Category: Holy Grails

Uphill Battles Are Fun

May 11, 2008

Sometimes it feels like an uphill battle to fight against the drumbeat of fundamental predictions and gurus predicting this or that after the fact, but then I am reminded (article) why I like to take the vantage I do. That Yahoo article will be read by tens of thousands, but how many will pause and realize at immediate first thought that it is useless?

How High Will It Go?

May 09, 2008

From the AP:

NEW YORK (AP) -- Oil rose above $126 a barrel for the first time Friday, bringing its advance this week to nearly $10, as investors questioned whether a possible confrontation between the U.S. and Venezuela could cut exports from the OPEC member. Gas prices, meanwhile, rose above an average $3.67 a gallon at the pump, following oil's recent path higher.

How high will it go? Any one who says they know is not exactly truthful. Why is it going up exactly? Ditto.

More Buffett Spin

May 03, 2008

I found an article titled "Warren Buffett: A Legend Who Actually Lives Up To the Hype" on Yahoo Finance tonight. An excerpt:

Buffett's genius is that beneath the homespun wisdom and self-effacing personality is an incredible intellect with an astute understanding of how to value stocks, which he learned from the legendary Benjamin Graham. Buffett is far from infallible, but this is one investor who deserves the accolades.

How does that jive with this? Do all the people who show up in Omaha really understand the derivative prowess of Buffett? More power to Buffett. He is a legend and deservedly so. I just have a gripe with the folksy-simple -investing-Ben-Graham-nonsense when it is clear he trades in ways that most of his audience of true believers could never comprehend.

Warren Buffett: "Do As I Say Not As I Do"

In Berkshire Hathaway’s 2002 annual report, Warren Buffet said:

In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

Today, May 3, 2008 in the AP this headline ran:

Unrealized derivative losses send Berkshire's 1Q profit 64 percent lower

With this article:

OMAHA, Neb. (AP) -- Berkshire Hathaway Inc. said Friday its first-quarter profit fell 64 percent because it recorded an unrealized $1.6 billion pretax loss on its derivative contracts, and its insurance businesses generated lower profits. Berkshire reported net income of $940 million, or $607 per share, in the quarter ended March 31. That's down significantly from the net income of $2.6 billion Berkshire generated a year ago. Berkshire's chairman and CEO Warren Buffett warned shareholders in his annual letter that the derivatives could make the company's earnings volatile. But he predicted the derivatives will ultimately be profitable. The four analysts surveyed by Thomson Financial expected earnings per share of $1,476.99 on average. Including the derivative losses, Berkshire's net investment losses in the quarter totaled $991 million. A year ago, the Omaha-based company recorded a $382 million investment gain. Berkshire's derivatives fit into two major categories. Berkshire will have to pay on some of the contracts if certain U.S. entities default on their credit. Most of the other derivatives will only be paid if the certain stock indices are lower in 15 or 20 years than they were when the contract was written. Berkshire has received $2.9 billion in premiums on the credit-default derivatives and $4.9 billion on the stock index derivatives. Berkshire said its operating earnings are a better measure of how the company is performing in any given period because those figures exclude derivatives and investment gains or losses. Berkshire reported $1.93 billion in operating earnings during the first quarter, which was down from $2.21 billion in operating earnings a year earlier.

Keep that buy and hold long only legend up WB!

Looking for the Man Behind the Curtain Is Perilous Work

April 29, 2008

From Trader Daily's ear to the ground comes a list of questions posed to guest John D’agostino (a former Nymex executive) from FOX's Bill O'Reilly:

Now, who's driving [the price of gasoline]?

Is that the greedy sheiks and Hugo Chavez?

Is there a guy who says $121 a barrel?

Somebody has to put the $125 a barrel on the barrel. WHO does it?”

Bill, come on, you can't be serious?

Head in the Sand

April 22, 2008

A reader writes:

This post is a complete contradiction to everything you write about on your site. Automated systems don't have character - objective. They are specifically designed to override human weakness and character traits - subjective. Are you losing it Mike? Loll! Best regards, Vince

This reader missed the point. A system does not override "human weakness and character traits". An easy example can be seen in the comparison of three individuals profiled in chapters 11, 12, and 13 of my book "The Complete TurtleTrader". Those chapters outline winners and losers. This reader apparently missed these chapters or just did not get the message. If the system was the only issue that mattered then why did some Turtles fail? Failure by some Turtles started with human weakness (character trait issues). Those kinds of issues can be overcome, but not if you avoid admitting their existence. So yes, a system is critical, but as those three chapters in my book point out there is more at play in the long run then just saying: "I got a system".

"We Don't Need Your Stinkin' Analysts"

Read.

Complication for the Sake of Complication

April 20, 2008

Instead of doing all of this, why not just follow the trend?

Bubble Watch

April 10, 2008

Cramer is the man.

Freakonomics Guys Also Ask "Why"

April 06, 2008

A question I have been asking on a redundant basis for over 10 years.

Politicos Will Bring Energy Prices Down!

April 01, 2008

Now this will cause gas prices to drop for sure! A dog and pony show...

Now I Feel Safe

March 29, 2008

After 9/11 in an effort to do "something" the Department of Homeland Security was created. Now it appears that in the wake of too many people bidding up the prices of homes to unsustainable levels the government will now solve the basic problems with human wiring (read: behavioral finance) by creating a new bureaucracy to stop the next bubble from occurring. What would we do without politicians?

The Government Will Get to the Bottom of It!

From the wires:

March 28 (Bloomberg) -- U.S. regulators are investigating whether traders spread false rumors about Lehman Brothers Holdings Inc.'s financial soundness to profit from a drop in the company's share price, two people familiar with the probe said.

Here is the chart. Now explain to me how "Bobby" badmouthing Lehman Brothers to "Timmy" is responsible for that chart? Are we going to go back in time and figure out how exactly that spike down happened? But isn't the trend right back down again? What a waste of time and money by the government.

The Great Social Security Hoax

March 27, 2008

This is pathetic. A big scam organized and maintained by politicians with the consent of a very ill-informed public. Why does this institution exist again?

Hard Reverse

March 25, 2008

The Worst Retirement Plan Ever Conceived

From the AP today:

WASHINGTON (AP) — The trustees of Social Security and Medicare are certain to kick off a fierce round of debate when they release their annual assessment of the fiscal health of the government's two biggest benefit programs. The battle will be waged not only between the Democratic-controlled Congress and President Bush but also in this year's presidential campaign, where the issue is expected to attract a lot of attention in light of the looming retirement of 78 million baby boomers. All sides will try to use Tuesday's report to score political points, but that is probably as far as the debate will go — at least until a new president takes office next year. Bush, who had vowed to make overhauling Social Security a top priority of his second term, will almost certainly leave office with that goal unfulfilled given that Treasury Secretary Henry Paulson, his point person on the issue, has not made any headway with Democrats in Congress in finding a compromise to resolve the pension program's fiscal problems. Democrats contend that Bush lost valuable time after his 2004 re-election pushing a plan to allow younger workers to direct their payroll tax contributions into private accounts, an idea that went nowhere in Congress. The new report is expected to make only small changes in the estimates made last year for when both trust funds will be depleted. Last year's report put the date for when Social Security would exhaust its trust fund resources at 2041 with the same date for Medicare put much sooner at 2019. Medicare is facing much more imminent problems because of soaring health care costs.

Why does a so-called retirement plan, an investment fund, exist when it generates 1.2% return? In the real world a trader with that return would be fired.

Jim Cramer Says Bear Stearns Is Fine; Don't Be "Silly!"

March 17, 2008

Academia

March 14, 2008

Alex Spiroglou sent me this article noting this passage:

Legendary MIT economics professor Paul Samuelson is a big shareholder. To his students, Samuelson preached the efficient market theory of investing, which says it's just about impossible to beat the market. In his own investing, however, Samuelson picked a market-beater [Warren Buffett].

Says much about what you learn in business school about money and markets!

The AP Has It Figured Out!

March 11, 2008

From the Associated Press today comes the headline:

Fed Offers $200 Billion to Prop Up Lenders; Wall Street Responds With Huge Rally

And an except from the article:

WASHINGTON (AP) -- Staring at spreading financial dangers, the Federal Reserve announced a rescue package Tuesday that would pour as much as $200 billion into banks and investment houses and allow them to put up risky home-loan packages as collateral. Wall Street rebounded with its biggest rally since 2002 -- and hoped the Fed had even more cards to play.

