night of Nov. 9, the S&P 500
E-mini futures were halted after dropping
5% on the news that Trump had won the
election. Gold was up 4.3% and the Nikkei
was down 5.3%. Markets are more comfort-
M o d e r nTr a d e r. c o m
November futures closed at 15.80.
Because time value is currently at
rock bottom it makes sense that the
further you go out on the calendar
the higher the VIX futures would
be trading as a reversion to the
norm. VIX options are an equity
product regulated by the Security
and Exchange Commission while
VIX futures are regulated by the
Commodity Futures Trading Commission, so there is no cross margining, but VIX options are based on
the price of VIX futures.
Let’s take a look at the November VIX call options. We could buy
the Nov. 13-20 VIX call spread for
2.10. If we do it 10 times we have
risked $2,100. The maximum value
of the spread is 7.00 so the maximum possible profit would be $4,900. Recent
spikes in the VIX have been very short lived and
haven’t resulted in similar moves in the futures. If,
A spike in volatility increases the changes for both
profit and loss with this spread, and would require
maintenance near expiration.
for instance, the VIX popped to 30.00 in the next
month the VIX futures wouldn’t be near 20. It
would still be a profitable trade (see “Spreading
VIX,” page 16).
Another approach is to establish an
out-of-the-money put ratio spread in SPY.
This would also work with SPX options and
options on S&P futures.
We can buy 15 December 223 puts and
sell 10 December 233 puts for a $37.50
credit. If the market keeps heading higher
then it’s no harm, no foul as the trades expires and you keep the premium. If it heads
down, the pop in implied volatility will make
the spread profitable. As you can see, the
real risk is near expiration in the 223 area
(see “SPY ratio spread,” left). An adjustment
or liquidation of this trade will be necessary
six weeks before the December expiration if
it is close to the 223 strike.
Implied volatility is the level of time value
embedded in option premium. The greater
Dan Keegan is an options instructor
degree of uncertainty or fear in the market
and founder of
the greater the time
value. This means that a
downward move in the
market produces an upward move in the CBOE
Volatility Index (VIX) and
vice versa. VIX derives
its value from the amount
of time value embedded
in the SPX options. On
April 21, SPY closed at
234.39 when VIX closed
at 14.63. The next trading
day, SPY closed at 237.17
while VIX closed at 10.84.
On May 16, SPY closed
at 240.08 while VIX
closed at 10.65. On May
17, SPY closed at 235.82
while VIX closed at 15.59.
You get the idea. When
the market is ascending,
A full-service team for on-demand, private jet charters.
there is no reason to
worry. When the market is
We’re standing by ready for take-off. Experience the
dropping, it’s time to look
exclusivity, luxury and convenience of private air travel.
to buy any put in sight.
On June 2, the VIX
closed at 10.22. The June
VIX futures closed at 11.65
while the August futures
closed at 13.65 and the
Contact Deb Vitale • • 917-923-4118 • Available 24/7
You have arrived
long before you land.
M o d e r nTr a d e r. c o m
Issue 534
23% upside
Q By Joe Cornell finished its first day as a
spin-off (June 1) on a high note.
(CARS) with a market cap of $2 billion
closed at $27.28, up 7% on its first day as an
independent stock. The unit was spun off from
broadcast-oriented parent Tegna (TEGNA),
which has a market cap of $3.3 billion and a
stock price of $15.35. Gannett had bought
out other owners that held in 2014,
and those assets went with Tegna (itself spunoff from Gannett in 2015). provides car buyers with
research and makes money from selling ads
to car dealers and automakers: the company
had generated $633 million in revenue. We
expect the trend of more car shoppers going
online in search of cars to continue and
advertising revenue from increased traffic to
websites such as to increase.
CARS was launched in 1998 by a group
of newspapers that were eager to hang
on to lucrative classified auto advertising. operates, DealerRater.
com, and;
all specialized websites targeting different
consumer segments. The company hosts
about 4.7 million vehicle listings at any given
time and manages 20,000 franchise and independent car dealers across all 50 states.
Post spin, both TEGNA and
were kicked out of the S&P 500 Index, but
are included in the S&P 400 Midcap Index.
With several trillions of dollars mimicking
the S&P 500 Index, exclusion from the
S&P 500 may lead to technical selling
pressure, which may create an opportunity
to purchase CARS shares at attractive
levels. is a high-growth and high-margin business, which is likely to focus on its
growth strategies subsequent to the spin-off.
It is amongst the leading online automotive
marketplaces for (OEM), dealers and consumers in
the United States. OEMs are 18
August 2017
The online/digital automotive industry has
witnessed some key merger and acquisition
activity in the past few months, and in our
view, the pure-play higher-growth online automotive business should be valued at higher
multiples compared to the parent (TEGNA).
We expect the spin of will deliver
shareholder value, given the company’s
high-growth and high-margin business
fundamentals. We are optimistic about the
company’s mid-term prospects and believe
that management’s margin guidance could
prove to be conservative. Despite the high
leverage, we think that should
will deliver
trade at its peer group (EV/Adjusted
EBITDA 2017E: 11.5x, P/E 2017E: 22.5x).
This suggests fair value of $33 per share,
implying a 23% upside from the current
market price of $26.81 on June 2.
Joe Cornell is a chartered financial analyst
and the author of “Spin-Off To Pay-Off.” As
the founder and publisher of Spin-Off
Research. @spinoffresearch
Spin-off Research pegs fair value for CARS at $33.
Source: eSignal
M o d e r nTr a d e r. c o m
Rail play
Q By John Blank
In early June 2017, the 10-company
strong Transportation – Railroad industry
steadily chugged to the front of the Zacks
industry pack. U.S. Class I (a.k.a. major
trunk line) railroads show up in the top 11%
(#27 out of 265) of industries we rank. This
week, Zacks counted seven positive earnings estimate revisions and zero negative
estimate revisions from covering analysts of
that sector.
Further, across the entire U.S.-based
transportation industry landscape, we see
the story of “big freight” unfold in a fuller set
of bullish Zacks industry rankings. Air freight
and cargo sits in the top 17%; shipping sits
in the top 41% and transportation-services
sits in the top 42%.
Strong air freight and shipping ranks are
supportive of a stronger GDP going forward. The U.S. economy — after a lackluster
start to 2017 — appears to be looking up,
thanks to a pick-up in demand for goods as
demonstrated by transportation strength.
Confident consumers step up to the plate.
They close more deals to buy big-ticket
items that require long-term financing.
During prior years in this cycle, railroad
stocks took a beating. As a result, a key railroad industry valuation metric, the Price to
Earnings Growth (PEG) ratio, is 1.69 versus
a 1.97 for the overall S&P 500.
Here are three of the top sector picks
based on current Zacks Ranking (see “Best
in rail”).
• CSX Corporation (CSX): This is the
sole Zacks #1 Rank (STRONG BUY).
• Norfolk Southern (NSC): It’s a Zacks
#2 Rank (BUY).
• Union Pacific (UNP): It’s a Zacks #2
Rank (BUY).
John Blank is the Chief Equity Strategist
at Zacks. He covers the global financial
markets for Zacks Premium subscribers
and @JohnBlank100
M o d e r nTr a d e r. c o m
Top stocks in top-rated industries
Source: Zacks
Top Zacks Industries with Stocks
Top Stocks
Office supplies
Household appliance
Building pProducts: Air/heating
Publishing: Books
Consumer products: Misc staples
Insurance: Accident & health
Machinery tools
Semiconductor equipment
Office products
These three railroad stocks are picking up steam.
Source: eSignal
The U.S. Transportation Industries are humming midway through 2017.
Source: Zacks
Top Peers
Industry Rank
Transportation - Railroads
Top 11%
Transportation - Air Freight and Cargo
Top 17%
Transportation - Shipping
Top 41%
Transportation - Services
Top 42%
Transportation - Equipment and Leasing
Bottom 37%
Transportation - Truck
Bottom 13%
Issue 534
Banks to reverse Trump trade;
High vol ahead
Q By John Rawlins
The Cycle Projection Oscillator (CPO) is a technical tool that employs
proprietary statistical techniques and complex algorithms to filter
multiple cycles from historical data, combines them to obtain
cyclical information from price data and then gives a graphical
representation of their productive behavior. Other proprietary
frequency domain techniques then are employed to obtain the cycles
embedded in the price.
KBW Nasdaq Bank Index (BKX)
The KBW Bank Index was approaching oversold territory in the CPO in early
June and is expecting to rally through June. While there may be a short-term
buy opportunity, the CPO is showing that the BKX will make a significant
top in later June/early July, which will be followed by a significant sell-off.
Any strength in the BKX around or after July 4 may provide a strong shorting
opportunity in the index.
The 10-year Treasury Note yield has been in a slow steady decline in 2017
even since spiking higher after the election. The CPO had predicted a bottom
in May followed by a solid rally through June and July. The continued drift in
the 10-year yield has put it in oversold territory just as the CPO is expecting
an upturn. This is a strong bullish signal (bearish 10-year Note futures) and
profit opportunity in 10-year notes. The opportunity may be short term as the
CPO is expected to top and reverse in August and back to current levels in
the fall. Expect a lot of volatility in rates for the remainder of 2017.
Crude oil is roughly 15% off of its 2017 high close of $54.45 made on
Feb. 23, but it has hardly gone in a straight line. There have been five swings
of 10% or greater in crude since setting that high. The CPO expects crude
oil to continue its slide through mid-August. Traders should look to take
advantage of sharp moves and be quick to take profits. Despite the long-term
outlook, the daily CPO chart shows a short-term rebound in the midst of its
current sell-off, so expect sharp swings to continue.
Silver began a sharp rally in May that carried into June. This rally may provide
a great shorting opportunity as the CPO is indicating silver may fall sharply
this summer. The sell-off is expected to last into September and take out lows
made in December 2016. This is a strong signal and shows silver reversing
sharply higher once it runs its course around mid-September, and then rallying
for the remainder of 2017.
John Rawlins is a former member of the CBOT with more than 30 years
of experience in trading and research. He co-developed the Cycle Projection Oscillator with an aerospace engineer. @cpopro1
August 2017
M o d e r nTr a d e r. c o m
A look at long-term trends of commercial interest in the
CFTC’s “Commitments of Traders” report.
Trend, Sideways,
Reversal +
Reversal +
Reversal -
Reversal -
Reversal -
Reversal +
Reversal +
Net Commercial
4 Week Net
Change +/-
Reversal -
Reversal -
Reversal -
Trend -
Reversal +
Reversal -
Reversal +
Reversal +
Reversal -
Reversal -
Reversal -
Trend +
Trend +
Trend +
M o d e r nTr a d e r. c o m
Bond bull
won’t go away
Q By Andy Waldock
Forecasting the bond market is difficult, especially when a
highly anticipated Federal Open Market Committee (FOMC) meeting lies between writing and publication. However, the possible
setup provides an excellent example of commercial trader behavior.
Commercial traders set a net record short last summer as the
September 2016 contract reached an all-time high above 177. That
contract dropped 6%, to 166 at expiration. The December 2016
contract, which includes the first full retracement from the July 2016
high, peaked at 175-16 before falling more than 14% by expiration
that December. We’ve been watching the commercial traders’ behavior on this decline, and they feel pretty confident that the next move
is higher. Rather than exiting the market outright, they’ve reversed to
long December 2017 contracts. The December 2017 futures contract
has held up well, falling about 4% from the July 2016 high. While the
FOMC has begun its long-awaited tightening cycle, the commercial
traders are suggesting the long bond could test the July 2016 high.
The support in December futures provided by commercial purchases
has caused the market to develop a bull flag formation on the weekly
chart. A close above 173-12 should push December 2017 bonds toward
their contract high and an implied yield around 1.506%. This is the rally
and test we’ve been waiting for prior to finally establishing a short.
Sugar Bottom
World sugar could be making a bottom. The sugar market bottomed nearly two years ago at 12.27¢ per pound. Sugar producers
tend to control the sugar market. This can be seen in their consistently negative net position. It is easy to see that a bullish commercial
trader’s net position can simply show up as less negative on the
chart. Their current position of short 55K sugar contracts still leaves
room to grow as their position does drift to the positive side from time
to time. Therefore, the commercial traders’ purchases combined with
an improving fundamental picture suggest that the September 2015
low may hold and that the recently dramatic decline in the October
2017 futures contract is just washing out the speculative long position
before setting up another run higher. It’s been nearly two years since
the commercial traders’ net position was this bullish and they’ve still
got another 300K contracts to grow their total position to record size.
Finally, soybeans and bean meal have fallen more than 15% from their
spring high, far enough to attract processor buying. The recent acceleration of their decline has put the $8.50 to $9.00 per bushel support level in play and processors are behaving as if it will hold. They’re currently
holding a record net long of 130K. However, they may be nearly done
buying. If so, November beans will fall faster than December bean meal.
Andy Waldock is a futures trader, analyst, and founder of full
service brokerage firm Commodity & Derivative Advisors. He
specializes in analyzing the CFTC COT data.
Issue 534
Using word clouds
to predict FX moves
Q By Abe Cofnas
bank statements indicates that
The search for an edge in curWORD COUNTING
“inflation” is the major focus of
rency trading often takes the tradSource:
the banks (see “Word counter through incessant back-testing
ing”). The take-away for traders
of different indicators, strategies,
is to be vigilant on Consumer
set-ups and systems. Some
June 14
Price Index data, as it becomes
work until they stop working. The
June 15
important in confirming whether
markets seem to be irreducibly
the central banks are getting
complex, making it likely that
Apr. 12
closer to their near-universal
any set-up is, at best, a rough
May 2
2% goal. But of significance is
approximation of the variables
Apr. 27
the divergence of the Bank of
that will make a difference. As a
May 11
Canada and Reserve Bank of
result of this complexity it is a very
Australia’s focus from the rest.
difficult challenge to predict future
We see that the lack of a high
movements based on pure price
score frequency mentioning of
action. Yet, there are sources that
inflation indicates a bearish senprovide leading indications of liketiment skew for that currency as
ly direction in currencies. These
their economies are not heating
sources are not hidden. They are
up to warrant expectations of a
the central bank statements.
tightening of monetary policy.
Central banks are the key
The word cloud on the May 2
catalysts for currency direcCompare the word cloud of the statements for the Australian
interest rate statement
tions. By setting interest rates
Central Bank vs. the Bank of England.
the concern is on
and monetary policy, central
growth, not inflation. Compare it
banks generate either bullish
to the Bank of England stateor bearish expectations about
ment on May 11 (see “Rating
the currency direction. Central
bank statements are carefully
It is no coincidence that rates
constructed, where each word
for Canada and Australia have
is compared to the previous
been on hold. For the trader
statements. Any differences
who wants an edge, a close
between statements impact
reading of central bank rate
immediate market reactions. In
decision statements provides a
short, words have become a key
different dimension of analysis
variable, and act like a Rosetta
and meaning compared to
Stone providing semantic clues
viewing the currency pair charts.
behind the decisions.
It may very well be that the edge
Central bank statements can
that is being sought after by forex traders on
frequency of the word “inflation” used by
provide actionable knowledge beyond the
finding direction can be found in the word
different central banks in their latest statedata release dates. A comparison of key
ments. Word clouds are images composed
words used by the central banks in recent
statements show a leaderboard of concerns of words used in a particular text or subject,
and provide further clues to the coming
in which the size of each word indicates its
Abe Cofnas is a fundamental
shifts in currency valuations. For example, in frequency or importance.
strategist, currency trader and founder
trading currencies, expectations of inflation
A frequency analysis of the number
is a critical concern. Let’s compare the
of times a word is mentioned in central
Central Bank statements
can provide actionable
knowledge beyond the
data release dates.
August 2017
M o d e r nTr a d e r. c o m
Corporate tax
Winners & losers
Q Christine Short
After the election0'3&4*%&/536.1*/
*/%06#-&%*(*5130'*5(3085)'03#*( EARNINGS OPTIMISM
The optimistic earnings estimates for 2017 and 2018 are based on
the belief that Congress will deliver considerable corporate tax relief.
Source: Estimize
Christine Short, Estimize senior VP,
is an expert in corporate earnings who
produces content highlighting Estimize
data. @Estimize
M o d e r nTr a d e r. c o m
Issue 534
Buy this, not that:
Emerging markets
Q By Matt Litchfield
One of the big stories of 2017 has been
investors deciding that the grass really is
greener on the other side. There’s been no
bigger winner from this trend than iShares
“core” international funds. Intended to
offer investors a lower-cost alternative to
the first generation of international ETF’s,
the massive inflows of new capital have us
wondering if investors are going to learn the
same hard lesson that scorched so many in
the past; that calling something “new and
improved” doesn’t necessarily make it so.
Two of 2017’s biggest asset gatherers—
the iShares Core MSCI Emerging Markets ETF (IEMG) launched in 2012 and its
older sibling, the venerable iShares MSCI
Emerging Markets ETF (EEM) — are a
good case to consider. Investors may have
found new reasons to love foreign funds, but
IEMG is the belle of the ball, pulling in more
than $5.4 billion in new assets in the three
months ending May 31, while EEM pulled
in roughly $1 billion during that period. The
surge in money flowing to international funds
this year has pushed IEMG’s total assets
to within a hair of EEM’s total. Not bad for a
four-year old fund.
Investors’ love for IEMG is easy to understand. At first glance it seems indistinguishable from EEM, the first fund anyone
considers when looking for inexpensive
emerging market exposure. In fact, beyond
IEMG having the word “core” in its name,
anyone looking at the literature available
on the iShares website or at Morningstar
would conclude that the two are almost
interchangeable (see “Emerging market
brother”). EEM is benchmarked to the MSCI
EM index, established way back in 1988
when investing in emerging markets was in
its infancy, so the index was designed with
liquidity in mind. Today it has 23 countries
and 85% of the free-float adjusted market
cap in each, so funds that benchmark to the
MSCI EM index have the biggest and most
August 2017
“IEMG has had a
lower standard
deviation than
EEM over the
last three years
while producing
slightly better
well-known names and a large-cap feel.
IEMG is a refinement on that strategy, trying
to capture 99% of the market cap, meaning
IEMG has literally a thousand more holdings
than EEM, and a significantly lower average
market cap due to all those smaller names.
Still they have similar portfolio holdings, sector
and country weightings, but most importantly,
comparable performance since IEMG began
trading. Not to mention that as part of iShare’s
strategy to win over “buy and hold” investors,
IEMG’s management fee (0.14%) is a fraction
of EEM’s (0.72%).
What troubles us is that you would think
that more smaller stocks mean more volatility,
but so far that hasn’t been the case as IEMG
has a lower standard deviation than EEM
during the last three years while producing
slightly better performance than its big brother. If you’re wondering how that’s possible,
consider that IEMG’s larger portfolio has
the same mega-cap names like Samsung
and Tencent as EEM, but IEMG also has a
serious number of tiny positions in potentially
illiquid headscratchers like the Italian-Thai
Development Company (ITD-R) whose
market cap is less than $1 million in USD
terms and remains thinly traded. But that is
the point of indexing, isn’t it: to smooth the
volatility of individual stocks.
Emerging market stocks have come a
long way, but as any homeowner can tell
you, you only learn the price of an illiquid
asset when you try to sell it, and while so
far that hasn’t been a problem for holders
of IEMG, our colleagues at Morningstar
would point out the fund’s annual portfolio
turnover is only around 10% compared to
23% for EEM, while the fund also has a
relatively wide bid/ask spread and trades
far fewer shares on a daily basis compared
to EEM. Traders looking to climb on a sure
thing might find themselves in trouble if the
tides of liquidity start going out.
Matt Litchfield is the content editor for
ETF Global at @ETF_Global
The upstart emerging market ETF IEMG has mirrored the
performance of its older sibling EEM at a cheaper price, which is
why it took in 5x more assets from March through May.
Source: eSignal
M o d e r nTr a d e r. c o m
August 2017
M o d e r nTr a d e r. c o m
The testimony of former FBI Director James Comey came and went with more hype than
harm to Donald Trump’s administration. The more important issue is whether Congress spent too
much political capital to get comprehensive tax reform done by the end of 2017. The likelihood of
significant policy changes is fleeting for the year. Some economists are even losing hope that tax
reform will be completed by the midterm elections of 2018.
Many investors argue that the post-election rally in the S&P 500 was fueled by increased
optimism that the Trump administration would enact pro-growth policies such as 1986 style tax
reform, the repeal and replacement of the Affordable Healthcare Act or a $1 trillion infrastructure
program. But six months after the election, Congressional Republicans are treading water, while
Trump remains inflamed in a series of scandals – nearly all self-inflicted.
If Republicans want to enact tax reform, they must go it alone this year. The traditional class
warfare rhetoric has already spilled from the mainstream left. Given that wealthy Americans and
shareholders pay the bulk of government revenue, there has never been a tax cut that hasn’t
favored this class of taxpayers. Ironically, it’s hard to find any economist from any side of the left
to right spectrum who disagrees that corporate tax reform should be a priority in Washington.
Modern Traderr elected to dive deep into the policy end of tax reform for this month’s feature
story. This month, we caught up with a panel of tax-reform advocates, leading economists and
policy experts from both sides of the aisle. The consensus: Washington must complete
comprehensive tax reform – but Republicans must take a gamble to enact such policy. ª
The divide centers on not only what policy should look
like, but who would be the winners and losers from the
current proposals floating through the nation’s capital.
