Michael Covel’s Official Site

I added a new video excerpt to YouTube.com today. The other (3) clips can be found here.

From yesterday:

Rumor has it that another major hedge fund in the U.S. is headed for a meltdown and reportedly may be behind the recent drop in the U.S. dollar as it allegedly diverted capital to cover losses in energy trades. Chicago-based Citadel Investment Group has denied that it is the hedge fund in trouble, telling The Wall Street Journal that the rumors concerning it are unfounded.

More from the Wall Street Journal:

Citadel Investment Group LLC, the $12 billion Chicago hedge fund, says it continues to enjoy a successful year and isn’t suffering from big energy bets gone bad — despite speculation coursing through financial markets today that the firm is dealing with heavy losses. “We are aware of the rumors. They are completely unfounded,” says Bryan Locke, a spokesman for Citadel. Mr. Locke wouldn’t give details about the firm’s performance this year. However, an investor in Citadel said the firm remains up about 20% so far this year, despite sharp price declines in the energy markets in recent days. Citadel’s returns are better than major stock market measures this year. In early September, Citadel, which does everything from market making in options to energy trading, teamed up with J.P. Morgan Chase & Co. to purchase the energy portfolio of struggling Amaranth Advisors.

Feedback on the “+20%”:

It means nothing when they say ‘we’re still up 20%’. Amaranth was ‘up 30%’ in one week, and ‘down 60%’ the next. When funds play with highly concentrated leveraged bets, things can go sour real quick.

Feedback from an earlier post:

Michael Covel, Wake up! Our government put Al Capone out of business and took over his business. It’s called the protection racket! As a previous member of the CME I experienced this first hand. The head of the newly formed CFTC was a guest speaker at our annual members meeting. His speech was real short and real direct. I’ll never forget it. He said, “The California Garbage Collectors Union” has a lobbyist in Washington D.C. and you guys aren’t even in the directory and you had better get someone up there to watch your back! Less than 90 days later a bill was intro ducted in the house that if passed, would put the futures industry out of business in the U.S. Guess what! Magically a PAC was formed and money was sent to D.C.! O’yes, the “Shake Down” is what they really do and that’s pretty much it, period! It’s an art form with these guys. Don’t forget, most of them are attorneys. Gary C.

Feedback:

Hello, Michael! Maybe some of your more fundamentally oriented contacts would like the opportunity to explain this: Last Friday, before the market opened, Ann Taylor Stores (ANN) announced that quarterly earnings had beaten the year-earlier by 29%. Sounds to me like a good fundamental story. This was above the analyst consensus expectation, which is usually good for a gap up. Yet, on Friday, almost 8% of ANN’s market capitalization was wiped out because management made a remark that the coming year was expected to be flat. News organizations reported that investors were “disappointed” by this remark and that explained the drop. Are management comments “fundamental”? Are they more fundamental than the hard numbers? It seems to me that fundamental traders who are in love with a stock can always find some justification for buying it, and if a fundamental trader wants to dump it, he can find a fundamental story somewhere to justify the sell order. Thank you for letting me rant. Regards, Chuck

I don’t know the man in the video clip that follows. I just want my readers to consider the first 50 seconds of this video. His style or how he trades is not something I subscribe to or track, but his opening 50 seconds where he talks about the difficulties of speaking about ‘performance’ is useful. The rest of his pitch is a rambling fundamental monologue not useful in my opinion.

Consider this excerpt from Marketwatch.com:

Paul Mendelsohn, chief investment strategist at Windham Financial Services, said this week’s tamer-than-expected inflation data was another support for equities, which finished higher for the week…Mendelsohn said the Thanksgiving break may give market players time to assess the run-up in stocks. “The market is incredibly overbought. In addition, bullish sentiment has really skyrocketed which would be another warning signal. I’m participating in this rally, but…my antenna is up,” he said.

How does one go about assessing a run up in stocks? What does overbought mean in concrete terms, not just jargon speak? Bullish sentiment (which is exactly what?) would be a warning signal to what? Is there some kind of rulebook that defines when these warning signals happen and what you should do?

‘What Trading Teaches Us About Life’ is a good top 10 list from Brett N. Steenbarger, Ph.D.

Trading is a crucible of life: it distills, in a matter of minutes, the basic human challenge: the need to judge, plan, and seek values under conditions of risk and uncertainty. In mastering trading, we necessarily face and master ourselves. Very few arenas of life so immediately reward self-development–and punish its absence. So many life lessons can be culled from trading and the markets:

10) A formula for success in life and finance: never hold an investment that you would not be willing to purchase afresh today.

Feedback from last night about this podcast:

Michael, That cocktail quote is bang on. I was involved, as a partner, in a management company, which oversaw the commercial hedging side of a large group of hog producers (over 700,000 hogs per year in various weight stages). Our futures positions were initiated and exited based on a set of rigid criteria which included the bottom-line profit available (position placement) and hog/feed delivery (position removal). We basically applied a ‘hog crush’ to the operations production; the more profit, the further out we went. We had to deal with all of the common fundamental questions of where we saw the market going etc. etc. We became a broken record constantly repeating “When we get this much profit we put this many positions on …” At some point the person’s eyes would glaze over and the conversation would dry up. I think it’s just human nature for people to want the fundamentals. It gives them a sense of accomplishment — however false. Regards, Cliff G.

Jim Cramer offers some good and bad comments about hedge funds here. His conclusion:

In the end, the lesson to be learned from Amaranth isn’t about a sole runaway manager who made bad bets on the weather. It’s about broad institutional problems: how hedge funds are run and monitored, and who’s investing in them. Hedge-fund strategies have become so obtuse, their sales pitches so aggressive, and their monitoring so lax that one could question whether anyone should be in these funds, let alone pension-plan managers who have no ability to judge what these funds are doing and are supposed to invest regular folks-money in relatively safe places. Sure, pension funds that opt out won’t generate the huge returns that hedge funds do in good times, but more important, they won’t get crushed in the bad ones. The simple truth is that only the rich, who can take the hit, belong in these funds. And even they should proceed with extreme caution.

As I commented recently on Christopher Cox’s similar views, what about mutual funds? They can’t go down? To keep lumping all hedge fund strategies into the same camp is not an accurate portrayal of reality. Cramer is dead wrong when he implies the average guy should have no access to something beyond buy and hold long only. Of course, you need to be careful and do your homework, but that’s the case for just about everything in life these days.

Feedback below from my earlier post:

Hi Mike, I agree that there is a hidden story i.e. it could be the mutual funds spending a lot of money on lobbying to protect their turf. I think what is more likely is that the politicians are waking up to how much money is being made by HF managers. So they threaten to regulate them, and in return HFs are then forced to start spending money on lobbyists as well. If you look at the amount of money that HFs are giving to political candidates, it has skyrocketed in the past few years. I don’t think it is a coincidence that politicians started focusing on increasing regulations for HFs only in the past few years. This is a classic shakedown of a growing and prosperous industry by government. Best, XXX