Let's assume that this article is correct. Let's assume they have correctly stated why the US equity markets went up big today. What do you as an investor do? Wait for the next unexpected Fed announcement with the hope that you will be able to quickly jump on board? Don't bother with the retort of "buy and hold". The Nasdaq is still down 50% eight years after the March 2000 meltdown.

Its Not My Fault

March 03, 2008

From Bloomberg:

Feb. 29 (Bloomberg) -- Peloton Partners LLP, the London- based hedge-fund manager being forced to liquidate a $1.8 billion asset-backed fund, said it's a victim of the lending drought on Wall Street. "Credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms, which has compounded our difficulties and made it impossible to meet margin calls," Peloton co-founders Ron Beller and Geoff Grant said in a letter yesterday to clients.

More.

Rose, Rose, Rose

February 26, 2008

Feedback in responding to this recent podcast:

Michael: Oi..vey. You want to go at it again. From December 18, 2007, through January 14, 2008, there was a constant rising trend in the currency pair EUR/GBP, seen on a daily chart, amounting to 497 pips, from the low of the range on the first date to the high of the range on the last date. At that time the pip cost on the spot market was at 2.0 so this was actually a gain of twice the 497 pips, or 994 pips. I routinely review and investigate my log of past trades, and saw this wondering why I did well in this pair over this period, although I did not gain anywhere near the total pips offered. Investigating further, I found reports from Thomson and Reuters confirming that during this period there was information from traders and economists, and other "news", that the BOE would need to reduce their rate, and the ECB would probably stand pat or raise their rate. Ergo, EUR is in demand as against GBP. Would you agree that this is a fundamental reason for price movement,…or not? Despite this fundamental force, I followed what you might call the trend following method, depending on price movement and technical analysis to make the yes or no transaction decision, and time entries and exits. Would you call this "Trend Following"? If not, why? If so, then is this not a blend of using Fundamentals with Trend Following? If not, could you please answer with specific details, and if I am convinced, if I have no further argument, I will admit to you that the two cannot be used together, that they are separate. Michael, it is not nice to call people ignorant as you did in your podcast of February 25th referring to me. I believe you are a very insightful writer and researcher, and I would not at any time call you ignorant although I am sure I have more university degrees than you (including a post grad degree) all from one of the big 5 or 10 universities (as in Harvard, Yale, Princeton, etc.). Now what? Regards, Rose.

A follow-up shortly after:

Michael; I see on re-reading the email I sent some minutes ago that I left out a pertinent fact. I knew at the time of the trades that there was this market force creating the demand for EUR vs GBP, every day I was reading Thomson, Reuters and other news, so I felt I could use the technical analysis backed up by this fundamental market force. I was not trading just from this fundamental scene, but heavily dependent on following the trend. Rose.

Be Afraid of Your Shadow

February 17, 2008

The background of the author of this article says something about WHO the people ARE who have the ability to SCARE the public. He did break the story where "what happened at one company when a male executive became a female."

Great. Awesome.

Dow 18,500

February 13, 2008

Feel like a nice morning prediction for today?

Dazzle 'Em with Words

February 06, 2008

I received a nice note recently from a retired pathologist. Some subtle sarcasm came in today from him:

This week I was at an ice creme shop in a fancy part of town. A visiting hegd fund evaluator sat down next to me and in our conversation he said his approach involved more than metrics on financial performance and included finding out if a firm attended to the business side of the business. This reminded me of the latter 1/3rd of your book which focussed on turtle subsequent success. I mentioned that to the evaluator who knew of your work and the "trend followers". Because he was not a trader himself, I suggested he might find your book well worth the read. He also was concerned about the explosion in volume, variety and interconnected risks in his world. I wondered if we are really in for a rough ride given [what he described of] W.D. Gann's admonition that log rises are followed by severe contraction and Soros's contention that speculative markets tend to always get out of control, lacking reliable self correcting homeostatic mechanisms and credit default swaps daisy chained to India. "Come on." said the retired pathologist as he finished up his cup of rum raisin.

Now I Am Relieved!

February 03, 2008

From the campaigns:

I am not anti-Clinton, but I do think this ad is a pathetic distortion of what a politician can really do to affect the economy. It was good to see Obama decline to endorse the idea of freezing rates. Are any Republicans after rate freezes?

Bank's Billions Burnt in 10 Days

January 29, 2008

Nick Leeson never really left us.

The Limits of History

January 27, 2008

A reminder of what can happen when there is an answer for everything.

Why Trends Persist

January 24, 2008

Trends exist and persist. Why? There are many, many reasons. One perhaps at first appearing off topic reason for why trends in the markets will persist can be found in the halls of DC government. Do you think the people who work for this government and or the people who run this government are rational, logical, thoughtful people? If this is how they run their workplace, how they run their government, do you think these same folks turn around and make rational, logical, thoughtful choices when it comes to their investments? I could pick any number of human behavior examples (and I am not mocking their porn surfing), but if so many people can't even get going in a straight line when it comes to their daily job, if the leaders are not even in tune with what the employees are even doing, it's not hard to understand why issues in behavioral finance will persist.

Makes the Sad Point in First Few Minutes

January 23, 2008

Every Rose Has A Thorn

January 16, 2008

I think this does it for Rose. She might have the last word!

Michael: You and your feedback artists apparently feel the need to defend your insecurity, which is being unsure about the blocking out of all trading information other than pure observation of price movement. Trend Following is an important and wonderfully valuable tool, but adding fundamentals, technicals and trader's needs producing a total picture would seem to create a higher value. As for the feedback from Michael H…Why did he buy a winter coat? He obviously had it around before winter arrived. He just happened to buy it because it was stylish? Rather he knew winter was coming from weather reports, past history. Somewhere he heard from a friend, or the radio or TV, or the newspaper, information on the existence of winter, and so in preparation for the cold weather, he bought a winter coat. Are you otherwise going to tell me that he had no winter coat, then he stepped outside, felt the cold temperature, waived his hand, went with the trend, and created a winter coat from the 3 feet of snow he found, with no previous information on cold weather coming? Michael, I am not missing your message as you claim repeatedly. The Trend Following methods you propound, just working from the price action, are extremely important, but don't you and your feedback cohorts have a clue that your message is incomplete? Not only does Trend Following work, but the trends are set up by macroecon events, government data announcements from all over the globe, rumors, news events, oil prices, gold prices, and on and on. Wait and see if a trend actually develops from Bernanke's or Trichet's remarks, and then dive into your Trend Following methods. Do you prefer to close your ears and mind, watch the charts, and be shocked and stoked to action when prices spike suddenly, and you must try to protect your account? You must live on valium. And then the feedback from William L., probably a nice guy, but soooo narrow minded. Is he a watchmaker? The weatherman has to predict the temperature to the correct degree? If you tune in three network weathermen in the morning, they all have different temperatures. But the message is generally the same, and helpful, it will start to snow at midnight, maybe not 12 inches, but maybe 3 inches. So all the data from government agencies may not agree, they are not making watches either, but you can see a picture, and understand where there might be a market force to create a trend that you can follow with your trend following method. Good luck, …and good night. Rose.

No Convert

January 14, 2008

I alerted "Rose" to some of the discussion on this site regarding her initial post:

Michael: You have apparently chosen Mike Shell to speak on your behalf to uphold the nonsense you put out in your January 10th podcast, so I will assume Shell's words are yours. It appears that you both have decided to deny the existence of the philosophical field of causality, cause and effect is not interesting to either of you. Taking your point of view, I should not wonder why it is colder in January as compared to July, not study past weather reports of January in past years, and on that basis not have the useless information regarding the need to buy a winter coat. I should expect the temperature to change randomly, so that it could be freezing in July or September and I should just deal with it at the moment, follow the trend. Of course you would find the cause of seasons in North America, the tilted spinning axis of the earth, useless information, you claim not to be curious people. On that basis, all of modern medicine and other sciences which seek to find the why, would be useless information to you both also. If I had a heart attack I should not be curious about the cause and change my diet and quit smoking. That I should bear with it and wait for the next heart attack would probably be your advice. In the markets, on the first Friday of each month at 8:30 AM EST I should not expect or worry about the possibility of huge volatile spikes in the US dollar due to the Non Farm Payroll announcement, not seek to understand the cause of the price spike by reviewing past first Friday data reports so I could be prepared to avoid losses in my account. Instead I should just deal with it in the moment. This insanity that you propound does not require any further response or comments from myself. Michael, you do wonderful research on traders like The Turtles, Simons, Henry, and I enjoy reading your articles, research and your newsletter. Your work is wonderful. Are you not trying to learn the cause of these traders successes, the cause of their effect of success? I am prepared for winter being aware of the history of the seasons, having studied the past historical weather reports. I have a nice pine fire going in the fireplace here in the old farm house, and am looking for more fuel for the fire, anything that would burn well. Aha, here is a book, I can feed to the fire, titled "Trend Following". Goodbye, Rose.

