Tuesday, November 30, 2010

Is QE2 Failing?

All the reasons for the Fed’s QE2 program have now been explained; they are trying to lower the value of the US dollar, lower long term interest rates, and that they are trying to avoid deflation. A quick look at the US dollar and 30 year bond charts, since early November, show that exactly the opposite is happening.

The US dollar has appreciated and bond prices have gone down; yields have gone up. Does this mean that the program is not having its intended effects? Or does it mean that the markets already anticipated the Fed’s move and moved before the Fed announcement? I know it may be early, but so far, so bad.

I also would not rule out that other countries, particularly China, may be behind this. China has been vocal and has stated that they are not happy with the Fed’s program. Maybe China is dumping some of its bond holdings and buying dollars? Who knows? …but I would not rule this out as a possibility. China has been recently flexing its economic muscle and they have even downgraded US bond credit ratings, so it’s not impossible that they are moving to counter the Fed’s actions.

Monday, November 29, 2010

Mr. Joseph Campbell - Taking the Left Hand Path and Traders

The other day I was watching some lectures given by Mr. Joseph Campbell. Mr. Campbell was known for his interdisciplinary studies in mythology. In his lecture he mentioned taking the “left-hand path” in life. There are many definitions and ideas associated with the left, and the left-hand path, however, in this particular lecture Mr. Campbell was discussing the hero’s journey.

The mythological hero who takes the left hand path is taking the unconventional, not tried, and risky path. The person who follows the right hand path can be considered risk averse, conventional, and comfortable following the herd. The hero who takes the left hand path must be confident, understand that he or she may or may not be helped along the way, and if they return unharmed will be stronger going forward. The strength gained may be emotional, psychological, or physical.

Nonetheless, this all made me think about traders. Traders to me are people who follow the left hand path in life. They deal with risks everyday. The way they trade and their choice of working for money in this way is unconventional. The trader faces difficulties and pressure under stressful market conditions, which are similar to the trial a hero may face. It is during the trial that the hero will succeed. Are you following the left-hand path in life? For those who do, the rewards are enormous.

Saturday, November 27, 2010

Smile and be Thankful...

A guy calls up his stock broker’s office and asks to speak to his broker Mr. Smith. After an awkward pause the receptionist at the other end informs the client that his broker had died. The caller says nothing in response and hangs up the phone.

A while later the client calls up the office again and asks to speak to his broker. The receptionist pauses for a moment and responds by saying "I'm sorry sir, but your broker is dead." Again, the man says nothing and hangs up the phone.

Several hours later the man calls up again making the same request. The bewildered receptionist asks the caller "Haven't you called here already today asking to speak to Mr. Smith?" The caller replies with a simple "No." The receptionist once again informs the gentleman that his broker has died.

Later on that day the same client calls up the office again, asking to speak to his broker. This time the receptionist is certain that it’s the same guy calling again, so she transfers him to the manager. The manager picks up the phone and offers his assistance. After the caller requests to speak to his broker, the manager responds, "Sir, we have records that you have already called here three times today. Each time you ask to speak to your broker and each time we inform you that your broker has passed away. Why do you keep calling? Don't you realize that the man is dead?"

To this the caller responds, "Oh, I realize that he's dead, I just like to hear you say it..."

Tuesday, November 23, 2010

Mr. Andrew Redleaf Lecture

Recently I have been watching videos on Youtube of guest lecturers in Mr. Robert Shiller’s class at Yale. I have recently watched Mr. Andrew Redleaf. What a great source of information these videos are. I encourage you to go into Youtube and search for Yale’s videos.

Mr. Redleaf runs a hedge fund. His lecture centered mostly on efficient markets, the two types of investors that exist, and how he runs his shop. Mr. Redleaf does not believe in the efficiency of markets and describes examples where mispricing and inefficiencies seem to appear; for example, when closed-end funds trade at a discount or premium to the assets they hold, or if a company owns shares in a different company but the value of those shares is not reflected in the stock. One example he gave was when 3Com owned Palm shares.

Mr. Redleaf’s lecture was interesting, but not riveting. What I did like about it and some of the points that interested me were the following:

There are generally two kinds of investors: coupon clippers and security resellers. A coupon clipper is someone who generally analyzes investments from a cash flow perspective. Similar to how bond holders would redeem their coupons and receive the cash flow or interest from their bond holdings. He mentions that Mr. Buffett is a coupon clipper and how Mr. Buffett tends to look for the coupon in equities. Security resellers, on the other hand, are those who buy something and look to resell it at a higher price.

Mr. Redleaf also described the three main concepts his firm uses. The first is that they are coupon clippers. What kind of coupons can we extract is a general philosophy of his. The second is analyzing risk. What’s the worst thing that can go wrong? (By the way he thinks VAR analysis is fundamentally wrong). And lastly, how do we eliminate the risks that we have? He provides an example of these concepts of how his firm may own a high-yield bond and short the stock of the company as a hedge.

