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Mercenary Trader ( was created by traders, for traders. We are aggressive swing traders who routinely combine fundamentals, technicals and sentiment with deep awareness of global macro and rigorous analysis of individual equities. See all of our content, including free... More
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  • You Don't Have To Know The Future (And Shouldn'T Want To!)

    We'll get back to our normal commentary soon… but first a little reflecting…

    As 2014 winds to an end, the 2015 predictions are rolling in.

    We've got our ideas and opinions. We certainly see some big things happening in 2015.

    And we'll focus on those events - and trade them as they unfold - right here via the Live Feed.

    We'll of course provide plenty of analysis - and do plenty of anticipating and scenario building.

    With that said, what we do is very, very different from the vast majority of the financial media sphere.

    To wit, we don't predict. We just don't believe in it…

    You can see the folly in the way most analysts and economists think.

    Here is a nice example of how not to think as a trader.

    In a New York Times piece titled, "The Big Unemployment Unknowns of 2015, From Unemployment to Oil," Justin Wolfers writes:

    I wish I knew where the economy will be heading next year. If I did, I might become rich. But, alas, I don't - and even if we don't always acknowledge it, no economists do.

    To which we laugh and say: "No, no, NO."

    Wolfers doesn't get it at all. But then, if he did get it, he probably wouldn't be an economist…

    It's not about "knowing where the economy is headed." And it never was…

    The idea that you have to "know where the economy is headed" to get rich - or just to do well in markets - is silly.

    Markets have always been impossible to predict far ahead of time. It has never been any different.

    The past may look easy - or at least easier than now - but that is only the false clarity of hindsight.

    When you read market history, and absorb what people were saying and thinking in 1983 or 1996 or what have you, you understand the future is always cloudy. The crystal ball is always cracked.

    And yet, George Soros consistently got rich. Paul Tudor Jones consistently got rich. Warren Buffett consistently got rich. How?

    Hint: They didn't focus on predicting the future at all…

    If someone could tell you the future, you might not even want to listen!

    The Raj Rajaratnam story was very interesting.

    Rajaratnam, who founded the Galleon Group hedge fund, was one of the biggest insider trading takedowns ever.

    The funny thing is, as the story unfolded, it became clear that many of the "inside information" tips that Galleon got didn't even help much.

    They would work their butts off (and break the law) to get some insider data on technology companies… and then the broad market would often mess up the trade anyway.

    Truth be told, if someone could funnel you government reports ahead of time, or give you tomorrow's economic data, it might actually hurt you more than help you.

    If Justin Wolfers was given tomorrow's economic forecast, but didn't know how to trade, the knowledge would probably blow him up instead of make him rich.

    Doing well in markets is about 1) managing risk; 2) making rationally attractive bets; 3) betting big when the time is right. That's pretty much it.

    And this comes around to the big "secret," which really shouldn't be a secret at all.

    Making money in markets is all about three things:

    • managing risk
    • making rationally attractive bets
    • betting big when the time is right

    Consider that all legendary global macro traders do these three things… and that all legendary value investors also do these three things.

    Value investing and high level speculation - taking advantage of sweeping trends in the macro landscape - are supposedly as different as night and day.

    What could they possibly have in common? The three things listed above.

    Warren Buffett does every single one of those. So does Paul Tudor Jones. So does [fill in the blank of your favorite super-successful trader or investor].

    Meanwhile, when you SKIP one of those things, you wind up like Bill Miller, who had one of the greatest mutual fund track records of all time before arrogantly vaporizing his clients.

    Winning poker players and entrepreneurs also follow those same guidelines.

    Here is how we KNOW market success is not about predicting the future: Poker players and entrepreneurs are on exactly the same track.

    Poker, by definition, is a game of incomplete information.

    You almost NEVER know precisely what your opponent is holding, or what the next card will bring (unless you are cheating).

    Instead, you have to deal with a range of probabilities. You don't even try to "know the future." You simply adhere to the logical probability distribution.

    Markets are the same way. Great entrepreneurs and great CEOs don't try to magically predict the future - which would be a fool's errand anyway.

    Instead, they get a sense of odds and probabilities… and then figure out the most logical course of action based on those three simple principles:

    • managing risk
    • making rationally attractive bets
    • betting big when the time is right


    It's really mind-blowing in some respects.

    The path to success is not rocket science. It takes hard work and elbow grease to figure out what an "attractive bet" is.

    It also takes discipline to apply risk control… and courage to bet boldly when the situation calls for it.

    But this isn't Einstein's theory of relativity we are figuring out here. It is straightforward stuff.

