Archive for September, 2008

TARDS or Idiocracy revisited


Image by Captain Alcoholica via Flickr

Maybe this plan should be called the “Troubled Asset Removal and Disposal Service”- TARDS.  It made me think of the clip from Idiocracy below (at around the 3:27 mark) where the doctor tells him:

Don’t worry scrow, there are plenty of tards out living really kick-ass lives.  My first wife was tarded, and she’s a pilot now.

Wow – what an amazing parallel to where we find ourselves today – bailing out the biggest financial institutions.

Vodpod videos no longer available.

more about “SpikedHumor.com “, posted with vodpod

Disclaimer: I know this is politically incorrect humor and I mean no disrespect to those with mental disabilities.

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Market Reverses

This version, executed in tempera on cardboard...

Image via Wikipedia

Obviously a crazy day yesterday – market made a huge swing around lunch time.  I was looking at the market and saying “we’re going to reverse”.  Figures – right when I had to go to the dentist.  Ah, such is life.  So now the question everyone is asking is this: Is this the bottom?  Let’s look around a bit at what people are saying.  In general, I would divide these people into two groups – analytical traders and fundamental investors.  There are those that cross the divide – so it doesn’t work perfectly.

On the analytical trading side, we have Rob Hanna at Quantifiable Edge and Teresa Lo at InVivo Analytics:

  • Rob Notes, in his accurately titled post “Big Ass Reversals“: “The kind of price action we’ve seen in the S&P over the last two days has been found almost exclusively in one type of place – bottoms.”  His analysis shows that the price action we’re seeing has happened at major turning points.  Now, someone in the comments of his blog notes that there is usually a retracement before moving higher – so with the market already up huge this morning as I write this, I’m wondering if it makes sense to get involved here or wait.
  • Teresa noted the rise in fear as represented by the Gold Panic: “That was no surprise to us. How did we know that gold is a panic indicator? Because it has always been so, and just like always, it formed one of those spikes at the intraday low on the S&P 500 Index and impaled many poor souls.” – Nice call Teresa!

So from my point of view this is a tradeable bottom – I don’t know yet whether or not this is an investable bottom.

On the fundamental side, we have Barry at the Big Picture pointing out that SEC is about to ban all short selling. Now, I’ll be honest and say that I’m not sure what this will really do.  My initial guess was that liquidity would dry up – but that is clearly not happening as stocks are flying higher today.  Here’s what Barry wrote:

This is the ultimate bailout attempt, which will have repercussions far far beyond our imaginations:

1) We suffer a loss of Market Integrity; The US is now a Banana Republic

2) Blatant market manipulation: this is nothing more than an attempt to force markets higher;

3) 60 days prior to a presidential election? This is a none-too-subtle attempt to influence the elections — especially coming on top of the Fannie/Freddie bailout;

4) The coming pop will create a huge air pocket, ultimately leading to us crashing much lower;

5) Expect a huge increase in volatility — upwards first, then down;

We Are A Nation of Morons, led by complete Idiots, making us complicit in our own self destruction.

Now I agree we are a nation of morons (hence Idiocracy being one of my favorite movies), and some of his other points are true as well.  But how does this help me in trading?  To me it just says that I need to treat this as a tradable event and nothing else – so that’s how I’m going to treat it.  However, with the markets up huge already this morning, I’m not looking to get involved in any big until some more smoke as cleared.

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S&P gets laid out!

Not much more that can be said about this video, but finally someone lays out and into S&P for their ratings of companies and derivatives.

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Barry over at Big Picture has a damning post about how the SEC is at least partially responsible for the current mess the investment banks are in.  Basically, the SEC reduced the capital requirements on the banks and they took on too much leverage:

Is Financial Innovation just another word for excessive and reckless leverage?

Apparently so.

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years — as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right — the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption — given only to 5 firms — allowed them to lever up 30 and even 40 to 1.

Teresa over at Invivo also has comments that are similar:

[7:33:31 PM] Teresa Lo says: Peter Fisher said, “We’ve got to think harder about all the embedded leverage. I mean, it’s a little shocking that not more people understood that if you take a 30:1 levered, structured product and you put it on a 30:1 levered balance sheet, you’re not talking about 30:1 leverage. You’re talking about 900:1 leverage and you can magnify gains and losses pretty dramatically when you do that. So the risk management system, the capital rules just haven’t kept up with the instrument innovations–another decade has gone by.”
[7:34:18 PM] Quant Friend says: i fully agree. i saw soo many shitty products and how they performed. no wonder that the whole system is taken out. LEH owns billions of cmbs ready to default. but losses won’t be big, just too big for the bank

So next time some argues that it was the short sellers, just forward them some of this information.

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Emanuel and Mayer LehmanImage via Wikipedia

Donald Luskin writes an editorial for the Washington Post talking about how the economy isn’t really that bad and that we just need to stop talking about it:

But that doesn’t make any of it true. Things today just aren’t that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression — or exaggerated Depression comparisons.

