More on the Economic Recovery…(?)

By trader7757, 16 June, 2009, No Comment

With the current unemployment picture, where will the spending for this recovery originate? I would think any recovery would need some encouraging jobless numbers to be authentic.

Is Inflation Looming On the Horizon?

By trader7757, 15 June, 2009, No Comment

The chatter in the financial columns has turned from trumpeting the economic collapse of the developed world to predictions of Zimbabwe-style hyper-inflation. I suppose there is a certain logic to these predictions, after all, we have flooded the economy with dollar bills in unprecedented fashion. Of course, there is the usual blather from the conspiracy theorists who are convinced that our recent problems are self-inflicted at the hands of the Federal Reserve Board.

But the world has not ended yet, and there are tentative signs some sort of recovery is developing, though I think it is premature to embrace any sort of “green shoots” view of our economy. I think it is safe to say that things have stabilized some, and leave it at that. The folks at CNBC are upbeat and gushing good news, as usual, and the market has recovered a significant amount of ground from the bloodbath of late last year and earlier this year.

But therein lies the rub, economists are a bi-polar bunch(at best) and have stratified in their predictions of either dire consequences in the economy or a view that envisions a healthy but gradual recovery is under way. Since the eventual outcome probably lies somewhere between these two choices, ones finds himself scratching his head.

Are we in for a raft of hyperinflation?

In a perfect constellation of horrible circumstances, it is possible. But my gut feeling is we will get some inflation and the Fed will begin the process of raising rates to combat the problem. It is a ticklish paradigm, though, as it requires perfect timing, something the Fed has never been adept at pulling off…not that anyone can know until “after the fact” whether a rate adjustment is properly timed, and hindsight is always 20/20.

Fitch Ratings statement from Friday

By trader7757, 14 June, 2009, 1 Comment

“Fitch Ratings today made massive downgrades on various vintage ‘05 through ‘08 subprime residential mortgage-backed securities (RMBS), indicating the extent of the fallout related to subprime defaults has yet to subside.

The rating agency slashed hundreds of RMBS ratings further into junk territory”

Then went on to say:

“The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010. To date, national home prices have declined by 27%. Fitch Rating’s revised peak-to-trough expectation is for prices to decline by 36% from the peak price achieved in mid-2006. The additional 9% decline represents a 12.5% decline from today’s levels.”

Fitch explains this:

“The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages. In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%.”

One of the nice things about scalping emini index futures contracts is the freedom from predicting long term, or any term, for that matter, pricing trends. I simply trade what is on the chart in front of me. I will surely admit that much of what I see leaves me scratching my head.

Did I mention that the stock market, by some indicators, is in positive territory for 2009?

And while I am in a questioning kind of mood, can someone explain to me just how the stock market could be in positive territory for the current year?

I don’t spend much of my time pondering the mysteries of life, such as, “what is the meaning of my existence”, or matters of metaphysical consequence. But the rationale for the recent rise in prices is beyond my little one-watt brain’s ability to compute. I have never seen the economy in such shambles, nor the employment numbers, nor the GDP numbers…..

The Fed has taken extraordinary measures, of questionable theoretical value, to prop up the economy, and the government has spent itself into oblivion.

Did I mention the stock market is up this year?

Maybe I should start contemplating the meaning of life.

Efficient Market Theory in Practice: How do you account for Long Tails?

By trader7757, 12 June, 2009, 3 Comments

I was reading an interesting blog post yesterday on Falkenblog that seemed to defend, in part, efficient market theory. One of the most basic tenets of efficient market theory is the assumption of investors as rational individuals. Further, this rationality is a function of the dissemination of information in our society so that all is known about a certain stock or equity instrument. The conclusion, then, is that the market efficiently distills this information, via the rational persons buying and selling of certain stocks.

Twenty five years in the stock business long ago dispelled any notion I learned in college that investors are anything close to rational, though the law of large numbers would seem to apply in that the more individuals participating in an individual issue the more likely the issue is likely to be priced properly. But history has, again and again, made it apparent that rational investors are a scarce commodity. Whether it be tulips, dot.com IPOs or houses, we are NOT rational, we are irrational. Lemming-like.

Mendelbrot theorized in “The Misbehavior of Markets” that long tails exist along any dispersion curve. With that statement he infers that catastrophic or unique events cannot be nearly encapsulated in any market theory for the exact opposite reason efficient theory draws its premise: Investors are rational.

For example, the premise during the dot.com bubble was something like this: things besides information can be efficiently distributed over the internet. I can remember looking at the business model for a dry dog food distribution operation and wondering how in the world a rational man could believe such a business model could work. It didn’t, even though the initial IPO skyrocketed, irrationally, to dizzying heights in early weeks of trading. And no the dot.com IPOs are resting in peace, after relieving millions of rational investors of their money.

