I’ve grown tired of the news flow. I’ve had this feeling growing in the pit of my stomach for quite some time. I ebb and flow between having my finger on the pulse of what is going on in the markets to being quite off the mark. Every time I’m off the mark and I work my way back up to a good understanding and the ability to see everything for what it is, I feel like I shave a few months off my life. Very short term trading (day trading and scalping) or very long term investing can lead to a reasonably stressful, yet manageable, lifestyle. In one you try to stay out of the way of news, and in the other, a single news event rarely changes everything. I’ve come to feel like everything in between those extremes, where most of the real gains are to be had, will kill you. It will literally take years off your life.
I find myself contemplating making moves that I would have never previously considered. The 20 year old version of myself would slap me across the face and call me a sell out. With a reasonable amount of effort I could probably network my way into a decent sell side analyst position within the next year or less. I hate the sell side like a lot of people here, but the idea of simply being a purveyor of information and being paid to build contacts and network doesn’t sound too bad right now. I’d work my way into covering an industry that is all but guaranteed to grow for the next generation (energy, health care, bio-tech etc), maybe pick up my CFA along the way, and use the contacts I’m paid to acquire to transition into said industry. All at the price of not having my finger on the pulse of what is happening in the world. Maybe I’ll even end up doing something useful rather than just critiquing others through reports and stock purchases. Sounds mildly exciting.
I’m probably not going anywhere soon, but I expect myself to slowly fade into the background, if I haven’t already begun to. I LOVE thesis investing and I think I’m pretty decent at it, but lately I find myself reviewing long term sector rotational systems I’ve written in the past and perusing different broker’s platforms for day trading. Scalping a few ticks and throwing any out-sized gains into a long term system that tries to beat the market by a few % each year, while I pour most of my energy into building a more stable career, sounds a lot more comforting than just trying to eat what I kill, with a side order of decent employment.
Most analysts have zero accountability, buy and hold is dead, and day traders/scalpers are like vultures circling a dead corpse on the savanna, waiting to pick up the scraps after the lions have had their fill. And here I am contemplating pursuing/dabbling in all three. Like I said, the 20 year old version of myself would slap me across the face and call me a sell out.
Anyways, just in case this is for real this time and I fall off the planet, I want to thank the Fly for his accessibility and for creating the greatest source of investing information on the net. And thank you to all those who contribute. You have taught me the majority of what I know.
At least not directly.
Take a look at crude right now. It’s up nine fucking percent in one day! On news that Europe may not be as big of a disaster as most thought and because the 152nd meeting they’ve had went better than expected.
Let’s go back a week to when everyone was front running QE3. What would have happened if Bernanke dropped a trillion dollars on the market? Would crude be 15% higher in one day? 20%? Actually I think limit up is $10 if I remember correctly, so I’ll go with $10.
The announcement of QE3, in the traditional QE sense, all but guarantees demand destruction. It all but guarantees sinking us back into recession. The Fed has successfully priced themselves out of the market. Now that doesn’t mean they can’t be back door liquidity providers and partake in propping up asset prices in ways that few people understand. But unless a major institution is in threat of imploding, that announcement you wanted so bad isn’t coming…ever.
But that’s okay. I fully expect within the next few months that the Fed will explicitly start talking about the ways it will prop up the market. They could prop us up for a good year just talking about it, without actually doing anything. I think it’s now evident, whether this was the original plan or not, that their only play is to bide time to allow for the possibility of actual sustainable economic demand to enter the market.
In a race to be first, CNN decided it would forgo any and all facts.
Read the rest here:
Reuters put out an article this morning that is, in my opinion, pretty fucking crazy.
The European Central Bank is discussing a medium-term plan to scrap rating rules on euro zone sovereign bonds and instead set their value when used as collateral in lending operations on its own internal assessment, central bank sources said.
Any sane and rational human being would view this as potentially an incredible overreach of power. Mark to model on steroids if you will. But an investor, someone who is trying to preserve and grow their assets in order to deal with whatever the world throws at them in the future, has to view this as the potential to be one big fucking kick of the can. And that is it.
Will the “internal assessment” be in any way accurate. Nope. Will it be transparent? Ha! You’re kidding right? Will this make central banks judge, jury and executioner? Yup. Will it create a bigger problem in the future and prolong “too big to fail”? Quite possibly. Will every POS bond sitting on European bank balance sheets, that can’t be posted as collateral, magically turn into AAA paper? Pretty much.
The last point about magically turning shit into gold is all that matters.
This truly needs to be seen to be believed:
“An upset victory over Russia would no doubt fill the streets of Athens will celebrating fans, and their emotional euphoria will carry over to Sunday. Given how close the Greek electoral race is expected to be, even the slightest swing in voter emotion could mean the difference between surging markets and a financial implosion.
That said, it’s quite difficult to predict exactly which way a victory, or a loss for that matter, would sway voters. A win may inspire nationalistic pride, perhaps driving voters to push for an exit from the eurozone. On the other hand, a victory could conceivably lead to a widespread impression that things are okay the way they are, encouraging fans to stick with the incumbent New Democracy Party. And who knows, many Greek citizens may vote neither way, choosing instead to stay in bed nursing hangovers.”
Read the rest here:
In other news, I fully expect Lebron James to determine the outcome of the 2012 presidential race. Of course I have no idea how. Forbes, want to give me a job?
Kind of dragging up a bit of old news, but I feel it needs reiterating in light of Mr Dimon’s dog and pony show today.
