..so predictable...!!

Today, the FTSE-100 has been traded between 4330-4270 so nicely with 1% zig-zags between support and resistance that I am blown away. There were at least 8 beautifull trade opportunities within the day. With a standard trade size of £10'000, one could easily have made about £1000. Who's to say one cannot get into these markets during a recession??!

A Ponzi scheme certainly doesn't help...

I woke up this Monday (15th December) to check the business news and what a nasty surprise this was!! One of the largest frauds in history that could cost around $50bn has been uncovered. A certain polite looking gentleman who used to to direct and sit in several prestige posts, such as heading the NASDAQ exchange, has been accused of transfering primary investments of some clients to simulate profits and returns for other clients. Something like this is well known as a Ponzi scheme, a simple idea that can make the organizors of such schemes super rich in super short time.

Michael Covel's blog, one of the blogs that I read had a funny link the other day. A link to an article on how the Social Security Administration really is a big Ponzi scheme. I thought a good joke and it carries some truth but then looking at the comments I found that these people are quite serrious and really believe this stuff!!??
For one the SSA certainly does not qualify as a Ponzi scheme, it certainly does not promise huge returns, we all know that it is a necessity of a social system and that will not make us rich but the idea is to help the less fortunate among us. In fact this is just criticism of a socialist policy and calling it fraud or ponzi scheme's is ridiculously far-fetched and simply - hmmm, how should I say this, well - silly!!

http://blog.mises.org/archives/009099.asp

Turbos

You may have heared about Turbos recenty! These are relatively new derivative products that are linked to various shares and indexes. Hehehe, I know you are thinking "YATDP" - YetAnotherTradingDerivativesProduct, but this one looks quite sweet.

Turbos are interesting for at least these reasons:

1. Price Transparent - Turbos are listed & traded on the London Stock Exchange
2. No Stamp Duty - even thought Turbos are listed products, the no stamp duty "treat" applies :-)
3. Geared - the higher the price of Turbo the more gearing it provides. There are usually several Turbos for an asset with different payouts and risks asociated with, so trader can pick the most suited gearing levels.
4. Guaranteed Stop Loss - Contracts usually come in 3 month expiry times and have a Knock Out levels. It is the same as the strike level. For a long turbo, the turbo has value as long as the index is above the knock out level, and for a short, below that level. Otherwise position gets closed even with up or down gaps in the derivative. This guaranteed stop loss feature is incorporated into the derivative price, there are hence no extra charges.

They are accesible through most private investment brokers and certainly deserve some attention.

Monday 8th Dec 2008

FTSE rose to 4300 by 6% today. A good time to sell short might be tomorrow, this depends on overnight movements in markets. However 4400-4600 is a strong resistance against upward moves, so plunging into any long trades with both feet would yet not be a wise move.

Todays' bullish world market performance (Nikkei 5.20%, DAX 7.63%, CAC 8.40%) is attributed to Barack Obama's rescue package plans [see http://biz.yahoo.com/ap/081208/wall_street.html].

Placing a Stop loss the RIGHT way

Stop loss orders are incredibly important in managing transaction risks, as is diversification and optimal asset exposure time-spans. So how do we place good stop loss orders?

• Usual approach - given an entry point at which I get into a trade I just place the stop loss p% below the buy price (where p depends on a recent volatility window, as measured by range or standard deviation)


• This is often a reasonable strategy as my entry point would be at some optimal price pattern (or fundamental land-mark) and hence the stop loss should be relatively well place.


• However it is quite a blind-folded approach... somewhat like a defender passing back to your own goaly without looking whether the goalie is really there - see this metaphor in action. Usually this would work, but it could cost you a lot if the goalie isn't there. Hence when placing a stop loss, make sure it is reasonably well placed. Bruce Konver sumarises this nicely in Market Wizards [pp. 65]: Whenever I enter a position, I have a predetermined stop. I know where I'm getting out before I get in. The position size on a trade is determined by the stop. If the market is in the midst of a trading range, it makes no sense to put your stop within that range since you are likely to be taken out. I always place my stopn beyond some technical barrier.

