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Looks like a battle of the titans right at 4 %.
That battle has been ongoing for several days.
Does Hussman go net short or is 100% out of market his most bearish position?
BCGI big move down afterhours.
Perhaps some bounce tomorrow.
I posted those articles since they resonated with some of my recent tradng activity.
I violated a lot of my own rules about diversification, stops, etc. and it created a risk situation that I could not manage. The result was highly stressful.
Hope readers can learn from the articles oand others experiences without having to endure the pain.
By Bill Fleckenstein
07/15/2003 06:26 PM EDT
URL: http://www.thestreet.com/p/rmoney/marketrap/10100450.html
"Now back to the fool-on-the-Hill testimony. Because I am tired of reprising the utter drivel of this man, I had not planned to discuss today's speech. I changed my mind after reading what he had to say, which just blew me away. Early on, he was predictable enough: "The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as it's needed to promote satisfactory economic performance." Of course, satisfactory economic performance is to be determined by him -- somebody who can't distinguish a bubble from a bust.
From there, he hinted at what was to come: "Policy accommodation aimed at raising the growth of output, boosting the utilization of resources, and warding off unwelcome disinflation [my emphasis] can be maintained for a considerable period without ultimately stoking inflationary pressures." Translation: The Fed is so good, it can not only tell the difference between these two but make sure that we get only welcome disinflation, not unwelcome disinflation."
"Or, said differently, if disinflation, i.e., the lowering of the inflation rate, is unwelcome, the Fed will somehow magically pick the right level of inflation (though Greenspan chose to keep us in the dark as to whether that's 2%, 3%, 4% or 5%, or clue us in on how he came by his powers of omniscience). So, he has basically dropped the pretense of the Fed's deflation-preventing crusade to expose its true colors -- the desire for more inflation. (Of course, what the Fed really wants is asset inflation and more speculation.)
Toward the very end of his speech, when praising the Fed for bringing down the rate of inflation, Greenspan let the cat out of the bag completely: "We face new challenges in maintaining price stability, specifically to prevent inflation from falling too low [the emphasis is mine] ." Read that again. It's a seminal event in the history of that great inflation machine, the Fed. Let the record show the Fed believes its goal is not maintaining price stability but rather making sure inflation runs at a high enough rate. To repeat, the Fed now deems itself capable of picking the right rate and engineering things perfectly to that level."
"Oh, but there's more. Greenspan goes on to crow about welcome speculation (vs. the unwelcome kind) in the financial markets, giving a tip of the hat to what's been happening in bonds and junk bonds: "Moreover, strong inflows to corporate bond funds, particularly those specializing in speculative-grade securities, have provided further evidence of a renewed appetite for risk-taking among retail investors." So Gordon Gekko had it wrong. It's not "greed is good" but "speculation is good." Or, in the parlance I've invented for today, "welcome" speculation is good.
That, of course, brings Greenspan to thoughts on the housing market: "Households have been able to extract home equity by drawing on home equity loan lines, by realizing capital gains through the sale of existing homes, and by extracting cash as part of the refinancing of existing mortgages." Once again, he recognizes that we've got all this leveraging up in housing, and that, too, is welcome in his book."
"Shifting to the slump in capital spending (a fly in the ointment of his little scenario), he turns to a rather novel concept to explain the problem away: "But as yet there is little evidence that the more accommodative financial environment has materially improved the willingness of top executives to increase capital investment. Corporate executives and boards of directors are seemingly unclear, in the wake of the recent intense focus on corporate behavior, about how an increase in risk-taking on their part would be viewed by shareholders and regulators [the emphasis is mine] ." "
"Well, there you go, folks. Capital expenditures are being held back by regulatory concerns, and/or by chieftains' concern about alienating their shareholders. These are the same guys who grant themselves stock-option packages across the board and don't give a damn about what the shareholders say -- and now Greenspan is using that as an excuse? Anyone with a basic understanding of economic history knows that capital expenditures are not picking up because we had the biggest bubble in the history of the world. In the aftermath of a bubble, as history has shown, capital expenditures usually remain pretty soft for a decade, because it takes that much time for the prior misallocation of capital to be purged."
"In any case, Greenspan ends by reaffirming his commitment early in the speech: "The FOMC stands ready to maintain a highly accommodative stance of policy for as long as it takes to achieve a return to satisfactory economic performance." He has demonstrated for years that he cannot judge what "satisfactory" is. He lurches from crisis to crisis borne of his own incompetence, making them bigger each time.
Despite my outrage at his wrecking of the economy and the financial system, I am glad of one thing: Greenspan has finally made it crystal-clear that the Fed's goal is to be an engine of inflation. Since it was a successful engine of inflation even when it claimed that it wasn't, we can only guess at what the inflation rate's going to look like in the future."
A New Look at an Old Strategy — Covered Calls
by: James B. Bittman
With long- and short-term interest rates low, and dividends on common stocks even lower, what are yield-hungry investors to do? Write covered calls; purchase stock and sell call options on a share-for-share basis. Although many investors became disenchanted with this strategy during the bull market of the 1990s because it couldn’t keep up with skyrocketing stock market gains, the current market environment, in fact, lends itself to writing covered calls. This simple strategy can provide income in flat markets, income and some capital gains in bull markets, and even some protection of capital in down markets. What more could you ask for in a trading strategy?
Furthermore, a range of investors, from the John Q. Public stock investor to the savvy options investor, can use this strategy. But, before we get into the advanced strategies for aggressive investors, let’s start with the basics.
The ABCs of Writing Covered Calls
Covered writing involves the purchase of stock and the sale of call options on a share-for-share basis. For example, you might buy 300 shares of XYZ stock at $52 per share and sell three XYZ September 55 calls at $2 each. In this example, the call options that are sold are frequently described as “written calls,” or “short calls.” The term “written” or “writing” comes from the insurance industry. Similar to how an insurance company “writes” a policy, so too might a stockowner “write” covered calls.
In options, the term “short” means that an obligation exists. In the case of a short call, there is an obligation to deliver the underlying stock if an assignment notice is received. Remember, call owners can “exercise” their right to buy stock, and call writers can be assigned. The Options Clearing Corporation, the central clearing house for all securities options in the U.S., conducts assignment of exercised options on a random basis. If assignment occurs, then a call writer – or “short” – must deliver the shares.
Calls that are written when the underlying stock is owned are described as “covered,” because there is no doubt that the obligation to deliver stock can be fulfilled. In the case of “uncovered calls,” the stock is not owned. If an assignment notice for a short call is received when the stock is not owned, then the call writer must purchase or borrow the required shares to deliver. Such a person faces unlimited risk, because the stock price can rise indefinitely causing the writer to pay an unfavorable sum for the stock. Uncovered call writing is a high-risk, advanced strategy and is beyond the scope of this article. We’ll stick to the safer strategies.
Covered calls also may be sold against stock that is already owned. This strategy is frequently referred to as “over writing,” which distinguishes it from buying stock and selling calls simultaneously.
For example, assume that you purchase 100 shares of stock XYZ for $52 per share, and one September 55 call is sold for $2 per share. Also assume that it is 90 days to September expiration and that XYZ stock pays a dividend of $0.25 per quarter. In the real world, 100 shares in this example would cost $5,200, and $200 would be received for selling the call. Consequently, the net investment would be $5,000, not including commissions. You would also receive a dividend of $25. But, for the sake of simplicity, the following explanation is based on a per-share basis.
Chart 1 represents the covered writing strategy described above compared to the outright purchase of stock at $52. The covered writing position earns a profit at any stock price above $50, which is the break-even point at option expiration, not including the dividend. The potential profit in this example is limited to $5 per share, not including the dividend, which is equal to the $3 rise in stock price from $52 to $55 plus the call premium received of $2. The up-front premium and the lower break-even point are the benefits received in return for accepting a limit on potential profit.
Calculating Returns
Now on to the most satisfying number crunching of all: figuring out how much money, you’ll make. When writing covered calls, there are two types of returns to consider: the static return and the if-called return.
The “static return” is the annualized rate of return assuming that the stock price is unchanged on the option expiration date from the initial purchase price. If the stock price is unchanged at option expiration, then the short call expires worthless. The covered call writer will receive $0.25 in dividends and $2 in option premium for a total profit of $2.25 per share, not including commissions. For the 90-day period, this is a “static return” of approximately 4.3 percent. If one could repeat the process every 90 days over the course of a year, then the annualized rate of return would be approximately 17.5 percent. There is, of course, no certainty that this return could be repeated. The static return on a per-share basis is calculated as follows (commissions are not included):
The “if-called” return is the annualized rate of return assuming that the stock price is above the option’s strike price on the expiration date. In this case, it is assumed that the call is assigned and the stock is sold at the strike price. The possibility that the call might be assigned prior to the option expiration date, an “early assignment,” cannot be overlooked. In that case you might not receive the dividend.
However, assuming the call is assigned at expiration, then the dividend of $0.25, the call premium of $2 and the $3 gain (stock price rises from $52 to $55) are all received. This is a total profit of $5.25 per share not including commissions, or approximately ten percent in 90 days. This equates to an “if-called” return of approximately 40 percent annualized if similar transactions could be repeated every 90 days over the course of a year. Again, there is no certainty of this actually happening. The if-called return on a per-share basis is calculated as follows (again, commissions are not included):
Don’t Forget about Risk
While you’re calculating your possible profit, keep in mind the risk involved in such a strategy. If the stock price declines, the premium received from selling the call offers only limited protection. In this example, the premium received of $2 lowers the break-even price from $52 to $50 per share. Below that price, the position is nearly the same as owning stock at a cost basis of $50. If the stock price declines, you must choose the appropriate course of action. You might hold the position, buy back the call and write another call with a lower strike price or close out the position altogether. Writers of covered calls bear the risk of a significant stock price decline, which would result in a loss.
Executing This Strategy
For the income-oriented stock investor, covered writing means buying stock and selling calls on a share-for-share basis, possibly withdrawing the net premium (after commissions), and maintaining appropriate reserves for taxes, of course. However, proper execution of this strategy does not stop there!
Covered writing is not simply a buy-and-hold strategy, but involves planning for the profitable action at expiration. For example, if assignment occurs, you will sell your stock and then have cash to invest. So what will be your next move? Will you write another covered call? On which stock will you write a call? Or will you stay out of the market for a while?
On the other hand, if the call expires, you’ll have another set of possibilities. You would need to decide whether to write another call or to sell the stock and invest elsewhere, either in another covered write or in another investment. A decision to hold or switch also must be made if the stock price declines, regardless of the timing of that decline.
The goal of covered writing, here is to receive cash income, similar to how bond investors receive interest. Consequently, the results of covered writing should be compared to other fixed-income investments and not to unmanaged stock market indices. With covered writing, however, the risk of stock ownership exists, and this risk must be managed carefully.
A Covered Writing Substitute Using LEAPS®
If you are a more aggressive investor, you can take advantage of a variation on traditional covered writing by using an in-the-money LEAPS call for the stock position*. LEAPS stands for Long-term Equity AnticiPation Securities—-a fancy name for what are simply long-term call and put options. Their expiration dates stretch out to three years from the time they are listed, while traditional options have expirations of not more than nine months. LEAPS were introduced in 1990 on only a few large-cap stocks, but they are now available on more than 400 stocks. LEAPS options have fewer strike prices and fewer expiration months and different root ticker symbols. A complete list of LEAPS options and their root symbols can be found in the “Directory of Exchange Listed Options” which is available on the website of The Chicago Board Options Exchange, www.cboe.com. (For more on LEAPS, please see “Stretch Your Options - Riding the Market Trend Longer With LEAPS,” by James Bittman in April 2003 SFO p.106.)
