Oct
22
One of the most prolific members we have is Mike T. He works very hard to learn about the markets. After reading What The Market Says, he made the following observations:
Hi there T,
As I continue to digest all the market information, I keep thinking about that Justin Mamis interview pdf file you posted a few days ago. I like how he tries to explain the unexplainable methodology of intuition and the old school ways he goes about ensuring he has a proper ‘feel’ of the market.
But his best insight was how with all the computer program trading and modeling and such that none of the floor traders now are even allowed to have cash as a position. They are required to chase after the latest hottest thing and anyone not in is not only scorned, but their entire existence as a trader might be on the line. You multiply that with all this derivative stuff and it is no wonder we see what is now happening (i.e. pre-market crazy gap up for AAPL).
The best is that all these financial blogs (including yours) have gone out of their way to repost all the essential truths from true sages such as Justin Mamis and such. The enlightened quants know the truth of the market and they don’t really need to remind themselves of the essentials, but we all nod along in case we have strayed from the true path or God forbid, think that some derivative might be the new true path. I can almost hear them saying “Yes, I know it is not different this time, but is there even the slightest chance it might be?” Speaking of that, how many enlightened quants have Paulson’s ear? I bet that number might be a bit too low.
My thinking is that few people take time to read, think and observe these days. Most prefer to have it dumbed down to a red arrow for sell and a blue one for buy. That’s all well for short term stuff, but what about big picture stuff, information that might not be tradeable but is essential to know? What the market says in the macro picture determines your trading strategy going forward.
Right now, most of us who have been in the market for a long time are exhausted. We’ve become addicted to watching this train wreck to the point of no sleep. And so it was that I reminded JG in the middle of the night that our Dow Death Clock had about six days left:
8:48 PM Teresa: So, only 6 days, 16 hours left before the Dow goes to zero.
8:55 PM JG: I know. You could see the shockwaves going through the markets this afternoon. They know what’s up.
8:56 PM Teresa: I actually passed out for a few hours. Did I miss something?
8:57 PM JG: Just the usual insanity. It looked like it might be a normal day…Then the moves started getting bigger…And bigger….And then it was insane again.
8:58 PM Teresa: I’m sure the people who said “this is the bottom” and bought are getting worried.
9:34 PM JG: Well, I’m still hoping we make it through. Preferably without the red button getting pushed.
9:35 PM Teresa: I think it’s basically up to the Gods now because all the stuff they are doing right now in the U.S. has a price tag of $3 trillion so far and not much of it will help deal with the problem of actual people, the consumers pay their debts. It might have been easier to pay for everyone’s healthcare because that would free up thousands of dollars per person per year to go toward other things and there is no way that would have cost $3 trillion. But whatever. There will be a the New New Deal, Bretton Woods II.
9:37 PM Teresa: The thing that worries me the most is that Brad Delong interview [DOWNLOAD MP3]. Friedman = wrong. Delong = wrong, so it’s down to Bernanke’s thesis and what if he’s wrong and this is not The Great Depression II. I mean, back then did the populace have private debts to the tune of what they owe now?
10:16 PM Teresa: So let’s take a look at the daily chart of $SPX.X. We have a pennant.
10:17 PM Teresa: If the market holds, then it should go up and take out the 10/14 high at which point the pennant morphs into a two-swing bear flag. After that, it might come down to test the 10/16 low.
10:19 PM Teresa: It literally needs to jam to the upside tomorrow or else it’s nearly out of time
10:20 PM JG: Well, that doesn’t sound good.
10:54 PM Teresa: So brace for some excitement. It’s do or die here for the stock indexes.
I’m lucky to know JG and The Quant. They were quants before the term entered the lexicon. Back in the day, we observed the world from a certain perspective with certain assumptions before playing with the math:
10:08 PM Teresa: I put the question to the members about making a position sizer for TradeStation and only one person wanted to use it. Everyone seems to be obsessed with stock picking. Few seem to understand that position size is important. It’s like gospel that there are people who can pick needles out of a haystack.
10:09 PM JG: Well, from my perspective, I think the vast majority of people should just be invested in diversified, low cost beta.
10:10 PM Teresa: But the vast majority of people seem to have other ideas. They really do.
10:11 PM JG: I think you’re always better off starting with the hypothesis that the market is efficient.
