Michael Covel is the author of the internationally bestselling book Trend Following

Foul Language

August 31, 2007

A recent podcast brought in:

I am insulted by the language that you use [here}. I found you unprofessional. My wife was ashamed to hear your message. If you can't speak proper English then how can I trust your trends? If you wish to continue gutter language then take me off your e-mail [list]. If your next message is some of the same then I will e-mail all my friends and tell them what I am hearing from you. I am retired and teach young men at risk and they do not [sic] us your language. Gene A.

Gene needs a dose of the real world! I did enjoy his red herring of connecting foul language to the veracity of my statements regarding trend following. Bad logic.

Colo. School Bans Tag on Its Playground

August 30, 2007

Want some inspiration?

COLORADO SPRINGS, Colo. (AP) - An elementary school has banned tag on its playground after some children complained they were harassed or chased against their will. "It causes a lot of conflict on the playground," said Cindy Fesgen, assistant principal of the Discovery Canyon Campus school. Running games are still allowed as long as students don't chase each other, she said. Fesgen said two parents complained to her about the ban but most parents and children didn't object. In 2005, two elementary schools in the nearby Falcon School District did away with tag and similar games in favor of alternatives with less physical contact. School officials said the move encouraged more students to play games and helped reduce playground squabbles.

Now that is the way to teach kids about life! In a world that will only continue to be more competitive, we see another example of training kids to be weenies.

A Billion in 10 Years!

From AOL today:

Do you ever wish you had invested in Amazon or Apple before they hit the jackpot? Nobody can predict the future, but if you went back 10 years with only $100 and the knowledge you have now, you could be a billionaire today. [Here is] how it's possible.

Yahoo (YHOO)

Year: 1997
Jan. 1: $100
Dec. 31: $611

If you invested $100 in Yahoo stock at the start of 1997, the year of the Spice Girls, Hanson, and Titanic, you'd have $611 by the end of the year, thanks to Yahoo's 511% return.

Amazon.com (AMZN)

Year: 1998
Jan. 1: $611
Dec. 31: $6,532

If you invested the previous $611 in Amazon.com stock at the start of 1998, the year Sex and the City debuted and Britney Spears was still innocent, you'd have (roughly) $6,532 by the end of the year, thanks to Amazon.com's 971% return.

QUALCOMM Inc (QCOM)

Year: 1999
Jan. 1: $6,532
Dec. 31: $175,327

If you invested the previous $6,532 in QUALCOMM stock at the start of 1999, the year Backstreet Boys and NSYNC were big and everyone was freaked out about a global "Y2K" crash, you'd have $175,327 by the end of the year, thanks to QUALCOMM's 2587% return.

Lab Corp. of America (LH)

Year: 2000
Jan. 1: $175,327
Dec. 31: $836,704

If you invested the previous $175,327 in LabCorp stock at the start of 2000, the year hanging chads made for a very interesting election outcome, you'd have $836,704 by the end of the year, thanks to LabCorp's 377% return.

NVidia (NVDA)

Year: 2001
Jan. 1: $836,704
Dec. 31: $3,392,432

If you invested the previous $836,704 in NVidia stock at the start of 2001, the year Silicon Valley was imploding and stock investors were no longer printing their own profits, you'd have $3,392,432 by the end of the year, thanks to NVidia's 305% advance.

MEMC Electronic Materials (WFR)

Year: 2002
Jan. 1: $3,392,432
Dec. 31: $7,213,680

If you invested the previous (roughly) $3.5 million in MEMC stock at the start of 2002, the year American Idol began launching homegrown superstars, you'd have $7,213,680 by the end of the year, thanks to MEMC's 113% gain.

Akamai Technologies (AKAM)

Year: 2003
Jan. 1: $7,213,680
Dec. 31: $43,270,538

If you invested the previous $7.2 million in Akamai Technologies stock at the start of 2003, the year the Iraq war started and the first Pirates of the Caribbean movie plundered box offices worldwide, you'd have $43,270,538 by the end of the year, thanks to Akamai Technologies's 498% return.

Sears Holdings (SHLD)

Year: 2004
Jan. 1: $43,270,538
Dec. 31: $179,147,269

If you invested the previous $43,270,538 in Sears Holdings stock at the start of 2004, the year John Kerry and George W. Bush went head-to-head for the White House, you'd have $179,147,269 by the end of the year, thanks to Sears Holdings's 314% return.

SanDisk (SNDK)

Year: 2005
Jan. 1: $179,147,269
Dec. 31: $448,904,325

If you invested the previous $179 million in SanDisk stock at the start of 2005, the year Hurricane Katrina demolished New Orleans and Pope Benedict XVI succeeded Pope John Paul II, you'd have $448,904,325 by the end of the year, thanks to SanDisk's 151% advance.

Allegheny Technologies (ATI)

Year: 2006
Jan. 1: $448,904,325
Dec. 31: $1,118,314,364

If you invested the previous $448,904,325 in ATI stock at the start of 2006, the year the Steelers won Superbowl XL, you'd have $1,118,314,364, thanks to ATI's 149% gain. More than $1 billion in just 10 years.