* This is a spread strategy and must be done in a margin account. Consequently, an account must be approved for trading spreads. If this strategy interests you, the first thing to do is to check with your broker to make sure the necessary paperwork is in order.
Let’s revisit the example presented earlier in which stock XYZ is trading at $52. Assume, however, that instead of buying 100 shares of XYZ stock, you purchase an XYZ January 2005 40-strike LEAPS call for $15 per share, or $1,500, not including commissions. This is the new position:
Remember, the owner of a call option does not have the right to receive dividends or to vote in corporate affairs, but an in-the-money call typically has a higher price correlation with the underlying stock than either an at-the-money or out-of-the-money call. Therefore, a “covered write” with an in-the-money LEAPS call will have a high price correlation with a traditional covered write.
Advantages of Using LEAPS
The first advantage is obvious: the net investment is less. In this example it is $1,300 per contract for the LEAPS covered write versus $5,000 for the traditional covered write on 100 shares. Even if stock is purchased on minimum margin, the net investment required for the traditional covered write would be approximately $25 per share, or $2,500, in this example, or nearly twice the amount required for the LEAPS covered write.
Second, the LEAPS covered write has less theoretical risk than the traditional covered write. If the stock price declines sharply, then the maximum risk for both positions is the net amount invested. That is $50 per share, not including commissions, for the traditional covered write and $13 per share for the LEAPS covered write.
Third, if all goes according to plan – meaning that the stock price remains between $52 and $55 – then the annualized percentage return for the LEAPS covered write is higher than for the traditional covered write. With the stock price unchanged on the expiration date of the short option, the traditional covered write earns $225 on the $5,000 net investment. The LEAPS covered write, however, earns nearly the same amount on a $1,300 net investment. The actual profit of the LEAPS covered write will be less than $200 per contract, because time erosion will reduce the price of the LEAPS call.
Disadvantages of Using LEAPS
First and foremost, a LEAPS covered write will incur a loss if the price of the underlying stock declines sharply. Although the maximum potential loss of a LEAPS covered write is less in absolute dollars than the potential loss of a traditional covered write, the percentage loss may be larger.
The second disadvantage occurs if the stock price rises too much. If an assignment notice is received in a traditional covered write, then the obligation to sell the underlying stock is easily met. The stock you own is simply delivered to the exerciser of the call.
Assignment of the short call creates a different situation with a LEAPS covered write. Since no stock is owned in a LEAPS covered write your broker must borrow stock on your behalf and deliver those shares if the short call is assigned. The result is that a short stock position has replaced the short call. You must then choose between three courses of action. First, you can cover the short stock and keep the long LEAPS call. Second, you can cover the short stock and sell another short-term call, and, third, you can close the position by covering the short stock and selling the LEAPS call. Although it is also possible to exercise the LEAPS call to cover the short stock, this is generally not desirable, because the time premium in the price of the LEAPS call will be lost.
Regardless of which action is chosen, there will be extra transactions and extra costs. Depending on the price of the LEAPS call when assignment of the short call occurs, it is also possible that a loss may result from the entire strategy, even though the stock price is higher than when the position was initiated. If you found the above explanation confusing, then you will understand why LEAPS covered writing is primarily for experienced options users.
Execution of Covered Writing with LEAPS
As with traditional covered writing, covered writing with LEAPS is not simply a buy-and-hold strategy, but involves planning appropriate action if a stock price decline occurs or if an assignment notice is received. The motivations for “covered writing” with LEAPS are also the same as for traditional covered writing. First, you must be confident of a stock’s short- and intermediate-term prospects. Second, you must be suited to take the risk of being wrong. Third, you must be willing to deal with extra transactions if assignment of the short call occurs.
At Last…
Whether you are an income-oriented stock investor or a more risk-tolerant, aggressive investor, covered writing is a strategy worth your consideration. But, as with any trading strategy, you should assess your risk tolerance.
If you are an income-oriented stock investor, keep these two things in mind before attempting to execute a covered call. First, a covered writer must be willing to own the underlying stock. This means you are confident of the stock’s short- and intermediate-term prospects and that you are suited to take the risk of being wrong. Second, you must be willing to sell the stock at the strike price of the call because the short call position is an obligation to do so. Although you can repurchase the call to close out the obligation to sell, the possibility of an early assignment cannot be ignored. If an early assignment occurs, then the stock must be sold. If you are not comfortable owning the stock or if you are not comfortable with the possibility of selling it, then covered writing is not a suitable strategy for you.
On the other hand, if you are a more aggressive investor, covered writing with LEAPS is a spread strategy suitable for you, assuming you want to earn higher annualized percentage rates of return than from traditional covered writing and are willing to live with potentially higher percentage losses. Losses occur if the stock price declines sharply, and extra transactions and extra costs are involved if the stock price rises “too much.”
Above all else, you must remember, whether you’re risk-tolerant or you’re risk-averse, that covered writing requires thinking ahead to option expiration and taking appropriate action as needed. Furthermore, be sure to measure results of covered writing against fixed-income investments and not against stock market averages.
Disclaimer: For simplicity, commissions and taxes are not included in the examples, but these are important factors to be considered when undertaking any investment.
Options involve risks and are not suitable for everyone. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options which may be obtained from your broker or from the Chicago Board Options Exchange at 400 S. LaSalle, Chicago, IL 60605. Investors considering options should consult their tax advisor as to how taxes may affect the outcome of contemplated options transactions.
Savvy Speculators Sell Short, But They're Not Always Right: Learn to Identify Potential Short Squeeze Candidates
by: Brian Shannon
Three of the key factors that influence people’s decisions when trading stock are fundamental analysis, technical analysis and psychology. Fundamental analysis is mainly concerned with why a stock may move; it measures sales figures, price/earnings ratios, cash flow and dividends. Short-term traders may find the fundamental information interesting, but on a stand-alone basis, trading on fundamental analysis rarely equates to profitable trades. In fact, following fundamental analysis often is an obstacle when trading because traders tend to form an opinion of what the stock “should do,” and many times that opinion gets in the way of objectively analyzing what the stock actually does.
Think of how many times you may have bought a “good company,” but it turned out to be a bad stock. Technical analysis, on the other hand, attempts to determine when a stock may move and how long that move may last. I have never met anyone who has consistently made money trading that does not use some form of technical analysis. Technical analysis allows the trader to objectively look at price action to determine what is a good or bad trade, without any understanding of what the company may do or what the fundamentals may be.
The final, and probably hardest factor to measure, is psychology. Understanding the psychology of stock movements often is measured through technical indicators and attempts to answer who would be a buyer, and who would be a seller under certain circumstances. Big money can be made in a stock’s movement when there is a favorable combination of the three factors listed above to uncover profitable upside opportunities.
Short Interest Can Help Identify a Short Squeeze
In this article, we will take a look at a specific technical indicator, short interest, in an attempt to uncover situations where a short squeeze may develop in a stock. We’ll then review a stock that has the characteristics of what may offer good upside potential based on these three factors.
Short selling is a strategy that attempts to capitalize on a decline in share value by selling stock at a high level and later repurchasing the stock at a lower price. The short seller benefits by selling high and buying back lower. It should be noted that once a stock has been sold short, those sellers represent future demand because they must buy the stock back at some future date.
The appeal of selling short is easy to understand, as we’ve seen in this bear market; stocks usually fall faster than it takes to move higher in an uptrending market. Of course, as with any strategy that is a straight directional bet, there are risks. The biggest risk to a short seller is that instead of share price dropping, the stock price rises. Later we’ll see that a rising share price in a stock that is heavily shorted can often lead to dramatic upward movement as losses mount in the accounts of those who are short, and these traders attempt to minimize their losses by buying the stock back.
The motivation by the short seller to buy back the stock is often the fear of unlimited losses. When you buy a stock at $20/ share, the most you can lose is your entire investment, $20/ share. When you sell a stock short at $20, the potential for losses, in theory, is unlimited. The stock may rise to $40, which would result in a 100-percent loss of capital, but what prevents that stock from rising to $50, $60 or even $100? It is the fear of such an advance that can make for an explosive upside in a heavily shorted stock. The phenomenon of a rapidly rising stock with a large short interest is known as a “short squeeze,” and we will now explore the dynamics of how a short squeeze develops.
The Basics
Before we continue, first let us cover some terminology. Short interest is defined as the total number of shares of a stock that have been sold short and are not yet covered. When a person sells a stock short, exchange rules mandate that the order must be identified as a short sale, with statistics on the total number of shares sold short kept by the exchange and released to the public once each month. Short interest for Nasdaq stocks is tallied up by the exchange on the 15th of each month, and that information is disseminated to the public eight business days later. For example, if the short interest is 1,500,000 shares as of August 15, that information is released to the public on August 27. Any change to this number is released one month later.
The short interest ratio (S.I.R.) is the number of shares sold short (short interest) divided by the average daily volume for the previous month for the particular stock. This number is interpreted as the number of days it would take to cover (buy back) the shares sold short based on the average daily volume. The higher the ratio, the longer it would take to buy back the borrowed shares. This often leads to upward momentum for the stock if the sellers become motivated to buy back their short positions. If the stock had a short position of 1,500,000 shares and an average daily volume of 500,000, the S.I.R. would be 3.0, meaning it would take three full days of average daily volume for the short sellers to cover their bearish bet. If the stock had average daily volume of just 250,000 shares, the S.I.R. would then be 6.0, meaning it would take six days of buying to cover their position. From a contrarian standpoint, a higher S.I.R is desirable because it means it is more difficult to cover the position, and the resulting buys have the potential to create significant short-term trading profits.
Why Short Squeezes Occur
With the basic understanding of short interest and the short interest ratio in hand, let’s now learn how to identify stocks that could be vulnerable to a short squeeze. A short squeeze develops when those who sold short the stock, expecting it to decline in price, change their minds about the trade (often because of rising prices) and attempt to cover their positions before the market advances and losses accumulate. Short squeezes often occur because of a news event that changes investors’ perception as to the worth of a particular company. A short squeeze also can be created by long holders of the stock attempting to push the price higher, in an attempt to tap into the emotional buying that a trapped short seller can provide. Obviously, if you are short a stock that is advancing, there is a point where you will become fearful of holding a position. With that said, in order to eliminate the mounting losses and the emotional trauma of holding a big loser, the once-pessimistic seller will become a panicky buyer. It is this buying that makes the stock advance at a rapid pace.
There are numerous sources for finding information about the number of shares that are short for any individual stock as well as the corresponding ratio to average daily volume. The site I use most often is www.viwes.com, because this website not only lists the information for individual stocks, but also has some unique screening features. Below is an example of one such screen. This is often a good place to start your search for stocks that may be vulnerable to a short squeeze, because it shows there are fresh shorts in the stock. Professional money managers (usually hedge funds) that establish large short positions are typically very disciplined about taking losses, and their discipline can often work in the longs’ favor. When the stock starts rising, fund managers often will act quickly to cover their shorts, and they tend to become aggressive buyers in their attempt to minimize losses. It is this pick-up in demand that can benefit long positions as shares can rapidly move higher.
In Table 1, we can see the stock with the highest S.I.R. is Odyssey Healthcare Inc. (ODSY), with a S.I.R. of 22.28. Typically any number more than 5.0 (days to cover) is considered high. ODSY shows an S.I.R. four times higher than this relatively high number, which indicates the short sellers may have a difficult time covering their positions without moving the stock higher. This information is a good starting point for finding potential short squeeze candidates because it gives us the answer as to who would buy the stock. By recognizing the large short position, we can understand the potential urgency buyers may have in ODSY, and this urgency could be a key psychological development behind a buying frenzy in the stock.
