10% Intraday Swing
No one knows the future, but we can play the odds when they are in our favor.
Today was one of those days.
What was looking like a shaky retest now looks like a reverse head & shoulders low (or a triple bottom). For those of you who have been paying attention to both the broader market theories espoused here, as well as the specific trading dynamics, there was money to be made in this environment.
Questions For Your Financial Advisor
A good list for those of you who delegate your investing to an outside adviser.
Consider asking these questions of your advisor during your quarterly and/or 2008 year-end review:
1. What were your adviser's expectations for the stock market's returns in 2008 and how did these expectations compare to the actual results?
2. How did your investment performance compare to that of the major indices? In what areas did you outperform, and in what areas did you underperform -- and why?
3. What was your adviser's economic and credit expectations, and how did these expectations compare to the actual events? Where and why were his assumptions wrong?
4. Did your adviser change his strategy as economic and financial events changed? If he didn't, why not?
5. Did you experience outsized individual stock or large specific industry or sector share price losses? Did your adviser institute a discipline to stop losses, or were your losses allowed to compound? Did your adviser "double down" on poor investments?
6. Ask your adviser whether he "eats is own cooking" -- that is, did he invest along with you in the same investments, and are both of your interests aligned?
Hat tip: Doug Kass
Wall Street Research MSMedia Blogs
Sometimes, these things just all come together at once:
The other day, someone sent me this rant by Scott Ritter (video below). Ritter goes off on a tear, but he makes some valid points. Note the crowd's response not to his criticism of Bush or Congress, but if the media (I find placing so much blame on the press a little weird).
Then this evening, I see an interesting rant by Felix Salmon, Blogonomics: What CFAs Read, referencing another article: Blogs Slow to Influence Financial Advisors. Felix was not than enthralled with the CFA article.
I want to suggest another, perhaps more insightful approach.
The article in question is somewhat mixed in its criticism of blogs -- but it has the sort of common sense bromides that can be applied to almost anything about investing. Like CEOs, or Wall Street research, or the mainstream media -- anything some people accept mindlessly.
Indeed, you can rewrite the article: Anywhere you see the word "Blog" substitute the words "Wall Street Research" or "Corporate CEOs" "Business Press" or "Mainstream Media." The end result is nearly the same.
Here's my rewrites (in italics):
“I don’t want to leave the impression that I would invest a client’s money based on a tip from a Wall Street Research.”
“Many who write articles in the Business Press are not professionals, most are not even licensed to render financial advice.”
"Russ Thornton of Thornton Wealth Management looks to the Mainstream Media for good “talking points” from investors whose investment strategy is similar to his. 'It helps to see how others communicate and share investment concepts so I can become a better communicator myself.' "
"Some Corporate CEOs may offer useful information, but even their fans believe you should approach them skeptically."
Hey, that's pretty sharp stuff!
The article appears to be about blogs, but its really about critical reading and independent thinking. At least, that's my take. Note we previously discussed similar issues in Lose the News . . .
Lose the News (June 2005)
Who Do You Trust? (January 2008)
Investment Strategy Blogs Slow to Influence Financial Advisors
Susan B. Weiner, CFA
Advisor Persepctives, August 19, 2008
Bob Farrell's 10 Rules for Investing
Bob Farrell was a legend at Merrill Lynch & Co. for several decades. Farrell had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987's crash.
He retired as chief stock market analyst at the end of 1992, but continued to occasionally publish. Rumor has it for a humongous donation to Farrell's favorite charity, you can get on his very exclusive email list.
Marketwatch gathered some of Farrell's more famous observations, and republished them as "10 Market Rules to Remember."
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people's heads. It's easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an opposite excess in the other direction
Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras -- excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get cut in half.
As the fever builds, a chorus of "this time it's different" will be heard, even if those exact words are never used. And of course, it -- Human Nature -- never is different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don't expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction -- eventually. comes.
5. The public buys the most at the top and the least at the bottom
That's why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains "make us exuberant; they enhance well-being and promote optimism," says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that "Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks."
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks ("Nifty 50" stocks).
8. Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that as of August 2008, we are on our third reflexive rebound -- the Januuary rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
Even with these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.
9. When all the experts and forecasts agree -- something else is going to happen
As Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?"
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be full invested. Those with more flexible charters might squeek out a smile or two here and there.
Q&A: Paul Desmond of Lowry's Reports (Feb 18, 2006)
Q&A: Paul Desmond of Lowry's, Part II
Ten rules to remember about investing in the stock market
MarketWatch, 6:24 p.m. EDT June 11, 2008
Is the Market Still a Future Indicator?
At this point, you would have thought the Efficient Market Hypothesis would have died a quite death. But as is its wont on Wall Street, myths, bad theories, and old information linger far longer than one would expect.