Who has a good explanation that can win Rose over? Or is this truly a blind spot. I knew when I wrote "Trend Following" a few years back that her mindset was going to be a tough obstacle to overcome. While I appreciate that she likes my work, she also seems to miss the message.

Blind Spot Continues

January 12, 2008

I received this feedback. I asked her to re-listen to the podcast in question. She responded:

Michael; As you recommended, I listened again very carefully to your verbal piece in your January 10th Newsletter, several times. While I disagree with most of it, in the last few sentences you seem to say that despite what macroecon or news events happen in a day, there will be people who are nuts, or have their own unknown motives, and they will cause a move un-related to the day's macroecon and news event history. I can agree with this, the trader should go with the flow, whether created by nuts or by the macroecon and news. However, you can't just dismiss the whole body of data reporting, macroecon events, and news events that you can see move the market as plainly as you see the nose on your face. So I have an impasse with you. You cannot possibly be serious in your proposal that studying all aspects of the history of a trading day cannot be extremely illuminating in what causes market forces, although I agree that some part of a trading day may often be attributed to what you call nuts, and what I call needs of traders. Regards, Rose.

The blind spot is bigger.

Portfolio Ego

January 11, 2008

This article made me think of those people who fall in love with their particular "market" to the exclusion of better information. How much does ego play in market selection and then the continued adherence to those choices? I saw a once large fund hold true to their portfolio size (smaller number of markets) for the longest time in spite of what their competitors were doing successfully (more markets). This one fund eventually added more markets.

Covel Is A Nut!

January 09, 2008

I posted this podcast and received this response from Rose Pearl:

You are the one that is nutz! Regarding your "Listen Now" segment of your email newsletter of Thursday January 10th. Yes, of course one would be able to determine what market forces added to the movement of a specific market, on a specific day, or even during an hour of that day last week or last month if you still have all the data and reports for that day. I do it every day. Everybody does it. Are you aware of a subject at universities called "History" that students and professors study and research to try and understand why certain events occurred in the past? The present administration in the White House in Washington DC possibly has never heard of History, they forgot to read a history of Arabia and the Middle East for the last 100 years before creating the disaster in Iraq. I can only make sense of a day of trading after I sit down after quitting for the day to relate the market moves to macroeconomic events. For instance once source reported today that Moodys is considering decreasing their rating on the US dollar. Zooom! Right at that time, at about 0800 EST today, up goes the euro. These things happen hour by hour, minute by minute. Jean Claude Trichet says he is biased towards inflation, and the euro becomes well bid. So if I didn't get a clear picture of what happened last week on Tuesday, I sit down with all my printouts of my sources for that day and put together the whole picture. That gives insight on how to handle similar events while trading at a future moment. That's what History has been useful for over thousands of years. Your piece is totally ridiculous. Are you telling me you don't try to figure out what happened in the past by using the data from that day? You are kidding, right? Your piece was just meant to gather infuriating responses, right?

I don't think Rose has read either of my books. But she responds:

Michael; Yes, I have read Trend Following, a very good book, I keep it on the small shelf right above my main monitor. I have not yet read The Complete Turtle Trader, but I will. I do follow prices, while fundamentals and technicals are fascinating and often the impetus for a move, I believe it is necessary to first believe what the trend of prices are doing, the reaction. But back to your verbal piece in the last newsletter, the fact remains that markets move, probably initially, because of some news or macroecon event, the price then being modified by the needs of the traders in the market. So your rant on how imbecilic it is to study the past macroeconomic and news reports, the history, disbelieving that it will help a trader understand what happened, is ridiculous. Whatever a trader can understand about market reaction to past events, can help him/her understand what is happening in the present, hopefully preserving capital, or realizing gain. You need to recant. Regards, Rose.

The blind spot continues...

Campaign Talk Gives Market Jitters

From the WSJ comes:

Recession. Inflation. Frozen credit markets. Falling profits. There is a lot for investors to worry about and now, here comes more: the looming presidential election. Worry about possible policy changes can weigh on markets ahead of a presidential vote. If an incumbent seems likely to win, markets often recover by the fall. This year, with many of the candidates on both sides promising change, the risk is that the market jitters could linger.

My head is spinning. This article makes it sound like all "investors" are simpletons waiting for permission to stop crying. People who really make money are not sitting around cowering in the corner waiting for the world to hit them in the face. The people making money, the people making "it" happen are hitting the world in the face.

Predictive v. Reactive

January 07, 2008

In my book Trend Following I make the distinction between predictive and reactive technical analysis (no small distinction). I am not sure this author gets the distinction. Reactive technical analysis or if you call it systems trading or if you call it trend following is all about the use of the scientific method.

The Real Estate Winds Change

January 04, 2008

Funny.

The Bear Flu: How It Spread

December 20, 2007

A novel financing scheme used by Bear Stearns' hedge funds became a template for subprime disaster.

All The Answers A Week Before X-Mas!

December 17, 2007

Who wants to bet their cash on this analysis?

Say Anything

December 13, 2007

This article states:

A day of exceptionally volatile gyrations in stocks left traders exhausted, and showed how nervous investors still are about the market's prospects. Stocks began the day by soaring on news of a new Federal Reserve program to lend banks money, but then sagged as the day wore on amid concerns that the Fed's efforts might not be enough.

Isn't any explanation plausible after the fact?

Ugly People

December 09, 2007

Ugly people fight back.

Straight A’s, With a Burger as a Prize

We can give kids all the free junk food in the world for getting good grades, but if our educational system continues to teach the wrong lessons, the whole debate is silly.

Making the Calendar Work?

Seasonals? This guy says he can do it.

Searching for the Holy Grail

November 25, 2007

A recent comment seen:

[I] would like to know what was the top stories in the past few days/months to find out what was the main reason why the market moved that direction on this day...does anyone know which would be the best source online to find this info? I'd like to be able to just select the day and find out exactly what happened on that day instead of searching through a load of mixed events.

Trying to find "news" explanations for historical price movements is an entirely subjective exercise...and pointless.

The Cycle

November 10, 2007

The Bernanke cycle.

Cautionary Tale of Victor Niederhoffer

October 07, 2007

From the New Yorker comes a familiar story.

A Prescription for Everyone!

September 11, 2007

An email newsletter that came across my desk:

Risk levels continue to rise in the stock market as investors remain unsure as to whether or not the Fed will lower interest rates at their meeting later this month. Investors would be well served to keep a portion of their portfolio in the safety of cash and/or short-term bonds until the market sorts itself out as the odds are increasing that the market will retest the lows set on August 16th. If that is the case how the market reacts at that time will dictate whether or not the volatility will continue or whether the up-trend will resume. During times such as these it is better to protect your portfolio than to risk significant losses. The first rule of investing is to avoid the big loss. It is far easier over time to regain lost ground if you miss an opportunity while the market is advancing than it is to dig yourself out of a hole if you take a big loss. Just ask any investor who bought tech stocks in 1999-2000. The tech heavy NASDAQ 8 years later still needs a 100% gain just to break even with the all-time high set in 2000. Protect your portfolio as much as possible until a lower risk buying opportunity presents itself.

The line that really caught my eye was "until the market sorts itself out." That phrase puzzles me. What does it mean?

Buffett's Top Picks Gives 404 Error

September 05, 2007

Saw this ad on Yahoo Finance tonight:

So I clicked and received:

HTTP Error 404 - File or directory not found

Made me smile. While I have been critical of the idea that Buffett's success can be emulated, I do know he is not pushing ads on Yahoo!

A Billion in 10 Years!

August 30, 2007

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.

"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.

CNBC Is Dangerous for Your Health!

August 16, 2007

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.

David Faber on Delevering

August 13, 2007

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?

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.

Jeff Zucker on Building Wealth at CNBC

August 05, 2007

"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

How Would You Like to Lose 90% in One Day?

July 31, 2007

American Home Mortgage Investment Corp. (AHM) lost 90% today. Big news? Not really.