There are 3 important elements (or reasons) related to stop losses:

• The reason to place a stop loss by inspection rather than "blind" rule of thumb rule is not to get executed too easily when I as a trader strongly believe the market will move the opposite direction, however when I also want to avoid a loosing position in case my initial market conviction was faulty.


• The transaction size is determined based on the stop loss, the farther the stop loss the smaller the transaction size should be.


• The stop loss should not be static, it should change with price. To illustrate, I have a position that moves in my favour by quite a few points (maybe the initial stop loss - buy margin), now I want to hang on to this open position in order to ride the current trend for a little longer, but I also feel I want to protect my gains (this is the only safe way of trading a trend). I therefore move my stop loss to a higher price. So that 1st I protect some of my gains, and 2nd, the new stop loss is placed into a reasonably intelligent / significant price landmark, so that it does not execute with the next price swing, (the stop loss must be based on a good measure of volatily, I will run some empiricall experiments on this when I get spare time).

Catching the big Moves

Most trading seems to be sideways (I'll do an empiricall analysis sometime soon, when I get a spare moment), however at breakout points strong trending action tends to occur and this are the best places to get into positions with good stop loss order strategy. Especially then (with a loss limitting strategy) when you are wrong, it doesn't matter too much!! Famed trader Bruce Konver talks about this in Market Wizards [pp. 59]: Michael Marcus taught me one other thing that is absolutely critical - You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgement, being wrong, making your next best judgement, being wrong, being wrong, making your third best judgement, and then doubling your money.

I just experienced such a situation yesterday. Friday close & Monday open FTSE-100 rolling bet price was at around 4200 and I felt dead sure on selling short. Unfortunatelly I lacked the concentration & peace of mind to execute this trade, during the day the price fell down to 4000 with literally no big %tage up jumps that could trigger a good stop loss with reasonable bet sizes. With a 20 bet-per-point transaction size this would have produced a £4000 profit with only ever giving a virtual loss of around £500 during the trading day. The best thing of all, if I didn't manage to sell at end of trading, I would be able to sell for even less the next day untill 10am Greenwich Time.

You could say it is a shame I missed this trade, but this is completely beside the point. I have learned a lot by observing what my trade action would have been without putting money at stake. Next time a market price builds up that I am completely confident about its point moves, I hope I will have the guts to listen to my intuition and trade on it. Quite obviously it is conforting and true what Robert Petcher sais about this psychological problem all serrious traders epxerience at a certain point: It is difficult enough to develop a method that works. It then takes experience to believe what your trading method & intuition is telling you. But the thoughest task of all is turning analysis into money.

New Wave of Government Intervention

Wednesday & Tuesday have seen positive market action since that huge 10% rise in Western Europe Markets. The current consolidation seems to have some momentum!!!

New Wave of interventions have been anounced this week:

• Monday, the UK anounced it will cut VAT to 15% from 1st Dec. 2008
• European Union anounced a $200bn euro recovery plan http://news.bbc.co.uk/1/hi/business/7749382.stm
• Barack Obama began detailing his rescue plans for the economy, http://biz.yahoo.com/cbsm-top/081126/210d57da98961961a24ddd903b6b0cec.html
• China Slashes interest rates by 1.08% (biggest decrease in 11 years) http://biz.yahoo.com/ap/081126/as_china_economy.html

However the crisis is on, and untill any help propagates through the system many months will pass.

Jobless claims remain at recessionary levels, Americans cut back on their spending by the largest amount since the 2001 terrorist attacks, orders to U.S. factories plummeted and homes sales fell to the lowest level in nearly 18 years. [source: http://biz.yahoo.com/ap/081126/financial_meltdown.html]

9.84% Up day

The FTSE-100 opened with an up gap and rallied towards the end of the trading session to close at 4153 points. The psychological price level of 4K is being highly disputed by nervous market participants, as Citigroup receives a bail out package of over 20bl and the UK treasury announces further tax rate cuts in an effort to inspire more consumer spending and pump money into the economy.

Germany and France have also seen over 10% growth, whereas Nikkei 225 performed poorly with 2.7%.

To be honest it seems the 4K level will not be given up without a fight. It is always easier to find reasons for a move after it has occured and I am certain nobody expected such a strong rally on European Markets today.