Our first annual Economics Forum features
conversations with Steve Forbes, Laurence Kotlikoff,
Austan Goolsbee, Grover Norquist, Dan Johnson,
Stephen Moore and William Gale. In the following
pages, each participant makes their case for the role of
tax reform in the Trump era, provides their take on who
wins and who loses, discusses the major trends that
are missing from today’s debate and more. Will policy
makers listen? Will Republicans go it alone?
Economic Tilt
Modern Trader: Where would you define
yourself in the school of economic thought in
the spectrum of whether it’s the Keynesian
school, Chicago School, Austrian School, the
range of left versus right, or up versus down?
“There is no reason to expect
a bipartisan deal right now.
Republicans control both houses
of Congress and the White House.
Paradoxically that makes tax
reform harder.”
– William Gale:
William Gale is the Arjay and Frances Miller Chair in Federal
Economic Policy in the Economic Studies Program at the
Brookings Institution.
August 2017
Stephen Moore: The Chicago School.
Steve Forbes: My view is “free market.” I find fault
with all of the schools. Obviously, the Keynesian school
is very bad. The Austrian is pretty good, but not an
Austan Goolsbee: Up.
Dan Johnson: Results.
Grover Norquist: Somewhere among [Friedrich]
Hayek, Milton Friedman and Adam Smith is the right
place to be. Everyone has an economic school of
thought they follow. Some won’t admit it because all
Statist economic theories have ended badly. Very badly.
Much blood on the floor. Better to call “socialism”
“Economic Democracy.” The Nazis and Soviets kind of
made socialism smell of death.
Laurence Kotlikoff: Anybody who aligns themselves
with a school should give up his economics card. It
means you don’t have an open line to what questions
you’re asking and what answers you’re getting. You’re in
some club and you’re supposed to adhere to that club.
Inevitably they end up becoming a spokesman for one of
the two parties.
MT: William Gale recently said an August
timetable for tax reform was ridiculous. What
is a reasonable timeframe for tax reform?
William Gale: It depends on whether it’s bipartisan
or one party and how much they do.
If you’re talking about something similar to the tax
M o d e r nTr a d e r. c o m
Where are all the women economists?
reform of 1986, with major revisions, restructuring of the
tax code, and a bipartisan agreement, I don’t see how
that happens this year or next year. There is no reason
to expect a bipartisan deal right now. Republicans
control both houses of Congress and the White House.
Paradoxically, that makes tax reform harder. You might
cut taxes for some people, but you have to limit some
deductions and thus raise taxes for other people.
No party wants to do that by itself. That’s the type of
thing you do in a bipartisan deal. I don’t think it is a
coincidence that the 1986 deal happened when there
was divided control. Each party had some power. They
could take responsibility and compromise. Today, I don’t
see that Republicans are in any mood to work with the
Democrats or the Democrats are in any mood to work
with the Republicans.
Johnson: I don’t see tax reform getting done this
year. I barely see it getting done next year. Certainly
part of it is the congressional races, the congressman
will be out fundraising in preparation for the midterms
so there’ll be a lot of big promises made. But they won’t
be willing to rock the boat on tax reform. The second
thing is the administration has been unable to get many
of its policy proposals through Congress so far. We
see what happened with healthcare reform. And the big
thing that all the tax reformers a couple years ago were
looking at was that we need a president in charge; we
need a president who can lead. That’s what it will take
for tax reform. For the Reagan reform of 1986, you had
Reagan leading the charge. We do not have bipartisan
consensus on tax reform. And the idea that the
Republicans are going to use the reconciliation process
to get tax reform through is based on the idea that they
have a unified party right now; but they don’t.
Goolsbee: It would need to happen by fall to work.
In the end, I don’t think it’s going to happen. They are
frittering away their time of action. By the time we get to
2018, they won’t be able to pass it. The thing is, the last
time we did real tax reform, we spent years laying the
groundwork and everyone understood where we were
going. This time there is none of that.
Moore: Tax reform will happen before the end of the
year. [We’ll see the] biggest tax cut since Reagan. But
Democrats are so anti-Trump that they are against
anything he favors. It will be only Republican votes that
get it passed.
M o d e r nTr a d e r. c o m
“I dare you to do something. Fetch a piece of paper and write
something on it: the names of five famous female economists.
It’s hard, isn’t it? You may have thought of Gillian Tett,
Stephanie Flanders or Joan Robinson. But naming five is a bit
of a stretch. Most people know the more prominent names in
economics – the Keyneses and the Hayeks and the Marshalls
– but there are no women among them. Economics does not
have a Marie Curie.
“Economics has a problem with women. In 2014, The
Economist published a list of influential figures in the field
that didn’t list a single woman. Of the 76 Nobel laureates in
economics, only one has been female: Elinor Ostrom, who won
the prize in 2009.”
-- Francis Wheetman, New Statesman,
February 2017
MT: Stephen Moore, what is happening in
Washington that is makes you think this is
only going to be Republican votes?
Moore: I was here in 1986, one of the last times we
had a tax reform. That was a genuine bipartisan effort.
It was led by Bill Bradley (D-NJ) and Dick Gephardt
(D-Mo.). People like Howard Metzenbaum (D-Ohio)
and Ted Kennedy (D-Mass) were voting for tax reform.
Unfortunately, today there are maybe one or two out
hundreds of Congressional Democrats who would vote
for a lower tax rate structure in exchange for broadening
the tax base.
Most Democrats today want to raise tax rates. They
don’t want to cut them. They want to make the tax
system more onerous. Bernie Sanders ran for President
endorsing a 70% marginal tax rate, and he almost won
the Democratic nomination. I would love a bipartisan
effort, but it takes two to tango.
MT: Steve Forbes, do you think any Democrats
will join in to support tax reform?
Forbes: Right now, no, but circumstances do change.
If they come to conclude that that Donald Trump will be
“Anybody who aligns themselves
with a school should give up his
economics card.”
– Laurence Kotlikoff
Issue 534
Kotlikoff: We need to have a fundamental reform
of our tax system, no question. I wouldn’t exactly do
[Trump’s plan], but I’m a supporter of this House Better
Way Plan. I think it’s a good thing for the economy and
would lead to about an 8% increase in wages, based on
our simulation studies.
MT: So, are the reforms being discussed a step
in the right direction?
“The corporate income tax is
arguably a tax on workers.”
– Laurence Kotlikoff
Laurence Kotlikoff is a Professor of Economics at Boston
University, a Fellow of the Econometric Society and a Research
Associate of the National Bureau of Economic Research.
around for a while, that might make them more amenable.
Democrats fear the radicals in their base. That base
includes a lot of big check writers, and they all fear
well-funded primary opponents. You’re going to find
only a handful willing to do anything, and most of the
time they’ll just be marching in lockstep against the
MT: Where should tax reform rank as a policy
priority for Washington right now? Is there an
issue more deserving of Congress’ time and
Goolsbee: Tax reform or tax cutting? Tax cutting
is probably #3 for the administration and #2 for
the Republicans in Congress. Tax reform (actually
broadening the base and not just lowering the rates)
is not a priority at all. This administration seems to be
pushing healthcare and immigration [reform] before it.
August 2017
Goolsbee: No. The right direction would probably
be broadening the base and lowering the rates like
in 1986, just not on corporations. The argument that
massive cuts in rates for the highest income people
have magical powers to grow the economy has been
disproven again and again. Why are we back on this
Johnson: I would say that the proposals represent
a step in the right direction. They show that Congress
and the White House are thinking seriously about
tax reform. That said, they are nothing more than
a smattering of ideas on a piece of paper lying by
a blueprint. [Their plans] also misquote some of
the facts. The charts and figures are wrong in the
blueprint. There are some serious statistical errors
there. The Trump plan is a one-page piece of talking
points. So, we don’t consider either of those tax
reform plans. By the looks of the market when the
Trump plan came out, the market doesn’t either. A step
in the right direction for us would be release an actual
plan. Release actual tax reform legislation or at least
a draft of what that legislation will specifically cover.
Then we can actually talk specifics on tax reform.
Moore: We have a business tax system that
makes America hopelessly uncompetitive in a global
world. It sucks jobs, factories and capital out of the
country. The rest of the world, as Donald Trump might
say, is laughing at us behind our back. So we need a
tax code that puts America first. The way to do that is
to get the rates down from the highest in the world to
the lowest, or at least near the lowest. The business
tax system needs to be fixed because that’s where
we’re at such a competitive disadvantage. It’s like
there are dollars on the sidewalk waiting to be picked
up if we just lean over and do it. The business tax is
just an abomination.
M o d e r nTr a d e r. c o m
Corporate Taxes
MT: How should we view the corporate income
tax today?
Kotlikoff: The corporate income tax is arguably a tax
on workers because it’s incentivizing companies to leave
the country, operating through these inversions but
also just [rewarding them to] move their capital abroad.
Workers have less to work with. Permitting companies
to engage in transfer pricing games lowers revenues. So
you have a discorporate tax with a very high [affective]
marginal tax. I’m not the world’s expert on who’s right in
this debate, but what we’re talking about is getting rid
of a corporate tax that is falling on workers. It’s called
the corporate tax, but it’s corporate tax in name only.
It’s really a tax on labor because the corporation can
escape the tax. Rich people who own the corporations
can take their capital abroad and escape the tax.
Norquist: Corporate income taxes are a destructive
way to raise taxes. It is a deliberate effort to hide the
incidents of taxation by putting it on companies, letting
people think that somehow we’ll tax companies, not
people. Only people pay taxes. Companies collect taxes
from people and give them to the government.
Johnson: I dislike the term corporate tax. It’s not a
corporate tax. I understand why they did it, because
legally, under the IRS these are entities called
corporations, but it’s actually a tax on the consumer
who buys the product. It’s not a tax on the corporation.
The consumer is the one who eventually pays for it. On
real terms, it’s basically just another consumption tax. I
would be in favor of completely canning [it].
MT: There’s an argument that if you reduce the
corporate tax rate, then other countries would
follow suit. Oxfam has called this “a race to the
bottom.” Do you agree?
Norquist: They say race to the bottom because the
bottom is usually considered a bad thing. It would be a race
to lower taxes and lower the tax burden for countries all
across the globe. The leadership of the Australian Treasury
Department [recently] said, “We’re at 30%; as soon as you
guys go to 15%, we are right after you. We cannot compete
in a world where you’re at 15% and we’re at 30%.”
M o d e r nTr a d e r. c o m
If the United States goes to 15%, the rest of the
world will go to 15% and beyond. It would tremendously
strengthen the United States. The United States is
bigger, stronger, more secure than any other country.
Other countries today are viewed as secure because
we chase foreign capital out of the United States with
destructive tax rates and a destructive worldwide tax
system. We should always be looking to be one of the
lowest corporate income tax countries in the world.
Johnson: It’s only a race to the bottom if your priority
is government revenue. And I don’t think that government
revenue drives economic growth, and more importantly,
economic prosperity. In fact it’s a race to the top, where
countries are kind of forced into the only thing that really
lowers taxes around the world, which is tax competition.
And they’re kind of racing to bring jobs and bring
corporations to their particular country. That is what
creates economic growth, not the government having
more revenue. I disagree that it’s a race to the bottom.
MT: Was it an error for Congress to take aim at
healthcare before [tax reform]?
Goolsbee: In principle, yes, but practically, no. The
problem is that there are many Republican members
of Congress who insist on removing the taxes from the
Affordable Healthcare Act, and doing that costs more
than $1 trillion. If you do a tax cut without ring-fencing
those into a health bill, then they will insist those go into
the tax bill and then the deficit apocalypse of the bill
gets even worse. That’s why they didn’t think they could
do taxes first.
Johnson: Healthcare is in the internal revenue
code because that’s where they put it. If they wanted
a simplification of the code they really did have to go
healthcare first. So, what is an ideal tax plan in terms of
corporate rates, individual rates and structure? What
are you advocating for? Well, obviously our position as
an organization is that taxes are a bad way to fund what
“Most Democrats today want to
raise tax rates. They don’t want
to cut them.”
– Stephen Moore
Issue 534
“Corporate income taxes are a
destructive way to raise taxes. It
is a deliberate effort to hide the
incidents of taxation by putting
it on companies, letting people
think that somehow we’ll tax
companies not people. Only people
pay taxes. Companies collect taxes
from people and give them to the
– Grover Norquist
Grover Norquist is president of Americans for Tax Reform,
a taxpayer advocacy group he founded in 1985.
they’re supposed to do. Taxes are a bad way to fund
social policy period and that nonprofits, corporations,
etc., do a much better job effecting essential public
policy and essential social services. That said, we
obviously support efforts to try to make the system a
little bit better.
Forbes: Yes. They have to deal with [healthcare]
because the current system is making the accessibility
to medical care more difficult. The Democrats love
August 2017
to prattle on about how “we insured millions of
people,” and then leave out the fact that the amount of
deductibles have gone up catastrophically. So, people
either have less access, or they’re paying far more than
they ever did before. So we have to deal with healthcare.
I would have preferred to go with a tax cut. But this is
where House Republicans especially, and a lot of U.S.
Senators, get caught up on the [Congressional Budget
Office (CBO) not] scoring it more favorably. If we do
healthcare first, it will give us more money to play with
in tax cuts. It’s preposterous. You can tell CBO to take
a hike. The real question, the real metric in terms of
judging a tax bill, is how much it helps the economy;
[the] rest is irrelevant.
Gale: If the Republicans could unite around things,
they could get them passed. There’s no question. But
as we saw in the first round of the healthcare reform
debate, differences exist within the Republican Party.
Their margins are relatively thin. If Democrats stay united
and the Republicans have factions, then nothing will get
Winners & Losers
MT: In the current tax proposals, who do you
view as the winners and losers?
Forbes: The winners will be 98% of the American
people having more vibrant economy. Men, especially,
who have dropped out of the workforce may be thrown
back in the coming years. The only losers will be the
media, which elects to deal in slogans now rather than
the hard work of analysis, the extremist Democrats and
perhaps some lobbyists. We won’t get a comprehensive
tax bill change this round, but just as Reagan had two
big tax bills, there’s no reason why Trump can’t have two
biggies, and once he establishes his political footings,
perhaps we can get a true flat tax in the next few years.
Gale: It’s a little tricky because the tax reform
plan isn’t well defined. The Treasury Secretary said
essentially that you couldn’t analyze our tax reform plan
in the budget because there isn’t a specific plan. But if
you go by the things that Trump said in the campaign,
and the estimates coming from them, then the bigger
winners are extremely wealthy households who benefit
from the lower rate on business income. The lower rate
on corporate income, the elimination of the [alternative
M o d e r nTr a d e r. c o m
minimum tax], the elimination of the estate tax, the drop
in the top tax rate, and so on. And we’re talking about
enormous gains among the top 1%: after-tax income
growing by 10% to 14% in that group. The big losers, if
you count the tax plan, the budget proposals, the healthcare proposals, are low-income households who would
be actively worse off. It’s hard to say for the middle class
precisely without more knowledge of the details of the
tax plan. For example, it depends on how aggressive
they are going after the mortgage interest deduction,
or state and local tax deductions. And then the future
generations are a big loser because the run up in debt
would be enormous.
Norquist: If we do not cut corporate income tax rates
there will be no American pharmaceutical companies in
six years. Burger King moved its ownership to Canada,
for crying out loud. The entire economy would grow at
Reagan rates of 4% a year rather than 2% a year if we
moved to a 15% corporate rate.
Moore: Under the Trump plan that I put together
with Larry Kudlow, we got the rates down to about 15%
from 35% today, so that would be an enormous benefit.
We also think that allowing businesses to immediately
expense their purchases would be a huge boost to
growth. And you’d start to see a lot of new machinery
and equipment purchase, and planes and trains, and
trucks and things like that. The capital purchases
would be rationally accelerated in that some for a lot of
growth. Then the repatriation would just suck capital
from the rest of world back in the United States. So
all those things are very positive for the United States.
[It] can get us back to 3% + growth. And that’s a big
improvement over the 1.5% to 2% growth that we had
under Obama.
Goolsbee: Absolutely the biggest winner would be
high-income pass-through entities. The administration
plan would create the biggest loophole in the history of
the tax code and give a $2 trillion Christmas present of
15% maximum rates to private company owners.
Moore: About 70% of the benefit goes to workers when
you cut the corporate tax, so this is a tax cut for middle
class workers; if you want higher wages you have to do
something about [corporate taxes]. If you don’t have healthy
companies, you can’t have high paying jobs. Workers
benefit, shareholders benefit, America benefits. America
becomes more competitive, and when America’s growth
expands, it’s the old saying that a rising tide lifts all boats.
M o d e r nTr a d e r. c o m
“I don’t think that government
revenue drives economic growth,
and more importantly, economic
– Dan Johnson
The Details
MT: What are the appropriate tax structures
and rates?
Gale: Let’s start with rate reduction and we’ll move
to the consumption side. So, rate reduction would have
the benefit of reducing all of the distortions that are
in the corporate tax right now: the negative impact on
investment, the favoring of debt over equity and the
favoring of retained earnings over dividends.
Also, the double taxation of corporate equity income
relative to non-corporate income, so it would help
reduce all of those things, but at the same time if you
reduced the corporate rate dramatically you introduce
new distortions and new problem areas in the economy,
particularly between wage income and corporate income.
The Republican [rhetoric] has extended to noncorporate income too, non-corporate business income.
If you think of three top rates, if they’re not all relatively
close to each other then there’s always going to be ways
to game the system.
Moore: It’s been 30 years since we cleaned out
those stables. All we’ve been doing for 20 years is
promoting tax reform. I remember back in the late
1990’s when we started talking about the flat tax
and the national sales tax, which would get rid of all
the income tax. We know what’s wrong with the tax
system. It’s too complicated, the rates are too high,
the compliance costs are too high. It is inequitable
that some people pay high taxes and other people in
similar economic situations pay almost no tax. That’s
true on the business and individual side. There’s
nothing good about the tax system. It is filled with
all sorts of ridiculous carve outs and special interest
loopholes for everything [from] investing in windmills
to NASCAR racetracks; it’s indefensible. Businesses
Issue 534
MT: Is there any evidence that tax cuts can pay
for themselves?
“The winners will be 98% of the
American people having more
vibrant economy. Men, especially,
who have dropped out of the
workforce may be thrown back in
the coming years. The only losers
will be the media.”
– Steve Forbes
Steve Forbes is Chairman and Editor-in-Chief of Forbes
Media, and candidate for the Republican nomination for
president in 1996 and 2000.
are leaving because of the tax system.
Kotlikoff: I would get rid of the corporate tax, the
personal income tax, the state and gift tax. I’d replace those
with a progressive value added tax of about 20% across the
board. That’s pretty similar to what the business side of the
house plan is. But I also have a progressive consumption
tax that kicks in after about $100,000 in consumption and
it starts with a rate around 5%, and goes up to about 30%.
But you’d be able to deduct wages so that people would
not be disincentivized from working. I’d have a $2,000 per
person payment. I’d have eliminated the ceiling on the FICA
tax. And then I’d have an inheritance tax of 20% above $5
million of gifts and bequests received in your life.
August 2017
Goolsbee: Of course not. There are hundreds
of economic research studies documenting that
they don’t [pay for themselves]. In a major survey
of the world’s leading economists from across the
ideological spectrum, support for the idea that tax
cuts pay for themselves was zero (initial reports
suggested one economist supported the idea but it
turned out he misread the question).
Gale: Not [the] broad-based tax cuts that we’re
talking about. If you have an excise tax on expensive
cars, and [it was] 90% or something, and so nobody
bought the cars and you cut it back to 70%, people
might buy some more cars. But in terms of income
tax, which are broadly on labor supply and savings,
there is just no evidence to suggest we’re anywhere
close to the point of a tax cut could pay for itself.
[The idea of tax cuts paying for themselves] is the
ultimate in wishful thinking.
Norquist: First, you get more economic growth
when you reduce the fiscal drag on the economy.
Two, you want to reduce taxes, because the
government spends too much money. You want the
government to have less and spend less money.
You want to reduce taxes because people who earn
money should keep it. This idea that somehow the
amount of the doctrine of the federal government that
since we have this much money we will always have
Poland. We will always have this much money. And
whatever negotiation you want to do you must always
give the king this much money. We don’t care whether
it comes out of your left pocket or your right pocket.
Reducing the tax rate is a good, independent of
anything else. All taxation is a drag on the economy.
Taxes make prices lie to people. And people who are
lied to make bad decisions. For all those reasons,
you want to minimize the tax burden. When we cut
taxes in 2003, cut the capital gains tax and the
dividend tax, the money raised by the government
after taxes were cut, was higher than they expected
to raise total if taxes had never been cut. So in that
example, the tax cut, more than paid for itself. It
created so much growth that revenue came in higher
than it would have.
M o d e r nTr a d e r. c o m
Will Apple Pay?
MT: Will repatriation lead to job growth or are
we looking at a scenario where money simply
returns to shareholders?
Gale: Repatriation is not a geographic concept, it’s
a tax concept. The money is not literally sitting offshore
or buried in some vault in a third world country. It’s in an
account of a New York bank, and it’s being lent out to
finance loans either to the U.S. or the world economy.
When U.S. companies make profits overseas, they
don’t have to pay taxes on those profits until they
repatriate them, which is essentially bringing them back
to the parent company, so that they could pay it out as
dividends. They can’t just pay it out from the foreign
affiliate to the owners of the parent. They do have to pay
taxes on it at some point before it goes out as dividends.
So the notion that the money is sitting offshore or parked
offshore is just fundamentally wrong in an economic
sense. The only thing that’s limited is you can’t use the
money to pay dividends or to buy back shares.
