Rhody Trader

There was a recent post by Michael Kahn on his Behind the Headlines blog which he titled Trade the News? I Don’t Think So. The basic point of the piece is that what you read or hear in the media is more or less meaningless in terms of what the market is doing in the present. This is a subject that came up several times in the presentations I did that Traders Expo earlier this month. Michael is exactly right that inexperienced traders and investors expect current news, like the latest earnings headline for a stock, to drive prices.  The fact of the matter, though, is that the market is a discounting mechanism. It’s looking to the future and positioning itself for what’s to come.

Micheal attempts to drive home his point with this example of how things already known were driving the market. At least that’s what I think he was trying to do.

Why did the stock market peak in October 2007. The fundamentals looked great. Bears Stearns was still in business. Subprime had not exploded. There was not such thing as TARP and Bernie Madoff was just the guy who owned the market maker that kept screwing me on executions.

I think maybe based on a purely stock market view he might be right that things were looking fine from a fundamental perspective in the Fall of 2007. If, however, you were looking at what was happening in the money, credit and currency markets you would have known all was not well. They were all roiling in the Summer, well before the stock market peaked.

In fact, I can remember the bond market guys wondering aloud what the heck the stock traders were doing continuing to buy stocks when it was so clear to them that something wicked this way was coming. And not all stock traders were oblivious either. If you look at a chart of the financials you’ll see they were already turned down well before the general market did.

Of course the questions these days are whether financials will be the sector to lead the market out. Some folks think that must be the case. I’m not in that camp. I think while they definitely did get oversold, they are also extremely diluted due to all the new capital and the earnings environment is going to be more challenging. That to me doesn’t add up to strong EPS growth, which in the end is the requirement for a group to become a market leader.

Last week Moolanomy posted How I Save $8,535 Per Year By Not Having A Car. It’s a subject that’s been on my mind for a while now, but has come up at a very interesting time, perhaps prophetically.

Yesterday I was on my way for a drip to spend some time with friends and visit with family down in Rhode Island (I live near Boston). Before I got on the highway I had to fill the tank. Having done that, I began accelerating up the onramp only to lose top gear. Uh-oh. Not good. This is probably going to cost me. Needless to say, I never made it down to RI.

So now I face the prospect of a big repair bill.

Here’s the deal, though. I hardly ever drive. Most weeks the only time I spend on the road is to and from the grocery store. I might make one real drive involving highway travel each month. This is the benefit of living near the subway, which in turn stops close to the office.

With that in mind you can probably understand my reluctance to put a great deal of money into repairing this 10 year old, 100k+ miles car. And by extension you can probably also understand why I’m not too keen on purchasing a replacement. I’m strongling thinking of going the rental/Zip Car route for when I need wheels.

I was totally blown away today when I found out that our much maligned US Men’s National team had managed one of the all time great escapes today. After losing 3-1 to Italy and then getting embarassed by Brazil 3-0 there was basically no chance that the Red, White, and Blue was going to make the semifinal round of the Confederations Cup. After all, it would take a win by 3 goals against Egypt and Brazil pummelling Italy. We had only scored 1 goal so far, Egypt looked very good, and Italy almost never gets pummelled by anyone.

Who would have ever thought Sunday’s final pool play round would see these scores:

Brazil 3 – Italy 0
USA 3 – Egpyt 0

That left Italy, Egypt and the US all on 3 points (1-2 records). Italy and the USA both had -2 goal differentials (-3 for Egypt), but los Americanos advanced as the second place team by virtue of having scored more goals than Italy (4 to 3). Amazing!

Next stop, the first semifinal on Wednesday for a date with Spain. They’re just on a 15 matching record winning streak. We played them pretty close a year or two back in Spain, though, so it might not be a complete blowout.

The Financial Blogger brought up an interesting question.

Which job would you do if you were a millionaire?

Now the question is part of the title of a book which talks about doing what you love and letting the benefits acrue from there. I’ll leave you to read TFB’s post on that subject. For my part I’m just going to ponder what I would do if I were wealthy enough not to require an income.

Part of me says I’d go back into volleyball coaching. I did that for years at the Division I collegiate level, plus ran a juniors club program, and have coached players from ages of about 10 on up. I enjoyed coaching quite a bit and periodically have thoughts of going back. Unfortunately, it beat me up physically, so at this stage it might not be such a great idea. I ain’t gettin’ any younger.

