My prediction is more exciting, right?

From ZH:

Confirming just how leveraged hedge funds and general investors were exiting February is the latest margin debt data from the NYSE, which indicates that the recent trend of pursuing beta on ever increasing margin continues.Total margin debt jumped by a whopping $21 billion from $289.6 billion to $310.3 billion, the highest it has been since July of 2008. It should, however, be kept in mind that this is a gross leverage number. To get the far more accurate net number, one needs subtract the margin debt from Free Credit Cash Accounts and Credit Balances in Margin Accounts, or in other words, the “net worth” of the investor (the less the supporting cash, the lower the “capitalization ratio” of the speculator). And here things get very concerning. The Net Free Credit (or net margin debt depending on whether one puts the + or – sign in front), calculated as Total Free Credit less Total Margin Debt jumped from ($46) billion to a massive ($57) billion. This is the third lowest net worth reading ever reported by the NYSE. Only the ($67.8) billion in May 2007 and ($79) billion in June 2007 are worse, and confirm that everyone is levered to the gills at virtually the same level as when the market was at its all time highs. We all know what happened next.

You can’t trade off that data, but it is interesting.

Buffett comment this week:

They are not new lessons. Never owe any money you can’t pay tomorrow morning. Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle. But all of those were old lessons, unfortunately. Even though I didn’t see it coming, those lessons which are timeless allowed us to in effect profit from it rather than suffer from it. Good businesses, good management, plenty of liquidity, always having a loaded gun; if you play by those principles you will do fine no matter what happens. And you don’t ever know what’s going to happen.

He knows how to spin a yarn. It’s almost like he has become Jason Bourne — an amnesiac on the loose.

This email came in from a friend on my Facebook.

Michael, I’m very upset as I just lost $30K (wipe out) as the main/sole investor in a new currency hedge fund … do I have recourse? Is there a place to go somewhere and complain? Thanks for intelligence if any …

I felt it would be useful to post this for everyone. Brutal honesty? Everyone gets what they … [read my mind].

Michael Rosenberg of SI.com writes:

It’s good to sprint to the edge of a cliff and stop. If you almost get eliminated, two wonderful things can happen. One, you know you can handle the pressure, and you don’t worry about it anymore. And two, you feel like it’s your destiny to win. I don’t believe in destiny, but I believe in believing in destiny. What I mean is that a team that believes in its destiny is more likely to win. We’re seeing that now with VCU and Butler. As Kansas came back Sunday, VCU never came close to panicking, just as Butler looked like the more poised team down the stretch against Florida. We’re all surprised that those guys from Butler will face whoever those other guys from VCU are in the Final Four. But they don’t seem surprised, and maybe that helps explain why they are here.

Wise words. Relates to much more than college basketball — the original context.

Markets are more predictable than you think? No they are not. I don’t know who wrote that, but they are either ignorant or trying to lift your wallet. An excerpt:

NEW YORK – The markets may be rational after all. The threat of severe nuclear contamination from a breached Japanese nuclear reactor still looms. The outcome of the escalating war in Libya is uncertain. Yet The Standard & Poor’s 500 index ended the week up 2.7 percent. The Dow Jones industrial average rose 3.1 percent. So what happened to all that headline-driven volatility from two weeks ago? If you look at historical patterns, this week’s rebound isn’t so surprising. The numbers suggest stocks will likely keep rising for the next few months.

Excuse me for a minute while I go beat my head with a bat!

Tip to Curtis Purington, Portfolio Manager at Oppenheimer & Co., for the link.

Is it a new bubble? Who knows! This much is true: trend following is the only way to keep from being caught on the wrong side AND to possibly be on the right side when one pops.

Many believe academic intelligence is the direct path to reaping a fortune. Some literally tout their IQ–as if their IQ is money in their bank account. One longtime trend follower drilled that nonsensical stance: “I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few are not. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.”

In an interview with another legendary trader, it struck me how he chose to begin. He opened saying that while he was in kindergarten he did not pass blocks. That humor is from a man who has made a fortune north of 100 million dollars trading trends. Yes, he is smart, but his larger point: IQ is not a magic elixir.

Trend following is objective. It’s not about stuff hanging on your wall with fancy seals.

Abelson on “Immunity to Bad News”

No Exit, No Entry

Oil and Stocks

And a lively protest from London:

I have no idea if there is a current bubble in stocks, but it is amazing that some people think they know. Had a conversation with a friend yesterday. He mentioned that real estate in Southern California was stabilizing (forget that debate for a moment) and then the conversation of “bubbles” came up. I was amazed at his confidence, and he is a smart guy, that he could so quickly announce that are we not in the middle of a stock market bubble now. Has there every been a time when the majority knew it was in the middle of a bubble and acted accordingly? Bubbles are never clear until the dust settles.

Gold is not a buy and hold asset class (well, nothing is!). Just unreal thinking. If there is no exit strategy before you enter — disaster waiting to happen. Period.

Tip to pragcap.com for video.

This was written by a trend follower in December 2004:

“‘Buy low, sell high” – it’s the mantra of every traditional, stock-and-bond investor. But in today’s market, finding a low-priced, ‘undervalued’ asset can be challenging. Interest rates are at long-term lows, meaning that bond prices are very high. The valuation levels of equity markets appear high as well, as measured by price/earnings or other traditional indicators. Where is there a bargain in these financial markets? Perhaps the answer lies in the historically low volatility of markets. Despite war, global energy turmoil, massive deficits, a hotly contested U.S. presidential election, and other complicating factors, volatility – as measured by the Volatility Index (VIX) – has dropped to unexpectedly low levels…”

Interesting, eh? Times change, times don’t change.