Look at the chart.

Wasn't that chart telling you there was a problem LONG before today? Did you even have to know what this company did to know there was a problem LONG before today's 90% drop? The "price" was talking loud and clear all along.

One Day Event?

July 29, 2007

Following a weekend in New Jersey for a family reunion, I find myself looking for fun sound bites in advance of tomorrow. I found a good one:

Was Thursday's stock sell-off a one-day event or part of a longer trend?

My question? What percentage of people tried to answer that question one way or the other versus realizing that there is no accurate answer? More importantly, why did they not edit the question to include Friday too?! That got me to thinking...

CNBC had me pitch them on a "show" several months back, but I don't think my perspective would mesh well. Don't get me wrong, I would take the air time, but on the flip side I am not going to roll over and stop preaching the benefits of trend following and systematic trading. Right now CNBC, and to put it into political terms, is a "one party" show. They need to get away from being only "Democrat" or only "Republican" and start giving the other side a voice.

Relax. Being "Average" Is Ok. Not.

July 28, 2007

Gerri Willis of CNN writes:

This past Thursday was the second worst day of the year for the Dow Jones Industrial Average. But remember, it was just a week ago today that the Dow closed above 14,000 for the first (and only) time. Fluctuations in the market shouldn't get to the 401(k) investor. Keep in mind your time horizon - most of us are going to be invested in the market until we retire, often decades from now. On average, stocks move higher - their long term average gain is 10.8 percent each year, according to Hugh Johnson of Johnson Illington Advisors.

Question one: does everyone ONLY want 10.8%?

Question two: does this writer think a return of more than 10.8% a year is even possible?

Before you fall in love with 10% a year, take a look at what compounding does to "other" returns (i.e. 12%, 14%, etc.).

One Eye Beats CNBC

July 27, 2007

I found this guy on YouTube. An American original!

I have a feeling George would not mesh well with trend following.

Dow Down 300; "Showtime"?

July 26, 2007

From the AP today:

NEW YORK (AP) -- Wall Street suffered one of its worst losses of 2007 Thursday, leading a global stock market plunge as investors succumbed to months of worry about the mortgage and corporate lending markets. The Dow Jones industrials closed down more than 310 points after earlier skidding nearly 450. Investors who had been able for months to largely shrug off discomfort about subprime mortgage problems and a more difficult environment for corporate borrowing finally decided it was time to sell after the Commerce Department issued another disappointing home sales report. Feeding the plunge were concerns that higher corporate borrowing costs will curb the rapid pace of takeovers that had driven stocks higher this year. Investors also feared the sluggish environment for home sales and continued defaults in subprime loans would spur debt defaults and weigh on corporate earnings. While stocks plummeted, investors poured money into the safe haven of the bond market. The soaring price of Treasurys pulled yields lower, and the rate on the 10-year note plunged to 4.79 percent from late Wednesday's 4.90 percent. "Worries that have been out there for the past couple of years are coming to a head right now," said investment strategist Edward Yardeni, president of Yardeni Research Inc. "It's show time."

Show time?

The above analysis sounds smart. It is from very bright people. But what do you do with it? If you were not paying attention to anything, and were simply "long only" before today, do you now read this excerpt from the AP and take action? What's the point?

The Wrong Way to Approach It

July 23, 2007

I found a great example clip on YouTube of what systematic trading and trend following are NOT. Opinions, opinions and more opinions do not help you to answer these 5 questions:

* How do you determine what market to buy or sell at any time?
* How much of a market do you buy or sell at any time?
* How do you determine when you buy or sell a market?
* How do you determine when you get out of a losing position?
* How do you determine when you get out of a winning position?

At what point in the below clip do you want to jump off a bridge?

Sell, Sell, Sell

July 21, 2007

BusinessWeek has a story about how the time is "now" to sell stocks. However, if you are long equities it seems following the price as it continues to rise may be a better strategy. History is littered with folks trying to predict tops. Let the price action dictate the top, not your opinions or feelings.

Hedge Your Bets!

July 17, 2007

From the AP today:

The Dow Jones industrial average swept past 14,000 for the first time Tuesday after a relatively tame inflation report gave investors reason to extend an extraordinary -- but questionable -- Wall Street rally.

Why is this a questionable rally over any over rally? I guess if you say extraordinary and questionable in the same sentence you got all of your bases covered!

A Poll

July 10, 2007

From Yahoo Finance comes this poll:

How will corporate earnings fair, on balance, this quarter?

They'll exceed expectations: 35%
They'll meet expectations: 48%
They'll fall short of expectations: 19%
28513 Votes to date

Isn't the implication that if you can know corporate earnings you will make better buy and sell decisions? Where is the evidence that corporate earnings connect with speculating in stocks to make money? If you happened to know how corporate earnings would fair, how does that tell you how much to risk from your limited capital?

This type of "data" is thrown at everyone 24/7, but is there really any value?

Define Please

July 08, 2007

I caught a headline in the Washington Post today:

"In this uncertain market, big firms may be the safest."

1. How is this market more uncertain than others?
2. What is the definition of "big"?
3. What does uncertain mean exactly and how is it defined to a number?
4. Safest means what?

More Buyers than Sellers?

July 06, 2007

From the AP:

NEW YORK (AP) -- Gas prices rose overnight for the first time in more than a month as the closure of a Kansas refinery sent prices in the center of the country sharply higher. The average national price of a gallon of gas inched up 0.3 cent overnight to $2.952, according to AAA and the Oil Price Information Service. Retail prices, which typically lag futures, had fallen steadily since their late May peak of $3.227 a gallon. Analysts have long argued that the slide was due to end and that prices were likely to start following futures prices higher. Futures have rallied in recent weeks on concerns about domestic refining capacity.

So how do we know the real answer for the rise was not simply more buyers than sellers?

Fairness Doctrine

June 25, 2007

Forget liberal or conservative, the idea of a "fairness doctrine" is subjective !@#$. This excerpt should scare thinking people to their core:

WASHINGTON, June 24 (UPI) -- U.S. Sen. Diane Feinstein, D-Calif., said Sunday she is "looking at" the possibility of reviving the fairness doctrine for U.S. broadcasters. Feinstein, speaking on "Fox News Sunday" with Sen. Trent Lott, R-Miss., said talk radio in particular has presented a one-sided view of immigration reform legislation being considered by the Senate. U.S. talk radio is dominated by conservative voices. "This is a very complicated bill," said Feinstein. "Most people don't know what's in this bill. Therefore, to just have one or two things dramatized and taken out of context, such as the word amnesty -- we have a silent amnesty right now, but nobody goes into that. Nobody goes into the flaws of our broken system." Feinstein said the measure before the Senate "fixes those flaws" but that doesn't get presented on talk radio, which she said "pushes people to ... extreme views without a lot of information." Asked if she would revive the fairness doctrine, which used to require broadcasters to present competing sides of controversial issues, Feinstein said she was "looking at it." "I remember when there was a fairness doctrine," she said, "and I think there was much more serious correct reporting to people."

Put aside this particular issue, what happens when it is another issue? What happens when it is the issue of money and markets? Where do these lines get drawn and by whom?

Senator Levin Wants Hedge Funds Taxed More

June 22, 2007

Feedback in:

Mike, did you catch the interview on Bloomberg with Senator Levin who is spear heading a bill to increase taxes on equity and hedge fund managers? It is absolute horseshit! This idiot senator actually says one of the reasons they want to pass this bill is because they are trying to make things "fair" and these hedge fund and equity funds are not "contributing anything to society." FAIR?! Shit, life isn't fair! Don't these types of vehicles stimulate the economy by generating global competitiveness? This will ultimately hurt long term investing. Why do the politicians think American investors need their hands held? I just don't get it...

I thought Matthew K.'s profanity was useful. Anyone have the link for the video?

Compromised market games sure do imitate real life

June 19, 2007

Take a read of an article by Chuck Jaffe about recent stock picking fun at CNBC. An excerpt:

The story involved the shenanigans that have occurred in two well-publicized stock-picking competitions, one run by TheStreet.com and the other by cable business-news channel CNBC. TheStreet has called off the first round of its "Beat the Street" competition because some contestants apparently had taken advantage of the system by which the game was being run. The site didn't disclose exactly how the purported cheats were gaming the system, but said all of the participants of the first contest could enter its next stock competition, and that the $100,000 in prize money will carry over and be part of a much bigger prize for the next go-round.