Moore: I looked at the evidence, and about one-third
of the money was used for new labs and equipment and
business spending. About one-third of it was used for
dividend payments to shareholders, and about one-third
of it was paid to buy back company stock. Those are
all good things. You have businesses that expanded
their operations and increased employment. Why is it a
bad thing if you pay out dividends to shareholders? The
shareholders have more money that they can spend and
invest. Stock buybacks are a way to increase the value
of the stocks, and who owns those stocks? Americans
do in their retirement accounts. Making American
companies more valuable and profitable is good for
everyone. We got a lot of our money back, and that’s
why we should do it again.
Gale: In 2004, we did a temporary repatriation tax
holiday. For a temporary period, there was a much
lower rate. You couldn’t qualify for the lower tax unless
you swore up and down that you were going to use the
money for new jobs or a new investment. But studies
eventually showed that the firms that did this didn’t
create any more jobs than anybody else, and didn’t
invest more than anyone. But their dividends and their
buybacks did go up.
M o d e r nTr a d e r. c o m
“The country that has the best tax
system is Hong Kong; they have a
15% flat tax. That would be a dream
come true for America.”
– Stephen Moore
Flat Tax
MT: Should we have a flat tax?
Gale: There are two separate issues here. One is the
simplification, and the other is the rate structure. And
the flat tax combines the two of them. Let’s talk about
simplification. Everybody thinks the tax system should be
simpler; and yet every year it gets more complicated. The
political dynamics of that is very interesting. Everyone
will take their targeted tax break in exchange for a little
more complexity. The result is the situation that you
have. I would love it if we could clean house on a lot of
these nonsensical subsidies in the tax code from the
perspective of the economy. However, they got into the
tax code, because someone in Congress put them there.
I was a huge advocate of simplification efforts
20 years ago, and wrote a lot about it. And I now kind
of look at that as the fervor of my youth. I don’t see
that we’re going to get simplification anytime. It’s just,
everybody wants their own tax break.
If you ask people how much more would you willing
to pay in taxes in order to simplify your filing, I don’t think
people would pay a lot. I would love it if we simplified
the tax system. I just don’t think it’s likely.
MT: Steve is the advocate of the flat tax. Would
we see lobbyists and IRS officials go home if
we had that type of simpler code?
Forbes: Well, if you do it right then many of those
lobbyists will have to find other lines of work. There’s
always a need for Uber drivers. Even though I’m a
conservative, I would support job retraining [and] grants.
Gale: Forbes has said [if] we had the flat tax
lobbyists would go home. There’d be no lobbyists. But
that’s just ludicrous. [A flat tax] would start the game
Issue 534
What is your stance on the Value Added Tax (VAT)?
“In a major survey of the world’s
leading economists from across
the ideological spectrum, support
for the idea that tax cuts pay for
themselves was zero”
– Austan Goolsbee
Austan Goolsbee is the Robert P. Gwinn Professor of
Economics at the University of Chicago and previously served
as the Chairman of the Council of Economic Advisers under
President Obama.
over at a different spot. The notion that major interests
would not represent themselves to the tax writing
committees of Congress is ridiculous. The game is
never going to be over. It’s just going to keep moving.
One of the things about the flat tax that’s so interesting
is that it’s basically a massive tax cut for the rich. Where
they don’t say that, they say we’re simplifying the tax
system. And so the rate structure argument is different
from the simplification argument. The vast majority of the
complexity in the tax system comes from the tax base,
not from the rate structure. A little bit comes from the
rate structure because of marriage penalties and other
small things. But most of it is due to the separate rate
for capital gains.
August 2017
Moore: If you were to totally eliminate the corporate
tax and move towards a value-added tax, that would be
the right thing to do. A value-added tax is a low rate,
broad-based system that would be highly efficient for
the American economy, but we don’t want to end up like
Europe where we have a value added tax and a business
tax. This idea of a border tax right now is a poison pill. It
would destroy the bill and I’d recommend it to the White
House and to Paul Ryan to drop the border tax.
Johnson: A Value Added Tax is the best way to
ensure that you will never have low taxes again.
Goolsbee: My view is that it can’t be done in
isolation from the rest of the tax system. They are
efficient types of taxation but also fairly regressive
types. But, you can make progressive consumption
taxes and it’s worth considering such systems instead
of progressive income taxes if you are starting from
Norquist: Replacing the corporate income tax with
a value added tax would be temporary. The next time
the Democrats won the House, Senate and Presidency,
they would return the corporate income tax and keep
the VAT. Then we would have a VAT, a personal and
corporate income tax—and be France.
MT: Are there other nations you look at and think
that they have a better tax system than we do?
Moore: The country that has the best tax system is
Hong Kong; they have a 15% flat tax. That would be a
dream come true for America.
Forbes: Hong Kong.
Johnson: Estonia. But you have to remember where
their system came from. They set this simplified system
up after the collapse of the Soviet Union.
Goolsbee: Other countries, advanced countries
have basically adopted tax systems with lower corporate
rates (but limited pass-throughs), higher individual rates
and big VAT/consumption taxes. You could argue that
such systems encourage production in those countries,
but they only do that by having domestic consumers and
income earners pay for it.
M o d e r nTr a d e r. c o m
MT: You all ring unique perspectives, but is there
anything on the other side of the aisle that you
can agree with when it comes to taxes?
Forbes: There are some Democrats who oppose
corporate welfare such as the Export-Import Bank. They
are hurting the very people they claim to represent.
They oppose choice, they are cravenly in the hands of
the unions; whether it’s taxes, healthcare, education,
entitlements in the future for young people or a sounder
Social Security system for young people. It is hard to
find much area of agreement right now.
Goolsbee: Revenue neutral cutting of the corporate
rate. The idea that the United States needs to have a
more competitive corporate tax system is one that I
agree with and could definitely support if it were done in
a revenue-neutral style.
Moore: The consensus in the 1980s of lower rates
for a broader base doesn’t exist today. Most Democrats
want a broader base and higher rates, not lower rates.
There are very few if any Democrats today that have
sane ideas about taxes. They want to raise them. They
want to soak the rich. They want to soak businesses,
and that’s not going to help jobs, it’s going to hurt them.
MT: When Modern Trader attended the 2017
SALT Conference, one of the stories that
buzzed was the possibility that reform would
lead to individuals being able to shift personal
income to business income. Austan Goolsbee
referenced earlier that partnerships would be
able to drop their rates down to 15%. What are
your thoughts on this potential loophole?
Norquist: The administration and House Republicans
have made it clear they will be strict in requiring that
wage income be taxed as wage income, and business
income would be recognized as business income. You
can’t simply announce that you are a corporation and
pay 15%. That will not be allowed under the system.
The New York Times is free to say that somebody might
sneak past, but this is not reducing all personal income
tax to 15%. [That level] is a place I’d like to go soon, but
that’s not what’s happening right now.
Moore: To be considered a business, you need to
have employees; you have to reinvest the money in the
M o d e r nTr a d e r. c o m
“We know what’s wrong with the
tax system: It’s too complicated, the
rates are too high, the compliance
costs are too high. It is inequitable
that some people pay high taxes and
other people in similar economic
situations pay almost no tax.”
– Stephen Moore
company. We don’t want people to take money out of
the company. We want them to reinvest money in the
business. We want to make sure that people aren’t
gaming the system. You have to build some rules, but it’s
not that complicated. You could do that really easily to
prevent abuses.
Ending the Debate
MT: What story is missing from the debate?
Is there anything that the mainstream press
is missing or an issue that you wished people
would discuss more today?
Moore: The biggest issue not understood by the
media is that we require much faster economic growth
if we’re going to solve any economic problems in this
country. Whether it’s income inequality, the education
crisis, the infrastructure crisis, or the budget deficit,
all of these things depend on faster economic growth.
One of the easiest ways to increase economic growth
is to fundamentally reform our tax system. That’s
missed in the debate. All these people say you can’t
get more growth by cutting taxes. I say, what about
what happened under Kennedy? What happened
under Reagan? If taxes don’t matter, why is it that the
no-income-tax states like Florida, Texas and Tennessee
are growing two and three times faster than [higher tax]
states, like New York, Connecticut, and California?
Goolsbee: This is not an accurate assessment.
Steve [Moore] started saying [what he said above]
when the oil economy was booming and low tax states
were doing well (the tax foundation started making this
claim in 2011 and 2012). But he kept saying this even
after the oil boom chilled and California, Massachusetts,
Issue 534
“The country that has the best tax
system is Hong Kong, they have a
15% flat tax. That would be a dream
come true for America.”
– Stephen Moore
Stephen Moore is the Distinguished Visiting Fellow, Project
for Economic Growth, at The Heritage Foundation.
and many high tax states began growing faster than the
low-tax states. Also, under Jack Kennedy the rate started
at over 90%. Almost everyone agrees that cutting from
such a high base is a reasonable thing to do.
Norquist: Ronald Reagan took the top marginal
tax rate from 70 to 28%, but engaged in the kind of
tax increases that the Democrats insisted on. But
saying “Reagan raised taxes” is like saying George
Washington lost battles. Yeah, he did, but he won the
war, and he wasn’t trying to lose battles. He lost battles
because his enemies beat him. And Reagan raised
taxes, signed tax increases, because his enemies beat
him sometimes.
Forbes: I’ve been asked almost every question about
tax reform, especially when I ran for president. They
didn’t leave too much unexamined there. I wish the
August 2017
mainstream media would ask: ‘How much better off we
would have been with the flat tax?’ Just increase your
income by 50% for starters. Maybe double because
it’s been 20 years [and] compounding adds up. Just
take the six billion hours a year that the IRS estimates
we spend on filling out tax forms. Take the billions that
experts estimate we spend complying with the tax
code, and multiply it by 20 years. Think of all those
tens of billions of hours, trillions of dollars if it had been
invested in creating new products, new services, new
medical devices, and new cures for diseases, instead
of this idiotic, corrupt tax code. How much better off
would we have been? This is a moral issue.
Moore: We should discuss alternatives. For
example, if you had a national sales tax and got rid of
the income tax, imagine how many jobs you’d get in this
country? It would be unbelievable. We’d have more jobs
than we’d have people. You think we got an immigration
problem now, people would swim here, or they’d
parachute in, or they’d build tunnels to get into this
country, we’d have so many jobs. Something that would
create that much growth is explosively progressive in
terms of raising everyone’s income.
Johnson: I wish people would focus more time
asking, “’What is the actual problem with the tax
system?” In that regard, it’s the coercion of the tax
system. Entities don’t have to earn those dollars.
Taxpayers have no direct response when government
agencies fail to achieve what they say they will achieve
with tax dollars. The private sector and non-profit sector
should be able to compete for this money.
The vast majority of human welfare is already
provided by nonprofits, for-profits and informal
groups. Private companies build the roads, bridges,
tunnels and buildings. Supermarkets and food banks
provide food, shelter is provided by everyone from
apartment owners to pastors. Hospitals provide
healthcare, consumer associations protect us from
harmful products, etc. And in every other area of life
outside taxes, we can hold these organizations directly
accountable with our dollars. Public services should
be provided the same way.
M o d e r nTr a d e r. c o m
“I wish people would focus
more time asking, “’What is
the actual problem with the tax
system?” In that regard, it’s the
coercion of the tax system.”
– Dan Johnson
MT: Dan, you advocated for competition
and non-profits to help manage some of the
social and economic issue we face. What
if there is too much scale and too many
Johnson: During the past 100 years, Americans
have consistently paid more and more taxes to
their local, state and Federal governments. Today,
approximately half of our income is going to government
to solve social problems, and look around you. Has it?
The solution to complex social and economic issues
isn’t to reduce the amount of solutions, or the number
of people working towards solutions. The government
has had at the very least a hit-or-miss record on
solving complex social problems, and it seems
counterproductive to put all our eggs in one basket to
solve social and economic problems, especially with
millions of organizations and companies with significant
experience solving these issues already.
Our Conclusion
“Taxpayers have no direct
response when government
agencies fail to achieve what
they say they will achieve
with tax dollars. The private
sector and non-profit sector
should be able to compete
for this money.”
– Dan Johnson
Dan Johnson is the Executive Director of the
Tax Revolution Institute, a non-partisan, nonprofit organization committed to researching and
developing innovative, voluntary tax solutions.
M o d e r nTr a d e r. c o m
On the surface, economists and advocates from a
variety of schools and perspectives all agree that
corporate tax reform would provide distinct value to the
U.S. economy. However, we see that any discussion of
tax reform quickly pivots to a different conversation on
class warfare.
The backdrop of today’s corporate tax reform
debate is a comparison to the 1986 reform led
by both Democrats and Republicans. Today, the
poisonous rhetoric spilling from the halls of Capitol
Hill has made cooperation a fleeting possibility.
Centrist Democrats remain largely in lock-step with
liberal counterparts and in fear of a liberal base
seeking to primary candidates. Republicans, however,
remain equally divided as evidenced by the failed
effort to repeal and replace the Affordable Healthcare
Act within Trump’s first 100 days.
If tax reform remains critical for the U.S. economy
– and it is based on the responses in this roundtable –
Republicans must be willing to go it alone.
Issue 534
Veteran publisher and two-time presidential
candidate Steve Forbes discusses markets, media
and modern political discourse.
The Medium
The Message
handful of others do so well. Obviously, sites like RealClearPolitics.
Congratulations on turning 70! How do you feel
com do well in part because they’re aggregators. Politico, and even
about the milestone?
though I don’t agree with them philosophically 90% of the time, it’s a
As my father liked to say, just think of the alternative.
good barometer of what’s happening politically. And of course, you
Is there a song that changed your life along the way?
always have to look at the Drudge Report.
In Hey Jude by The Beatles, there is a line… “You know that it’s
a fool, who plays it cool, by making his world a little colder,” — a
In 1999, you said that, “Now that the Cold War is over,
very, very good observation.
we no longer need such a massive centralized Federal
government. We should now downsize Washington and
Any books?
money, power and control back to individuals,
Yes. They range from economic books like George Gilder’s
families and local communities.” America faces new,
“Wealth and Poverty,” Jude Wanniski’s “The Way the World
more challenging security threats since you made that
Works,” all the works of Thomas Sowell, other Gilder books, some
statement. Has your thinking evolved?
biographies of Alexander Hamilton, and starting as a kid with Bible
stories. There have been a number in 70 years.
Well, we face challenging security threats, but of a very different
character than those of the Cold War, not to mention the two
Media political bias is well documented. As an example,
the full-time U.S. journalists who claim to be Republican World Wars as well. And, well, we need to beef up our defense
spending. There is a lot that can be done to get more for our money
dropped from 26% in 1971 to 7% in 2013, according
in defense, especially in the area of procurement. And the key,
to a study by Indiana University, Professor Lars Willnat
though, is getting our economy growing vigorously again. Then we
and David Weaver. A 2016 Politico poll found that of the
can meet our global obligations by spending between 3% and 4%
72 press corps members asked, they were all registered
of GDP on defense. And in terms of downsizing the government,
republicans — how did this come to be?
that means, among the big things, getting more patient control
People of a liberal ilk seem to be more inclined to go into
of healthcare, simplifying the tax code with a flat tax and giving
journalism. Journalism involves words and writing, rather than
parents school choice for their children. There is a lot that can be
running a business.
done to reduce the scope of government,
Does political bias exist within Forbes
and people would applaud it rather than fear
something is being taken away.
There are a lot of people here who
Chairman and Editor-in-Chief of
probably wouldn’t subscribe to my
If there was one new government
Forbes Media, GOP Presidential
philosophy [but] I don’t know, and I don’t ask,
policy, regulation or legislation that
candidate in 1996 and 2000,
publisher, author and economist.
as long as they turn out good copy, I am not
you could enact by fiat, to better the
Age: Turned 70 on July 18
going to care.
lives of all American, what would it be?
Which political media platforms do
Linking the dollar to gold. Alexander
Academic History: Cum laude,
you have high regard for?
Hamilton did in 1791 and the gold standard
Princeton University (1970)
lasted 180 years, during which time the
The web is a relentless commoditizer,
Director Positions: The Ronald
United States experienced the highest
and if you don’t have a strong brand, you’ll
Reagan Presidential Foundation,
the Heritage Foundation and
average annual rates of growth in world
be grounded to dust. There is a lot of noise
the Foundation for the Defense
history. Since we went off gold, growth has
out there, but if you don’t have something
of Democracies, Overseers of
the Memorial Sloan-Kettering
slowed markedly.
distinguished it’s going to be very hard for you
Cancer Center, Board of Visitors
Have there been any social issues on
to survive and thrive. The turnover is enormous.
for the School of Public Policy of
which you’ve evolved in recent years?
And that’s why sites like, The Wall
Pepperdine University, and the
Board of Trustees of Princeton
Street Journal’s web site ( and a
I am pro-life. I am also libertarian. So if
August 2017
M o d e r nTr a d e r. c o m
somebody wants to go wreck their lungs by inhaling weed, which is
far more powerful than it ever was when I was in college, go ahead,
just don’t ask me to pay for your health care bills.
Do you see any conflicts in being both pro-life and
Grade President Obama’s eight
years of policy substance.
D-, the only reason I don’t give
him an F is that he had substance,
just the wrong substance.
President Obama’s political style?
“C,” and the only reason it doesn’t look worse is because the
Republicans floundered. It’s like having a football team and the
defense of the other team is no good. It doesn’t mean your offense
was great; it just means the other side’s defense was awful.
Your grade for President Trump in terms of the policy
substance that he has articulated thus far?
Let me be a harsh grader, an “A-.” I’d give him an “A,” but
[without] the tax bill, yet, I’ll be conservative, “A-.”
His political style?
His political style is absolutely unique, so you have to give it an
incomplete. Whether it’s going to lead to anything substantive, we
will see.
What advice would you give the president as to how
he might improve the administration’s optics, and
They’ve got to change this daily press briefing. It doesn’t mean
you ignore the press but doing more online may have a better
M o d e r nTr a d e r. c o m
chance of getting through in terms of substance instead of the
“gotcha” game you see now. Remember the Obama administration
was a press control freak — very Nixonian.
Trump and Twitter?
Well, if it’s focused on things like tax cuts, yeah. One thing Trump
discovered is that people read tweets more than they do press
releases. If you want to get a theme out, that’s the way to do it.
Who do you think will be the Democratic nominee in
It will not be Hillary Clinton nor Chelsea. I would guess it’ll
probably be a CEO. Which one, I’m not sure. Whether Howard
Schultz at Starbucks, Robert Iger at Walt Disney or someone else.
I don’t think they’re going to go for Bernie Sanders or Joe Biden or
Hillary. They’re going to try something totally different.
Mark Cuban?
He would break the mold like Trump did. Not sure, though, that
he has the themes to go the distance.
Does a third party have any chance to succeed in the
United States?
The answer is no. The Electoral College makes that very difficult.
Even if you get a plurality of the popular vote, if you didn’t get those
270 votes in the Electoral College, then it goes to Congress and
you are going to have a very hard time surviving.
Favorite musical artist living and dead?
Elvis Presley and Leon Russell. Living, there are a number of
them ranging from the [surviving] Beatles, the Rolling Stones,
Stevie Wonder and Tina Turner.
Your business heroes?
In addition to my father and grandfather, A.P. Giannini, Alfred P.
Sloan, Henry J. Kaiser, Ruth Handler and William Knudsen.
Any current CEOs on your list?
Jeff Bezos.
What is the best investment that you have ever made?
My family.
Which sector of the stock market do you feel has the
most opportunity for the year ahead?
Healthcare. And high tech will still do well in the next five years.
The Trump bump has resulted in a significant postelection market advance. How does it end?
It’ll end if they don’t get a tax bill through; a good one. And if they
get a good one through, you’ll see less movement, reward from big
stocks [and a rotation into] smaller cap Russell 2000 stocks.
Congratulations on 50 years of financial publishing
and your 70th birthday; what have you learned that is
essential to pass on to investors?
It’s more fun to buy stocks when they’re going up than watching
them go down. The other thing is, my grandfather said you make
more money selling advice than following it. And finally, in terms
of an age where all business models are being fundamentally
changed, you have to do what Peter Drucker said you should
do, and remind yourself what it is you’re trying to do, what your
mission is. Then even if the tools change, you won’t be too
— Interviewed by Jeff Joseph
Issue 534
Mainstream market mavens tell us that we
are in the midst of a long (in-the-tooth) bull
market. This technician thinks that is bull.
is Technically Bullish on
this New Bull Market
Q By: JC Parets
There is a common misconception that stocks are in
the ninth year of a bull market that began in early 2009. The
misconception provides an opportunity to profit. The market is a
very selfish place. We’re here to make money.
There are many reasons why we are not in the ninth year of a
bull market in stocks. A lot of it has to do with identifying your
time horizon. Are we referring to a much larger secular trend or a
smaller more intermediate-term cycle? Either of these time horizons
can apply and neither suggest we are anywhere close to a decadelong bull market for stocks; in the United States or otherwise.
The single reason being used, not
one of the reasons but the single reason
being used, is because in 2011 the S&P
500 only fell 19.38% from peak to trough
on a closing basis, and not a full 20%.
Again, this is the only data point used to
suggest this is a nine-year bull market.
Let’s address the issues here one by one. To start, 20% is a
completely arbitrary number. I’m not sure who made this up, but
there is zero logic why a 19.999% correction is still considered a
bull market, while a 20% correction is considered a bear market.
As market participants, we must not accept faulty reasoning.