I thought the best point made in his lecture was that he likes to think that firms or people get paid to eliminate risk, not for taking it. Overall, I learned something and thought it was interesting. If you have the time, watch it, if not, I think I just outlined his main points.

Friday, November 19, 2010

Mr. Aaron Brown - The Poker Face of Wall Street

I have recently finished reading Mr. Aaron Brown’s book, The Poker Face of Wall Street. I have some mixed emotions about this book. I really liked the economic ideas he presented, but I did not care much for the poker parts. This is because I personally am not interested in poker. However, for those who are interested in poker, I think these parts would be of interest to you. Nonetheless, I did want to read the book, and in the end I am glad I did. I have also added it to my recommended reading list.

I think it would have been better if Mr. Brown separated the subjects of poker and finance into two books. I can understand the relationships between finance and gambling, but I was more interested in his insights on economic history and theory. I enjoyed learning about John Law and Fischer Black’s ideas. I found the section on expected value and utility value interesting. And I can also buy into his thesis that risk and gambling lead to capital concentration and further reinvestment. He did a nice job in all the subjects he discussed. I feel I now have a better understanding of why gambling is important for a society and its economy.

Lastly, Mr. Brown adds detailed references and recommendations of many other books at the end of his book. A good book, in my opinion, stimulates learning and ideas. Mr. Brown’s book did this for me, and I will be reading some of his recommended books in the near future.

Thursday, November 18, 2010

Mr. Barton Biggs and Hedgehogging

Mr. Barton Biggs has written a book called, Hedgehogging. Mr. Biggs used to be the head of Morgan Stanley’s Asset Management business and research groups. He now works for himself at his hedge fund called Traxis Partners LP.

In my opinion, this is not a very catchy title for a book, nonetheless, it really is a very good book to read. When I was younger I worked for a small firm that had close ties to Morgan Stanley and we used the firm for its trading and research. I used to read many research reports, but I remember always wanting to read his research reports and letters to clients.

The book is not a how-to type of book. It is a collection of many stories and ideas that he has gathered over a lifetime of investing. His varied investment experiences and broad thoughts on many topics make the book fun to read and very thought-provoking. I highly recommend it and I am putting in my recommended reading list. I will also be writing about some of the concepts discussed in the book in the near future. Now it’s onto Mr. Soros’ latest book, The Credit Crises of 2008 and What It Means.

Tuesday, November 16, 2010

Why Beauty is Important in Trading Systems and Trading Models – Emini Trading System

In Mr. Arthur Koestler’s book, The Act of Creation, he relates a story that occurred between Mr. Erwin Schrödinger and Mr. Paul Dirac, two founders of quantum mechanic who shared a Nobel Prize in 1933. Mr. Dirac tells a story of how Mr. Schrödinger created his wave equation of the electron. Mr. Schrödinger concentrated on developing his ideas by relying on his thoughts and by making beautiful generalizations, rather than relying closely on experimental data. Mr. Dirac states,

“I think there is a moral to this story, namely that it is more important to have beauty in one’s equations than to have them fit experiment. If Schrödinger had been more confident of his work, he could have published it some months earlier, and he could have published a more accurate equation…It seems that if one is working from the point of view of getting beauty in one’s equations, and if one really has a sound insight, one is on a sure line of progress. If there is not complete agreement between the results of one’s work and experiment, one should not allow oneself to be too discouraged, because the discrepancy may well be due to minor features that are not properly taken into account and that will get cleared up with further developments of the theory...”

I think the moral of this story is that as we develop our trading models and trading systems we too should consider beauty. Are our trading models and systems “beautiful”? Or are they a jumble and a mess of ideas? Mathematicians look at equations and theories and can see beauty in them. All type of art forms have beauty in them. As trading system creators, we too should not forget to make our models “beautiful.”


A drunk was proudly showing off his new apartment to a couple of his friends late one night, and led the way to his bedroom where there was a big brass gong.

"What's that big brass gong?" one of the guests asked.

"It's not a gong. It's a talking clock," the drunk replied.

"A talking clock? Seriously?" asked his astonished friend.
"Yup," replied the drunk.

"How's it work?" the friend asked, squinting at it.

"Watch," the drunk replied. He picked up the mallet, gave it an ear-shattering pound, and stepped back. The three stood looking at one another for a moment.

Suddenly, someone on the other side of the wall screamed, "You bastard it's ten past three in the morning!"

-from my friend at ZZJoke.com

Monday, November 15, 2010

Mr. Jeremy Grantham's 3Q 2010 Letter

For those of you who are stock investors, reading and utilizing Mr. Grantham's advice may be helpful. I really enjoyed reading this letter.

Friday, November 12, 2010

Mr. Jeremy Grantham's Warning and Advice

Mr. Jeremy Grantham, a partner in the asset management firm Grantham, Mayo, Van Otterloo, was recently interviewed on CNBC. Mr. Grantham has criticized the Fed's actions; both under Mr. Greenspan and Mr. Bernanke. As a professional analyst of bubbles, Mr. Grantham makes the case that the Fed is basically leading us to the next disaster. He feels that both the bond and stock markets are overvalued. Holding cash and being patient will provide options and the opportunity to invest when these market bubbles collapse. His opinion of fair value in the SP500 is around 900. This interview is well worth watching.

