Michael Covel: News & Info.

I was sent this the article excerpt below this morning. It reminded me of earlier Christopher Cox criticism:

Fears that hedge funds will rock the financial boat are greatly “overblown,” and are based “more on ignorance or simplistic caricatures than on actual knowledge.” That’s the assessment of Washington Post columnist Sebastian Mallaby. Writing in Foreign Affairs magazine, Mallaby states that “popular resentment” stems from the fact that hedgies “earn too much,” rather than the much-ballyhooed concern that they pose a systemic risk to financial markets, which some say could be controlled with proper regulation. Mallaby points out that such risk is “neither limited to the hedge fund sector nor best addressed through regulation of it,” noting that most proposals are “so vague as to be impossible to evaluate or are poorly suited to addressed the supposed problems.” The author explains that those larger-than-life earnings “reflect the workings of a daunting star system” in an industry that each year attracts smart analysts “just as thousands of aspiring movies stars arrive in Hollywood.” Mallaby takes issue with the assessment that hedge funds are concerned only with profits “without regard to any costs or consequences that might follow.” In fact, he says, hedge funds “do not so much create risk as absorb it,” viewing them as “quasi insurers” that shoulder “risks that others wish to avoid.” In other words, hedge funds should be seen not as “locusts” as one German so famously labeled them, but “benevolent firefighters.” He admits that hedge funds can pose a serious risk if they become too large - picture the fallout from Amaranth Advisors debacle had the losses mounted to $26 billion rather than $6 billion. But, he notes, “imposing some arbitrary regulatory cap on the size of hedge fund would unjustly penalize successful firms.” He concludes, “The best safeguard against the risk posed by large funds is the presence of other large funds.”
–December 2006 Hedge Fund Daily

Feedback:

I could find no discussion of the mathematical theories which predict the success of trend following methods [in your book]. I believe that this omission is a deficiency in an otherwise excellent book. Of course, there is the possibility that I’m just stupid and can’t find what I’m looking for when it’s in front of my face. If this is the case, please forgive the above comments and direct me to the relevant part of the book. I have the “New Expanded Edition” [of Trend Following].

I will open this up to all readers for feedback.

I have over a long time been able to find ‘access.’ Readers see it and emails like this result:

I am writing you because I have a burning desire to become a professional trader. I graduated college in June with a degree in Economics and History, and currently, I am putting my full-time efforts into educating myself about trading. I have read your book on three separate occasions within the last two years, and I frequently reference it. I feel as though I have built a good theoretical foundation, and now I would like to take my learning to the next step by working with a mentor. The search for a mentor has proven difficult since there are no real conventional methods to finding one. I know you have come across many prominent figures within the trading community, so I was wondering if you know of any traders who would be willing to take on a hard-working, devoted, and smart student. I live in Orange County in Southern California, but would follow an opportunity if I believe in it. If you do not know of anybody in particular, but could point me in the right direction, that would also be greatly appreciated. I am sincerely sorry if this is a waste of your time, but I am trying to find the right guidance in order to help me find the path of least resistance in accomplishing my goal. I would be grateful of any suggestions you might have. Thank you very much and Happy Holidays, Brett

I don’t consider your email a waste of time. That said, there is no short answer to your question. The old adage of knocking on doors - literally - is still true. I do have one lead that may provide education and networking. Attend a Managed Funds Association conference. Many of the men I write about attend and speak at these events. It’s a great way to listen, learn and meet people.

Today silver dropped 7%:

NEW YORK/LONDON (Reuters) - Silver plunged about 7 percent, while gold fell to its lowest in more than five weeks late Friday, as a rallying dollar, weaker base metals and the bullish stock market triggered heavy selling by funds ahead of the weekend. Spot silver fell to $12.82/12.89 at 4:30 p.m. (2130 GMT), down from $13.76/13.83 late Thursday. It hit a low of $12.77, lowest in about four weeks. New York Mercantile Exchange March silver accelerated its loss in late trading, plummeted to a four-week low, down 97 cents, or 7 percent, to finish at $12.980, Leonard Kaplan, president of Prospector Asset Management, called precious metals “way too high,” and said fund selling was behind the markets’ decline. “When the dollar started to turn around, all the funds got out at the same time, creating enormous volatility,” said Kaplan. “You see the funds liquidating everything. They are selling grain. They are selling copper, everything,” Kaplan said. Kaplan also said that when the stock market could not maintain its new highs, it was the signal for investors to sell, including commodities. “The sell-off certainly began with the dollar-friendly economic data,” said James Steel, analyst at HSBC. “It’s not just precious metals, the base metals were down quite a bit too.” he said.