Next, let’s point out the fact that anyone claiming that this is a
bull market in the S&P 500 is blatantly choosing to ignore reality.
They are trying to convince you that this is a bull market simply
because the S&P 500 Cash Index fell only 19.38% while the S&P
500 futures fell more than 22%, and on an intraday basis the S&P
500 Cash Index also fell more than 20%. They are cherry- picking
this one specific vehicle to make their claims. They get to lie in a
headline so you either click/watch/listen, or in other cases they
skew their “research” to help achieve their own goals, such as
to gain attention or help raise assets. It’s unfortunate, but their
motivations clearly do not align with ours as market participants,
and they make it very obvious.
Many Stocks Struggled
Bear markets are an extended period of stock index declines
where over time the majority of stocks in that index participate to
the downside. In other words, this is a market of stocks, not just a
stock market. In 2011, almost 70% of stocks in the S&P 500 had
corrected more than 20% from their peaks. Also, by the beginning
of 2016, 63% of stocks in the S&P 500 had corrected by more
than 20% from their top. So twice, a
majority of components in the S&P 500
had corrected dramatically, arguably
entering a bear market. To suggest
that these periods were bull markets is
not only incorrect, but an irresponsible
statement to make by anyone who
experienced trading in those markets. “Find the sleeping bear,”
right, is a good chart showing these bear markets.
To continue with this theme of cherry picking indexes that fit
your narrative while blatantly ignoring the important facts, look
at the S&P 500 Equal Weight Index (EWI). EWI treats each
component in the index exactly the same, giving us a much better
gauge of market breadth (see “Equal weighting reveals,” right).
Remember, when analysts choose to use the S&P 500 Market
Cap-Weighted Index to determine bull and bear markets using
their arbitrary 20% level as the threshold, trends can be distorted.
Meanwhile, in 2011, the S&P 500 Equal Weighted Index fell
more than 25% from peak to trough. Also, if you really want to be
picky and use only closing prices, once again the S&P 500 Equal
Weighted Index fell more than 23% from peak to trough on a
closing basis in 2011. But the irresponsible parties will tell you this
“We’ve had plenty
of bear markets
since 2009.”
August 2017
M o d e r nTr a d e r. c o m
“We could
potentially be
in just the
second year of
a bull market.”
As you can see, there have been multiple bear moves since 2009.
Source: Bloomberg Finance
doesn’t count. They tend to use the S&P
500 Market Cap Weighted Index, and only
use the cash market, not futures.
Next, let’s remember that the S&P 500
is not the stock market. By cherry picking
this one index, and only the S&P 500
Cash Index, not S&P 500 futures, they are
blatantly ignoring the rest of the world. While a majority of S&P
declines. The entire metals and energy complex also put in their
500 stocks were getting killed throughout most of 2015 (because
bottoms during this time (not a coincidence). Japan, Europe and
we were in a bear market), the rest of the world was selling off
the United States (S&P 500) bottomed in February of last year,
by much more. By January of 2016, emerging markets were
right around the same time. Credit spreads, which we look to for
down 45% from their peak in 2011. Was that a bull market too?
confirmation of ongoing trends in stocks put in their bottom at the
Europe and Japan each fell around 30% from their 2015 highs.
same time. This was not one big giant coincidence. This was when
Were those bull markets? The Russell 3000, which represents
market participants globally reached a point where demand finally
approximately 98% of all investable assets in the United States
was able to exceed the selling pressure that we had seen persist
equities market fell 23% from the 2011 highs. Was that a bull
for a long time, which some might refer to as a bear market.
market? The All Country World Index
(ACWI) fell 27% in 2011, and then fell
22% in 2015. Bull markets also?
Some of the 2011 weakness was hidden due to heavy weighting of major stock in
the S&P 500. When weighing components equally this weakness becomes clearer.
What Cycle Are We In?
Source: Optuma
The bottom line is that we’ve had plenty of
bear markets since 2009. This is not the
ninth year of a bull market. So when did it
begin, you ask? There are a few different
market cycles traders can point to. One is
the breakout in 2013, when prices finally
got above the 2000 and 2007 highs. A
valid argument can be made that this was
the start of a new secular bull market and
the end of a 13-year bear market that
began after the boom of the late 1990s
(see “The real cycle?” page 44).
Another argument can be made that a
bear market for stocks ended in the first
quarter of 2016 and a new cyclical bull
market began. This is when emerging
markets bottomed out after five years of
M o d e r nTr a d e r. c o m
Issue 534
This exponential chart highlights the 2013 breakout as the potential start to the
current bull market.
Source: Optuma
So why is this time, with the bottom in
2009, the start of a new bull market? You
can’t have it both ways using the 1980s
model. The start of this new bull market
was in 2013 when we broke out. But let’s
markets Europe and Japan continued to
It makes it very difficult to argue that we’re pushing a decade-long
decline into 2016. So there is more to it than just this.
bull market. It’s simply not the case. When we talk about timing, the
start of the bull market of the 1980s and then through the 1990s —
Playing devil’s advocate, you might say, “Well the S&P 500
separated by the worst day for markets since the Great Depression
represents America and American investors, so we use that index.” OK,
in between — was 1982. That was the year that we finally broke out
let’s go with that for a second remembering that you are specifically
of the bear market from the 1960s and 1970s. No one says that the
cherry picking the S&P 500, ignoring every single other U.S. Index
start of the new bull market was in 1974, when we hit the bottom.
and International Index and also ignoring the fact that intraday the S&P
That’s because we had three bear markets shortly thereafter where
500 fell more than 21% in 2011 and that the futures market also fell
the S&P 500 lost well over 20% each time. Then in 1982 we broke
more than 20%. But to suggest that the S&P 500 represents American
out of this base (See “Long-term trends,” below).
investors is also wrong. This is money coming from all over the world,
not just the United States. With each day
that passes, the stock market is becoming
more and more global. So if you want to
Equities go through many cycles within cycles, which should not be ignored when
know what the stock market is doing, it would
looking to what may come next.
be irresponsible to focus on just one capSource: Optuma
weighted index in just one country.
To help identify the direction of the
underlying trend in stocks, it makes sense
to take the top 10 exchanges from all over
the world and create an equally-weighted
index of 10 of the world’s largest exchanges,
including both developed and emerging
markets. We’re including not just U.S.
stocks, but stocks from Germany, UK, Japan,
Canada, Brazil, China and Hong Kong. You
can see that twice during the past eight
years we have seen corrections in global
equities of more than 28% (see “Global
trends,” right). These are not characteristics
of bull markets when stocks lose nearly a
third of their value twice over the period you
are claiming is an eight-year bull market.
August 2017
M o d e r nTr a d e r. c o m
“By the beginning of 2016,
63% of stocks in the S&P 500
had corrected by more than
20% from their top.”
Why Is This Important?
The irresponsible don’t let facts get in the way of their
Winners ignore that noise and instead focus on reality.
So, when you see people trying to convince you that we are in the
Data mining and cherry picking to create an alternate reality is not
ninth year of a bull market, this is further evidence that their goals
for the winning trader.
are not aligned with ours as market participants. The media loves
This is not just an academic exercise; there is a competitive
the headline, and doesn’t care whether it’s correct or not. Then
advantage in recognizing that we are not in the ninth year of a bull
there is the sell side trying to make you feel bad for not keeping
market of any kind. This misconception drives investors toward
up with this bull market so you can move your assets to their firms.
the belief that we are in the later stages of a secular advance and
There are also examples of people commentating that are just
perhaps a healthy correction is due, when in reality, we could
wrong, and don’t actually have any malicious intent. But this is
potentially be in just the second year of a bull market.
the rare exception, not the rule. More often than not, people are
A very good argument has been made here that we are in the
trying to fool you for their own personal gain, whether dollars or
fourth year of a U.S. equity bull market and already passed our first
clicks (that lead to dollars). It’s best to assume all these so-called
cyclical decline. The fact that emerging markets and many other
experts are completely full of it, until they prove otherwise.
developed markets around the world didn’t actually bottom until
Most don’t.
last year suggests that we are much more
likely to be in the early stages of a bull
market than in the later stages.
Looking at the corrections in 2011 and 2015 on an equal weighted S&P 500 chart
We’ve seen secular bull markets last
makes it clear that we are not in a continuous uptrend.
more than 15 years. There is no reason
Source: Optuma
to believe that we can’t see that again.
If we do, and if history is any indication,
then we are much closer to the beginning
than the end. Considering how few people
recognize this is happening is likely a
catalyst to extend a rally much longer than
most think. So, while we will have cyclical
corrections, just like every other period in
time, the bigger picture is the trend is up
and there is no sword of Damocles hanging
over an old-in-the-tooth bull. This bull is
young and vital.
JC Parets is the founder of All Star
Charts, a research platform for
individual and professional investors
covering stocks, interest rates,
commodities and forex markets.
M o d e r nTr a d e r. c o m
Issue 534
is Pitching This IPO
Spoiler Alert: We prefer the pitchman, to the pitch
Q By: Shruti Khetan & Jeff Joseph
like private businesses, they aren’t considered start-ups anymore.
These companies can have thousands of employees, millions of
dollars in revenue and private valuations in the billions of dollars.
They just haven’t gone public yet. And while they’re less risky than
a typical (pre-revenue) startup investment, the upside potential
is still very high. Because these deals tend to offer lower-risk and
relatively high returns, they’re extremely high in demand. Which is
why, generally, the largest institutional investors can get in. Individual investors had been unable to access these opportunities until
now. But under new Securities and Exchange Commission (SEC)
Regulation A+ rules, it’s possible for non-institutional investors to
Pre-IPO investing?
have access to these opportunities.
The earlier that you are able invest in a start-up, the more money
That is a good thing. Simply, more investors should have more
you can make. That’s one of the golden rules (and grand risks) of
venture capital. For the most part, today’s “pre-IPO companies” are investment options, including private offerings. But, with less operating, earnings and price history
to evaluate, the risks are distinctly
Go for a ride with YayYo founder El-Batwari...
YayYo, which was incorporated in
RE: Yeah, and that’s why we always have a
Modern Trader: Do you expect to
is offering for sale securities
a plan “B” and “C,” if they don’t come to the
launch the app sometime soon?
table right away; we’re going to launch (a
under YayYo under the regulation A+
Ramy El-Batwari: Our app is ready, and
ride-haling service in Los Angeles) next month
that allows non-accredited investors
we’re actually going to put the cars on the
and we’ll have our own fleet of cars, brand new
into the equity securities market that
road with trained drivers owning their cars
cars, paid and trained drivers. So Uber and Lyft
and all that. The app has been ready for three
was previously unavailable without
are not the beginning or end-all of anything. I’m
months and now we are just enhancing what
SEC qualified investor or (high-net
not here to fail. I’m here to succeed.
we’re doing. We’re building a model that’s
worth) accreditation.
MT: What would you tell investors
really going to outshine what everybody else
YayYo has opportunistically gone
is the reason that they should
is doing.
consider this in their portfolio as an
to selling shares for an IPO.
MT: Where do you stand currently in
less than 1,000 Play
terms of the agreements necessary to
RE: This is not a guarantee. If we win, we
integrate Uber and Lyft into your app;
Store (android) downloads, without
win big; if we don’t that’s the risk with it.
as an aggregator?
an actual functioning app, but, with
But that’s why it’s a risk. I mean, you’re not
RE: We were in talks that were pretty far
a slick television ad promoting the
earning 5% or 10%; this is for somebody
along, but bad press hurt our talks, so we now
who wants to take a shot. If (losing) it will
have to start all over again and let that press
change their life, I don’t want them to put the
Without a tangible product in
die down a little bit.
money in. We’re not targeting the old mom
hand, how can you judge its funcMT: Does the app still move forward
and pop and other channels like that. We
tionality, differentiation, user benefits
and does it have value?
want people to want to invest.
and experience? Well, you can’t.
Beverly Hills-based YayYo aspires to introduce a
single sign-on metasearch app for your smartphone that provides price comparison and booking of eventually all available ride
sharing and taxi services along with select limousine and public
transportation services. YayYo plans to offer all the convenience
you expect plus unique benefits and conveniences not available
from Uber, Lyft or taxi services alone.
Currently, YayYo offers non-accredited investors the option to
invest during the pre-IPO stage.
August 2017
M o d e r nTr a d e r. c o m
Recently enacted Title IV of the Jumpstart Our Small Businesses (JOBS) Act,
commonly referred to as Regulation A+, allows private companies
to offer securities to the general public subject to certain eligibility, disclosure
and reporting requirements. YayYo Inc. is running ads on the financial
cable networks, so we take a look under the hood.
The ideas is that in one app, you can compare prices of multiple
rideshare companies like Uber, Lyft and others. You can also see
who will get to you the fastest. You can book directly on YayYo and
save. Have Uber and Lyft agreed to collaborate? Our conversation
with YayYo founder and CEO Ramy, El-Batwari (see “Go for a ride
with YayYo founder El-Batwari,” left) suggests that those talks are
at best, in early stages.
Moreover, El-Batrawi, the consummate dealmaker and passionate mastermind behind YayYo, does not have the best bio for window-dressing for a speculative offering circular. He was previously
barred by the SEC from starting a public company for five years
and has a colorful past including an association with arms dealer
Adnan Khashoggi.
The numerous risks of investing in this pre-revenue company
are well-documented in the offering circular. So, what is drawing
investors to consider the YayYo IPO?
With a massive marketing budget, YayYo has already spent thousands of dollars on commercials on CNBC and Fox Business, and
continues to do so. The TV ad pitchman for YayYo is John O’Hurley
— more commonly known as J. Peterman from Seinfeld…
“Then, in the distance, I heard the bulls. I began
running as fast as I could. Fortunately, I was wearing
my Italian cap toe oxfords. Sophisticated, yet different;
nothing to make a huge fuss about. Rich dark brown
calfskin leather. Matching leather vent. Men’s whole
and half sizes 7 through 13. Price: $135.”
-- J. Peterman on Seinfeld, 1995
O’Hurley, a friend of El-Batwari, brought his flowery prose to
“The future is here, today, and the future is YayYo.
Yes, YayYo. YayYo is developing a Kayak-style single
sign-on metasearch app that compares the prices and
allows you to book ride-sharing and taxi services…so
we are excited to announce an initial public offering of
YayYo stock…and your chance to invest in the new millennium of ride-sharing…under these new SEC rules
it’s possible for the little guy, like you and me, to buy
into an IPO previously unavailable.”
-- John O’Hurley for YayYo, 2017
M o d e r nTr a d e r. c o m
Trade or Fade
YayYo Inc.
Maximum Offering Amount: $50,000,000,
$8.00 per Share
• YayYo is a pre-launch, pre-revenue app idea that seeks to
be a Kayak-like aggregator of popular ride-sharing apps
like Uber & Lyft
• There is no indication that deals are in place with Uber
and/or Lyft
• The majority of its expenses to date have been toward
legal and marketing costs
• YayYo’s founder was previously barred by the SEC from
running public companies for a period of five years
CEO El-Batrawi hopes the app will be launched in July. A
ride-hailing app aggregator, with user loyalty-incentives and rider
security enhancements could be a disruptive business model if
the leading ride-sharing services are integrated and the app’s
user interface is compelling. But, in the absence of Uber and
Lyft signing on, a functioning app, and a raid-hailing experience
to evaluate this is nothing more than vaporware. This high-risk,
pre-revenue offering will be open until the company raises
$50 million or through March 17, 2018, providing interested
investors with ample time to watch this unfold and evaluate the
investment after the app is launched.
Issue 534
Modern Trader’s Readers
Grade Presidents
Obama & Trump…
In a survey of Modern Trader digital subscribers conducted
through June 6, respondents graded both President Obama and
President Trump on style and substance. Here are the results:
Modern Trader readers decidedly have little regard for the policy
achievements of President Obama’s two terms in office, but they
did view the former president more favorably than President Trump
in terms of political style. The favorable marks President Trump
received on policy for his first six months in office seem to be
How would you grade
President Obama's
8 years in terms of
policy achievements?
How would you grade
President Obama’s eight
years in terms of political
grading jawboning and executive orders over substantive legislative
achievement. We will check back at the end of the second
semester this year to see how actual (or absent) tax, healthcare and
immigration reforms, along with regulatory rollbacks, impact the
President’s freshman year grades.
How would
you grade
President Trump
thus far on policy
How would
you grade
President Trump
thus far on political
…and Tout Tax Reform…
When President Trump announced his intent to reform the
current tax system, Gary Cohn, chief economic advisor to the
president, posted on that ”In 1935, we had a onepage tax form consisting of 34 lines and two pages of instructions.
Today, the basic 1040 form has 79 lines and 211 pages of
Do you agree that the
current tax code is in
need of reform?
instructions. Instead of a single tax form, the IRS now has 199 tax
forms on the individual side of the tax code alone. Taxpayers spend
nearly 7 billion hours complying with the tax code each year, and
nearly 90% of taxpayers need help filing their taxes.” Do you agree
that the current tax code is in need of reform?
Do you believe
that tax cuts
are an effective
way to increase
*The survey recorded 230 respondents with a 6% margin of error.
August 2017
M o d e r nTr a d e r. c o m
L i f e , Lux u ry & t h e P u r s u i t o f H a p p i n e s s
Featuring The Scotch Guy
WILLIAM MEYERS (aka, “The Scotch
Guy”) is a criminal defense attorney in
St. Louis with an unusual hobby. He is an
international authority on single malt scotch.
Modern Trader: Scotch Guy, how
did you earn your street cred in the
whisky biz?
The Scotch Guy: Once I discovered the
world of whisky I needed to share it with
others. I began by writing for the St. Louis
Post-Dispatch, which led to writing for the
Chicago Tribune, and eventually being
honored as one of three authors called
upon to update the industry tome “Michael
Jackson’s Complete Guide to Single Malt
Scotch,” 6th Edition, after Jackson passed
away in 2007. I also contributed to the
book “1001 Whiskies
You Must Taste before
You Die.” I frequently
write on spirits for St.
Dewar’s releases
Louis Magazine.
The Last Great Malts
Are you a whisky
From straddles to
paddles: An options
trader tackles
collector or
table tennis
All of the above,
New book, music &
media reviews
but I prefer to think
of myself as a scotch
Trading Pit & Breakout
enthusiast. My collec58
tion has become quite
an investment, which
I occasionally use to
M o d e r nTr a d e r. c o m
Bill Meyers
invests in
whiskies that he
loves. He already
appreciates these
six drams, but
expects them
to appreciate
as well.
trade for bottles money can’t buy. Unlike
some collectors, almost every bottle I
own is open to be consumed: tasted,
shared and enjoyed. I have multiples so I
don’t run out.
Run out?
Many of my bottles are single cask
expressions, whose outturn is typically
200 to 500 bottles. Each cask produces
a unique expression, which will never be
What is your collecting philosophy?
My collection is organized alphabetically
by distillery, and from youngest to oldest
expression within each distillery. My goal
is to have what I consider to be a truly great
bottle from every distillery, and then to fill
out with a range of young to old expresIssue 534
Straight Up —
proper storage of
The Scotch Guy’s
private stash
sions from each distillery. I view scotch like
artwork. I buy paintings I enjoy, and if they
appreciate in value that’s just a bonus.
Where does a collector trade or sell
inventory for liquidity?
For a while people would buy and sell
whisky on eBay, skirting the rules by
calling them collectables, valued for the
bottle with the contents being considered
incidental. eBay has shut these auctions
August 2017
down. While full-service auction houses like Christies, Bonhams and Skinner
auction whisky, there are dedicated whisky
auction houses including Scotch Whisky
Auctions, Whisky Auctioneer, and
How does whisky need to be
Unlike wine, which continues to age in
the bottle and requires humidity and tem-
perature control, whisky is very sturdy, and
my only suggestion is to store it upright.
Over time, light and heat will cause the
whisky to break down, which is why many
whiskies are bottled in green or brown
What are the must-attend events for
whisky aficionados?
I’m still overwhelmed by the wall of whiskies at some retailers. Whisky events held
in larger cities such as Whisky Live provide
the opportunity to taste from hundreds of
expressions and to meet master distillers.
How many bottles are in your
I have well over 1,000 bottles in my personal collection (left), consisting of more
than 900 expressions with more than 600
bottles open.
What makes a whisky collectible
with the opportunity to appreciate in
value? What factors do you look for?
Why some whiskies appreciate in value
is mainly simple supply and demand. Some
distilleries are mothballed, closed or
demolished, so the current supply will only
decrease as bottles get consumed. Some
single cask and limited edition bottles appreciate due to rarity. Some bottles, such
as Macallan 18, have regular price increases and continue to appreciate over time
like Rolex watches. I watch the prices of
bottles that I like to drink and will stock up
on bottles if I think there’s a price increase
on the horizon.
Tell us about some of your
purchases which have appreciated
the most?
I prefer scotch to bourbon, but when I
drink bourbon I prefer A. H. Hirsch Reserve
16, old Willett Ryes and bourbons more
M o d e r nTr a d e r. c o m
“Ardbeg 1977 and Macallan
Gran Reserva 18, which sold for
$80 and $180 respectively, now
sell for 10 times that at auction.”
than 20 years old. These bottles were
more than $100, 10 years ago, before the
bourbon craze, but now are incredibly hard
to find and only available on the secondary
market for $1,500 to $2,000 or more.
Macallan and Ardbeg are two of my
favorite distilleries, but as supply has
outstripped demand, some of their older
bottling from 15 years ago like the Ardbeg
1977 and Macallan Gran Reserva 18,
which sold for $80 and $180 respectively,
now sell for 10 times that at auction.
