Michael Covel

Granted, this was debated some last summer, but this article on “terror futures” is still great food for thought. Download PDF here.

Two articles discussing the new exchange HedgeStreet.com:

Article 1

Article 2

Some other innovative exchanges include:

OneChicago

TradeSports

Of course before trading new instruments, always best to check for liquidity.

“As a contrarian investor I have been skeptical by default of trend following models. Still, after reading Michael Covel’s excellent and eye opening book about some professional traders, who with iron discipline follow market trends up and down and in the process achieve impressive capital gains, I find myself more inclined to endorse a trend following approach to investments. In fact, I wished that at times I would have had the kind of discipline the trend followers have in terms of entirely reversing their investment positions once the trend dictated such a posture. I think that Michael’s Trend Following is an outstanding read from which all investors can learn to trade markets better by limiting their risks and maximizing their profits through a more disciplined approach to investments.”
Marc Faber
Managing Director, Marc Faber Limited
Editor, Gloom, Boom & Doom Report

A deal to translate the book Trend Following into German has been signed.

Trend Following is currently the #1 book in the investing categories of 1.) stocks, 2.) futures and 3.) options at Amazon.com.

If you are still of the mindset that your local Merrill broker is the guy to talk to about your “money”, think again. An excerpt from the NY Times:

“For years, analysts have said that Merrill, as well as Morgan Stanley, a similar stand-alone investment bank, may have to merge with a larger commercial bank. But in recent months, the hum of speculation has taken on a higher pitch. The talk comes as the two firms’ stock prices continue to lag behind those of their peers: Merrill’s is down 20 percent from its high this year, while Morgan Stanley’s is off 23 percent from its 2004 peak. That both the future and the relevance of these two storied Wall Street institutions are being questioned at all is testimony to the broad changes in the financial landscape over the last few years. The Morgan Stanley name embodies the essence of white-shoe financial wisdom, dating to the 1930’s, when the firm was carved out of the original J. P. Morgan. For its part, Merrill Lynch, as the first Wall Street firm to popularize the idea of marketing stocks and bonds to small investors, symbolizes the idea of democratized stock ownership in America. Universal banks like Citigroup and J. P. Morgan, with their swollen balance sheets and ripe ambitions, are encroaching more than ever on Merrill’s and Morgan’s turf. European banks like Barclays, Royal Bank of Scotland and HSBC are also looking to expand in the United States. Even onetime regional banks like Bank of America and Wachovia have been hiring droves of investment bankers and brokers. Merrill Lynch and Morgan Stanley, in other words, are being squeezed on all sides. “The business models of these firms may not be sustainable,” said Richard Barrett, who runs the Credit Suisse First Boston investment banking unit, which is responsible for bank mergers. “Inevitably, Morgan Stanley and Merrill Lynch should align with the big balance-sheet providers.”

Start making the transition now to running your money (or at least use a money manager) — as it appears days of chit chat with the friendly neighborhood broker may be going the way of the dinosaur. If you don’t bring value — what’s the point?

Ethics and Economics of Private Property.

Money is not the root of all evil.

I enjoy Guy Kawasaki’s writing. An excerpt to think about:

“Play to win and win to play. Playing to win is one of the finest things you can do. It enables you to fulfill your potential. It enables you to improve the world and, conveniently, develop high expectations for everyone else too. And what if you lose? Just make sure you lose while trying something grand. Avinash Dixit, an economics professor at Princeton, and Barry Nalebuff, an economics and management professor at the Yale School of Organization and Management, say it this way: “If you are going to fail, you might as well fail at a difficult task. Failure causes others to downgrade their expectations of you in the future. The seriousness of this problem depends on what you attempt.” In its purest form, winning becomes a means, not an end, to improve yourself and your competition. Winning is also a means to play again. The unexamined life may not be worth living, but the unlived life is not worth examining. The rewards of winning - money, power, satisfaction, and self-confidence - should not be squandered. Thus, in addition to playing to win, you have a second, more important obligation: To compete again to the depth and breadth and height that your soul can reach. Ultimately, your greatest competition is yourself.”