Open-Outcry Cries

August 29, 2007

A question in today:

What are the differences and similarities of the open-outcry and computer based trading? What do you think are the pros and cons of both systems?

A timely question. Read.

Sheep

There could not be a better time than August of 2007 to interview sheep!

A Simple Chart

August 28, 2007

I was on the road today interviewing a very successful trend trader. While today was clearly "volatile", he could have cared less what was going on during market hours. Why? He doesn't make his trading decisions during market hours. He is all about having the flight plan set before the market opens. All if/then contingency decisions are made in advance. The rules rule.

Taking that story into account take a look at a simple little chart. We all know there has been some serious volatility during that stretch. Now think about each day during that three month window. Almost every day was filled with "news". Almost every day had talking heads on TV giving a forecast or prediction.

See where I am going? Doesn't the existence of a trend trader with a thirty year track record conflict with a talking head forecaster convinced his or her "words" matter?

Overconfidence

August 26, 2007

An interesting article on overconfidence. It sounds very much like what was written during the summer of 1998 following LTCM.

Mark Cuban on Dead Internet

August 24, 2007

An excerpt from a recent interview:

Lloyd Grove: As recently as May 2007, you told the House Subcommittee on Telecommunications and the Internet that government policy could encourage internet providers to make the necessary investment in fiber optics to significantly increase bandwidth to home users, in line with industrialized nations such as Japan, Germany, and South Korea, and that the economic benefits would eventually outweigh the costs. But last month, you declared: “The internet is dead. It’s over.” You said it’s “for old people” and it’s a “stagnant consumer platform.” Did you change your mind between May and July? Who or what killed the internet? And aren’t you biting the hand that fed you?

Mark Cuban: The internet of today versus what I suggested to the committee would happen if internet speeds to the home increased to 1 gigabyte per second, is like comparing the plane Orville and Wilbur Wright built in 1903 to a brand-new Boeing. We have reached a point of diminishing returns with today’s internet. The speed of broadband to your home won’t increase much more in the next five years than it has in the last five years. That is not enough to work as a platform for new levels of applications that will require much, much higher levels of bandwidth. Broadband to the home isn’t fast enough for downloads of movies at DVD quality to be ubiquitous. That means it’s no longer a platform for technological innovation. Think of it this way. Way back when, electricity changed the world. It was the platform for everything electronic that we do today. Do you get excited about electricity or is it just a utility? Maybe old people who remember the advent of electricity still get excited about it. No one else does. The internet is in the same position today. It’s no longer an exciting platform for societal and business change. It’s a utility. It’s something that is exciting to people who remember the old days of the internet. The only way to change that is to upgrade the platform for bandwidth transport across the country to a minimum of 1 gigabyte per second throughout to every home. At that point kids will come up with new and unique applications that we can’t imagine today. That’s when it becomes exciting. Until then, it’s dead and boring.

Good points by Cuban.

"Stocks Dip As Credit Worries Persist"; Oh Really?

August 23, 2007

From the AP tonight:

Wall Street ended a mildly erratic day slightly lower Thursday after anxiety about widening credit problems offset investor optimism about a $2 billion capital infusion into troubled mortgage lender Countrywide Financial Corp.

What did equity market indexes look like?

Dow Down 0.25 (0.00%)
Nasdaq Down 11.10 (0.43%)
S&P 500 Down 1.57 (0.11%)

In percentage terms the Dow did NOT change at all! But the AP thinks NO change can be attributed to Countrywide something or another? Millions of people read this stuff. It makes me wonder if the author is literally just sitting at his PC pounding beers laughing to himself that he has the ability to say anything.

On the Randomness, or Lack Thereof, of a Baseball Linescore

A nice piece from Stephen Dubner that reminds of the markets.

Turtles and Coconuts

August 22, 2007

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.

The Other Side of the Zero Sum Game?

August 20, 2007

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?

Alan Sloan on the Handouts

August 19, 2007

As usual, good logic from Alan Sloan.

Skipper Gilligan Vents About John Henry

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.

Picking Winners Is Not the Fed's Job

August 17, 2007

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.

James O. Rohrbach on Timing

August 16, 2007

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.

CNBC Is Dangerous for Your Health!

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.

Ratings Agencies 2007 = Equity Analysts 2000?

August 15, 2007

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.

The Tempest

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.

The Art of Words

August 13, 2007

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 on Delevering

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

August 12, 2007

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

Jim Simons Letter to Investors Today

August 10, 2007

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

Excuses

Calm Down

I caught a nice excerpt from a Money Magazine article:

Am I acting on reason or emotion? While at my gym last week, I was watching one of the cable TV financial shows as the market was in the midst of a steep decline. Based on the frenzied rapid-fire report of the correspondent on the trading floor, you could easily get the impression that you'd better quickly dump your stocks before you get caught in a bloodbath. Of course, just weeks before, the same show was so upbeat when the market was hitting new highs that you could have gotten the impression you were an idiot if you didn't take out a home equity loan and plow the proceeds into the market. All of which is to say that you've got to be careful about getting caught up in undue pessimism during bad times and irrational exuberance when things are going swimmingly. It's almost always a mistake to invest in the heat of the moment. Better to step back, calm down a bit, even let a day or two go by and then make sure that you're making a decision that reflects a long-term strategy, not some passing passion.