What are the primary trends that
investors and collectors should
be aware of that are likely to drive
appreciation going forward?
Ideally, whisky should be bought with the
intention of drinking, with any appreciation
as a bonus. That said, shuttered distilleries and older expressions from when
distilleries had their own floor maltings and
direct fired stills will continue to appreciate
as these bottles become even rarer.
Where do we follow you for recommendations and tasting notes?
Aside from my books and published
articles, I frequently post about my tastings
on social media. I’m Scotchguy on Twitter
and Instagram and on
Of your best bets here (right), which
pick is most likely to appreciate
I could see the Macallan increasing in
value once people discover how good it is,
about the same time supply starts running out. This is what happened with The
Macallan Cask Strength, which debuted at
$50 and now sells for over $500 for those
original batches with the red label.
— Interviewed by Jeff Joseph
M o d e r nTr a d e r. c o m
The Scotch Guy’s
6 bottles to buy now
Heaven Hill 10, 100 Proof Bottled-In-Bond: Only available in Kentucky
and recently discontinued at $12, it’s perhaps the best value in bourbon, so grab what
you can find. An Everyman’s bourbon with lots of vanilla, butterscotch, honey, oak and
bing cherry. Elegant enough to fill your crystal decanter, without having to watch how
big a pour your friends take! I’d put this up against any bourbon under $30.
Cutty Sark Prohibition: Besides the cool bottle and higher alcohol content
(100 proof), this $30 bottle is not your father’s Cutty Sark. It contains a higher
percentage of sherry matured whiskies and single malts from Glenrothes, Tamdhu,
Bunnahabhain, Highland Park and Macallan, amongst others. This has become my
top pick for value blended scotch at $30.
Smooth Ambler 10 Single Barrels: This 10-year-old cask strength is about
as good as you can get for $50 in today’s bourbon market. Typically big, full bodied,
rich and spicy, it also has notes of dark spice, chocolate and vanilla.
Aberlour A’Bunadh is a high octane sherry bomb with cloves, tobacco, baked
apples, cinnamon and a bit of lacquer; this is a monster of a dram I could sip all
night. It can still be found for under $70, but is quickly approaching $100 in parts of
the country. Now released in batches, it hovers around 120 proof.
Glendronach 15 Revival 46%: A Christmas desert dram overflowing with dark
chocolate covered oranges, tobacco, cloves, dark vanilla and cinnamon. Every nose
and sip reveals another layer of flavor complexity leading to a long finish. Superb!
Glendronach was closed for six years, resulting in a warehouse gap and causing
some bottles from 2015 to contain 20-year-old juice. The 15 was discontinued until
the warehouse can catch up, but it can still be found for less than $100 and goes
for upwards of $150 on the secondary market.
Macallan Ed. No. 2: This limited, non-chill filtered release is not to be missed if
you’re a Macallan fan. The nose leaps out of the glass with traditional sherried notes
of cardamom, vanilla, pipe tobacco, oranges and figs. The palate is a bit hot, but
delivers so much flavor, which extends to a lengthy, dry finish. While not as complex
as the Macallan 18, it has a great mouthfeel and brings back fond memories of the
discontinued Macallan Cask Strength. It retails for $90 to $100 a bottle.
— Williams Meyers, The Scotch Guy
Issue 534
Spirited recipes & reviews from our resident mixologist
The last
great malts
Q By: Hillary Choo
The “Last Great Malts” saw their grand
unveiling in 2014 and John Dewar & Sons
Fine Whisky Emporium has since been rolling
out a portfolio of award winning malts, with
the newest and most prestigious award given
to Craigellachie 31, named World’s Best Single Malt by the World Whiskies Awards. The
collection is a release of new expressions
and never-before-released single malts. With
the height of demand for single malts, are
now seeing their opportunity to shine.
Here’s a look at the five labels and what
makes each unique.
Aberfeldy – 12-21 years - 40% ABV
The primary single malt for the Dewar’s
blend is Aberfeldy. The family built the
distillery in 1896 to keep the blend consistent and has been in the house of Dewar’s
ever since. Vanilla and toffee round out the
profile making it a great choice for an entry
level whisky drinker looking for an easy
drinking, honeyed sweet style of whisky.
Craigellachie – 12-31 years - 46% ABV
A meaty, hearty style of single malt, Craigellachie lends Dewar’s some of its bolder
character. Craigellachie is a great choice
for the adventurous Scotch drinker. What
really makes it shine is its use of worm
tubs, or long copper condensers used to
cool the whisky off the still. This ancient
and very delicate process actually touches less copper. With the lack of copper
interaction, these big flavors give this malt a
bold, chewy flavor that is unique and highly
sought after. Think of a struck match aroma,
chewy, with a studded apple finish.
The Deveron – 12-16 years - 46% ABV
This Speyside malt is distilled in the MacDuff Distillery, the northeastern-most distillery in all of Scotland. Located right on the
sea in a little fishing town and thus the bot52
August 2017
tle, created in the style of green sea glass is
a nod toward its nautical roots. The whisky
shines with notes of green apple. Classically
known as the heart of the Lawson’s blend,
it is a prized single malt and is seeing its
first proprietary bottling. A classic Speyside
style, The Devron is fruity in character but
would still pair well with a cigar. The 46%
For generations,
these single malts
have been resting in
casks to mature to
ABV is a lighter style, yet still rich in flavor.
Aultmore – 12-25 years - 40% ABV
Founded in 1897, the Aultmore of the
Foggy Moss is a distillery set in the middle of nowhere in the mysterious Speyside area once famous for illicit distilling.
Aged only in American oak, the color is a
beautiful pale straw with a flavor profile to
match. Lightly floral, touch of vegetal with
grassy cereal notes, this malt is pleasant and noticeably different than classic
Speyside malts.
Royal Brackla – 12-21 years - 40%
The oldest of the collection, Royal Brackla
dates back to 1812. Originally the favorite
whisky of King William and one of the oldest
distilleries in all of Scotland. Royal Brackla is
also famous for having one of the longest fermentation times, resulting in a sweeter, fruitier expression. The whisky also sees Oloroso
sherry casks finishing the liquid for about 3 to
4 months and adding notes of raisins, dates
and pears with a touch of spice.
Hillary Choo is an award-winning mixol-
John Dewar and Sons - White Label, 12-18 & Signature
With a history as rich and deep as its flavor, John Dewar was one of the very first to
purposefully blend and bottle single malt whiskies together, launching his line of blended
Scotch whiskies in 1846. In creating the Dewar’s blends, up to 40 single malts come
together to create the signature profile. Dewar’s is also famous for being one of only a
few whisky houses that double age their whisky. After blending the single malts, Dewar’s
is then rested for a period of a few months to marry the single malts together for better
harmony. Also one of the only whisky distilleries in Scotland to employ a female Master
Blender. Stephanie MacLeod is famed for creating the Dewar’s 15-year blend.
M o d e r nTr a d e r. c o m
to paddles
A former options trader seeks to
corner the table tennis trade
Q By: Tamarah Webb
Table tennis is one of the fastest growing
activities in America and Robert Blackwell,
Jr., a Chicagoan, former options trader and
entrepreneur is capitalizing on its growth.
“It’s a sport and a game,” says Blackwell
founder of Killerspin, a high-end table tennis equipment manufacturer. After stints as
an options trader, working at IBM and in the
diamond business, Blackwell seems to have found
his niche in, of all things,
table tennis (or Ping-Pong).
Blackwell, an options
trader during the 1980s who
focused on technical analysis, says he developed an
ability to spot market tops.
He was on the trading floor
during the crash of 1987,
and in 2000, Blackwell was
concerned the stock market
could be nearing another
significant turning point.
While it is an often repeated
cliché, his fears of a market
top were confirmed when
a taxi driver gave him some
stock advice.
Thinking the market had
peaked; Blackwell decided
to diversify his business
portfolio into the public
sector and sponsored
the Chicago Ping Pong
Festival. Chicago put out 300 table tennis
tables across Chicago and wherever the
tables were, there were lines of people
waiting to play.
Table tennis has clearly moved beyond
the fun game you may have played in
your neighbors’ basement, into a cultural
trend among young millennials who are
joining leagues and turning it into a social
“People need natural experiences and
table tennis is an accessible sport that is
a part of American culture as an activity,”
says Blackwell. “Table tennis is trending
because it bonds people together.”
“There are two big trends in the
world, the digitization of everything and
the rebellion against the digitization of
everything,” says Blackwell, who believes
people need to “unplug” themselves and
do something fun, something physical.
Last year the company had its first annual
World “UnPlugNPlay Day,” presenting a
luxury Killerspin Revolution SVR Bianco
table ($4,500) to Pope Francis with his
insignia on it at the Vatican.
Killerspin plays a major role in promoting
table tennis on mainstream platforms like
ESPN, Fox Sports and the Tennis channel,
and works with professional athletes, like
“There are two big trends in the world, the
digitization of everything and the rebellion
against the digitization of everything.”
August 2017
— Robert Blackwell Jr.
Revolution SVR
Bianco table
M o d e r nTr a d e r. c o m
BiBa Golic
at Killerspin
sponsored event
company Technavio, table tennis is most
popular in the Asia-Pacific region with more
than 350 million players in 2015. The sport
is growing as a recreational pastime in the
United States, with 17 million players in
2015, as compared to less than 15 million
in 2006. Even in the UK, more than two
million people had played recreational table
tennis in 2015.
The increasing popularity of table tennis
as a recreational sport in many developed
countries like the United States portends
a boost in sales of the equipment market,
which is expected to reach $649.6 million
by 2020, a compound annual growth rate
of more than 2%.
Killerspin luxury products have been
featured in high-profile TV programs and
professional table tennis player BiBa Golic
is the product developer for Killerspin.
She’s appeared in ESPN The Magazine’s
Body Issue.
Killerspin has been manufacturing table tennis equipment since
2002. Its signature table, the Kill1. Table tennis tables have become a staple
erspin Revolution SVR ($2,700) is
recreational and cultural component at
self-titled as the No. 1 selling table
technology companies.
tennis table in the world, and has
2. The table tennis paddle market is expected to
been featured in numerous movies,
reach $380.8 million by 2020, according to
magazines and television commerTechnavio.
cials including a spot during Super
3. The table tennis ball market was the second
Bowl XLIX.
largest segment in the market in 2015 with a
The company recreated all the
market share of almost 20%. Its major use is no
longer beer pong!
imagery around table tennis; from
the way its events are staged, the
4. The table tennis table segment accounted for a
market share of over 17% in 2015.
clothes people wear and equipment to create the luxury category
5. In 1926, London held the first official World
Championships, and in 1933, the United States
and media space for table tennis.
Table Tennis Association (USATT) was formed.
Killerspin is branded to promote the
entire lifestyle package surrounding
! this emerging trend, not just as a
#" $
seller of equipment.
The company has hosted some
of the largest table tennis events ever held
economic behemoth, China.
in the United States, including the Chicago
China has been the most successful
International Table Tennis Festival, Extreme
nation in Olympic table tennis, winning
Table Tennis Championship and others. Kill53 medals. Since 1992, Chinese players
erspin’s goal is to have a Killerspin paddle in
have won at least one medal in every event.
every hand. They are more than
According to the global market research
Growth factors:
baseball and hockey players, to improve
their hand-eye coordination.
Obviously you don’t have to be a world
class athlete to be good at table tennis, but
Killerspin welcomes the exposure.
Perhaps an even bigger factor, and
opportunity, is that table tennis is the
national sport of the world’s faster growing
M o d e r nTr a d e r. c o m
Issue 534
Book Value
and building methods to measure carbon offset protocols.
Sandor had already been dubbed by many as the Father of Finan“How I Saw It: Analysis
cial futures for his pioneering work developing interest rate futures
as Chief Economist at the Chicago Board of Trade when he turned
and Commentary on
attention to environmental markets. During this period Sandor
Environmental Finance
building the Chicago Climate Exchange (CCX), which led to
By Richard Sandor
Climate Exchange Plc., an international climate exchange he would
sell to Intercontinental Exchange for £395 ($607 million) in 2010.
World Scientific Publishing Inc. 2017
Hard Cover $59.95
Much of the work was dependent on coordination with internationKindle $67
al group to set up various protocols to measure and reduce carbon.
In our anti-globalist America of 2017, it seems out of step. But
Greenhouse Gasses (GHG) do not recognize borders, so any effort
“How I saw it” is a collection of articles
Richard Sandor wrote from 1999-2005
to affect a reduction in GHG must be international.
for Environmental Finance magazine. It
It is also instructive as it goes back to a period of time when the
documents the hard work and research required to build environnotion of global warming was more accepted. There are political
mental markets. This involved convincing corporate and government struggles cited — that includes when the George W. Bush Adminisinterests on a global scale to agree to a carbon reduction scheme
tration rejected the Kyoto Protocol — but the main fight was over mandatory vs. volunteer reductions, not whether
global warming existed, as it is today.
Music Musings & Reviews
While the idea of reading 12- to 18-yearNOTABLE NEW RELEASES
old articles on the environment may seem
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it is instructive. The book is a road
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Big Bad Luv
map highlighting the difficulty of building a
global market for an entirely new asset class.
A Northern Star, A Lord Huron, Matt Pond PA, Great Lake
Mappe Of
Perfect Stone
It is also instructive to be reminded that the
The Mavericks
Brand New Day
Lyle Lovett, Joe Ely, Dwight Yoakam
idea of cap and trade was not some snowflake
idea by a tree hugger, but a proven program
Jeff Tweedy
Together At Last
Wilco, Golden Smog, Tweedy
tested in real world dynamics, successfully
meeting its Sulfur Dioxide (the main cause for
Skyway Man - Seen Comin’ from a Mighty Eye
Average – 88
acid rain) emission reduction targets on time.
Standard Deviation – 6.3
The success of the cap and trade program
targeting acid rain, which Sandor was a part
Alternate and futuristic universes inhabit the
of, is what led Sandor and others to create
landscapes of Skyway Man’s debut concept album.
markets — and brought in funding for those
Tales of living on the ocean floor in the year 9999,
efforts — to target carbon reduction.
with hopes of returning to land soon, burning skies
With cap and trade legislation being
and morbid deaths of families crushed in cars by
defeated in the Obama Administration and
tanks litter the landscapes of opaque tales. Almost
the Trump Administration pulling out of the
every song describes visions in the sky, which is
Paris Agreement, one might be tempted to
where the band’s name may have come from. Front
declare many of these efforts a failure. This
man and sound visionary James Wallace describes
would be a mistake. This book highlights
his sound as “folk futurism,” an apt name given
where environmental markets started.
the sprawling non-traditional song structures. The sounds and lyrics evoke
That there is a Paris Agreement signed
expansive futuristic cinematic landscapes shot in 2.39:1. Keyboards and
by all but two (now three) nations is a
horns work together to lay down a base for Wallace’s voice, which evokes Luna
testament to that. And Sandor once again
and Galaxie 500’s Dean Wareham and Matthew E White. Drums syncopate at
proves prescient. In 2005 he argued that
times and lay back at others, allowing Wallace to soar. More than 20 musicians
individual states working together will lead
contributed to the album, which is apparent with a sound as expansive as
the struggle to reduce GHG emissions,
the skies and alternate worlds of which he sings, punctuated by background
citing 28 U.S. states that already had set
vocals both supporting and answering Wallace. Skyway man has managed an
up reduction regimes. The reaction to the
incredibly ambitious vision in a package that works as music you could make
recent Paris announcement proves he was
— J Burr Vannatta @JVevanston
out to and get lost in.
August 2017
M o d e r nTr a d e r. c o m
The Pit
The Pit: Photographic Portrait of the
Chicago Trading Floor
By Jonathan Hoenig
CapitalistPig Publication, $30.00
There is some irony that The Pit, a
newly released photographic novella
from “Capitalist Pig” Jonathan Hoenig
so reverently pays homage to the 20th
century’s ultimate symbol of capitalism
when you consider that its inspiration is the
fiction of a turn-of-the-century, anti-capitalist
writer obsessed with corporate greed.
Hoenig’s effort is inspired by the
eponymous 1903 Frank Norris book, The Pit:
A story of Chicago, about a businessman
who casually begins speculating, only to
be swept in to the Chicago Board of Trade
wheat pit and ultimately ruined by the
markets — a fascination “worse than liquor,
worse than morphine.”
Included alongside selected passages
from the Norris classic lush photos of the
trading floor’s most thrilling era, along with
an epilogue documenting its final years.
The Pit’s historical perspective and
anxious prose, along with the archival
photos, warrants a place alongside the
likes of American author Edwin Lefèvre’s
Reminiscences of a Stock Operator.
M o d e r nTr a d e r. c o m
“Oh, the fine, promising
manly young men I’ve seen
wrecked-absolutely and
hopelessly wrecked and
ruined by speculation! It’s
as easy to get into as going
across the street. They make
$300, $500, even $1,000
sometimes in a couple of
hours, without so much as
raising a finger. Think what
that means to a boy of 25
who’s doing clerk work at
$75 a month? It would take
him 10 years to save $1,000,
and here he’s made it in a
single morning. Think you can
keep him out of speculation
then? First thing you know
he’s thrown up his honest,
humdrum position--oh, I’ve
seen it hundreds of times-and takes to hanging round
the customers’ rooms down
there on La Salle Street, and
he makes a little, and makes a little more,
and finally he is so far in that he can’t pull
out, and then some billionaire fellow, who
has the market in the palm of his hand,
tightens one finger, and our young man
is ruined. I tell you the fascination of this
Pit gambling is something no one who
hasn’t experienced it can have the faintest
conception of. I believe it’s worse than
liquor, worse the morphine. Once you
get into it, it grips you and draws you and
draws you, and the nearer you get to the
end the easier it seems to win, till all of a
— Excerpted from The Pit,
sampling the 1903 Frank Norris best-seller
The Pit: A Story of Chicago
Issue 534
Bloomberg Launchpad
Bloomberg Launchpad
and News
3 CWG Stormvista WX
weather, real time tracker
4 Ballymena marketing deck
5 Green coffee exchange
6 Lucky alien from Varhina,
7 Proprietary
worksheet and models
8 Cocoa beans exchange
lot sample
Oliver Kinsey,
Lead Portfolio Manager,
Ballymena Advisors LLC
$105 million
Discretionary commodity fund
Location New York
Do MT readers care about Trump’s taxes?
An issue during the 2016 Presidential Campaign was whether
Donald Trump would release his past tax returns. It has become a
routine part of modern presidential elections as every major party
nominee has released some tax returns dating back to President
Nixon (with the exception of Gerald Ford). Trump actually had
pledged to release his tax returns at some point in the future.
The reason he gave for not releasing them was that he was under
an IRS audit, however that did not prevent Nixon from releasing his
Is this a problem for Trump? Here is what our readers think.
What is your reaction to the
fact that it does not appear
likely that President Trump
will be releasing his personal
tax returns anytime in the
near future?
I am
I am
ok with it
I am
I am
*The survey had 230 responses and a 6% margin of error
August 2017
M o d e r nTr a d e r. c o m
Essential, time-tested trading strategies
Despite a recent dive in prices,
fundamentals should keep beans
struggling for some time.
Options Strategies
for Trading
Soybeans, Record
Yield or Not
Q By: James Cordier
reverse is true for the put seller. You don’t need a bull market to
Buy low and sell high: It’s the cornerstone philosophy of
make money as a put seller, you just need there not to be a crash.
trading and investing that has been pounded into us since we all
looked at our first price chart.
For put selling, you seek out markets that are
least likely to crash; for call sellers, you seek out
New converts to commodities, however, learn
markets least likely to experience a sharp rally.
that selling high and buying back lower can be just
Which brings us to the soybean market. The
as easy – and just as, if not more, effective in these
The Sidewinder Trading
novice may look at a soybean chart and think “this
versatile markets.
Method (Williams)
market has just taken a nose dive (see “Beans
However, options offer strategies where
take a hit,” page 60). Why would I want to sell it
traders can be less precise in their bets and
Trading Head & Shoulder
now?” An experienced option seller may look at
still earn profits. Option selling does not require
Reversals (Duddella)
it and think, “This market has sold off for some
a trader to necessarily buy low and sell high or
Reading Between the
very strong fundamental reasons and is unlikely to
vice versa. We stopped caring about buying
Lines: Trading with
recover any time soon. It could be a stellar market
low and selling high. We don’t really care if a
Envelopes (Bhandari)
for collecting call premium.”
market is at a high or a low.
Predictive Market
Soybean prices have sold off sharply this
Thus, while many of the articles you read
Modeling in R Language
As with most significant price moves,
discuss markets in which there is a “bullish” or
there are some powerful fundamentals behind
“bearish” fundamental outlook – whether the price
this downtrend. Whether prices continue to trend
of that commodity moves up or down is technically
lower remains to be seen. However, for markets like
irrelevant. If you are selling a call because you
this to rally, it typically needs some good reasons. At this time,
believe the market is going down, you’re missing the point.
the soybean market has few. Thus, despite the recent selloff, it
It doesn’t have to go down to make money for a call seller. It
becomes an ideal candidate for call selling.
just has to not go way, way up. There is a big difference there. The
M o d e r nTr a d e r. c o m
Issue 534
“2016-17 global soybean ending stocks
will hit a record of 90.14 million metric
tons, while 2017/18 stocks are expected
to be the second highest on record.”
Front month soybeans dropped roughly 15% in the early part of 2017.
