“Hedge funds known as trend followers – which chase market movements, rather than making fundamental investment decisions – also appear to have been hurt on bad trades.”
Notice the not so subtle slap against trend following above. It’s the cavalier and reckless sounding “chase” versus the wise and stoic sounding “fundamental investment decisions.”
Also, I notice the emotionally charged use of “bad trade.” What was the bad trade? A preset loss to take that trend followers knew about in advance of ever entering the position?
I grew up watching the Baltimore Orioles and can still pretty much from memory name their starting teams from the late 70s and early 80s Their manager at the time Earl Weaver, and he won a ton, believed in the home run (from my book ‘Trend Following’):
“Earl Weaver designed his offenses to maximize the chance of a three-run homer. He didn’t bunt, and he had a special taste for guys who got on base and guys who hit home runs.”
“Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America’s secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. Our job is to help those who house America.“
And from Bloomberg:
“The bailout of Fannie Mae (FNM) and Freddie Mac (FRD), already the largest on record, could reach $1 trillion. Fannie and Freddie, 80 percent-owned by taxpayers, hold or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages. Their federal regulator is having them delist their shares, which have been trading for about $1 each, from U.S. stock exchanges. As of Mar. 31, borrowers were late on $338.4 billion worth of loans, up from $206.1 billion a year earlier. The companies have drawn $145 billion from an unlimited government line of credit.”
Fannie Mae says their job is to help those who house America. Pardon me. Who else is helping them in this mythological secondary mortgage market?
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“An important feature of our approach is that we work almost exclusively with price, past and current. One reason for this is that to make any progress in the early stages of quantitative investigation you usually have to reduce the relevant factors to one or two crucial variables. Price is definitely the variable traders live and die by, so it is the obvious candidate for investigation. The other reason is that in a system that’s making good use of price information, it is very difficult to add other information without degradation. Pure price systems are close enough to the North Pole that any departure tends to bring you farther south.”
More from a conversation never heard on CNBC:
“Many systematic traders spend the majority of their time searching for good places to initiate. It just seems to be part of human nature to focus on the most hopeful point of the trading cycle. Our research indicated that liquidations are vastly more important than initiations. If you initiate purely randomly, you do surprisingly well with a good liquidation criterion. In contract, random liquidations will kill the best system.”
Real estate seems to be in trouble again as evidenced by here and here. However, I still love the logic from a critic of my film:
“Actually, all houses WILL eventually regain their value. It will be the very simple combination of eventual market stabilization and inflation. It’s why even with a burst bubble, my modest home is worth twice what I paid for it—because I bought it 11 years ago. It’s why all homes in 5 or 10 years will be worth more than they are today.”
If you want to trade, be a trend follower, but let’s put that aside for a second too.
When does the economy recover? I don’t see it. On the backs of iPhone sales and tequila shots (no one ever stops drinking even when the economy is dead)?
Not happening. Let’s be straight. It all comes down to the millions upon millions of people who believe two precepts:
When those people have their Aha! moment — we will be at the tipping point. “But, Mike the President talked about getting rid of fossil fuels soon and that will create millions of jobs.”
I love controversy. It works for me. My bluntness though can bring the nuts out of the woodwork (an example at Amazon today) and the nuts seem to have a common refrain: “Your book is a waste of trees and you sell trading courses!” Followed by the always implied “Covel is the devil” outbursts. But as that ‘review’ at Amazon shows — the angry critics never get into the ring with me on content — just ad hominem attacks. You would think by now that they would change their approach — nope.
Where am I going? Well, after seeing that review I had a scheduled lunch with a late twenty-something fund manager. He runs a trend following fund that is closing in on $10 million dollars under management. Considering he started three years ago with less than $60,000 — that’s a pretty impressive trend following start.
Where did our conversation go over two hours? All over! However, we ultimately talked about his ‘start’. Him and his partner first read ‘Market Wizards’ years back, but he said that it was my book ‘Trend Following’ that really provided the inspiration. He said ‘Trend Following’ was the book that laid the foundation for their success up to this day. That’s a good feeling. It’s nice to know that my writing labor over the years continues to have such rewarding results.
“Hi Michael, I recently came across your writings about turtle trading and was quite impressed by it. I have already called for the book and am quite excited about it. I would like to share with you an indicator that I’ve developed which gives timings for super cycles in the US 2 Yr Treasury, SP 500 and Gold. I would appreciate if you could have a look at it. In the last 12 years we have only 6 times that the indicator has come to the watermark 800 level, from where we anticipate a trend. The indicator signal time is markets as red boxes and the larger boxes are for the complete moves. The time line on the indicator chart are replicated on the price chart, the results are phenomenal. We’ve been able to catch the most important trends in the US 2 Yr Treasury market and ride it. Not mentioning the predictive value of this indicator on the treasury prices, interest rates, the economy and its effects on the stock markets. We are once again at a critical level in terms of the US 2 Yr Treasury. Your reading this email and your specific views would be highly appreciated.”
I have no expertise in ‘predictive’ technical indicators.
Ben Bernanke and his colleagues at the Federal Reserve, for example, have refused to acknowledge that by keeping interest rates at zero “for the foreseeable future,” they have begun to generate new bubbles in financial assets and overheated the economies of developing countries, where much of the money is going. These are many of the same folks, after all, who once claimed they couldn’t see the credit and real estate bubble developing right under their noses — and, once those bubbles burst, rejected criticism that overly loose monetary policy might have been a cause.
Point of my film. That said, I disagree completely with a ‘fix’ he mentions — more government spending.
Buy or sell gold if it is trending and do so only with a loss-limiting stop in place. Don’t buy gold because Glen Beck or George Soros promotes it (see NY Times). Excerpt:
Tongue only half in cheek, Glenn Beck advised his audience to consider “Gold, God and Guns,” while laying out three possible scenarios for the economy: recession, depression or collapse. One major advertiser on Mr. Beck’s show is Goldline, a huge California marketer of gold coins and bars that is also a sponsor of programs hosted by other prominent conservative commentators like Laura Ingraham and Mike Huckabee. Mr. Beck has said he “was a client of Goldline long before they were a client of mine,” adding: “I personally don’t buy gold as an investment. I buy it for protection.” Of course, the right hardly has a monopoly on gold. Mr. Soros, a prominent donor to liberal causes and candidates, holds more than $600 million in bullion and gold mining shares.
Call Goldline and ask about how their ‘gold exit strategy’ works. I have done it. Their response is pure comedy.
