Michael Covel: News & Info.

I have decided to run a contest. I will pay $1 to whoever can provide the best fundamental explanation or “story” for the movement of this chart.

Brett Steenbarger authored this article on practice (PDF). It is a real good piece, except of course trend followers who would not be saying:

“…and their ability to read patterns in noisy market data and act upon them has become lightning quick.”

That line is my small quibble! That skill is not needed in trend following.

The recent NY Times article “Dear Graduates: Money Is a Means” by Daniel Akst is good reading for all those still denying the importance of money in life.

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A good piece of reading (PDF) on Enron’s legacy…it’s not what you think. An excerpt:

“It has been forgotten, because of the unfortunate things that happened at the top, that Enron had a good group of people who were very innovative,” said Robert Shiller, an economics professor at Yale University whose 2000 book “Irrational Exuberance” predicted the stock market crash.”

An assortment of interesting research to cross my desk recently:

1. The Rules of the Long-Term Game (PDF)

2. Are Hedge Funds Suitable for Individual Investors? (PDF)

3. Risk Management: From Gut to Quant (PDF)

4. Managed Futures and Varying Correlations (PDF)

Feedback from a reader:

“While the idea of sizing one’s position according to anticipated volatility and available capital sounds reasonable on the surface, recently it appears that all markets in all countries are well correlated. Thus in the current environment position sizing doesn’t manage risk very much. For example, if all your appreciating positions decline as simultaneously and deeply as they appreciated, what’s the use trying to allocate risk with a 1% thimble? Look at metals for example. Why bother diversifying among the commodities and producers with position sizing? The same result would have been obtained by simply exclusively buying any one of gold, copper, or zinc alone. Diversity among exploration companies and types of metals with [trend] trading position sizes just makes a messy portfolio. In the end they all sold off more or less at the same time and by roughly as they appreciated compared to 100%. Let me explain a bit more about “compared to 100%”. I am talking about all available investments being well correlated in the sense of trend following. In Trend Following as I understand it, one seeks the 100% or greater return on investment in a few trades rather than trying to make small gains over many risky capital intensive trades. Furthermore, if you look at every stock exchange in any country that nearly any stock that went up also went down by a comparable amount relative to 100%. If you look at forex, it is ALL US dollar. Dollar goes up a bit, dollar goes down a bit.”

Selecting a portfolio to track and trade is not just guessing. Correlation must be considered and even then it is not a perfect diversity measurement 100% of the time. Sometimes, in the short-term, everything can quickly move together.

This reader continued:

“You need huge leverage to get a trend out of the US dollar chop. That’s not really trend following is it?

Trend following trading does not attempt to use vast leverage to make money in choppy markets. Period. Trend following loses money in choppy markets.

This reader continued:

“Is this the end of speculative trend following? If it’s not dead, maybe position sizing isn’t so important in the modern era of investing?”

How can the question of “how much?” ever go out of style? I am not following the logic.

“In response to some of the guru comments you posted in your newsletter last night, I have inserted a quote from “Reminscences …” … “The big men of The Street are as prone to be wishful thinkers as the politicians or the plain suckers. I myself can’t work that way. In a speculator such an attitude is fatal. Perhaps a manufacturer of securities or a promoter of new enterprises can afford to indulge in HOPE-JAGS”. I am a student of your trend following course and an avid reader of your newsletter. I’m currently going through the CTA registration process with the NFA. As I put the finishing touches on my Disclosure Document I am both puzzled and relieved by a comment on the NFA website (all in all I believe the NFA has done a great job guiding a start-up through the registration process), the comment states that when coming up with a trading methodology, to be original, “the world doesn’t need another trend follower”. Puzzled by why they thought it necessary to rebuke a solid trading methodology and relieved that there will always be someone on the other side of my trades. Whether it’s very short intraday trends, betting on spreads getting tighter or wider, medium or long term trends, trading pairs, even value guys have to have trends to make money, my point is call it what you want, the entry is hardly relevant as long as you have a program that’s consistent and gets you involved – what sets the successful apart from the rest is risk management, as you say over and over, “how much?”. Get involved on any signal you want, breakout, moving average crossover, fundamental valuation if you must, but for God’s sake, know your downside and set your stops, cut your losers let winners run, have a strict system for position sizing and don’t get married to your ideas of what the market is going to do in the future, that as Ed Seykota is fond of saying, simply doesn’t exist anywhere, but your head. As I am having meetings with former colleagues to begin raising capital, I am befuddled by some really bright guys sticking to their guns, that it’s not necessary to play around with futures trading and trend following systems, we buy companies now because we know that 5 or 10 or 15 years from now those companies, that make up the bright and shining S&P500, will be higher – they just will be, they always have in the past. HOPE-JAGS! Trade as a trend follower, sleep at night, end of story. Thanks for a great newsletter…”