That said, though, education is the core of coaching. I don’t think I’ll ever venture too far from there, in one fashion or another. My trading education blog is something I enjoy doing as a way to help new traders develop. My interests go way beyond trading and the markets, though, so I can see myself working in education in other areas as well.

Maybe I’d even go so far as to get my PhD and teach at the college level. I’ve got a professor friend who’s been pushing me in that direction for ages.

Then there’s writing. I don’t know if I’d ever want to specifically become a “writer” like some authors who seem to churn out book after book, but I definitely have at least one novel in me. I just need to get it out. Writing fiction isn’t quite the same as writing non-fiction, so the fact that I’ve got one book to my credit doesn’t make being able to write a good story a guaranteed thing. I’m going to give it a heck of a try, though!

One thing’s for sure, though. I would definitely continue to trade and invest. I can’t ever see myself getting too far away from the markets.

Barry Ritholtz posted a comment the other day complaining about the number of folks suggesting that we stop the blame game. His expressed point of view is that we most certainly should not allow those who bear responsibility for the mess we’ve gotten into to get by without being indentified. Moolanomy also recently discussed a series of blame based Time articles. I’m fine with all that, but there are two problems I have with the fixation on blaming.

1) Much of the blaming is being done in a “It’s not my fault” way where folks are trying to make themselves look good (or at least avoid looking bad) by pointing the finger at others. Believe me, there is plenty of blame to go around. Anyone trying to tell you that it’s exclusively the fault of one group or institution is either delusional or misrepresenting the facts to suit their own agenda.

2) The process of sorting out what went wrong is almost always best done when the dust settles and rational thinking can be applied to the problem. We are still too close to events to have a properly unbiased general view on things.  The result of trying to sort out blame on the fly tends to be bad decisions made in the attempt to fix or reverse the problems. That’s why I’m not a big fan of this rush to regulation that seems to be going on. It’s almost going to be an over-reaction because that’s the way these things almost always play out.

My major gripe with all this blame business is how Obama and his crew have kept us locked in on blaming the prior administration by constantly droning on about how they “inherited” the current situation. So what? The Bush administration inherited the tech bubble fallout from the Clinton administration. Each administration inherits problems from the prior one. I’d like to see Obama & Co. get over it and stick to forward looking statements. It’s not like he didn’t know what he was getting into. This was a mess well before the election.

TraderMark at Fund My Mutual Fund has a good write up on a proposal that’s been made to require mortgage originators to retain at least 5% exposure to the loans they make. This is one of those regulatory ideas which on the face of it at least seems to have a lot of merit. A contributing factor in the housing bubble was rampant mortgage origination by those who weren’t taking any on any of the risk of the loans they were writing. Such a rule as that proposed would certainly put a clamp on that sort of thing.

I’m a bit uneasy about this particular plan, though. I can’t peg exactly what bothers me, but I see the potential for unexpected outcomes here. For sure, there would be less origination, and I should think that mortgage brokerage would suffer very badly.

Maybe the thing that bothers me is the impact on competition. I think this type of play would tend to mean higher mortgage rates because by taking on more direct credit risk the lenders are going to be more inclined to want to offset with higher rates of return. Plus, less competition probably means the types of rates we are used to seeing would be a thing of the past. Maybe that’s not a bad thing, though.

From a trading/investing perspective, the implication is that mortgage spreads over Treasury rates (or LIBOR) would probably move higher, suggesting shorting a mortgage ETF like MBB against a Treasury one like TLT.

I had the distinct pleasure of finally meeting Brett Steenbarger face-to-face while I was at the Traders Expo a couple weeks back. I’ve known the good doctor for something like four years now. He was a big help in both the development and publishing of my book, The Essentials of Trading, and even wrote the foreward. We’ve had the opportunity to communicate several times over the intervening years, but the Expo was the first time we actually got to meet.

Brett recently posted on the subject of blog growth. He’s been nothing short of prolific in his writing over the years, including bloggging and books and everything else. At times I’m in awe of how much he churns out. Of course I do my fair share of writing too. My forex analyst job, after all, is all about writing. It’s just not so much in the public domain.  Even still, the amount of verbiage Brett puts out is impressive by any measure when you consider how much travelling and other stuff he does as well.

In his blogging post Brett makes five key points.

