You know how these days, magazines that used to cost hundreds of dollars per year, or those that came from overseas sometimes cost over $1000 per year, are now free? If you’re a rational participant in business, you’d understand this “free” readership was so advertisers see a large circulation number. Sadly, they don’t care whether the circulation pays or not. They seem too stupid to realize those that don’t pay are HIGHLY unlikely to even open the magazine, let alone read a single article.

There’s this one trading magazine written and printed in Australia. They’ve sent me over 12 “this is your last issue” warnings, which all end in the trash, but the magazines just keep on coming, where it also ends up in the Recycling Bin (this is Cali. It’s law). I must admit though, I am curiously attracted to articles about  the late great WD Gann for reasons I couldn’t even begin to get into.   Back before the robots took over market-making, the magazine YTE, which stands for “Your Trading Edge”, was actually pretty cool. There was one ENORMOUS PROBLEM though, which they still have. By the time it reaches their American readers receiving it Gratis, it’s been in transit for weeks because they’re too cheap to pay for overnight delivery. (Hey, it’s free)

This results in all of their examples and articles  being “slightly” outdated. It’s cool though in a way to see how their predictions fared out by the time the magazine arrives.  Unless they go bankrupt first,  which seems to be a strong possibility suddenly with the direction their going. They’re trying to look more like “Active Trader” or the “Online Trading Expo”. You know, the magazine and convention for trader wannabes and failed 2nd careerers(no offense).  Or Technical Analysis of Stocks & Commodities (another one of those “this is your last free issue of TAS & C unless you send back this card” but they just won’t stop sending them no matter how many cards I trash!)

Getting to the point, be patient…..  I saw this name on the front page of the current edition. This guy, whose name I will not  mention for I will have to wash my mouth out with soap if I mention anything that identifies him or the firm he works for, owns, and is controlled by, but here’s a clue:  It’s  another one of those 3-letter trading companies out of NY, but their main office is in a building I’m familiar with, or so I saw, but one learns after being in this business for many years, that things are never what they seem.

Let’s back up a second, I’m not talking down on the magazine’s WD Gann expert that writes things like “without sharing the Gann Secrets” he says something like “Saturn is aligned with Jupiter, and the Virgo constellation is perpendicular to Orion’s belt so Corn is about to make a huge move”. Not kidding. Not entirely irrational either. I don’t understand the astronomy aspect of Gann’s work, but there are less sophisticated and easier to decipher parts of his work dealing with mathamatical formulas and Geometry.  Gann wrote in code, and as you learn this code, it’s like opening the door to the next level, and it keeps going  deeper and deeper until you become lost.  In the past, and even in the present to some, WD Gann is a market God or something.  We have become enlightened enough to know by now that planetary alignments affect gravity and light and solar storms and therefore the weather, and hence commodities. Simple logic.  We’ve pretty much accepted by now that a full moon and its proximity to Earth can cause massive gravitational disturbances on the planet as well as with people. It’s a fact that crime jumps during a full moon. 

What’s not a fact is the correlation. A great deal of Scientists go out of their way to try and  disprove this theory. Maybe they’re just Werewolves; or Vampires just keeping the Werewolves at bay. Whatever the supernatural aspect, or lack therof, we all have experienced  in our own selves how a full moon makes people a little less “rational”.  The sun and the moon rule the oceanic tides but the correlation with humans was pure folklore.  But every now and then when there’s a full moon, you’ll notice a big move in the markets. A move probably thriving off the irrationality of humans. But since black boxes have no concern for the cycle of the moon, good traders learn to fade these moves. As the market reverts to its’ mean depending on where that mean is, above or below, so starts a new Lunar cycle. 

I digress, just a tad.  As for the free magazine, the little article in the back that’s written by their in-house Gann voodooist, is actually the only part that’s “long cycle” enough, sometimes focusing on the Kondratiev Wave or “Grand Super Cycle”,  that makes the lag in transit irrelevant. WD Gann worked on this Super Cycle quite a bit. But I’m getting off subject again.

Back to this outdated magazine that arrives at my house on Friday or Saturday and low and behold, on the front page I see the name of this guy whose office is based in a building I’m, let’s just say familiar with. He runs one of the thousand or so 3 letter trading firms in NYand  works out of “a beautiful building with views of the Statue of Liberty” like a good view has any relavence on one’s performance. Nevertheless, this guy is the subject of an interview about Proprietary Trading, how it’s “evolved”, what’s “changed”, how to react to the various environments, andwhat to expect in the “future”, like he knew. The best hedge fund managers in the world are lost right now. And the head of a retail daytrading arcade knows?  Oh man.  That had me laughing for a while. I admit, I  actually read the interview. Aside from the two times I almost hurled, by the time I was done, my stomach felt like it was doing jumping jacks. 