Today's case in point: The WSJ Ahead of the Tape column today (Predicting What's Next Gets Harder) looks at how much of a future discounting mechanism the markets actually are:
Investors often expect the stock market to behave like a crystal ball. Lately it has made a better rearview mirror.
Conventional wisdom holds that the market efficiently reflects future corporate earnings. This makes sense, as one ostensibly buys stocks in companies to claim bucketfuls of their future profits.
For decades, turns in the stock market typically led earnings by roughly six months. But during the past decade or so, stocks have moved roughly in tandem with, and occasionally lagged, the trajectory of profits, notes Tobias Levkovich, Citigroup's chief U.S. strategist.
I have several favorite examples of where markets simply get it wrong. When I spoke with the reporter on this, I used the credit crunch as exhibit A. It began in August 2007 (though some had been warning about it long before that). Despite all of the obvious problems that were forthcoming, after a minor wobble, stock markets raced ahead. By October 2007, both the Dow Industrials and the S&P500 had set all time highs. So much for that discounting mechanism.
We've seen that sort of extreme mispricing on a fairly regular basis. In March 2000, the market was essentially pricing stocks as if earnings didn't matter, growth could continue far above historical levels indefinitely, and value was irrelevant. How'd that work out?
Three years later, the market priced tech and telecom in a similarly bizarre fashion. Some of our favorite tech and telecom names -- profitable, debt free firms -- were trading below their book value. Some were even trading below cash on hand.
The market had "efficiently" priced a dollar at seventy-five cents.
The most fascinating aspect of this is the opportunity for anyone int he market to identify inefficiencies. Discover where the market has a non random error -- we've called it Variant Perception over the years -- and you have a potentially enormous money making opportunity.
This is the reason why everyone doesn't simply dollar cost average into index funds -- its the lure of the big score. And as the recent list of Hedge Fund Winners and Losers makes clear, the winners reap enormous windfalls:
"All of this suggests the stock market may prove less useful as a leading indicator of profits and economic growth. But it also suggests stocks are likely to get out of balance more often, creating opportunities for savvy investors."
Levkovich points to the "proliferation of hedge funds" as making
markets "increasingly focused on breaking news and short-term swings,
rather than longer-term fundamentals." I would add the narrow niche
focuses used to differentiate amongst funds and raise capital also
contribute to this phenomenon. We end up with a case of the six blind men describing the
elephant, with few seeing the big picture.
To an EMH proponent, however, hedge funds should make markets more,
not less efficient. Their long lock period (when investors cannot take
out cash) means they should have a longer time horizon for investment
themes to play out.
One of my favorite quotes on the subject comes from Yale University economist Robert Shiller. He notes the huge mistake EMH proponents have made: "Just because markets are unpredictable doesn't mean they are efficient." That false leap of logic was one of "the most remarkable errors in the history of economic thought."
Just don't tell certain Traders that. They hate hearing that markets contain a high degree of random action and inefficiencies.
Except for the really clever ones . . .
Predicting What's Next Gets Harder
WSJ August 11, 2008
Lessons Learned From A Dangerous Year
In the beginning of the year, a column I wrote for Real Money discussed some lessons of the past year. It never was moved over to the free site, so here is my belated update.
It is a mix of fundamental, economic, technical and even philosophical lessons that those savvy CEOs, fund managers and individual investors who were paying attention picked up in the recent turmoil.
1) Ignore market rumors: It seemed every time some firm was in trouble, the same gossip was floated that Warren Buffett was about to buy them. Time and again, these tales proved to be unfounded money-losers. This year's most egregious example was Berkshire's imminent purchase of Bear Stearns (BSC).
That The New York Times Dealbook got suckered into printing this just shows you how pernicious these rumors are. The stock was as high as $123 the day of the rumor.
Anyone who bought homebuilders or Bear Stearns stock on the basis of either of these rumors -- or nearly any other stock that had similar rumors floated throughout the year -- lost boatloads of money.
2) Buy sector strength (and avoid sector weakness): It's a truism of real estate: It's better to own a lousy house in a great neighborhood than a great house in a lousy one. And the same is true for stock sectors: Buying mediocre companies in great sectors generated positive results, while great companies in poor sectors struggled.
The losers are obvious: The homebuilders, financials, monoline insurers and retailers all struggled this year. The winners? Anything related to agriculture, solar energy, oil servicing, industrials, software, exporters, infrastructure plays -- even asset-gatherers thrived.
3) Never blindly follow the "big money": Why? Because professionals make dumb mistakes too. Many people chased the so-called smart money into these trades. Unfortunately, all of these trades have proven to be jumbo losers.
