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

From Ben Stein:

I’m 61, and have many friends who are roughly the same age. In fact, most of my friends range in age from 50 to around 65. Some of them are far happier and more self-confident than others. Some of them have plans to go places, play golf, take photos of exotic lands. That’s some of them. The others are in fear, afraid to leave their houses, afraid to think of growing old — just plain afraid. I can think of two major differences between the ones who are successful and the ones who are not. The first difference is that the confident group did not disable themselves by drug use or excessive alcohol use. It’s an amazing thing, but it’s true: The men and women I know who have spent a lot of time smoking pot have, by and large, thrown their lives away in the pursuit of feeling no pain. There are exceptions, but typically they can barely get out of bed, let alone pursue a career aggressively or save in a disciplined way. Basic, long-term sobriety seems to me a precondition for a successful life, and certainly a precondition — in most cases — for a life of prudence as far as money is concerned. The man or woman lost in marijuana-induced bliss cannot and will not be able to evaluate investment options and pick the best ones — it’s that simple. One of the many blessings of sobriety is to be able to invest sensibly.

I will be in Tokyo and Hong Kong in December. If you are with a hedge fund and or investment bank and would like to speak in person either on or off the record for a new book I am working on, drop me an email in the next 2 weeks. I am specifically looking for non-US perspectives.

Take a quick read of Christopher Cox’ Testimony Concerning the Regulation of Hedge Funds. Now consider excerpts from Bloomberg News on November 11, 2006:

NEW YORK — The Securities and Exchange Commission will propose rules next month raising asset requirements for investing in hedge funds after Amaranth Advisors LLC lost $6.5 billion on bad natural gas trades…Senate Finance Committee Chairman Charles Grassley has asked Cox and Treasury Secretary Henry Paulson to figure out ways to boost transparency in the $1.3 trillion hedge-fund industry, which is largely unregulated. Grassley said in a letter Oct. 16 that “hedge-fund investments could put the retirement security of American workers in jeopardy.”

Let me get this straight. Amaranth blows up so we need new laws? I am for transparency, but how about some transparency for the true intentions of politicians too? Grassley is worried about pension fund money in hedge funds, but not pension fund money in mutual funds? What those can’t go down? Of course they can go down and do (i.e. dot com bubble)!

My gut tells me there is a story behind the story here. How much lobbying money is being pushed into Congress from big mutual fund firms seeking to protect their monopoly on keeping retirement assets locked up in ‘long only’ investing strategies? I bet it is a huge dollar figure. The government’s effort to keep the average Joe away from alternate investing strategies is not so noble in my opinion.

Feedback in today:

Hi. I very much enjoyed reading Trend Following. I’m currently trying to learn more about trading and aim to build an expertise in it. In the meantime, I have a question for you. Based on your gut/common sense / experience does the following trader sound legitimate to you? There is a trader who is via an “investment club” offering/giving monthly returns of around 7-11% to investors. He is trading foreign currencies (beyond that I don’t have more information). Investors get statements, however there is no other information shared with them on the accounts/financials of the operation. The operation is registered offshore in Panama (he was doing his trading from Jamaica, and I understand he is now living / working from the US. He recently bought a plane I hear). He seems to have opened up the ‘investment club’ in the last 2 or so years. As far as I know he is subject to no regulator (or rather has not subjected his operations to any, i.e. the ‘investment club’ and offshore arrangement were designed to avoid regulators). I find the steady consistent monthly returns a red flag (seems like a guaranteed return that is unlikely given the fluctuations a trading profit). Am I being arrogant/too cynical. In other words -based on the brief sketch I have given you – do you think this guy’s returns are legit? Regards, Monique

Christopher Cox might want to shine his flashlight here instead of making reputable hedge funds jump through more inane hoops.