Michael Covel: News & Info.

A reader writes:

“Why don’t you give customers what they want? They want to know what trend the market is right now. You tell them that and you’ll get and keep so many more customers. I write and publish a newsletter myself and each day I stick my neck on the line to say what is happening in the market and whether or not the action is healthy (safe to invest long) or unhealthy (move into cash/short).”

This is the exact same mindset that ran crazy during the dot com bubble. I thought they were all dead and buried, but they live on to fight another day! All readers here should see the huge downfall to this man’s desire.

Just finished a trip to London. I interviewed three notables in the industry. One trader has a 15+ year track record and now manages over $1 billion USD trading as a trend follower. Before that number seems large (and it is) keep in mind that he was a one-man business but a few years ago. Another trader is relatively new to the public world and still runs a small and lean shop. He uses only the closing price each day and competes just fine with less data. Lastly, I spoke candidly with a professor who has written extensively on the subject of trend following trading. He agrees with me that to some degree many academics will have a hard time ever acknowledging the existence of trend following as it upsets the carefully crafted “efficient markets” foundation upon which they rest their reputations.

CNBC Transcript of Jan. 19, 2005, interview with Warren Buffett:

BILL GRIFFETH: I know I’m not going to get you to tell us what you’re buying or anything, right now, but your thoughts on the stock market right now in light of what’s going on with the economy and corporate profitability, the Fed raising rates? I mean, just big picture, what’s Warren Buffet think of the U.S. stock market right now?

BUFFETT: Well, I certainly welcome the chance to buy businesses, or for that matter, stocks, denominated in the other currencies, or businesses that do — make their money in other currencies. But I’ve always been interested in that. But I would say that it would be a small plus to be in half a dozen other countries versus earning money in the dollar. We still have most of our money in dollars. That’s the nature of running all the businesses we do. But we’ve never — prior to 2002, I had never owned a dime’s worth of foreign currency. I mean, when I got back from a trip, I couldn’t wait to cash in my eight euros, or whatever is was that was left over. But I’ve changed my views.

Curious minds want to know when and how Buffett would reverse his opinion on the dollar. Since buying and holding currencies is not exactly a strategy, what is Buffett’s currency trading strategy?

Even with trend following trading many people still fixate on watching prices during the day. However, if you are trading as a trend follower for your own account there is no reason you can’t use end of day prices for your trading. That means you can focus on making your trading decisions off one price each day.

Japanese version of Trend Following.

James Altucher wrote an article (PDF) in The Financial Times yesterday. It is worth noting that Altucher first thanks Victor Niederhoffer in his most recent book.

Here is a very sad example of complete nonsense. Traders who believe this deserve what they get.

TransTrend, a Dutch-based trend follower, spells out their views on “robustness” and “systematic” trading:

“TRANSTREND considers a high degree of robustness to be essential. With regard to the design process of trading systems, this has led to three fundamental principles:

TRANSTREND’s trading systems are not models. They do not attempt to forecast fair values or equilibrium price levels, and they are not based on an economic theory that risks becoming out-dated. Systems are dynamic and reactive by nature, they respond to changes in a consistent way.”

I made the point in my book Trend Following that traders are not to blame for price trends. Great traders follow trends. They don’t generate them.

Along those lines a good excerpt from Peter C. Fusaro and Gary M. Vasey:

“…don’t blame the hedge funds. They are only a sign of a woefully under-invested energy market that has suffered neglect for decades. They are true trend followers and they are attracted by tightening supply/demand along with ongoing potential disruption through terrorism and other unforeseen events. Contrary to what you may read elsewhere, they aren’t the underlying cause of rising energy prices. The hedge funds see the writing on the wall as a result of the lack of real investment in the energy complex combined with increasing demand. And this is at a time when their traditional alternative investment strategies and markets haven’t performed well. They are armed with ever increasing amounts of investor’s cash looking for a market…the recriminations have already started with various politicians and energy industry figures crying “foul.” By placing the blame for raising energy prices on “speculators” and “profiteers,” the public’s attention is drawn away from the real issue a sustained lack of investment in energy industry infrastructure. Yes, it’s true that hedge funds and investment banks seek to make a profit in the energy industry. In fact, this influx of cash is a good thing for liquidity and for the energy companies that need access to capital. Yes, it is true that speculation tends to magnify an existing trend somewhat by helping to accentuate that trend but no, speculation is not the underlying reason for rising energy prices. It is clearly market fundamentals of supply and demand and an aging energy infrastructure that is the basis for the trend.”

Chris F. Masse has put together some great links in the field of “prediction markets“. I am the first to admit this use of the term “prediction” is misleading. It reminds me of the term “managed futures”. Everyone uses it even if it is confusing. The action on these new exchanges is about following the trend, not predicting it.

Hedgestreet.com, mentioned fondly by Chris above, continues to innovate. They have added silver now.