    And yet you still see Barron's routinely running articles with titles like: "Don't question the bull market for 2015."

    No, no, NO you ignoramus goobers! That is NOT how to go about it!!!

    We are fortunate to have such wonderful opponents…

    The market is, after all, a zero sum game. Or in certain respects a negative sum game.

    "A rising tide lifts all boats," it's true. But by definition, less than half of all investors can beat the baseline. And sometimes the tide sinks!

    We'll continue to marvel at how the world works… how Wall Street works… and the wonderful opportunities thus presented to us.

    The above is excerpted from our December 29th Live Feed commentary.

    Tags: economy
    Dec 30 12:03 PM | Link | Comment!
  • Global Macro Notes: Slowing To A Crawl

    Global Macro Notes Mon Aug 13th


    • Japanese GDP Slows to a Crawl. Japanese economic growth slowed to an annual rate of 1.4 percent in the second quarter, the government said Monday, as cooling global demand weighed on the nation's exports, while domestic demand, which had helped Japan outperform other Group of 7 industrialized countries this year, appeared to lose steam.

    Japan stagnation shows further evidence of global growth slowdown. Twenty years on, still near stall speed. U.S. at increasing risk of becoming like Japan b/c policymakers fear the impossible outcome (Greece), thus improving odds for the more likely one (Japan).

    This sounds more bearish than bullish, re, contrarian positioning. Hope in stimulus is a time decay hope. The returns on such are rapidly diminishing. Hope for China stimulus over the weekend was not met.

    • Preparing for a collapse of the euro. Banks, companies and investors are preparing themselves for a collapse of the euro. Cross-border bank lending is falling, asset managers are shunning Europe and money is flowing into German real estate and bonds. The euro remains stable against the dollar because America has debt problems too. But unlike the euro, the dollar's structure isn't in doubt.

    Further evidence that Europe's problems are far from solved. There is no structural agreement that the periphery countries deserve to be saved, let alone how.

    Deadly serious issues in China. Stimulus won't cut it this time, and may be off the table due to inflationary concerns. If China implodes, the Aussie implodes with it. More reinforcing evidence of global slowdown and meaningful cycle fears.

    Romney pick of Ryan as VP candidate intensifies "America as Japan" risk. Fiscal conservatives wrongly believe America could become 'Greece.' This belief system could lead to a combination of economy-weakening austerity measures and non-job-producing, budget-draining tax cuts that increase the likelihood of becoming like Japan.

    Democrats no answer either, though, as Dems more likely than Repubs to let America fall off the 'fiscal cliff.' No reason to expect logic or sound policy from either party.



    • The Disappearing Market. "There are times when the market gives the impression it is fading into nothingness. Volume becomes very low, trading ranges become very small, volatility becomes very low. Also, there is very little change in market levels and day-to-day fluctuations are minimal. Looking back at history, when that happens it is almost always a sign of a market high point."


    Copper weakness = further confirmation of Asia / global slowdown thesis, serious threats of commodity led implosion. If we get a $USD ramp, all of this accelerates. To the degree that late stage China growth entered a ponzi stage (complete w/ Golden Elephant subprime), the ramifications are serious.

    Strong odds for more 'grind-up,' but non-trivial odds for swift sell-off. A very dangerous time to be complacent. Light volume and narrow ranges leave this 'grind-up' rally vulnerable to a sufficiently negative catalyst, or just a big enough sell order to crack things wide open.

    • Nasty bearish engulfing in KOL (coal miners).
    • Copper miners (NYSEARCA:COPX) rounding out?

    Various and sundry base metal miners and other base metal plays have been beaten like a red-headed stepchild, but playing them for a rebound is a little too cute for our taste in respect to serious ongoing China concerns.

    • Utilities (NYSEARCA:XLU) flagging out?

    If the grind-up rally is going to stick, then bonds are going to head lower, which means rates are going to rise and safe haven capital flow is going to leave utilities and go back to more logical areas of the market.

    Food for thought: Would a utilities short actually be something of a hedge / neutralizer for other shorts, as utes are likely to do worse (break down faster) if the risk on rally continues?

    • GBPNZD: Beautiful clean downtrend pattern.

    Don't know what the relationships here are (UK vs New Zealand), but odds are the UK is worse off than NZ and that pattern sure is pretty…


    General stance is to respect the price action without deferring to it. Price action here is increasingly bullish, but it also increasingly smells like bullshit. A low volume, low volatility environment, with junior traders manning the NYC desks and bears mostly neutered / scared off by threat of the big central banker mallet… with technicals to justify emotions, this is the type of environment where bulls could get ahead of themselves (or perhaps already have) enough to feed a severe downward dislocation.