As a “self-proclaimed”  child prodigy of the markets, I’ve seen em all after 10 years. But the things this guy says, and the representations he makes are borderline unnatural (note to self, avoid libel or slanderous terms). These “prop firms” with their multi thousand dollar training fees, software fees, over-rides disguised by intermediaries withAlien names like “Firm58″, are nothing more than modern versions of early 20th century bucket shops where people would sit and watch a blackboard with symbols and numbers being changed by a kid on a ladder and a real Wall Street ticker tape printing off trades done minutes or hours ago depending on where you were. Then came this guy that decided to monopolize the wires and invented Western Union, who then proceeded to ban bucket shops from using their service. If you really wanna know, just google the term ”bucket shop” or read this, on me: It’s a pre-req. Reminiscences of a Stock Operator    

The crooked ones would delay the public tape and get ahead of the trade by seeing the real tape a few minutes earlier, and would wipe their customer out by over-leveraging them and just cleaning up. Never even putting the trade through. That’s why it’s wise for all retail traders to check their confirms in order to check who or what the contra party was for the trade. It was either an ECN or another MMID, or it was  their own firm or a clearing house owned by the firm. For example, Fidelity owns National Financial. When you see this, it technically means your firm is taking the other side of your bets because it believe the odds are your gonna lose on that trade according to their multi-billion dollar super computers.  The firm never  takes your trade to market but always gives you the NBBO so you have no reason to complain.  But in reality, the firm is trading against you. Conflict of interest?  Maybe.  But remember the four cycles of a stock. If you don’t know what this means, you shouldn’t even be trading.  When you’re in a margin call, the firm closes you out as fast as possible and wipes out any remaining equity when a margin call is generated. Why? Because they were on the other side of the trade and were just licking their lips at their computers telling them which customer accounts are likely to blow up, so they can keep doing this for eternity, kind of like blood-sucking vampires (hey, that’s two mentions of the super-natural in one blog post, maybe I’m watching too many episodes of True Blood on HBO).  If I was you, I would stay away from any online trading firm that names itself after honesty (e.g. Fidelity) and is private (e.g. Fidelity). 

Let’s return to what’s written in the article.  And I’m writing this because it goes against everything I believe in and why I hate this business to the point where I’d rather go to Law School and return armed and ready with a passion to shut every single one of these blood thirsty, borderline legal firms down. They’ve hurt my friends, my cousin, myself, people who I never met that trusted me. These firms won’t stop until someone stops them. Seems the SEC is giving a crap recently but it will fade from the public and institutional memory and with it, the SEC’s investigation. Undermanned and broke, the agency is lucky to even be alive. With the SEC or not, I will take great pleasure in crushing every single one like the cockroaches they are.

Living and breeding on deception, the weaknesses of human beings, their ambitions, counting on their propensity to be ignorant and closed minded (otherwise know as tunnel visioned), especially the younger ones because  they could convince mommy or daddy to pay via credit card, promising to only give it the summer or just 1 year.  Their ignorance and naivety; sucking out the inspirations of the young and their ambitions, torturing them to waste their real Golden Years sitting in front of an array of monitors, in full hyper-tension, trying to make a couple bucks a day.  Instead of being out partying, hooking up with girls, learning, meeting the most amazing professors and just immersing themselves in something totally interesting to them, they instead end up with empty promises and bank accounts, having to work a cheap job without a college degree, then trying to do it again, until the gap in their education has gotten so big that their 4.0 gpa doesn’t even matter anymore.  They’re screwed, hook, line, and sinker.  A young mind is full of ambitions that will go to waste if they choose this path over a real education.  To me, that’s just plain wrong and writing crap that instigates and propagates this is wrong and the SEC is coming after them one by one.

Listen carefully now. If everything I’ve written to this point is a bunch of garbage, heed my advice on this one point:  If you still have money at any unregistered, non broker/dealer firm that is allowing you to trade firm capital and requiring a risk deposit to do so is breaking the law unless they are PROVIDING YOU WITH A SALARY, which would make you an employee of a hedge fund. If the firm is neither a hedge fund, nor a CBSX registered Broker/Dealer, and your are not licensed or getting your education FOR FREE,  or the firm is in fact structured as a hedge fund but doesn’t pay you a salary while at the same time dictating how you work, when you work, and provides the equipment for you to do that work on, and also makes you sign a non-compete/non-disclosure agreement, is an EMPLOYER. And you are an EMPLOYEE, which means at the VERY LEAST, you are owed minimum wage, and if you’re full time, they owe you health benefits.  Anything less and they’re breaking many laws. These firms want to have it both ways. Hopefully soon, they’ll all go down. The thing I love about New York law is that there is no corporate veil when fraud is involved. In other words, you can go after the owners personal assets. What a wonderful state!