He continues:

“Obey the absolutes. Playing to win, however, does not mean playing dirty. As you grow older and older, you will find that things change from absolute to relative. When you were very young, it was absolutely wrong to lie, cheat, or steal. As you get older, and particularly when you enter the workforce, you will be tempted by the ’system’ to think in relative terms. ‘I made more money.’ ‘I have a nicer car.’ ‘I went on a better vacation.’ Worse, ‘I didn’t cheat as much on my taxes as my partner.’ ‘I just have a few drinks. I don’t take cocaine.’ ‘I don’t pad my expense reports as much as others.’ This is completely wrong. Preserve and obey the absolutes as much as you can. If you never lie, cheat, or steal, you will never have to remember who you lied to, how you cheated, and what you stole.”
Guy Kawasaki
Palo Alto High School Baccalaureate Speech 6/11/95
Author of The Art of the Start

From today’s AP:

“While oil prices are around 80 percent higher than a year ago, they are still more than $27 below the peak inflation-adjusted price reached in 1981. Still, many market observers say prices are likely to continue to skyrocket because of continuing supply concerns. “It’s a small correction just before the winter season. It’s November (delivery), the December, January prices will be more expensive,” said Misui Bussan, chief commodities strategist for Tetsu Emori in Tokyo.”

Unlike Mr. Emori, the great trend followers freely admit they have no idea what direction oil will continue in. They do know they can only make decisions based off today’s price movement.

The ominous headline from Barrons reads:

Coffee Jitters: Brazil weather watch under way

The article states:

“It’s springtime in Brazil and dry weather, not frost, is the biggest threat to the nation’s coffee production. In the winter, any mention of chilly weather can roil coffee futures, but since groves were moved north (closer to the Equator) in the last decade or so and out of the frost belt, growers’ worries over frost damage have been superseded by drought concerns. After an upward jolt in September, coffee futures on the New York Board of Trade slipped in early October as traders responded to wet-weather forecasts for Brazil’s new crop. “We’re waiting to see if Brazilian groves get enough rain for blooming, and then more to fix the flower and allow buds to grow,” says Rodrigo Costa, a trader with Fimat USA. “September was very dry, but October is usually a rainy period.” Brazilian trees flower in October and November. A front bringing needed rain to groves should arrive Oct. 11-14, according to the local Somar service. “We’re in volatile weather trading now, and the market’s especially sensitive since the next Brazilian crop is expected to be smaller based on the tree cycle,” Costa says.

If you were to rely on this type of analysis or if you were to gain this level of fundamental expertise in Brazilian coffee yourself…how exactly would it help to trade the coffee market for profit?

The best traders don’t use weather analysis for buy and sell signals.

Read Legg Mason review of Trend Following from Richard Cripps.

Richard Cripps

Full PDF review here.

Larry Elliott of The Guardian put forth the following on “funds” on October 4, 2004:

“The International Monetary Fund is to step up its surveillance of hedge funds as part of an attempt by the global community to tackle the speculation that has driven oil prices to $50 a barrel in recent weeks…Germany’s finance minister, Hans Eichel, told the annual meeting of the IMF that speculation by hedge funds - highly borrowed investment funds that take big gambles on market movements - was responsible for high oil prices…[The IMF] stepped up its pressure on Opec for further increases in oil supplies but said it also wanted the IMF to supervise a “dialogue” between countries that produce oil and countries that consume it. The IMF believes that hedge funds often exploit a lack of public information about reserves and stocks to manipulate the price.”

The market is the market. It goes up and down. Attempting to place “blame” for high or low prices is a waste of time. Trade the market price is our only option. Deal with reality would be the message to the “suits” at the IMF.

Why call them hedge funds? Good question. Why call them commodity trading advisors (CTAs)? Another good question. Consider a quote from Futures Magazine:

“Hedge funds should be renamed, perhaps to ‘anything-but-hedge’ funds.”

Hedge funds do not make money by hedging. They make money by speculating. They take risk and hopefully reward will follow. The term hedge fund confuses the issue.

On the other hand, many trend followers are regulated by the government. The CFTC calls them Commodity Trading Advisors (CTAs). How does this make sense? CTA is a misnomer. It doesn’t come close to accurately describing traders that take positions in stocks, bonds, currencies and energies. Sure, many trend followers trade physical commodities, but many do not.

I would like to see the terms hedge fund and commodity trading advisor disappear. Let’s just call the men and women who trade client capital fund managers. There will be far less confusion!

Jeff Neal recently wrote a piece for Yahoo Finance titled “Taking Note of Changing Fundamentals”. An excerpt:

“When performing fundamental analysis it is extremely important to be keenly aware of major changes and shifts from the baseline or historical model. For example, consider how important oil is to our economy today-but looking back before the invention of the internal combustion engine, oil played virtually no role.