In order to whittle the list down further, the charts of each company should be studied to see if there is any technical confirmation that it might be the proper time for a low-risk entry into the stock. As a general rule, any stock in a downtrend can be immediately eliminated because short sellers are more confident in a position that is moving in their favor. Eliminating situations that are not high-probability candidates frees our time to focus on the strong stocks where the short sellers may be in trouble. In order to make this a quick process, I like to look at where the stock is trading in relation to its 50-day moving average (50 DMA). If the stock is below the declining 50 DMA, I will eliminate it from the list and then focus on stocks that are trading above the rising 50 DMA. A stock that is above a rising 50 DMA is in an uptrend and should be studied further on different timeframes to find where there may be potential for resistance to halt its upward progress.
If a stock is at a new high, it indicates to me the only source of supply will come from profit takers, rather than people selling to get even on a position they may have been holding in their portfolios at a loss. A stock trading at a new high also indicates it is unlikely that the short sellers are in a profitable position and that may make them more motivated to cover their short positions. A chart of ODSY shows the stock trading above its rising 50 DMA, and this upward momentum is further confirmed by the fact that as of this writing, May 6, the stock is trading at an all-time high. After I find a stock that has both a large short position and is at new highs, I want to know the approximate price at which the short position was initiated. By understanding how much the short sellers are losing, I can monitor the stock for signs they may become urgent in their buying.
In order to find the information on where the short position was initiated we can look deeper into the short interest tables. By clicking on the symbol “ODSY,” we get a new table, seen in Table 2, that shows the current short position as well as any changes made to that number over the last year. Looking at the information on ODSY, we can see that on May 15, 2002, the outstanding short position was just 881,825 shares. As of April 15, 2003, that number was up to 6,795,939 shares sold short and not yet covered. This means that between May 15, 2002, and April 15, 2003, nearly six million shares were added to the short position in ODSY.
Chart 1 for ODSY shows when the short position changed, and this allows us to understand from where sellers may be short. For ODSY, from September 15, 2002, when the stock was trading near $19 to April 15, 2003, the short position grew by 5.2 million shares. All of these shares were sold short below $26, meaning the potential for a short squeeze is high because the short sellers are in a losing position, and they have to buy back stock to prevent those losses from growing. This puts the short sellers in a very uncomfortable position because they are damned if they don’t do anything. They are further damned if they buy back shares because this will add to the upward momentum they were trying to avoid in the first place This makes conditions ripe for a short squeeze.
Look for a Downtrend
It is important to know that a large short interest ratio by itself is not a reason for buying a stock in anticipation of a short squeeze. As with any other indicator, the short interest ratio should not be used on a stand-alone basis. The informed trader will find an edge when there is a preponderance of indicators leading to a price advance. Short sellers who take large positions are typically sophisticated speculators who have done extensive research on their targeted company and often are right. Many times those who sell short have the right idea fundamentally (examples include names such as Qualcomm, Rambus, Iomega, Presstek, Amazon.com and Krispy Kreme), but their timing could be off. The correct time to sell a stock short is when it is either in, or entering, a downtrend. When a short position is initiated in a stock that is trending higher, there is real potential for big trouble. As the stock continues higher in an uptrend, it often becomes tempting to sell short because “it is up too much,” or “the P/E is too high;” however, avoiding that temptation and going long is usually the right thing to do until the stock rolls over and shows weakness. Essentially, the potential short squeeze candidate is a stock in an uptrend that has attracted a large short interest and has strong fundamentals.
Finally, and probably the least important factor re: a short squeeze candidate, is the fundamentals of the company. Although poor fundamentals would not preclude a stock from being a potential short squeeze target, a company with strong fundamentals would add to the source of demand that would move prices higher. When looking at fundamentals on a momentum play, it is important not to look too deep. I usually look at the company’s news headlines for sales and earnings information, as well as new product developments and analyst ratings changes. In the case of ODSY, a glance at the headlines shows news reported on May 5, 2003, that read, “Odyssey Healthcare Reports First Quarter 2003 Results; Revenue Increases 50 Percent, Net Income Increases 79 percent, Company Increases Guidance.” Just reading this headline tells me the company is growing their business by selling more (revenue increase); they are more profitable than they were last year (net income up 79 percent); and the business remains strong (increases guidance). On the day this fundamental news was reported, the stock advanced $0.56 on heavy volume—clearly the reaction from Wall Street was a positive one. This news gets me thinking, “This is why people will buy this stock.”
When reviewing fundamentals, traders should be more interested in why others would buy or sell. It is important not to make a decision about the company, but only what others may think about the stock. There are many people who buy and sell stocks based on what the prospects for the company are, and we cannot ignore them in making our decisions due to their potential large impact on price.
In Short…
By walking you through my thinking on ODSY, you now should have an example of how to quickly analyze fundamental, technical and psychological influences that could be involved in a trader’s decision-making process. When we have all three of these factors telling us the same conclusion (buy) like we do in ODSY, it makes sense to be long (which is why as of this writing I am long ODSY.) By the time this article is printed, I will likely have exited this long position, hopefully with a profit. The one thing I know for certain, barring an unforeseen event, is that I will not take a large loss on the trade. As much as I think it is a good idea to be long ODSY, I realize that the market does not always agree with my analysis, and my ego will heal a lot quicker than my equity after a large loss.
It’s important to remember that short sellers are usually very savvy speculators; however, like any group of market participants, they aren’t always right. When shorts are wrong about the direction of a stock, the move higher can be dramatic, leading to some excellent short-term profits for traders who see a short-squeeze situation developing. Like any indicator, short interest should not be used on a stand-alone basis, but it should become part of a trader’s arsenal. Because technical analysis is largely about measuring supply and demand, short sellers can become an excellent source of demand for a stock at higher prices when the stock is in an uptrend.
Psychology of Trading
I have reently violated some of my own trading rules and gotten in trouble.
Advice herein for sfomag
Be Honest With Yourself: Conquer Paralysis, Overconfidence and Other Psychological Pitfalls
by: Kevin Pendley
To me, the psychology of trading is really about conquering your inner demons, especially those that haunt you on losing trades. As human beings, it’s almost impossible to see our own strengths and weaknesses from an unbiased viewpoint, but the market is a harsh critic, and if you’re stuck in a mental slump, it’s a sure thing that you’ll also be mired in a trading slump as well. When SFO first approached me to write a story on the psychology of trading, I had nightmares of what the future therapy bill would cost me. There are some discussions that just don’t come easy among traders! That said, I’m going to try to bare my soul a little on this topic, which, by the way, is a crucial, if largely untapped key to investing.
After making about every mistake possible in my trading career, I’ve decided that these are the most important elements in trading:
Desire. Let’s face it, if you don’t desperately want to make money more than everyone else, you’ll get soft and turn your large fortune into a small one sooner or later;
Risk capital. The old saying, “money goes to money,” is legit; if you don’t have extra funds to dabble in trading, then don’t do it (more on this later);
Reliable, consistent research/trading information. The world moves on information, and if you don’t have access to top-notch research that you know how to put to use, then even if you’re a great trader with an uncanny knack for the right decisions, you’ll never maximize your return. Please note the key here is gaining access to information that helps you make money...you can read all the research reports on earth, but if they don’t help you identify how to trade and when the odds are in your favor, then you’re just spinning your wheels with reading material;
The proper psychological make-up. It’s tough to get a handle on this one because very few of us are comfortable analyzing our strengths and weaknesses, but here’s the kicker: you can have more desire than Tiger Woods at the Masters; you can have access to the risk capital of a Warren Buffet; you can find the perfect research to fit your style; but if you can’t get a grip of how psychology affects your trading behavior, it won’t matter.
Can’t Pull the Trigger?
One of the most debilitating trading “psychoses” is paralysis. If you can’t make yourself pull the trigger on trades that should be done, then you must find an answer why or you will either drive yourself crazy missing great trades or start scrambling on a scattershot approach that won’t work. In my own experience, the following reasons have typically been at the forefront when I’ve had a paralysis issue:
Trading Scared from a Money Standpoint
Remember one of our key trading elements was “risk capital?” When you overextend your trading account or your own personal finances beyond the proper risk element, you’re in deep trouble; either all of your money is too tied up in one trade, which paralyzes you from entering what would be a better trade, or you simply freeze, hoping that a large losing position will miraculously turn around in your favor...while you wait, you lose more money and watch as other good trades pass you by.
Uncertainty
This is almost always linked to the quality of the information you’re using for trading and the conviction of your view of the marketplace. If you’re suffering from this form of paralysis, it’s usually much better than trading on a whim and hoping you’ll turn out right.
You’ve Lost That Winning Feeling
A series of bad trades can quickly sour your confidence, dent your psychological make-up and send you to the sidelines. Once there, you suddenly spot a bevy of winning concepts, but never pull the trigger because your confidence was already sapped, and you are paralyzed. If you fall prey to this symptom, there are ways to escape! First, try to figure out what went wrong on the losing trades that triggered the paralysis and see if your thought process or execution approach was different than the winning trades which were not put on.
In order for this to work, you must be brutally honest with yourself. Was it really a case where you thought you had a bunch of winners while sidelined, or did you just notice a couple of winners that stood out more in your mind, while you conveniently looked past the same losers you had in the first place? And, if you had put the trades on, would you really have stuck with them correctly? These are very difficult “look-in-the-mirror” kind of questions, and you have to be completely honest with yourself, or you’ll be doomed to make the same mistakes in the future. If you’ve been on a losing streak, you have to be prepared to accept the fact that you have shortcomings either in your approach, your access to helpful research or your trading instincts. If so, then start paper trading for a set period of time, say one week, or one month. I know it’s painful to paper trade and see winning trades go by without you, but let me assure you, there is always another trade waiting for you!
In my own trading, I find that I can often become complacent when a winning strategy has been effective for some time. Overconfidence breeds laziness and laziness sows the seeds for losing trades. Let me give you an example from current market trends:
Don’t Get Overconfident
For several months dating back to last autumn, the asset allocation trade in which bonds and stocks traded in a reliable inverse relationship worked beautifully, and it became fairly simple for me to make money in a broad basket of investment vehicles all at once by applying my preferred trading research – technical analysis – to stocks, Treasury futures and foreign exchange products all at once.
Simply put, if I saw a bearish chart signal for Treasury futures, then I would sell bonds, buy stocks and even trade the dollar all at once based on that technical analysis chart signal. This approach cruised along smoothly for months, with stocks and bonds working on a very tight inverse tether. Then suddenly in April, something terrible happened: stocks and bonds started going higher together at the same time.
I lost plenty of money for a few weeks trying to sell bonds while the stock market churned higher. In essence, I got stubborn for a couple of weeks and clung to a principle of trading that was no longer effective. To be honest, I still find myself validating stock market trades via the bond market even though I know the asset allocation trade has been buried by the concept that the Federal Reserve will do whatever it takes to re-flate the economy—even if it means buying cash Treasuries. It’s hard to let something go that worked so well, but the market is very Darwinian in nature...if you can’t adapt and see signals quickly, you’ll get devoured by someone higher on the information food chain.
Another psychology mistake that I’ve had to navigate recently is that the news hasn’t fit trading patterns very well for the stock market. For instance, we’ve had a steady stream of soft economic reports, yet the S&P 500 notched the highest weekly close in mid-May in nearly one year! Trading those morning economic reports at face value has been a treacherous minefield. One thing that helped keep me out of the quicksand has been the realization that market psychology is working overtime against the bears—in essence, every single new short in the market since mid-March is losing money, which is no small issue considering open interest in S&P 500 futures is marching along at a record high clip!