Expert Predictions Go Expertly Wrong

June 16, 2007

Dale D. writes me with a good reminder that we all know intuitively, but forget:

Michael,

I wanted some expert advice on possible directions of oil, natural gas and gold prices. I typed, "Oil, Natural Gas and Gold Price Predictions" into Google. I did not include a date with my query, so I received a list of predictions from newsletter writers and analysts going back about four years. I read through the complete list of predictions. Absolutely fascinating!

So how did the "experts" do? A couple were close to what actually happened, but by far the majority -- more than 95% -- were completely, totally, one hundred percent wrong! Gold did NOT hit $1000 to $1500 an ounce by the end of 2006 and the price of oil did NOT crash down to $40/barrel this spring. So much for the experts. Lesson learned: Do NOT rely on the experts. They are either outright wrong or have an agenda with their hands in your pockets.

Regards,
Dale D.

Fundamental Perspectives Equal Emotional Volatility

June 15, 2007

An excerpt I caught from Market Wire on Yahoo Finance this weekend:

QUALICUM BEACH, BC--(MARKET WIRE)--Jun 16, 2007 -- Profiting from the stock market has just been made much easier. Powerful new technologies combined with proven Value Investing strategies deliver the performance most investors only dream of. With just one click you're shown the top undervalued stocks with the greatest built-in margin of safety. "Ultimately a stock's value depends on its fundamentals," said Mark Hing, President of Aptus Communications. "Investors who keep their eyes firmly planted on fundamentals and remove their emotions from the investment equation are best positioned to increase their returns and minimize their risks in the markets."

Hold on! Sticking to a pure fundamental approach is the antithesis of removing your emotions from the investment equation. Fundamental perspectives are always tied to subjective interpretations of things like balance sheets (which of course are often "massaged" into whatever number the executive wants).

Reviews from Odd Sources

June 14, 2007

Feedback in:

Michael:

This article (link supplied below) might seem silly, except that it was linked to by a Yahoo News front page, mixed in with links to stories supplied by places like CNN, Reuters and AP. It gives "five star ratings" (sounds like the S&P STARS system) based on how many people click thumbs-up or thumbs-down for the stock. It quotes people by screen name as though they were experts.

When dealing with ratings from places like S&P and Argus and brokerage houses, everyone may not agree on the value of the ratings, but at least we can have an intelligent debate because the analysts are starting with some background and follow an agreed methodology (i.e. everybody knows what they're looking at because they tell you.) They also put their names to the reports and sign-off on disclosure. You are free to examine these reports in the light of day and decide whether to use the reports and ratings. Are people really using the CAPS rankings? No wonder individuals have such a lousy track record as traders. I guess these are the people on the other side of my trades.

Link 1

For more on what CAPS is, see link below.

Link 2

Regards,

Chuck Cain

Top Trading Cities?

June 10, 2007

I found this article (PDF) from TRADER Monthly fun reading, but if you actually believe there is relevance to a listing like this for trading success, well I have some swamp land in Florida to sell you...

"Even Idiots Can Make Money"

June 09, 2007

From today's Washington Post...excerpts that need little setup:

Until recently, it was hard to blame the average Chinese investor for assuming that the stock markets only go up. Since June 2005, the Shanghai composite index has gained about 300 percent. Chen Junjie, 34, who works at a consulting company, used to joke that if the Chinese stock market had a motto, it would be "Even idiots can make money."

Continuing:

The Chinese stock markets, which are largely closed off to foreigners except for a select group of institutional investors, are dominated by inexperienced individual investors struggling to understand capitalism. They have driven up shares of companies that are known to be corrupt or losing money. Investment strategies in China are far from scientific. Many investors flip stocks after a few days. Stocks with lucky numbers 6 and 8 in their trading symbols are considered good buys. Xu Wenming, who works in importing and exporting, said he invested a lot in the Pudong Development Bank because, he said, "Pudong is a good name." Pudong refers to the part of Shanghai east of the Pu River. Yu Xueqin, a retired office assistant, invests in companies that produce retail products because government officials are "always saying China is a big populated country and the need for consumer products is big." In the past, posts on Internet investment boards were mostly tips about how to invest. Now they are filled with desperate tales of caution. A woman, who said she was 48, described how she took $26,000 out of savings bonds without her husband knowing and put it into the stock market, only to lose money. "I am sweaty, shaky, like I'm about to collapse," she wrote.

Everything to Everyone

June 07, 2007

From the AP today:

"Historically, we're at lows," said Michael Church, portfolio manager at Church Capital Management, referring to interest rates. "I don't think 5 percent is some sort of hard and fast number where this market turns. I don't think 5 percent is going to compel people to take money out of equities." "Everyone seems to like to focus on this 5 percent level. I think it's in many ways mythical. Five percent is really not that high of an interest rate." He contends that after the run-up in stocks that began in the second half of last year and accelerated in recent weeks, Wall Street was due for some retrenchment. "I would be concerned if we didn't have some profit-taking and some mild pullbacks here and there."

After you read that, what do you do? The ability to speak noise seems to be one of the best skills on Wall Street.

Hmm..."China Shares Tumble as Panic Spreads"

June 05, 2007

From Reuters:

"I knew the market would go down, but I did not expect it would be this fast. After a small plunge, it should go up, but it is not going up," said Madame Wang, a pensioner in her 50s, who put some of her savings into stocks during the bull run. "Next time I will remember -- once the market falls, I will sell all my stocks." Another disillusioned investor at an Everbright Securities branch in Shanghai's financial district, a woman in her 30s surnamed Xu, said: "I used to have confidence in the stock market. But how can I have confidence now that it has fallen so much. I have no more confidence. Even if the government wants to regulate the stock market, it should not be done like this."

Why did she have confidence when it was going straight up, but not now?

Follow the Leader?

June 04, 2007

James Altucher writes about investing in China with an example stock to consider:

First on the list is CNOOC Ltd. (CEO), also known as China National Offshore Oil, which pays a yield of 3.6%. It has a P/E of 9.4 and a PEG of 0.32. Cash in the bank totals $4.6 billion. It's understandable to be worried that companies in communist China can be shut down at a moment's notice. But this is a company with $4.6 billion in the bank, trading at a tiny multiple of earnings and returning cash to shareholders. With such a low P/E, steady earnings growth, dividend growth, and a low PEG, I can easily see the stock doubling by year-end. SAC Capital also owns CNOOC. The hedge fund, run by Stevie Cohen, has returned over 30% per year since it started in the early 90s. And that’s after taking up to a 50% performance fee. This means that gross returns before fees (which is all we care about since we're just piggybacking, not investing in the fund) often exceeds 60 percent. Citadel Associates also owns it. This fund is run by Ken Griffin, who started it out of his Harvard dorm room when he was 19 with a $100,000 investment. Now Citadel has over $15 billion under management. A recent New York Times profile speculated if Citadel would be the next Goldman Sachs. One of my favorite hedge funds, Renaissance Technologies, also owns CNOOC. Renaissance is very quant driven and only hires Ph.D.s but that formula has been very successful. Currently, Renaissance is are out raising a $100 billion hedge fund, which would be by far the largest ever. My theory is they are buying every stock that has a lot of cash in the bank and a low P/E ratio. CNOOC certainly qualifies.

Three billionaire hedge fund managers supposedly own this stock. That means what?

1. How does anyone really know these hedge fund pros own anything? And if you did, are they going to call you when it is time to sell?
2. Calling Simons' fund, Renaissance, a favorite is hardly difficult. Everyone knows Simons is in a different league.

My point? Think critically...please!

Wall Street Myths

June 03, 2007

Wall Street might have "10 myths" (read article), but you alone are responsible for making your decisions with your money. No excuses.

Stamp Tax; Say What?

May 29, 2007

From the AP comes news of the new Chinese "stamp tax" on trading:

BEIJING (AP) -- China's move to raise a tax on share trades, aimed at slowing a boom that could lead to a possible market bubble, seems to have worked, at least for now. The main Shanghai Composite Index tumbled 6.5 percent to 4,071.27 Wednesday after hitting a record high on Tuesday. The Shenzhen Composite Index for China's smaller second market fell even more, closing down 7.2 percent at 1,199.45. The decline in Chinese shares hit other markets, too, although not as dramatically as on Feb. 27, when investors around the world flinched from a nearly 9 percent slide in the Shanghai index. The retreat in Chinese shares came after the Finance Ministry tripled the "stamp tax" on stock trades from 0.1 percent to 0.3 percent, effective Wednesday. The ministry was trying to "cool (the) stock market," the official Xinhua News Agency said. "This policy change reveals the government's concern about a possible stock market bubble," said Citigroup economist Minggao Shen, describing the tax hike as Beijing's first formal move to cool the boom. "The market didn't know what the government was thinking until now." Despite the drop, Shanghai's benchmark index is still up 52 percent for the year, following a 130 percent jump in 2006.