More here: Quit Doling Out That Bad-Economy Line

Let’s look at some more of Don’s great timing (via Washington Monthly):

  • “So what words are left to describe a really big down day like Thursday? How about, “Stocks became a better bargain than ever!”” — July 27, 2007 (DJIA closed at 13,265.47, 1843.47 points higher than Friday’s close.)
  • “If you see any financial stocks that have gotten run over by a bus in the last couple months — and then the bus backed up and ran over them again — you might want to consider taking a flier, and putting some money down by expecting the unexpected.” — Oct. 26. 2007 (see a chart of financials over the past year here, and tell me whether you think Luskin was right. Best I can tell, they’ve lost about a third of their value, on average.)
  • “THE BOTTOM IS IN. Yes, I know I’ve been too early in saying to buy stocks during the correction from the October highs. But all the classic signals of a durable bottom are in place now. Let me count the ways.” — Nov. 30, 2007 (DJIA closed 13371.42, 1949.43 points above Friday)
  • “On Wall Street, vultures don’t go after dead things. They go after things that are alive and very cheap. And right now, they’re going after troubled financial stocks in a big way, which means it’s time to move in.” — Dec. 7, 2007 (see chart described above. Buy now, and you’ve only lost about 25%, on average, as of Friday.)

These are almost as good as Cramer calls – speaking of which – this is a great video clip summarizing Cramer’s fantastic calls:

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While the market is trying to decide whether it is up or down today, I find myself wandering the web in search of new stuff to read.  I found the best political site I’ve seen in a while – not in terms of coverage but uniqueness of mission: DC Fashion.  I give you – Princess Sparkle Pony.

Friggin’ hysterical.  Finally, a blog that addresses Washington, DC’s fashion sense (or lack thereof).  As a friend of mine who lives in DC often quotes (it’s an old line): “DC is Hollywood for ugly people.”

Another site that often makes me laugh is GraphJam – here’s a great example of their user’s fine work:

song chart memes

On the more serious side – here’s some interesting market-related information:

  • Mebane Faber over at World Beta just pushed a link to a paper that looks at his tactical asset allocation method on a daily basis – it’s a good read: Tactical Asset Allocation Using Daily Data.
  • Headline Charts has a good piece on interest rates and offers a simple method for determining whether to be in stocks or bonds.
  • iCharts.net has a interesting site for creating interactive charts – it’s not live yet but I’m interested in using it when it finally launches.

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Well, I’ve been hugely busy with my day job, so the blog has had to take a bit of a backseat.  Add to this the fact that my wife and I are expecting our first child and you can probably understand why the posting has been less frequent.

I’ve also been working on how to modify the existing strategies to work in these kind of markets.  I spent a bunch of time on the MOMO1 strategy in particular, because there was a similar (though not as bad) sell-off in the system during the last bear market (around 2000-2002) – so it strikes me that the strategy, overall, doesn’t work well during bear markets where everything is going down.  Or, as they say, in a panic all correlation approaches 1.

So for August (and a bit of Sept), I’ve decided to post the trades as they would have happened using the old system while I continue to work on the new versions.  Hopefully this is helpful.  In the meantime, MOMO1, TREND1 and MR1 are all out of commission pending review.

As normal, you’ll find the individual strategies pages (MOMO1, TREND1, MR1) have updated equity curves, statistics and current holdings. As was true of my last update – all the trading systems below assume an Interactive Broker‘s-like commission plan – for these, it is .01 cent per share with a $1 dollar minimum.


  • Return for August-08: -7.7% (does not include dividends)
  • Return for Sept-08 (up to 09-10-08): -1.5%
  • Return YTD: -14.3%
  • Current holdings: RTH, IYT, IWM


  • Return for August-08: -0.2% (does not include dividends)
  • Return for Sept-08 (up to 09-10-08): -3.6%
  • Return YTD: -12.5%
  • Current holdings: IWO, XLV


  • Return for August-08: -12.3% (does not include dividends)
  • Return for Sept-08 (up to 09-10-08): 1.7%
  • Return YTD: -4.2%
  • Current holdings: FXE, QQQQ.

Benchmarks: All my benchmarks are from Google Finance – so your results may be slightly different.

  • S&P500:
    • August-08: 1.55%
    • YTD: -16.08%
  • DOW:
    • August-08: 1.28%
    • YTD: -15.05%
  • Nasdaq:
    • August-08: 2.06%
    • YTD: -15.97%
  • IWM (proxy for the R2000):
    • August-08: 3.77%
    • YTD: -5.83%
  • EFA (proxy for developed foreign markets):
    • August-08: -4.30%
    • YTD: -24.37%
  • EEM (proxy for developing foreign markets):
    • August-08: -9.36%
    • YTD: -28.37%

Not much to say beyond this report – so hopefully I’ve have some updates over the next month or so.  One thing I may do is change from reporting just on my systems to more board market metrics that I track as a way of providing other info to readers that they might find useful.  So more to come and thanks, as always, for stopping by.

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