Is the housing bubble any different? Well, maybe a little, as there was an overriding greed component to this bubble. Which brings me to my point: Investors aren’t rational, they’re greedy. Now don’t think for a second I believe greed is a bad thing, for it is greed, or the desire to earn a higher rate of return, that fuels capitalism. But this greed component often leaves up out on Mendelbrot’s long tail, and we have to find our way out of the long tail wilderness and back to the cozy equilibrium that exists in the main Bell curve structure.

But if Efficient Market Theory and it’s CAPM component are bunk, why is it taught at the university level with the reverence afforded holy books? Well, it’s partially true, until it comes to Long Tails, and then it falls apart. Boy, economics is tough stuff

Todays Charts and some observations

By trader7757, 11 June, 2009, No Comment

ESU9

I am sure everyone remembered to roll to the Sept. contract today. The market roller coastered around the chart and various economic entities debated the validity of the economic data the government has released of late.

Over at Financial Armageddon, there is an interesting article from a fellow who claims the nation’s books are grossly understating the current unemployment figures, money supply…just about everything, once you get reading the article. His claim goes something like…”the country would be flat on it’s belly if we weren’t using doctored numbers…”

I’ve never been much of a conspiracy theory kind of guy, so I find his declaration of “all things government” to be a bit hard to swallow. On the other hand, another study showed the government subsequent revisions to economic data were usually negative, that is, the revisions usually put the economy in a less positive position than the initial release. Of course, you could argue coincidence. But I’ve never been too big on consistent coincidences, either.

So I suppose the truth lies somewhere between these extreme views. The government has changed the methodology it uses to measure the countries unemployment and GDP, and by in large, the new formulations tend to understate the seriousness of the current problems.

Sheesh, sometimes the entire business wears me out.

As an aside, I have been wondering what the difference in Bernie Madoff’s Ponzi scheme and the credit default Ponzi scheme AIG has saddled us with. Think about it….AIG did not have the assets to repay, nor was it even close, the entirety of the credit default swaps it issued….kinda of like Madoff, when you think about it. Only we gave AIG billions of dollars to straighten things out, we gonna give Madoff lots of years to straighten things out…in the pokey.

Where in the Hell are we in this ongoing mess?

By trader7757, 10 June, 2009, No Comment

I was listening to Dr. Roubini on a PBS clip last night and he believes we have averted the possibility of a depression. Hmmm….I decided that was some good news, I think.

As of late, though, I have felt manipulated by the powers-that-be (and you can decide just who the powers-that-be actually might be) as we have had this tremendous run-up in stock prices while unemployment has continued to march straight upward. Good Grief…the government’s official number is 9.45%, and some economists are squabbling that the calculation is artificially low, and if we used a non-manipulated formula for unemployment, say the one we used in 1982, the number would be much higher. And then there is the foreclosure issue…

The rate of foreclosures has also marched steadily upward, which would indicate that people do not have the money to pay for their homes. Or perhaps, they do not find it financially expedient to pay their homes and are diverting their funds to savings or some other investment vehicle, which I find highly unlikely.

The credit markets are broken, with the government guaranteeing everything from car manufacturer loans to bank accounts, to….well, you name it.

My point is simple: The stock market is disconnected from the economic health of the country. Granted, the VIX has stopped oscillating like a seismograph needle in 8.4 earthquake, but the markets, of late, would have you believing that everything is honky-dory.

I don’t feel honky-dory. No, the footing on the path I am walking feels loose and very sketchy.

With the amount of money we have pumped into the economy, a great deal of the looming disaster has been put off, but has it been put off forever, or have just put it off for another ten years?

In the past, countries that have inflated their M1 and pumped the kind of stimulus money into their economies have had a nasty dust-up with inflation, and that worries me. Where are we headed with inflation? I have this niggling that there is inflation out there waiting…at least it ought to be waiting.

No, none of the current economic data makes sense to me, there are too many asymmetric variables to account for to let me breath deep and comfortably.

Is financial television making us crazy?

By trader7757, 9 June, 2009, 1 Comment

By Barry Ritholtz – June 8th, 2009, 9:30AM

Over the past 5 years, I have appeared on various Financial TV shows over a 100 times. But I am also a huge consumer of financial news, in print, on the web, radio, and of course, TV. Being on both sides of the camera gives me a fairly good perspective on what does and doesn’t work on TV. I also have some strong ideas as to what is good and bad TV in terms of providing a social utility, being part of the democratic process, etc.

Indeed, this is a longstanding interest of mine. Over the weekend, I referenced the current Columbia Journalism Review (CJR) issue that focused on the role of the media in the credit crisis, stock market and economic collapse (CJR on CNBC, WSJ & Business Press). This area has long interested me (hence, our media panel at TBP conference). But I was surprised this post generated 100 comments from readers.

One emailer challenged me on CJR’s CNBC piece: “Its easy to complain, but what would you do to “fix” Financial Television?”

Challenge accepted. Here are my general suggestions as to how to “fix” what needs repair on not just CNBC, but all FinTV.