Exiting Losers Really Matters
One of the most valuable tips of all time that has deep roots in successfully mastering your own mental dangers is that age-old saying, “cut your losses short, and let your profits run.” In essence, don’t fall in love with a bad trade! If you enter a trade and it goes through your support zone, then get out and re-evaluate your strategy. When you don’t cut your losses short and let your profits run, it puts tremendous pressure on your stock (or futures market) picking ability. Conversely, I have seen traders with a scalping mentality that are doomed to scrape and grind for every penny for their trading lifetime because they take profits too quickly when they get into a good trade. The secret here is to do your homework and find out which circumstances favor letting a winning trade run its course.
A classic psychology pitfall—especially from those who are “too close” to the market—is the tendency to assign random value points to a stock or a market just because of price history. For instance, many investors got caught buying stocks on the way down from the March 2000 peak simply because they perceived value based on those old prices. Hey, if a great company like GE was worth $60 bucks at the highs, it has to be a steal at $40, right? Make sure that you don’t just look at the price of a stock or a market and project your own sense of value onto that product without backing it up with solid research. Remember that when a market starts to run away from everyone, it typically overshoots valuation models by anywhere from 20 percent to 40 percent...bringing another one of our old favorite sayings into the forefront: the trend is your friend.
If you’re looking to maximize your trading profits, or even keep yourself in the game during a run of losses, it’s critical to come to grips with your own inner psychological demons. I know it’s painful, but it can pay off if you are willing to analyze carefully all of your losing trades. Think about what went wrong: did you pull the trigger too soon on an entry? Did you enter a trade with research or data that was off the mark? On this note, be careful not to deflect blame away from yourself too easily, which is just another form of denial that will not make you a better trader! Did you fail to exit a losing trade in a timely fashion? And don’t forget to be critical as well on your winning trades! On the winners, did you leave a significant portion of the move on the table, or did you exit at a strong time? Did your risk/reward ratio justify the trade in the first place? (Yes, there are such things as bad winning trades!) Putting it all together is a continual process, but once you honestly face the reasons for your actions, you will have mastered another important step on the road to success and consistent profits.
Why Can't You Pull the Trigger?
by: Ned Gandevani, Ph.D.
A common problem among novice and experienced traders alike is at some point they fail to implement their trading plans. They may spend countless hours developing a trading plan, but for some reason, when the time comes for executing their plan, they lose sight of the goal and let the trading opportunities presented pass them by without reaping any of the benefits.
For example, you may see the market is approaching your price level to buy, but you fail to pull the trigger at the critical time. As the market is moving up, you feel compelled to act, yet you do not. You feel angry and begin beating yourself up psychologically. You keep asking yourself why you didn’t take the necessary action? To get a better understanding of this behavior, let’s look at factors that make up our behaviors.
Behavior of a dynamic system results from two factors: internal dynamics and external factors. A dynamic system is any type of system that exhibits a behavioral change over time. A dynamic system, be it a stock market or a human being, moves and interacts based on the outcome of two primary forces, internal dynamics and external forces. For example, when you arrived at your office this morning, you used a means of transportation (an external factor) to meet your immediate objective (your want and desire, internal dynamics) to get to the office.
To identify the main cause behind the “not-pulling-the-trigger” syndrome, we will review these two factors in the following sections.
Internal Dynamics
In addition to external factors, your own internal dynamics can dramatically impact your behavior. According to David McClelland, a psychologist with about 40 years of research in human motivation under his belt, three variables interact in complex ways and cause an individual to elicit certain behaviors:
1. Cognition (i.e., your knowledge, your beliefs and understanding);
2. Skills and adaptive traits (i.e., your habits, abilities and personality traits);
3. Motives.
So, how does each of these factors affect a “not-pulling-the-trigger” syndrome?
You did not have a trading system or have the proper knowledge for trading. (Cognition);
You were not able to follow or implement your trading system due to your personality traits and habits. (Traits);
You did not place your order due to lack of motivation and desire (Motives).
In short, your understanding, psychological and emotional states and your motivation collectively had a major impact, so you did not place your orders. Let’s look at each of these three variables in the following sections.
1. Trading systems and trading knowledge. Your cognitive understanding of the market, i.e., your knowledge and beliefs about your trading system, help you perceive outside information and filter it accordingly. To trade successfully, it is necessary to establish a trading plan that answers the following questions: What market(s) do you want to trade? Do you want to trade futures, stocks or currencies? In which timeframe are you interested? – long term (position trading), short term (swing trading), day trading? How do you want to trade? – do you want to use a mechanical system or a discretionary system?
The cognitive variable deals with your understanding and belief. Today, a majority of traders know that they should have some sort of trading system before they risk their hard-earned money in the market. Your trading system basically tells you when to enter the market by placing your buy (long) or sell (short) orders, and it also tells you when to exit and where to put your protective stop. In future articles, we would discuss the essential factors in choosing and developing a sound trading system. For now, you should look into your own trading system to see if its variables are compatible with who you are. However, knowing how to trade and implement your system should enable you to bite the bullet and pull the trigger.
2. Applying your trading system and knowing your ABC’s. According to Dr. Ellis, the father of Rational - Emotive therapy, our beliefs about events, rather than events themselves, determine our emotions and behaviors. His theory is based on the ABC model. When you see an activating event (A) in a particular way, because of your beliefs (B) about the consequences(C) of that behavior, you adapt your behavior to the perceived outcome of the action. The activating event (A) and what you believe (B) about it, creates the consequences (C) of your behavior. Your beliefs create and shape your behavior rather than the activating event, e.g. the market.
Let’s look at an example of this theory. Suppose you are driving home from work, when a cyclist seemingly comes out of nowhere. You hit your brakes and the car screeches to a halt. Your heart is racing, adrenaline is coursing through your body, and you may even break into a cold sweat. Though you were surprised, the event was resolved quickly and no one was hurt, yet your physiological reactions were identical to those had you had an accident. This is due to the fact that your beliefs about the event, whether real or not, had a powerful effect on your experience both physically and emotionally.
Similarly, your beliefs establish a foundation for your reaction to market behavior. Though the market is the same for everyone, everyone’s reaction to the market is not. For example, you may think that futures trading is high risk and akin to gambling. Since this is the basis of your belief, your action is based on this belief, and you exhibit gambling behavior. You might risk too much or try to make a killing in the market. The result is that you may not follow your trading system; you may pull the trigger too much or not enough. On the other hand, your friend views trading futures markets as simply another way to make extra when they traded consistently through a system. Because of your friend’s belief about the futures market, he is likely to pull the trigger exactly when he planned.
Using the ABC model then can enable you to understand and, more importantly, correct your behavior. So, it’s important for you to analyze not only your beliefs about the market, but also the basis of your beliefs about the market.
Like our beliefs, our traits affect our actions and behavior, even in trading. Think about your experiences trading. Do you become nervous as soon as you place a trade and end up not following your trading plan, or do you sit back and gauge the market’s movement against your plan? On a Trading Personality Profile (TPP) test, for example, a nervous trader will likely have a high score in neuroticism, a determining factor in your trading. Dr. Pierce J. Howard describes neuroticism or negative emotionality as one of the main dimensions of our personality traits. The range of behavior ranges from reactive to resilient. In that continuum, the middle ground is someone who is responsive, someone who may have a mixture of both traits. Have you noticed how some people are naturally cool under stress? You may even call them cold or aloof. They probably have a low score in neuroticism.
Perhaps, you’re not exactly nervous when you trade, but you always feel you can improve on your trading plan, and you’re constantly tweaking it. Say that on a particular day you notice that a few signals were not profitable. Then you start playing with your system with the idea that you could improve on it. “Why not,” you think to yourself. You could add a few more indicators that seem to have some validity and achieve a better performance. You check out a few indicators like moving averages or different periods for the stochastics. Subsequently, you get a signal from your new and improved system, and it is a loser. Now you realize that the old version of your system might have produced a winning trade. You get angry with yourself because you did not follow your system, and you kept modifying it.
A TPP test may reveal that you have a high score in the openness dimension. It means that you like to explore different options and keep tweaking your system while looking for the perfect system. You find that you keep repeating that same behavior and you wonder why. You repeat your behavior because it is part of who you are, that is one of your traits. Rather than beating yourself up over it, you may need to look for a system or an alternative method that is compatible with your particular personality traits rather than try to change the system or trade in conflict with it.
In order to quickly identify your strengths and weaknesses in trading, take a TPP test. If you are able to identify your particular traits, you then can create or select a trading system that is more compatible with your own personality, giving you a higher probability of success. As you can see from the previous example, we must have a better understanding of our own personality traits in order to become better traders.
3. Trading motivation and desire. Why do you trade? Do you like the action? Do you see trading as quick money? Your answers to these and similar questions will reveal your inner motivation for trading. Motivation is the underlying force that moves you toward or away from something. Many traders may come to trading – in particular day trading – because they enjoy the action. Some may trade solely for its potential monetary rewards. However, other people may trade because trading presents an intellectual challenge for them and keeps them sharp. They like the challenge of trying to figure out what the market will do next.
What is your motivation for trading? If, like many individuals, you started trading merely to make money, then ask yourself, “can I make the same amount of money without going through all the inherent financial risks and the emotional stress of trading?” What if you were offered a job that you could make the same amount of money, even more? Would you take the job?
Let’s consider two traders who have just taken long positions in the S&P.
Trader A watches the market as it fluctuates around the entry point. Then, without warning, the market breaks three points straight down. The stop being used is a mental stop of two points. Trader A gets angry and exits his position with a three-point loss. Although upset, he realizes that this is just part of the cost of doing business and begins to look for the next setup.
Trader B also watches the market as it fluctuates around his entry price. Again, without warning, the market breaks and is now three points below the entry price. The stop is also a two-point mental stop, yet the trader does not exit his position. He gets very angry and begins cursing and banging on his monitor. He is yelling at the floor traders, brokers, whoever might be responsible for this move against his position. Now the market retraces about two points toward his entry. He is now feeling much better about things and is validated for not exiting his position and following his plan. Then, just as suddenly as the last break, the market drops another four points. Now he is fuming. His position is now underwater five points. And, yet, he still does not exit his position. His anger is fueled by the fact that he could have exited with only a one-point loss, but now has a five-point potential loss.
Considering the pain vs. pleasure principle, why has he not exited his losing trade? Often traders feel pain from losing trades, but don’t follow their plan or make the necessary change in strategies. Did Trader B enjoy his feeling of loss and regret? What was his motivation for not exiting? Did he not like being wrong? Or was it something deeper? Was it denial? Or was it about control. These questions require serious consideration before one could answer them, and it is essential to identify the motivating factor behind your behavior before you can change it.
The blanket view of the psychology of trading focuses on fear and greed. Fear as a primary motivation may show itself in different variations. Fear and greed may be utilized as general concepts to understand market psychology. To break it down, fear is primary, but does not provide the answer for the causes underlying all problems. The trader in a losing trade fears losing more. It is human nature to manage risks, so he manages his losses and stays with the losing trade longer than he should. Another way in which a trader exhibits fear is when he cuts his winning trades short. He takes the profit quickly out of fear of losing whatever money he has gained. Further research of the psychology of human behavior reveals that we are risk averse in our gains; we try to protect profits by exiting trades quickly. Nevertheless, understanding that motivation is a critical component of internal dynamics should shed more light on behavior, in particular, trading behavior.
Many times motivating factors are clear, and many times they are not. Motivation and emotions interact with each other in a complex format. Sometimes the motivation might be easily distinguishable from emotions. Other times, the line between them is blurred, making it difficult to find the underlying cause for behavior. One way to identify your inner or subconscious motives is to look at your value system. What do you value the most? How do you define good and bad? How do you define success and failure? The answers to these questions can help you figure out your motives for being in the market and help you define or redefine your value system for faster goal attainment.