Monday... the last week of November

Here we are :-), the month of November is comming to an end, and what a month it has been. October 2008 will unquestionably go down in history as black month on world markets.

However November wasn't much brighter either, on the 20th (Thursday) the FTSE-100 fell below the psychological 4000 level and Friday has seen more trading down in these regions. The Dow as well as the just mentioned british index are at their lowest for over 5 years this month.

More falling is to be anticipated, governments around the world however are actively fighting the oncoming avalanches of disaster, such as a sheduled statement in the UK on Monday 24th and plans to reduce VAT to 15%, see http://news.bbc.co.uk/1/hi/business/7739749.stm, http://news.bbc.co.uk/1/hi/uk_politics/7744273.stm

As for the comming week, who knows, it might be a very bad week indeed, however as for tomorrow FTSE-100 will likely open with a positive gap, due to the large Dow Jones gains on late trading hours on Friday, positive intervention plans by UK government and finally 3 continuous days of ~10% drops might call for some new interest from traders.

A lot of hope has been lost and long term or even mid term positive trends are extremely unlikely. But there is still hope, by mid-2010 we might be out of this recession http://biz.yahoo.com/ap/081123/lt_apec_summit.html!

hehe, oh my :-((

Trading in the current environment!

hmm.... I am really starting to believe that trading is again becomming somewhat less riskier. With most governments now having had reacted to the immediate crisis events. Secondly volatility is calming somewhat since October.

1st - Markets have been too volatile for most risk limiting strategies. Even with the correct anticipation of price moves, it was very easy to end up on wrong side of the trade. Stop-loss orders have recently been very prone to execution due to outrageous volatility.
2nd - Rescue and other aid packages by governments cannot by any practicall means be predicted. This just ment more volatility and scope for unanticipated price action.

I'm starting to get convinced again that going short or long rather than staying out, is the way to go forward. Rescue package approval has strongly slowed down, and volatility seems to be a little more behaved. Anyway, I know what way I'm going to trade ;-).... selling short, except anticipated market corrections on the long side, but search for proper growth is just a little to soon.

Market update, 2 weeks after Obama election

It's been exactly 2 weeks since the election of Barack Obama, who is sheduled to be sworn in as the 44th President of the USA on January 20, 2009.

On the day of election the Dow Jones was up 1.5% from previous close, in fact 4th November was the highest price for past month. Since Obama's election, markets haven't been doing too greatly, but also there is some talk about an easing situation in media. Compared to month of October this clearly seems to be the case, however the bottom of markets is ony beeing tested at 8K (Dow Jones), 4K (FTSE-100), 7K (Nikkei 225), 4.2K (DAX), 3K (CAC 40) and another drastic drop might be around the corner. For the next 2 days or so, we might however see some positive consolidation, as the 8K (Dow Jones) bottom is beeing tested.

More rescue packages have been approved by the likes of emerging economies such as China (over $500bl) and today a drop in inflation was reported to 4.5% from 5.2% (United Kingdom). Yet the crisis may be still worse than it appears. There are huge manufacturing decreases, redundancies and problems (at least unexpected changes) with implementing rescue packages are starting to creep out with the USA $700bl plan.

Cornered into an illiquid market

Short selling is a simple technique that enables traders to make profit on down trends. The underlying process involves borrowing shares, selling them instantly, rebuying the same number of shares at a later point and returning them to the lender. The lender makes their profit from a small interest paid for the privilege of borrowing shares and of course in their best interest hopes for share prices to go up.

I came across the VW/Porshe - Hedge Funds story on BBC today, see http://news.bbc.co.uk/1/hi/business/7697082.stm. Share prices VW have soared by over 300% in the past 3 business days. Many Hedge Funds found themselves in lossy short positions after Porshe anounced that it owns over 70% of VW. These short positions got cornered, not enough shares on the free market as most are owned by Porshe.