    Of course, the upward grind could also continue, against a backdrop of waving off macro data concerns, until the frying pan to the face comes at a later date. Right now, though, the general mood seems 'hopeful and unrealistic' in the manner that bulls love to embrace, where, when risk assets rally for bullshit reasons, the longs don't ever question it, they just smile and try to justify their hopefulness with fundamental backing after the fact.

    Also classic from a poker / pot-odds type perspective in that the high probability play (going with grind-up) gives greater likelihood of a small, risk-inadequate payout; whereas the lower probability play (positioning for a less likely but meaningfully possible sell-off) has potentially excellent reward to risk. Being a contrarian and understanding expectation means understanding when the outlier bet is the better bet (as when your 30% draw has a 6 to 1 payoff and so on).

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 20 8:51 AM | Link | Comment!
  • A Trader'S True Allies: Making Millions The Livermore Way

    Many don't realize it, but Jesse Livermore was the original "global macro" guy.

    He would trade anything back in the day - stocks, wheat, cotton, coffee, options contracts - and he surely would have traded currencies too, had the world not been on the gold standard.

    Livermore, whose ideas and approaches were immortalized via Reminiscences of a Stock Operatorin 1923, is widely recognized as one of the greatest traders ever… his life and times contributing to the greatest trading book of all time.

    Livermore has long been one of our "mentors from afar."

    Our broad trading approach - long / short with a global macro overlay - is much modeled after his. (Along with later global macro greats who operate in the Livermore mold, such as Soros, Druckenmiller, Kovner, Bacon and Jones.)

    Getting back to Livermore, it struck me how valuable the wisdom of Reminiscences has proven in this tape. Having gotten more involved on StockTwits and Twitter lately - and you should follow us if you aren't already - it has grown apparent the great degree to which others can benefit from Livermore's wisdom.

    And by "others" I mean (ahem, cough cough) those who tried to be wiseguys this week, picking Thursday tops and bottoms in TLT and SPY, and thusly getting their heads handed to them.

    Let's go through a few classic Reminiscences quotes and see how they've applied to this market:

    But I can tell you after the market began to go my way I felt for the first time in my life that I had allies - the strongest and truest in the world: underlying conditions. They were helping me with all their might. Perhaps they were a trifle slow at times in bringing up the reserves, but they were dependable, provided I did not get too impatient.

    Being a contributor to the StockTwits and Twitter Stream, one of the things that consistently amuses and confuses yours truly is the lack of regard for underlying conditions.

    Underlying conditions - also referred to by Livermore as "general conditions" - represent the flow of what is going on in the world.

    Here it is again, in plain English:

    I still had much to learn but I knew what to do. No more floundering, no more half-right methods. Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities.

    Underlying / general conditions encompass not just technicals - Livermore didn't use charts, though he watched price action like a hawk - but fundamentals and sentiment too… a sense of which way the world is going and why.

    Back to present day: For a macro oriented trader who pays attention to underlying conditions, it seems crystal clear which way the wind has been blowing.

    In a recent piece on Gold vs Bonds, -- SPDR Gold Trust (NYSEARCA:GLD) vs DB US Dollar Bull (NYSEARCA:UUP) we laid out extensive drivers, along with story links, as to what was happening. Namely, the world is slowing down (as Europe slowly falls apart)…

    In short, paying attention to underlying conditions can save you a lot of money - or MAKE you a lot of money - if you consistently make an effort to put the puzzle pieces together (technicals, fundamentals and sentiment) and then listen to the market's message.

    I was not pitting my tape-reading knack or my hunches against chance. The inexorable logic of events was making money for me.

    Sounds damn good doesn't it? Having "the inexorable logic of events" make money for you? As a trader, how do you do it? By studying and heeding the power of underlying conditions!!

    Here's another bit of Livermore wisdom, re, overnight gaps in the tape:

    …any important piece of news given out between the closing of one market and the opening of another is usually in harmony with the line of least resistance. The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated, and vice versa.

    It is hard to emphasize how true this is!

    And we got one hell of an example today (June 1st), with bad news from Europe, China and the US whacking markets brutally all at once. Thursday seemed to tease, and give the top-and-bottom pickers a brief minute of smugness, but then Mr. Market said NOPE…

    And we were "loaded for bear" into this tape, with no long positions to speak of. Why? Because of general conditions!

