Disclaimer

DISCLAIMER: The foregoing has been prepared solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any thought or instrument or to participate in any particular thought process. I am not a seminarian, an economist or a politician, but this blog may contain thoughts that may pertain to any of the above, and these are just my thoughts on the date of record. I reserve the right to change my opinion or thoughts based on new information, new misinformation or life experiences. Although not all thoughts may necessarily be original (after all, there is "nothing new under the sun"), I will do my best to point out where I have borrowed other's thoughts and ran with it. WARNING: Continued reading may result in headaches, apparent loss of intelligence or apparent gain in intelligence, or initial annoyance at the writer of this blog. This blog is not intended for the weak at heart, the ill-tempered, or people who already know it all. Read at your own risk, and only post or email comments to me in a friendly manner if you really expect or desire a response. Consult your family therapist before reading this blog. If the views of this blog are overly offensive to you, seek immediate attention. The thoughts provided are not meant to raise your blood pressure - just to get you thinking, but in certain cases, may require an increase in blood pressure in order to get you thinking. Clark's Thoughts may not be suitable for all people.

Wednesday, April 15, 2009

Staying up with the Lingo

Staying up with the Lingo – The Second Derivative

Have you ever noticed that any time a group of people get together with the same interests, a new language evolves? They create their own jargon, their own slang, their own lingo. Sometimes it goes to the point of what outsiders would call, "excess." Occasionally the lingo gets used often enough to spread to the "civilian" world. I have a friend who will routinely ask me for my 10-20, and will conclude the conversation with a "10-4, over and out."

Educators have "educationese." In Indiana they have PL221, NCLB, TRF, SST, and 504 plans.

The military uses terms like Squid, Jarhead, Wingnut, Grunt, ASVAB, AWOL, GI, and ROTC to name just a few.

If you have teenagers at home, you may have heard or read the terms LOL, OMG, OXOXOX, W8, AFAIK, and BRB,

The financial services world can be every bit as confusing. 401K, 403(b), 457, IRA, Roth IRA, SEP, SIMPLE, 1035 and 1031. You can’t watch CNBC for too awful long before you hear economic terms like leading, lagging, contango, stochastic indicators, moving averages, and so on. But, like everything else, the jargon is always evolving.

The new "in" word happens to be a math term. Now, I am not a mathematician. MA 223 at Purdue just about put me over the edge. But I do know that math terms are routinely used in our industry, and rightfully so. Technical traders rely on math computations to plan their daily trades. Math is essential for fundamentalists when calculating P/E ratios and dividend discount models.

But recently economists have been utilizing a calculus term to help find a glimmer of hope in a topsy-turvy world. The "second derivative", as it is being called, is, as one would assume, a movement of a second order. What does that mean in plain English? Instead of the absolute change in a number, it is the rate of change of a variable. Got it? If so, then you had more fun in MA 223 than I!

More simply put, it is the rate of change in deterioration. In today's economic context, we can look at economic variables such as unemployment. For instance, if employment numbers continue to worsen, but worsen by a smaller margin than the previous month, than we have improvement in the "second derivative."

Is this a good thing? Of course. Presumably, the second derivatives must all improve before we have positive change in the "first derivative" (the leading and lagging indicators). But call it improvement in the second derivative or not, the fact remains that things are still bad. The importance in the stock market is that the market moves very quickly in front of actual changes in the economy. So many highly paid individuals are looking at anything resembling "second derivative improvement". Little doubt exists that these types of "improvements" have helped fuel the nice run the markets have had over the past several weeks.

You can impress your friends by using the term when talking about a cigarette smoker. Is he still smoking? Yes, but if he has cut back on the number of cigarettes each day, then there has been improvement on the second derivative. But the fact remains that he is still smoking and still harming his body.

I am just glad that there has been improvement in my second derivative of personal pizza consumption during the last year…..