Michael Covel: News & Info.

I had a two and half hour lunch today with an original Turtle who had some funny recollections about his Turtle days. He chuckled at two ways people tried to win Dennis’ attention. Some women actually sent nude photos of themselves in an effort to be hired as a Turtle. Better yet one guy sent two coconuts with a note that said, “If you have the balls to hire me, I have got the nuts.” None of these people were hired.

August has been carnage in the hedge fund space. It seems to have smacked all types of funds and all types of strategies including trend following. While it is difficult to assess the situation on a real time basis, one question keeps coming to mind for me: who are the big winners in the zero sum game for this particular event?

As usual, good logic from Alan Sloan.

A reader calling himself “Skipper Gilligan” writes me today:

Your blog has been noticeably devoid of news regarding the recent heavy losses experienced by the trading methods you champion. Truth is these guys have been getting slaughtered. Your credibiity [sic] is being damaged by your head in the sand approach…face facts and acknowledge what is happening, as a “true trend follower” supposedly does. In your book you go on and on about Henry. Well, Henry has performed miserably for years now. At what point do investors there “cut their losses”? Wait, looks like they already have as he has lost over 75% of AUM since November. That level of redemptions means he is circling the drain. I hope you will be man enough to acknoweldge [sic] it when the fund closes. This isn’t to say that systematic trading doesn’t work or doesn’t have its place. However your devotion borders on religious zealotry with you coming off as a bit of a crackpot evangelist. System Breakdown is the achilles heel, where managers keep taking losses trusting their system will revert back to their historical models of performance (LTCM anyone?). Fact is that markets DO change over time. No not the underlying concepts of fear and greed, but trend vs non-trend. And much to your’s and trend follower’s chagrin, periods of non-trend often last much longer than your access to shrinking pools of capital.

I welcome vents from ‘Gilligan’ and anyone else.

Some thoughts on Henry:

1. His track record goes back to the early 1980s. I write about his losses and wins in my book. I write about his drawdowns. There is no hiding.
2. Many traders have assets pulled by investors. I write about this in ‘Trend Following’, I don’t run from it. I am sure many good (and bad) traders will see investors pull assets this summer.
3. I can’t speak to changes or adjustments inside John Henry’s money management firm. One of the common bits of feedback I receive about Henry? People ask how he is able to run both a professional baseball team and professional money management firm. My answer? I simply do not know. So far he has had great success with both.

The worst part about being a trend follower? The Fed. When the Fed intervenes, like they did today, market trends often flip on a dime. Now this of course is nothing new as the Fed has always been prone to not let the market run its course, but it sure would be nice one day if the Fed just stood back.

Jim Rohrbach is a big believer in trend trading. His most recent sell signal for the NYSE was on 7-24-07 and his most recent sell signal for the NASDAQ was on 6-7-07. That said, Jim doesn’t put signals out there trying to call tops and bottoms as that is impossible. Some of his recent commentary:

Is it too late to get out? I get this question quite often, or I am asked if it is too late to get in, when the market is going up. Both of these questions assume that I can predict the future course of the stock market. I can’t. But my answer will always be the same. If the RIX is on a Buy Signal, get in. If it is on a Sell Signal, get out. Any other response gets into the game of guessing. I leave guessing up to others.

Jim’s site.

As part of a research project (news on that coming!), I have watched most of the last 3 days of CNBC’s daily programming (trading hours in the US). Historically, it was a good time to tune in no doubt, but I seriously wonder about the mental health of anyone who can listen all day long to fundamental opinions - especially when markets are gyrating over 200 points a day on the Dow. One minute a 30 point Dow rally is news and all smiles, them the market closes down 169 and screams for the Fed to cut abound. Everything has a reason and everyone has an opinion. Why not say what Jim Simons has said about early August so far (”we were not lucky”)? Doesn’t that sound more real?

Don’t get me wrong, many of CNBC’s on air reporters are talented broadcasters and fun to watch as entertainment, but they are tasked with making random price movements appear exciting. They are tasked with connecting random price movements to “meaning”. And that is impossible regardless of how good a broadcaster one might be.

Barry Ritholtz makes a good analogy about the changing face of Wall Street’s cheerleaders. I look at his analysis not as a trigger to trade by, but rather as a well stated look behind the scenes of how Wall Street’s advice machine oils up panicky sheep investors.

Feedback in from a reader…

Hello Michael,

The recent market turmoil reminds me Shakespeare’s plays :

Be not afeard. The isle is full of noises,
Sounds and sweet airs that give delight and hurt not.
Sometimes a thousand twangling instruments
Will hum about mine ears ; and sometime voices
That, if I then had wak’d after long sleep,
Will make me sleep again ; and then, in dreaming,
The clouds methought would open and show riches
Ready to drop upon me, that, when I wak’d,
I cried to dream again.

The Tempest. Act III, scene 2.

I saw this “looking for bright news” headline this morning:

“The Nasdaq is 5.5% off of a 6 1/2 year high.”

Or my way to look at it?

“The Nasdaq is still down 49% from it’s high nearly 7 1/2 years ago.”