EMINI TRADING WITH XYZ

The Situation is BOSS

2011-03-29T09:07:00.000-04:00

One business maxim of mine is that “the situation is boss.” High pressure, quick changing environments need decision makers who are flexible and adaptable. The situation is always the boss. Sometimes we want to impose our own ideas onto the situation in order to bring things under control. This may work; but I believe that most of the time the situation dominates and our decisions tend to be reactive. In other words, it is not what occurs that is important, but rather how we react to it, that is more important.

Climbing the Wall of Worry

2011-03-25T08:36:00.000-04:00

There is the saying that strong markets climb the “wall of worry.” It sure feels like that nowadays. Tunisia, Egypt, Bahrain, Yemen, Syria, and Libya are rumbling to various degrees. The US has just entered into yet another war in the Middle East. Japan is glowing and no one seems to give a damn. Oil is over a $100 bucks a barrel. The US Government is negotiating to stay open for business a little bit longer. States are finding that they are facing critical shortages of something really important--money! Workers cannot find jobs. Greece, Ireland, and Portugal are desperate. The list seems to go on and on, yet the market seems to be acting pretty well…hmmmm…

STOCK TRADING SYSTEM

2011-03-25T08:30:00.001-04:00

SHORT

MAT Mattel Inc.
GPS Gap Inc.
GENZ Genzyme Corp.
BIIB Biogen Idec Inc.
CL Colgate-Palmolive Co.
ERTS Electronic Arts Inc.
YHOO Yahoo! Inc.
MA MasterCard Inc. Cl A
CA CA Inc.
V VISA Inc. Cl A

The Red Queen Rules Europe

2011-03-24T08:18:00.002-04:00

It seems to me that the European debt problem can be best understood from the standpoint of the Red Queen hypothesis. This evolutionary hypothesis states that continuing adaptation is needed in order for a species to maintain its relative fitness among the systems that it is evolving with. The Red Queen hypothesis comes from the line in Lewis Carroll’s book, Through the Looking Glass, "It takes all the running you can do, to keep in the same place."

It seems to me that Greece, Ireland, and now Portugal, are running and going nowhere fast. These countries must evolve relative to their European counterparts or else they will reach a point where their economic, political, and social systems will breakdown. In my opinion, the European debt problem is evolving to outright defaults and bigger problems.

SOME ADVICE FROM MR. WARREN BUFFETT

2011-03-23T07:24:00.001-04:00

One of Mr.Warren Buffett's business tenets is to "Never Suck Your Thumb." That means that, at a certain point, you've got to stop thinking — and start acting.

In his 1989 annual report, Buffett explained how he learned the thumb-sucking lesson the hard way: "It's no sin to miss a great opportunity outside one's area of competence. But I have passed on a couple of really big purchases that were served up to me on a platter and that I was fully capable of understanding. For Berkshire's shareholders, myself included, the cost of this thumb-sucking has been huge."

The only way to make money is by pulling your thumb out …

STOCK TRADING SYSTEM

2011-03-22T07:12:00.001-04:00

SHORT

CERN Cerner Corp.
KMB Kimberly-Clark Corp.
CL Colgate-Palmolive Co.
RDC Rowan Cos. Inc.
FLIR Flir Systems Inc.

PLOTINUS AND BUILDING TRADING MODELS

2011-03-21T10:08:00.001-04:00

Plotinus, the ancient Greek philosopher, did not have the creation of trading models in mind when he wrote this. Nonetheless, I think there are similarities between the creation of our trading models (our “statues”) and creating ourselves…

Withdraw into yourself and look. And if you do not find yourself beautiful yet, act as does the creator of a statue that is to be made beautiful: he cuts away here, he smoothes there, he makes this line lighter, this other purer, until a lovely face has grown upon his work. So do you also: cut away all that is excessive, straighten all that is crooked, bring light to all that is overcast, labour to make all one glow of beauty and never cease chiseling your statue, until there shine out on you from it the godlike splendour of virtue, until you shall see the perfect goodness surely established in the stainless shrine.

When you know that that you have become this perfect work, when you are self-gathered in the purity of your being, nothing now remaining that can shatter that inner unity, nothing from without clinging to the authentic man, when you find yourself wholly true to your essential nature, wholly that only veritable Light which is not measured by space, not narrowed to any circumscribed form nor again diffused as a thing void of term, but ever unmeasurable as something greater than all measure and more than all quantity—when you perceive that you have grown to this, you are now become very vision: now call up all your confidence, strike forward yet a step—you need a guide no longer—strain, and see. This is the only eye that sees the mighty beauty…

STOCK TRADING SYSTEM

2011-03-17T07:17:00.000-04:00

LONG

HPQ Hewlett-Packard Co.
MSFT Microsoft Corp.
LIFE Life Technologies Corp.
STJ St. Jude Medical Inc.
BAX Baxter International Inc.

STOCK TRADING SYSTEM

2011-03-16T07:24:00.001-04:00

LONG

PNW Pinnacle West Capital Corp.
NEE NextEra Energy Inc.

The Myth of Sisyphus

2011-03-14T07:21:00.000-04:00

Mr. Albert Camus, who won the Nobel Prize in Literature in 1957, wrote The Myth of Sisyphus. I recently read a part of it. Sisyphus was a character from Greek mythology who was condemned to live life in a vicious circle; push a rock up the hill, watch the rock roll down the hill, push a rock up the hill, forever. Sounds like fun.

Mr. Camus believed that Sisyphus was an absurd hero. I think traders are absurd heroes. We try to make money trading a dynamic thing called the market. We can have our great runs, only to see the market roll our accounts right back to where we started. We push onward and upward again, only to once again see the market roll us back down. This cycle can be vicious and can make us feel that what we are doing is absurd. Nonetheless, faith, persistence, and determination is what allows us to face absurdity and uncertainty each day; just like Sisyphus.

Cheers to all you absurd heroes out there, keep pushing your rocks…

STOCK TRADING SYSTEM

2011-03-11T07:51:00.001-05:00

LONG

CELG Celgene Corp.
NBL Noble Energy Inc.
NFX Newfield Exploration Co.
XOM Exxon Mobil Corp.
JNPR Juniper Networks Inc.
MMI Motorola Mobility Holdings Inc.
V VISA Inc. Cl A

Another Favorite Guru

2011-03-10T19:16:00.001-05:00

Another favorite guru of mine, Mr. Barton Biggs...

ONE OF MY FAVORITE STOCK GURUS SAYS...

2011-03-10T13:59:00.003-05:00

One of my favorite gurus over the years has been Mr. Birinyi. He recently gave a long term bullish outlook on the US stock market. Check it out.

OILY PIGS

2011-03-10T08:22:00.000-05:00

If oil prices stay high for a prolonged period of time it will be put incredible pressure on the Greek, Irish, and Portuguese economies. The risk of default increases as the price of oil rises. European leaders will need to be more proactive. Mr. Trichet is talking about raising interest rates, while here in the United States, Mr. Bernanke is giving indications that rates will not be raised. Why is Europe jumping so quickly to raise interest rates? Yes, I know the inflation fear is present, but default fears need to be addressed. I believe the US stock market is starting to smell it.