Why doesn't the AP reporter have the guts to say that sounds nutty as hell? A stamp tax? Picking bubbles? Deflating them a little, but not too much? All organized by typical government busy bodies? But perhaps they have figured out, perhaps this all ends well. I smell the same kind of aroma that took over America up until March 2000.

Finger Length Predicts SAT Performance

May 27, 2007

From LiveScience.com comes another attempt to have nature be more important than nurture when it comes to achievement:

A quick look at the lengths of children's index and ring fingers can be used to predict how well students will perform on SATs, new research claims.

Continue reading Finger Length Predicts SAT Performance »

Famous Last Words

May 23, 2007

From the WSJ comes a list...

Sept. 5, 1929 -- "Sooner or later a crash is coming, and it may be terrific."
-- Businessman and statistical analyst Roger Babson, quoted by John Kenneth Galbraith in "The Great Crash 1929"

Mid-October 1929 -- "Stock prices have reached what looks like a permanently high plateau."
--Yale economist Irving Fisher, just days before the market crash

Nov. 6, 1982 -- "Sell all stocks. This is a bubble market, not the normal entrance to a new bull market. ... The recent rise of 37.1% in the Dow average in 12 weeks is the largest bet Wall Street has ever placed on expected economic recovery. It equals the final blowoff rise between June and September 1929."
-- Technical analyst Joseph Granville, after the U.S. had entered a new and at that time unidentified bull market

Oct. 19, 1987 -- "The Dow could be as low as 1900 next February."
-- Market strategist Elaine Garzarelli of Shearson Lehman Brothers, a couple of weeks before "Black Monday."

March 17, 1999 -- "How high will the market go? ... Our calculations show that with earnings growing in the long term at the same rate as the gross domestic product and Treasury bonds below 6%, a perfectly reasonable level for the Dow would be 36000 -- tomorrow, not 10 or 20 years from now."
-- James K. Glassman and Kevin A. Hassett of the American Enterprise Institute, in Wall Street Journal commentary

March 28, 2000 -- "What we are concerned with is the market is not as undervalued as it was." And: "We didn't make bearish comments today. What we said was, we have been very bullish, that was correct. We now are less bullish than we were."
-- Analyst Abby Joseph Cohen, of Goldman Sachs, about three weeks after the Nasdaq reached what remains its all-time record, 5048.62. About two weeks later, the Dow and Nasdaq suffered their biggest point losses to date, 617.78 for the Dow and 355.49 for the Nasdaq.

Has This Song Played Already?

May 22, 2007

A May 22 2007 article in FT.com China’s day-traders look for ‘black horses’ by Geoff Dyer is scary yet comical:

The thousands of ordinary Chinese who are signing up each day to trade shares are not too concerned about the conventional ways of valuing a stock, but they need to know the difference between a ghost and a black horse. Chinese have combined a traditional delight in word-play with their new-found passion for stocks to create a rich supply of colloquial jargon for investing that is bandied around brokerage offices. “Ghost shares” are highly risky, but “black horses” have beaten expectations. Buying cheap to sell high later is known as “fighting for the hat”, while selling at a loss to avoid further losses is “meat slicing”. Investors who think a piece of news will boost prices claim to be “lifting the sedan chair”. When a fund manager was sacked last week for allegedly manipulating share prices, websites hummed with talk of “rat investors”, the term for insider traders. There is even a Chinese phrase that could define the current boom. On top of bulls and bears there is the “deer market”, when large groups of amateur, short-term speculators cause markets to move in erratic jolts. The jargon is being quickly learned by the long lines of new day-traders who have helped push share prices up 52 per cent this year – on top of last year’s 130 per cent rise – but who are making the market look increasingly over-valued. Despite an interest rate rise on Friday aimed at cooling the market, retail investors ignored the messages from Beijing and opened 287,000 trading accounts on Monday, 35,000 more than on Friday. The explosion in day-trading has created some unintended consequences in Shanghai in the form of unwashed dinner dishes, badly ironed shirts and dusty floors. In recent weeks the city has developed a shortage of ayis, the domestic helpers who do chores in the homes of middle-class families, because some have found more gainful employment playing the market. Sheng Min, who runs a Shanghai agency that recruits ayis, says his company started to face problems finding new domestic helpers in April because of the stock market fever and now has 50 per cent fewer women on its books than usual. “We occasionally receive phone calls from employers complaining about their ayis,” he says. “Some of them seem to be more interested in chatting about stocks with their friends than working.” Zhang Wei works most weekday mornings in several houses around the city, but for the last few weeks she has been visiting a brokerage in the Hongkou district of Shanghai in the afternoons. “Last month I made almost half my salary from investing,” she says. With an eye on the new day-traders, a man placed an advert on the Taobao auction site last week selling signed doctors’ certificates for one month off work for Rmb100 ($13, €9.70, £6.60). The advert has since been removed. Cynics would say speculator-ayis are a sure sign of a bubble, but if everyone continues buying, prices will keep going up – even in a deer market.

Copyright. The Financial Times Limited 2007

Scam Artist PDF

May 20, 2007

An interesting (and sad) read regarding scam artists in the investment field. An excerpt:

Q: Most people probably think that only some- one who is uneducated or naive or stupid would fall for these pitches. True?
A: Totally not true. The majority of clients that I dealt with over the years were white- collar types of people. They were people who were already successful. They were people who had cash - had made money - and had worked very hard for it. They were doctors, they were dentists. [That] was a big group we went after - dentists. Dentists love to be loved by people.

Q: Dentists?
A: They sure do, because nobody likes going to the dentist. They're the easiest group to sell. There are companies that just sell [investments] to dentists.

We Have Seen This Before

May 13, 2007

The article below from the AP has some choice quotes. This ain't gonna end good!

1st-Time Investors Buy Up Chinese Stocks
Sunday May 13, 3:14 pm ET
By Joe Mcdonald, AP Business Writer
First-Time Investors Pour Money Into China's Stock Market, Which Has Soared to Dizzy Heights

BEIJING (AP) -- After watching Chinese stock prices gallop upward for months, Ding Xiurui wanted a piece of the action. The 45-year-old office worker stood in line at a bustling brokerage Friday to open her first trading account. She brought her sister, who opened an account too. They joined millions of other novice investors who are jumping into a market that has soared to dizzying heights, with prices up nearly 50 percent this year.

"We still can make money," Ding said as she stood at the counter at Tiantong Securities with the paperwork for her new account. Asked what stocks she would buy, Ding said, "I don't know. I'm still learning."

Continue reading We Have Seen This Before »

Can Any of These Guys Define Risk?

May 05, 2007

So hedge funds are "risky" (Watch Video), but mutual funds that lose over 80% are not?

Chinese Investors: Only Bull Market Babies?

May 02, 2007

An article titled "t’s like a casino set up by the Communist Party" (PDF):

If Chinese banks can be worth as much as the best America can deliver, why not its primary metals businesses? No reason, declared investors on the Shanghai stock market on Monday as they pushed the price of newly listed Aluminium Corporation of China - known as Chalco - up almost three fold. Against an offer price of 6.60 yuan, the quote topped 20 yuan before settling at 18.50. That values the business at 238bn yuan, or $31bn - just a fraction below America's Alcoa, the world's largest aluminium producer. Bizarrely, the Shanghai price was roughly twice the quote available in Hong Kong, where Chalco's H-shares are also now listed. Asked about the discrepancy by a Reuters reporter, Chalco's chairman Xiao Yaqing, said: The H shares should move closer to the A shares. Neither Xiao or his Chinese mainland investors seem to be reading the Western financial press. Amid almost daily evidence that Chinese stock market have parted company with reality, The Economist has become the latest to warn that tens of millions of Chinese are risking their shirts, noting that if it goes wrong, things could get nasty. If the bubble were to pop, it could have a bigger impact on social stability than any previous downturn in the stockmarket's 16-year history. There are now more than 91m accounts held by individuals at brokers or in mutual funds. Estimates for the number of investors vary widely. At the height of the last market boom, in 2001, there were 60m accounts but perhaps fewer than 10m investors. There are certainly many millions more now. New accounts at brokers are being opened at a rate of more than 200,000 a day, touching a high of more than 310,000 on April 24th. The total so far this year is more than 8m, which is around ten times as many as in the whole of 2005, when the market began to emerge from a four-year slump. Apparently, so many employees are spending their time trading stocks online that some companies have introduced fines. Many continue surreptitiously trading and sharing tips through e-mails, instant messaging and texts. Despite market wobbles, the bulls have quickly returned. As one Chinese investor puts it to The Economist: "It's like a casino set up by the Communist Party."