In this YTE article, I read the kind of crapola that would inspire a 3.7 or 4.0 gpa student that just crushed his or her LSAT’s, GMAT, MCAT or GRE’s to skip school and try the short-cut to becoming rich. He mentions over and over that “with the proper training and mentors around you, you will succeed in our beautiful office overlooking the Statue of Liberty”, as if view has any relevance on your performance. In fact, after trading for 10 years, I’ve come to learn that the best environment to trade in is one that is totally dark, silent, perhaps you have your iPod on listening to music that pumps you up, standing up with at least 16 to 24 monitors surrounding you like a circle, and trading with a little device in your hand that goes from brain to trade in nanoseconds, like Nintendo WII.  And if I’m at home trading, no matter what area of the planet I’m on, I’m at my desk, showered, having just finished a healthy meal, and before me is AT LEAST TWO TO THREE hours before the US equity markets open. 

What happens overnight is more important than what happens during most of US trading hours.  Trades put on overnight are settled or closed in New York because that’s where they’ll find the liquidity. A currency trader can put on a Kiwi/Aussie trade, or a Yen/Kiwi trade overnight, but can only close that position in New York because of liquidity. The only time the US equity markets are relevant are during the first 40 minutes and the last 75 minutes. That’s it.  The rest is churning noise. Noise designed by very deep pockets via sophisticated algorithms to eat your equity a few hundred dollars at a time all day long, forcing you into a corner, where you have to make a high risk trade near the end of the day just to cover your equity loss because, like the rest of them you gotta eat too and unless you kill, you don’t eat, even though you’re making your full-time employer a fortune whether you profit or not. Eventually, if you enter a losing streak, guess what, under the guise of good “risk management”, an algo starts to trade against you, because the firm has placed your accuracy ratio at around 30%, which means that you’re wrong 70% of the time.

An algo with  a success ratio of 70% is printing money.  And if you start to make money again, the algo stops fading you because it wasn’t programmed to fade you, but to hedge against your trades on the basis that you were wrong 70% of the time. It’s not a conspiracy, but rather good risk management.   But you know what is devilish?  If you, as one of the firm’s full time traders, enter into a drawdown and their algorithm in-house starts to do what it was programmed to do and manage the risk of the firm, if you make money, they’ll lose money in a sick way. So say you get offered 70% of your profits and pay a commission of $6.50 per 1000 +/-.  The sooner you get into a hole, the sooner the firm can start paying you a fraction of that 70%.  Because until you come out of the hole, they’re not entitled to pay you a dime, but just to keep you hooked by a rope, they’ll give you 25% or 40% if you have a profitable month, they don’t care, they have a natural hedge as a prop firm, which is what made them such good businesses in the past. But not anymore.  If you’re a retail prop trader (you know you’re a retail prop trader when you have a daily stop loss limit under $25,000), you will constantly hit your limit and will never make a dime. It’s a behavioral thing. Again, for another article.

So back to the YTE article… As much as it was written to not appear like an advertisement which I assume would have been pretty expensive, it’s really written in a way where us “Yank’s” here in the US see it as nothing but an advertisement. The truth about the Proprietary Trading business in its present form is that there is none. The Volcker Rule has pretty much made it impossible to make money from proprietary trading without breaking the law or paying a huge amount of money for an infrastructure that abides by the law. So be very wary of those hole in the wall firms that are actually Hold Brother’s affiliates, offering you 99% or even 100% of the profits. Who offers you 100% of your profits? A firm that is assuming from day 1 that you won’t make a dime and all their revenue will come from your trading.  This is why the big boys are shutting down their Prop Desks, and I’m talking the top 10 banks in the world, which doesn’t mean there’s a huge new talent pool to choose from. Because the guy used to pulling the trigger on billion dollar trades because his trading line was a few hundred million, cannot and will not adapt to a trading line of $250,000 or $1mm or even $5mm.  They’re used to seeing equity swings that would cause a coronary for the owners on day two of this new traders employment. These are guys that manned desks and got paid 7 figure base salaries plus a huge bonus at the end of the year from their firms, not quite how the “other” prop side works is it?  They saw their “daily” equity, which they were trained not to watch, oscillate $200,000 for example.   

Nonetheless, this dude was pitching in this article that “kids out of high school, with the right training and education, would succeed”. WRONG. All they want is to be able to mark-up your commissions. Let me blow the roof wide open on this business since I’m safe in Cali and attending a Top 5 Law School. The company’s cost to trade is approximately $0.00027/share. That means, it costs 27 CENTS to execute a 1000 share order withtheir clearing firm, give or take a few cents. Their so called in-house traders are being charged around $.0065/share to trade, which equals about $6.50 cents to execute a 1000 share order. The mark-up is 2,500% per share and sometimes more, not to mention the huge chunk of your profits they take on top of that mark-up that costs you at least 5 figures a month, admit it. Then there are the pass thru’s for taking liquidity or getting paid for adding, but none of their training programs teach anything about the market’s micro structure.