"'Each and any short-seller in the world is trying to close up their position and there is no way they can do it, except for trying to buy like mad,' said Heino Ruland, an analyst at FrankfurtFinanz. What is upsetting the hedge funds is that if between 10% and 15% of VW shares were on loan to be shorted and only just over 5% were available in the market, it is likely that many of the funds that shorted VW had borrowed the shares from Porsche." [source: BBC article]

VW is now clearly overvalued, so what does this mean?!! I wonder at what point the shares start falling? "VW's shares peaked on Tuesday at 1,005 euros, valuing the company at 296bn euros ($370bn; £237bn), which is well over the $343bn value of Exxon Mobil - previously the world's most valuable company. Last Friday, VW's shares closed below 200 euros. As an indication of how extreme the market valuation is, last year Exxon made profits of $41bn on sales of $390bn while Volkswagen managed profits of about $8bn on sales of $136bn." [source: BBC article]

This is a stock to watch, maybe once the lossy short positions are accounted for the stock will plummet down?!!

Big price rises!!

Hehe, no chance... what we are seing in the market for past 2 days (28th-29th October) is overvalued madness. Apparently the 10% up on the US markets was beeing credited to planned US interest rate cuts expected later today, however financial commentators lacked enough factual explanation to justify current market behaviour. Recession is underway with a lot of bad quarterly reports and it is pretty clear that whatever interest rate cuts will be, tomorrow (very latest by friday) we will see more strong drops on markets!

As anticipated...

Just check out last paragraph of my previous post, go on, check it! You will notice that the expected fall has occured today, what's more it was a very volatile trading session again. The British Markets closed down with -4.46% loss of its value. The company that I've been tracking as an example (ANTO.L in the top UK 100 by capitalisation) experienced volatility of up to 10% today...
Wait, let me re-iterate that, the blue chip metal-mining company saw 10% volatility. Only reaction that comes to mind is, wow, because this is not a single case of such volatility, in blue chips these days.

To explain, the Asian markets started daily trading with a horrible nearly 7% drop on NIKKEI 225. Followed by other eastern markets doing rather badly and when western europe opened up the fall continued with now 6:30pm (Greenwich Time) the DowJones is craweling at 8600, meaning -3.65% loss.

A lot of these drops are attributed to some sort of realisation by the investors that eventhought credit markets are improving, everybody else is now going into recession.

See the following articles that will help summarise "events":
http://biz.yahoo.com/ap/081022/world_markets.html
http://biz.yahoo.com/ap/081022/wall_street.html
http://news.bbc.co.uk/1/hi/business/7684216.stm
http://biz.yahoo.com/ap/081022/oil_prices.html
http://ekonomika.sme.sk/c/4135938/svetova-ekonomika-smeruje-do-recesie-euro-pada.html

I think we are now in vain looking for explanations, it is clear markets will be volatile and generally on the down side for big part of near time to come. Traders will still however try to make profits in short term, so we will see upswings and drops as investors take profits (or losses while they are still alive :-).

Volatility can be great & gloomy

As I wrote on October 14, 2008 it is becoming clear we are close to the bottom of largest market falls, but a recession is what we are just enterying. However as this is happening the worse falls are behind us and markets are now looking to find their bottoms. This means large volatility, and brings plenty of opportunity to make money, but also to loose some.

Caution is hence advised. I recently started day trading, and it was not uncommon to see in stocks that I traded, such as ANTO.L (a large in the top 100 by capitalisation in UK) moves that ranged over 10% during a trading session.

Anyway, a lot, really a lot, of chaotic trading seems to be going on at the moment. These are dangerous times and predicting market direction is hard, lets look at tomorrow. The previous 2 days have seen some growth of market prices again, and today there was slight drop, most of it starting on the Dow Jones after British markets closed at 4:30pm (Greenwich Time), hmm... I'm
thinking now tomorrow might be a negative roller coster as traders sell some of the growth they accumulated over the past up days. Let's just see what will happen tomorrow ;-) !

Hedge Fund: StrategyCapital

• Funny :-D - http://www.strategerycapital.com/
• Wall Street Gossip - http://dealbreaker.com/

Close to the bottom??!

As I wrote on Friday 17th October the "Black Friday of 2008" has reached shores of global markets. Looking at past crises what follows after such days is a lot of extremely volatile sideways action and a possibility of market bottom beeing reached. Every individual crisis is handled differently with varying macro variables involved. Hence it is difficult to say whether a natural market bottom is close.

Given the current environment and efforts my bet is that there will be further drops but some sense of stability returning into markets. Maybe the worst panic has been shielded but an economic downturn is not over yet!! At least not for some market regions, let us remind ourselves that recent years have initiated some economies becoming more potent now than ever.