>
How to Fix Financial Television

1. Stop Yelling. Stop interrupting. Stop Talking Over Each Other: This is not Jerry Springer, its serious business. People’s retirement and investments are at stake. Please treat it that way.

2. Bring us People We Don’t Have Access to. What various FinTV channels do really well is when they bring us long, thoughtful interviews with the likes of Warren Buffett, WIlliam Ackman, David Einhorn, and others. People we wouldn’t ordinarily have access to. Example: This morning, CNBC had on James Rickard. More of this please.

3. S – L – O – W D – O – W – N

4. Risk: All traders must appreciate the potential downside of trades. So too, must FinTV. Explain stop losses. Understand Risk/Reward. Recognize there are periods when Buy & Hold is a jumbo loser.

5. Lose the Octobox. Fire whoever came up with the Decabox. ‘Nuff said.

6. Separate the Signal from the Noise. Understand that most of the day-to-day action is simply noise. Look at a long term chart, you can barely see 9187 or 9/11. If those major events get lost in the long term trend, what does the intraday jags, kinks and reversals mean? Very little. Recognize that not every data release, slice of news, or rumor is at all significant. Stop treating them as if they were.

7. Fact Check: An awful lot of things on air get stated with authority and confidence. Much of them are little more than junk or pop myths. Why is it that the more dubious a proposition is, the greater the confidence the speaker seems to muster? Consider fact checking as much of the statements that are made on air as possible, and making frequent corrections.

8. Accountability is important: I am astounded at some of the money losing hacks that are various shows again and again. These are the “articulate incompetants” to use Bennett Goodspeed’’s phrase. Why not keep track of the records of guests — and let the viewers know how their past few calls have been. Are they Perma-bulls or bears? Are their stock picks awful? Are they reliable money makers? If not, let us know. (Of course, the better question is, if not, why even have them on?)

9. Bring Back Louis Rukeyser: Not the man, but rather, his style. Wall $treet Week — Rukeyser hosted it from 1970 to 2005 — was plain-spoken, thoughtful and accessible. Quiet, contemplative, discussions, with intelligent market participants, revealing helpful information. The investing public would appreciate something of that sort — again.

10. Sound FX: What is with all the bizarre sound effects every time a screen changes? Its financial news, not a video game. Kill ‘em.

11. Embed your video (on your own website or YouTube) instead of using WMP. At long last, thank you.

12. Investigative Pieces: David Faber seems to have a monopoly on deep, long thoughtful analyses. Be they on Wal-Mart, the credit crisis, whatever, his long format work is a highlight of CNBC. More of these, please.

13. Most stock picks are losers. That’s normal, but the audience does not realize this. A big part of the challenge is informing the viewer that finding the biog winners is a low probability, high outcome event. As in a baseball, a 350 hitter is a star. Explain this to your audience.

14. Stop the Bull/Bear Debate: This is a vast over-simplification of the market, and often does not serve the audience well. There are nuances and variables that get lost when you reduce everything to black and white.

15. Partisanship: Leave your personal politics at home. Viewers don’t care what most of you think.

16. Respect the Audience: We are adults. Treat us that way.

An interesting day, to say the least

By trader7757, 8 June, 2009, No Comment

emini trading dow trading

What a day we had, the market fell out of bed from the onset, as economists squabbled over what the “real” unemployment numbers should be. No matter how you look at it, they ain’t good, so to speak. And at the end of the day the financials staged what I would call a miracle rally and drove the Dow into positive territory. There any number of theories being floated as the the nature of this late rise in price, and they range from conspiratorial to fundamental. Heck, I’m just a scalper, I want to stay in the trend.

The late day rallyy was a hard one to stay in as it made no sense, so there was a constant compulsion to pull out with a large gain, but the thing just kept going up, and up, and up. One of the oddest last minute moves I’ve seen. Then again, these are odd times…so what should I expect?

Another easy set up today

By trader7757, 4 June, 2009, No Comment

YM trade

This was an interesting trade, as the price bounced a third time off the bottom of a short support line, all the indicators, which I have circled, turned to indicate executing a long position. It turned out to be a good trade. The DecisionBar software, which is not shown, all indicated a long trade one bar later. Also notice how I took my profits one bar too soon, the indicators were beginning to flatten out and I felt I was somewhere near the top. This was a fun trade to watch play out.

A Fairly Typical Trade Today

By trader7757, 3 June, 2009, No Comment

I thought I would share with you the first trade of the day today, as it is fairly typical of the trades I look to enter. You can see at point A we had a close below an intermediate line of support I had been tracking. I took 5 short looking for a breakdown. As you can see, I had to endure a little flack at the beginning and feared I would get stopped out, but the market finally cooperated and broke down nicely and I exited at point B with a nice gain of about 20 points on the YM. I like to go short in these situations and have a high level of success. An interesting trade.

The Fractal Futures Trader