STOCK TRADING SYSTEM

2011-03-09T07:29:00.000-05:00

SHORT

CMS CMS Energy Corp.
NU NORTHEAST UTILITIES
SLM SLM CORP.
AXP American Express Co.
BAC Bank of America Corp.
USB U.S. BANCORP
PNC PNC Financial Services Group Inc.
SCHW Charles Schwab Corp.
MI Marshall & Ilsley Corp.
HBAN Huntington Bancshares Inc.
MTB M&T Bank Corp.
LUK Leucadia National Corp.

The Global Misallocation of Capital

2011-03-07T10:42:00.002-05:00

Nowadays, global capital flows rapidly in and out of assets around the world. Investment managers, hedge funds, and traders of all types seek to make a buck wherever they can. Today it is oil; tomorrow it will be something else. The point is that greed and profit moves the prices of assets probably more than they are worth, just as fear and losses move prices lower than their “true” value (if you believe in intrinsic and fundamental value).

As the price of oil becomes more volatile, and as trading firms move their capital in a herd like, stampeding fashion, oil will pull in global capital. This will inevitably create a worldwide misallocation of capital. One has to wonder how the global misallocation of capital will affect our future. Companies around the world will have to consider how the recent moves in oil will affect their business. Government policy makers will have to consider the possibility of a slowdown in economic growth, how this will affect interest rates and inflation, and consumers will think twice before purchasing any goods and services. The problem is that the speed which capital moves and the increase in the volatility of prices it brings, will exaggerate the consequences and effects of all the decisions being made today.

STOCK TRADING SYSTEM

2011-03-04T07:37:00.001-05:00

SHORT

CI CIGNA Corp.
VAR Varian Medical Systems Inc.
BAX Baxter International Inc.
TMO Thermo Fisher Scientific Inc.
BMY Bristol-Myers Squibb Co.

MIND OVER MONEY

2011-03-03T07:42:00.002-05:00

I recently watched a NOVA special entitled “Mind Over Money.” I thought it was pretty good. It discussed the two leading and opposing theories regarding markets and economic behavior. On one side there are the rational, self-interested market participants. These types were first defined by Mr. Invisible Hand himself, Adam Smith. On the other side are the behaviorists. The behavioral school of economic thought predominantly concerns itself with the idiotic decisions and non-understandable side of irrational human beings making decisions. The argument basically boils down to whether we are smart and rational people, making sound economic decisions, or that we are idiots and irrational, who make stupid decisions based on our thoughts and feelings, etc.

The show touched upon efficient markets, with Mr. Eugene Fama leading the charge for the smart and rational people creating efficient markets. Got May 6, 2010? Mr. Robert Shiller, aka. Mr. Irrational Exuberance, led the charge for those on the behavioral side. “By the way Robert, got a house to buy or sell?

It was worth watching for an hour, I especially enjoyed the bidding for a $20 bill that some fool was willing to pay $27 to 28 for…genius…maybe Mr. Shiller would like to sell his home to that guy…everyone knows that home prices never go down…

TRADING CDS AIR

2011-03-02T07:30:00.001-05:00

The Wall Street Journal recently reported that banks and hedge funds are trading credit default swaps on General Motors bonds that do not exist. All I can say is here we go again. How can these kinds of things go on? I am all for free market capitalism, but when my money and yours is being used to keep these guys operating when they F*up, then something has to give. The value of derivatives is linked to some sort of “underlying” asset. It now seems that the underlying security can be a concept and an idea. Wow, got to give credit to the genius that brought this about….

STOCK TRADING SYSTEM

2011-03-01T07:30:00.000-05:00

SHORT

JNJ JOHNSON & JOHNSON
KMB Kimberly-Clark Corp.
ETN Eaton Corp.
BXP Boston Properties Inc.
DELL Dell Inc.

IMMANUEL KANT AND MARKET VALUE

2011-02-28T07:13:00.001-05:00

I was recently at my local library’s book sale and came across a set of Harvard Classics that I could not pass up. I bought them and began to read Immanuel Kant’s, Fundamental Principles of the Metaphysic of Morals. Mr. Kant can be pretty dense and obscure. Reading his writings reminds me of a line by the comic, Steve Martin, who believed he had taken just enough philosophy to screw him up for the rest of his life. Reading Mr. Kant can have a similar effect.

Nonetheless, Immanuel Kant can be pretty easy to understand (sometimes) and there were a few brief moments of pure, lucid thought that I could follow. I found the following interesting…

“In the kingdom of ends everything has either Value or Dignity. Whatever has a value can be replaced by something else which is equivalent; whatever, on the other hand, is above all value, and therefore admits of no equivalent, has a dignity.

Whatever has reference to the general inclinations and wants of mankind has a market value; whatever, without presupposing a want, corresponds to a certain taste, that is to a satisfaction in the mere purposeless play of our faculties, has a fancy value; but that which constitutes the condition under which alone anything can be an end in itself, this has not merely a relative worth, i.e., value, but an intrinsic worth, that is dignity.”

As traders we always deal with the concept of value and price. Stocks can have market value and fancy value. I find it interesting that the word and concept Mr. Kant uses is “dignity” for something which is beyond value. As a trader this tells me to short fancy value and go long dignity.

STOCK TRADING SYSTEM

2011-02-25T07:22:00.001-05:00

LONG

POM Pepco Holdings Inc.
CMS CMS Energy Corp.
CEG Constellation Energy Group Inc.
SWY Safeway Inc.
PG Procter & Gamble Co.

STOCK TRADING SYSTEM

2011-02-24T07:21:00.001-05:00

LONG

LEG Leggett & Platt Inc.
JCI Johnson Controls Inc.
RSH RadioShack Corp.
WPO Washington Post Co. Cl B
DIS Walt Disney Co.
BSX Boston Scientific Corp.
A Agilent Technologies Inc.
PKI PerkinElmer Inc.
LIFE Life Technologies Corp.
LLY Eli Lilly & Co.
SRCL Stericycle Inc.
DNB Dun & Bradstreet Corp.
MMM 3M Co.
HCBK Hudson City Bancorp Inc.
CINF Cincinnati Financial Corp.
FII Federated Investors Inc.
BMS Bemis Co. Inc.
EBAY eBay Inc.
ADSK Autodesk Inc.
RHT Red Hat Inc.