If money is your primary motivation, then you will experience emotional swings associated with your performance. In some cases, when the market moves against you, you may get frightened and exit your trade prematurely. Then, after you exited your trade, the market goes in your favor, as was indicated by your trading system. Or when your position starts to show a bit of profit, you are compelled to exit quickly. Then, much to your dismay, you see the market continue going in your favor for a much larger profit. This type of motivator creates behavior that, in turn, results in an emotional roller coaster for you. You start beating yourself up psychologically and your self-confidence is shaken.
For the same reason, you may not pull the trigger since you had a losing trade and are concerned that your next one may be a losing one too. So, you tell yourself that this time you will look for more confirmation before you enter your trade. This time the market moves away from your potential entry point too quickly. Now you feel that you acted too slowly and missed a great deal of profit on the trade. So the next time you decide to be more aggressive and not wait for confirmation to enter your trade. As luck would have it, the market moves against you and you end up with a losing trade. “@!#%$$,” you repeat to yourself and curse the market and whoever is close by. You again start the negative internal dialogue and feel there is no end in sight.
Trading is a business and, like any other business, you need to have the fundamentals before your start. A love and passion for trading. A motivation for trading far beyond money. A sound trading system or methodology, a sound, trading plan, and the ability to implement that plan. If you only trade for the money, you would do best to find another career and avoid risking both your emotional and financial capital. Your motivation for trading is an important component underlying your behavior or lack of it. If you are not able to pull the trigger, I encourage you to find the real reason you are trading.
External Factors
External factors and your environment, such as your trading location, may also play a large role in why you can’t pull the trigger. Are you in an office or at home? If you are at an office, are you alone or in a group setting? Are there any windows? Is the room light and airy or dark and subdued? What color are the walls? All of these may or may not have an impact on your trading. In addition, there are other external factors. Your Internet connection, your PC, your account size, your broker, etc., all can have an impact on your trading. Though external factors may influence your behavior, they affect you only to the degree that your personality shows sensitivity to them.
External factors are more like catalysts; they affect your behavior and your ability to implement your trading strategies. However, the decisive factors are internal dynamics: your motivation, knowledge and personality traits. Among your personality traits, you have one dimension that is called the extraversion dimension. This dimension of your personality deals with your preference for being actively involved or engaged with other people and environments.
Depending on your score for the extraversion dimension, you could be categorized as either being an extravert or an introvert. If you like to take charge, assert your opinions and work with people, you are most likely an extravert. If you tend to be more independent, steady, reserved and comfortable being alone or working alone, you are most likely an introvert.
An environment more suited to your personality would facilitate better trading results. Therefore, you need to pay close attention to your trading environment and arrange or modify it so that it best suits your personality.
Understanding the internal dynamics and external environment will help you implement your trades and help you avoid the “not-pulling-the-trigger” syndrome. You need to acknowledge and identify your habitual behavior patterns or personality traits in order to be a successful trader. Paying attention to your personality will aid you in making the right decisions and increase your willingness to pull the trigger. A proper trading environment and support group along with your clear understanding of your trading system, habitual pattern and personality traits and your true motivation, all hand in hand eliminate the “not-pulling-the-trigger” syndrome and help you achieve your trading success.
Here is an article from
www.sfomag.com
Demons of Trading Can Shrink Your Potential: Four Experts Discuss the Mind Games of Trading
by: Gail Osten
GO: At what point in their trading/investing journey do you typically see traders/investors, personally? What types of situations typically bring them to you?
RR: There are several. One would be that they’ve spent years designing a system to trade and now they can’t “pull the trigger” on the system. That’s one. Another would be that they’re losing money over trading or not getting out of losses, and they come to a forced awareness that they need help. They’ll come to me then.
GO: Those are the most typical problems that you see?
RR: Yes. Or maybe they work for a bank and they’ll ask the bank to send them to me and they will.
GO: Ok. So, you do both individuals and individuals trading for institutions. Interesting. You work with institutional traders as well, Ari.
AK: Right. I work with a number of hedge funds, and I work with individuals within these hedge funds.
SIDEBAR
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Blogs: A Tool for Cultivating a Winning Mindset
by: Brett N. Steenbarger, Ph.D.
As a psychologist and an active trader, I am my own trading coach and client. Much of my self-work has little to do with resolving conflicts from the past, learning coping skills, or other such therapeutic staples. Rather, I find myself working on consistently implementing the cognitive, emotional and behavioral patterns that distinguish exemplary performers across a variety of disciplines. There is rich research literature on the psychological factors that distinguish creative, successful individuals in the arts, sciences, sports and politics. Dean Keith Simonton, psychologist at the University of California, Davis, and K. Anders Ericsson, psychologist at Florida State University, are two of the more prolific contributors to this body of knowledge. Both emphasize that high levels of achievement in any field are the result of continuous, intensive, deliberative practice, in which skills become internalized to the point of becoming automatic.
An insightful article about legendary baseball pitcher Sandy Koufax appeared in the May 16, 2003, issue of Investor’s Business Daily. Koufax observed, “As much as you can do to get the variables out of the delivery, the easier it is to repeat. That’s the key to a repeated golf swing or pitching motion or batting swing…The pitcher wants to do exactly the same thing every time.” Jane Leavy, author of Koufax’s biography, noted, “The hardest thing in sports is no single act, it is the replication of that act.”
Working on my own trading, I have been able to achieve a higher degree of replication by developing a set of rules to guide my entries, exits and position sizing. Most of these rules are based on research that I have performed regarding the trending qualities of the SP and ND futures. In general, I want to be entering directional markets when the market’s trendiness is expanding, exiting when the trendiness is waning, and adding to positions when the short- and intermediate-term trends and trendiness are aligned.
To keep myself grounded in these rules, I maintain a daily weblog (“blog”), which is an online diary that allows me to follow each trend-related measure, assess its status and formulate my ideas for the coming day’s trading. (The blog can be accessed at www.greatspeculations.com/brett/weblog.h
tm). The blog forces me to focus on basics and “get the variables out” of my trading. I have found that it greatly reduces my internal mental chatter during trading by taking much of the discretion and potential impulsivity out of decision-making. It takes me out of the mode of trying to pick tops and bottoms and concentrates my efforts on riding the sweet spot of market movements. It also makes all of my market mistakes quite public—a useful tool in cultivating humility!
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GO: Because you’re there to help them anyway, in the context of the hedge fund, what are the most typical problems that you try to help them through?
AK: I think the biggest problem is getting people to size their positions, and I try to do that typically by getting them to set some goals. One is to really develop a methodology where there is a consistent kind of track record of performance. Somebody can have more winning days, but they don’t make as much money on their winning days as they do on their losing days, which means they’re holding on to their losers and not getting out.
GO: That’s very typical, isn’t it?
AK: Yes, so I would use these kinds of parameters. How much can you make this year? Given what you know, given that you have some control of sizing, given that you have so much capital, maybe you can make X dollars this year. OK. Say you have Y dollars of capital, so the next thing would be to get them to say, “To make X dollars a year means to make Z dollars a day. And to make Z dollars a day, how many positions do I need? How big should they be? How long should I hold them? How much work do I have to do to give myself the confidence to be able to buy those kinds of things.” So, managing loss and developing that discipline, building a kind of methodology, finding a group of financial instruments that you really can do the work on. It’s not just automatic.
GO: But to be able to ingrain a skill, to make it automatic, doesn’t that take a certain type of personality? Are there certain types of personalities that make better traders than others? Or are there certain personalities that should probably avoid trading altogether?
AT: One is the opposite of the other. Entrepreneurial people – and that means self-starters, motivators, risk-takers. People who are not only analytical, but who are creative as well. Most people think that to have the analytical skills is to be a great trader, but I found that to be a really great trader you also have to be creative and synergistically combine the right brain with the left brain. Emotionally self-confident, optimistic, self-disciplined—that’s how I would describe a good trader.
GO: What about smart?
AT: There are different kinds of smart. There is emotional smart. There is street-wise smart. There is wisdom. There is intellectually smart. I find that intellectually smart very often gets in the way of being a great trader. People that are street-smart, wise and intuitive are more likely to be better traders.
GO: Are there certain types of personalities that make better traders than others?
BS: Absolutely. That was some of the questionnaire research that I was doing a while back with Linda Raschke while we were looking at traits and coping styles. The successful traders were high in a trait called “conscientiousness,” meaning they were very dependable, very reliable. The successful traders had coping styles that were more problem-based. When something went wrong in trading, they would say, “OK, what can I do about this trade?” The traders who were having problems were high in a trait called “neuroticism,” which is a tendency toward negative emotional experiences, like anxiety and depression. And when the unsuccessful traders were having a problem with trading, they would get emotional and they’d say, “What’s wrong with me?” and “Nothing ever works.”
GO: So there are certain personalities that probably should avoid trading altogether?
BS: I think so. No one ever wants to hear that, of course.
RR: I don’t think so. If they want to trade, we’ve got to find a way for them. They come to me to find a way, and so I’ll find a way, with their personality, to do it. But basically, good traders are optimistic. They are optimists who can apply discipline on top of their optimism. Good traders are risk takers. They’re people that are comfortable with uncertainty. They’re adventurous. They’re able to think quickly and make decisions. Act. They’re able to act. They’re willing to admit when they’re wrong, and they don’t have a fear of being wrong.
SIDEBAR
************
The Day Trader Who Didn’t Trade
by: Ruth Barrons Roosevelt
In my years of coaching traders and investors, I have seen many kinds of self- and profit-defeating behaviors. One would think it would be easy enough. Find a winning strategy that gives you an edge. Test it to make sure that it works. And employ the strategy consistently. Some do that, to be sure. But others become their own worst enemy on their way to success.
Traders and investors hang onto losing positions until the enormity of the loss
overwhelms them. They sell their winning positions quickly to pocket slender profits, while the trades go on to make enormous profits. They write trading rules, only to violate them. They get greedy and over-trade, only to lose all their money. Some simply can’t pull the trigger on a trade or investment. The opportunities slide right past them as they remain immobile and disappointed.
John Smith (not his real name) came to me after a year of watching the markets. He said he wanted to support himself by day trading the E-mini S & P. He had only taken three or four trades in the past year. His proven system offered him 15 to 20 trades a day and made money on paper. He had the idea that if he studied enough, he could pick out the winning trades and let the losers ago. In fact, those few trades he had taken had been losers. Time and money were slipping away. It costs money just to sit there day after day doing nothing.
John said he was learning by watching the market. I suggested that what he was learning was how not to trade. I suggested he start each day setting his intention to actually trade, and that he leave the screen as soon as he let the first trade go by. He agreed, but was unable to do that. He sat there watching, telling himself he was learning about the market. He had developed a comfortable spectator sport.
When fear is stronger than desire, fear dominates. John feared losing money, and he feared being wrong. Each time a signal came up, he imagined that if he took the trade, it would be a loser. Imagination is stronger than will power, and so he was unable – no matter how determined – to put the trade on.
Over the next three months, John began to trade. First, he mentally rehearsed taking all the trades. He shifted the belief that losing made him a loser and was wrong, to the belief that losing is a natural part of the game and that not taking all the trades is wrong. He shifted his imagination from losing to winning by asking himself whenever an entry signal came up, “What if this trade is a big winner?”
Most importantly, he learned to set a new intention when he began each day’s trading. He shifted his intention away from losing or making money to following his system. He understood that the long-term consequences of following a winning strategy consistently was indeed wealth creation.
He developed what I call emotional inoculation through actual trading. At first he only took one trade a day, then two, then three, and finally all of them. Each time he took a trade, it became less significant and easier to do. Today he makes a nice living with his trading.
************
GO: Do you ever turn anyone away?
RR: No, I don’t, because they’ve come to me and said, “Help me.” I’ve had some really difficult clients, and I’ve been able to get them trading.