For one thing, the partners are clueless themselves. Number two, the micro-structure is so fluid and dynamic that it’s pointless to try and teach an 18 year old kid, or a 24 year old young adult about it unless they’re studying it on their own. You can’t tell someone how to become a good trader, or teach someone how to find the right strategy. Or how to execute in the markets without leaving a trace; how to create baskets and customized algorithms that spray the NBBO and all the MMID’s on the inside to make sure you get your fill, even if it’s for 100 shares from each MMID; or that witha 2 second “fill or kill” instead of a market or IOC order, the trader can outsmart these automated market making algo’s and beat them at their own game.  Or how to use ”order remainder allocation” to go to the highest paying ECN for adding liquidity. Or when ECN’s flip and actually pay for liquidity like EDGE/X was doing. I don’t know if they still are.  Labor Day is today, and I won’t be returning to the markets for another few weeks.  This allows for order flow arbitrage if you’re fast enough. You take from the paying ECN and post on another paying ECN maybe at the same price. If both orders get hit, you make like 25 cents on that 1000 for playing “infrastructure arbitrage”.  This is all Chinese to the partners, to the teachers, to the traders. It’s quite sad really, and I only got to witness it because I ”did my time” in New York. If I ever trade from somewhere, it’ll be further east, like London, Spain, Italy, France, Montenegro, Croatia,  etc… The number of edges one gains is another article in an of itself. So we’ll leave it alone. But remember, the one with the most information wins. And sadly, those in NY have the least info in a 24 hour period. 

You can’t give someone a daily trade sheet, and expect them to trade off that sheet, unless you’re running a real hedge fund, like Stevie Cohen at SAC, or Millennium, where they love the term risk and being the one on the other side of any trade. Instead of spending even a penny on any seminars, trading schools, or online webinars, or anything of that sort, use your money to continue your education, get your MBA or PhD or JD, or JD/MBA, andthen get hired by one of the top 50 firms in the world. Don’t go working for one of the bottom feeders of this business just because you don’t want to go to school anymore. Think of school as a bridge to get to a more advanced, and significant trading arena, where you don’t have to worry about eating what you kill or starving to death. Remember that NY is a tough place, and not everyone can make it there, not even this writer. So use your wits, and avoid firms with either 3 letters in their name or the number 3.  But more importantly, remember there are no shortcuts in this world, and even a trader with the most impeccable track record that dates back 5 years, say without a single losing week, constantly earning an avg. of 50% per year, on a line of no more than $5 million, will NEVER get hired by the real big firms.  Because they START their traders with $25 or $50 million lines and expect them to produce immediately. A trader used to trading a few million is nothing but shark bait. Good luck and throw the article where it belongs.

Here’s the point. The markets look sick on the back of some of the bleakest economic indicators we’ve seen since the Great Depression. Yes there are some optimists that see the cup as half full, and to counter them, there are the pessimists who see it as half empty.  I see it for what it is: completely dry. Not a drop left in the cup.

Why?  Take a look at the charts. Either the “flash crash” and recent major bear market top confirmations, which are undergoing retracements right now, are no reason to be worried; then there’s one thing you should definitely be worried about, and that is the debasing of not only the USD, but all major G8 currencies, as well as all currencies tied to the USD, which is half the world. Considering commodities are priced in USD’s, and you have some sort of mental block and are unable to short stocks, the long side of your MARKET-NEUTRAL portfolio should contain commodity stocks, although a global recession will kill demand, regardless of the value of the USD as nation after nation devalues to remain competitive with those tied to the US Dollar.

It’s like the days of Fiat Currencies are crashing down.  As the cycle turns, and factories close, and mergers that were done at the top are unwound or scaled back, unemployment will continue to rise.  The Bush Administration did a heck of a job destroying any last vestiges of worker’s union’s, which was one of his top policy objectives. So forget about any “cradles” to support those forced to go on welfare; the indigent, the transients, the homeless, basically, the poor.  I don’t personally agree with the concept of a “workers union” for this exact very reason. Union’s were built in the very early part of the 20th century, when workers needed rights, child labor was rampant and civil disobedience was not tolerated and countered with severe force, as if we were how Iran is today.

However, in the 21st century, labor mobility is a key factor in keeping those with specialized skills employed. Web sites with thousands upon thousands of jobs are available to the unemployed, with jobs all over the country, something that wasn’t available 100 years ago.  Labor mobility is the opposite of Labor Unions. But since the world has changed, Labor Unions have become nothing but a hindrance to productivity and an excuse for certain employees to abuse their union rights.  I recall living in Michigan and my neighbor above me was usually on strike from Chrysler. He loved it because he got to stay home and drink his Budweiser while collecting 98% of his pay!  No wonder our automotive industry was shattered. Have no doubt though, this same industry, without the ball and chains attached to it, will become the most prosperous industry in the world, powering employment in green energy, new construction, advanced labor, etc.  No more people trained to pull a lever all day long, but instead, those trained in sciences that make lasting contributions to civilization as a whole. With Labor Unions, I doubt even Craig’s List would get any hits.