STOCK TRADING SYSTEM

2011-02-23T08:00:00.001-05:00

LONG

YUM Yum! Brands Inc.
RL Polo Ralph Lauren Corp.
KMX CarMax Inc.
DRI Darden Restaurants Inc.
BBBY Bed Bath & Beyond Inc.
SBUX Starbucks Corp.
MYL Mylan Inc.
MHS Medco Health Solutions Inc.
GWW W.W. Grainger Inc.
COL Rockwell Collins Inc.
CAT Caterpillar Inc.
FAST Fastenal Co.
AVY Avery Dennison Corp.
TXT Textron Inc.
PCAR Paccar Inc.
LUV Southwest Airlines Co.
CMA Comerica Inc.
BXP Boston Properties Inc.
DFS Discover Financial Services
COF Capital One Financial Corp.
ORCL Oracle Corp.
S Sprint Nextel Corp.
CTSH Cognizant Technology Solutions Corp.
WDC Western Digital Corp.
FTR Frontier Communications Corp.
ALTR Altera Corp.
CSC Computer Sciences Corp.
SHW Sherwin-Williams Co.
ATI Allegheny Technologies Inc.
SIAL Sigma-Aldrich Corp.

Mr. El-Erian and the Libyan Crisis

2011-02-22T17:53:00.004-05:00

Mr. El-Erian was interviewed by Mr. Keene on Bloomberg regarding the recent crisis in Libya. The interview revolved around a few issues that one would expect; the price of oil, geopolitical risk, inflation, etc. What I thought was interesting was that near the end of the piece Mr. El-Erian mentioned the US Dollar. He noted how the flight to quality and safety that usually occurs during these kinds of situations barely moved the dollar. Mr. El-Erian stated this is because investors and traders are realizing that the United States is being perceived more negatively and as having a higher risk than in the past. I agree with him. The world's perception of the US has changed and is changing...

STOCK TRADING SYSTEM

2011-02-18T07:35:00.000-05:00

SHORT

DD E.I. DuPont de Nemours & Co.
VMC Vulcan Materials Co.
CI CIGNA Corp.
ZMH Zimmer Holdings Inc.
BSX Boston Scientific Corp.
WLP WellPoint Inc.
ABC AmerisourceBergen Corp.
STZ Constellation Brands Inc. Cl A
TSN Tyson Foods Inc. Cl A
CPB Campbell Soup Co.
MJN Mead Johnson Nutrition Co.
CCE Coca-Cola Enterprises Inc.
APC Anadarko Petroleum Corp.
RDC Rowan Cos. Inc.
AMD Advanced Micro Devices Inc.
PAYX Paychex Inc.
LSI LSI Corp.
CA CA Inc.
NSM National Semiconductor Corp.
FISV Fiserv Inc.

STOCK TRADING SYSTEM

2011-02-17T07:26:00.000-05:00

SHORT

AN AutoNation Inc.
WPO Washington Post Co. Cl B
HUM Humana Inc.
MHS Medco Health Solutions Inc.
HIG Hartford Financial Services Group Inc.
SLB Schlumberger Ltd.

STOCK TRADING SYSTEM

2011-02-15T08:54:00.001-05:00

LONG

FE FirstEnergy Corp.
AYE Allegheny Energy Inc.

SHORT

BIIB Biogen Idec Inc.
VAR Varian Medical Systems Inc.
MUR Murphy Oil Corp.
BTU Peabody Energy Corp.
DNR Denbury Resources Inc.
MRO Marathon Oil Corp.
DO Diamond Offshore Drilling Inc.
CLF Cliffs Natural Resources Inc.

STOCK TRADING SYSTEM

2011-02-14T07:30:00.000-05:00

SHORT

NWSA News Corp. Cl A
SWK Stanley Black & Decker Inc.
GPC Genuine Parts Co.
MAR Marriott International Inc. Cl A
HOG Harley-Davidson Inc.
LEG Leggett & Platt Inc.
LOW Lowe's Cos.
BEN Franklin Resources Inc.
MI Marshall & Ilsley Corp.
HST Host Hotels & Resorts Inc.
JNS Janus Capital Group Inc.
LUK Leucadia National Corp.
PLD PROLOGIS
BRKB BERKSHIRE HATHAWAY B
TROW T. Rowe Price Group Inc.
LM Legg Mason Inc.
LNC Lincoln National Corp.
MKC McCormick & Co. Inc.
CLX Clorox Co.
KMB Kimberly-Clark Corp.
HON Honeywell International Inc.
CAT Caterpillar Inc.
PH Parker Hannifin Corp.
PCAR Paccar Inc.

STOCK TRADING SYSTEM

2011-02-11T07:37:00.000-05:00

SHORT

FDX FedEx Corp.
UPS United Parcel Service Inc. Cl B
ETN Eaton Corp.
NSC Norfolk Southern Corp.

STOCK TRADING SYSTEM

2011-02-10T07:39:00.000-05:00

LONG

EQT EQT CORP.
SWN Southwestern Energy Co.
HES Hess Corp.
SE Spectra Energy Corp.
DO Diamond Offshore Drilling Inc.
RRC Range Resources Corp.
CNX Consol Energy Inc.

STOCK TRADING SYSTEM

2011-02-08T07:27:00.000-05:00

SHORT

KIM Kimco Realty Corp.
TMK Torchmark Corp.
NYX NYSE EURONEXT

STOCK TRADING SYSTEM

2011-02-07T08:39:00.000-05:00

SHORT

NKE Nike Inc. Cl B
RSH RadioShack Corp.
RL Polo Ralph Lauren Corp.
A Agilent Technologies Inc.
GIS General Mills Inc.
CLX Clorox Co.
TLAB Tellabs Inc.

STOCK TRADING SYSTEM

2011-02-04T08:58:00.001-05:00

SHORT

DISCA Discovery Communications Inc. Series A
HAS Hasbro Inc.
SHLD Sears Holdings Corp.
IPG Interpublic Group of Cos.

Using Barron's Statistics

2011-02-04T07:40:00.001-05:00

When I was young I used to read Barron’s from cover to cover each week. I loved the statistics at the back of each issue. I would always try to figure out how I could use them. Nowadays, I still look at Barron’s from time to time, but I like this page the most. It provides the SP500 earnings, which are currently $71.86. Trying to figure out the growth rate of these earnings, and what multiple the market will trade at, is a pretty good way to get an idea of the value of the market. I do not trade on this information, but I like to look at it as a reality check.

Are More Bailouts Coming for Our States?

2011-02-03T08:04:00.005-05:00

What will happen with the financial situation of state, local, and municipal governments? There is no question that some states are in bad shape, for example, Illinois, New Jersey, and California. Other states are better off. This question will become a bigger issue as the year goes on. Some argue that the financial situation of state and municipal governments is not a huge problem and can be handled. Others argue that this is a big problem that will become much larger.

We have not heard a single thing from Washington about what to do with this problem. My feeling is that the politicians are all hoping that the issue will just go away. In my opinion, it all comes down to the following; years of poor political leadership, corruption, unreasonable financial assumptions, greed, and lack of fiscal control have created the problem. Are more financial bailouts and larger budget deficits for our nation on the horizon?

STOCK TRADING SYSTEM

2011-02-02T07:40:00.001-05:00

SHORT

COF Capital One Financial Corp.
USB U.S. BANCORP
SLM SLM CORP.
PFG Principal Financial Group Inc.
PNC PNC Financial Services Group Inc.
LNC Lincoln National Corp.

