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.”

David Faber has been reporting today that Goldman Sachs and all “other” top hedge funds are 75%-100% done delevering their stat arb funds. Does anyone really believe some of the best hedge funds on the planet are really doing exactly what is being reported? Is the news that very successful hedge funds are now “delevered” supposed to pacify or make the average guy feel comfortable?

The Hedge Fund Implode-O-Meter tracks the hedge fund implosion.

Interesting reading…

***

Dear Renaissance Investor,

As promised in my July letter, posted today on the RIEF website, I want to share some thoughts on August-to-date performance in order to provide perspective on a most unusual period.

RIEF results through July 31 were below expectations, but not extraordinarily so. I’ve previously stated that the low volatility Basic System, to which our predictions are added, was not in sync with the market during much of this period. Nonetheless, we remain confident that over time the Basic System will match the return of the S&P and, enhanced by our predictive signals, should exceed it. Since we do not attempt to track this or any other index there will be periods of positive and negative relative returns.

August (down 8.7% through today) is a different story. The culprit is not the Basic System but our predictive overlay. While we believe we have an excellent set of predictive signals, some of these are undoubtedly shared by a number of long/short hedge funds. For one reason or another many of these funds have not been doing well, and certain factors have caused them to liquidate positions. In addition to poor performance these factors may include losses in credit securities, excessive risk, margin calls and others. All of this may not influence the direction of the overall market, but it may certainly alter the relationships of stocks to each other in a dramatic way. Given the undoubted partial overlap of our portfolios, these liquidations have had a negative impact on RIEF.

Other examples of such liquidations are the meltdown of risk arbitrage positions in the October 1987 crash, the forced liquidation of junk bonds around 1990 and the collapse of European bonds in 1994. Some of these were in the midst of a bear market, some not.

Such events tend to occur extremely infrequently. We cannot predict the duration of the current environment, but usually such behavior causes first pain and then opportunity. While we may hedge out some market risk, our basic plan is to stay the course and, as conditions revert to the norm, we anticipate the possibility of an attractive opportunity for RIEF. Our firm remains strong, and although Medallion has experienced some losses in August, it is solidly profitable year-to-date.

We are confident in our approach, and we urge you to contact our staff should you have any questions.

Sincerely,
Jim Simons