Michael Covel

If you followed the news on Freddie Mac (FRE) maybe you waited until it got to $7 a share to sell. From a trend trading perspective the price action said there was a problem long before the talking heads opened their mouth.

There is a reader named ‘John’ who comes to this blog regularly. He also sends along emails regularly. He appears to operate under the notion that I have somehow created an illusion to dupe people about trend following trading. His latest email tonight was in response to this post. He offers:

“…you’re a front man for the trend followers and have yet to truthfully say anything contrary about same, but you might have more creditability [sic] if you’d give an unbiased view and include the bad and the ugly along with the good.

John conveniently ignores the fact that both of my books list MONTH BY MONTH performance data going back decades. The good and the bad? It’s all there for those who have their eyes wide open!

These days many people cringe when the Dow is down hard as they are only “long only” and are stuck with no knowledge of what other steps they can take. The nightly news programs then reinforce the end of the financial world offering solutions like “stay the course and hang in there” (while some of these people go broke). But some people are making money. For example, David Harding’s Winton Capital is up +18% so far in 2008. Bill Dunn’s Dunn Capital is up +37% so far in 2008. Christian Baha’s Superfund is up +31% so far in 2008. Salem Abraham’s Abraham Trading is up +14% so far in 2008. Those are but a few examples of traders doing well. And by and large those traders are all trading trend following strategies.

From Yahoo Finance today

NEW YORK (AP) — Wall Street tumbled Wednesday as investors grappled with renewed worries about the soundness of the financial sector. The major indexes fell more than 2 percent, including the Dow Jones industrial average, which lost more than 230 points.

Does that comment really hold water when you look at this chart? Has the Dow dropped 2000 points in short order? How could anyone possibly have an explanation for one day’s random market movement?

From Yahoo Finance an educated view:

“For the time being it’s what we call corrective. … It’s a profit-taking pullback that could still be followed by fresh highs down the road,” said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. Ritterbusch said Tuesday’s decline may have gained added momentum when computer models used by large investment funds automatically sold oil contracts once prices fell to a pre-set threshold. “A significant part of it’s technical,” he said of the day’s trading. “A lot of these funds don’t watch supply and demand fundamentals.”

From NPR more perspective on the oil blame game.

From the news services:

Investors’ anxiety builds as retirement nest eggs show cracks

By Robert Weisman, Globe Staff | July 6, 2008

The bad news is in the mail.

In the coming week, millions of ordinary investors will rip open envelopes holding their retirement account statements for the second quarter and cringe. Most will find their stock and bond funds in 401(k) and individual retirement accounts sank between April and June as soaring fuel prices and woes in the financial sector dragged down markets.

While the first quarter also brought some steep declines, the second quarter could feel more painful to the majority of investors who track market activity casually, financial advisers say. That’s because markets climbed through April and early May, before tumbling late in the quarter, dashing hopes of a recovery.

“I open it when I get the statement and weep,” said Joyce Kauffman, 58, a lawyer from Roslindale. “I keep putting money in, and I’m not getting anywhere. I look at it, I grimace, and I file it away.”

Lillian Gonzalez, 51, an accountant from Stoughton, said she gets “sweaty palms” when statements arrive. “The closer you are to retirement, the more anxiety it’s going to provoke,” she said.

That kind of reaction does not surprise Michael A. Cirillo, a psychologist in Worcester with an interest in the ups and downs of investor behavior.

“Anxiety and avoidance go hand in hand,” he said. “It’s probably a coping mechanism, though not necessarily a sound one.” Some people become so anxious that they make the critical mistake of thinking they can “time” the market,” Cirillo said - they pull money out of stocks that are on their way down and miss the subsequent rally.

Investor dread in this slowdown has been compounded by a slump in housing values and increases in gas and food prices. Then there’s the Dow Jones Industrial Average, which closed in bear market territory last week, meaning it’s down 20 percent from October’s peak.

“I’ll take a quick look at it and put it right down,” Chris Neri, 57, a Plymouth realtor, said of his quarterly statement. “Right now I’m just treading water. I try to think long term. I’ve probably got another eight to 10 years before retirement, so hopefully I’ll catch an upswing and get out alive.”

Such long-range thinking has been ingrained in investors who have experienced the ups and downs of past economic cycles. Some said they try to boost contributions to retirement funds when the market retreats to buy shares at a discount, but others said escalating costs have left them no choice but to scale back. Most have kept their contributions steady, as financial planners advise, while looking to rebalance their portfolios between stocks, bonds, and cash.

“My portfolio lost $18,000 in the first quarter, and I just shrugged,” Gonzalez said. “I don’t fret about it. If it doesn’t come back, then everyone’s going to have some real problems.”

But expectations of a rebound are cold comfort after a second quarter during which the Dow average plunged by 7.4 percent, the Standard & Poor’s 500 by 3.2 percent, domestic-stock mutual funds by 9.7 percent on average, and foreign-stock funds by 11.9 percent on average.

Most bond funds were down, too, with short-term US Treasury funds skidding 3 percent in the three months ending June 30. Among the few bright spots were tech stocks, with the Nasdaq eking out a 0.6 percent gain for the quarter.

Stockbrokers and financial planners have been doing more than their usual share of hand-holding lately, as they have in past market corrections. After the last bear market, between 2000 and 2002, it took nearly four years for the Dow to recoup all of its losses.

“People are paying more attention, and need a little more reassurance,” said Stuart L. Ritter, a certified financial planner for T. Rowe Price, a Baltimore investment firm. “There are people we might spend some time reassuring, but there’s no wholesale panic.”

