Michael Covel: News & Info.

George Stephanopoulos outlines the Plunge Protection Team:

“I don’t know if you remember, but in 1998, there was a crisis called the Long Term Capital crisis. It was a major currency trader and there was a global currency crisis. And they, at the guidance of the Fed, all of the banks got together when that started to collapse and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall.”

Read full article (PDF). To all free market players this is unfortunate news.

In the quest to find interesting information, take a read of Lawrence Speidell’s The Human Element…in Individual and Institutional Investing (PDF).

Make as much money as possible and don’t depend on some pension plan for your security. Why the bluntness? Consider this excerpt of incompetence from the June 27, 2006 WSJ:

“Delta Airlines announced last week that it will terminate its pilot pension plan, becoming the latest airline company to flip liabilities to the federal Pension Benefit Guaranty Corporation (PBGC). Congratulations, taxpayers. You’d think this might upset Congress, or at least inspire some reforms. But no such luck. In fact, House and Senate conferees are busy negotiating another pension fix that would give airlines one more reprieve and make taxpayers even more vulnerable to airline mismanagement down the road. Since 2002, far too many airline, steel, auto and other companies have dumped their pension plans on the PBGC, the quasi-government agency that “insures” private pension plans. That body has gone from a $10 billion surplus in 2000 to more than a $23 billion deficit last year, and it is the financier of last resort for a private defined-benefit pension system that is underfunded to the tune of $450 billion. On present trends, this could become a fiasco on the order of the savings and loan collapse. This is what happens when Congress socializes what ought to be private labor contracts. The theory behind the PBGC was that it would collect enough premiums from companies to cover future liabilities. But as always in Washington, unions and powerful industries have worked the political system to prevent premiums from reflecting real market and business risks. The result is today’s underfunding and a looming taxpayer bailout. Congress has known about this for a long time. But it made everything worse with a previous election-year “reform” in 2004 that gave special breaks to the most underfunded companies rather than requiring that they put their pensions on a sound footing.”

Who is incompetent here? The airlines, the government and the employees. Everyone is guilty of trusting someone or something. That is a bad prescription today and into the future.

Chidem Kurdas forwarded me her article today about a presentation I gave a few weeks back at Superfund’s offices. As you read the article below keep in mind a quibble I have: it’s not a matter of this month or the next month being a so-called trend follower’s market - doesn’t work that way. The ups and downs are part of the game. If you go around saying “now” is “not” the time for trend following, next month could be a huge trend following month. You can’t predict performance or the unexpected events that drive that performance. Here is the article:

By Chidem Kurdas, New York Bureau Chief
Tuesday, June 27, 2006 11:15:37 AM ET

The 22-year-old futures program, the world’s largest, carries higher risk than the funds of funds, according to Man Group. It is routinely subject to quick, double-digit drops. But it also yields significantly higher returns over time.

From the Wall Street Jounral comes Russell Adams’ article Is that team good — or just lucky? An excerpt to consider:

Melky Cabrera, a highly touted 21-year-old outfielder for the New York Yankees, started off the season well, batting over .300 through early June. Now he is in a slump, hitting .189 in his last 10 games. For fans and the Yankees, the question is simple: How much of the rookie’s impressive start was dumb luck? A lot of it, according to some baseball number-crunchers. Using new statistical methods, they calculated that the equivalent of one in four of Mr. Cabrera’s early-season hits resulted from chance, not skill. Subtracting out good luck, his early season batting average should have been .231 — nearly 80 points lower than what showed up in the box scores. Even in the numbers-obsessed world of sports, baseball has stood out for its efforts to track all aspects of the game. Now its fanatic record-keepers are on a quest to quantify something seemingly beyond measurement: the ethereal quality of luck. They’re using insights into randomness that are shaking up other fields, from cancer research to weapons testing — and that may even help you pick a good mutual fund.

This excerpt is useful food for thought when analyzing performance data of trend followers…especially when they are doing really well or really bad. The key is to think about how they typically trade.

In the June 24, 2006 WSJ, Scott Stearns authors ‘Advisers Mine Clients’ Personality Types Emotional Responses, Rather Than Assets, Affect Service and Marketing to the Wealthy’. An excerpt:

“In hot pursuit of the affluent, more financial advisers are focusing on the passions and motivations of their clients, rather than just the size of their wallets. For these advisers, it no longer suffices merely to know clients’ favorite sports teams and the ages of their children. They want to know how a client’s mind works — and they are using a host of new “psychographic” tools to help them figure that out. JPMorgan Asset Management, a unit of J.P. Morgan Chase & Co., recently hired a New York-based cultural anthropologist to research what makes the affluent tick. The study, released to advisers in March, found that wealthy people generally fall into one of five categories, including “thrillionaires,” who see their money as a means to splurge on fabulous objects and experiences, and “willionaires,” who feel wealth brings a responsibility to improve the world and who are most likely to see their name carved into the side of a building. This kind of research influences the way retailers decorate stores and the kinds of homes real-estate developers build in planned communities. Pharmaceutical companies use it to target sales pitches to physicians. For advisers, it provides a framework for working with clients — and selling them new products and services. An adviser might pitch a conservative asset allocation as “innovative and customized” to a thrillionaire client, said Susan Hirshman, a wealth strategist and managing director at JPMorgan. Drone on about “conservative investing,” and that investor might flee to another adviser who better understands what pushes the investor’s buttons. Similarly, a meeting at the fanciest restaurant in town might lead the “realionaire” client (thrifty, “Millionaire Next Door” types) to wonder if the adviser is charging too much.”

This type of analysis doesn’t suprise me, but it does scare me. “Feeding” bad habits, which I believe these efforts do, is not wise long-term strategy.

Feedback on smaller minimum trend followers:

Hi Michael,

David B. Root Jr, CFP
CEO
D.B. Root & Company
Financial Planning
3100 Koppers Building
Pittsburgh, PA 15219

This is not a sales pitch from me as I don’t know David. Just seemed like good information to pass along.

Feedback from a reader:

Hi Michael,

Keep it up,
Mike

Orin Kramer is Chair of the State of New Jersey Investment Committee and a General Partner of Kramer Spellman, L.P. managing private investment partnerships concentrated in public equities. He spoke the other day at a Managed Funds Association event in Chicago I attended. Some of his stark comments (paraphrased):

“When we drop 100 million in Microsoft over the course of a day, 14 million an hour, no one views it as a big deal. People accept the up and down, the volatility. But if a hedge fund drops 2%, it is a big deal. That is irrational.”

On screening out volatility:

“We expect hedge funds to be non-volatile. It is irrational. By doing this you screen out all investment opportunities where there is volatility.”

On correlation:

“Many of the people in the public pension world still don’t get that adding a volatile hedge fund component (not positively correlated) to an existing portfolio reduces the portfolio risk.”

While he did not say it expressly, Kramer’s words for me point to why opportunities like trend following will continue to exist. With so many billions upon billions tied up in pension funds and with those funds often run by a ‘herd’ mentality (i.e. not necessarily the brightest bunch), chasing benchmarks and chasing reputation risk (i.e. afraid of doing something different than the other guy who is scared too) will keep those unpredictable trends coming.

I did Mike Norman’s radio show today on the BizRadio Network. Mike is also a regular pundit for Fox News.