I digress. Back to the present day and current market. When studied up close, one can see prices have leaped above widely used moving averages. Prices did this after confirming major tops and some even making new bear market lows!  So we know the smart money has been distributing stocks for a few years now, and in the process, creating the occasional rally that appears bullish to the laymen, like button pushing day trading robots who are going broke every day while their firms get richer and richer.  There are 4 phases to the stock market, and this is Stock Theory 101. If you don’t know those 4 cycles, get out now while you still have a chance. You’re a dead duck.

This is not a traders market. It’s not a stock pickers market. It’s not a market to invest long-term assets, it’s not a market with anywhere to hide. There is debasing going on, and unless you are sitting on something tangible, like blocks of gold and silver, then you will continue to see an erosion of wealth. Even when you are sitting in cash, you are slowly draining money away due to the ZIRP that’s been in effect forever now.

So without further adieu, I present to you the recent “event” that has all the day trading button pushers at the edge of their seats because prices have “gapped” above their 50-day Simple Moving Averages. The charts look entirely different when using Logarithmic scaling and Exponential or Weighted Moving averages, but the average person who invests via Scottrade, or Ameritrade, or eTrade doesn’t even have a clue what those terms mean. I’m going to link to the charts rather than post them because I’m not in the mood.

The reality is:  Gold is rising and the number of actual “deliveries” vs. rolling of contracts has exponentially increased in Chicago to unprecedented levels, and believe me, it’s expensive to take delivery of the gold rather than rolling the contract, plus storage, transportation, security, etc… So near term, buy companies with no overhead, that just collect royalties, like Royal Gold (RGLD) which just corrected 20% so now is the time to pick some up.

My favorite at the moment to buy and park is Chimera (CIM). They are running operating margins in excess of 80%. Their P.E. is below 6. And their yield? A fat 18% and trading for less than $4. You probably could get it for $3.50 if you’re patient. The smart play is to scale into the positi0n.  Start building it up. They are in the exact sweet spot of where you want to be as a company. Buying Residential Mortgage Backed Securities at huge discounts. They’re also gobbling up Residential Loans, real-estate related securities, and other asset-backed securities, again, at enormous discounts. If I had the money to back me, this is exactly what I would be doing right now. I would have my team combing through the pieces that make up each tranche of a CDO, ABS, RMBS, and even some CMBS.

Yields are falling and continue to fall as the Fed continues its quantitative easing operations in the market and has made it clear that their ZIRP will remain until the economy has substantially stabilized, a far cry from where we are now. The yield on government bonds can’t go to zero though because then the Chinese will look like fools for sterilizing their surpluses using zero return or negative return investments.

All the major indices, after making new lows for the year, have rallied back up to their downtrend lines, regardless of the fact that they are above their “50 day Simple Moving Average”.  But anything hopeful to cling to right?  Poor, poor fools.  The primary trend in developed economies is down. Showing promise are India and M.E.N.A. economies, especially after the World Cup being held in South Africa. Brazil is still too dependent on natural resource exports, so they’re in trouble too. As for Russia, forget it. They’ve gone back to the days of communism. There is no free market anymore in Russia.   China is still “on fire” according to the numbers, but one wonders “who’s buying all their output they’re reporting”?  Could they be manipulating the numbers? Will there be a major fallout there?  A Chinese bank went public recently, after ICBC went public last year. So there is demand for these stocks, could the demand be internal? In other words, could the party (Communist) be buying stocks for their own account?

Where does that leave us? It leaves us hoping for a major technological innovation, a world changing event, some sort of technology that will return optimism to the hearts and minds of all the Capitalists so they can finally tell the Socialists to shut-up, Capitalism works.  Perhaps if and when Obama re-directs the $100 billion+ per year our government is spending in Mesopotamia, for what, I don’t know; into domestic programs and fights not to be labeled as the “tax and spend party” by reminding the public using every channel available that the money is being diverted from the war, and not from new taxes, then we’ll see some real stimulus.  God help us if faith in the USD is lost. Unless the “brave New World Order” wants it that way, and is trying to introduce an international, single currency using SDR’s held by the IMF in the accounts of nations, and can be used as “money” between nation to nation.

I’d like to make an SDR withdrawal please.

Disclosures:  NONE

Once Facebook opened up its marketing platform to developers and the widget was born as a cheap marketing and branding tool, entrepreneurial endeavors became accessible to all 6th grade level programmers . Then came the Apple iPhone and its gazillion applications.  The Facebook and Apple platforms enable anyone to create social applications which allow users to interact with their friends or a particular business. With many deep integration points, platform applications are effective ways for a business to leverage the social graph in ways unimagined until now. This bold move turned Facebook, and possibly the iPhone, into primary ‘storefront’ applications for business’s, allowing small companies to create a dynamic online presence for their customers. 

So when Microsoft threw out $240 million for a 1.6% stake, thereby valuing Facebook at $15 billion back in ’07, it was one of Bill Gates’ shrewdest investments, even though it took a while for the so-called experts to in fact ‘get it’. Not only did this keep Facebook out of the hands of Google, but more importantly, had Google swallowed up Facebook, it would have changed the dynamics of competition between Microsoft and Google so heavily in favor of Google that it could have forced Microsoft to accept defeat in search engine marketing sometime down the road.  