“This is the best, or one of the best-managed banks. You could have a bank that isn’t as strong, isn’t as profitable making those same bets and we might have had to step in.” – Barack Obama.
If someone could give a coherent argument as to how the government “steps in,” but doesn’t bail them out, I’m all ears.
That is all.
Most people are blissfully ignorant of the fact that the inverse correlation between equities and the US dollar is a very recent phenomena. In fact it has only been around for about 10 years. The current relationship makes a lot of intuitive sense. A stronger dollar means you can buy more equities with it, therefore that should be reflected in lower equity prices. But like I said, this is all very recent. The dollar index gained 50% during the bull run of the late 90′s. Back then higher equity prices AND a higher dollar were believed to be the sign of a strong economy. In fact this has largely been the way things have worked for the last 100 years.
So here we are today, in the new normal of the continuous bailout and the countries doing the bailing are not printing dollars, they are bailing using Euros. I’ve given up trying to understand exactly what they are doing and how the money magically appears, but it is HIGHLY unlikely that they are printing dollars (although nothing is impossible). So yes, it is obvious that printing money should lead to higher equity prices, but it is also equally as obvious that printing Euros should lead to a lower Euro.
This is not a statement about what is priced in or where the market is going, but rather that a major component of how financial markets operate is defying logic at this present time. The Euro rallies with 100% certainty on any news of a European bailout. I would like to think that this is the most obvious arbitrage opportunity ever and the reason we sold off today was an ongoing attempt to arbitrage this nonsense out of the market, but I am skeptical that is actually happening. This is the biggest correlation in the markets and all those HFT bots, that are apparently supposed to be able to learn and teach themselves, haven’t existed in a world outside this correlation.
Markets can certainly continue to defy logic, especially if the bailout details continue to remain so vague. When these correlations flipped 10 years ago it took a year or two for the market to adjust. Nothing says correlations have to completely reverse, they just can’t remain in their current state. At some point basic supply and demand functions have to take over and increasing the amount of Euros can not lead to a higher Euro with 100% certainty. If it does Europe should announce they’re going to print 10 trillion and send the Euro to all time highs.
In the mean time stay on your toes while the super computers try to figure this one out without ripping the basic fabric of our markets apart.
Anyone familiar with The Wire seriously needs to watch this video.
Just made my day.
As we stare into the teeth of another summer of panic selling, I feel it is necessary to reiterate a point that seems lost on a lot of people out there. Shorting a volatility ETF is in no way a “can’t lose” trade. In fact it is the epitome of everything a rank amateur looks for when he wants to find that “magic formula” we’re always told doesn’t exist.
Here are some facts:
1. Volatility always collapses.
2. Volatility ETF’s are broken products that are all going to zero.
These two points will always work in your favor, but you have many other things working against you:
First of all volatility ETF’s have been around for about 3 ½ years. During that time no one ever spoke of NAV until about 3 months ago. If you were aware of backwardation/contango you supposedly knew what you were doing. Now all of a sudden you have to also be aware of NAV, something that apparently never mattered up until now. What does that mean? It means there is something else in there that we don’t know about. I don’t care how much you research these products, you are still taking on the risk that something else will come out and completely change the way these things are traded. It is a risk that is completely unnecessary.
Everyone shorting volatility ETF’s needs to study the chart of TVIX very carefully. It went up 650% last year. It went up 230% AFTER volatility peaked. Meaning if you waited patiently for TVIX to run up 300+% before you started legging into a short, you still had to sit on over a 200% draw down. Why the hell would you subject yourself to that? Is your trading strategy really based around sitting and suffering while you wait for a “sure thing?” The same guys saying this trade is a sure thing laugh at amateurs who sit through massive drawdowns fully invested saying “the stock market always goes up eventually.” At least the rank amateur will have assets in their portfolio all the way down.
“But they’re going to zero!”
This statement is stupid. First of all you aren’t going to hold it to zero. At best you’ll make 50% on your position. Second of all, the VIX topped out at 48 and TVIX ran up 650%. Where would TVIX have gone if last summer was the real deal and VIX went to 2008 levels? You want to sit on a 1000% draw down? What kind of position sizing do you need to withstand a 1000% draw down? A 2% position will draw your portfolio down by 20%. If you can only realistically expect to make 50% on your position, that’s a risk of 20% for a gain of 1%. What’s the point? And this is ignoring all the forced liquidations you’d have to make in order to hold that short into those kinds of conditions.
And there is the ultimate truth in all of this. If you short a volatility ETF you are essentially selling a call. Little reward with lots of risk. And if things go bad, unlike selling puts, you are left with nothing.
I used to be the biggest proponent of this trade, but I count my lucky stars that it didn’t blow me up last summer/fall. The reason why I think this trade is popular is because it eliminates the time factor. If you can survive the draw down you will make money. You don’t have to be smart and time it correctly, you just have to survive. Doesn’t sound like much of a trading plan to me.
If you want to throw some puts at these things, or at VIX futures, go right ahead. Timing is an issue, especially in contango, but at least your downside is known and limited. If you want to make a watch list of names you’d like to own at lower levels and sell puts on them when volatility spikes and options become expensive, that sounds like a very responsible thing to me. At least if things go south on you you’ll end up with an asset in your portfolio at some level.
But if you’re looking for a sure thing and think shorting volatility ETF’s is that, put yourself back in the amateur category with all those other fools looking for the magic formula.