Still, new contributions to mutual funds for investment and retirement accounts are showing strain. New cash in-flows declined from $139.9 billion in January to $122.8 billion in February to $56.2 billion in March, according to the Investment Company Institute, a Washington trade group. Investors pulled $16.8 billion out of funds in April, the first net outflow since September 2005, suggesting some money is being reallocated to bonds or cash, before adding $83 billion in May, the most recent month for which data are available.

The numbers do not indicate whether investors have lightened up because they are nervous about the market or because they’re too financially strapped to raise their contribution levels.

Most financial counselors tell clients to ignore quarterly statements, though they recognize that few do. During bull markets, they said, many investors watch their portfolio obsessively online.

“As a general rule, I think people should decide on their risk tolerance, develop their allocations based on that, and then only look at it once a year,” said Bill Driscoll, a financial planner in Plymouth. But Driscoll conceded that “almost nobody” follows that advice.

Joanne Dalabon, 46, a Sharon office worker, said the quarterly ritual of peeking at her retirement statements is irresistible.

“I’m always dying to open the envelope, and see what’s in it,” said Dalabon, who has two children and college bills on the horizon. “When you have more, it’s like a little Christmas present. When you have less, you have to live with it. I’ve learned to not let it upset me because I’m not ready to retire and there’s nothing I can do about it.”

Robert Weisman can be reached at weisman@globe.com.

This article is why I have spent two and one half years in total, interviewed over 100 people (from Nobel winners to regular Joes) and traveled 75000 air miles all to get at why so many people go through life afraid of that envelope!

Financial Times recently ran an article by John Train titled ‘The heresies and swamis that can hurt your portfolio’. In it Train states:

There are several heresies in the investment business that can harm you if you believe them. One is astrology. Probably almost no Financial Times reader will be troubled by that one, but you would be surprised how many readers of fashion magazines and the like give it attention. Another is technical analysis the idea that by studying the shape of the markets wiggly lines you can predict the future. Famous swamis have arisen, such as Joe Granville and James Dines whose pronouncements would move markets. Yet it has been only a matter of time before they crash and burn.

If he is talking predictive technical analysis I agree. If he is talking rective technical analysis - he is dead wrong. I paint this picture in my book “Trend Following”. Train also states:

Todays heresy which I find particularly annoying because it is so lazy intellectually is claiming that volatility equals risk. What rubbish! Risk is when a company goes belly-up, a currency goes against you, or a country turns sour, such as Cuba; that is, the possibility of permanent loss of capital which has nothing to do with inevitable fluctuations of the market. Here is an example. Suppose you like living in your house, hope to live in it for 20 years, and do not want to sell it. It will get more valuable over time, and is thus a good investment. But suppose you constantly priced it in a thin market, and one year it was up, and another down. Does that make it risky? No. As Buffett says, better a lumpy 14 per cent than a smooth 12 per cent.

I agree here - bumpy is reality and smooth is for dreamers not connected to the real world. Train then offers a conclusion which is problematic:

So what should you do? Buy a stock that, like your house, you know all about and would happily own at that price, in the absence of any market.

This is pie in the sky. Buy one stock? How do you “know” about it? At any price? His article is very odd. Some nice analogies and comments, then a conclusion that simply doesn’t pass the smell test.

This article paints a tough picture for Las Vegas and casinos, but the charts of Las Vegas Sands Corp. (LVS) and Wynn Resorts (WYNN) showed a problem long before the article hit the wires.

This article and excerpt caught my eye

“The [mutual fund] industry sets targets that are far too high and then says, ‘Gee let us help you hit that target — put your money in stocks,’” he says. “It is true that the probability of making your target will go up, but the probability of having a really bad outcome — like losing your principal — will also go up, and so will the fees charged for management.”

Its never about just putting your money in any asset “long only”. Once you decide on the asset class you need a plan for buying and selling before you ever lay one dollar on the table at risk.

I posted this recently on author Alexander Elder. A response to that came in from a reader

The Turtles, if I read your book correctly, were winnowed down out of about 1000 applicants, and given a two week or whatever intensive tutoring, and watched over like hawks. Most traders, investors, or weekend punters, do not have the advantage of intensive training by the turtle trainers, or by a Warren Buffett , for that matter. Possibly Dr. Elder’s advice is more in tune to the “working man”.

The working man. What a term. What a silly term! If you make too much (whatever that number is exactly) you are no longer working? As for the Turtle view presented above clearly this reader only made it through certain parts of my book “The Complete TurtleTrader”. He only absorbed the parts that buttress the view he wants to have. How can anyone read Chapter 11, 12 and 13 and come to his view?

People are seduced by the bling and dazzle of pro athletes. I bet the average guy thinks pro athletes are swimming in cash set for life (some think that about all original Turtle traders, but clearly that is not true either!). Not so fast. Consider this excerpt from a recent ESPN article:

Filing for bankruptcy is a long-standing tradition for NBA players, 60% of whom, according to the Toronto Star, are broke five years after they retire. The other 40% deliver the Toronto Star.

Can you believe that? Guys who are paid monster sums of money go broke shortly after their careers end. In a round about way it’s why I always find the “starting capital” question (”How much do I need to start trading mister?”) so silly. Ed Seykota’s answer to that question is still the best. Seykota answers the starting question by asking, “how much money would you need to stop trading?”

It’s never really about how much you have, but rather it is about what you do with the limited capital you do have (and, yes, we all have limited capital).

I caught the article today that Starbucks is closing 600 stores. Looks like the chart was saying there was a problem long before the news today?