Yesterday (13th October) markets saw their White Monday of 2008. Over the weekend European leaders have finally agreed on coordinated rescue action, over $2 trillion were put on the line as off Monday in guarantees and emergency measures to save banks in Europe.

The current crisis prevention efforts have prevented the worst for now. Monday and today have seen good bullish price bursts. However rescue efforts create a number of deep problems. To name a couple,

• huge budget deficits, this will put a lot of strain on population and take time to heal.
• due to the current scare it is also clear markets will become over-regulated, this will criple free trade mechanics and it is difficult to say to what extent will negatively affect markets.
• even thought we are in a recession inflation risks are still very real, in the UK today reached 5.2% as opposed to government's target of 2%.

In the end of day, specifically risks of Securitised Mortgage Backed Assets are just beeing shifted from private sector onto thegovernment, it does not dissapear. There is no magic tric to this, we will have to deal with this pickle!

10th October 2008 - the Black Friday of 2008

We have see large losses on world markets for the past two weeks. You may wonder why then did I pick today.

Well it's pretty simple actually, and has to do more with psychology than with real economy. This week served to confirm that feelings are now taking the larger part of healthy judgement.

Last week 29th Sept - 3rd Sept, was full of expectations. Monday the House of Representatives voted against the $700b bail out plan, hopes were still high thought after wednesday senate voted in favour of a slightly tweaked $700b rescue plan and finally friday the rescue bill did pass the House. It was thought that this should ease the crisis, some even hoped for a miracle. To most traders thought it was always clear the question is not UP or DOWN but the severety of the market DOWN.

The $700b rescue bill didn't do the trick ;-)! Monday 6th Sept was a complete let down, as we saw FTSE go down by nearly 8% and other world markets following this trend. In fact this was a clear sign that the $700b came too late. Whats more, on wednesday 8th Sept UK government anounced its rescue plan worth dozen billion pounds the markets still fell. Thursday saw coordinated efforts of 7 central banks lowering interest rates, to no avail. Well and today came the cherry of the week, Nikkei dropped nearly 10% eventhought the government anounced that they'll pump several billion dollars into its markets.

I could carry on mentioning a plethoria of rescue efforts by governments and regulators, let me just say that the UK markets have lost nearly 20% of its value this week, so have the US and Nikkei has lost twice as much as during the 1987 crisi. We are way past the fundamentals now, this is a full on crisis, comparable to 1987, 1970s, 1929.

We have reached a point where economics stops making sense and investor psychology takes over. Let me rephrase, economical incentives in form of regulation and rescue efforts should logically help, however panic has spread and nobody wants to own anything in the markets anymore, investor trust is gone!! This is just panic.....

Rebuilding trust takes time, which is the only thing we never have enough off.

another 100 year move, woohooo!

so here we go again a 9.4% drop on Nikkei this wednesday 8th Oct 2008, triggered by previous days drop of Dow by more than 5.1%, and now the European markets responded with multiple percent drops in the first trading hours :-)

I think it's obvious that we are now in a panic more than in just an economic crisis. All the drops on world markets propagate like a chain reaction with moves that are theoretically extremely unlikely (given standard capital market theory), and all this is still happening even with the various government rescue plans beeing anounced.

Today UK government unveiled their rescue plan, which compared to the US is tiny but clearly better. Even then the FTSE-100 fell with more than 90 constituents showing a drop in price!!

7.85% - the market's going down baby!

So what's up with that, a hundred year move is occuring a couple of times every two week these days. I mean given the current volatility, we can pretty much throw most of EMH out of the window. It ought to be understood that moves like this certainly violate any sense of Normal density distribution of returns.

Lets face it EMH is a crappy, oops, sorry lets use other words here... mhmm, incomplete model of financial markets. Maybe we should give a chance to FMH, AMH, or George Soros' Reflexivity Theory!!

George Soros

I wanted to mention this gentleman for a while. He's best well known as the man who broke the Bank of England. His Quantum fund was behind the huge short selling of British Pound on the 16th September 1992, that brought it onto its knees.

