Thursday, February 2, 2012

Gangster economics: The Pleasures of Obscure Indicators

I've mentioned that one of my mentors, one of the best traders I've ever met (brains, guts and a bankroll go a long way in the market and in life) was also a very creative analyst.
He'd while away a slow trading morning reading the help-wanted ads ( for you kids) to see who was hiring and thus expanding.

On the flip side he was a firm believer in watching loading docks to spot potential business slowdowns and/or frauds to short.

I'd argue that no, I didn't want grab a box lunch and go see if some pink sheet deal was loading finished goods at a slower pace than last quarter. I'd whine and moan and end up doing his bidding.
I was playing with fire by taking this approach. During a Navy stint he had worked himself up from enlisted man to command of a destroyer and wasn't fond of backtalk.

One morning, after going through the 'Positions Available' he marched over to my station, threw the WSJ on the desk and said "Don't dispute me".

The story the paper was open to was about some charter airline/leasing outfit that Drexel had done an IPO  for and which subsequently filed bankruptcy. We had been offered some of this beauty but never did anything with it.

Unbeknownst to me the boss had thought this IPO an excellent excuse to go down to the Cayman's and do some snooping around. The airline had a large facility with a couple hangers and a repair facility. He set up a stakeout (Tanqueray and tonic, conch fritters, really roughing it) and over the course of a weekend saw no activity during what should have been the high season. His suspicions were confirmed when he talked to an elderly Caymanian gentleman who answered one of the questions posed to him by saying "No mon, no planes in deh".
 T&T's all around!

As it turned out, not only had we passed on the offering but he had somehow managed to get a small short on. The stock was halted and I don't think we ever covered.

Anyway, that's a real world example of why you should read this FT Alphaville post:
Struck by a recent report about how the Italian mafia was now Italy’s largest ‘bank’, Nicholas Colas, chief market strategist at ConvergEx Group, has decided to take a closer look at what one might call “off the grid” indicators for the US economy.
As Colas notes on Wednesday, some of these have been gaining traction:
Today we present our quarterly “Off the Grid” Indicators of the U.S. economy – everything from gold and silver coin demand, to trends in Food Stamp program participation, to gun sales. The bottom line is that some segments of the US economy are gaining traction – pickup truck sales are accelerating (a proxy for small business health) and used car prices are very strong (portending another year of improving new vehicle sales). Still, consumer confidence is fragile at best. Food and personal security is still a worry for too many consumers, and interest in precious metals (silver, though, not gold) still trends higher. Bottom line: if the data we present fits your idea of a “New normal,” you need to look up the word “Normal.”
We ourselves were particularly struck by his gun sale metric — the results of a “buy a gun” search from Google Trends:

Steady, but definitely ascending in terms of a longer-term trend.

Though there were other intriguing “off the grid” factoids pointed out by Colas too....MORE