July 19, 2013 Update

DJIA:15,549 S&P 500:1,689 NASDAQ:3,611 Gold:$1,291 Oil:$108.53 EURO:$1.31 YEN:100.32

Nash Equilibrium

The Nash equilibrium, coined by John Nash in 1950, is a concept in game theory explaining common behavior and reasoning in general games. The principle states that in a non-cooperative environment each player will choose a strategy that rewards them the biggest personal payoff since it is the player’s absolute best decision while taking into consideration the other player’s choice. Because each decision is the absolute best choice for each player, there is no motivation or reason to deviate to an alternative strategy. Although it is argued that the Nash equilibrium is a simplified explanation of real life behavior and reasoning, the theory has only been observed in specific situations in controlled environments. A game may have multiple Nash equilibriums, or none at all. The dire search for yield and return is what makes the stocks market an engrossing, but controlled, game. It is a common belief that the market is a zero sum game, regardless of the fact that wealth is created from it. Even though the market is linear, the outcome of investment decisions are symmetric. In other words, although the market can only move in two ways (and has been in a steady climb since its genesis) the fact that gains cancel out the market’s losses (academically speaking) is what makes the market symmetric. Strategic and informed investors choose their positions because they believe it will award them with the biggest payoff and is, therefore, the best decision for their portfolio. Finding return is competitive since markets are non-cooperative by nature. I think investor behavior is transforming equities into a stock-by-stock market. People are becoming risk averse and investing in what they believe to be the absolute best outcome for them. I think the markets are currently trading in a Nash equilibrium, everyone wants them to continue to rise before the inevitable end of QE. But as the markets change, investor philosophy remains the same. Everyone is in it for the profit and is searching for the decision that will reward players with the biggest payoff, and that’s just the nature of the beast.  

Domestic News

• Market Update Futures are trading down as investors are likely to take profits from yesterdays record close. The nasdaq is set to open 1% lower. 
• Moody's has affirmed the U.S.'s AAA rating and even raised the country's sovereign outlook to Stable from Negative, citing economic resilience relative to other top-rated nations and "major reductions" in government spending growth.

International Updates

Asia

• Market Update Japanese markets beat sharp retreat after opening higher, China trades lower. 

Europe

• Market Update Markets traded lower as technology firms tumbled after disappointing earning.

Corporate

• GE (GE) gains in early trading on rising orders.
• Google (GOOG) is selling off after yesterday’s earnings release missed analyst expectations. 
• Microsoft (MSFT) shares plummeted 6.4% pre-market after its earnings missed analyst forecasts. Microsoft swung to a net profit of $4.97B from a loss of $492M a year earlier, EPS was $0.66 and revenue grew 10% to $19.9B.
• The G20 just endorsed an OECD idea that would revamp international corporate taxes and end the loopholes that allow major multinational corporations such as Starbucks (SBUX), Google (GOOG) and Apple (AAPL) to avoid paying large amounts of tax.