10:11 PM Teresa: exactly
10:11 PM JG: Most people seem to start with the hypothesis that the market is inefficient.
10:11 PM Teresa: the market is really efficient at taking candy from a baby
10:11 PM JG: And then try to figure out how exactly. lol
10:12 PM Teresa: And worse, they just don’t believe me when I tell them that luck has a lot to do with stock picking.
10:14 PM JG: Oh well.
10:15 PM Teresa: I guess they are forever on the other side of the trade. Someone has to be.
10:15 PM JG: Right.
10:23 PM JG: What do you think of heating oil here?
10:23 PM Teresa: Let me have a look.
10:24 PM JG: By the way, I absolutely nailed the top in crude. Was a sight to behold lol
10:24 PM Teresa: Oh my God. I haven’t seen the HO chart. It’s just like the Dollar three years ago, the exact same pattern at the top.
10:24 PM JG: I even sent the e-mail out with my analysis.
10:26 PM JG: Got the bottom in the dollar as well, pretty much.
10:26 PM Teresa: Good work
10:26 PM JG: They’ll make a macro trader out of me yet. lol
10:27 PM JG: Just a shame all the relative value stuff has gone to s**t! lol (I exaggerate.) (But it’s not good.)
10:28 PM Teresa: Well, did you do the trade as macro or on the big failed breakout?
10:29 PM Teresa: Wasn’t that crude a beauty? The Trader Vic 2B of 2Bs?
10:29 PM JG: I did the fundamental call in mid/late June.
10:29 PM Teresa: The Ernmor Trap supreme. It was like all the stars aligning
10:29 PM JG: And when it did the 2b. That was the icing on the cake.
10:30 PM Teresa: Remember that was like the QCOM and AMZN predictions? Like the GOOG predictions where the analysts doubled the upside target after a tremendous run? That was a total silent bell.
10:31 PM JG: Was a bit early in the dollar though.
10:31 PM Teresa: Well, no one is perfect, not even you and me. ;-) Shhh, don’t tell anyone.
10:32 PM JG: It’s fun when it all comes together like that though. When the stars align, as you say. I mean, the crude top was obvious really.
10:34 PM JG: I remember when you called the top in the dollar on your website. To the day. Right? And the bottom in gold, if memory serves.
10:35 PM Teresa: Well, that was easy. I remember buying a bunch of gold futures at $270ish and then going on vacation without even a stop in there. I mean, the cash cost at that point was like $250/ounce. lol It was a no brainer.
10:36 PM JG: You were only a year or so out on real estate too.
10:36 PM Teresa: I think I relayed the story from the summer of 2005. I was at this housewarming party where the guests swarmed the guy who worked as a real estate appraiser, much like I have been swarmed at cocktail parties at previous market tops. That rang the silent bell.
10:37 PM JG: You should be getting huge guru credibility now! lol
10:37 PM Teresa: Nah, nobody cares. I s**t you not. Everyone else gets to bask in glory but it never happens to me. Must need to get a good publicist or something.
10:38 PM JG: Come to think of it, didn’t you get the bottom in developed equities in 03 too?
10:38 PM Teresa: Yeah, I actually did my one and only seminar series leading up to the War and I pounded the table. But nobody cares. I think what I need to do is to find an old man to front the website. Lo and behold…
10:39 PM Teresa: “Remington Steele” will be a guru within the year.
10:39 PM JG: So that’s basically every major macro trend for this decade!
10:30 PM Teresa: But no one knows my name. Maybe Abby wrecked it for all the women.
10:41 PM Teresa: I guess it comes down to lack of PR.
10:41 PM JG: I guess so.
10:41 PM Teresa: Plus, I tell people things they don’t want to hear.
10:42 PM JG: It’s all been on your website(s) though.
10:42 PM Teresa: I know, but it matters not. I think they need frequent predictions, and predictions of doom, in particular. I also picked an incredible top in the bonds too and the top for QCOM within 1 day and said that would be it for tech because it was the bellwether. People like things such as conspiracies, doom, gold and Armageddon. Common sense is not something people value.
10:42 PM Teresa: Every big turn is always accompanied by a big sentiment top.
10:44 PM Teresa: To step up and tell them that it’s the turn is something they don’t want to hear. Believe it or not, I have members who were pissed I told them to get out on September 24 because they thought it implied that my model was broken! Ugh.