GO: Well, for those people who really want to trade, but need help, how do they find a good coach or therapist? How would you define a trader’s coach or therapist?
AT: First of all, recommendation is the best. Credibility, evidence of work and accomplishments, speeches, articles, books. Ask for testimonials or ask for people to call. A good coach takes an investment in your life, someone who makes a long-term commitment to you – not just there for you right in the beginning, but at each new level of success. And the good coach makes a trader as independent as possible as soon as possible. That’s really important. In a typical psychology class, you’re really taught to keep a client coming. A coach gets the best results when a client trusts and follows the advice the coach gives, so it can’t only be a one-way street. There has to be a bond between the coach and the trader to get the best results.
BS: A good coach or therapist is part expert, part teacher. I think if you don’t have experience and expertise in the skill domain, you’re going to be limited in what you impart. I don’t think a person could be a good basketball coach if they had never played basketball. That being said, just knowing a lot about something or having done it oneself doesn’t necessarily mean you’ll be effective in imparting it to others. In fact just recently, there were all of the problems with Michael Jordan and the Washington Wizards; he is no longer with the team because they felt that he wasn’t effective in imparting his abilities to others. He’s clearly one of the greatest ever to play the game and, yet, he didn’t seem to be able to mentor all of the young ones to reach his level. You have to have both.
AK: I think a good traders’ coach is somebody that understands the trading process, that understands the challenge, the dilemma that traders face as regards the realm of uncertainty in a disciplined way…the balance between the willingness to take risk against the need to preserve capital. That creates a certain amount of inner tension and frustration, and you have to be able to deal with that. You need somebody that’s interested in working with people who are in a game that lends itself to high performance. Not everybody likes to do that because you’re talking to people who are—if they’re successful—able to do things that are beyond what most “ordinary mortals” could do. So, these guys are, as a result of their willingness to play in the game, like sports stars. You have to be able to work with them and help them and not put a value judgment on their lifestyle or the fact that they’re making such an inordinate amount of money. And yet, do it without feeling envy or jealousy, which isn’t necessarily the easiest thing.
GO: I’d like to switch gears here. There are probably more investors than traders, so I want to address the investors out there with this question. What do you do differently for traders and investors? Is there a difference?
BS: I think it’s a completely different thing. They’re not even related in my book psychologically because in investing you are making longer-term decisions and it’s a very conscious, deliberate, analytical process. In trading, very, very often, you’re making short-term decisions in very active markets, and you’re relying on skills that you have honed over time and that you’re executing relatively automatically. The shorter the time frame of your holding a position, the more automatic your skills have to be. You don’t have time to engage in elaborate analyses.
RR: Yes, but it shouldn’t be too much different, it’s just a different time frame. That’s where people in the stock market got robbed. If they had had more of a trading mentality, they would have gotten out or gone short. But they didn’t. So we really don’t want to think of investment as just staying put. With any good investment, you have to see if it’s still a good investment. You need to reassess it. Investing is just a slower-term trading, and I think if you look at it that way, and reassess all the time, you would be much better.
AT: Psychologically, a trader and investor go through the same process, but those who make quicker decisions are more likely to have more emotional issues to deal with. For both, I start out with an assessment.
GO: In other words, we have some very different ideas out there about what it means to be an investor and a trader. It’s definitely something to consider for anyone who is seeking a trading/investing coach. This is always something I love to ask because I think it is exceedingly helpful for traders – if there were three pieces of advice you could offer the new trader, what would they be?
AT: First, to have a good education in trading. And while there’s a lot of stuff out there, there’s a lot of people teaching and everything, you really need to self-educate. Just read, read, read, read and read. And then have a plan, a business plan which includes rules for entering and exiting a trade. And follow those rules, and if you can’t follow those rules, then hire a coach.
SIDEBAR
************
Stretching into a New Comfort Zone
by: Adrienne Laris Toghraie
Robert has been a consistent trader for many years. Each morning, he awakens knowing that his mortgage is going to be paid, his children will remain in private school, and his wife can impress friends with elegant entertaining from his trading profits. When Robert stopped at my booth at his first trading conference and looked at my sign, “Problems with Discipline, Stop Here,” he said, “This is the most important part of trading,” and asked if I could bring him to a new level of success in trading. I suggested that he take an evaluation and see if there was anything that was actually preventing him from reaching his next level of success. Though Robert’s evaluation indicated that he was in great psychological shape, he wanted to kick up his trading and his life a notch. He decided to work with me in private consultation.
Robert had a remarkably good life without the trials and setbacks that most traders experience. But I was to find out that being safe in his level of comfort was why he never made it to exceptional levels of trading success. His practical and loving parents who never wanted to risk or stretch beyond their comfort zone passed those ideals on to their son. When I asked him why he wanted to go beyond his level of security, he said it was because his son’s achievements as a golfer inspired Robert to do more. The athletic coach had inspired his son’s success, which then inspired Robert to become the best that he could be. Robert joked, “I cannot be outdone by my son.”
In order to motivate the best performance in Robert, we had to change his values about money and risk, which meant that we had to increase his neurological system’s comfort zone. We accomplished this transformation by replacing his current mental images of his life and the feelings of comfort those pictures inspired, with new pictures of how he would like his life to be and feelings of comfort with a more enriched life. In addition, we developed an overview of his entire life, accentuating and expanding on the things that gave him more pleasure in a progressively more ambitious lifestyle.
I am pleased to report that Robert is actually working fewer hours, making more money by cherry picking, and risking more with his better trades than ever before. This process has given him twice the amount of time he is able to spend with his son on the golf course, and he and his wife are spending more quality time together. Their life together has been revitalized. He is taking better care of his health and has a new interest in learning more about himself. Now, Robert lives his life finding enjoyment and excitement in the process of reaching towards the best he can be in all areas of his life.
************
GO: OK. Ruth?
RR: Find out what works. Verify that it works. Do it.
GO: Those three things.
RR: It’s pretty simple.
GO: Brett?
BS: First of all, if your goal is to become proficient, that takes, like in any field, a number of years of concentrated practice. In trading, start with a very small account and very small positions, so that you can survive your learning curve. And, then, as you gain success, as you gain experience, you can always add to your size.
The second thing is that, if a newcomer’s going to be a full-time, very active trader, he must be adequately capitalized. If he’s under-capitalized, he’s subjecting himself to very high potential draw downs. So when a trader is under-capitalized, he goes through more emotional swings because the draw downs are affecting a greater percentage of his total equity. So, being well capitalized is also a psychological strategy.
GO: I don’t think most people would have considered being well-capitalized as a good psychological approach to trading. And your third piece of advice?
BS: My number three piece of advice: Find a mentor. Find someone who you can emulate and learn from that person. That was certainly true when I learned how to do therapy. I could pick up things from their style and synthesize those into my own style. And I think it’s the same with traders.
GO: Ari?
AK: First, keep your losses down. Be willing to face the facts, tell the truth, admit to being wrong, and get out to preserve your capital. Don’t get attached to your ideas to the point that you are losing money.
Second, as you build up a cushion, begin to size your positions commensurate with your level of conviction in your ideas and consistent with your profit targets. This is tougher than it appears, and most people tend to be too conservative and cautious and miss opportunities. Be willing to be guided by your objectives and do the work necessary to justify your conviction.
Third, review what you have done, be flexible, keep course correcting and improving your performance and adjusting to the new and changing demands of the marketplace. Successful trading requires attention and intention and commitment.
GO: Brett, there is one other thing that you said to me that I’d like to add as refers to how trading, or working on it, can be of benefit generally. One more time, because I think it’s a good way to end this piece.
BS: When done properly, I think that working on trading is a way of working on yourself. As you work on the trading, it forces you to deal with pressure in certain ways, and it improves you as a person. And as you improve yourself as a person, and work on your ability to handle risk and work on those analytical abilities, it helps the trading as well. So, in the best of all worlds, you get a certain synergy going, your trading is improving and you’re improving. That makes it a noble pursuit.
GO: Excellent comments from you all today. Thanks again for your insights.
Stronger Dollar will hurt foreign stocks (in US Dollars).
Reducing small foreign exposure further.
WOW !!!
TNX closing in on 4 %
GO RYJUX !
Looks like a good day for Rydex Juno.
Reducing Asia exposure as well ?
Pacific Rim Funds Rebound Post SARS Scare
http://biz.yahoo.com/rb/030712/financial_fund_score_1.html
Reuters
Saturday July 12, 1:59 pm ET
By Svea Herbst-Bayliss
BOSTON (Reuters) - U.S. stock mutual funds that invest in Pacific Rim countries are delivering robust double-digit returns after the region has bounced back from serious health and political crises.
Early in the year, investors pulled money away from the region that reaches from Japan to Korea amid fears that SARS, the sometimes deadly respiratory infection virus, and a deepening nuclear crisis with North Korea would hurt growth.
Tourism, retail and transportation sectors were hit hard, but analysts and fund managers say the storm has now passed for the small number of U.S. funds that concentrate on this region.
"The bad news is over," said Bill Rocco, analyst at research group Morningstar Inc. "SARS doesn't seem to be too much of a current problem and North Korea, which flared up early in the year, has become mostly background noise."
For fund managers, the passing storms that included a spike in oil prices around the time of the war with Iraq left plenty of bargains to be snapped up when U.S. markets started to rally and the global economic gloom began to lift.
According to fund research group Lipper Inc., a unit of Reuters Group Plc(London:RTR.L - News; NasdaqNM:RTRSY - News), Pacific Region funds returned an average 19.5 percent in the three months ended July 3, more than the 12.95 percent return posted by the Standard & Poor's 500 Index (CBOE:^SPX - News) in the same period.
"Everyone was worried about anemic growth in the United States and that colored judgment on Asia," said Andrew Beal, lead portfolio manager for emerging market countries at Nicholas Applegate Capital Management.
"But our view is that there is going to be a very large middle class in Asia that will spend money on things like televisions, computers, and consumer durables, which will help propel Asian growth for the next decade," he said.
Nicholas Applegate oversees two of the best-performing Pacific Region funds -- the PIMCO:NACM Pacific Rim fund (Nasdaq:NAPRX - News) and the John Hancock Pacific Basin fund (Nasdaq:JHWPX - News).
The funds' bets on retailers and real estate are taking off. For example, Hyundai Department Store (KSE:69960.KS - News) of South Korea has surged more than 50 percent this year, helping fuel the Hancock fund as the company's high-end department stores and home shopping businesses boom, Beal said.
Hong Kong real estate group Sino Land (HKSE:0083.HK - News) is also in the portfolio, Beal said, noting that he likes the company's earnings profile and was able to buy it at a deep discount.
While fund managers may be having a field day -- even the worst-performing funds in the group posted double-digit returns in the last three months -- investors have been wary.
Jointly, these funds manage only about $2.9 billion, according to Lipper data. That compares with $33.2 billion invested in emerging market funds and $471.2 billion in large-cap core funds, one of the most popular types of funds.
One reason investors have shied away may be the group's erratic performance, which makes the category more appealing to market timers rather than long-term investors, analysts said.
In each of the last three years, for example, Pacific Region funds have lost an average 14.87 percent, more than the 10.93 percent average loss for the S&P 500 during the same time.
"Most people will own only one foreign fund and you have to be a real fund junkie or have a lot of assets to go into this area," Morningstar's Rocco said. "You can make a case for having these funds in addition, but not in lieu of, a broad foreign fund."
=DJ US Agency Debt Mkt Vulnerable As Negatives Stack Up
07/08/2003
Dow Jones News Services
(Copyright © 2003 Dow Jones & Company, Inc.)
By Julie Haviv
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)- The agency debt sector has been so far relatively unscathed by the recent shift out of Treasury securities into stocks by Japanese investors.