Tuesday, November 9, 2010

Mr. Aaron Brown - The Poker Face of Wall Street

Yesterday I began to read this book. I am not a poker player but I am interested to see how he ties the game of poker to finance.

Maybe I'll also learn to how to break Vegas and AC...:)

Monday, November 8, 2010

Mr. Emanuel Derman - My Life as a Quant: Reflections on Physics and Finance

I have just completed reading Mr. Derman's book. I really liked it and would recommend it to anyone interested in modeling, quantitative finance, or financial engineering. I will also be adding it to my recommended reading list.

I will be writing more about this book in the near future.

Saturday, November 6, 2010

Emini System Trading This Week

No trades this week.

Meanwhile here is some humor from ZZJoke.com

There is a new study out about women and how they feel about their ass:

85% of women think their ass is too big...

10% of women think their ass is too little...

The other 5% say that they don't care - they love him and would have married him anyway!!

Friday, November 5, 2010

Working through Underperformance as a System Trader

This is a quote by Eleanor Roosevelt which I would like to share with you. I find it inspiring and helpful.

“The future belongs to those who believe in the beauty of their dreams.”

When times are tough and you are underperforming, especially as a system trader, you need to stay optimistic and know that you will experience good and bad times. It is just the nature of the game. We now have three trading weeks left before we close out the year. I am interested to see how things play out.

Looking at our historical data we know that rough years can occur. This year has been one of them, as was 2002. My models and my heart also tell me that when I look at the historical results, I also see great performance the years following a relatively poor year. Let’s see what happens…

Thursday, November 4, 2010

Mr. Lewis Borsellino and Mr. Robert Shiller - Irrational Exuberance

I have been reading financial books lately. I have now finished Mr. Lewis Borsellino’s book, The Day Trader: From the Pit to the PC. I have also finished reading Irrational Exuberance, by Mr. Robert J. Shiller. It takes a lot, in my own mind of course, to make it into my reading list. Mr. Borsellino’s book does not make the cut because it produced very few, if any, good ideas for me. In other words, it did not make me think much. One criterion of a good book is that it should make one think.

Mr. Shiller’s book, on the other hand, does score a few points on the thinking front. Although the book was quite boring in some parts, I did find it interesting to read. I would recommend it, but I am not going to put it in my reading list. I will, however, be writing about some of the ideas that I thought were important and interesting from Mr. Shiller’s book in the near future.

For now, I would like to go back to Mr. Borsellino’s book and take out, what I thought, was the meat from it. As traders, we instinctively understand this, but it is always good to read things from successful traders who have “been there, and done that.” Here are three quotes from the book:

“Where there is risk, however, there is also fear. Fear cannot be avoided, and it is not a sign of weakness to feel it. The important thing about fear is how to handle it. Mastering fear propels you forward. Letting fear master you paralyzes you.”

“to be successful in life, especially in trading, which puts your money on the line every day, you cannot be a prisoner of your own thoughts.”

In regards to one of the lessons his father taught him, “he gave us stomachs for risk and the ability to push past the fear.”

Good stuff and well worth remembering as a trader and as a human being. What I also like is that he says that fear is not a sign of weakness to feel; it is something to acknowledge, feel, and use.

Wednesday, November 3, 2010

Mr. Lewis J. Borsellino's Book; The Day Trader:From the Pit to the PC

Mr. Lewis J. Borsellino wrote a book called The Day Trader: From the Pit to the PC. Mr. Borsellino was one of the biggest, if not the biggest traders of the S&P futures contract at the Chicago Merc.

Mr. Borsellino’s book was interesting only if you are interested in his autobiography. He relates many stories about himself and of his father. The book, however, is a disappointment if you are looking for trading insights. Although he tells you how he made zillions on trades, he never describes ideas, insights, or methods on how he did it.

I am always looking for new ideas to explore and test. Mr. Borsellino’s book, like many other trading books out there, will disappoint you if you are looking for trading ideas.

Tuesday, November 2, 2010

The Federal Reserve and Quantitative Easing

The Federal Reserve is expected to announce their new policy of “quantitative easing.”

Q. Does anyone really understand what the Fed is doing?

A. Nope.

Q. Does anyone understand if they should do 100 billion, 500 billion, or 1 trillion dollars in purchases?

A. Nope.

Q. Does anyone understand what the effects of this program will be?

A. Nope.

Q. Does anyone understand if they should include mortgage backed securities, 30 year bonds, CDO’s, and generally any garbage that can be purchased?

A. Nope.

Q. Does Wall Street and the market understand what this will really do for the economy?

A. Nope.

Q. Does the Fed itself know what it is doing?

You guessed it…

Have a nice day:)