Rescue Package(s)

It is somewhat ironic and maybe even perversely funny... the credit crunch is mostly consequence of over spending above our abilities. Basically countries and individuals were taking on too much debt and credit for a number of reasons, that certainly are significant and for sure logical, in a way just like it is happening again. Governments are increasing their spending and hence debt again (think - rescue / bailout packages)!

BBC prepared some nice overview graphics of the current crisis

44th US president and the Markets

Yesterday (20th January 2008) saw the Dow Jones drop by a massive 4%. The fall on the market came on the same day Barack Obama was sworn in as the 44th US president. Notice all these 4, by the way, only joking lets better not look for such patterns :-)!

As explanations and analyses for this drop began to appear in the financial media, I was just thinking to myself, this is just very, very, very bad. The media, brought forward a number of reasons for the drop;

1. the first reason - bad company reports, such as Bank of America, JP Morgan, City Group, Bank of New York Mellon (88% fall in profits) or others - just check out this bbc.finance article.
2. the second reason - apparently the speach that Obama gave at his inauguration, highlighted how bad the challenges for the US economy really are.

It is clear the bad company news are negative and the challenges highlighted by President Barack Obama might have hit a nerve with investors.

Imagine this however;

1. a young, determined president takes office and promises to adress and deal with the economical challenges directly and as swiftly as humanly possible
2. after an avalanche of negative quarterly reports, finally a positive one appears as IBM announces surprisingly good profit forecasts above analysts expectations.

So among all the bad news... especially yesterday had the chance to be a good day, but the markets decided otherwise. This shows that current market mood seems to fuel negative moves and if the mood isn't right, the whole market won't be.

A Happy New Year in the Crisis!

Hmmmm... well, well, what a start to the new year - highest unemployment numbers in the states since god knows how many years, bust businesses (Virgin's Zaavi, Woolworths,...), lowest interest rates and risks of deflationary nature, gas supply problems into significant parts of Central and Eastern Europe from Russia (via Ukraine) and like all this isn't enough we also have a flaming war in GAZA.... mhm, excuse me, I ment a Genocide and a most horrible humanitarian crisis!!

...the last year also wasn't the best one, in fact it was the worst one for the stockmarket, a truly most horrible financial debt crisis since 1929 (I highly recommend for readers to at least check out this link of Dow Jones' historical index).

Given all this, what is the prognosis for 2009, well it looks to be a very gloomy year Economically and Politically... the Middle East, UN, Economic crisis, and Financial regulation will most likely be in the forefront this year.

As every year, there are also a number of bright sides, this year should (whatever everyone says) see the bottom to the falling and battered equity markets and hence certain diversified portfolo investments (with minimised systematic risk) on the long side might be right this year as a turnaround in economic prospects is eventually invevitable.

More on this, and specific investment ideas & brainstorming, in my future posts!

..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]