But the market is at a vulnerable point, say analysts, after its recent strong performance, particularly given its reliance on overseas buyers this year and the lower liquidity of the securities compared with Treasurys.
"Inflows from overseas investors might begin reversing," said Mukul Chadda, agency strategist at Lehman Brothers. "The recent backup in the Japanese bond market might prompt such a reversal."
In recent days, Japanese investors have been selling securities issued by government-sponsored enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks, according to a source at a large Japanese-based firm.
The pressure on prices was offset by buying out of non-Japan Asia, but Tuesday's selling out of Asia was said to have outweighed the buying, he noted.
Japanese investors have been selling Treasury and agency bond holdings in recent sessions and moving into stocks. That shift comes as the Nikkei 225 stock average has inched ever closer to 10,000, closing Tuesday at an 11-month high at 9898.72.
This doesn't bode well for the agency market, which has benefited from Asian investors' hearty appetite for such debt this year.
In the first half of 2003, Asian buyers bought 33.9% of Fannie Mae's noncallable debt and about 24% of Freddie Mac's dollar-denominated debt.
And just two weeks ago, Asia bought a staggering 37% of the Federal Home Loan Banks' $3 billion five-year global debt offering.
And, apart from a brief interlude when the market was rattled by Freddie Mac's management shakeup and official probes into its accounting, the market has enjoyed an extremely good run in past months.
Agency yield margins over Treasurys - the premium demanded by investors for the additional risk associated with the bonds - are currently at their tightest levels in five years, and to some the sector offers little upside potential.
Lehman's Chadda noted that because trading volumes in the agency market are far lower than in the Treasurys market, price changes in the event of a sell-off would be far more pronounced in agencies than in Treasurys.
He said that the agency market has grown as a percentage of the Treasury market over the last few years, yet the average daily trading volume of agencies has not increased as much.
"If indexed funds were to alter their allocation of agencies, the impact on spreads would be greater now than earlier," he said.
Hunt For Yield A Negative, Supply A Positive
Some market participants are also keeping a close eye on domestic investors, who, in the current low interest rate environment, are reaching ever further for yield and turning to corporate debt.
"I think more important right now is domestic appetite for more corporates given the first half performance," said Jim Vogel, senior vice-president at FTN Financial Capital Markets in Memphis, Tenn. "While there might be a leveling off or slight decline in overseas appetite, I think the marginal buyer/seller to watch is domestic."
Vogel pointed to Tuesday's 10-year corporate offering from Goldman Sachs. The deal, originally launched with a size of $1.25 billion, was increased to $2 billion. It sold at 104 basis points over Treasurys, with a coupon of 4.75%. A basis point is 100th of a percentage point.
In comparison, the 4.50% Freddie Mac 10-year reference notes were quoted late afternoon at 36.6 basis points over Treasurys.
The agency market, however, does have positive supply issues working in its favor.
According to research by Shrikant Ramamurthy, agency strategist at RBS Greenwich Capital in Ct., net agency issuance declined by $15 billion in June as a result of strong call activity and buybacks. Net noncallable debt, or bullet, issuance declined by $27 billion in June.
Year-to-date net issuance has totaled a mere $14 billion compared with $115 billion in the first six months of 2002. Net bullet issuance in the first six months of 2003 has declined by a whopping $60 billion after an increase of $44 billion in the same period of 2002.
"Given the sharp drop in net agency supply...it is not surprising to find that agency spreads are close to their cyclical tights, despite the re-emergence of headline risks," Ramamurthy said.
By Julie Haviv, Dow Jones Newswires; 201-938-2071; julie.haviv@dowjones.com
(END) Dow Jones Newswires
07-08-03 1616ET
http://www.prudentbear.com/internationalperspective.asp
International Perspective, by Marshall Auerback
Winning The War, But Losing The Peace?
July 8, 2003
Long forgotten by the markets, but still lingering in the background is Iraq. Before the Iraq war the polls showed that both individual and professional investors thought the war would go swimmingly. In the first days of the war it did not go as well as expected. But after the thunder run of American armor through Baghdad on the weekend of April 6-7, it was apparent that the underlying reality of the war outcome was closer to those pundits in the "cakewalk" camp, as opposed to who predicted a quagmire. At that point in time there was a consensus that winning the war handily would buoy the sentiments of consumers, corporations and investors. At a minimum, there would be a month or two in which consumer and corporate spending would surge and stock prices would rally.
Well, the rally has occurred with a vengeance, but it is questionable as to how much of a role America's wartime success has actually played. The market's recovery rests more with the extraordinary degree of monetary stimulus and mortgage refi activity than any military proficiency per se; "hock and awe", as opposed to "shock and awe", if you will. In the words of global market strategist, Chris Sanders of SRA Research:
"It seems quite clear that the Fed is moving closer to what it calls 'unconventional' measures, ostensibly to offset the risk of a self-reinforcing deflation. There may be Fed governors that really do worry about deflation, but deflation is not the Fed's biggest problem, or even a problem. Financing the growing government deficit is. In declaring its bias toward lower rates and clearly mobilising its principle shareholders, the banks, to buy the bonds that finance it, the Fed is in fact moving closer to a war footing. The US financial system is being mobilised along with its military.
That this is not even discussed in the public media is a triumph of agitprop and expectations management. Investors and citizens should take note, however. The dollar is in free fall; a rout that would have already been disastrous were it not for the heroic efforts of the Japanese Ministry of Finance and the Bank of Japan to support the US currency. No one knows how far the Japanese financial system can be squeezed to finance the burgeoning American current account deficit because no nation has ever, since the advent of central banking, been in quite the position Japan is now in. The Japanese government is now accumulating dollars in huge tranches, billions at a go. Rightly or wrongly, the Japanese government evidently believes that it has no choice but to follow Washington's lead."
Nor has oil been much of a factor. Indeed, after falling initially to $26 amidst expectations of a flood of Iraqi oil, the price has recently hovered around $30 per barrel again. Natural gas prices have moved even higher, prompting an unusual expression of concern by Fed chairman Alan Greenspan. Optimistic expectations of a prompt resumption of Iraqi exports have been persistently scaled back. Even the Iraqi state oil company professionals, who were among the more westernized part of the population that the U.S. has relied upon to staff the new government apparatus, have made it clear they do not want the Americans involved in the repair and reconstruction of the Iraqi oil fields and have proved reluctant to provide assistance. Sabotage has become an increasing reality as well, as organized resistance to the Anglo-American occupation has emerged.
Despite the military success, the main concerns of the war skeptics - namely, that the war would transition quickly into an occupation that would prove difficult and carry with it unacceptable costs - have not yet been invalidated. Before the invasion began, the U.S. army chief of staff, General Eric Shinseki, estimated that the occupation might require as many as 200,000 troops at a cost of $50 billion a year. Although Shinseki's estimates were publicly repudiated by Secretary Rumsfeld at the time of their publication, the increasingly urgent calls for additional foreign troops from America's allies, suggests that if anything, Shinseki's estimates could be conservative. The following press report is pertinent:
"History shows that two factors determine the force level necessary for policing operations: the size of the population and the underlying level of violence. As documented by Rand Corp. analyst James Quinlinvan, societies with relatively low levels of civil violence such as the United States, require only two to three police officers per thousand residents. By contrast, during instability in places such as Northern Ireland, Malaysia, Bosnia and Kosovo, intervention forces have required approximately 20 troops per thousand residents to maintain order.
Post war Iraq will likely fall in the latter category. Even before this war, Iraq was seething with ethnic discontent, partly due to Saddam Hussein's vicious suppression of Kurdish and Shiite revolts in 1991. Now Iraqi Kurds are taking back their former homes in the north, sending Arabs fleeing for their lives. In the south Iraq's Shiite majority likewise seeks revenge against anyone associated with the Sunni dominated regime of Saddam.
Further complicating matters, Turkish troops might cross into northern Iraq to defend ethnic brethren and oil claims if Iraq's Kurds attempt to consolidate control over Kirkuk and Mosul. In addition, the demise of Saddam's security apparatus has sparked widespread banditry and looting, leading some areas to embrace radical religious leaders hostile to the U.S. occupation. Finally, the unexpectedly strong resistance of Saddam's militias during the war, the discovery of arms caches throughout the country and the influx of self- declared Arab holy warriors suggest that armed insurgency and suicide attacks could persist. To quash all of this simmering civil violence, centralized policing of postwar Iraq would require and average troop level of about 20 per thousand residents. Given Iraq's population of about 24 million, that could mean 480,000 peacekeepers."
----Lack of Troops Threatens Bush's Postwar Goals, USA Today, Alan J. Kuperman
Despite the recent reaffirmation by General Tommy Franks that existing troop levels in Iraq are sufficient, the example of Afghanistan provides testimony to the credibility of such claims that the cost of peace keeping in Iraq will be high. According to the New York Times, the allied forces still have 16,500 soldiers and peacekeepers in Afghanistan - a nation of 27 million people. That is less than one peace keeper per thousand in the population.
What has been achieved in Afghanistan? According to numerous reports, the allied forces only control the capital Kabul, and their control even there is not complete. The rest of the country is under the control of war lords and Al Qaeda. After almost a year, there is still ongoing military action. As a New York Times article ("Warlord Central") recently makes clear, reconstruction of the most vital infrastructure has not been possible given the chaos outside Kabul. This article also notes that, as the U.S. forces there persist in ferreting out terrorist groups, their incursions have progressively increased anti-American sentiment.
The cost of the "occupation" of Afghanistan has been so high that President Bush has reversed policy there. Initially the U.S. was to control post war Afghanistan. Recently, control has been turned over to NATO. Many will argue that Afghanistan has always been a more violent country than Iraq and that the terrain of Afghanistan has made occupation extremely difficult. This may be so. But the fact that the "occupation" of Afghanistan has secured so little gives some credence to the claims of Rand Corp analyst James Quinlinvan and U.S. army Chief of staff Eric Shinseki.
When this evidence is to any number of informed market participants, they uniformly responded: The occupation cannot possibly prove to be so costly and the oil revenue of Iraq will pay for it. When it is pointed out to them that the net oil export revenue after operating costs of Iraq at recent "full capacity" production was only $12 billion a year and that this was needed to pay for minimal imports of foodstuffs and supplies for the Iraqi people, market pundits have remained uniformly skeptical. In any case, they reply, it's early days in Iraq and public opinion is being prepared to expect the troops in Iraq for a considerable period.
But do American and British governments have the staying power and, indeed, the financial resources to maintain a long occupation? If so, why are increasingly urgent requests going out to America's allies (most recently, India) for increased military assistance in Iraq? And will the incipient forces of opposition organize in a more systematic fashion to drive the coalition forces out before a proper functioning authority is re-established in Baghdad? Even as they step up their ambushes on U.S. troops, Iraqi insurgents have begun targeting the security services and civilian infrastructure U.S. forces are trying to rebuild, such as police forces, oil pipelines and Baghdad's electricity grid.
In addition, the New York Times reports that the attackers seem to be growing bolder. The 3rd Armored Cavalry Regiment, which has lost around 10 of its soldiers to postwar ambushes, is headquartered in a former presidential palace in Ramadi that sports Arabic graffiti on its entry wall: "Saddam's return is better than Bush's freedom." There is now an average of 13 attacks a day on the American forces, including mortar attacks on American bases, and the risks for everyone working alongside the Americans are growing, as the recent deaths of some Iraqi-trained police officers last week illustrate.
With American and British casualties mounting (even long after President Bush declared an end to formal hostilities), there is some disquiet emerging, but this has largely been obscured by the feel good factor of a rising stock market. We would guess that were the stock market to turn down again, recognition of a difficult future in Iraq might begin to percolate into the consciousness of the investing publicly, potentially providing another complicating factor for American policy makers as they seek to keep consumer spirits buoyant.
