Nick Murray says “The ability to distinguish between volatility and loss is the first casualty of a bear market.”
I turned to one of my favorite passages of his masterpiece Simple Wealth, Inevitable Wealth this morning as turmoil from overseas and the commodity markets made its way through the headlines. Nick relays a great anecdote about how much money one investor personally “lost” during the last Russian Ruble crisis in the summer of 1998…
Yes, that’s right, it’s six billion two hundred million dollars. A very large sum of money, wouldn’t you say? Now what, you ask, does it represent?
It is roughly how much Warren Buffett’s personal shareholdings in his Berkshire Hathaway, Inc. declined in value between July 17 and August 31, 1998. And now for the six billion dollar question. During those forty-five days, how much money did Warren Buffett lose in the stock market?
The answer is, of course, that he didn’t lose anything. Why? That’s simple: he didn’t sell.
In July and August of 1998, I was doing time at a brokerage firm on Long Island as a summer intern. The brokers were panicking and the partners began yelling at them to get off margin and help maintain order in the Asia Pacific technology stocks in which the firm made markets. It wasn’t working, from what I could surmise. The simultaneous meltdown of several Far East currencies and then the toppling of the Ruble proved too much for US markets and eventually the contagion found its way here.
People forget that, in the midst of the massive late 1990’s bull market, we had this two-month bear market episode in which the S&P 500 dropped by a quick 25 percent. The giant Nobel laureate-run hedge fund, Long Term Capital, imploded as a result and Greenspan was
I also think of some rather mystic notion that the Fibonacci series of numbers — which generate the "golden ratio" -- can somehow help equity traders examining a chart predict which way the price line is going move. I've assumed we're looking at "group think" and not magic, and certainly not the rules of the universe affecting something so contrived as the US stock market.
In the third interview in our series, I asked John Ehlers about the Fibonacci series and whether he puts Fibonacci numbers to use in his trading algorithms.
Ilene: Has Fibonacci or his series of numbers influenced your trading system?
John: Fibonacci is kind of a hero of mine. He is also called Leonardo de Pisa and was born in about 1170 AD. His father was a merchant who directed a trading post in what is now Algeria. He returned to Pisa in about 1200 AD. He introduced the Hindu-Arabic numbering system to the western world when he published Liber Abaci (Book of Calculation) in 1202 AD. Up till then, Roman numerals had been used, and they were terribly inefficient for commerce. Just think about it. Roman numerals had no concept of zero. Negative numbers were not used in Europe until much later – but that was before they had margin calls.
In his book, Liber Abaci, Fibonacci solved a problem involving the idealized growth of a rabbit population, solving generation by generation as a sequence of numbers. That sequence creates the next number in the sequence as the sum of the previous two numbers as: 1, 1, 2, 3, 5,…
One key perk to working alongside investing seers is the opportunity to ask them the big questions. Wondering what lies ahead, I asked Casey Research Chief Economist Bud Conrad and technical analyst Dominick Graziano to share their views on what investors should expect in 2015.
These two gentlemen blow me away. Bud can make big-picture forecasts with uncanny accuracy. Dominick is a pure trader, relying on historical charts and graphs and seeing relationships I had missed. He is totally unemotional in his approach and makes decisions based on what the charts tell him. Like Bud, Dominick has made many calls far ahead of time.
Here’s what Bud and Dominick had to say.
Dennis Miller: Bud, I’ll start with you. We’ve experienced a lot of changes in the last few months. A new Congress is being sworn in, the Federal Reserve has stopped Quantitative Easing, and the energy industry is now quite volatile. What do you see as you look into 2015?
Bud Conrad: To get the discussion positioned, I’ll make some summary evaluations: the US and China are doing comparatively well. I gave a keynote speech in China to a huge mining conference where everything is booming, including the pollution. The US is benefiting from the reflation of our monetary bubble and hasn’t gotten to the end of this round yet.
Europe is declining from sanctions, burdensome bureaucracy, and weaker peripheral nations of Portugal, Ireland, Italy, Greece and, Spain (PIIGS). Japan has returned to slow growth despite money printing and should be a warning to the rest of us that money printing has its limitations.