STOCK TRADING SYSTEM

2011-02-01T07:50:00.000-05:00

SHORT

PXD Pioneer Natural Resources Co.
NBL Noble Energy Inc.
COG Cabot Oil & Gas Corp.
EOG EOG Resources Inc.
NFX Newfield Exploration Co.
CHK Chesapeake Energy Corp.
RRC Range Resources Corp.

GOLDMAN'S STOCK FORECAST FOR 2011

2011-01-31T07:34:00.001-05:00

STOCK TRADING SYSTEM

2011-01-31T07:20:00.000-05:00

LONG

CBS CBS Corp. Cl B
NKE Nike Inc. Cl B
WYN Wyndham Worldwide Corp.
AN AutoNation Inc.
BIG Big Lots Inc.
DIS Walt Disney Co.
APOL Apollo Group Inc. Cl A
SBUX Starbucks Corp.
TWX Time Warner Inc.
HAR Harman International Industries Inc.
MAR Marriott International Inc. Cl A
CCL Carnival Corp.
CMCSA Comcast Corp. Cl A
HOT Starwood Hotels & Resorts Worldwide Inc.
OMC Omnicom Group Inc.
JCI Johnson Controls Inc.
TEG Integrys Energy Group Inc.
XEL Xcel Energy Inc.
POM Pepco Holdings Inc.
AEE Ameren Corp.
SO Southern Co.
DTE DTE Energy Co.
AES AES Corp.
AEP American Electric Power Co. Inc.
DUK DUKE ENERGY CORP.
PNW Pinnacle West Capital Corp.
KO Coca-Cola Co.
HRL Hormel Foods Corp.
WFMI Whole Foods Market Inc.
SYY Sysco Corp.
WAG Walgreen Co.
PEP PepsiCo Inc.
FDX FedEx Corp.
UPS United Parcel Service Inc. Cl B
LUV Southwest Airlines Co.
RTN Raytheon Co.
AVY Avery Dennison Corp.
EFX Equifax Inc.
EMR Emerson Electric Co.
LLL L-3 Communications Holdings Inc.
NOC Northrop Grumman Corp.
GR Goodrich Corp.
NSC Norfolk Southern Corp.
DNB Dun & Bradstreet Corp.
R Ryder System Inc.
CEPH Cephalon Inc.
CELG Celgene Corp.
ESRX Express Scripts Inc.
CFN CareFusion Corp.
ADBE Adobe Systems Inc.
PAYX Paychex Inc.
MYL Mylan Inc.
ADI Analog Devices Inc.
SAI SAIC Inc.
WPI Watson Pharmaceuticals Inc.
SNDK SanDisk Corp.
HPQ Hewlett-Packard Co.
CSC Computer Sciences Corp.
BMC BMC Software Inc.
AMGN Amgen Inc.
CSCO Cisco Systems Inc.
A Agilent Technologies Inc.
FISV Fiserv Inc.

STOCK TRADING SYSTEM

2011-01-28T07:36:00.001-05:00

LONG

GPS Gap Inc.

SHORT

LTD Limited Brands Inc.
PCLN priceline.com Inc.
AMZN Amazon.com Inc.
AMP Ameriprise Financial Inc.
MMC Marsh & McLennan Cos.
LNC Lincoln National Corp.

Jeremy Grantham's Letter for January 2011

2011-01-27T10:33:00.002-05:00

Once again, Mr. Grantham has issued his letter to clients. I really enjoy his writings. Mr. Grantham's advice for the current market is that we are likely to reach 1500 SP500 and to be careful in October. Most of his analysis assumes that the third year in the Presidential cycle is the best year to be in the market. Nonetheless, be aware, or beware, that Mr. Grantham's valuation of the market is approximately 900 SP500.

STOCK TRADING SYSTEM

2011-01-27T08:59:00.000-05:00

SHORT

IRM Iron Mountain Inc.
BTU Peabody Energy Corp.
MUR Murphy Oil Corp.
HP Helmerich & Payne Inc.
NBR Nabors Industries Ltd.
CAM Cameron International Corp.
EMN Eastman Chemical Co.
CLF Cliffs Natural Resources Inc.

How to Get Investment Ideas from the Pros

2011-01-26T07:29:00.002-05:00

Here is a good way to get an idea of what the well-known investors are holding in their portfolios and funds. By searching 13F filings on this site, one can get some insights into industries and companies that investors like Mr. Paulson, Mr. Klarman, or Mr. Soros are holding. Periodic searches also allow one to see where they are reducing their positions. Hope this is helpful.

STOCK TRADING SYSTEM

2011-01-25T07:21:00.000-05:00

SHORT

MMM 3M Co.
UTX United Technologies Corp.
PWR Quanta Services Inc.
DNB Dun & Bradstreet Corp.
GWW W.W. Grainger Inc.
SNA Snap-On Inc.

The Seven Habits of Highly Effective People

2011-01-24T07:52:00.000-05:00

Stephen R. Covey, the author of The Seven Habits of Highly Effective People, first published this bestseller in 1990. Here is a nice summary of the ideas in this book. The seven habits concern personal change and how one can become more effective. One of the parts I find interesting is the “win/win” situation. One should seek agreements, situations, and relationships where there is win/win. This is what we are creating at TradingXYZ. The second is that we see things not as they are, but as we are conditioned to seeing them. This principle is helpful to remember when we look at the market and try to make sense of it. Viktor Frankl’s attitude towards a horrific situation is a great lesson for all people. Humans have the freedom to choose. Frankl’s book, Man’s Search for Meaning, is another that I have on my list of things to read in the near future.

THE BEST STOCK SCREENER

2011-01-21T07:56:00.002-05:00

In the quest for information on stocks one will scour the web for hours. Lately I came across what I believe is the best stock screener out there. It is the FINVIZ stock screener. This stock screener allows easy downloading to Excel and a variety of variables that can be used to screen stocks. Hope it is helpful to you all.

STOCK TRADING SYSTEM

2011-01-21T07:37:00.001-05:00

LONG

EFX Equifax Inc.
PCAR Paccar Inc.
DOW Dow Chemical Co.

SHORT

AYE Allegheny Energy Inc.
FE FirstEnergy Corp.

AUTOMATED STOCK TRADING SYSTEM

2011-01-20T08:16:00.001-05:00

LONG

PX Praxair Inc.
AKS AK Steel Holding Corp.
MON Monsanto Co.
FMC FMC Corp.
NUE Nucor Corp.
X United States Steel Corp.
HST Host Hotels & Resorts Inc.
CINF Cincinnati Financial Corp.
HIG Hartford Financial Services Group Inc.
JPM JPMorgan Chase & Co.
PRU Prudential Financial Inc.
KEY KEYCORP
BAC Bank of America Corp.
TROW T. Rowe Price Group Inc.
RF Regions Financial Corp.
PFG Principal Financial Group Inc.