An interesting piece of research on assembling CTA portfolios from AIMA (PDF).

Buffett recently warned:

“You are looking at a market that is responding more to speculative forces than fundamental forces.”
Warren Buffett

If he is right, does it matter one way or the other?

I came across a market newsletter that aggregated various comments from investing newsletters. How do you actually apply the following four comments?

“It’s increasingly clear that the primary characteristic of the current marketplace is that there is too much money around, looking for places to put it, perhaps to work, but more evidently to play with. It is reminiscent of one of Fraser’s useful buttons: ‘Money to burn will find a home.’…In sum, this is not a market climate suitable for initiating long-term investment positions, nor is it suitable for speculation…nor for brilliant market timing. Such slow and teasing deterioration requires patience. Better to be a wallflower than a gambler.”
Justin Mamis
The Mamis Letter
April 3, 2006

“In an environment of global event risk, potential fixed income market turmoil, and deteriorating industry group performance, our advice remains to be defensive.”
Michael Belkin
The Belkin Report
April 3, 2006

“I believe The Market will continue to groan forward this month, possibly even challenging the old highs. But I don’t think the underlying fundamental, technical, economic, and sentiment factors are in place to sustain it. For that reason, we need to begin the process of rebalancing our portfolios. …I see a flat-to-declining U.S. market ahead. We’ll begin to sell our U.S. market-sensitive issues - even some of those that I still believe in long-term. My plan is to move you more completely into metals, timber, and energy, all of which will move contra to the market in general, as well as to seek some special situations in foreign markets to which the U.S. market correlates poorly.”
Joseph L. Shaefer
April 2006

“The greenback now looks vulnerable to a breach of 88.00, which would increase the risk profile toward 86.00 and negate the potential for the U.S. dollar to fulfill the previously anticipated upside.”
Ron Daino
The Day of Reckoning is NOW for the U.S. Dollar … And It’s Failing!
April 5, 2006

I am not questioning the intelligence of these men. There is a side of me that always like a good market story, but I just don’t see how these kinds of statements can be applied to ‘when to buy’, ‘when to sell’ or ‘how much to buy or sell’.

Note: Joseph L. Shafer, quoted above, responded to this blog post with the following:

Clearly you are unwilling to issue a retraction or explanation for your out-of-context quote no matter how compelling the evidence. We won’t communicate further. I answered your question 3 different ways. I read the article you sent me from 2000 — it sounded suspiciously like what I wrote in my first book 20 years ago. Bottom line: We tell subscribers how many shares of what stocks to buy at what price, when to sell, and at what price. We know it, our peers in the business know it, and our subscribers and clients are wealthier for it. You’ll note on page 10 of Investor’s Edge (R) the words “All rights reserved” and “Copyright.” Do not violate our copyright by quoting us without permission. Bloggers may wish to spread their words indiscriminately but, as professionals in the business, we take infringement of our trademarks &/or copyrighted material very seriously. If you respond, which I do not expect, respond to our Legal Department at charperesq@investorsedge.us. Good day, Joseph L. Shaefer, Chairman The Stanford Advisory Group