Source: eSignal
Why Did Prices Fall?
the crop is in the ground.
Once planting is completed, it is
not uncommon to see anxiety exit the
market, and prices have often responded
accordingly as the seasonal averages
show (see “Soybean seasonals,” below).
U.S. Planting Moves Ahead
Soybean prices declined this spring
This year, however, has seen quite the oplargely as a result of a second mammoth
posite. Why? On top of the global supply
year of South American production.
glut, U.S. farmers are planting a record
Because of this, 2016-17 global soybean
89.5 million acres of soybeans this year
ending stocks will hit a record of 90.14
(see “Record planting on pace,” page 62).
million metric tons, while
There has been little
2017-18 stocks are expected
regarding planting
to be the second highest on
far in U.S.
The main November soybean contract tends to reach its
high shortly after the crop is completely in the ground in late
record. The onset of Brazilian
growing regions. As of the
spring and progressively loses value into harvest.
and Argentine harvests in
latest U.S. Department of
Source: Moore Research Group
March served as a catalyst
Agriculture (USDA) crop
for selling, and bean prices
progress report (May 10),
responded in turn. World
U.S. soybeans are 32%
Soybean Ending Stocks will
planted, right where they
hit a record for the 2016-17
should be for this time of year
crop year and are expected
based on a 20-year average.
to remain burdensome in
The result of this increased
acreage? Assuming an avThe global supply glut
erage yield of 48 bushel per
was enough to usurp what
acre, 2017/18 U.S. soybean
is generally a supportive
production would hit 4.255
time for U.S. soybean
billion bushel – with ending
prices. U.S. planting season
stocks hitting 480 million
has historically brought at
bushel – the highest in over
least some form of weather
a decade. Stocks to usage
premium into the market –
at 11.3% would also be the
firming prices at least until
highest since 2006 (see
August 2017
M o d e r nTr a d e r. c o m
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“With global ending stocks at
record levels, 2017 U.S. planted
acreage at record levels and a
strong seasonal tendency, soybean
prices will have a hard time staging
any kind of sustained rally.”
U.S. soybean planted acreage will hit a new record
in 2017, significantly higher than the previous
record, and planting is on pace.
Source: The Hightower Report
Source: The Hightower Report
“That’s a lot of beans,” above).
With U.S. production contributing to
overall global supply woes, the price
picture does not look fundamentally
bullish for soybeans. Sporadic rallies can
happen in any market and it would not
be surprising to see a rally off of weather
news as the U.S. summer progresses.
However, the burdensome global supply
picture should keep a lid on any rallies and
prevent them from getting out of hand.
The risk of a breakout move is much
more likely on the downside. The USDA
is assuming an average yield of 48 bushel
per acre. However, 2016’s crop yielded
a whopping 52 bushel per acre. While
USDA credits ideal weather for the robust
yield, genetic engineering and more
efficient fertilization techniques played a
roll and will make 50+ bushel yields the
norm in the coming years.
August 2017
The 2017/18 U.S. soybean ending stocks are projected to
hit the highest levels in more than a decade.
Should 2017 yields hit last year’s levels,
U.S. ending stocks could soar well above
500 million bushels – further exacerbating
the oversupply issues.
With global ending stocks at record
levels, 2017 U.S. planted acreage at
record levels, a healthy start to U.S.
planting and a strong seasonal tendency
to the downside in coming months,
soybean prices will have a hard time
staging any kind of sustained rally in the
months ahead.
Despite the recent selloff in bean
prices, we feel that call sales will continue to be a high yielding cash cow for
investors this month. We will continue to
position managed accounts in this market
as the situation dictates. For individual
traders, we suggest considering selling
the November 11.60 calls for premiums of
$500 or better. In “Beans take a hit,” you
can see any rally would need to take out
several resistance levels before breaching
this level.
The market reached oversold territory
in April and rallies are possible this
summer. Such rallies can be treated as
opportunities for selling additional calls at
strikes of 12.00 or above.
If the 2017 crop comes in at even
average USDA yield projections, prices
could fall well below $9.00 by harvest.
But perhaps more importantly, for traders
considering selling call instead of simply
shorting beans, a marginally weaker yield
won’t be able to overcome record stocks
and produce beans anywhere near the
James Cordier is the author of The
Complete Guide to Options Selling
and president of
M o d e r nTr a d e r. c o m
While the trend may be your friend,
markets spend most of the time rangebound so you need to find a way to
profit in those scenarios.
three market conditions in play at any given
time: bullish, bearish and range bound.
Because the markets only trend a small
portion of the time, the majority of the
time it is trading sideways (or in a range).
This phenomenon occurs because neither
bulls nor bears have seized control of the
market to force it into a trend, so it remains
in a trading range. Trading ranges form
between two price levels — support and
resistance — which trade back and forth.
Smart and quick traders can profit in rangebound markets by buying tests of support
and selling tests of resistance; but there
Q By: Billy Williams
are dangers from support and resistance
professionals know that a novice needs to
Successful trend trading takes a combination of faith, iron
learn before jumping in.
discipline and a solid position size strategy to stay the course to
The first of which is that there are no sure things in the market,
avoid risk of ruin.
even with something as clear-cut as support and resistance trading.
This faith can be tested many times because the markets only
Seminar promoters and market technicians paint a rosy picture
trend around 15% to 20% of the time. This can cause stress and
sleepless nights while waiting for the markets’ next big opportunity. of trading off these price levels to set off on the road to profitability.
But, if you’ve ever actually attempted to do it, then you realize it’s
But, there is potentially a greater opportunity for a trade in the
not that black-and-white.
80% to 85% of the time when the market is trading sideways.
Price can trade below a support level and keep trading lower
A reliable trading method attempts to adapt to the environment
just long enough to hit everyone’s stop loss orders before trending
and attack from the most advantageous position. For trading, you
back higher.
have to know the current market conditions in place since that will
Resistance levels may seem solid, but the market has an overall
dictate the most advantageous position to profit from. There are
bullish bias, which can make shorting
the market dangerous for individual
Price action in a sideways market
On April 17 (Point B), the Dow tested the March 27 low (Point A), confirming a
support level. When price traded beyond Bollinger Band, the set-up was initiated
can resemble the erratic motion of the
and then was triggered the following day when price closed above the high of the
sidewinder snake, which travels in an
previous bar.
irregular sideways motion as it makes
its way through the desert terrain. This
makes price travel in a hypnotic pattern
but hard to pinpoint where one price
movement ends and another begins.
This is because market volatility can
ebb and flow at any given time and
make static price levels unreliable.
Support and resistance should then be
considered a guideline, not the rule.
Once you begin to understand
that part of the equation, it’s a matter
of finding the rest of the formula to
M o d e r nTr a d e r. c o m
Issue 534
On Feb. 2, 2017 Netflix (NFLX) developed a significant low (Point A) before
resuming its upward movement. Price began to wander then traded down to the
$139 support level on March 3 (Point B) and beyond the lower Bollinger Band.
This created the conditions for a trade setup. The following day, price closed
above the previous high of the price bar triggering an entry of $141.94.
Source: eSignal
“The biggest edge
that you can
have is to find a
trading method
that matches your
Finding Your Niche
Traders of all experience levels actively
seek any edge that will take their performance to a higher level. Looking to a heavily marketed mechanical trading system,
buying the newly released trading guide by
a famous personality, or trying to match the
trades of your favorite hedge fund manager,
misses the point entirely.
All of these things have their place but
the biggest edge that you can have is
to find a trading method that matches
your personality. There is a reason that a
Warren Buffett or Paul Tudor Jones can
sit back calmly and make trade decisions
that would crush normal traders. They both
found a method that suits their personal set
of beliefs about the market and matches
their own unique personality.
If you lack either of those traits then the
odds of you being able to maintain discipline is going to be slim to none. Discipline
After a successful Sidewinder Method entry in March, another setup
appeared on April 19, but NFLX failed to trigger a buy because NFLX did not
settle above the April 19 high on April 20.
Source: eSignal
is the glue that holds together the foundation of your trading approach.
To maintain trade discipline in trading
support and resistance levels you need to
be more comfortable with short- to intermediate-term time frames. You also have to be
comfortable with putting no more than 2%
of your capital at risk. Finally, you need to
have the ability to act at the right time when
putting a position in play and taking profits
at the price target.
If those are guidelines that are in-line
with your personality and don’t conflict
with any belief you have about trading the
markets, then you already have an edge in
using this trading style.
Now, you just need a reliable rules-based
Know Market Conditions
It is important to define when a market
enters a sideways period. On March 27, the
Dow Jones Index set a low at 20,412 that
was later tested on April 17. This support
level was confirmed at the same time price
traded beyond the lower Bollinger Band
creating the condition for the sidewinder
setup (see “The set-up,” page 63). The
following day, price closed above the high
of the previous bar signaling an entry.
During the next three days, price traded up
to and beyond the upper Bollinger Band for
August 2017
M o d e r nTr a d e r. c o m
“Bollinger Bands are designed to
give you a visual reference on an
underlying security’s volatility.”
a potential gain of 331 points.
When Netflix (NFLX) tested support
at $139 and dropped below the lower
Bollinger Band on March 3, the Sidewinder
Method was queued up and was triggered
the following day for an entry of $141.94
(see “Sidewinder launch,” left).
The Sidewinder Trading
You now understand that trading between
price levels isn’t a sure thing and that there
takes a certain amount of finesse as well as
the right temperament.
But, if you have those pieces of the
puzzle then the remaining pieces are in the
form of a reliable rules-based approach that
gives you an edge.
The trading approach has to take into account certain technical considerations like
identifying support and resistance levels
but also volatility and how it reacts when
trading at extremes.
The Sidewinder Trading Method combines
the best elements of trading in a price
range while integrating certain realities
of market volatility. This combination is
designed to increase the odds in your favor
by giving you a distinct edge in a sideways
The Setup Rules:
1. Use daily price data
2. Overlay Bollinger Bands on the daily
price chart
3. The underlying security must be
trading sideways between support
and resistance levels
4. For long entries, wait for the stock
to trade below support while trading
beyond the edge of the lower
Bollinger Band
5. The setup occurs when a price bar
establishes a significant low
6. The entry is triggered when a
following price bar closes above
the high of the price bar that
established the significant price low
M o d e r nTr a d e r. c o m
When price is trading in a range its
volatility begins to contract, but when
it trades beyond its established price
levels then volatility expands. Bollinger
Bands are designed to give you a visual
reference on an underlying security’s
volatility. When price trades beyond the
limits of the Bollinger Bands then the
underlying security is trading at extremes.
But, at some point, volatility reverts to
its mean, which is basically like saying,
“What goes up must come down, and
vice versa.” It’s like a rubber band that
gets stretched too far but then snaps
back into place.
So, when price trades through its
established support/resistance levels
while also trading beyond the limits
of the Bollinger Bands, it creates an
opportunity for you. You gain an edge
by waiting for price to revert back to its
mean like the rubber band snapping back
after being stretched too far.
“Riding the wave,” (left) shows that
seven days after the initial setup, NFLX
reached the upper Bollinger Band
signaling an exit. After trading in a range,
on April 19, NFLX retested support and
breached the Bollinger Band creating
another setup. However, the following
day NFLX failed to close above the setup
day high.
Instead, an inside bar formed, which
could or could not have been traded
depending on the skill of the trader. If you
followed the rules then you would pass
but lose out on a potential 11-point gain.
Unfortunately, this happens in trading
and you have to be mentally prepared
to move on to the next trade without
dwelling over missed opportunities and
focus on the long-term.
the method works well with futures or
forex trades, there are rules in place to
discourage shorting stocks in the market
like the “uptick” rule. You literally have
to wait for price to go up before you can
gain an entry and ride the stock down.
This dulls some of the edge you gain
with this method because there is a
chance that price could continue to go
up without ever going down. Again, this
fact takes away part of the edge you gain.
You could use options with this method
but you need to be mindful that volatility
expansions can temporarily increase an
option’s price.
Refining Your Edge
Use Caution Shorting
With the market trading sideways the
majority of the time you’re going to find a
lot of trade candidates with this method.
That said, you can refine it further by
sticking with stocks or securities that
trade above the 200-day simple moving
average. The moving average acts as
a trade filter to help you identify long
entries that have a stronger bias to
snapback to the upside.
Profit targets are typically the upper
Bollinger Band, but you can take partial
profits on large moves at the median
line and the rest at the upper band if you
want to reduce the chance of losing all
of your profits and getting stopped out
when a rally fades sort of your target.
Whichever profit taking strategy you
take, just be sure to limit your risk to no
more than 2% of your trade capital. In
using the Sidewinder Trading Method,
you will trade more often and see a high
probability of winning trades and you
won’t overexpose yourself to risk of ruin.
It’s a good way to trade markets that are
not trending, which occurs more often
than not.
You can follow the same guidelines
for shorting an underlying security by
reversing the last three rules, but you
should be cautious. While reversing
Billy Williams is a 20-year
veteran trader and publisher of
Issue 534
Applying classic chart patterns to
current trading opportunities
Trading Head
and Shoulders
Q By: Suri Duddella
After Donald Trump’s victory in the
U.S. Presidential election in November
2016, global stock markets have performed
significantly well. Financial companies led
buoyant markets to perform well across the
globe. U.S. financial corporations and the
banking sector outperformed many other
sectors on election promises of lower taxes
and less regulation.
“Head and
shoulders patterns
reverse prior
uptrends and
into a bearish
downtrend from its
As election promises started to fade
and reality sets in, financial institutions,
funds and the general public realized
it may be difficult to implement all the
promised financial reforms, resulting
in under-performance in the financial
sectors. The technical representation of
such a scenario is often revealed through
a head and shoulders pattern. Several
financial companies and exchange-traded
funds’ performance in the second quarter
reveal an emerging reversal patterns in the
financial sector (see “Breakout,” page 58).
Head & Shoulders Pattern
One of the most popular chart patterns in
market analysis is the Head and Shoulders
Pattern (H&S). The H&S pattern forms
near market tops in an established
sideways to up trending or bullish market.
The H&S patterns are reversal patterns
as they reverse its prior uptrend and
follow a bearish or downtrend from its
breakdown. These patterns are signified
by three successive peaks resembling two
shoulders on both sides and a head in the
middle. The head is the largest of the three
peaks (see “The basics of H&S,” below).
Spotting H&S: The “head” and
“shoulders” in H&S patterns are formed
This chart shows a classic long-term head-and-shoulders reversal pattern in Qihoo
360 Technology (QIHU), a Chinese Internet company that has since been acquired.
A short was initiated in September 2014; it reached our first profit target in 2015.
Short below neckline
Stop mid of neckline and right shoulder
Targets: 62% to 79% and 127% to 162% height
Reversal pattern, prior up trend
Entry only if close above neckline
Price retest of neckline for another
August 2017
M o d e r nTr a d e r. c o m
by three successive peaks. The ratio of
the height of the head to the largest of the
shoulders height should be less than 0.78.
The size of the head is measured as the
vertical distance from the neckline to the
peak of the head.
Neckline: The neckline is formed by
connecting the lows of shoulders and the
lows of the head in the H&S pattern. These
reaction lows are formed to define the
pattern structure. The neckline can be up,
down or a horizontal sloped line. Upward
sloping neckline H&S patterns tend to be
more bearish than downward sloping H&S
patterns. Patterns with horizontal necklines
tend produce better results.
Volume: Volume plays a significant role
in pattern structure and its validation of
trading rules. Price breakouts from the
neckline must be supported by expanding
volume for a valid short entry. Volume buildup in the left shoulder is usually higher than
the volume in right shoulder. During the
head formation (bottom), the volume in the
first half of the head may be higher than
volume in the second-half. An increased
volume above neckline for a breakout
signifies completion of the pattern.
enter a short trade below the breakout
bar’s low.
Stops: Place your initial stop above the
middle of the neckline and right shoulder.
Place a final stop above the high of the
Targets: Targets are projected from the
neckline level. Measure the height of the
head and use Fibonacci ratios to compute
targets. The first target range is 62% to 79%
of the height of the head and second target
range is 127% to 162% below the neckline.
As mentioned in our introduction, several
financial sector listings were ripe for a
H&S reversal as initial bullish reaction to
the 2016 election begins to wane. “Stocks
to watch” (below) shows emerging H&S
patterns (as of May 22) in several key
financial stocks and ETFs. Most of these
H&S patterns are trading near the neckline
and need to close below the neckline for a
clear pattern confirmation and entry signal.
The H&S pattern in Financial Select
Sector SPDR Fund (XLF) is trading above
its neckline at $22.89. A close below
$22.89 with increased volume would
confirm a short trade. After a successful
breakdown below the neckline, the first
target for an XLF short would be $21.40.
The stop should be set above the neckline.
Similarly, in JPMorgan (JPM) the neckline
is at $84.36. A close below neckline
would confirm the pattern with an initial
profit target at $78.40 with stops would be
placed above neckline.
Suri Duddella is a 20-year veteran,
patterns-based, algorithmic trader and
author of “Trade Chart Patterns Like the
Pros” at @tradepatterns
Several financial symbols are close to confirming a H&S
reversal signal as of the end of May. Once they close below the
neckline with rising volume a short can be initiated.
Source: SuriNotes
Trading the H&S Pattern
Entry: After the right-shoulder is formed
completing the pattern, if price closes
below the neckline with increased volume,
“Price breakouts
from the neckline
must be supported
by expanding
volume for a valid
short entry.”
M o d e r nTr a d e r. c o m
Issue 534
The Moving Average Envelope can
confirm trends and signal overbought/
oversold conditions. It is a valuable tool
for your technical toolbox
Between the
Trading with Envelopes
Q By: Bramesh Bhandari
The Moving Average Envelope is
an indicator that is based on a simple
or exponential moving average, and
sets bands based on a set percentage
deviation, thus creating envelopes. Moving
Average Envelopes are percentagebased envelopes set above and below
a moving average. Each envelope is
then set the same percentage above or
below the moving average. This creates
parallel bands that follow price action.
They are also known as trading bands,
moving average bands, price envelopes
and percentage envelopes. The default
setting is a 20-period simple moving
average (SMA) with envelopes set at
5%. Envelopes are a good indicator for
trend identification as well as identifying
overbought and oversold conditions.
Calculation for Moving Average Envelopes
(MAE) is very simple. Envelopes can be
deployed around any type of moving average. To calculate the envelope you have
to first choose a SMA or an exponential
moving average (EMA). SMAs weight each
data point (price) equally. EMAs put more
weight on recent prices and have less lag.
Next, select the number of time periods
for the moving average and then set the
percentage for the envelopes.
Upper Band = MA (CLOSE, P)* [ 1 +
Lower Band = MA (CLOSE, P)* [ 1 –
MA = Moving Average
P = Periods
K = Percentage change expressed as
whole number percentage.
A 20-day moving average with a 5% envelope would show the following two lines:
Upper Envelope: 20-day SMA + (20day SMA x .05)
Lower Envelope: 20-day SMA - (20-day
SMA x .05)
Interpreting Envelopes
“Like this!” (below) shows a chart of
Facebook (FB) with MAEs using a
20-period SMA with a 5% envelope.
These envelopes can then be used to
indicate two technical patterns:
1. Trend Confirmation: The envelopes
can be used to determine what the trend of
Facebook has trended higher, but within a standard
Moving Average Envelope for most of 2017.
Source: eSignal
“Moving Average
Envelopes can be
used to identify
strong moves that
signal the start of
an extended trend.”
August 2017
M o d e r nTr a d e r. c o m
the financial instrument is when the market
is trending.
2. Overbought and oversold: When
the market is range-bound, the moving
average envelope indicator can also be
used to indicate when a financial instrument
is oversold or overbought.
Trend Confirmation
Moving Average Envelopes can be used
to identify strong moves that signal the
start of an extended trend. The trick, as
always, is picking the correct parameters.
In choosing the right parameters, it often
helps to overlay a few different Moving
Average Envelopes and compare. This
takes practice, trial and error. Stock
indices and exchange traded funds
require tighter envelopes because they are
typically less volatile than individual stocks.
The goal of using moving averages or
the Moving Average Envelope is to identify
trend changes. Often, the trends are large
enough to offset the losses incurred by the
whipsaw trades, which makes this a useful
trading tool for those willing to accept a
low percentage of profitable trades.
“Searching for strength” (right) shows
Google (GOOG) with the Moving
Average Envelopes set at 20 periods and
a 2.5% envelope. Closing prices are used
because moving averages are calculated
with closing prices. Google surged above
the upper envelope on April 24, 2017, and
continued moving above this envelope.
This shows extraordinary strength. Also
note that the Moving Average Envelopes
turned up and followed the advance.
“Prescription for pain” (right) shows
Endo Pharma Holdings (ENDP) with
the Moving Average Envelope of 20 and
M o d e r nTr a d e r. c o m
10%. We used 10% in this example to
show that bands needs to be adjusted
based on the volatility of a stock. See how
ENDP surged below the lower envelope
on Nov. 3, 2016 and again on Jan. 10,
2017, and then continued moving below
this envelope. This shows extraordinary
weakness, declining to $11.37 following
the January breach.
Overbought and Oversold
Traders typically use envelopes to determine overbought and oversold levels
when the price rises above the upper band
or falls under the lower band. When the
security’s price touches the upper band
and turns downward, the security might be
at an overbought level. Conversely, when
the security’s price touches the lower band
and turns upward, the security might be at an
oversold level (see “Too well-liked,” page 70).