Leverage Fear

April 30, 2007

From the Wall Street Journal comes a familiar refrain today:

Hedge-fund manager John Paulson made $1 billion using a complex financial instrument to pump up a bet that the subprime-mortgage market would crater. The parent company of retail giant Sears made $74 million using a similar device to boost its wager that a basket of stocks would rise in value. Both were playing with leverage -- the magical power that allows investors to make big investments without putting big money on the table. These days, they have lots of company. Thanks to advances in financial engineering, investors have never had so many different ways to make commitments that exceed their bankrolls. And never before has leverage wormed its way into so many nooks of the financial world. We're living on planet leverage, and regulators and market gurus are growing nervous. How did this happen? For starters, hedge funds and leveraged-buyout funds have proliferated. They're pioneers in boosting returns using borrowed money, the most traditional form of leverage. Also, investment banks are pumping out newfangled leveraging tools such as derivatives, complex securities that allow hedge funds and other investors to add leverage without borrowing money.

Whole article.

99 Percent

April 18, 2007

A great example of something many people believe in. So what happens if 99% of the time you win little to nothing, but 1% of the time you lose it all? Focusing on percent accuracy refuses to acknowledge the core issue: magnitude of winning and losing trades.

Interesting Questions? Perhaps. Ask Your Banker? Well...

April 08, 2007

I found this list of 25 questions (PDF) to "ask your private banker" interesting. My question: when someone gives you these answers, have you not just received glorified stock tips?

Rich Dad Misses the Price Point

March 25, 2007

An excerpt from a recent Rich Dad Poor Dad column by Robert Kiyosaki:

So how can I say that the market is crashing even if it continues to go up? To see the true crash, educated investors need to compare apples to oranges, not apples to apples. When you compare the Dow to the Dow, or the S&P 500 to the S&P 500, that's comparing apples to apples. The Dow at 12,000 appears better than the Dow at 9,000, just as an apple at $1 a pound looks better than at $1.50 a pound, even though it's still the same apple. All that's happened is the price per pound of the apple has gone up -- the apple hasn't changed. Years ago, my rich dad taught me to be a comparison shopper, especially when it comes to investments. He said, "You need to understand value more than price. Just because the price of something goes up doesn't necessarily mean the value has gone up." He also told me, "If prices go up without a corresponding increase in value, it means the value of the asset has actually gone down." This holds true for all assets, including stocks, bonds, and real estate. For example, when the price of a house goes up it doesn't mean that the house is more valuable. And prices going up may mean that something else is going down in value. In today's global markets, what's going down is the purchasing power of the U.S. dollar.

He is right: price going up doesn't mean value is going up. But does it matter? If you have a strategy predicated on riding price increases (long for profit) and riding price decreases (short for profit), why then does it matter if you are able to discern the elusive "value" or not?

Comedy of Predictions

March 21, 2007

Wouldn't you just like to be able assemble all the "why" comments over the last month from the talking heads to explain this chart? That chart can't be explained. All you can do is accept it as is.

Hedge Fund Losses in 06 Mean Nothing

I caught this headline blurb from the AP:

U.S. hedge funds that once managed $35 billion shut down last year as more big firms ran into trouble, according to a survey released on Monday by industry publication Absolute Return. At least 83 U.S. hedge funds shut in 2006. The largest was the $9.1 billion multistrategy fund run by Amaranth Advisors LLC, which ranks as the biggest hedge fund collapse in history, Absolute Return said. Also among the folded funds: Archeus Capital Management's Animi Master Fund, which oversaw $2.65 billion at its peak; another run by Sagamore Hill Capital, which once held about $2.6 billion; and Saranac Capital's Citigroup Multistrategy Arbitrage/Saranac Arbitrage fund, which topped out at $2.2 billion. Five other funds that once managed at least $1 billion also shut last year. That's a big change from 2005, when none of the hedge funds that folded ever had $1 billion in assets, Absolute Return noted. Still, most of the hedge funds that shut down last year were small: Almost half of those funds never reached $50 million in assets. That suggests the $1.4 trillion industry is evolving into a business dominated by the bigger firms, Absolute Return said.

If the style of trading is not defined, if the manager is not noted, then aggregate statistics for hedge fund losses serve little purpose other than giving naive reporters something "fun" to write about for that day.

Bank Stocks: Proceed with Caution; Huh?

March 18, 2007

The International Herald Tribune ran with this article (PDF) recently. An excerpt:

Sticking with institutions that safeguard money instead of taking big risks with it may be the best course after a multiyear expansion, especially given the penchant that bankers have for poor timing. It is always possible that they have learned from past mistakes, but Sellar, for one, is not willing to bet too much on it. "I don't think they're more resilient," he said. "They try to talk good talk about improved risk models and stress-testing different scenarios, but you're never able to know which scenario will lead to a blowup. A lot of them didn't manage to miss Enron."

The ending analysis, at least the Enron part, is on target. The problem is the 'squishy' way they get to that understanding: its all fundamentally driven.

New Century Financial Corporation: Oops

March 13, 2007

Today, New Century Financial Corporation was all the news. Stock cratered. Straight down. Get ready for the dog and pony Congressional hearings show. I am sure there were accounting problems. If they violated the law, executives should get ready for their own version of HBO's Oz. However, don't complain if you are still holding the bag at $1.66 a share. There were clear warning signs in the price movement long before the meltdown. There were no excuses for not exiting, that is unless you were dollar cost averaging (losers average losers).

Life, Liberty and the Pursuit of Hedge Funds

From Trader Daily:

Does the public want to be protected from its own feeblemindedness in judging investment risk based on wealth? The SEC asked, albeit not in those words, and the public took ample advantage of the opportunity to comment. The answer was an emphatic: "No!" Last December the SEC proposed raising the required-asset bar for would-be investors in hedge funds and other pooled investment vehicles. The period for public comment on the suggested rule change ended on Friday, and the SEC had received more than 500 responses to what it had predicted would be an uncontroversial issue. Individuals from around the country protested the notion that assets in the safe were any way to judge financial acumen. Investors who qualify under current rules were horrified that they could be regulated out of the best and broadest range of investment opportunities available to them now. Some industry voices also questioned the impact on competition, as newly created hedge funds often depend on smaller investors to get off the ground. This feedback, though, may not be enough to influence the SEC's ultimate decision on the rule. Since December, there has also been a contrary trend in thinking, which is that the higher-level entry requirement should also be extended to investments in private equity. As distinctions in investment strategy become harder to make among hedge funds, private equity and venture capital, the result may be a broader investor accreditation requirement applied to all.

More.

Social Investment Research Analysts

March 12, 2007

Am I the only person who thinks this is nuts and impossible to execute? Once the Social Investment Research Analysts weed out companies involved in nuclear power, major manufacturers of tobacco products, alcoholic beverages, weapons, and firearms, companies that have serious and persistent human rights problems or directly support governments that systematically deny human rights (does this rule Google out due to censorship in China?), the field has been narrowed hasn't it?

"Are Some Stock Analysts Rewriting History?"

March 11, 2007

I caught the headline "Are Some Stock Analysts Rewriting History?" An excerpt from the article:

In their paper titled “Rewriting History,” professors Alexander Ljungqvist of New York University, Christopher J. Malloy of the London Business School and Felicia C. Marston of the University of Virginia say they found 55,000 changes to the database from 1993 to 2002 that tend to make certain stock analysts look good. The database is widely used by fund managers, academic researchers, by regulators to track questionable activity on Wall Street — and by The Wall Street Journal to assemble its annual list of the best analysts.

Remember the Gomer Pyle surprise, surprise, surprise (MP3) line? It is amazing that this much effort goes into categorizing predictions. Am I surprised that efforts might go into making the prediction mavens look good? Not exactly.