It was an exit. Pure and simple. You don’t see this type of decline from the assessment of fundamental factors or new economic views. This was technical. I see the comment that silver was “way too high.” What’s high? High to what? I wonder if AP would ever give me the opportunity to offer a less BS view on price movement. I am betting that unless I could tell them “why” something happened they would not hire me!

Perusing the chat sites and news sites offers me great food for thought. I caught this excerpt tonight from Yahoo Finance about ‘return on equity’:

We begin the series with a discussion of return on equity. ROE is one of the most crucial and elemental gauges of a company’s profit potential. There’s more than one way to determine ROE. IBD’s method is to divide annual operating income by an average of the last two fiscal years’ stockholders’ equity. IBD also blends ROE in its SMR Rating, a gauge that also includes sales growth and profit margins. Stockholders’ equity, in turn, is a balance sheet item that shows the difference between assets and liabilities. That result, expressed as a percentage, shows how efficient a company’s management is with its equity funding. This allows shareholders to ask, “How good are these guys doing with my money?”

So do you think if you become an expert on a company’s ROE that you will also become an expert on when to buy that company’s stock, sell it and know how much to buy or sell of it at any given time?

A story from an old bold trader:

Hi Michael-I guess in this business there’s a story a day if you don’t live in a cave. Yesterday I had a visitor who wanted to come by and get my input on his trading. As you might imagine his trading has gone very poorly since his “advisors” have been quite negative on the US stock market and he continues to fight the existing trend which as of today at 2:00PM CST remains UP! He had heard through a mutual friend that I traded the S&P 500 Futures so perhaps I could give him some insight on what the market was GOING to do in the future. I quickly told him I had no clue whatsoever what the market was going to do and I learned long ago my opinions run from “wrong” to “really wrong”. I went on to tell him my trading decisions revolved around what the market is doing now as well as what it has been doing recently i.e. “what’s the trend?” Now I must confess as I have admitted to numerous times before I am not a long-term trend follower in the purest sense BUT I do trade with the trend be it up down or whatever. I have addressed that with you before. Anyway yesterday morning my plan for the day was to observe the S&P early in the day and watch for possible set-ups given my personal rules of engagement. Yes I approach trading on some level as a military exercise. I explained to my visitor that the S&P daily degree was still in an uptrend and my method always traded with the trend but I employ the shorter time frames to place my bets. This fits my personality as well as my tolerance for pain if you will. Sometimes I can tell you within 60 seconds if I have a good trade. Long Term Trend Followers can do the same thing but for them the confirmation of a good trade might take a few days but those who read this know what I mean. Sometimes you just know! On the alleged S&P mini crash of early yesterday-CNBC’s definition not mine a set up presented itself in the Hourly Time Frame that gave me a go. I went to my trading platform and left clicked twice and I was in. My visitor suddenly got that “deer in the headlight look” and asked me what I had just done. I said I just bought five contracts of the S&P 500. I then very quickly entered my protective stop and looked at my visitor and said, “Now where were we?” He kind of babbled something about DAY TRADING was a losing cause which I totally agree with for MOST traders but not ALL traders. I asked him if he had a written plan and if so was one of his goals to follow his plan in his trading. He told me he gave up on written rules because he had so many rules they were confusing him. I have been there and done that. I asked him how much he risked on each bet as a % of his trading equity as well as how much of his universe of investable assets he had committed to trading. This time his eyes began to glaze over and I feared he might faint. After maybe 45 minutes the market had spurted to the upside and I calmly and without saying a word sold my position with a decent profit of say a 2-1 risk vs. reward. The second reason I sold was the FED was meeting and my PLAN was to be out of the financial related markets prior to 1:00PM period no matter what I THOUGHT might happen. My new friend said, “How you do that?” I said I had a plan formulated that as luck would have it worked this time with a witness. They don’t all work that way but if 50% of ‘em do I have a good life! He then asked me about my rules and my “system”. I told him I did not have time yesterday but if he would come over Saturday I would go through what I do. He seemed very excited but then I had to throw in the caveat to my offer. I explained to him the pain and suffering I had gone through both mentally and financially to get where I have been the last couple of years. Some call it “Up Down Up Down”. I told him what I did was ME and not HIM. I told him if he needed some help finding his ME I could refer him to some people who helped me three short years ago. This man has a law degree from Harvard along with a Masters degree in Tax Law. He is truly brilliant and he can’t trade a lick. You see intelligence has its downside in investing. The young student you quoted has a professor that emphasizes my point. Although politically incorrect I wish you a Very Merry Christmas and a Very Happy and Safe New Year! Semper FI!, XXX