AUTOMATED STOCK TRADING PROGRAM

2011-01-19T13:28:00.002-05:00

This post is late but the stocks this am to short were:

SHORT

VLO
CAT
NOC
ROK
MSFT
FSLR

The Battle that Changed Western Civilization

2011-01-14T07:19:00.001-05:00

I like to read, especially during the winter, when it is difficult to do things outside. Recently I have been reading the book, Marathon: How One Battle Changed Western Civilization, by Mr. Richard A. Billows. This book makes a compelling and convincing case that the course of world history was indeed changed by the Greeks defeating the Persians at the Battle of Marathon. I found the book to be exciting, informative, and fun to read.

Mr. Billows is a professor at Columbia University specializing in Greek and Roman history. He specifically discusses the role of democracy, which he states began with the Kleisthenes in Athens, as one of the primary reasons leading to the Athenian resistance. The defeat of the Persians in Greece halted the westward expansion of the Persian empire. This eventually led to the decline of the Persian empire and to the rise of the Greek empire. As the Greek empire expanded it influenced western culture with its arts, architecture, philosophy, history, and theatrical drama and comedies.

The movie 300 popularized Leonidas and the Spartans who held off the Persians in a different battle, the Battle of Thermopylai. But it was really the Athenians, led by Miltiades, that changed the western world and made popular what we today take for granted.

AUTOMATED STOCK TRADING SYSTEM

2011-01-13T08:21:00.001-05:00

SHORT

KMB Kimberly-Clark Corp.
PG Procter & Gamble Co.
NYX NYSE EURONEXT
NVDA NVIDIA Corp.
WFR MEMC Electronic Materials Inc.
THC Tenet Healthcare Corp.
IBM International Business Machines Corp.
HSP Hospira Inc.

Meatstick and Phish - Happy New Year !!

2011-01-12T20:02:00.002-05:00

Correlations and Comparative Statistics - Stocks

2011-01-11T09:12:00.003-05:00

There are many stock screening websites that may be useful, for example MSN Money and Google Finance, but I also like these two. The first is Wolfram, which allows the user to input a variety of stocks and make comparisons in different ways. The second is the Select SPDR site which calculates correlations. Although these things can be done in Excel, sometimes it is helpful to get quick information. I hope you find them useful.

AUTOMATED STOCK TRADING SYSTEM

2011-01-09T18:04:00.001-05:00

LONG

LO Lorillard Inc.

AUTOMATED STOCK TRADING SYSTEM

2011-01-07T07:34:00.001-05:00

SHORT

HUM Humana Inc.
JDSU JDS Uniphase Corp.
HRS Harris Corp.
DELL Dell Inc.
IBM International Business Machines Corp.
GLW Corning Inc.
WU Western Union Co.
NSM National Semiconductor Corp.

AUTOMATED STOCK TRADING SYSTEM

2011-01-06T07:34:00.001-05:00

SHORT

DFS Discover Financial Services
HCBK Hudson City Bancorp Inc.
AIG American International Group Inc.
COF Capital One Financial Corp.
SCHW Charles Schwab Corp.
FII Federated Investors Inc.
BK Bank of New York Mellon Corp.
BBT BB&T Corp.
V VISA Inc. Cl A
HRS Harris Corp.
LSI LSI Corp.
GILD Gilead Sciences Inc.
CRM Salesforce.com Inc.
MA MasterCard Inc. Cl A
JNPR Juniper Networks Inc.

AUTOMATED STOCK TRADING SYSTEM

2011-01-05T07:54:00.001-05:00

SHORT

EXC Exelon Corp.
D Dominion Resources Inc. (Virginia)
ETR Entergy Corp.
NEE NextEra Energy Inc.
AEE Ameren Corp.
DTE DTE Energy Co.

AUTOMATED STOCK TRADING SYSTEM

2011-01-04T08:00:00.003-05:00

Happy New Year...It's that time again...

SHORT

DHI D.R. Horton Inc.
DTV DIRECTV Group Inc.
ATI Allegheny Technologies Inc.
IP International Paper Co.
PCLN priceline.com Inc.
MAS Masco Corp.
VNO Vornado Realty Trust
PSA PUBLIC STORAGE
VTR Ventas Inc.
CBG CB Richard Ellis Group Inc. Cl A
BXP Boston Properties Inc.
MYL Mylan Inc.
SYK Stryker Corp.
TDC Teradata Corp.
AET Aetna Inc.
MWW Monster Worldwide Inc.
ZMH Zimmer Holdings Inc.
TSS Total System Services Inc.
GOOG Google Inc. Cl A
FIS Fidelity National Information Services Inc.

ZZJoke.com - Jokes

2010-12-25T10:40:00.000-05:00

One day a blond who had no past experience in horseback riding, decided to try.

She mounted the horse, and it started to gallop, the horse kept going faster, and faster. The blond lost control and started to slide down the side of the horse. So she made a grab for the horse's tail, but couldn't get a good grip.

She then reached for the horse's mane, still she couldn't get a good grip. Now she was at the mercy of the horse's pounding hooves.

Fortunately, Dave the Wal-Mart manager, came and unplugged the horse...

Mr. Stephen Schwarzman’s lecture at Yale

2010-12-22T07:51:00.000-05:00

I really enjoyed listening and watching Mr. Stephen Schwarzman’s lecture at Yale. Mr.Schwarzman discussed many topics such as the nature of private equity, real estate, successful and failed deals, and how the financial crisis occurred and evolved. I have read and heard so much of the financial crises by now, that I thought there was nothing new that I could learn. I was wrong.

I learned from Mr. Schwarzman’s lecture that government policies and laws can lead to unintended negative consequences in our society. Although this was not the main point of his discussion, he did refer to a few government actions that had clear and unintended negative consequences for our society.

The first was the start of the real estate bubble, which began with the US government’s policy to get more people into homes. Although this was a good policy, it wound up turning into a fiasco, with all the unintended consequences to come later. For example, Mr. Schwarzman stated that subprime mortgages at one point were 2-3% of all mortgages; and by the end they had become more than 30%. He also described how 87% of pooled mortgages which were securitized were given AAA ratings. This misled investors into thinking that these securities were safe and could not default. Mr. Schwarzman believes historians will look back at this time and wonder how AAA ratings were given to these securities in the first place. In addition, he wonders how so many investors believed in these ratings and were fooled by them. In my opinion it’s pretty simple; just like there is a fog of war and a fog of panic, there is also the fog of greed.

The second unintended negative consequence came from the passage of the Sarbanes-Oxley law. This law was passed after the Enron scandal and created fair value accounting, also known as FAS 157. Mr. Schwarzman described how FAS 157 forced financial institutions to take losses before defaults actually occurred. These losses, in turn, created a crisis of confidence in financial institutions which eventually morphed into the much bigger financial crisis.

His stories of successful deals, US Steel and Celanese, and unsuccessful ones, an Argentinian cell phone company, were also interesting. One point he stressed was that capital always comes back. Even though there is a credit crunch occurring, he is optimistic that credit and capital will come back. He mentioned the past credit crunches of 1975, 1982, 1987, and 1990-1991.

