July 2009


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Mr Lee, lays it down on his blog. Initially I just thought he was taking the piss, but you know, I think he’s actally serious. Don’t have a hot drink in your hand when you read this.

The Chart Addict says:
July 31, 2009 at 11:03 pm
For the very, very few of you that seem 100% sure of yourself in regards to the direction of the market, this is for you.

Having conviction/confidence is ok. Thinking that you know EXACTLY what will happen, is not. In fact, you sound like a fool to me, unaware of the nature and force of the markets. Even I don’t know what will exactly happen – it’s the uncertainty that make trading so challenging for the majority and the most satisfying when you are correct.

No one knows what will happen for sure. There are forces and events beyond your control (for ex: global macro, forex, government, regulatory, commodity, earnings, etc.). You are wrong to think that the markets are in your control. That’s how traders blow up.

I win a lot, yes. However, I remain humble knowing that the markets cannot be tamed. I win because I choose my trades carefully and take the right actions to maneuver my way through the complexity of this interconnected multitude of traders full of emotions. When there is one side, there is another. You have to stop and think about what the other side is thinking. Surely there’s got to be a good reason why they are ‘betting against you’.

When I trade, I am constantly thinking about what could go wrong since that risk is present in every trade. I suggest that you keep your minds open for any and every possibility that could arise, most notably the ones that can fuck you up.

If you were so sure of yourself, why not 1) use 100% cash, 2) fully margin yourself, 3) take out a bank loan, 4) max our your credit cards, 5) etc, and place a huge bet that will support your words? You won’t, you know why? Because you are not 100% certain. And since there is no way to verify that you would do such things, don’t even bother mentioning that you did such and such.
In the end, words are meaningless. Your REAL-TIME trades are the only tell.

The next person that is completely sure of him/herself and is completely and entirely wrong, I will ban you. The ’so sure’ mentality is harmful to other traders and it distracts the community with nonsense.

Specifically, Da_bears, you are a new person on my blog. I suggest that you develop a track record on the blog before you make such bold predictions. Since I am a fair person, I will give you a chance to prove yourself. This also goes for the very few that aren’t as vocal.

That is all.

That is all. Classic.

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Chart of the Day
Today’s chart presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 9.8 ounces of gold to “buy the Dow.”

This is considerably less that the 44.8 ounces it took back in 1999. When priced in gold, the US stock market has been in a bear market for the entire 21st century and is currently trading 78% off its 1999 highs. The recent five-month rally, however, has the Dow (priced in gold) putting in a significant test of resistance of an accelerated downtrend that began in mid-2007.

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Congress seems determined to waste as much money as possible. Here they detail their continued funding of the clunkers trade in.

Rhodytrader has a take on this program. Essentially the government is providing a subsidy to the carmakers of $4,500/per car of taxpayer money. This further drives the deficit.

Driving the deficit via subsidy, actuates a credit creation injection at the consumer durable goods stage. The American carmakers, having just exited Chapter 11 bankruptcy, having laid off workers, closed plant, closed dealerships, placed supply chains in disarray, are not in the position to supply the increased demand.

Enter the Japanese, who are sitting on inventory [just as well] that can probably absorb the demand, if not, prices rise, distorting the profit margins that drive the correct allocation of capital.

Do Congress intentionally want to subsidise the Japanese carmakers? Probably not, with all the protectionist talk out of Congress, they may have overlooked this minor point.

Either way, the credit creation, simply [at the expense of taxpayers] distorts the price signal, driving potentially further malinvestments that will need to unwind at some point, plus of course adding to the debt load.

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gld

Gold is giving me a good kicking. I simply can’t seem to make any sense of the moves in Gold. The problem really is that fundamentally, if inflation takes hold, Gold should move higher. The technicals say Bull market – but, the entry points at this level produce too many whipsaws. Thus I have been trying to trade something that possibly I needed simply to buy and grit my teeth.

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Mr Lee is reverting to form.

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There is a guy with the initials GM that is probably my biggest hater that is spreading false rumors. To set the record straight, the dollar stocks that I play are not in my fund, nor do I ever disclose my fund’s positions (besides UNG). Playing $1 stocks in a multi-million dollar fund is the dumbest accusation ever, you peanut-brained fucktard. The hater in question is a 40ish year old homosexual (nothing against gay’s) masseuse from New Zealand (for real) who is a terrible trader and is obsessed over me in a ’stalkerish’ manner over the internets. Get a life.