Go to Second Article from Slate >

"Fundamentals" Are A Flying!

March 05, 2007

When there is no volatility, the fundamental explanations in the "news" (regardless of how useless) don't stand out as much. Now, they "look" inane. From the AP today:

NEW YORK (March 5) - Wall Street managed to stabilize itself Monday, although investors remained nervous about nagging mortgage default concerns and tumbling stock markets abroad. t managed to stabilize itself Monday, although investors remained nervous about nagging mortgage default concerns and tumbling stock markets abroad. The major indexes fluctuated as investors tried to size up where the market was headed, and as traders swooped in to take advantage of stocks left severely depressed by last week's big decline.

1. How is "stabilization" defined with precision? Is there a rule or number?
2. How is "nervous" defined with precision? Is there a rule or number?
3. What investors are worried about "nagging mortgage default concerns"?
4. Now that markets are "fluctuating", should we view that as something new?
5. Investors now have the ability to "size up" market direction? How do they do that exactly?
6. "Severely depressed" means what in terms of a precise number?

Why No Capital Requirements for Las Vegas?

March 02, 2007

My podcast (MP3) on proposed new hedge fund requirements brought in a simple, but powerful thought:

"Where are the net worth requirements and risk disclosures in Las Vegas casinos?"

Give Me a Break!

March 01, 2007

From ABC News today:

Tuesday, just after the New York Stock Exchange bounced in and out of the 500 point pothole, an interesting item appeared on the blog site for the U.S. News & World Report. In it, senior writer James Pethokoukis asked the interesting question: "Did the Drudge Report help tank the stock market?" In fact, there were a number of other, more likely, causes, ranging from Alan Greenspan's warning that morning about a possible impending recession, falling durable orders and housing sales, rumors of China instituting a capital gains tax, etc. But still, Pethokoukis's question was intriguing.

It is not an intriguing question. It is an ignorant question. Excuse me while I go pull my hair out...

Read article.

The Motley Fool Is Only Feeding Demand

February 26, 2007

From Motley Fool comes this "wisdom":

It's YOUR money. According to this prominent Wall Street whistleblower, those high-priced investment types are getting high on YOUR commissions. And you won't believe the other dirty secrets this gentleman revealed to us about the teeming underbelly of the financial services industry. You owe it to yourself to hear every word! Because only then — once you know the full truth — can you decide for yourself whether you want to continue feeding Wall Street's insatiable addiction. Or if you should keep your money where it belongs... in your own account, compounding exponentially into a private fortune for you and your family to enjoy. You Absolutely Can Do It It's not even hard. You simply need to buy and hold the very best U.S. stocks. These are the opportunities that make investors truly wealthy, gaining in excess of 22.8% per year.

This kind of writing only exists because people want it to exist. Give "The Fool" credit for feeding the demand and building a business that makes money. Of course, their writing is 100% BS.

Hedge Funds Are Scary! Success Is Frightening!

February 25, 2007

One view on hedge funds from Loren Steffy of the Houston Chronicle:

Hedge funds need latitude to maintain the kind of returns that makes them attractive to investors. Instead of buying only stocks and bonds, for example, hedge funds make riskier plays. They may buy an entire company, restructure it, and sell it a few years later for a big profit. They may buy and sell stocks by the hour. They may sell stocks short, betting, essentially, that the stock will fall in value. They may dabble in derivatives, currencies, collateralized mortgage options or the swap market. Or all the above. All that risk, of course, doesn't always lead to reward. Last year, about 5 percent of all hedge funds failed, according to Hennessee Group, a New York-based hedge fund consultant. A typical fund has about a three-year life span. But the hedge funds that succeed do so precisely because they are free of restrictions. That creates a double-edged financial sword for investors, because hedge funds provide an important function. The markets need them. Hedge funds sop up risk, which helps reduce volatility, and they employ tactics such as short-selling that make markets more efficient. A study by the Federal Reserve Bank of Cleveland last year found that hedge funds tend to reduce price volatility in the market. That's why Paulson and his fellow regulators are reluctant to offer investors more than platitudes. For most of us, though, the best way to benefit from hedge funds is to stay out of their way. So take my advice. If you're thinking a hedge fund may be the right investment for you, it probably isn't.

Loren is right. Immediately go hide under your bed. Put your money under your mattress. Eventually you will be dead and the fear will subside!

It appears investors don't agree with him: read (PDF).

The Folly of Predictions

February 21, 2007

I was emailed a quote today from Ulf af Trolle (Swedish business consultant):

"If you really have to make an economical prediction, then follow this golden rule: Make the prediction optimistic. If you are right, then you will get a reputation to be extraordinary skilled. If you are wrong people will sympathize with you. At least you did your best. If you instead make a pessimistic prediction, and get it wrong, then you are a klutz. And if you are right, then you will be blamed for creating the situation."

A very nice summation on the folly of predictions!

Very Little Data for Decision-Making?

February 17, 2007

Carla Mozee at MarketWatch writes on Feb 17, 2007:

SAN FRANCISCO (MarketWatch) -- U.S. stocks are expected to drift lower next week, as a light lineup of economic data and a dwindling number of corporate earnings reports leaves investors searching for direction after a week of record highs for the Dow Jones Industrial Average, strategists said. Other factors that could weigh on stock trading include predictions that first-quarter earnings growth is set to ratchet down, concern about a possible rate increase in Japan and the closing of stock markets on Monday for Presidents Day, they said. "Earnings season is winding down, there's very little data, it's a short week. We'll come down on the market's own inertia, so to speak," said Donald Selkin, director of equity research at Joseph Stevens. Selkin said he expects any move downward, however, to be "short and shallow" following the pattern of declines in the market since July. The only way the market could advance substantially next week would be if a significant development such as a "very big buyout" deal occurred, said Paul Mendelsohn, chief investment strategist at Windham Financial Services.

What struck me about this excerpt is the comment about the lack of "data". It all depends doesn't it? If your decision-making is driven by "price analysis" then "other" data is only so relevant. Will there ever be any consistent reporting showing anything other than a 100% fundamentally driven fixation?

Amaranth Revisited

February 01, 2007

An excerpt from WSJ story on Amaranth:

How much the investors in Amaranth will lose depends on when they got in. They've gotten back about $1.6 billion to date. For one investor that came in in mid-2005, money returned so far comes to 27% of what it put in and about 18% of what its stake was worth at the peak. Investors will receive somewhat more when Amaranth finishes liquidating. Some investors have a keepsake. Amaranth once sent chess sets as year-end gifts, inscribed with a quotation from the late grandmaster Alexander Kotov: "It often happens that a player carries out a deep and complicated calculation, but fails to spot something elementary right at the first move."

Religious Fervor Is Not Wise For Your Portfolio

January 28, 2007

This email came into tonight:

Hi there, I live in London and I want to buy shares on the London Stock Exchange, but I don't know which shares to buy which are XXX principle compliant. Please guide me to where I can find out about this OR any group who is already buying shares according to XXX principles. Kind regards, XXX

This is the first email I have ever received like this. After 10 years and tens of thousands of emails, I hope this 'thinking' is not the start of a trend. To think like the above email in my humble opinion - is wacky. Beyond wacky, the markets are hard enough without tying one arm behind your back.

Yahoo Inc. Makes Some News...

January 23, 2007

Take a look at the last year chart of Yahoo. Now consider an AP news story about Yahoo today:

Yahoo Inc.'s fourth-quarter profit topped analysts' expectations to end a recent pattern of financial letdowns, a breakthrough that the Internet bellwether hopes to build upon by accelerating the introduction of long-awaited improvements to the advertising system that fuels its growth. The pleasant surprise lifted Yahoo's stock price by more than 5 percent late Tuesday after management shared the news. The Sunnyvale-based company said it earned $268.7 million, or 19 cents per share, during the final three months of 2006, traditionally the peak season for Web sites like Yahoo that depend on advertising for most of their revenue. The profit declined 61 percent from net income of $683.2 million, or 46 cents per share, at the same time in 2005, but the two quarters didn't provide an apples-to-apples comparison. That's because a one-time gain of $310 million boosted the 2005 results while the 2006 figures included stock option expenses that weren't recorded on Yahoo's books in the previous year. If not for certain tax benefits, Yahoo said it would have earned 16 cents per share, exceeding the average analysts' estimate by 3 cents per share, according to Thomson Financial.

Given the 1 year chart and given today's news...where does it seem logical that 'long' Yahoo makes sense? Isn't there a d