Other than that instead of me repeating information that is already out there, definitely check out wikipedia article or much better the numerous books he wrote. In short, Soros is a philantroper, phylosopher and a successfull fund investor.

What I like about this guy are his thoughtfull insides into current issues. He's also a man who is not scared to stand up for the right thing he believes into. Soros also acknowledges that he can be wrong and doesn't make an issue of it but accepts the world as it is, that it is full of biased opinions.

Check out some of his interviews available online:

• http://uk.youtube.com/watch?v=0zzQk8IwSJE
• http://uk.youtube.com/watch?v=Nnf62Uhl3ac&feature=related
• http://uk.youtube.com/watch?v=_PeEzg8xFO8&feature=related

Rescue Bill passed!

I was just reading an article about Alternative solutions to the currently discussed $700 rescue bill when I checked the news to find the House has passed it. http://biz.yahoo.com/ap/081003/financial_meltdown.html

As I was reading I started to be more convinced that the bill isn't a fair solution and may have many implementation problems. I think Nouriel Roubini's quote summs up nicely, the feelings of so many people who opposed this bill:

It is pathetic that Congress did not consult any of the many professional economists that have presented – many on the Monitor Finance blog forum – alternative plans that were more fair and efficient. This is again a case of privatising the gains and socialising the losses; a bail-out and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this treasury scam that does little to help millions of distressed, debt-saddled home-owners."

or maybe "yes" after all???

Friday 3rd October 2008 - the House of Representatives of United States Congress is to vote on an ammended version of the $700bn rescue package.

The ammended version still consists of a $700bn made available to the Secretary of Treasury for buying out the troubled Mortgage backed Securities, however the package now also includes $100bn worth of tax breaks and increased government's guarantee on savings from $100,000 to $250,000.

• http://biz.yahoo.com/ap/081003/wall_street.html
• http://news.bbc.co.uk/1/hi/world/americas/7649822.stm

Only on monday the initial version of the rescue package has been declined by the House however later this week a slightly changed version of it has passed the Senate and now needs final approval by the House. Check out how the Senate and House of Representatives work - http://en.wikipedia.org/wiki/Concurrent_majority

It is now 6:30 Greenwich time and the House should be voting soon on the "Emergency Economic Stabilization Act of 2008", the expectations are very high and markets have been extremely volatile this week. FTSE-100 incrased by over 2% in the last trading hours and the Dow Jones is up by 2.80%

An open letter to the congressed endorsed by over 200 economists pointed out the pitfalls of the current rescue plans [see: http://freakonomics.blogs.nytimes.com/2008/09/23/economists-on-the-bailout/]

I am doubtfull the rescue package will pass, however there is a lot at stake for some high-profile characters and only a couple votes are needed to shift the cards around...

So no approval, hmm...

Rescue package didn't gain congressional backing. There was always the possibility of this happening, the rescue package of $700b announced on 19th September has failed to get approval by lawmakers. The effect was a fall of UK's FTSE 100 index by 3% before recovering to rise to 0.3% by later morning hours. Biggest losers was the banking sector in the UK, with HBOS down 10% and Royal Bank of Scotland 10% lower. Relevant articles can be found on http://news.bbc.co.uk/1/hi/business/7643441.stm and http://biz.yahoo.com/ap/080930/wall_street.html.

• Dow Jones fell on Monday 29th by 6.98% (777.68 points) one of the largest one day drops ever
  
• In the UK, FTSE 100 fell by 3% early morning but recovered quickly. Hopes in Europe are still strong on getting a rescue package approved soon.

THOROUGHLY understanding the crisis

Today I've received my regular research newsletter from NBER (National Bureau of Economic Research). Among the working papers I came accross a nice in-depth analysis of the subprime crisis, and the underlying products and system that can be blamed for the current crisis.

I have to warn all u keen and interested readers out there - the paper is a good 90 pages long :-P. Here it is:

http://papers.nber.org/papers/w14358 - The Panic of 2007 by Gary B. Gorton.

REASONS for this crisis

As a follow up to my previous blog post, I would like you to understand the system behind bad loans that has brought so many companies into turmoil recently. I found a number of videos by khanacademy on youtube, that do a pretty good job at summarising the subprime crisis.