You just know that when the rebuttal comes in the form of an ad hominem, that the rebuttal doesn’t have a leg-to-stand-on.

Spreading false rumours? Well, actually no. Simply highlighting the gross inconsistencies within your claims actually. We have however now established that the daytrading moves are not portfolio based, despite rather misleading information to the contrary.

The Chart Addict says:
July 30, 2009 at 11:40 am
FAS was a 48% position, and TNA was a 50% position.

That was the definition of ‘massive’ and ‘crazy’ earlier this morning.

If I told people this at the open, people would somehow screw themselves up.

A 48% and 50% position in what, if not your portfolio?

As to not ever disclosing your portfolio’s positions, fair enough, but why even mention the Hedge Fund in your marketing campaign for your $4K training course?

Most likely because it sounds good. Professional money manager, principal in a Hedge Fund – 200%+ returns, when all linked together, rather implies that the Fund has returned 200%+, when really you are talking about something else entirely.

As to playing $1 stocks with a multi-million Hedge Fund, not only is it stupid, but, it’s simply not possible, hence my illustration of the fact, which has elicited the clarification.

As to my being 40’ish, well 46yrs actually, but close enough. As to my sexual orientation, like many homophobic Americans, this counts as some form of slur. Europeans, which include us Brits, grew out of that type of behaviour at least a decade+ ago. Do you actually know my sexual orientation? Had you simply done a little homework, you’d know I was married, although while not conclusive, certainly tips the probabilities. But of course it wasn’t research, simply abuse, which is precisely your level of interaction.

It is however, again indicitative of the lack of maturity and professionalism from a Hedge Fund manager [alleged] that this type of response becomes necessary.

Stalker, obsessed, some of the adjectives that have appeared today. Well, I prefer stubborn, determined, thorough, but hey, that’s just my preference. But of course now I’ll have to redouble my efforts to find the truth of the matter.

I already have first hand confirmation that Greenfaucet do not actually verify any claims of returns etc. I shall now approach Greenfaucet directly to see what light [if any] they can shed on the matter.

Interestingly, Mr Lee omits the ad hominem from is otherwise similar post on Greenfaucet Now why might that be? iBankcoin is heavily into trying to generate revenue from it’s reader base, and I do on a regular basis take issue with much marketed there. However, Greenfaucet is his entry into the mainstream, he can’t afford to be viewed as an obnoxious liar here, he, to them, is a professional Hedge Fund Manager, and professional Hedge Fund managers do not use profanity in such a manner when being queried about the veracity of their claims.

Anyways, I will try to post as many real-time trades as possible, but know that I can’t post all of them. Many trades last for only seconds or minutes which make it pointless to post. In addition, if you are posting buy/short trades, don’t forget to post sell/cover trades. Some of you fools post only entries, and your credibility is in danger. Don’t think that I don’t keep track of people here

So not all the trades are posted. I have no problem with that at all, save for one minor point. Are the returns [profits/losses] contained within the claimed 200%+ returns?

Second, does it not strike you as somewhat hypocritical that you keep track of people on your blog, but rather resent the fact that I keep track of you?

The Chart Addict says:
July 31, 2009 at 9:09 am
because he attacked Fly and the other tabbed bloggers for 2 years now, and this fucker has turned his attention on me.

A big mistake

My, my, that sounds like a threat. Such a quaint turn of phrase this young chap has, still it could be worse, he could insult my mother.

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Again from sigmaoptions,

In other technical fields, I often heard of experts speak of the phases of skill progression from novice to expert, invariably stated as having four phases as below:

Unconscious Incompetent
Conscious Incompetent
Conscious Competent
Unconscious Competent

It’s a fancy way of saying that you progress from an idiot, to knowing what you’re doing without thinking. The unconscious competent is that individual that acts and reacts from second nature without having to think first. A kung fu master has hundreds of complicated techniques as his disposal that are second nature, due to thousands upon thousands of hours of practice. A master tradesman can be thinking about the hot looking woman that just walked past while he works; he is creating his work without thinking about it.

I want to address the unconscious comepetent stage. Unconscious depending on who you are talking to can have very different connotations. For example talk to a neurologist about the unconscious and you’ll get a different answer than if you spoke to a psychologist.