Earlier that year, when Google swallowed up DoubleClick for $3.1 billion in April, it also got a superb deal mainly because of the way Google has been able to integrate DoubleClick into its’ Adsense and Adwords platforms. Absolutely seamless, very easy to use, and a category killer for domain name parking. Why go through an intermediary to park your domain when you can go straight to the source and make more money? Most domains don’t even look parked these days. For example:  www.CureThis.com is a full web site parked by a company called DevHub! However, when Google parks a site, there are no bells and whistles, it’s quite obvious the site is parked. For example, take a look at www.ShopBestMortgage.com or www.FlashVirtual.com.  Both of these sites are parked with Google. However, even with the very simple look, many studies have shown that simplicity like that creates the greatest return. It’s just a matter of getting the site indexed and showing up on searches.  Even my nickname is parked at www.MarketWizard.us with an entirely different template. About five years ago, domain parking was for the uneducated masses trying to get lucky. Now it’s becoming a strategic asset.

In May of 2007, Microsoft’s $6 billion purchase of aQuantive for a massive 85% premium, and Yahoo’s “me too” buy of Right Media for $680 million, were both in response to Google’s acquisition of DoubleClick. It’s quite true those acquired by the latter two giants were players engaged in BT (Behavioral Targeting) since at least 2004, however, the marriage of a search platform with the largest banner ad serving network for publishers has blurred the line between service provider and competitor. The major online players appear to be declaring a head on war with the old school Madison Avenue companies, although WPP of London appears to be with the curve following their acquisition of 24/7 RealMedia in May of 2007, which seems to have worked out quite profitably for them, especially for clients that want a “one stop shop”. As the next evolution of the internet gets underway, the concept of “Long tail theory” is all of a sudden a part of every ad executive’s vocabulary.

Now entering the fold is Apple’s iPhone and iPad, both of  which have access to Apple’s “App Store” where they can download thousands of applications which makes the concept of behavioral tracking even more granular, even though this concept has not yet grabbed the attention of the blogosphere or the press.  With the app store, Apple can track, at a very granular level, the way their customers behave, without even having a web presence.

The iPad alone is a major game changer and will allow computing at a level never before imagined. The response to the iPh0ne and iPad is Google’s Android open source platform, which has been catching on quite rapidly, although in term of the number of app’s available for Android relative to Apple’s iPhone is pathetic. It’s like David and Goliath in this match, and Google is David.

Google’s advantage lies in their dominant market share of search traffic. By tracking the user through his or her I.P. address, Google is cataloging and mining a mammoth database of user behavior. DoubleClick on the other hand tracks the user by placing a cookie on their computer. Combine the two and you have a full profile of most internet users at an individualized, highly granular level. Anonymous or not, that’s highly valuable information. And it put Google in a position of incredible advantage.  I hope they maintain their “Don’t do evil” mantra.

Google will always have to walk a tight line, similar to bumps in the road eBay faced as it was on its way of becoming the largest original user generated content (UGC) site. When eBay would make a management decision at the executive level, the repercussions in the event their user base disapproved were almost immediate. Google is walking this same line, and I believe the boys at Google headquarters are smart enough to realize that as long as they continue to innovate and provide useful services at zero cost to the consumer, they will retain their user base.

Recently, for example, I found a “Transliteration” tool in Google Labs, where I look quite often for really cool toys in pre-Beta or just toys that will never see the light of day via an actual release. The transliteration tool is beyond cool. It allows me to type in English, and transliterates it into one of many languages from which you can choose, so that when the reader reads the message, they are reading it in their native alphabet but they are sounding out the English word.  It’s just like foreigners communicating via email in their home tongue but using the English alphabet by sounding out the words. Except Google has reversed this. So a user can type “Hello my name is Bob” in Persian, or Hindu, and it will type it out in that language but when read will sound like “Hello my name is Bob”.

It’s these kinds of innovations that keeps Google miles ahead of the competition, while also watching the competition for any fatal mistakes, which hasn’t happened yet with Apple and its iPhone. Moreover, the launch of Android as an open source system whereas iPhone is closed could be an area to keep an eye on. Who will win this war? Apple fought this once before against IBM/Microsoft and lost. But this time, it has the advantage. They are way ahead on user saturation and their product is cool in many aspects. But I digress…

For now, if a user visits any major site on the Internet where DoubleClick is serving ads, and the user got there using Google search, or any search engine for that matter, even Microsoft’s Bing, Google knows where the user came from, when the user was on other particular sites, where the user went after leaving the site and what the user bought.  This allows them to serve an ad at a later time customized for that user based on this data. Google is certainly at an important juncture and must find ways to continue growing revenues. This means that Google and all of the other major online players must expand beyond text-based search. Hence, the iPhone and Android.