1. http://uk.youtube.com/watch?v=oosYQHq2hwE&feature=related
2. http://uk.youtube.com/watch?v=eYBlfxGIk28&feature=related
3. http://uk.youtube.com/watch?v=q0oSKmC3Mfc&feature=related
4. http://uk.youtube.com/watch?v=XjoJ9UF2hqg&feature=related
5. http://uk.youtube.com/watch?v=8IR5LefXVPY&feature=related
6. http://uk.youtube.com/watch?v=wYAhlTHIBT4&NR=1
7. http://uk.youtube.com/watch?v=aAfMps_VyOY&feature=related
8. http://uk.youtube.com/watch?v=s6UYa2nwaDw&feature=related

The first 3 videos look at Mortgage backed Securities, 4th clip explains CDOs, and remaining 4 videos address housing market and the mortgage system that was at fault. Carefully watch these youtube videos, they explain the problem in its entirety. I found them extremely easy to follow so I'm sure you will as well and maybe even easier.

FTSE-100 & 19th September

Wow, the current stock-markets are serriously volatile!

The 19th Sept 2008 (last Friday) has seen an 8% rise on the FTSE-100. The biggest rise since its inception on 3 January 1984. This was the reaction to US, Bush backed plan to pump $700bn into the markets http://news.bbc.co.uk/1/hi/business/7628144.stm. Even thought this plan still needs congress approval (which it is expected to get next week, before the pre-election break commences), it has immediately spurred immense optimisim within investor circles.

A 700bn fund that promises to buy out a lot of bad loans and CMOs, CDOs, ... is a pretty hefty rescue package. It is a real strategy / plan rather than tactical ad-hoc case based interventions that we have seen up to this point.

A couple links to nice educational videos about the products behind the mortgage/debt crisis are below:

• Mortgage Backed Securities - http://www.youtube.com/watch?v=DHLcD405VsI&feature=related
• Structured Securities - http://www.youtube.com/watch?v=-Ycjn8xzszA&feature=related
• Asset Backed Securities - http://www.youtube.com/watch?v=3_pRi0BThJM&feature=related

have fun!!

Lehman, Fannie and Freddie

Wow!! Yesterday (Monday 15th Sept 2008) the FTSE-100 fell from Fridays' closing price 5,416.70 to 5,204.20, nearly a 4% drop in a day, some markets falling even harder. So what can we identify as a reason for the drop. Well, the fourth largest investment bank - Lehman Brothers has filed for bancrupcy, Meryll Lynch is getting ready for a takeover and AIG has some problems too. However all this didn't come quite too unexpected. We were in huge trouble since the Subprime crises erupted 14 months ago. What we've seen since then, was a lot of patching and quick-fixing. Banks, such as Bear Sterns or Northern Rock among others being rescued, inflation targets beeing ignored for the price of cheap cash and the highly controversial rescue of Mortgage Giants Freddie and Fennie Mac http://news.bbc.co.uk/1/hi/business/7603946.stm.

The problem with pumping money into these companies are numerous-fold. First off, tax-payers are paying for something they should not be be paying for in a fair economy. The system is shaken up already, consumer confidence is very, very low!! Nobody knows how much more real estate will fall, people are more likely then ever to put off home buying in the current climate. Another real problem, when the government steps in to rescue a private financial firm it encourages other firms to engage in risky behaviour too [see http://biz.yahoo.com/ap/080915/paulson_markets.html].

Most people knew a time would come when the patching becomes unbearable. Untill now all that was done was simply putting off of a crisis further back that cannot be avoided anyway. Jim Rodgers explains this nicely in his August 2008 interview for CNBC:


Jim Rodgers - CNBC video (August interview)
http://www.cnbc.com/id/15840232?video=835801384


Even the biggest of the biggest Bulls now see that we are going into a pretty hard recession. A recession always happens in one of two possible ways:

1. Markets fall hard and painfully, but the recession tends to be shorter
2. A crisis is put off by government intervention for so long, that when eventually a recession happens it takes much longer for it to come to an end.