From Yahoo Finance a few minutes ago:

Wall Street edged higher Wednesday in a volatile session where stocks at first surged on robust retail sales numbers, but then reversed course after a disappointing crude inventory report caused oil prices to surge.

* Retail Sales Surge in November AP
* Business Inventories Rise in October AP
* United and Continental in Merger Talks AP
* Home Depot Buys Retailer in China AP
* Market Overview: Wed 12:30 PM ET Briefing.com

I knew there was a REASON why the stock market is up for the time being today. What a relief to know why! How do you think those twenty-five year old AP writers got so much market wisdom at a young age? Of course, if the day ends down, AP reserves the right to change the reasons why.

Some feedback today from a student:

I talked to one of my professors today. She is a very smart lady. Has a PhD in finance and used to work for a hedge fund here in New York. She used to be a professor at Baruch College. She [started] telling me that she is planning on moving away from trading options because they are too “risky” and she had lost a lot of money trading them. I went ahead and asked her, “Do you know anything about trend following?” She literary blew me away. She said to me and I’m quoting, “ Don’t waist your time money and energy, I don’t believe in that, it doesn’t’ work nor do my colleagues believe it either.” She did not give me a minute to talk about it. I then asked her what she though about Long Term Capital Management. She said, “They are very smart people. You can’t blame them for what happened.” I said, “Who is it to blame?” She said, “It is the market. It was ‘volatile.’”

Good to see our academic worlds are right there when it comes to knowing what is going on!

Michael Gibbons of Gibbons’ Trading LLC provides good insight on “trend”:

“The reality is, most hedge funds make money on the long side of the market. That is, to get and maintain their clientele, they must focus on long only trades. To attract clients, they generally must claim they are fundamentalists, as technical analysis (specifically market timing) is out of favor at the moment. Now trading the long side of the market based on fundamentals (whatever they are), is still premised on the existence of a trend. That is, since the trend is the basis of all profit, the market has to be moving in your direction to make a profit. If you buy at A and sell at B, and the trade was profitable, the market went up-or trended (at least for as long as you were in the trade). Very few people can correctly define trend; I will do that here: it is something that repeats. So funds that trade the long side of the market, still require the existence of a trend to make a profit. Therefore, all those that would deny that they are trend followers are in fact, trend followers. They may not be consciously aware of it, but metaphysically, they are relying on the presence of trends to make money. Their methodologies may not be trend following algorithms, but nonetheless, they are in bed with true trend followers-even if they are not aware of it. The directional movement of a market determines dollar profit. If the S&P 500 goes from 1000 to 1500 and we are long, we make 500 points of profit less fees. The move from 1000 to 1500 was something that repeated-the S&P kept going up. The directional movement was up caused by the presence of a trend. Therefore, any attempt to deny that the trend is the basis of all profit, is a logical contradiction. True trend followers eliminate the rationalizations-they just admit they need trending markets to make money, and act accordingly.”

This post brought in this feedback:

Michael - spoke with guy who runs Morgan Stanley’s prime brokerage couple years ago on few things, and asked him one thing I was always curious about: of the people who run funds that blow up: what percentage blow up again? His answer was confident and quick. Said they had done that analysis and the result was 100% - talk about trends! Recall hunter effectively blew up at UBS a few yrs prior to this, though he again blamed an unprecedented turn in the energy markets at year-end. Especially interesting that the last line of the Bloomberg article…had some guy saying that Hunter would be back - no doubt, and we should track, as he will blow up again.