Web communities such as LinkedIn, MySpace and Facebook (and dozens of others popping up everywhere) have brought like-minded people together all over the world into hyper-niche verticals that continually optimize themselves through rapid evolution. From the advertiser’s (or Politician’s) perspective, each new social networking platform becomes a doorway to whatever psychographic and/or demographic being sought. All the old fuss about “monetizing the social network” is being addressed by technology delivering user specific ads to web site visitors customized for that visitor, whereas the next visitor or a visitor at the same time to the same page for that matter, is seeing an entirely different advertisement.

This new “socialization” of the web brings together multiple niche communities with similar interests. Even though I have a Facebook profile and spend time on the site, it doesn’t necessarily mean that I also like the same things as my other Facebook friends. “New” media marketing is all about serving highly relevant ads to every single user on the site.  I can’t figure out why ALL of the ads I get on my Facebook are for half naked single women desperate to meet guys. It makes no sense but I like the pictures. 

Advertisers no longer monopolize a specific time zone or TV network. At any given time, if there are 100,000 unique visitors on a web site, and 10,000 of them are on the same page within that site, one could in theory serve 10,000 different ads from unique advertisers at the exact same time, all of them customized based on the users “web print”.

Although behavioral targeting has thrived by allowing marketers to offer ads customized based on the web surfer’s age, gender, location and online activities, in the immediate future not only will those variables be considered, but also the items the user may have been shopping for recently.

For example, imagine you have searched for a specific bottle of wine from a shopping web site in the past couple of weeks, and were now on your favorite news site reading an article about foreign affairs. At the end of your article, you might see an ad from a wine merchant for that exact same bottle of wine “on sale”. Now that’s helpful to the advertiser and the consumer.  It is RELEVANT and that’s the point. We’re a nation of consumerist pigs. But the net-net means the advertising network is tracking every single web user, although anonymously of course, in a way that continually allows them to “guide” users to products that meet their real time interests. The convenience factor lies in that last term, “real time interests”. But so does the “creep” factor for some, or “Big Brother is watching”.

Back to our example, say you visited the site but chose not to purchase anything. Tomorrow when you log into your Gmail account to check your email, you may find a digital coupon created just for you by a competing merchant offering the same product at a 10% discount. This is “long tail” marketing at its finest. And hey, you just saved 10%.  It’s a win-win.

The combination of statistical text analysis and clustering methodologies with semantic analysis procedures creates an outcome that can be different each time depending on multiple variations of subjects, keywords, and the unique relationships between them. In other words, each users screen becomes a dynamic megapixel billboard.

The natural evolution of this technology will be based on smarter and smarter algorithms that will be able to predict the potential buying habits of a shopper based on their behavior during certain days, seasons, local weather, and just about any data point you can imagine, including the performance of stocks they looked up recently on their favorite finance site and their interactions with their friends on other social networking sites.  Contextual advertising is for those of us that have learned to subconsciously tune out banner ads when viewing a site.

In the future, when this technology eventually merges with the television, or when the television doubles as your computer, then the really cool, highly targeted stuff begins to happen. Imagine Tony Soprano sitting in front of his white Cadillac while doing peyote in the desert during the shows closing episode drinking a can of coke (which he was by the way). That can of diet Coke is there for brand awareness and probably cost Coca-Cola several million dollars.

With advanced B.T. combined with contextual advertising, online advertisers could swap out the diet coke for a can of Budweiser, or a bottle of water, or even a carton of orange juice depending on what that viewer buys when they go grocery shopping, which Church web site they may have visited, or nutritional supplements they have purchased.  What’s a can of diet Coke worth to a viewer that hates soda? NOTHING! But how about a viewer that always buys Fiji Water? Instead of a diet Coke in Tony’s hand, there’s a bottle of Fiji water for that viewer. Bingo. Customized branding at the individual level. Now how amazing is that for advertisers? Not a dollar wasted. You only pay for what is displayed, or “served”. Nothing else.

Although this is not yet possible for video, if you tune out the banner ads when reading up on a geopolitical situation that you’ve been following recently, the words within the articles become active hyperlinks to products and items you are interested in. As an avid reader, I am thrilled when reading a very interesting article on the web which is embedded with hyperlinks to books being recommended by Amazon. It doesn’t bother me to read the word as a hyperlink and I can read through or hover my mouse over the link to see what the book is. It’s my choice. Furthermore, some words may hyperlink for me while other words will hyperlink for other readers based entirely on that reader’s interest. This is the maximum level of efficiency an advertiser can achieve when targeting a consumer but for the publisher’s of the world, this is absolute heaven.

Publishing is all about creating quality content that people will want to read, thus giving the publisher advertising inventory to sell to merchants interested in that audience. By turning every word in their content into a potential ad slot, publishers can benefit from having knowledge of real-time market prices for certain keywords and can tune their sites to favor certain keywords over others. This is made possible by the anonymous auction systems being used for clearing ad inventory.

