A trading friend of mine emailed me:

“Hi Michael - An old friend called me yesterday. He is a very successful neurosurgeon and a very good person as well. His only downfall in his mind is his lack of success in the trading world. After we exchanged pleasantries he asked me what I thought about the stock market. After a brief pause I responded, “I think the stock market is going up!” He then mentioned he subscribed to a couple of very expensive forecasting services one of which is run by a live “guru” who won a big trading contest several years ago. His next question was how could I disagree with the guru? I then responded, “You asked me what I thought about the stock market and I told you it is going up because it IS going up right now. Look at the chart!” We laughed as I was not being mean but simply offering him an observation of what the market is doing right now not what I think the market is going to do. I then told him I don’t ever have a clue what the market is GOING to do and anyone who says they know is either a very big liar or an idiot. I simply respond to a set of rules for trading and I guess I am dumb enough to just keep following them to the best of my ability. I then reminded him of two very important lessons that he should be learning right now.

#1: No one really KNOWS what a market is going to do although many profess to know.
#2: If you follow the beliefs and more importantly the advice of others you and you alone are responsible for your results be they good or bad. Van Tharp calls this phenomenon “respondability.” The only person responsible for your results is in the mirror.

Amaranth loses…so who wins? This blowout has the smell of a few big winners - maybe one big winner. It reminds me of Barings Bank. One dumb bet (Nick Leeson is now played by Brian Hunter) with some smart winners on the other side. Think the winners will be on the front of Time Magazine?

A reader, Chris Dugan, forwarded me this comment on Amaranth from Bernie Schaeffer:

“It’s amazing to me that Amaranth seems to have relied on the same “principle” as did the disgraced managers of Long-Term Capital, “stewards” of what was (until Amaranth) the biggest blow-up in hedge-fund history. Simply put, this “principle” holds that various historical relationships between various markets will “mean revert” once they begin to diverge significantly from the norm. The mean reversion principle has become an article of faith among many of the major hedge funds. Given the alleged sophistication of these supposedly risk-savvy players, it is shocking that a principle that thumbs its nose at the “fat tail” events that are far, far more common than any modeling ever suggests continues to have holy-grail status. And then, when funds like Long-Term Capital and Amaranth blow up, the ready excuse is “who would have thought such a ‘highly remote’ event would ever occur?”

He added:

“The lesson here is that these models that are so avidly followed by those who should know better have been dead wrong and continue to be dead wrong about the odds of so-called rare events. The equity markets have been in a derivatives-induced coma for several years now, and my sense is that the upcoming fourth quarter is about as ripe a period as I can imagine for this coma to come to an abrupt end. Regardless of which way the break goes, we will likely have derivatives pain, which almost certainly means more hedge fund pain. An upside breakout can blow away those who’ve been heavily overwriting calls; a downside break creates potentially huge liability for those who have sold a massive quantity of very low delta puts that have thus far been “free money,” month after month. In other words, market moves may begin to feed on themselves rather than mean revert, and some players will pay - big time - for this.”

Now that is a great view from Bernie Schaeffer.

A recent article PDF about religion and money. An excerpt:

In a recent survey of people with at least $25 million to invest, “hard work, smart risk-taking and God” were credited for wealth accumulation. Last week, Time magazine’s cover story asked “Does God Want You To Be Rich?”

This is all, quite literally, a Holy Grail IMHO. That’s not me professing a religious view one way or the other. I just see it difficult for rational investment choices to blend with ‘faith’ - whatever it might mean to whoever.

Here is a copy of a recent Amaranth conference call (PDF).

Janice Dorn (site) submitted this article:

Pain is what you walk through. Misery is what you sit in. Take an old pair of jeans and cut a hole in one of the front pockets. Now, start pouring sand into that pocket. What happens? Sand runs down your leg and to the ground. What do you do? Keep pouring until the sand is up to your ankles? Your knees? Your waist?

(more…)

From the wires today:

“Oil exporting countries may consider a cut in output after crude prices fell below $60 a barrel on Monday for the first time in six months…The oil price fall over the past month has been accompanied by investor selling in oil and other commodity markets, mainly on concerns that economic growth in the US is slowing. “There is a concern by hedge funds that oil and commodities are no longer the one-way bet they once were,” said an Opec official.”

No longer a straight line up? Nothing a little manipulation can’t fix. At least they are honest about the lack of a free market, eh?