Buy Scenario: Buy when the price
rises through the lower band having fallen
beneath it.
Sell Scenario: Sell when the price falls
through the upper band having previously
risen above it.
When it comes to a market/stock whose
movement is flat or in consolidation, then
a whole new dynamic comes into
GOOG remained within a relative narrow 2.5% bank for most of 2016
before leaping through the upper band of the envelope on April 27.
Source: eSignal
ENDP surged below the lower envelope on Nov. 3, 2016 and
Jan. 10, 2017 before continuing lower on extreme weakness.
Source: eSignal
Issue 534
“Traders typically
use envelopes
to determine
overbought and
oversold levels.”
Looking at the Facebook chart with relative strength in addition to our Moving
Average Envelope, it shows both moving to overbought territory in January and April.
Source: eSignal
play. This time, if the price action touches
the Moving Average Envelope’s upper
band, then it is a signal that the market/
stock is overbought and due for a downside
If the price action of the market/stock
starts to pierce the lower envelope, then it
means that the asset is due for a rebound
as it is presently oversold.
Using this information, the trader can
then trade within the range of price movement by selling on the upper envelope and
buying at the lower envelope band. CA
Technologies (CA) has provided numerous opportunities to profit on choppy prices swings since November where prices
were consolidating in range (see “Trade the
chop,” right). We applied a 20-period MA,
2.5% setting and were able to capture several significant turning points in the stock.
CA Technologies has traded in a volatile range since November. A trader going
short on a Moving Average Envelope overbought signal on the close, or short on an
oversold signal on the close, would have seen multiple opportunities to profit.
Confirming Signal
When combined with additional technical
analysis tools such as pattern analysis or
momentum indicators, the Moving Average
Envelope can become an integral part of
a sound trading strategy. Many traders
use 2% envelopes for momentum trades,
although preferences will vary. Setting the
envelopes too high will generate losing
trades as the move may be near exhaustion; setting them too low may result in
unprofitable over-trading.
Most charting patterns will allow you to
set the indicator wherever you want. Look
back on past data to see which levels
Moving Average Envelopes are similar
to other technical indicators, such as
Bollinger Bands and Keltner channels,
except that these also vary the width of
the bands/channels based on a volatility
measure. They are useful for identifying
high-probability turning points in short-term
trends. All traders can benefit from experimenting with these technical tools.
Being able to help identify trends as well
as overbought and oversold conditions
is a valuable trait in an indicator and one
that can greatly help technical analysts.
August 2017
Source: eSignal
tended to trigger reversals. You can also
compare the indicator to other trend and
overbought/oversold indicators to see
what levels work best and whether the
envelopes lead or follow other indicators.
You may find, depending on the levels
you choose, that the Moving Average
Envelope registered a trend reversal in
advance of others.
Bramesh Bhandari is a veteran trader
of the Indian stock market, providing
insight and tutoring on technical analysis
M o d e r nTr a d e r. c o m
In this first of two-parts, we
develop a hybrid autoregressive moving
average model combining machine
learning and advance modeling methods
to classic backtesting.
Modeling in
R Language
Q By Murray A. Ruggiero Jr.
Predicting returns one or more bars into
the future is a dream of both traders and
quants. There are many methods for doing
this that approach rocket science; many of
these are ensemble methods. One such
method is a hybrid model that consists of
both the autoregressive integrated moving
average (ARIMA) model combined with
the generalized autoregressive conditional
heteroscedasticity (GARCH) model.
Adding machine learning and an advance
modeling method to classic backtesting and
trading platforms will be a hot technology
during the next five years, as will using the
libraries of open programming language
R and Python combined with backtesting
programs as the most cost efficient way to
do this. R has many machine learning and
statistical libraries, while Python is better at
text processing (NLP) to create sentiment
indicators from news sources or twitter.
We will be using R to develop our hybrid
ARIMA/GARCH model after we have
explained the theory. First we need to understand some basics of stock market data.
It normally has an upward bias that must be
removed to use most prediction and modelM o d e r nTr a d e r. c o m
ing methods. Next, there are often seasonal
effects. Finally, you have heteroscedasticity; small percentage changes can become
large absolute changes.
ARIMA models are time series regression models. Regression models have an X
variable, which is an independent variable
and an Y variable, which is a dependent
variable. We regress Y on X and create a
linear model. ARIMA models are auto regressive, this means that we are regressing
today’s prices on past prices to predict the
future. The assumption when we do this is
that the errors are white noise, random with
homoscedastic volatility, relative volatility is
constant but absolute changes get larger
as prices increase.
On time series data you can regress
today’s value on yesterday’s value, which is
called auto regression.
Time Series Regression Models
• Independent normal with common
• Is basic building block of time series
In auto regression what happened
today is the dependent variable and what
happened yesterday is the independent
variable. Let’s see how the error is
If we assume the error is white noise, one
way to improve the estimation of the noise
is to use moving average of noise lagged.
Here we use noise today + some fraction
of lagged noises. This creates a moving
average of noise. If we assume white noise,
this creates an estimate of future noise.
Putting these two models together creates
the (ARMA)model. ARMA,
and ARIMA are the similar except ARIMA
can do differencing as part of the calculation. So ARMA is calculated as follows:
You can think of this as an ARMA model
with correlated errors.
In order to use an ARIMA model
“ARIMA models are auto
regressive, this means that we
are regressing today’s prices on
past prices to predict the future.”
Issue 534
your data must be what is called “stationary.” What does that mean? It means
that first the mean is constant — normally
0 — and this is often done by taking a first
difference. The other thing that stationary
time series have in common is that the
correlation of the current series value with
lagged values is constant. The time series
will show repeating patterns over time. If
the mean is constant, simple averaging will
allow us to estimate a correlation using the
mean. Also, if the correlation structure is
constant over different lags we can estimate the lag 1 correlation by using all data
points one point apart: X1-X2,X2-X3,X3-X4
etc. We can also use X1-X3,X2-X4 etc. to
estimate the Lag2 correlation.
If we look at the S&P 500 for example
we have a long-term uptrend and
heteroscedastic volatility. In cases like
this we want to use the log of the values
before we take a difference to make the
data stationary. If a series is a random walk
without a trend then simple differencing
will work. Simple differencing will also
work for trend stationary.
Why are ARIMA models valid?
Herman Wold’s decomposition shows that
a stationary time series can be written as a
linear combination of white noise and that
any ARIMA model is a linear combination
of white noise. This means that they are
suitable for modeling stationary time series.
ARIMA models are expressed by the
number of terms of each type: (p, d, q);
p is number of Autoregressive terms; d
is the number of time difference (this is
often 0) if we do this prior to passing to the
algorithms so we can make sure the series
is stationary first; and q is the number of
moving average terms.
ACF and PACF plot analysis
The sample autocorrelation function (ACF)
for a series gives correlations between the
series x t and lagged values of the series
for lags of 1, 2, 3, and so on. The lagged
values can be written as x t-1, x t-2, x t-3, and
so on. The ACF gives correlations between
x t and x t-1, x t and x t-2 , and so on.
The ACF can be used to identify the possible structure of ARIMA time series models.
Partial autocorrelation function (PACF)
August 2017
is essentially the autocorrelation of a signal
with itself at different points in time, with linear dependency with that signal at shorter
lags removed, as a function of lag between
points of time. The table below shows us
how these factors relate to ARIMA type
ACF and
Cut off
lag q
Tails off
Cut off
lag p
Tails off
Tails off
Pure auto regression (AR) ACF trails off
at lag – and PACF cuts off at lag p. A pure
moving average (MA) is the opposite, for
the ARIMA model both will tail off.
An ARMA model contains parts for an
AR and MA mode: ARMA (p,q). An ARIMA
model is extended as it includes the extra
part for differencing. If a dataset exhibits
long-term variation (i.e. trend-cycle components), the ACF graph will show a straight
line edge and will not quickly drop to zero.
In this case it is useful to difference the
data. This simply takes each data point and
calculates the change from the previous
data point. The ARIMA model is ARIMA (p,
d, q) where p is the order of the AR part,
d is the number of times differencing has
been carried out and q is the order of the
MA part. The extension allows the model
to deal with long-term variation better so
improves the usefulness of this modelling
Finding the optimal
parameters for ARIMA
Akaike information criterion (AIC) measures
the relative quality of a statistical models
on a given data set. It’s a way of comparing
models for a given set of data and estimating the quality of each model relative
to each of the other models. Hence, AIC
provides a means for model selection.
AIC is based on information theory, it
estimates the information lost when a given
model is used to represent the process that
generates the data. In doing so, it deals
with the trade-off between the goodness of
the fit of the model and model complexity.
AIC give us an absolute test of a model’s
quality for example testing against a null
hypothesis. If all the candidate models fit
poorly, AIC will not give any warning of that.
Akaike’s Information Criterion is usually
calculated with software. The basic formula
is defined as:
AIC = -2(log-likelihood) + 2K
• K is the number of model parameters
(the number of variables in the model
plus the intercept).
• Log-likelihood is a measure of model
fit. The higher the number, the better
the fit. This is usually obtained from
statistical output.
For small sample sizes (n/K < ≈ 40), use
the second-order AIC:
AICc = -2(log-likelihood) + 2K +
• n = sample size,
• K= number of model parameters,
• Log-likelihood is a measure of
model fit.
Mean reversion modeling of
price and volatility
The ARMA model aims to correct for
the autocorrelation, which is common with
financial time series. However, the original ARMA mean model assumes that the
variances are constant over time. While,
in fact, it has been well-documented that
variances of financial time series (e.g. the
stock returns) are conditional over time.
The current level of variance is conditional
upon the level of previous variances, that is,
the time series of variance itself is auto-correlated. This raised questions regarding the
validity of the original ARMA, which ignores
the existence of conditional variance.
The ARCHmodel of
M o d e r nTr a d e r. c o m
Engle 1982 has been seen as a revolution
in modelling and forecasting volatility. It
was further generalized by Bollerslev 1986
as the GARCH Model. The GARCH type
models assume that volatility changes over
time in an autoregressive manner.
GARCH means generalize
autoregressive conditional heteroscedastic
model Let’s discuss the simple GARCH
1,1 model.
L.R Variance
We can model the variance squared as
follows (equation 4):
This equation is simply: Gamma times
long term Variance +alpha times square
return lagged +beta times lagged variance
squared, this equals the current variance
Now, if we rearrange the equation we
can use it to predict volatility (equation 5).
With a little rearranging we can predict
variance squared for the next period.
The GARCH Model can not only predict
volatility but also returns. We do that by
going back to the ARIMA equation and
Here is the code taking ARIMA method into ARMA.
We use the simple GARCH 1,1, to make our predictions
(we deal with the ARIMA part in italics).
M o d e r nTr a d e r. c o m
making some substitutions.
Let’s assume our variance model is the
standard GARCH 1,1 (see equation 4).
Our ARIMA-GARCH Hybrid model will
calculate the forecasted returns by using
the ARIMA equation and replacing the
noise component with the variance from
the GARCH model. This is oversimplified
but does allow you to understand how the
predicted returns are calculated.
The ARMA model and ARMA-GARCH
model can be used to forecast markets.
Out-of-sample forecasting performance is
evaluated to compare the forecast ability of
the two models. From a statistical point of
view, the ARMA-GARCH model outperform
with all of the three commonly used statistical measures. Traditional engineering
type of models aim to minimize statistical
errors, however, the model with minimum
forecasting errors in statistical term does
not necessarily guarantee maximized
trading profits, which is often deemed as
the ultimate objective of financial application. The best way to evaluate alternative
financial model is therefore to evaluate their
trading performance by means of trading
We found that both ARMA and ARMA-GARCH models were able to forecast
the future movements of the market, which
yields significant risk adjusted returns
compared to the overall market during the
out-of-sample period. In addition, although
the ARMA-GARCH model is better than
the ARMA model theoretically and statistically, the latter outperforms the former with
significantly higher trading measures.
Developing our Simple Return
Prediction Model
Our model will use the ARIMA-GARCH
mode. This takes a mean forecast produced by an ARCH/ARIMA process and
combines it with a GARCH process. There
are several libraries in R to do this, but
only one is strong enough to be used as a
research tool. This is the Rugarch library
written by Alexios Ghalanos. He has taken
this analysis from interesting academic
research to a tool which can be used for
both risk and trade analysis as well as
forecasting future returns. His research in
GARCH has enabled him to even
Issue 534
“The best way to evaluate
alternative financial models
is to evaluate their trading
performance by means of
trading simulation.”
analyze how a given model will respond to
shocks caused by news events. It supports
most of the newer GARCH models and
submodels discussed in the research. He
even supports advance topics like external
regressors both for the variance and the
mean model; garch only supports it on the
variance model.
Another very useful library is quantmod.
The quantmod package for R is designed
to assist the quantitative trader in the
development, testing, and deployment of
statistically based trading models.
“Quantmod is an R package that provides a framework for quantitative financial
modeling and trading. It provides a rapid
prototyping environment that makes modeling easier by removing the repetitive
workflow issues surrounding data management and visualization,” says authors Jeffrey
A. Ryan and Joshua M. Ulrich. The core
of this library is built on top of the XTS R
package, also written by Ryan and Ulrich.
The XTS package provides several functionalities to work on time-indexed data,
including: time-based subsetting, aggregating, merging and aligning data.
Using R to predict
tomorrow’s returns
The complete code is too long to show
here and will be posted in the online version. Here are some key parts:
Let our “from” date be 2005-01-02.
getSymbols(“^GSPC”, from=from_date)
spReturns = diff(log(Cl(GSPC)))
spReturns[as.character(head(index(Cl(GSPC)),1))] = 0
This will create a XTS named “GSPC,” a
name of the symbol without ^. We then will
take the log of the close and then take the difference of this log to make the data stationary.
We next set up a window for testing and
create a vector to save the forecasts:
windowLength = window_Length
foreLength = length(spReturns) - windowLength
forecasts<- vector(mode=”character”,
Next we set up a loop that we use to
loop though the data while calculating our
ARIMA/GARCH hybrid model.
We will save the optimal order for ARIMA
based on AIC in final order and use it as
the mean part of the GARCH Model.
The next step is to take the best model
found for ARIMA and pass it into the ARMA
part of the GARCH algorithm (see “Mixing
models,” page 73).
Because our structure for our format is
today’s date, forecast for tomorrow, we
need to have two different versions of the
forecasts. The first one is the “tomorrow”
forecast, which is calculated using data
from today back to window-length days.
Next, we shift the forecast forward or dates
backward so that the forecast date is on
the row where the actual returns are. This
allows us to use little trick to do a backtest.
“Adding machine learning and
advance modeling method to
classic backtesting and trading
platforms will be a hot technology
over the next five years.”
August 2017
spArimaGarch = as.xts( read.zoo(file=”forecasts_new.csv”, format=”%Y-%m%d”, header= F, sep=”,”))
spIntersect = merge( spArimaGarch[,1],
spReturns, all= F )
spArimaGarchReturns = spIntersect[,1] *
You can see we combined the GARCH
forecasts shifts and the returns. This
allows us to multiple the sign of the
forecast by the actual return on that day
we create a poor man’s backtest. We then
multiply together 1+the returns and take a
cumproduct of these and then convert to
a log scale.
spArimaGarchCurve = log( cumprod( 1
+ spArimaGarchReturns ) )
spBuyHoldCurve = log( cumprod( 1 +
spIntersect[,2] ) )
We then merge the predictions equity curve and buy and hold and create a
PDF using the as well as plotting it. Note
you can only write the PDF in the active
spCombinedCurve = merge( spArimaGarchCurve, spBuyHoldCurve, all= F )
pl<- xyplot( spCombinedCurve,superpose=T,col= c(“darkred”, “darkblue”),
lwd=2,key= list( text= list(c(“ARIMA+GARCH”, “Buy & Hold”)),
lines= list(lwd=2,
col= c(“darkred”, “darkblue”))))
print(pl) }
This gives you an insight into the
methods of creating trading models with
machine learning that can predict market
returns. In the second part of this series
we will show you how it all works and
measure the results.
Murray A. Ruggiero is the author of
“Cybernetic Trading Strategies” (Wiley).
M o d e r nTr a d e r. c o m
Is this bad actor planning his next performance?
MF Global is gone, but Corzine may return
Q By Daniel P. Collins
Arguably no scandal in the history of the futures industry has done as much damage as the MF Global debacle in
the fall of 2011. The reason is that it challenged one of the
core underpinnings of the futures industry — that customer
segregated funds would remain segregated from the rest
of the capital in a futures commission merchant (FCM) so
that it would not be at risk if the FCM itself failed.
That principle held through the credit crisis of 2008
when U.S. futures customers of Lehman Brothers did
not lose a dime out of their Lehman accounts due to the
firm’s failure. Because of this, when Congress created the
Dodd-Frank Wall Street Reform and Consumer Protection
Act in the wake of the credit crisis, it adopted the futures
industry model of central counterparty clearing.
One of the heartbreaking elements we discussed covering the MF Global debacle was the number of folks who, in
the midst of MF Global’s troubles, left their accounts alone,
secure in the fact that their money was safe, even if the
firm failed. It was an anecdote many introducing brokers
One of the heartbreaking
elements we discussed covering
the MF Global debacle was the
number of folks who, in the midst
of MF Global’s troubles, left their
accounts alone, secure in the fact
that their money was safe.
(IB) shared with me as they contemplated the likelihood of
MF Global’s collapse: “Don’t worry, even if the broker fails,
your funds are safely segregated,” they told their customers. And why wouldn’t MF Global customers — including
farmers, feedlot operators, investors with commodity trading advisors and IBs — believe it? It was what the exchanges, FCMs, IBs and Futures magazine told them.
One man turned us all into liars. That man was MF
Global Chairman and CEO Jon Corzine, and he did it
because he saw MF Global not as a futures brokerage
business he needed to maintain where he had a fiduciary
responsibility to uphold, but a cash cow he could use to
fulfill his goal of creating the next Goldman Sachs. MF
Global illegally dipped into customer segregated accounts
to cover margin required for Corzine’s proprietary positons
M o d e r nTr a d e r. c o m
in foreign sovereign debt. Corzine pushed out risk managers who warned MF Global’s board of the risk in the
positions, which grew to $6.2 billion.
After a long, nearly six-year process, the MF Global
debacle came to a conclusion earlier this year. Corzine
settled the last lawsuit, agreeing to a $5 million civil
fine from the Commodity Futures Trading Commission
(CFTC), which also barred Corzine from ever working for
an FCM or registering with the CFTC.
The settlement provides some closure, but not justice
to the industry victims who would have preferred to see a
criminal prosecution.
There have been multiple settlements as well as bankruptcy
process, which eventually returned the $1.6 billion shortfall in
customer segregated funds to its rightful owners, though not
in time to save multiple businesses from their own demise.
While many may have viewed the CFTC settlement as
the closing chapter on MF Global and Corzine’s business
career, in May the New York Times Deal Book webpage
touted a potential comeback for the former head of Goldman Sachs and Governor of New Jersey.
The story, written by Ben Protess, continues on a
theme from that site and other major business outlets that
dismissed the seriousness of the crimes committed at MF
Global. It talks about Corzine’s plan to launch a hedge
fund seeking to trade volatility related to the Trump Administration. He has already received commitments.
This same site posted multiple stories in the midst of
the MF Global case, citing unnamed sources, suggesting
that criminal charges would not be filed against Corzine,
and also discussing Corrzine’s plans to eventually launch
a hedge fund. At the time we described this as journalistic malpractice. While a criminal prosecution was being
contemplated and the bankruptcy administrator on record
saying fraud was likely committed, DealBook was suggesting that this would all simply go away and Corzine would
be free to move on as if nothing happened. In the recent
story, they downplayed the damage done in the collapse
by noting “about $1 billion of customer money temporarily
went missing,” as if it was misfiled. It wasn’t, it was illegally
transferred from customer segregated accounts to cover
Corzine’s over-leveraged proprietary positions. It took
more than two years for customers to get their money—
which by law should have been safely segregated from MF
Global assets — back.
MF Global collapsed for one reason: irresponsible trading and money management by Corzine, who should never
be in a position of managing other people’s money again.
Issue 534
Modern Trader provides cutting-edge actionable market research
while holding analysts accountable. And, when we publish specific
recommendations, we will also let you know how we did.
Tracking Stock:
MT gets it right!
Cyber Threats & Opportunities
March 2017
Our coverage of the cyber threat to
traders in late 2015 led to our designation
of cybersecurity as a must-own sector in our
March 2017 Forecasting Issue. In early May,
the Wannacry Ransomware attack infected
more than 230,000 devices in 150 nations.
Major victims included Britain’s National
Health Service, Spain’s Telefónica, FedEx
Corporation and Deutsche Bahn. Cyber
experts have said that more attacks could
happen at any time.
Michael Robinson shared three ways
to tap into the growth of the industry in
February. First, Robinson recommended
Zix Corporation (ZIXI), a small company
with a niche in e-mail encryption, data
loss prevention and bring-your-owndevice (BYOD) security. Second, he
recommended a stealth position in
Raytheon (RTN) as cyber and cloudcomputing play and an opportunity to
tap into the expected rise in military
spending. Finally, Robinson recommended
the PureFunds ISE Cyber Security
ETF (HACK) as a pure play on the
hundreds of billions of dollars pouring into
August 2017
this industry around the globe.
From Feb. 1 to early June, shares of Zix
increased from $4.77 to $6.26, a more
than a 30% gain, hitting a 52-week high.