Today governments and central banks can drive the markets even more than traditional measures like profits or rational supply and demand. So to predict markets, we need to predict the actions of the big players: central banks, government regulations, sanctions, political alliances, and wars.
The expansion of government debt is at record highs for many countries. We will see further money creation by most of the world central banks to manage the government deficits and big private debt by keeping rates contained. That means that the Fed will be back with some form of…
The Ukrainian government has repeatedly claimed it is doing its best to improve the oil and gas investment climate, but official statements are the opposite of the reality, as Prime Minister Arseniy Yatsenyuk is leading the great deception.
According to Prime Minister Yatseniuk, Ukraine has taken a number of important steps to reform the energy sector, and has even achieved success in the formidable fight against rampant corruption, as well as signed open and transparent contracts for purchase of the natural gas from EU member states. Now he claims Ukraine is looking forward to Western companies' investment in Ukraine's gas transportation system.
"I would like to point out where we have succeeded: we have succeeded in overcoming corruption in the energy sector. Billions of dollars, which previously used to flow into the pockets of Ukrainian oligarchs, are now being brought out of the shadows. At present, Ukraine purchases gas under transparent and open contracts with European companies," Yatseniuk recently told a joint press conference with German Chancellor Angela Merkel in Berlin.
Even the President has made misguided and naïve statements this past week in Davos, declaring that “…Ukraine will build new ways for receiving Norwegian gas and gas from Europe, and Ukraine will also produce shale gas."
The stark reality is that these official statements are in no way reflected by government action, and the gas market players in Ukraine recognize the deception as does the energy industry as a whole.
The real story is that while gas has been received from Norway in reverse flows, Ukraine's current energy strategy, taxation and fiscal regime has forced Ukraine's current producers of oil and gas to stop drilling new wells and curtail production.
The development of Ukraine's potential shale gas is even further afield with Chevron announcing its departure from Ukraine and only Cub Energy remaining in the country as an operator with both technical and local expertise in developing the shale. Even if shale can be developed in Ukraine it will be extremely challenging given the highly service-oriented logistical train, which does not presently exist in Ukraine.
In the course of the last year the Ukraine's private…
Last night, AAPL reported the most profitable quarter of any company in history – EVER!!! – making $18.04Bn in the last 3 months of 2014. That's $8.3M per hour in PROFIT with almost $1Bn/day in revenues ($74.6Bn for the quarter). The company made $3.06 for each $109 share and that was already up 10% since last Q.
I'm sure NOW it is obvious why AAPL was our Trade of the Year in 2012 ($52 when we made that pick) as well as 2013 ($72) and again this December, even though it was alread hitting $110 after the split. Of course, we didn't just play the stock at PSW, we played the options and our Top Trade Idea for Dec 17th was:
20 2017 $90/120 bull call spreads at $13.50 ($27,000)
20 short 2017 $85 puts at $9.50 ($19,000)
Our 2013 Trade of the Year is pictured on the left and made the full 614% expected and our 2014 Trade of the Year parlayed that money into the following:
10 2016 $450/600 bull call spreads at $65 ($65,000)
10 short 2016 $450 puts for $41 ($41,000)
That trade is already 100% in the money and will make the full $126,000 (525%) if AAPL holds $85.72 (post split), which is why we were able to be be nice and aggressive with our 2015 Trade of the Year, going for another 650% if…
It wasn’t a bold call, markets had been acting differently since at least last August. Selloffs were occurring with more frequency and less stocks were rising as we made subsequent new highs. The days of “just buy anything” in the stock market had come to a close, the return of winners and losers, volume and volatility, was nigh.
Fast forward a few months later and it looks like we got ourselves a ballgame once again. The no-vol, sleepy grind higher has been replaced with all sorts of drama. Confusing economic data points abound. Global macro bullshit is back. People are talking about Greece like it’s an actual economy and not just an abandoned museum with $350 billion in debt.
I don’t know the real reasons for why BTFD isn’t working so automatically, so effortlessly, anymore. Neil Irwin at the New York Times says it’s because of currency fluctuation wrecking the earnings reports of US multinationals and because the drop in crude has castrated capex budgets from coast to coast. That all sounds realistic, sure.