10:51 PM Teresa: Anyway, there is good news. TradeStation released version 8.4 in beta. We are supposedly able to custom scan 8700 securities. Not that I have any clue what to look for, but we have the capabilities now.
10:51 PM JG: All the quant stock models I know have got #%^@ed this year.
10:51 PM Teresa: I know jack s**t about scanning. The way we did it in the old days was to look through all the charts by hand.
10:53 PM JG: Right. Like Cramer. With his chartbook. And his magic oscillator.
10:53 PM Teresa: OR just trade whatever the people are playing.
10:53 PM Teresa: and make money because we were more disciplined lol
10:54 PM JG: Personally, I always like to take a top down approach. I’ve never been able to get my head around doing it the other way.
10:58 PM JG: In terms of the big picture stuff, it’s basically looking at models, researching, reading, and talking to people.
10:59 PM JG: If you have a decent understanding of how things work, and you can think things through logically, then you’re generally going to do alright in this area.
10:59 PM JG: In my experience, at least.
11:00 PM Teresa: I think in the end, that is still the most effective. People never seem to change, although I have to admit at this point sometimes I get worried because it seems to be too easy.
11:00 PM Teresa: And so I say to myself, “It can’t be this easy.”
11:04 PM JG: I think the big picture stuff can be very easy at times. For sure.
11:06 PM Teresa: But again, not for most. Apparently that old common sense thing is a bit of a rare talent.
11:06 PM JG: The actual mechanics of trading is something else though…
Now, back to the real world, where common sense is usually conveniently suspended:
- Big Currency Bets Backfire
One day, Controladora Comercial Mexicana SAB de CV was thriving as Mexico’s No. 3 retailer and a competitor of discount giant Wal-Mart Stores Inc. The next day, Oct. 9, the family-owned chain, known to Mexican shoppers as La Comer, had filed for bankruptcy protection, crippled by risky foreign-currency bets. . . . Throughout Latin America, companies are telling investors they have lost millions, in some cases billions, of dollars due to foreign-exchange gambles that, in some cases, had little to do with their core businesses. Losses from bad-currency bets are ricocheting through the world’s major developing economies, including India and Korea. - Citic Pacific Slammed By Poor Currency Bet
Citic Pacific admitted in a statement Monday that it had realized a loss of 808 million Hong Kong dollars ($104 million), after it unwound some positions when the currency exposure was discovered in September, and warned that it may book a loss up to 14.7 billion Hong Kong dollars ($1.9 billion) when it marks the leveraged currency contracts to market at the end of 2008. The painful revelation forced Beijing-based Citic Group, which owns a 29% stake in its Hong Kong arm, to extend a standby loan of $1.5 billion to Citic Pacific. - French banks face audit after rogue traders lose €600m at the ‘Squirrel’
The French government is to take sanctions against one of the country’s biggest savings banks, the Caisse d’Epargne, after it suffered a €600m (£466.6m) loss on unauthorised equity derivatives trading. The finance minister, Christine Lagarde, yesterday ordered an emergency audit of all French banks after the Caisse indicated that a team of four or five traders had exceeded their limits. They were caught out in the panic surrounding last week’s stock market crash by what the bank called “routine control procedures”. The positions were immediately closed, the Caisse said. The traders had been disciplined. - Moody’s Employees Say They Sold Their Souls for Higher Pay, E-mails Show
An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, “Let’s hope we are all wealthy and retired by the time this house of cards falters.” Former executives from S&P and Moody’s told lawmakers today that credit raters relied on outdated models in a “race to the bottom” to maximize profits. . . . “Events have demonstrated that the historical data we used and the assumptions we made significantly underestimated the severity of what has actually occurred,” said Devan Sharma, president of New York-based S&P.
If you need a laugh, check out the financial cartoons by Kipper Williams.
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Teresa,
Could you please cover how may be hedging the Swiss Franc or not?
Thanks, Karen
The purpose of holding Swiss Francs was to hedge USD, so the way to deal with that would be to unwind and switch back to USD.
T,
I’d say Being a ‘Cult’ guru is better. Why be Ben Affleck, when you can be John Malkovich, or Why Be Paris Hilton when you can be Cate Blanchett.
Eric
Well said. We can be the ode to the Rocky Horror Picture Show. ;-)