The second point is obvious if one thinks about the idea a little bit. There is something inevitable about rescuing badly managed businesses, were management was incapable of adapting to shrinkage in consumer spending and minimising loses responsibly. In situations such as these, responsible companies survive and the badly managed ones will not. In a democratic society maybe we shouldn't let them. Anybody can do well in a healthy economy, however when hard times come around, the bad ones need to go and they eventually will. The question is how long it will take for them to go away; long vs. short recession?!?!

For those on the left side of political spectrum I will say only this, I am too, but saving badly managed businesses is not right, not right, not in a free economy! We should have and many countries (not all) do have enough social nets to take care of people who lose their livelihoods.

To Conclude

There are three things I would like to conjure from this little Tuesday post :-)

1. In capitalistic economy we should be socially responsible to people, however not to badly managed businesses even if they are in a recession. There is no reason we should all pay for mistakes and incompetences of a small group of people.
2. Recessions are inevitable in the free markets.
3. We are currently in a very recessive economic environment, and I am certainly bearish on the UK stock market and I have been for a while. That does not mean there are no mid-term opportunities, what it means is that short selling is now the way to go!!

Stock-market screensaver

This is a little application I wrote during first 3 days of my PhD at Loughborough. It is a screensaver style financial data screen - the type that appears on TV channels such as Bloomberg and CNBC. Still written on the old .net 1.1 platform, it has an easily extensible 3-tier design. Data is accessed via yahoo.finance.com, hence data might be delayed (stock-prices delayed by 15 minutes) and the accuracy of data cannot be guaranteed. However if you are looking for a fun & cool financial data screen than don't look any further ;-). The application has following features:

• FTSE-100 charts display area
• Major Currencies display area
• Stockprice ticker (15 minutes delayed)
• Currency ticker
• News feed display area (via RSS)
• Settings: ticker speed, scroll direction and visual appearance, RSS feed settings and appearance (settings can be accessed by clicking in top-left corner below the logo)

There is still much to be desired for this application as I only had very limited time to design it. If you have ideas on how to improve and make the data-screen better I will be very happy to hear from you, I hope that if I get a little time I will extend the application myself.

Finally please note that if you use this application you are doing so at your own risk. I have tested the application to a degree but as I had limited time designing it there might still be a number of bugs in code. Hence I would discourage direct use for making real investment decisions. Rather use it to keep you up to date and informed about UK markets / Currencies / News. I for example keep this little financial data-screen running on my 2nd computer on my work desk during the day and every so often I glance over to read news-items. I find it quite useful and I hope you will to :-)

note: The application will change your screen resolution. When it is closed it will return back to the original resolution, however during the process desktop icons might be moved around undesirably. Please do read readme.txt file for more information.

Success

Yesterday two interesting articles have caught my attention in the Business section of September's issue of Esquire.

• The first article presents Darius Bikoff's success story behind his 9 year old vitamin water brand (for which Coca Cola paid him 2bn). His story is interesting and demonstrates that a very simple idea can bring good fruit, even when others keep telling you how your idea is crap and won't work. The path of Bikoff's success wasn’t simple or without turnarounds, he nearly went bankrupt at one point. When asked for advice he would give to others he gave the following answer: First, don't pick something because you feel it's opportunistic. Chasing opportunity means the opportunity is already gone. Pick something that's close to your personal wants and passions, because then, when things get tough, you have the incentive to stick it out. The key point here is to pick something that's close to your personal wants and passions, and I really think nothing could be closer to the truth about growing a successful Hedge Fund. If one does not find passion in how and what you do then most likely you shouldn't put yourself on the line for such a thing in the first place.

• The second article takes an original but interesting look at MBAs. The author decided to spend two years doing an MBA at Harvard worth $ 100'000 to find out whether entrepreneurial talent is something they can teach you at school or something you are born with. The author seems to suggest that to a large degree an MBA can help, well at least it seems to open some doors. For example the hedge fund and private equity industries are dominated by business school graduates. Also at HBS they teach you a range of possible actions to consider on close to 800 cases over a period of 24 months, this clearly will provide experience that will be directly applicable, and since you have learned on past examples you should by this point avoid making mistakes that you might have made otherwise. However as the author also points out, "Great fortunes are after all made by individuals with wildly varying degrees of education". In the end of the day, an MBA does not mean much, yes clearly you might have the initial edge but if you've got what it takes anyway, an MBA might be a waste of money and time after all.