Michael Covel: News & Info.

Mark J. Walsh was not a Turtle, but Mark was close enough to the Turtle experiment and Richard Dennis early in his career to learn the ins and outs. Now 20 years later, Mark still a relatively young man, has put together an impressive track record (PDF) as a trend following trader.

I was in Chicago today for the Managed Funds Association’s Forum 2006. The lunch keynote was delivered by Elizabeth Cheval, Chairman, EMC Capital Management, Inc. and was titled ‘Let’s Get Negative! Correlation and the Case for Managed Futures’.

Cheval’s presentation was easily one of the best I have seen in the industry. Tackling a subject like ‘correlation’ and making it user friendly is not easy, but Cheval hit the mark. Some highlights with more to follow in the next week:

1. She framed the conversation in two parts: 1.) Human Investment Psychology and 2.) The Mathematical Solution.

2. The psychology that led to the tech boom/bust influences our portfolios every day. The psychology that led to the tech bubble does not go away and it is still a useful example because it is in reach of short-term memory.

3. She outlined chronocentricity [from this book] or the inborn egotism that one’s own generation is poised on the very cusp of history. Everyone should see why she was speaking of this.

4. Her definition of correlation: the nominal measure of the tendency for two assets to concurrently under perform or over perform their average returns by the same number of standard deviations.

5. You want negative correlation as much as you can get it in your portfolio as long as the components added are positive returns.

Michael Mauboussin, Chief Investment Strategist of Legg Mason Capital Management (LMCM), authored this paper titled Long-Term Investing in a Short-Term World (PDF).

Janice Dorn, M.D., Ph.D. sent me this piece. I like it:

There is a Zen Koan that says: Don’t just do something-sit there.

The most difficult thing for traders to do is to sit there and wait. Why? Because, we live in a society that is on a total dopamine, hypomanic binge. This is never more clearly manifest than by those who absolutely have to be in the markets at all times, desperately need to be trading and simply cannot wait. They are human do-ings, rather than human be-ings.

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Since so few articles are written on short selling, take a read (PDF).

Perusing Yahoo Finance tonight looking for some ‘fun’ logic I found this pearl:

“NEW YORK (AP) — Wall Street has finally come to grips with the fact that the Federal Reserve is going to raise interest rates until inflation is well contained. Now investors will focus on whether those rate hikes are going to pressure corporate profits. There’s very little economic data in the week ahead, which is not necessarily a bad thing. In recent months, Wall Street has shown a tendency to overreact to economic reports, even when analysts say the numbers are insignificant or inconclusive. The Fed’s month-long tough talk on inflation has coincided with a month-long selloff based on inflation fears. Now, however, with the Fed all but certain to raise rates at its meeting at the end of this month, Wall Street’s attention will turn to corporate earnings. This is “preannouncement” season, in which companies issue revised forecasts on their earnings. Preannouncements, which often aren’t scheduled in advance, can be either good or bad, and can send a stock sharply higher or lower.”

It’s Sunday night. One of the largest portals for finance news just posted this comment…so what do you do with it? Do you buy something tomorrow? Sell something? Is this comment meant for stock traders? Bond traders? Commodities traders?

What does “tendency to overreact to economic reports” mean exactly? How do investors “focus on whether rate hikes are going to pressure corporate profits” or not? And if you are able to do this, what then?

I am confused.

At a presentation at Superfund’s offices recently I met trend following trader Jean Jacques Chenier. Jean Jacques is the developer of the Trendoscil system (Alterama has the license to trade the Trendoscil system):

“The Trendoscil system is designed to make the bulk of its profit on long term trend following trades; the shorter time frame/counter trend improvements were implemented primarily to smooth the volatility in trend less periods.”

An overview of the firm (PDF) and top 10 ranking (PDF). There is always something to be learned from other traders…

Some feedback on Jim Cramer:

“Michael, I am not sure if you have already read this (link to blog), but I think you will find it of interest and a bit humorous too. Any thoughts you would like to share are welcome. Kind Regards, Muaad”

That is nice piece of fun writing, but did the writer need a bear market to start to doubt the wisdom of relying on Cramer’s stock tipping?

An article titled Negatively Skewed Trading Strategies (PDF) by Glyn A. Holton is definitely worth reading. Well said. For those not following the logic here completely, take a read of Chapter 4 and 8 of Trend Following.

Some feedback on above report:

Michael: When I used to own an FCM, we had a saying for option premium sellers, “they ate like birds and shit like elephants”. And they scared the crap out of us. Regards, Jack Zaner.

Thanks, Jack. Sometimes the short and simple sentence best describes it all!

Last night I gave a presentation to a lively group at Superfund’s Fifth Avenue office. Aaron Smith of Superfund had invited me up to speak a few months back. True to his word he provided forum space and let me cover whatever trend following topics I saw fit. I give Aaron (and ultimately Superfund’s CEO Christian Baha) credit as I brought up the full range of topics including positive stories about some of their competitors. Why do they allow this? In my opinion they are actively working at the big picture of providing education along with their hedge fund business model. Outside speakers like myself don’t like to be constrained and they accept that. It is refreshing.

After the presentation I spoke with a writer from Reuters who covers the hedge fund space (he had read 1/2 of my book so far). He was probing more as he was not really ‘getting’ trend following. I put a quick chart on the white board showing a move from 50 to 150. I asked if he cared what the market was and why it went from 50 to 150 as long as he could be long. He agreed that he would not care if he could catch that move. But then, seconds later, he says, “but how do we know why it went to 150?” We went round and round. He kept coming back to the idea that there must be a need for knowing why the market moved. He rationalized that if you knew the fundamentals you could surely add that knowledge to trend following and do even better.

It was a great example of a bright guy not seeing the trend following picture just yet. We agreed to continue the conversation as I promised to get him over the hump.