But the why isn’t terribly important to me. The what, however, is very interesting.
I submit to you that this new phase of deflation fear and headline-humping is actually a good thing for both the markets and for the professionals – like myself – who work here.
Financial advisors, traders, hedge fund managers and other asset assigners cannot distinguish themselves when the only thing that goes up is the S&P 500 and it goes up every day, every week, every month of the year. We mostly waste our efforts and our time in that atmosphere, which had been in force for approximately 24 months straight until this winter. When investment profits become automatic for anyone who simply shows up, and diversification looks increasingly asinine with every quarter, we become almost useless – vestigial.
Here we are, discussing hedges and protection and non-correlated asset classes and Value at Risk calcs and risk-adjusted returns and it’s like a giant f***ing joke as the ice cream man remains parked right
Here is an advance preview of the monthly moving averages I track after the close of the last business day of the month. At this point, before the open on the last day of the month, three S&P 500 strategies are now signaling "invested" -- unchanged from last month. Two of the five of the Ivy Portfolio ETFs, Vanguard FTSE All-World ex-US ETF (VEU) and PowerShares DB Commodity Index Tracking (DBC), are signal "cash" -- also unchanged from last month.
If a position is less than 2% from a signal, it is highlighted in yellow.
Note: My inclusion of the S&P 500 index updates is intended to illustrate a popular moving moving-average timing strategy. The index signals also give...
In spite of the Charlie Hebdo murders that raised the popularity of French president Francois Hollande and his staff, Les Echos reports than in the 2017 presidential election anti-euro candidate Marine Le Pen in the 1st Round Lead With Nearly 30% of the Vote. According to an IFOP 2017 presidential poll released Thursday, Marine Le Pen would come out clearly in the lead if the first round of presidential elections was held on Sunday.
Le Pen would get 29 to 31% of the vote. No rival would exceed 23%. Nicolas Sarkozy, Manuel Valls, and Alain Juppé, eac...
(ETFTrends.com by Todd Shriber): "Betting on insider buying is again proving to be an efficacious strategy as the Direxion All Cap Insider Sentiment Shares (NYSEArca: KNOW) has been noticeably less bad than the S&P 500 to start 2015. Add to that, investors are warming to the merits of KNOW's insider sentiment strategy." [Editor's note: KNOW tracks the Sabrient Multi-cap Insider/Analyst Quant-Weighted Index (SBRQAM)]. Read article
Suppose you had the technical ability and raw materials to print up counterfeit dollars, euros or yen that were identical to the real things. Assume you could spend them as fast as you could create them with no fear of any repercussions.
Would you prudently print up only as much fresh currency as you needed for your current lifestyle? Would you create just a bit more than that to help relatives or those in need?
It is most likely you’d have your printing press running 24 hours a day, seven days a week. Becoming the richest person in the world would confer great power upon you.
You could rationalize this action because you plan to use the money for good purposes. Imagine the warm feeling you’d get by giving every person in America one million do...
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We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.
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So as I was saying yesterday (Bitcoin: The Biggest Clown Show In History?), Bitcoin has several obstacles on the path to potential success as an alternative currency. But I forgot to mention hacking and theft at Bitcoin exchanges and other technical problems. This is related to the lack of government backing and the fact that the value of Bitcoins is based entirely on confidence.
Reminder: Pharmboy is available to chat with Members, comments are found below each post.
PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
Note: The material presented in this commentary is provided for
informational purposes only and is based upon information that is
considered to be reliable. However, neither PSW Investments, LLC d/b/a PhilStockWorld (PSW)
nor its affiliates
warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither PSW nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance, including the tracking of virtual trades and portfolios for educational purposes, is not necessarily indicative of future results. Neither Phil, Optrader, or anyone related to PSW is a registered financial adviser and they may hold positions in the stocks mentioned, which may change at any time without notice. Do not buy or sell based on anything that is written here, the risk of loss in trading is great.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only intended at the moment of their issue as conditions quickly change. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
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