Raytheon has increased from $144.05 to
$160.94 during that same time frame, a gain
of more than 10%. Finally, the HACK ETF is
up more than 7% during the period, and it
hit a 52-week high of $31.35 on June 8.
Snapchat Follies Continue
April 2017
In “The banana republic of Snapchat,”
in our April issue we discussed the unique
structure of its IPO and interviewed several
analysts who were skeptical of the stock’s
value proposition. The story concludes that
SNAP should be faded. On May 10, Snap
Inc. reported its first earnings report. Days
before its first conference call, Morgan
Stanley, Credit Suisse and RBC Capital
Markets all had “Buy” ratings and price
targets of at least $30 per share. Snap
underwriter Goldman Sachs issued a
price target of $27. But not much was said
when the stock dropped 22% in a day. The
firm doubled its operating costs and user
growth rates fell short of many analysts’
expectations. Hedge funds and others saw
the weakness as an opportunity to pile
into the stock. On May 15, the stock rallied
8% on news that firms run by Dan Loeb
and David Tepper were buying. Robinhood
announced that millennials continued to pile
into the stock. That enthusiasm was short
lived, as from May 15 to June 9, the stock
fell another 12.8%.
Analysts at Nomura have warned that
user growth could be slowing yet again this
quarter. The firm said that downloads of the
Snapchat application decreased by 22%
year-over-year during the first two months of
the second quarter. It is best to wait until the
company gets a few earnings reports under
its belt and the IPO lockup offers a clearer
view of the company from its own insiders.
Bitcoin Follow-up … and Up
November 2015
When we made bitcoin and the blockchain
the focus of our November 2015 issue, the
digital currency was already the subject of
intense debate, significant legal questions
and three distinct boom and bust cycles.
Fading was the original libertarian concept
of bitcoin replacing traditional fiat currencies
M o d e r nTr a d e r. c o m
in everyday consumption – a dream that
drove many early acolytes; while rising
(rapidly) was the recognition that bitcoin’s
blockchain settlement system was perhaps
a once-in-a-generation breakthrough.
At the time of our feature, debate still
raged. Digital Currency Group’s Barry
Silbert presciently noted, “The outcome
potential [for bitcoin] can be viewed as
binary. Either it wins and wins big, or it dies.”
Meanwhile, skeptics like veteran financial
journalist Felix Salmon pulled no punches,
saying, “The bitcoin community is already
retreating from the idea that this will become
a consumer-facing technology. Your average
consumer still doesn’t understand bitcoin,
and still doesn’t need it.”
The one area die-hard believers and
unabashed critics agreed on in November
2015 was the potential for the blockchain,
or to use today’s more accurate term,
distributed ledger technologies. “If we
end up in world where payment rails,
custody systems, clearance and transfer
mechanisms, etc., all use the blockchain,
[global financial institutions] will need
bitcoin,” Silbert said. “And if that
February 2017
February 2017: Of our bullish analysts that identified buying opportunities in
futures and equities, there were several big winners.
Security or Sector
Value (as of Jan.
1, 2017)
Joseph Parnes
Intuitive Surgical (ISRG)
James Cordier
Health Care Select Sector (XLV)
United Health Group (UNH)
Aetna (AET)
$2.40 per lb.
U.S. 30-year bond
John Rawlins
Ashraf Laidi
Andy Waldock
Joe Cornell
Versum Material (VSM)
Matt Litchfield
Chart Patterns
Suri Duddella
Bullish breakout $1,476.91
General Dynamics (GD)
John Blank
Northrup Grumman (NOC)
Engility Holdings (EGL)
Note: Forecasts are scored A (weakest) to AAAAA (strongest) based on actual outcomes.
M o d e r nTr a d e r. c o m
ISRG set a bottom in December and basically has gone straight up.
This short would have been stopped out in a matter of days.
Cordier recommended selling 975 puts for $500+, arguing that gold's
post-election sell-off had most likely run its course, and if not, support at
$1,045 per ounce (2015 low) or $1,000 psychological level would hold.
This trade never came under pressure.
The CPO suggested that XLV bottomed late in the year and would rally
through the first six months of 2017. It did precisely that and is up more
than 10% since Jan.1.
The CPO expected UNH to chop higher in Q1 before selling off sharply in
the spring. It did move higher in Q1 but did not see Q2 selloff.
The CPO expected AET to rise steadily in the first half of the year. After
a brief correction in January it rose steadily, up more than 15% from the
Jan. 1 level.
After a January selloff, GBP/CAD rebounded and rallied sharply in April.
COT data suggested that copper was nearing a reversal. It continued to
rally in Q1.
COT data suggested that the post-election selloff had run its course and
bonds were preparing to reverse. Bonds have move marginally higher in a
range in the first half of 2017.
Spin-off Research valued VSM at $30 per share, a 23% increase from
current valuation. It reached that level on Feb. 17 and continued to move
Litchfield suggested that the post-election rally in the QABA community
bank ETF was overdone, as was the sell-off in the EWW; and that the
Mexico Capped ETF and the fortunes of each could reverse. He was right
on-the-money as a long EWW/short QABA spread railed more than $13
since Jan. 1.
The Megaphone Pattern had not signaled a breakout or reversal as of
publication. This allowed readers to profit from the entire move as a
bullish breakout was signaled on Feb. 8. By May 8, PCLN rallied more
than 20%, just shy of its initial target.
GD rallied steadily in 2017, never settling below the Jan 1. open and
rising above $200 (more than 15%).
NOC has rallied 10% in 2017 after dropping slightly in January.
EGL sold off close to 20% since Jan. 1.
Issue 534
The QABA banking ETF and Mexican peso ETF reversed as
predicted in Modern Trader’s February 2017 ETF column.
Source: eSignal
happens, the velocity and monetary base
will expand exponentially.”
And while Salmon was incorrect in that
bitcoin would “just meander around” only
months before it began its massive ascent,
he agreed that customized private ledgers
could mark ownership and process transfers independent of the bitcoin blockchain
itself. “There will be sidechains, colored
coins and so on, and they’ll all implement
ledger technology,” he mused in a prediction that has come to pass.
A buyer of bitcoin in November 2015
is now sitting on a 10x return in less
than 18 months. It’s still very early in the
development of both digital currencies and
the distributed ledgers that support them.
Time will tell if the boil comes off bitcoin’s
price, but one thing is
increasingly certain: it is
here to stay.
Use code ‘FIN10’ for 10% savings
The Bank/Peso
In February’s ETF
column, Matt Litchfield
suggested that the postelection rally in banking,
particularly smaller banks
— as represented by the
QABA community bank
ETF — was overdone.
He also saw the massive
weakness in the Mexican
peso — as represented
by the Mexico Capped
ETF (EWW) — to be
overcooked as well. He
pointed out how the two
above mentioned ETFs
reversed sharply after the
election and were due for
a reversion trade. He was
right on-the-money as a
long EWW/short QABA
spread railed more than
$13 since Jan. 1 (see
“Banking on peso,”
August 2017
September 7-8, 2017
San Francisco, CA
M o d e r nTr a d e r. c o m
U.S. economic data & select global influences
August: Dog days of Dow
M o d e r nTr a d e r. c o m
8 9 10 11
14 15 16 17 18
Vital August Statistics*
Average % -0.19% -0.09% 0.11%
Best & Worst August- % Change
2000 11.1%
-15.1% -14.6% -19.9%
21 22 23 24 25
Issue 534
Chain Store Sales | Chicago PMI | Consumer Comfort | EIA Natural Gas Report
Bank Reserve Settlement | Mortgage | Employment | GDP | Farm Prices | EIA Petroleum Status
Redbook | Consumer Confidence
Dallas Fed | International Trade
Durable Goods Orders
Consumer Comfort | Existing Home Sales | EIA Petroleum Status | Kansas City Fed
Mortgage | New Home Sales | EIA Petroleum Status
FHFA House Price | Redbook | Richmond Fed
*Courtesy of Stock Trader's Almanac 2016 ©2015 John Wiley & Sons Inc.
1950 21971
Chicago Fed National
Consumer Sentiment
Philadelphia Fed | Consumer Comfort | Leading Indicators | EIA Natural Gas Report
Bank Reserve Settlement | MBA Mortgage | Atlanta Fed | EIA Petroleum Status
Empire State Mfg Survey | Import and Export Prices | Redbook | Housing Market
Consumer Price Index
PPI-FD | Consumer Comfort | EIA Natural Gas
Wholesale Trade | EIA Petroleum Status | MBA Mortgage
was 1998 when the Russian Debt Crisis exploded, which would lead to the implosion of
hedge fund Long-Term Capital Management.
In recent years a new trend has developed
as August has produced negative returns
in each of the last three odd-numbered
years. The most recent being 2015 when
the Dow dropped more than 1,000 points in
a couple of days following weakness in the
Chinese stock market. Depending on how
you measure it, it was the first correction of
10% or better in equities since 2011, which
also struck in August. Will history repeat in
August 2017?
NFIB Small Business Optimism | Redbook | JOLTS
Labor Market Conditions | TD Ameritrade IMX | Consumer Credit | Consumer Spending
3 4
OECD Composite Leading Indicators
International Trade | Employment Situation | Treasury STRIPS
1 2
Chain Store Sales | Consumer Comfort | PMI Services | ISM Non-Mfg | EIA Natural Gas
Bank of England Inflation Report
Bank Reserve Settlement | Mortgage | Employment Report| Job Creation | EIA Petroleum Status
PMI Manufacturing | ISM Mfg | Construction Spending | Redbook
Reserve Bank of Australia Interest Rate Statement
Modern Trader Monthly Trading Calendar - August. 2017
Despite ranking near the worst performing months of the year for all three major
stock indexes, August has produced more
up months than down months. August is the
10th worst month for the Dow Jones Industrial Average and the 11th worst for the S&P
500 and Nasdaq Composite, though since
1950 it has produced 37 up months versus
30 down months in the Dow and S&P 500.
August is perhaps best known for a lack of
interest as many traders and investors tend
to vacation in August and prefer to be out
of the market. However, it has seen some
volatility. The worst August across all indexes
28 29 30 31
CME Group names Toby Crabel 2017 Pinnacle Achievement winner
Crabel: Long-term profits
from short-term trading
Q By Daniel P. Collins
Toby Crabel played professional tennis after studying
finance at Florida Technological University, but was not
making a steady income from it. In addition to competing
on the circuit he was teaching tennis in the mid-1970s
when he met cattle trader Tim Brennan.
Crabel asked Brennan if he could get him a job on the
floor while he was between tournaments. “I preferred it
over tennis,” Crabel says. “There was a lot more opportunity in the trading business than in tennis at the time.”
Brennan, a principal at RB&H Financial Services,
became a mentor for Crabel. “After a couple of months,
I showed Tim some stuff that I was doing and he hired
me as his technical analyst. I was able to do work I
really liked and get paid for it,” Crabel says. “I ended up
getting a raise and an account to trade. It was the start
of my track record.”
Crabel went on to manage capital in RB&H’s customer business in the early 1980s. He also began writing a
market letter that provided short-term technical trading tips
that he would sell to floor traders. The letter was a huge
success and Crabel expanded it and published a collection
of his best models in a 1989 book, “Day Trading with Short
Term Price Patterns and Opening Range Breakouts.”
The book became his entry into the quantitative trading
area. It got him noticed and a few years later he went to
work with well-known quant Victor Niederhoffer.
Toby Crabel,
& chief
officer, Crabel
“If we hadn’t improved our
execution over the last six or
seven years, we would not be
making any money at all. That
tells you everything.”
“He was a scientist when it came to ferreting out market
patterns,” Crabel says of Niederhoffer. “As you can tell
from his famous spills, he didn’t apply it to portfolio management as well as he could have. He wasn’t a risk manager but he found alpha, and he would take advantage of
that in a very aggressive way.”
Crabel learned a lot from Niederhoffer, both what to do
and not do. “I looked at it and thought, I don’t want that kind
August 2017
of risk on a per-trade basis, but if I can
find alpha from research and spread it
out over as many markets as possible that are liquid enough to trade, I
would have a method of diversifying
and decreasing risk and having more
consistent returns.”
In 1992 he launched Crabel Capital
Management with that goal in mind.
“We haven’t had the spectacular upside one could have with
more intense positions in a single market, but we have had
consistent returns and the clients prefer that,” says Crabel.
The one thing that has separated Crabel from many other managed futures veterans is his short-term focus. “My
mentality was developed around the exchanges and having
been on the floor briefly,” he says. “If you had profits the
mentality was to take it, so I built that into the method.”
At the time, commodity trading advisors were dominated by long-term trend followers so this gave Crabel a
unique niche. “Clients were looking for different types of
trading other than pure trend following. They wanted to
see uncorrelated trades,” he says. “I understand [trend
following] but I thought there was a lot more going on in
the markets than long-term trends.”
His strategies were less volatile than the long-term
trend followers, targeting around 25%, but managed
to outperform that benchmark, particularly in Crabel’s
first decade of trading. The Crabel Diversified Futures
program has produced a compound annual return of
16.91% since 1992 with a 0.83 Sharpe ratio and virtually
no correlation with either the S&P 500 or the BarclayHedge CTA Index.
Crabel trades hundreds of short-term systematic strategies, which he continues to add to. “At the beginning we
had 14 strategies: seven were mean reversion and seven
were momentum that [held positions 24 hours],” he says.
While short-term trading increases execution cost and
slippage risk, there are advantages. “Trend followers
have to be in the market in a direction [all the time]; we
have periods where we are not in any markets, and therefore we are avoiding risk,” he says.
“For the client management business, trend following
is much easier because of cost. When you get into short-
Trader: Toby Crabel
Strategy: Short-term mean
reversion & momentum
AUM: $2.5 billion
Location: Milwaukee & Los
M o d e r nTr a d e r. c o m
Here are the 2017 Managed Futures Pinnacle award nominees and winners (highlighted in green) by category.
The winners are selected based on a systematic criteria developed by BarclayHedge.
Source: CME Group
Best Diversified CTA (>$500 million AUM)
Quantitative Investment Management (Global
Two Sigma
5-Year Best Single Sector CTA
Goldman Management, Inc.
Higher Moment Capital, LP
Cauldron Investments, LLC (Stock Index Plus)
Blue Diamond Non-Directional Strategy
Hehmeyer Capital Management
Whitehaven Correlation Fund
Best Multi-Advisor Futures Fund
UOB-SM Asset Management Pte Ltd (Oriental
Blue Diamond Asset Management (NonDirectional Strategy)
Higher Moment Capital, LP
Abbey Capital
Andurand Capital (Commodities)
Frontier Fund
5-Year Best Diversified CTA (> $500 million AUM)
Two Sigma
Mondiale Asset Management, Ltd.
5-Year Best Multi-Advisor Futures Fund
AC Investment Management
Abbey Capital
Altegris Futures Evolution Strategy Fund I (EVOIX)
Splendor Capital Management, Ltd.
Episteme Capital Partners (UK), LLP
Emil van Essen, LLC
5-Year Best Diversified CTA (< $500 million AUM)
Whitehaven Correlation Fund
Higher Moment Capital, LP
Splendor Capital Management, Ltd.
2017 Best Options Strategy
LJM Partners, Ltd.
GalNet Asset Management, LLC
Global Sigma Group
Goldenwise Capital Management, Inc.
Gremmy Advisors, Ltd.
Tom Capital AG (Tom Capital Growth Fund)
Best Single Sector CTA
361 Capital
Goldman Management, Inc.
Tanyard Creek Capital, LLC
5-Year Best Options Strategy
Warrington Asset Management
Esulep Management
Global Sigma Group
Best Diversified CTA (< $500 million AUM)
Splendor Capital Management, Ltd.
term trading, the frequency of our trades are 5X to 10X
more than trend followers. Take Winton, they manage
$25 billion, and in a typical program they trade 2,000
contracts a year [per million]; we will trade 16,000 to
20,000 contracts a year [per million] on $2.5 billion.
They have 10X more capital but we trade 10X more than
they do,” Crabel says. “Doing that in principle takes risk
off of the table because when you are getting in and out
of the market you are reducing risk, if you can execute.
The whole thing is dependent on execution.”
Non-correlation is also a big deal. “You’ve got to have
trades that don’t overlap and aren’t correlated with each
other,” he says. It is also important to be non-correlated
to other managers, particularly trend followers. It is key to
the value added in his short-term approach, and hard to
maintain. “Right around five days (holding period) you end
up correlating to trades that hold for five months because
you are trying to capture the same phenomena,” he says.
After 25 years managing money things don’t get easier,
even for the 2017 Managed Futures Pinnacle Achievement winner (see “2017 Pinnacle winners,” above). “It
has been harder and harder to make money using the
same things we started with in the mid-90s. It seems like
there was more froth, more opportunities for traders like
us. It has deteriorated so you have to continue to evolve,”
Crabel says. “If we hadn’t improved our execution over
M o d e r nTr a d e r. c o m
the last six or seven years, we would not be making any
money at all. That tells you everything.”
He attributes that to more professional traders
competing for the same edge and the fact that even
folks who in the past paid little attention to tick by tick
execution — such as longer term traders and hedgers—
are working every trade. “There is no reason why Cargill
shouldn’t execute their soybean and corn hedges in a
judicious way,” he says. “Trend followers are thinking
about it [and] high frequency traders depend on it.”
Computerized and high-frequency trading has made
finding an edge more difficult and everyone more cognizant
of execution. “It is like a tennis match, the better they are
able to hit their forehand, volley or serve, the better they are
to outwit you strategically, the harder it is to beat them.”
While still a traditional CTA, Crabel offers their strategies in a 40-Act fund format. Less than 10% of its $2.5
billion in assets come through a 40-Act wrapper, but
Crabel expects that to grow. “It makes sense; it’s more
and more of a viable product. For the trend follower in
particular it is a great idea because [it reduces cost] and
stabilizes the business.”
Crabel continues to work on new strategies. “I don’t
think I’m done. I’ve got ideas on what a trading firm can
do and be. I haven’t quite met the goals I set out for myself, so you’ll have me to kick around a lot longer.”
Issue 534
A Modern Trader Editorial
Face it Paris partisans, the climate
agreement was a shakedown
Q By Garrett Baldwin
On June 1, the day that President Donald Trump
withdrew the United States from the Paris Agreement,
everyone from CNN panelists to the local bartender
self-appointed themselves as experts on environmental
economics and international climate policy.
The partisan reaction to the United States’ withdrawal from the Paris deal was so vitriolic, one would have
thought the oceans had already swallowed us.
Few pundits seemed to have read the details of the
deal. Their talking points made that obvious. Anyone who
challenged this horribly designed policy was branded
a denier of climate change. Opposing the nonsensical
agreement meant you were an oil company shill, or meant
you wished that the earth would drop dead.
Days later, when the “Wikipedia diploma” on climate
policy had been discarded for the next daily outrage,
people who understood this deal’s politics and financing
couldn’t get the alarmists to see the obvious: The United
States is better off without this accord.
The Paris Agreement is a watered-down framework
from the 2010 Copenhagen accord (or shakedown) that
collapsed because no rational actors wanted to commit
“This movement started
with a rational environmental
message, but quickly
devolved into an argument
that we must engage in
a radical redistribution of
to massive emissions reductions at the expense of their
own economic growth. The prisoner’s dilemma is real, but
President Barack Obama seemed willing to choose the
dominated strategy for the sake of “getting a deal done.”
Why was the accord bad for the United States? At the
heart of these accords is the premise of “climate justice.”
This movement started with a rational environmental
message but quickly devolved into an argument that we
must engage in a radical redistribution of wealth from
rich nations to impoverished nations for clean energy
August 2017
technologies and climate reparations.
Under Paris, each nation voluntarily committed its own
selected cuts to global emissions. Wealthier nations
announced plans to transfer up to $100 billion to poorer
nations by 2020, with the United States taking the lead.
Without money from the West, the poorer nations said
they will keep polluting. And the end goal is comical: If all
went perfectly to plan, temperatures on earth would only
increase by 0.2% by 2100.
The list of countries that would get money includes Yemen, Bolivia, Venezuela, Iran, South Sudan, Cuba, Egypt
and the Central African Republic. These nations all rank
very low on the Heritage Foundation’s Economic Freedom Index and have high levels of self-induced poverty;
and they all rank very high in corruption. Also, they all
aren’t exactly on the best terms with the United States.
For U.S. supporters of this deal, emotions and the
need to do something trumped results, and history
shows that big transfer schemes like this fail to accomplish their goals due to a lack of accountability.
How is it that advocates can still argue in favor of a
large international transfer of wealth when we have the
example of $1 trillion in spending that failed to alleviate
widespread African poverty, and the oil for food programs of yesteryear, which simply enriched tyrants?
These advocates define insanity by trying the same thing
over again and expecting different results.
But the Obama Administration needed a legacy, so
his team overcommitted on cuts and transfer payments.
China did not commit to reducing emissions until 2030.
If people want a deal that redistributes wealth, they
should require a network to ensure the money is spent
accordingly. More so, the United States should demand
greater market liberalization and economic freedom in
these countries to help lift people out of poverty. That
would be a fair trade for technology. But writing a blank
check – given the history of global transfer schemes – is
as mindless as the shrill talking points from the self-appointed experts who are now howling about the Cuban
embargo or “tax cuts for the rich” based on a few articles
they read from a 20-something blogger on Buzzfeed.
Garrett Baldwin is features editor for Modern
Trader and holds a MA in Energy and Environmental
Policy from Johns Hopkins University.
M o d e r nTr a d e r. c o m
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