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The "Subprime Crisis Opportunities" Dashboard
A Dashboard Success Story

by Daniel Liezrowice, Engineering Software LabTuesday, October 9, 2007

Background

On July 18, 2007, I was sitting at my desk looking at my Bloomberg terminal watching the carnage in the financial markets. This chaos was caused by what we now know as the "subprime crisis" and I was wondering about the implications vis-à-vis our business. The phone rang. On the other end was a client, a manager of a large proprietary trading group of funds. "We need to meet today," he says. "Get your guys ready and come over here as soon as you can; we'll be working here all night."

This fund is considered a "value fund" from the so-called Graham & Dodd school. They believe in buying stocks and bonds at less than their intrinsic value - and they have devised elaborate systems of equations looking at various correlations between a set of financial ratios to a price. Supporters of this school are always on the lookout for opportunities where stocks and/or bonds are seriously and (in their opinion, wrongly) under-priced. When such an opportunity appears, they strike fast and grab it.

Sometimes, it might be many months before such an opportunity appears, but their philosophy is that "you make money by waiting." Since they are trading their own money, they are not obliged to invest any cash they have and can sit on it idle for years before using it for the right opportunity. It became clear to them that the subprime crisis was creating opportunities by the hundreds every hour, as panicked investors were selling low stocks, and bonds were wrongly priced on exchanges everywhere.

Need For A Custom Dashboard

The crisis situation created a need to constantly monitor a watch list of 4,500 stocks and 3,000 bonds, while waiting for the financial ratios representing the "value" to be correlated in a certain way with the price. The 7,500 instruments are scattered across 50 exchanges, 12 time zones, hundreds of sectors and sub sectors, etc. Such scattered data calls for a custom-made dashboard and we (once again) chose the Fractal Maps technology as the solution.

What are we monitoring?

The fund's quantitative analysis team created a large set of equations based on an analysis of financial ratios and their relation to the price. The bottom line is that we were looking at a normalized and smoothened value (codename "GE1") that represents the relation between price and value according to the fund's guidelines.

If the gauge is showing that the value is getting close to or crossing the GE1 at 1.5, our interest in the opportunity is piqued and we start looking at it closely. If it crosses 3.0, we definitely buy.

How do we do it?

The raw data is exported from Bloomberg terminal to an Excel 2007 spreadsheet, which acts as a database and performs the necessary calculations. A Fractal Map is connected to the spreadsheet via the Fractal Intelligence Excel data connector. In theory, we should have used 7,500 gauges; in practice, this is impossible. Rendering problems would make the process extremely slow, so we use the Fractal Intelligence colour coding.

We created a dashboard that automatically aggregates the 7,500 units to up to 10 color-coded deciles which update automatically. As soon as a unit value changes, it moves automatically into its respective decile. With such a large population, the data fits nicely into 10 deciles, so in theory, if all units were in the range of 1.5 to 5, we would have just one circle rather than 10.

The reddish circle aggregates all the stock/bonds that we don't want while the bluish one is all the stocks/bonds we'll consider buying. Everything else is in between.

Digital Dashboard Monitoring Stock and Bonds Investments

We drill down in to Decile 1.

Digital Dashboard Monitoring Stock and Bonds Investments

The next level is "exchanges". We see that the Toronto exchange has some interesting opportunities.

Digital Dashboard Monitoring Stock and Bonds Investments

The next level is "sectors". We see something promising in the basic materials sector, so we drill down to it.

Digital Dashboard Monitoring Stock and Bonds Investments

ELD (ELDORADO GOLD CORP) is the bluest of them all, having a GE1 value of 2.84 - that's definitely something to look at. On July 6, the price dropped from $7.50 to $4.95. A further drop below $4.70 will make it GE1 3 and a definite buy! (In reality we waited until July 27 to buy, when the price was $4.65). No emotions, no guess work, no tedious mining of hundreds of charts. It was quick and simple - dashboarding at its best - straight to the opportunity we were seeking.

How it works?
Understanding Fractal Maps is easy when you look at it in action. The best place to see live online Fractal Maps examples is at: http://www.eswlab.com/
__________________________________________________________
Created for a client and submitted and by:
Daniel Liezrowice from Engineering Software Lab Ltd

Israeli Developers and system integrators for Advanced Data Visualization products
1 Dov Carmi street , Tel Aviv 69544 , Israel
Ph: +972 3 6496678

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