I also liked his discussion about failure. He stated how he hates failure and when it does occur that he tries to learn from it. Failure can be a blessing in disguise. Mr. Schwarzman is a winner because he does not like to fail. This was worth watching.

60 Minutes and The Day of Reckoning

2010-12-21T07:34:00.002-05:00

This past Sunday night, “60 Minutes,” the television show, had a segment on the looming financial crisis of local, municipal, and state governments. The analyst who was interviewed, along with Governor Chris Christie of New Jersey, basically said the same thing. The Day of Reckoning is here and will need to be addressed. What does this mean? It means more catastrophic losses and bailouts by the US taxpayer.

According to the analyst, this will begin to occur within the next 12 months. Mr. Christie says that it is already here. This is serious and no one seems to care. For years I have been hearing of unfunded pension liabilities, creative accounting, and budget deficits-yet no one has done anything about it.

The show also stated how Illinois is effectively bankrupt and a deadbeat. Why have we not heard more about these issues? Are we ostriches with our heads in the sand ? Is our government unwilling to talk about this future crisis? I commend “60 Minutes” for this segment, but it makes me nervous. Just like everything else that is happening…

ZZJoke.com - Joke

2010-12-17T07:24:00.000-05:00

A couple of hunters were out in the woods when one of them fell to the ground clutching his chest.

After struggling for a few seconds,he seemed to stop breathing. The other hunter quickly pulls out his cellphone and dials 911.
He gasps to the operator, "My friend is dead! What should I do?"

In a soothing voice, the operator says, "Try to remain calm, sir. I can help you. First, we need to make sure he's dead."

Immediately the operator heard a shot.

The frantic hunter comes back on the line and says, "Okay, now what?"

MBA and the Top Business Schools

2010-12-16T09:20:00.003-05:00

Here’s a pretty good site that summarizes a typical MBA program. Also, Bloomberg Businessweek has released what it considers the best business schools in the country.

Confucius Peace Prize - Nobel - China - Liu

2010-12-15T08:26:00.002-05:00

China is very unhappy with this year’s Nobel Peace Prize winner; Mr. Liu Xiaobo. Mr. Liu is serving eleven years in a Chinese prison for supporting political reform, human rights, and an independent judicial system. In response, China has created its own peace prize, the Confucius Peace Prize.

Maybe the Nobel Peace Prize committee is politically motivated, for example, the choice of President Barack Obama was debatable and raised questions. We all can see this as a politically motivated game, but what I find interesting is the list of countries that have now rejected invitations to the Nobel Peace Prize ceremony. The list includes:

China
Afghanistan
Columbia
Cuba
Egypt
Iran
Iraq
Kazakhstan
Morocco
Pakistan
Philippines
Russia
Saudi Arabia
Serbia
Sudan
Tunisia
Ukraine
Venezuela
Vietnam

Here are some themes these countries represent: opposition to the U.S. and its policies, Arabs, natural resources, and non-Western. I’ll let the reader decide what they think of this, but it does make one wonder why they are not going.

Yes, You Can Time the Market ! - Ben Stein - Phil DeMuth

2010-12-14T07:35:00.001-05:00

I have just completed reading the book Yes, You Can Time the Market !, by Mr. Ben Stein and Mr. Phil DeMuth. The book is a well-written, no nonsense book, which gives practical and easy advice to follow for those who have a long term investment horizon. The authors have done their homework and they also discuss other academic studies which support their ideas. The authors make no claim that market timing can be done in the short run. If, however, you have a long term investment horizon (15-20 years), then buying when the market is “low” will generate better returns over other investment strategies.

So, you may ask, what is low? The authors look at a variety of criteria, such as market price, PE ratios, dividend yield, price to book, Tobin’s Q, price to cash flow, etc. In general, they argue that returns for any 5, 10, 15, 20 year period were higher when investors entered the market when it was trading better than the respective long term average of 15 years. For example, buying the SP500 when it was trading below its 15 year moving average price, was generally a good time to enter the market.

The authors are not ignorant that many times you may be sitting on the sideline feeling foolish as markets head to the moon, but they believe you will be rewarded over time because:

“Unlike other stock market anomalies, which disappear the moment they are pointed out, buying low promises to endure. This is because the extra returns it delivers do not come free. Rather they are a payment for assuming the psychological burden of buying stocks when everyone says the sky is falling, and demurring when Wall Street is having a feeding frenzy.”

The authors also believe that markets regress to the mean. This is why groups of stocks with high PE’s tend to underperform in future years, compared to groups of stocks with low PE’s, which outperform going forward. Another example of regressing to the mean was discussed in the performance of stock prices. Stocks that have outperformed (underperformed) over the past few years tend to underperform (outperform) in the future.

This is a good book to read for those who believe in investing for the long run. I enjoyed it and would recommend it.

The authors summarize their work in the following paragraph:

“The point of this book-so simple that a child can grasp it, yet so elusive that your broker will never get it-is that you are better off buying cheap.”

Mr. David Swensen's Lecture - Yale - Shiller

2010-12-13T08:17:00.003-05:00

I have always known about the excellent returns generated by the Yale endowment, but have never dug deeper to find out who is responsible for those returns. Since reading Mr. Biggs book, Hedgehogging, I have come to find out the man responsible is Mr. David Swensen. I recently watched a great lecture by Mr. Swensen and would like to share some of the main concepts he discussed.

Mr. Swensen begins his lecture by stating that when he came to Yale he decided to study what other institutions were doing at that time. He found that most institutions were allocating their funds, 50%-40%-10%; 50% US stocks, 40% US Bonds, and 10% cash or other. Mr. Swensen felt that this was inappropriate, and began to change the way Yale invested its endowment money.

Given some academic results of studies done by Mr. Ibbotson, Mr. Swensen decided that equities were the place to be in the long run, given their superior long term returns compared to other alternative asset classes. Mr. Swensen also began to look for investments in alternative asset classes. It was very interesting how he decided on where he should allocate most of his time and effort in search of higher risk-adjusted returns. Mr. Swensen decided that inefficient markets would offer better opportunities and could generate market beating returns. The way he determined this was by looking at long run returns of managers within various asset classes, and what the returns were of the top percentile compared to the bottom percentile within each category. He then also looked at the dispersion of those returns:

Bonds .5%
Large Cap Equities 2%
Small Cap Equities 4.7%
Hedge funds 7.1%
Real estate 9.3%
LBO’s 13.7%
Venture Capital 43.2%

It became clear to him that spending more time in the areas where the dispersion was greatest would pinpoint inefficiently priced markets and better investment opportunities. He stated that there was very little reason to spend a lot of time looking for managers in the bond market, where prices are generally mathematically calculated and pricing is very efficient, compared to other types of markets.

Mr. Swenson discussed three large topics in his lecture; asset allocation, market timing, and security selection. He concluded that asset allocation is the number one driver of returns. He discouraged market timing, and he felt that the system is not a zero sum game. Excessive fees charged by hedge funds, commissions, and consultant fees, have turned a zero sum game into a negative sum game.

