Michael Covel: News & Info.

Mark Cuban gave a great little story recently:

When I was about 23, I was in Vegas playing blackjack for the first time. I was at the $5 table and asked the dealer if I should double down. He told me, ‘No balls, no babies.’ Sometimes you just have to go for it.”

The business brain close up.

From the AP today:

The Dow Jones industrial average swept past 14,000 for the first time Tuesday after a relatively tame inflation report gave investors reason to extend an extraordinary — but questionable — Wall Street rally.

Why is this a questionable rally over any over rally? I guess if you say extraordinary and questionable in the same sentence you got all of your bases covered!

Feedback in:

Hello, Mr. Covel. I am an investor w/ about 2-3 yrs. experience and have learned from your commentaries posted. While most of your columns are excellent, I just wanted to make a comment about your criticism about Chinese investors blindly buying stocks on the Shanghai exchange and lacking strategy or reasoning. While that is true, I feel this doesn’t provide the correct message to your readers. Your criticisms of the Chinese investors miss the most important point of all; that Chinese stocks (Shanghai-based and ADRs) are TRENDING UP! Readers of your column would read your commentary about Chinese investors and agree with you about Chinese investors being morons. Then, they may end up not investing in Chinese stocks or Chinese ADR’s, because that would make them an idiot, like Chinese investors. Instead, I’d suggest that your columns emphasize that Chinese stocks/ADR’s are in an uptrend, and that readers of the column would find that stuff like Focus Media, Baidu, Chinese solar stocks, etc. are in an uptrend (they are in an uptrend, right? I haven’t seen one word in your column saying that they are!) Your columns could also focus on the difference between trend followers and idiots; that both can buy securities that rise in a trend, but the trend follower knows when the trend stops, while the idiot doesn’t (as it will be for Chinese stocks). I’ll continue to enjoy reading your articles, but your commentary on the Chinese investors continues to puzzle me, because you’re missing the main point that Chinese stocks are in a trend up.

I understand some markets are going up, but that is not permanent. Hence, you need a plan and the comments from some Chinese investors showed they had no plan. Their comments show they are gambling. If it would have been American, British, Japanese, etc., I would offered the same exact criticism.

Some feedback in from Germany:

Good article on why market value is more important than fair value, [and] why arbitrage is a lot more risky than many assume.

A good read on IQ and success.

Feedback in about this recent post:

I can’t help but think of trend followers as that wise old bear you see in the documentaries sitting on a rock in the middle of a river catching fish. He just sits there and sooner or later a fish swims by and he catches it and eats it. I never see him sitting on the sidelines talking to another bear about “why” the fish swims by, or if one rock is better than another, or even if it’s better to sit on the shoreline versus a rock in the middle of the river. He just knows that if he puts out the effort, sooner or later he catches a fish! Which mean is the best? Is the market efficient or not? Is a bubble a bubble or can you quantify the beginning of a trend…oh never mind, I’d rather go fishing!

–David M.
Sugar Hill, GA

I posted this podcast the other day. A critic on the web offered:

The 2 minute expression by Covel is a very poor statement about a topic. There are many many things that he does not know about trends. These things I mention are facts….facts about trends. If you have heard Pring speak, he is in the same boat as Covel. When you sit in a session on trends with Oliver Velez, you will come to see a similar vagueness about trends, particularly in the area he avoids addressing: their beginnings. Prentice Hall representatives, Covel’s publisher for his trend compilation, both in the financial department and the editing department, feel that there is still a lot left to be desired as well. Do not expect anyone to make sense of the snippet. Covel is not in a position to admit anything. Do get that straight. Covel is never going to be able to assign utility to trends. Covel cannot do that in any way. You are missing a lot. That is just the way it is in your realm or space. Read the Abstract of Magic Numbers in the DOW, Batchelor and Ramyar, Septembr 2006. The research examines the length and duration of successive trends in the Dow Jones Industrial average. This is research on a subject. The subject to be researched has to exist. It is possible that the subject of their research doesn’t exist as you think Covel suggests. For people who make money using trends, they usually, over time become more knowledgeable, skilled and experienced. The mathematical representation of trends is a broad and exacting science. There is almost no more effective, efficient or optimal utilization of any financial representaion [sic] of markets than the mathematical representaion [sic] of trends. If Covel, Pring, Velez, Batchelor, Ramyar, Steenbarger or you ever got to see the mathematics related to trends it would make absolutely no difference at all. That is just the way it is. John Netto wrote a book that deals with trading to make money. 55 bucks when new. Now a used copy goes for up to 200 bucks. The book has trading information in it from a trader who knows how to trade. There is bullshit out there all over the place. And there are facts and science and coded software that defines things very accurately and correctly and in such a way that money can be extracted to the extent that the market offers. Some people can figure things out. Some people write about things that they have heard of. Some people cannot understand what others have figured out and there is little chance that any understanding can be found by anyone who is trying to understand a person explaining or reading something that the author has just heard about. Covel is missing just about everything on trends. You are worse off; you are missing what Covel is telling you he is missing.

I feel like I just listened to Brando’s character Colonel Kurtz in Apocalypse Now.

I thought this excerpt was well stated, but still ends going the direction of “fundamentals” for an answer:

May 17th 2007
From The Economist print edition
Averages need to be treated with caution

CONSIDER these two statements: the American stockmarket was overvalued in 2000; company profits are high relative to economic output. Many people would agree with both propositions, but implicit in each is that there is a correct, or normal, value for shares or profits. The corollary is that when share price or profits are too high or too low, they will eventually revert to the mean. But what do people mean by mean? Efficient-market theory, which states that prices already reflect all available information, presents an immediate problem for the idea of a reversion to the mean. If share prices were obviously too high, investors would sell their holdings until prices fell to the correct level. There would be no extremes to revert from. However, in the light of the dotcom bubble, it seems inherently unsatisfying to argue that markets are always fairly valued. Such a position also gives a green light to those who argue that “it’s different this time”, and who use any old valuation measure (price per eyeball for internet stocks) to justify share prices. Pinning down the right mean, however, is difficult. American profits look high by the standards of the past 20 to 30 years. But they do not look unreasonable relative to 1950s and 1960s levels. Perhaps the 1970s and 1980s (which saw high inflation and double-digit interest rates) were the aberration and the immediate post-war era was the norm. Things get even more complicated when investors start to talk about stockmarket valuations. Most analysts tend to use the prospective price-earnings ratio as their chosen measure, rather than the historic figure. They justify this by saying that investors look forward, not back. But banks are in the business of selling shares. Since analysts nearly always forecast rising profits, the prospective p/e ratio is usually lower than the historic one; that makes the market sound cheaper.

Finding “cheaper” is not the objective. Buying and selling to a profit is the objective.