4) Day-to-day stock action is mostly noise: This is blasphemy to some people, but it's true: Markets eventually get pricing right. But the key to understanding this is the word "eventually." Over the shorter term, markets frequently under- or overprice a stock before settling into the right approximation of value. This process typically occurs over broad lengths of time.
5) P/E matters less than you think: If that sounds like more blasphemy, look at Google (GOOG) , Apple (AAPL) and Mosaic (MOS) -- they all sported high P/Es at the beginning of 2007 before going much higher. On the other hand, back in January '07, retailers, financials and homebuilders all had reasonably cheap P/Es. (How'd they do over the next 12 months?)
6) Ignore deteriorating fundamentals at your peril: One would think this doesn't need to be said, and yet it does: When the fundamentals of a given market, sector or consumer group are decaying, profit gains are sure to slow.
7) Nothing is more costly than chasing yield: For fixed-income investors, what matters most is not the return on your money, it's the return of your money. Reaching down the risk curve for a few bips of additional yield is one of the dumbest things an investor can ever do.
8) Know what you own: This very basic issue was mostly forgotten in recent years, and it was forgotten by pros and individuals.
Investment banks like Bear Stearns, Morgan Stanley (MS) and Merrill Lynch (MER) , big banks like Citigroup (C) and Washington Mutual (WM) , and GSEs like Fannie Mae (FNM) and Freddie Mac (FRE) were scooping up assets apparently without doing their homework. The complexity of these pools of mortgages almost guarantees that no one truly knows what's in them (see the next rule). If you don't know what you own, how can you properly manage risk?
9) Simple is better than complex: Start with a few million mortgages of varying credit-worthiness and create a series of residential mortgage-backed securities (RMBS) from them. Then take the RMBS and stratify them. Then leverage them up into collateral debt obligations (CDOs). Once that bundling is complete, make complex bets on which layers might default, via credit default swaps (CDS).
Gee, how could anything possibly go wrong with that?!
10) Stick to your core competency:
E*Trade (ETFC) is an online broker; what was it doing writing subprime mortgages?
Why was Bear Stearns running two hedge funds?
Isn't H&R Block a tax preparer? It was making mortgage loans -- why?
And exactly what was GM's expertise in underwriting mortgages? (The snarkier among you might be wondering exactly what business GM's expertise is in.)
Had these companies stuck to what they did best (or least bad), they wouldn't be in as much trouble today.
11) Fess up! Whenever a company runs into trouble, they seem to take a page from the same PR playbook: First, they say nothing. Second, they deny. Finally, they make a begrudging, pitifully small admission. Eventually, the full truth falls out, and the stock tanks with it.
12) Never forget risk management: Consider what could possibly go wrong, and have a plan in place in the event that unlikely possibility comes to pass. If there is to be upside, then there must also be a corresponding and proportional downside.
13) The trend is your friend: Despite the year's parade of horribles, this market cliché was proven true once again. The Dow, S&P 500 and Nasdaq are all higher this year, as their long-term trends have been tested but remain intact.
The exception, the Russell 2000, broke its trend earlier this year. That made trend traders abandon the small-cap index, which has since fallen even further. This confirms the corollary: "except for the bend at the end." As long as the index trend lines stay intact, investors can sleep easy. But once those trendlines break, well, then you better apply some of the earlier lessons (see numbers 2, 3, 4, 6, 7 and 12!).
Looks even truer 8 months later!
Lessons From 2007: A Baker's Dozen
RealMoney.com, 1/2/2008 6:54 AM EST
Hey! It did get moved over . . .
13 Things You Wish You'd Known in 2007
TheStreet.com (01/02/08 - 02:11 PM EST)
Seven Stock Blunders
Along the lines of our earlier post is this nice round up of investing/trading errors via Glenn Curtis:
Ignorance may be bliss, but not knowing why your stocks are failing and money is disappearing from your pockets is a long way from paradise:
1. Ignoring Catalysts
2. Catching the Falling Knife
3. Failing to Consider Macroeconomic Variables
4. Forgetting About Dilution
5. Not Recognizing Seasonal Fluctuations
6. Missing Sector Trends
7. Avoiding Technical Trends
Glenn goes into details on each of these in the full article.
Seven Forehead-Slapping Stock Blunders
Rules for Living from Nassim Taleb
Taleb's top life tips
1. Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.
2. Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.
3. It’s not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.
4. Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act — if you can’t control outcomes, you can control the elegance of your behaviour. You will always have the last word.
5. Don’t disturb complicated systems that have been around for a very long time. We don’t understand their logic. Don’t pollute the planet. Leave it the way we found it, regardless of scientific ‘evidence’.
6. Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.
7. Avoid losers. If you hear someone use the words ‘impossible’, ‘never’, ‘too difficult’ too often, drop him or her from your social network. Never take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).