Mr. Swensen also warned the students to be very careful when evaluating historical performance results. He stressed that data can be skewed by survivorship bias and back-fill bias. Survivorship bias removes the bad performance of managers who have folded and back-fill bias adds in good performance of managers.
At the time of the lecture the Yale endowment was allocated:

11% US Stocks
15% Foreign stocks
4% Bonds
23% Hedge Funds
28% Timber, Oil and gas, real estate
19% Private equity, LBO’s, Venture Capital

This is an excellent lecture and I highly recommend watching it. LINK Mr. Swensen’s long term performance has been exceptional. He did it by becoming equity-oriented, finding great managers who did well in efficiently priced markets, by changing the asset allocation of the total portfolio, and by diversifying the risks. Really quite simple...)

From ZZJoke.com

2010-12-11T10:23:00.000-05:00

Dear Abby,

My husband is not happy with my mood swings.

The other day, he bought me a mood ring so he would be able to monitor my moods.
When I'm in a good mood it turns green.
When I'm in a bad mood it leaves a big red mark on his forehead.
Maybe next time he'll buy me a diamond.

Sincerely,

Moody in Buffalo

Stoicism and Trading - Stoics

2010-12-10T12:55:00.001-05:00

Stoicism was a philosophy towards life that evolved in ancient Greece. Stoicism was founded by Zeno of Citium around 300 B.C. and was later popularized by Chrysippus, Seneca, Epictetus, and Marcus Aurelius.

The philosophy that stoics lived by was to be indifferent to pain or pleasure. They were not easily excited or upset. In a way they were like Zen Buddhists who follow “The Way,” the Tao, by taking the middle road. Stoic philosophy can be useful for traders. Don’t get too thrilled when you hit winners, don’t get too bummed out when you have losses, don’t get really bummed out when you are in long, painful drawdowns, and keeping your head level is philosophically stoic.

I consider myself emotional and sensitive. I like to live life. I emotionally exaggerate life’s highs and lows. It is in my nature. As I am becoming and getting older, I get better in managing my feelings, thoughts, and emotions. It is not easy, and I am sure some people are better in managing their states than others. Nonetheless, we all need to do it. Knowing what I am like as a person helped me in deciding how I would approach trading. I realized pretty quickly that discretionary trading was too difficult and emotional for me. System trading, however, gave me some “emotional separation” from the market. It also helped me be more stoic about my trading performance. Being a systematic trader helps me better manage my emotional states.

Perhaps we cannot live stoically in all aspects of our lives, but we can, however, benefit from its ideas in our trading.

Mr. Taleb and Mr. Mandelbrot

2010-12-09T07:50:00.002-05:00

Here is a gentleman that is fighting ingrained thoughts, the status quo, and money interests. Mr. Taleb is challenging fundamental concepts that are being used by bankers and financiers. There really is no credible theory to replace what has been used and established on Wall Street over many years. He does mention in this video that VAR (Value at Risk) analysis should be immediately discarded. The question I have is what replaces it? No bank or risk manager can go out there today and justify what they are doing, because there is no “standard model” that they can stand on.

I agree with Mr. Taleb’s views, but throwing out old theories and replacing them with theories that use power laws, etc. is what Mr. Taleb argues for in his books. It’s going to take a long time to change the way things are done. In fact, what is upsetting is that it seems to me that the bankers and financiers have “won.” Nothing has changed and the system is more fragile than ever. Maybe the whole thing just has to implode before things change. I hope not, but it sure feels like that is the way things are moving.

What can we say about Benoit Mandelbrot? He is a visionary. His insights have been brushed aside by the establishment, but someday, if not already, he will eventually be proven right.

Mr. Warren Buffett’s two rules for making money

2010-12-08T07:56:00.002-05:00

Mr. Warren Buffett has been quoted as saying the first rule of making money is not to lose money. The second rule is to remember the first rule.

This is a simple philosophy that is difficult to do. The point is that an investor cannot dig a hole in their capital. Preserving capital, limiting loss, and having a disciplined money management approach are some of the keys to successful investing and trading.

Mr. Carl Icahn Lecture

2010-12-07T07:49:00.002-05:00

Mr. Carl Icahn made his fortune buying undervalued companies that were poorly managed. One can feel pretty pessimistic listening to his lecture in Mr. Robert Shiller’s class at Yale. He stresses that America cannot compete because many companies are undermanaged. He also believes there is no accountability or corporate democracy in America. Interestingly, he admits he is not a manager, but instead puts managers in place who change the structure of the companies he invests in.

Some other topics he discusses are that America is overleveraged, it is very questionable Americans will be able to pay back their debts, and the housing crisis is a mess. In addition, he still believes making a career on Wall Street is a good choice.

Some of his positive influences in life are Aristotle’s Nicomachean Ethics and Rudyard Kipling’s poem IF. He mentioned that he reads IF from time to time. Mr. Icahn also suggests to the students to not be overconfident in their abilities when times are going well, and to not get too down when things are not going well. In addition, he suggests that by working hard and having faith in your abilities is a good way to be in life.

When asked about poor corporate governance in America Mr. Icahn mentioned that Canada and England have better models. He also felt that poison pills and staggered boards are some examples of how companies protect themselves and entrench their managements.

I really did not learn very much from his lecture, perhaps because I am familiar with his past. I am, however, interested in reading Aristotle and will turn to that at some point in the near future.

Drawdowns in Sports

2010-12-06T08:05:00.002-05:00

I was watching the Indianapolis Colts against the Dallas Cowboys yesterday. It was a fun game to watch. Although I am not a fan of either team, it was painful to watch Mr. Peyton Manning. He is in one of the worst slumps of his career. Mr. Manning has thrown 11 interceptions in his last three games. His former coach mentioned that he has not seen him do this poorly since the early 2000’s.

I realized that what I was watching was a man in drawdown. It occurs to everyone. Bad cycles and times are a part of sports, trading, and life. Mr. Manning is a future Hall of Fame quarterback. At some point he will come out of this as he came out of it in the early 2000’s. The lesson for all of us is to persevere and work right through these negative periods.

From zzjoke.com

2010-12-04T13:48:00.001-05:00

Sherlock Holmes and Dr Watson go on a camping trip. After a good dinner and a bottle of wine, they retire for the night, and go to sleep.

Some hours later, Holmes wakes up and nudges his faithful friend. "Watson, look up at the sky and tell me what you see."

"I see millions and millions of stars, Holmes" replies Watson.
"And what do you deduce from that?"
Watson ponders for a minute.

"Well, astronomically, it tells me that there are millions of galaxies and potentially billions of planets. Astrologically, I observe that Saturn is in Leo. Horologically, I deduce that the time is approximately a quarter past three. Meteorologically, I suspect that we will have a beautiful day tomorrow. Theologically, I can see that God is all powerful, and that we are a small and insignificant part of the universe. What does it tell you, Holmes?"

Holmes is silent for a moment. "Watson, you idiot!" he says. "Someone has stolen our tent!"