The economic opportunity is staggering. Total ad dollars spent via online platforms are still in the single digits, and as the pie shifts in favor of the web thanks to social networks and other UGC sites, the market opportunity for smart players is significant. Think of the recent quarrel between Google and China. China’s total ad spending on line for all of 2009 was $1 billion. That’s really pathetic for the nation  with the largest population in the world and merely a drop in the bucket; hence the stratospheric rise of Baidu (BIDU), the Chinese Google. This is a politically motivated move by the Chinese Government to make sure one of their own wins this market and not an American company that can ultimately track the web use of every Chinese on the Internet, censorship or not.

The world of consumer marketing is about to experience what Andy Grove, the former Chief of Intel termed, a “Strategic Inflection Point” . The fight between old and new basically comes down to the difference between a major consumer brand such as Gillette, Honda, or Budweiser spending $50,000,000 on a television commercial campaign during the Super Bowl, versus spending 10% of that amount on the web to achieve significant conversion rates from eyeballs to sales.

The days of “branding” by shot-gunning a company’s name in front of the consumer are being challenged by the wonderful opportunity to market directly to the person actually looking for a product on the web from the company they want it from, at the exact moment they are searching. Yes a bit Orwellian, but once we get beyond the “novelty” effect, we will realize that this is another downward pressure point on inflation as it encourages competition and achieves efficiencies that will allow merchants to lower their prices for consumer goods in general.

Although opponents are banging the privacy drum based on discrimination, this movement away from carpet bombing the consumer to laser guided bombing should improve the quality of the Internet for everyone. Right now, the total amount of spam sites all over the internet are overwhelming even the smartest search algorithms. Criminal elements in Eastern Europe and Asia continually find ways to beat the anti-spam efforts of the search giants.

When people accuse Google of not caring about click fraud, they are being naïve and overly simplistic. If users stop trusting Google to provide relevant information, they will search elsewhere. It’s very easy to change your default search engine. The shift to performance based marketing based on anonymous behavioral profiling of web users will put upward pressure on keyword costs in a way that will filter out the spam sites most likely auto generated in a few minutes.

This also benefits Internet marketing companies by streamlining the process of dealing with the ad networks and giving them access to quantitative data for analytic purposes. Google Analytics is an incredibly powerful tool for tracking and measuring a sites’ user base. And best of all, it’s FREE.

Keep an eye on the next wave of acquisitions by the major players. ValueClick (VCLK), one of the few remaining independent behemoths focused on “Cost-Per-Action”, is likely to go next for a price in the single digit billions.  As the Yahoo and Microsoft search partnership evolves, Google will be keeping a close eye on their share of the search market. If it starts to drop, you’ll see a big move by Google to raise the stakes. RevenueScience and Tacoda (now owned by AOL) will be eyed by Madison Avenue firms circling their wagons and looking for bolt-on acquisitions as a chance to survive another wave of Creative Destruction. To Joseph Schumpeter, this type of Creative Destruction must be a blast to watch from above.

And as for the privacy concerns, in 2006 the ChoiceStream Personalization Survey polled consumers asking them if they would be willing to let websites track their clicks and purchases. There was a 34% increase from 2005. If we are going to see the ads, they may as well be highly relevant and actually save me money and make my life better. I just don’t want to see them use this data to link a pattern of behavior, such as cross-campaign learning, to infer private information such as a person’s health. On the other hand, if I don’t have a cat then I don’t want to see ads for cat food.

I know many of you are Prop. Traders, whether equities or swaps or paper, or whatever. It doesn’t matter. The forum is to exchange ideas and share trades and various perspectives from highly qualified and advanced traders around the world (including myself, of course).  It goes without saying that if your LinkedIn Profile indicates you are a recruiter, or unrelated to content of the group, your request to join will sadly but most assuredly be declined.

With that being said, I invite you to join Discretionary Proprietary Traders Worldwide

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• Egocentric memory: the natural tendency to forget evidence and information which does not support our thinking and to remember evidence and information which does.
• Egocentric myopia: the natural tendency to think in absolute terms within an overly narrow point of view.
• Egocentric infallibility: the natural tendency to think that our beliefs are true because we believe them.
• Egocentric righteousness: the natural tendency to feel superior in the light of our confidence that we are in the possession of THE TRUTH.
• Egocentric hypocrisy: the natural tendency to ignore flagrant inconsistencies between what we profess to believe and the actual beliefs our behavior imply, or inconsistencies between the standards to which we hold ourselves and those to which we expect others to adhere.
• Egocentric oversimplification – the natural tendency to ignore real and important complexities in the world in favor of simplistic notions when consideration of those complexities would require us to modify our beliefs or values.
• Egocentric blindness: the natural tendency not to notice facts or evidence which contradict our favored beliefs or values.
• Egocentric immediacy: the natural tendency to over-generalize immediate feelings and experiences–so that when one event in our life is highly favorable or unfavorable, all of life seems favorable or unfavorable as well.
• Egocentric absurdity: the natural tendency to fail to notice thinking which has absurd consequences, when noticing them would force us to rethink our position.