8. Don’t read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.
9. Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.
10. Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.
click for video
Nassim Nicholas Taleb: the prophet of boom and doom
The Sunday Times, June 1, 2008
The Psychology of Selling
Whenever we discuss sentiment concepts like capitulation or exuberance, we get email asking why. "What's with the touchy-feely crap?" writes a new reader.
One comment summed up this line of thinking perfectly:
"Remember when trading was not all "up in your head"? We've all switched to the marriage counselor's version of investing. Crap."
Actually, trading is always "up in your head" -- but ordinary market conditions mask it. A day like yesterday -- a classic Bear Market rally, with the Dow up 276.74 points, and the Nasdaq gaining more than 3% in the session -- can only occur when sentiment extremes are reached.
Anytime there is a long stretch of asset price depreciation, be it the past 9 months in US equities, or the past 3 years in real estate, the sentiment factors often move to the fore. Consider several psychological factors of sellers: There is remorse for missing highers prices, and a significant price anchoring that occurs with that.
Equity and Housing sellers are similar in that respect. When they miss a given price, all they want to do is get back to it to sell (or buy). How many times have you heard someone say "If only I can get back to break even..." This psychological element of missed opportunity is what underlies the concept of support and resistance lines.
Anchoring plays a big role in the refusal to sell stocks that have fallen. In 2001 and '02, I can't count how many times I heard "I'll sell my Yahoo when it gets back to $200."
In Housing, anchoring its even worse. Without a daily price print, homeowners tend to be even more anchored in past prices. Add in tract developments were homes aree so similar, and its a recipe for the following: "My neighbor got $XYZ last year, and our house is nicer -- we have a new kitchen and a bigger back yard. So we should get at $X plus $50k."
That sort of mental selling analysis is a large part of the reason why there is so much home inventory available for sale. It also explains why prices seem to s l o w l y chase markets down.
Consider the following article about Florida Real Estate auctions. Pay attention to the elements of psychology impacting selling prices:
"Despite the standing-room-only crowd and live music, a recent auction of 22 properties in Port St. Lucie's tony Tesoro community didn't yield a single sale.
It's not that no bids emerged at the June 28 event - it's just that none of them were high enough for the owners of the 16 lots and six homes.
Call it a sign of the times.
One four-bedroom home listed for sale at $3.75 million attracted a high bid of only $1.2 million. Another, a three-bedroom, fetched a $450,000 high bid, though it's on the market for $2.15 million, according to Scott Powell, a Stuart-based appraiser who attended the auction...
What happened at the Tesoro auction is consistent with what agents are seeing around Florida, Boza said.
"Buyers are continuing to look for steep discounts, and sellers are looking for top dollar," he said. "Until sellers readjust their asking prices, there will continue to be an overhang of properties in Florida."
The sellers are stuck in a 2005 or '06 mindset; They are failing to recognize the change in psychology from a period of frantic bidding; they are ignoring the price depreciation, the rise in interest rates and the lack of easy credit.
These are the people who want to sell; The owners who have to sell are a different story.
Property owners balk at low bids at Tesoro auction
Palm Beach Post, Sunday, July 06, 2008
It's a Great Time to Be an Investor !
Jeff Saut recently quoted a WSJ article:
Memo to investors: This is what you get paid for.
Volatility. Stomach-churning drops. Watching your paper wealth evaporate.
Stock market profits aren't free.
Garbage collectors (at least, in non-union towns) know they have to turn up in the morning and pick up people's trash in order to get paid. Piano teachers know they have to teach piano to pay the rent. Shop keepers have to tend to a shop.
Only investors in the stock market expect to be like the lilies of the field. They toil not, neither do they spin. Could Wall Street just send us the checks every month please?
The reality is that investors have to earn their money, through brains and nerves. The brains can mean doing smart things – like buying Apple when it started to turn around. More often they simply not doing dumb things, like buying Pets.com.
The nerves mean not panicking or getting swayed by fear, at the bottom, or greed, at the top.
I cannot disagree with the concepts expressed here -- investing ain't easy, and once it gets shaky, markets separate the Men from the Boys.
There is much to be said for recognizing the myriad difficulties associated with deploying cash, managing risk, allocating assets and preserving capital.
However, I am rather uncomfortable with that title: Why It's a Great Time to Be an Investor.
'Cause it reminds me way too much of the NAR campaign It's a great time to buy or sell a home!
That was from 2006 -- how do did THAT work out?
It's a great time to buy or sell a home! (November 2006)
Analyzing why "It's a great time to buy or sell a home!" (November 2006)
Why It's a Great Time to Be an Investor
WSJ, July 2, 2008 10:38 a.m.