    Really, seriously, this stuff works. Regardless of all the whining and bitching about how hard charting has become, it works as well today as it did 100 years ago - as long as you are comfortable on both sides of the market and not just one:

    I cleared about three million dollars in 1916 by being bullish as long as the bull market lasted and then by being bearish when the bear market started. As I said before, a man does not have to marry one side of the market till death do them part.

    Some traders only play the bullish side, and this is a respectable approach. But we also think it's like being a tennis player without a backhand… if you can only go long, you are going to miss half the opportunities in play, and be forced to twiddle your thumbs for interminable stretches (especially in markets like these).

    Nor is this Livermore stuff just a bear market phenomenon… the "underlying conditions" logic applies in bull markets too.

    Do you remember back in 2009, when markets just seemed to go higher and higher, no matter how much bears gnashed their teeth? When data point after data point from China was bullish, and everything just kept levitating?

    Well, now we've got the opposite of that… but BOTH sets of conditions can be equally as good… as Jesse says:

    They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.

    Amen. There is no such thing as a crystal ball, or a method of analysis that works flawlessly 100% of the time, but by golly you can get one hell of an edge by 1) getting a grasp on general conditions, and 2) applying said lessons correctly.

    This stuff is SO INSANELY VALUABLE, it still blows me away that so many traders operate blindly, in shortened time frames, with no real sense of the "bigger picture" at all!

    And that gets back to one of the biggest Reminiscences lessons of all:

    And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!

    Now here is the key thing. When Jesse talks about "sitting tight" there, he does not mean sitting tight on the sidelines waiting for the next good trade. Patience is important, of course, but that isn't what he's talking about.

    No, the "big money" he speaks of comes from SITTING WITH BIG POSITIONS.

    Getting a low risk, high quality entry on a position of meaningful size… being aligned with general conditions… and then just SITTING with that sucker - maybe even pyramiding - as it develops into a huge trade!

    Not to again call out my Stocktwits brethren, but really and truly, I am partly writing this as a friendly message of encouragement and exhortation to you guys, and to all the traders I see playing for small money in small time frames, when the tape offers much greater things if they would only step back and get some vision.

    The big money is NOT in nipping around for teensy little gains! ("Don't be a dick for a tick," as my partner likes to sometimes say.) Short-term trading can certainly be profitable… but it isn't where the true killings, the FORTUNES, are made…

    You want an inspirational example? Okay, here's an example (click charts to enlarge):

    (click to enlarge)


    (click to enlarge)


    non-currency traders could have used the CurrencyShares Australian $ (NYSEARCA:FXA) to gain exposure

    This trade - which is time-stamped and still ongoing in the Mercenary Live Feed - was entered utilizing what you might call "the Livermore Method" (or what we less than modestly think of as the Mercenary method).

    • First, the Aussie was sized up in respect to general conditions - the potential for the AUDUSD carry trade to collapse, due to Australia's resource-leveraged exposure to an overheating China. We have talked about this possiblity repeatedly in past Global Macro Notes, and publicly referred to the Aussie as a potential "trade of the year" on more than one occasion. Here's proof
    • Second, we made multiple attempts at low risk entry based on technical confirmation - the first few getting stopped out around breakeven or for small profits, as we waited for the real move to commence. We even tweeted out a chart following the entry that stuck…
    • Third, we practiced the Livermore guideline of SITTING TIGHT on an excellent position, fully aware, via general conditions and clear sense of valuation / macro scenarios, that this could develop into a huge trade.

    Ever wonder how traders make hundreds of thousands, or even millions of dollars, on a single monster trade, with an excellent entry and strategic pyramids along the way?

    How guys get into those type of positions that, in hindsight, seem like a P&L dream?

    THIS IS HOW… and it isn't "our" method, it's Livermore's. We just humbly apply it, on a day in and day out consistent basis, to all the markets we cover.

    He laid out the blueprint, more than 90 years ago:

    • Sizing up conditions
    • Probing for strong reward/risk entries
    • Being fully cognizant of scenarios
    • Keeping a tight rein on risk
    • Risking small, entering with size
    • SITTING TIGHT when you land a big 'un

    Of course, they can't all be "big game" trades. We're happy to be short-term guys too. There's nothing wrong with ringing the cash register in a tight time frame - like, say, 3 to 5 trading days.

    But if you're stuck in tiny time frames as a rule, playing penny-ante poker and patty cake for pips, you've got to experience the thrill of the big kill… the hunt for big game… Jesse's way of making the BIG money on the BIG trades.

    Wondering Where the Rum's Gone,

    JS (

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Short AUDUSD

    Tags: FXA, GLD, UUP, economy
    Jun 11 5:56 PM | Link | Comment!
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