Forget for a moment "strategy", the author's overall philosophical stance is on target.

Dow at 13,504.30, Up 35.52 (0.26%); That is a "Bounce"?

August 07, 2007

From the AP today comes the headline "Wall Street Bounces on Fed Decision" along with this blurb:

Wall Street searched for direction Tuesday after the Federal Reserve disappointed investors by maintaining inflation fighting as its highest priority although credit has become tighter for consumers and businesses.

Questions:

1. Up 1/4 of 1% is a bounce?
2. How did Wall Street search for this "direction"?
3. Did the Fed disappoint all investors?

I understand the need to say "something", but am I the only person who finds it funny that 26-year-old writers feed millions of people every day dribble than says absolutely nothing?

"Money on Loan from God"

August 06, 2007

I was turned onto a website today called 'Money on Loan from God'. It's pitch:

If you have money invested in mutual funds, a 401(k), or other stocks and bonds, you are likely profiting from companies who distribute pornography, are helping to advance the gay & lesbian political agenda, or are a part of the abortion industry and you don’t even realize it! Now, you can do something about it. If you are tired of the roller coaster ride of the stock market, but unsatisfied with bank interest rates, you may benefit from considering alternative investments which have no stock market risk, but offer attractive potential returns. If you are asking "Why hasn't my stock broker, or financial advisor told me about these issues?", Money On Loan From God will give you the answers you need to develop a financial plan that attempts to not only meet your financial goals, but reflect your personal faith and values at the same time.

If you plan on placing a moral litmus test on all of your investments, you are chasing fool's gold.

Cramer Explodes

August 05, 2007

Barry Ritholtz offers some insights on Cramer's call for the Fed to cut. Here is a clip worth watching all the way through:

Thoughts on Barry Bonds

Barry Bonds has now tied Hank Aaron with 755 career home runs. The lead story, however, is not Bond's achievement, but his steroid use. I have a question: when did steroid use become something new? I remember being a sophomore in high school in 1984. There were clearly many in my high school "juiced". It wasn't even a debate. So if steroids were abused back in 1984 within my high school athletic world, is someone going to try and convince me that the use of steroids in pro football and baseball only started in the nineties? Look, it sounds like Bonds is an arrogant jerk. He took steroids. But why is everyone conveniently ignoring all of the other pro athletes over the last 25 years who have made steroids part of their breakfast of champions? The dirty little secret is that most sports over the last 25 years have been injected with steroids. Please rip Bonds. He deserves it, but so does everyone else.

Note: To all non-baseball people, Bonds swing did not come from steroids. There are plenty of bloated muscle freaks who could never swing a bat. That is not a Bonds defense, just reality.

Jeff Zucker on Building Wealth at CNBC

"CNBC is a network for those who are wealthy and those who want to be wealthy, and that's what we stay focused on every day."
Jeff Zucker

Michael Covel Video from June 07 Tokyo Speech

August 03, 2007

I added three new videos to YouTube.com today. These are from a June 07 speech in Tokyo. Part 1:

Parts 2 and 3 can be found here. The speech is around 30 minutes divided across three clips.

These Ain't Trend Followers!

August 02, 2007

Monty Python: The Money Programme

Yes, I know it is silly. And of course it is dated. But don't you wish these guys were making fun of today's roster of talking heads?

Hedge Fund Toasted

August 01, 2007

From the New York Times:

At the beginning of the summer, Sowood Capital was a $3 billion hedge fund run by a money manager who hailed from the team that built Harvard’s endowment into the $30 billion giant that it is today. Yesterday, Sowood sent out a letter to investors indicating that heavy losses in the credit market had caused the fund to lose more than half its value, prompting it to sell its portfolio to another hedge fund and return the remaining $1.5 billion to investors. With that, Sowood becomes the latest hedge fund hit by a tightening of the credit markets that started in subprime mortgages and has expanded into the broader market, including the loans and bonds used to finance leveraged buyouts. At one time, using leverage, or borrowed money, the fund had $12 to $15 billion worth of positions.

A protégé of the famed Harvard endowment, someone with all of the track record, someone with all of the experience, and now responsible for toasting billions down the drain. He should have just rolled dice instead.

Some background:

Sowood Capital Management is [was] a 59 person investment management firm with approximately $3 billion under management based in Boston. Sowood was formed in early 2004 by Jeffrey Larson of Harvard Management Company, the investment arm in charge of Harvard University’s endowment. Larson specialized in foreign equities while at Harvard. Harvard’s chief investment office, Jack Meyer, had this to say about Larson when he left: “He’s consistently outperformed his benchmark, and he will be missed,” Meyer said.” Of the $2bb that Sowood started with, $500mm was from Harvard.

Keep your eye on the benchmark! Must beat the benchmark! Benchmark, benchmark, benchmark! So what did Sowood do differently than other Meyer trainees to have such a meltdown? That's the real question to answer.