1. Don’t be afraid to start small
2. Success is a team sport
3. Promote ideas, not people
4. Stick to your niche
5. Maintain integrity

I’ve been blogging since 2006, though I probably didn’t really get serious about it until 2007. It’s been a massive learning experience and the points above are all part of that learning. Brett’s basic theme is that if you provide value and are honest in your dealing with readers and others people will gravitate toward you. This is what’s called organic growth and I can tell you from personal experience that it’s the most rewarding.

Now Brett and I do differ in that he only markets books while I sell a few different type of trading education products, and as a result promotion is part of the equation for me where it isn’t for Brett. The same principles apply, though. It’s about value, quality, and integrity. If you’re thinking to start a blog or a business, keep those things in mind and you’ll be much more likely to achieve long-term success.

The whole “The dollar shouldn’t be the only choice for global reserve currency” discussion is active again today thanks to the BRIC summit. This, of course, has been a running theme in the markets for some time now, with China and Russia being the two main instigators to start. The communique from today”s meeting made the following statement:

…there is a strong need for a stable, predictable and more diversified global monetary system…

This is basically a nothing statement. As Ducati and others have commented, there are all kinds of motivations for all this.

As has been stated repeatedly for months now, there’s basically no chance of any other currency. The reason the USD is at the top of the heap is because of the breadth and depth of the US financial markets and the relative social/political stability of the country. These aren’t things which can be easily or quickly replicated. Any move to create a second reserve currency would require building deeper regional financial markets, perhaps by merging them geographically. The Eurozone has moved in that direction with exchange mergers, but is still well behind the volume done by US institutions.

Even if something like IMF drawing rights, or some other multi-national institution, is used as the basis for a new currency there is still the question of why money would move  into them. Countries, companies, and institutions do trade in the USD and invest in USD-demononated assets. While an IMF “currency” could perhaps be developed for trade, there’s still not nearly enough of an underlying financial or asset structure in which investments could be made.

The USD is certainly bound to be progressively less influential over time. If, however, you see short-term reactions to “lets ditch the dollar” comments then you’re probably seeing a good fade opportunity, or just the market using it as an excuse to sell greenbacks.

Roger at Random Roger posted a question he received that basically asked him whether he believed in efficient markets. That question went:

Do you believe that the markets have priced all known public knowledge and that it is quite challenging to forecast the future?

Actually, the parts about pricing in all known public knowledge and forecasting the future are seperate things. In-efficient markets aren’t necessarily easy to forecast, after all. But I want to comment on the first bit.

I have the advantage of watching the markets all day long.

Then again, maybe that’s a disadvantage. I’ll leave that up to the reader to decided.

Anyway, doing my daily forex market analyst work I get to see how the market reacts to data. The one thing that is very clear to me is that the distribution of and reaction to new information is nothing close to instantaneous. I have seen over and over again some meaningful news item come out and it take considerable time for the market to react. And of course sometimes the market hyper-reacts. Traders do not all get the information instantly, and most definitely do not react to that new data instantly. It takes time for things to filter through.

The forex market is a perfect example. If data comes out during US market hours when Asian traders are sleeping, when are they going to react to that information and make it market of their analysis and/or trading? Not until some point many hours after its release.

The other thing I would toss in is this. Not everyone who will trade based on a certain bit of information will even look at that info until well after the fact because they were not immediately focused on the market in question. A perfect example is someone who trades the stock market and periodically looks for new stocks to play. They might have a stock come through their screener and they go back to do the fundamental analysis. It’s only at that point that they are incorporating prior information into their analysis.

This is a big part of why from the time I first heard of the Efficient Market Hypothesis I thought it was a crock.

Got a big week coming up. No, it doesn’t have anything to do with the markets. I’m talking about soccer - football to my friends across the pond. The 2009 FIFA Confederations Cup is going on in South Africa. Today the Red, White, and Blue face off against Italy (2:30pm Eastern). Fans of the beautiful game will recall the last time the two sides met up, back in the 2006 World Cup. It ended up in a hard fought draw that I contend was ruined by poor officiating (ejections saw the game end 10 vs 9).

The USA gets no break in the second match of the tournament either. On Thursday Brazil is the opponent. The supposedly weak member of the pool (relatively speaking) will be Egypt, which Los Americanos will play on the weekend.

The top two teams advance in the pool advance for a crossover semifinal round against the top two from the other pool next week. Given the draw, the odds don’t look great for the US to come out. I’d just like to see them play consistently well.