In what way are we defining it when we talk about traders? The example given of the Kung-Fu master definitely addresses unconscious within neurological terms, essentially in reference to the cerebellum which being sub-cortical, is unconscious and performs automatically. Particular strengths being the execution of learned motor [patterns] activities.

Trading however is not a physical task [save clicking the mouse] it is primarily a cortical task. That is to say all functions take place in the cerebral cortex and are fully conscious.

In trading the fast executions required in delta 1.0 instruments are intuitive in that the instruments start and finish delta 1.0. Not so with Options that have variable delta’s at any given point in the trade entry and exit.

The contention seems to be that if you trade options long enough, initially calculating the greeks manually, after thousands of trades, you’ll generally have a good idea of where the greeks are moving. I would agree with this, as essentially the greeks move quite consistently with the underlying price changes of the instrument.

In my initial post, I attempted to show that the determination of the Fair Value of the Option was based on numerous inputs, volatility being one of these inputs, and that the subsequent calculation provided the greeks and a price of the Option.

Implied Volatility, is expected volatility. It is a prediction of increased volatility. As a prediction, it is in the future, you cannot view it on a chart. You can visually assess past, or historical volatility, and estimate what quantitative metric would result.

With IV however, unless you actually calculate IV using a model, there is no way you can actually tell what volatility is being priced into the Option.

Thus our trader is likely utilising an heuristic and possibly one [or more] of these heuristics or this one or this one

I have referred in the past to the problems associated with probabilities that are [or have been] calculated with Gaussian distributions and the very high incidence of fat tails that invalidate the probabilities calculated. I would suggest that although the IV identified through calculation via a model might very well turn out to be false, or incorrect, actually knowing the number prior to a trade is preferrable to ignorance.

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(1) “Monetarily, money should be cheap and amply available”: Neutral. You might think that this factor should be rated as “bullish”, given how accommodative the Federal Reserve is currently. But Davis notes that banks are also significantly tightening their lending standards. Given the heavy debt load of both consumers and corporations suffer (see next criterion), banks are finding it “increasingly hard to find ‘credit-worthy’ borrowers”.

(2) “Economically, the debt structure should be deflated”. Bearish. This is the most negative of any of Davis’ seven dimensions, since the debt structure is by no means deflated. On the contrary, Davis calculates that the total credit-market debt load right now is nearly four times the size of gross domestic product, and that it takes more than $6 of new debt for our country to produce just $1 of GDP growth. That’s almost double the amount of debt required in the 1990s.

(3) “There should be a large pent-up demand for goods and services”. Bearish. Davis acknowledges that there has been improvement in this dimension from where things stood at the beginning of the bear market. But he is particularly worried by the ratio of total Personal Consumption Expenditure to Non-Residential Fixed Investment, which currently stands at a record high. At the secular bear market low in 1982, in contrast, this ratio was at a record low.

(4) “Fundamentally, stocks should be clearly cheap based upon time-tested, absolute valuation measures”. Neutral. Though the stock market “got undervalued at the March lows”, it never became “dirt cheap”.

(5) “Psychologically, investors should be deeply pessimistic, both in terms of the stock market and the economy.” Bullish. Davis says that past secular market lows were accompanied by extreme pessimism, and his indicators show a similar extreme existed earlier this year.

(6) “Technically, major investor groups should have below-average stock holdings and large cash reserves”. Neutral. While foreign investors have record-low stock holdings, according to Davis, household holdings – while low – are not nearly as low as they were at prior secular bear market lows. And institutional investors’ stock holdings “are only down to an average weighting historically”.

(7) “A fully oversold longer-term market condition in terms of normal trend growth and in terms of time”. Neutral. Davis believes that, though many of the excesses of the real-estate bubble have been worked off, some still exist. That’s particularly a problem, he says, given that the stock market bubble of the late 1990s never completely deflated either. “As we saw in Japan after 1990, a double bubble in stocks and real estate leaves it difficult to put ‘humpty dumpty’ together again.”

The research shows that only one of the seven criteria indicates that a secular bull is in place, whereas three are neutral and three are bearish. Although Davis believes the nascent rally has more upside potential, he concludes, like Richard Russell, that we are dealing with an extended rally (cyclical bull phase) within a secular bear market.