Wealth, War and Wisdom - Mr. Barton Biggs

2010-12-03T07:59:00.002-05:00

I have recently read Wealth, War and Wisdom by Mr. Barton Biggs. This book was an enjoyable read and I learned more about World War II and how markets reacted during the period from the Great Crash of 1929 until approximately 1945.

The main thesis of the book is that there is wisdom in crowd behavior as exhibited by market prices. Although the markets may misprice assets and bubbles do occur, Mr. Biggs states that the markets correctly predicted the future at major turning points in WWII. In particular, Mr. Biggs states that markets bottomed and turned during the Battle of Britain and The Battle of Midway and peaked in Germany when they attacked Russia.

Mr. Biggs makes the case that real returns in stocks far surpassed returns in bills and bonds for all countries. In particular, real returns from stocks in the countries that were “lucky,” generally the ones who won the war and were not occupied, also surpassed the real returns from stocks in the countries which were unlucky, generally the losers of WWII and those that had been occupied by the Axis powers.

There is also good advice for wealthy people and what they should do in times of crises and war; however, I am not going to go into this here. In addition, Mr. Biggs also observes how black marketeers became wealthy in all the wars around the world; that food, warm clothing, and cigarettes became tradable commodities, and easily transportable wealth like jewelry was helpful to have during these times.

The main conclusion of the book is best summarized by Mr. Biggs himself:

“I argue that the stock market, because it is the collective conclusion of multiple, independent, diverse, decentralized, motivated judgements, is a far different creature from the mob or group. This is not to claim that the stock market is all wise or cannot make mistakes or in the short term misjudge events. I am saying that in general its judgement is good and worth paying attention to.”

Winston Churchill's Big Black Dog - Biggs - Trading

2010-12-02T08:08:00.001-05:00

In Mr. Biggs book, Hedgehogging, he discusses the periodic bouts of depression that Winston Churchill would have.

“Winston Churchill, whose career had its ups and downs and also was plagued with bouts of depression, spoke of the huge, foul-smelling black dog with breath like the sewer, which appeared uninvited and sat heavily on his chest, pinning him down.”

Well, in all my years of trading, I can empathize with Mr. Churchill. That big, black dog is now visiting me and sitting on my chest.

All professional money managers and traders understand that there will be times when they underperform. Mr. Buffett, I believe, said that it can be up to 30% of the time that managers underperform. Mr. Biggs discusses the frustration money managers have with their investors when they do not perform well. As soon as a fund does not perform well, investors usually take the money and run, instead of waiting and being patient. Investors immediately begin to search for someone else who can make them money.

Generally, the good money manager is one who performs well, on average, over a long time frame. Mr. Biggs argues that investors would probably be better off staying with a manager with a proven long term record, rather than going out and searching for superstars and returns, just because of a bad year.

Just some food for thought…

Emini Trading Performance for 2010

2010-12-01T08:02:00.001-05:00

Our trading for 2010 is now completed (we do not trade in December). Our performance for 2010 was disappointing and frustrating. Tradingxyz’s point losses for 2010 were 2.50 points. Depending on the risk level chosen, this would have been:

1% risk = -.5%

2% risk = -1.1%

3.5% risk = -2.5%

This was our first losing year relative to our historical performance. Although the losses were relatively small, they were painful. It is always painful to lose money. In trading it is well known that losses are much more painful and memorable than gains. It is even more painful to underperform, but we will withhold judgement on this until the end of the year, when our performance benchmarks will be computed.

Nonetheless, one of the main aspects of money management and risk control is to not get blown out of the water. Good trading is about preserving capital and having it available in order to capture future opportunities. Our historical performance has been excellent and will return. The loss for 2010 was small, and generally insignificant, when one has a longer term perspective. Our capital has been preserved and we look forward to a much better year of trading in 2011.

Is QE2 Failing?

2010-11-30T07:55:00.003-05:00

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.

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

2010-11-29T07:49:00.001-05:00

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.

Smile and be Thankful...

2010-11-27T17:11:00.000-05:00

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..."

STOCK TRADING SYSTEM

2010-11-24T08:01:00.000-05:00

LONG

LIFE Life Technologies Corp
AES AES Corp
WM Waste Management Inc
CTAS Cintas Corp

Mr. Andrew Redleaf Lecture

2010-11-23T11:07:00.000-05:00

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.

STOCK TRADING METHOD - SYSTEM

2010-11-22T07:37:00.001-05:00

SHORT

COG Cabot Oil & Gas A
RRC Range Resources Corp

Emini Trading System this week

2010-11-20T14:13:00.001-05:00

Two trades were taken this week; an X buy and a Y sell, for 1.25 and 1.00 points.

Mr. Aaron Brown - The Poker Face of Wall Street

2010-11-19T07:30:00.001-05:00

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.

Mr. Barton Biggs and Hedgehogging

2010-11-18T08:53:00.001-05:00

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.

AUTOMATED STOCK TRADING PROGRAM

2010-11-17T07:28:00.000-05:00

LONG

YUM Yum! Brands Inc
RSH RadioShack Corp
COH Coach Inc

CCE Coca-Cola Enterprises
TAP Molson Coors Brewing Co B

MA Mastercard Inc A
MOLX Molex Inc

ITW Illinois Tool Works Inc
FAST Fastenal Co
CTAS Cintas Corp
FSLR First Solar Inc

ICE IntercontinentalExchange
CINF Cincinnati Financial Corp
PRU Prudential Financial Inc
DFS Discover Financial Services
CB Chubb Corp

BTU Peabody Energy Corp

WY Weyerhaeuser Co

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

2010-11-16T08:08:00.002-05:00

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.”

Joke

2010-11-16T07:59:00.002-05:00

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

Mr. Jeremy Grantham's 3Q 2010 Letter

2010-11-15T10:00:00.001-05:00

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

TRADING - STOCK SYSTEM

2010-11-15T08:09:00.000-05:00

LONG

AES AES Corp
RHT Red Hat Inc
LNC Lincoln National Corp

Emini Trading this Week

2010-11-14T10:21:00.001-05:00

No trades this week...

Mr. Jeremy Grantham's Warning and Advice

2010-11-12T07:55:00.002-05:00

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.

STOCK TRADING

2010-11-12T07:54:00.000-05:00

SHORT

OXY Occidental Petroleum

AUTOMATED TRADING - STOCKS

2010-11-11T07:50:00.000-05:00

LONG

RAI Reynolds American Inc

TRADING STOCKS - SYSTEMS

2010-11-10T07:38:00.000-05:00

LONG

MYL Mylan Inc.
MO Altria Group Inc
DPS Dr Pepper Snapple Group

Mr. Aaron Brown - The Poker Face of Wall Street

2010-11-09T08:07:00.002-05:00

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...:)

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

2010-11-08T10:02:00.004-05:00

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.

Emini System Trading This Week

2010-11-06T11:03:00.001-04:00

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!!

Working through Underperformance as a System Trader

2010-11-05T08:28:00.003-04:00

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…