Everyday one sees press articles reporting the rise of this indigenous Islamic social and political order to fill the power vacuum after Saddam's fall. Even moderate clergymen, such as the Ayatollah Sistani, have begun to warn the Americans that their followers will not tolerate an indefinite occupation. Pressures to declare a fatwah against the coalition forces are mounting.
The administration of the U.S. has tried to minimize the importance of this indigenous political development. When U.S. forces were not welcomed by Iraqis in the Shiite South in the early days of the war, Administrative spokesmen attributed this lack of positive response by the populous to fears of reprisal by supporters of Saddam.
But now Saddam's military, paramilitary, and administrators have been overwhelmed and have dispersed. Yet, with the fear of reprisals gone, anti-Americanism is everywhere both amongst these Shiites (who might have been expected to welcome the coalition troops as liberators) and the Sunnis (who, not unexpectedly, are revolting against the loss of political privileges accorded to them under the Sunni-dominated Ba'athist regime of Saddam). Sunnis and Shiite leaders have met to agree on common goals, which include the end of American occupation
The "feel good" response of Western investors to the U.S. invasion in Iraq has hitherto been based on market expectations of a new order in the Middle East. Many believe that democracy in Iraq will bring beneficial social change throughout the Middle East. American air bases in Iraq will curb future threats from the region. The threat of terrorism will abate. The reconstruction of Iraq will bring lucrative contracts to U.S. firms. Investment in the Iraqi oil fields will bring new crude supplies that will ensure low oil prices for the oil dependent American economy. And Iraq, under American tutelage, will eventually evolve into a liberal democratic model for the rest of the region.
The Bush neo-conservatives who are largely behind this policy generally eschew the notion that their motives are imperial. They would acknowledge that the idea of "exporting democracy" is not in itself much different from the "civilizing mission" and "trusteeship" doctrines of the late European imperialists, such as Cecil Rhodes. The crucial difference, they insist, is that they have an exit strategy, whereas the imperialists did not.
Even if these protestations can be taken at face value, they are based on two questionable assumptions: that democracy, like capitalism, is easily exportable, and that democracy is the pacific form of the state. Because democracy is inherently pacific and welfare-enhancing (so the argument goes), American occupation is inherently self-liquidating.
But this whole train of argument is based on an illusion. For one thing, Hitler and Mussolini each came to power through democracy. Even today, democracies do not always make societies more civil. In fact, if the experience of Africa is anything to go by, they can often institutionalize tribal divisions and thereby perpetuate conflict, rather than alleviate it, as has been the case in Nigeria or Sierra Leone. With conspicuous tribal divisions, a similar fate might await a democratized Iraq.
Even the post-war examples of Germany and Japan are both crass and historically misleading. Germany was part of a political civilization in which liberty was the norm and Nazism aberrant or pathological; Japan's militarism was largely a product of the depression, and interrupted nearly a century of imitation of western values. Consequently, in both Germany and Japan, following military defeat, there was little or no cultural resistance to the re-westernization of both countries, which is hardly the case in regard to Iraq.
And a closer examination of Japanese postwar history suggests an element of idealization in the role America played in developing that country's "democracy". Particularly in the early stages of effecting a smooth surrender Japan possessed an unusually flexible-some would say chameleon-like-leader in the person of Emperor Hirohito. The emperor had certainly been the symbol of pre-surrender militarism, and no innocent bystander to wartime policymaking. He was not, however, a hands-on dictator akin to Hitler or Mussolini-or to Saddam Hussein. Once surrender became unavoidable the emperor adroitly metamorphosed into a symbol of cooperation with the conquerors. He came quietly, and for reasons of pure expediency the Americans happily whitewashed and welcomed him. He became, as it were, a beacon of continuity in the midst of drastic change. There is nothing of that sort taking place in a post-hostilities Iraq, where American troops cannot even find Saddam, let alone use him in any constructive political context.
Furthermore, despite an impressive start to the democratization process in Japan (through the writing of a new constitution, the Dodge economic plan, the break-up of the zaibatsu, etc.), cold war considerations ultimately superseded the aspiration to develop a genuinely democratic polity, with the result that many old war criminals were gradually recycled into mainstream political life in order to frustrate the rise of the Japanese Socialist Party. In addition, as the pre-eminent historian John Dower has noted, the postwar occupation of Japan possessed a great intangible quality that simply is not present in the Iraqi context: American occupation forces in Japan enjoyed virtually unquestioned legitimacy-moral as well as legal-in the eyes of not merely the victors but all of Japan's Asian neighbors and most Japanese themselves. Japan had been at war for almost fifteen years. It had declared war on the Allied powers in 1941. It had accepted the somewhat vague terms of surrender "unconditionally" less than four years later.
As for the notion that occupations in democracies are inherently "self-liquidating", it is worth noting that until the collapse of communism, Germany and Japan were US military protectorates. American policy makers are only now discussing redeployment of troops outside of Germany (and more as a function of retribution for Germany's recalcitrance during the Iraq war, rather than any selfless anti-imperial motives), and there is virtually no discussion of removing the thousands of American troops stationed on military bases throughout Japan since the end of World War II.
In contrast to the political context post the Second World War, the United States today continues find the legitimacy of its actions widely challenged-within Iraq, throughout the Middle East and much of the rest of the world, and even among many of its erstwhile supporters and allies, particularly in light of the troubling inability to find weapons of mass destruction, one of the ostensible rationales for going to war in the first place.
There is also precious little sign of an "exit strategy". Last week, the US tabled a resolution at the UN which would explicitly recognize the US and UK as the legitimate occupiers of Iraq for a period of one year, automatically renewable unless the Security Council votes to terminate their mandate. Given the existence of a permanent veto by both the US and UK, this is tantamount to indefinite occupation, rather than laying the groundwork for an exit strategy.
And from the perspective of the markets, we expect that renewed focus will soon shift back to the rising costs of the occupation. The attacks of September 11, 2001, may well have strengthened US resolve and persuaded the body politic on the need to accept occasional military casualties in order to combat terrorism. But the combination of terrorism and mass civilian unrest in areas of US military occupation may ultimately sap the will of the democratic imperialists, whilst foreign creditors may begin to demand higher risk premiums as America's mounting financial imbalances rise. Uprisings which need to be put down by force will shatter the dream that America is intervening to liberate people and revive pre-war tensions amongst America's allies. France, Germany, Russia, China, and Japan do matter, at least as far as the economic context goes. President Bush may continue to view them as a troublesome irrelevance, but he is likely to be forced to change his mind if these countries stop viewing the U.S. as a stable guarantor of the world's monetary system and instead start seeing it as the world's greatest profligate. It is worthwhile noting that US unemployment is rising with interest rates at 40 year lows. One hesitates to think of the impact on this economically vulnerable empire in the event of rising interest rates brought about by an international credit revulsion.
In the words of Robert Skildelsky:
"A unilaterally imposed Pax Americana will drain America of the soft power it needs to support its hard power, while increasing the demands on its hard power. This classic progression in the decline and fall of empires may start to bite sooner than the hawks expect. To put it very simply: the older empires (including the British) lived on tribute, and died when the costs of empire came to exceed the tribute. The US was not able to levy an imperial tax for protecting Western Europe from communism, but did the next best thing by persuading the Europeans to accept the seignorage of the dollar-allowing the Americans to print as many IOUs as they wanted-because it was in their interest to do so. An American hegemony which is not solidly based on mutual interests will necessarily forego vital means of sharing burdens. The costs of the first Gulf war were widely shared, because the coalition consisted of most of the world. The costs of the recent Iraq war, as well as the reconstruction of Iraq, will be mostly paid by the US."
If we get to this point, then policy's armaments may not prove effective because then there will be a whole world of disappointed investors and a whole world of stocks for sale. Foreign creditors, increasingly worried about the sustainability of a US dollar dominated fiat currency system, may well put the breaks on the system that has sustained this great military machine. One can only guess at the reaction of the US: an angry America confronting a resentful world in a ceaseless, frenetic quest for an elusive security hits out further at its erstwhile allies. Needless, to say, this is hardly the most benign backdrop and could do much to frustrate the efforts of global policy makers to maintain economic momentum and growth.
The real tragedy of this looming problem is that there is nothing inherently wrong with the stated objectives of the neo-conservatives, (which is a separate issue from questioning the sincerity of those who espouse them). The US has been on the wrong side of Arab history for the past several decades, and an attempt to democratize the region is at least consistent with the country's best traditions. To fail is to consign the region to more poverty, hopelessness, and the risks of it becoming a breeding ground for more terrorism. The old policy had no future, but the new one is being undertaken under the most inauspicious economic circumstances imaginable, in which American unilateralism has undermined the chances for success by alienating potential partners in this great venture and simultaneously exposing the US economy to even greater risks. The most important need today, therefore, is to restore collegiality among those countries which, however unevenly, have power to shape the future in a benign manner and more conducive to global economic growth. That means a step back from aggressive American unilateralism as a quid pro quo for greater international burden sharing for global problems (such as the Middle East) with organizations such as the European Union and Asia. Such collegiality is the best way to preserve the independence and protect the interests of small countries, whilst simultaneously helping to alleviate America's current economic vulnerability through its huge external debt dependency. The alternative is too unpleasant to contemplate.
While bonds of all flavors including coporates decline:
http://finance.yahoo.com/q?s=LQD&d=c&k=c3&p=b,p&t=3m&l=on&z=m&q=c
Long rates just keep grinding higher:
http://finance.yahoo.com/q?s=^TyX&d=c&k=c3&p=b,p&t=3m&l=on&z=m&q=c
Bond yields are climbing steadily. 4 % may not be far away on the 10 yr.
Are you a "L"ibertarian?
I am a card carrying member.
Adding to RYJUX on any dip. I started accumulating late but I think there is more upside.
Which means buy and hold won't work.
To make money, you will have to learn to trade and rotate between asset classes.
Long Bond funds were down over 1 % today and the High Yiled funds that I follow wer up about .15 % on average.
I agree that Junk may do OK in here (not great). But, I expect Longer Treasuries to suffer.
Will get a sell signal on 10 and 30 year bonds if we hold at these levels into the close.
Considering starting to leg into Rydex JUNO. Any experience with it?
Is there an Index or closed end fund that track Junk that I can chart?
I am dangerously close to an intermediate term sell signal on $TNX and $TYX. When I get the signal, I will depart the Junk funds.
Will that be a signal to exit Asia as well, do you think?
I upped Asia today too.
Looked like an easy win.
Thanks,
I missed that little caveat. I called State Street Global (who handles a portion of my 401k) and they had no record of a redemption fee. However, Strong shows 1% on their website.
Note that SASPX does havd a 1% redemption fee for anything held less than 15 Days.
Asia could be up big tomorrow.
A 12b-1 fee is an additional expense that mutual fund companies charge for advertising and other marketing expenses. It is part of the total operating expenses like a management fee and reduces overall return. It is not deducted at purchase or sale.
Some other funds to consider in the High Yield Arena:
SSHYX, STHYX, NBHIX
A bond MASSACRE could hirt the high yield market as well.
The Fed is pumpin' like crazy.
That is what has other asset classes (e.g. Tech stocks, Real Estate, Gold Stocks, Junk Bonds, etc.) rising simultaneously IMO.
Lee,
I absolutely agree with you. The 10 and 30 year bonds are at 45 and 50 year lows. They make many other instruments look fantastic in comparison. But, when the trend reverses at some point the yield increase will get some traction and grab money from other instruments. That could be a problem for the stock market.
Dave
There certainly is an ocean of liquidity sloshing around looking for home.