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Just reading through some of Mr Lee’s blog entries, you know because that’s the type of sad bastard that I am. Again assuming after all his winning ways Mr Lee’s Hedge Fund is up to some $70M –

The Chart Addict says:
July 30, 2009 at 9:33 am
Massive position in FAS

The Chart Addict says:
July 30, 2009 at 9:37 am
Massive position in TNA

The Chart Addict says:
July 30, 2009 at 11:40 am
FAS was a 48% position, and TNA was a 50% position.

That was the definition of ‘massive’ and ‘crazy’ earlier this morning.

If I told people this at the open, people would somehow screw themselves up.

Reply

So 48% and 50% positions.

FAS would then be 607,155 shares at 09:33 or at 09:32 611,020 shares. Actual shares traded: @ 09.33 = 58,580 shares @ 09.32 = 102,612 shares traded.

TNA would then be = 981,767 shares. Actual volume was = 230,477 shares traded. If taken at 09:32 to allow posting time, then total shares traded was = 161,644. If we take from time of the post volume was only 84,192 shares traded.

So my question to Jake-baby is: do you actually subscribe to this bs? If you do why?

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cpi-2009-06

Looking at the data, certain conclusions can be drawn. Consumers are still demanding specific consumer goods and services. They are:

*Food & Beverages
*Apparel
*Medical care
*Recreation
*Education & Communication
*Other

Some of these goods/services are obviously inelastic, food and beverages being the highly obvious one. In an environment of high uncertainity, which describes most recessions, and this is the most severe since the 1970 – 1980 period, consumers cut back [save] as much as they can.

This leads the Keynesian economists to start worrying about the paradox of thrift, which describes a circular economy, which is an obvious fallacy. One firm does not search for oil, discover oil, drill for oil, pump oil, ship oil, refine oil, transport oil [again] utilise oil in manufacture of widget, transport widget, market & sell widget [assuming widget is a consumer good. If widget is a capital good, we can add further stages of production.]

So we can assume eight or more stages of production in a single consumer good. Thus, we have a ratio of 1:8 of consumer goods to stages of production.

Thus, in this case, the productive, or hidden economy is eight times larger than the consumer economy, yet GDP only accounts for consumer spending. Thus the Keynesian model is fatally flawed. By logical progression, if the model is fatally flawed, the policy response by definition is false. Thus further credit creation to support deficit spending is precisely the opposite response required.

The maintainance of prices within [or slight inflation of] the identified sectors illuminates the flow of stimulus credit that is flowing from the deficits created by the government. The money is currently flowing into the Welfare State via unemployment, medicare, medicaid, etc, is being spent, thus maintaining demand in these areas of the economy.

Also credit is flowing to the various banks, who are building their reserves risk free, courtesy of the taxpayer. As their capitalization levels again build, they will reach a point where they will start to lend again, thus re-inflating the credit expansion from a second front.

The singular problem with a credit expansion is that credit must continue to expand. If for any reason it stops, or is curtailed, the edifice as we have seen, shifts into reverse.

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Thus Bernanke’s thesis on the Federal Reserve plan to withdraw credit is disingeneous at best, an outright lie at worst. Once the Federal Reserve withdraws credit, or curtails further growth, the stockmarket crashes.

While the credit expansion continues, the stockmarket will continue to rally, confounding the bears, who intellectually are correct, but, in the market, that can be a fatal error.

Why?

The stockmarket represents capital. Capital in the presence of cheap money, rises in value in PV terms against discounted FV cash-flows. Until the Federal Reserve alters it’s stance on interest rates, and removes liquidity, the market will rally.

This is because when consumer prices remain constant, or even rise slightly, the profit margins for firms rise. Additionally the expanding profit margins encourage expansion of productivity, thus increasing profitability even further, due to the maintained demand via credit creation, and injection into the system via the Welfare State. GDP does not pick-up the expanded activity, as it only measures the final consumer demand. When money is saved, the expansion of productive stages is financed by the savings, and a commensurate fall in demand, which is accounted for via falling prices [increased supply/falling demand] thus maintaining profit margins. With credit expansion, increased profit margins drive unsustainable supply, requiring ever increasing credit expansion to maintain demand [stable or increasing consumer prices] and profit margins at the increased supply levels.

The converse of this stance is that unemployment will continue to rise. This is due to in contradistinction to capital, labour becomes more expensive. Only in an environment of high interest rates, will by comparison, labour become cheaper than capital. Thus you can have a booming stockmarket, with high unemployment, or lower unemployment with a falling market.

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Cover @ $91.75. The flippe-floppe continues.

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