Seeking Alpha
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.
-
Instablogged Stocks
Stocks that instabloggers have most recently written about -
Latest Instablog Posts
-
1
Key questions of a scenario planning after r...
-
2
dubai
-
3
Sichuan Exhibition Hall
-
4
Chengdu International Convention & Exhibitio...
-
5
Liaoning Agricultural Exhibition Hall
-
1
-
Top Instabloggers
-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
-
1
My Beginnings on Wall Street
My entering group of traders started by focusing solely on Lehman Brothers and we were only allowed to go long the stock. How ironic! Needless to say, we weren't all that profitable in our first few months. I think the only time any of us made any money was when a rumor circulated that Warren Buffett was going to purchase a large stake in Bear Stearns and all the investment banks rallied sharply. That was a good day, and our first happy hour!
As the market topped and prices started dropping, we saw Jim Cramer go nuts on CNBC in a segment that I will never forget. He argued that this crisis was much worse than anyone was forecasting. The Fed opened the discount window to struggling banks and began cutting the Federal Funds Target Rate. I believed through much of this that the market was experiencing a temporary pull-back and it was a good time to buy long-term. As the situation worsened, I was continually surprised by the downside action.
I specifically remember watching a PBS interview in late 2007 where the guest stated that the end of this selling pressure would come with the bankruptcy of a major bank. I was amazed by that statement as it was the farthest thing from my mind. This guy was clearly on the extreme and stating something no one else was saying or even thinking at the time. It's rather amazing how naive I was at the time.
I started a fantasy stock market account on Facebook with a few trading buddies here at the office in early 2008. Our idea was to make some big bets on macro ideas with play money to compete with each other. I made my first trade on Friday, March 14, 2008. Bear Stearns dropped over 50% that day and I bought BSC with my entire account at the close of the day expecting a bounce on Monday. I bought $10 million somewhere around $33 per share, a stock that was trading at $150 not one year before. I remember walking over to a buddy I was competing with and telling him about my trade. He thought it was a great idea. I said I thought my only risk was a take-under if JP Morgan were to buy the bank over the weekend as was rumored. He thought that was highly unlikely. In an off-hand manner, I said that we have no idea what it's worth and they're only going to pay what it's worth. I didn't realize how correct that statement would be. But in the end, we both figured a take-under was fairly inconceivable.
Sunday night, I sat down to my computer and saw the headline: JP Morgan Buys Bear Stearns for $2. I was appalled. How could one of the largest investment banks in the world be essentially worthless? I wiped out my fantasy account the first day I made a trade because I did not even consider the possibility of bankruptcy. Good thing it wasn't real money! It was an incredible lesson to learn, luckily only having my pride hurt and not losing any capital.
Bear Stearns went bust and I once again jumped on the long bandwagon believing the worst was over. Hey, the guy on PBS said it would be over after this. Not until June 2008 did I begin to believe a lot more downside was possible. With the market trading back to the lows of the year, I started to fear a good deal more selling. The Dow was around 11,000 and I thought we could see prices in the lower 9,000s. Never in a million years did I imagine the Dow breaking 7,000.
The largest difficultly with the entire crisis was its opaqueness. The lack of transparency on bank balance sheets made it an incredibly difficult bear market to predict. We all knew the housing market was overvalued, and vastly overvalued in select parts of the country. We knew once the real estate market topped, the economy would experience some contraction. I did not forsee however, nor could have foreseen given my lack of knowledge, the huge leverage in the system and the fallout stalling prices would create.
October 2008 significantly changed my perspective of the world and I began to understand what was possible in a world I did not understand. Stocks can go to zero. Companies can go bankrupt, overnight even. There is no safety in the stock market during a vicious bear market, everything eventually gets hit. In less than a year, I went from thinking the bankruptcy of a major bank was a far-fetched idea to watching and trading the stocks of about 10 major financial companies that saw plummeting prices. I shorted Lehman on its road to zero, I shorted Merrill as it was the "next Lehman". I shorted Citi and Bank of America which eventually needed a government backstop to stay afloat. Fannie and Freddie were great shorts needing government takeovers. AIG, the largest insurer in the world, essentially failed by all reasonable metrics. Goldman and Morgan had to covert to regular banks to qualify for capital. We feared the collapse of the entire global financial system.
I rode the wave lower, making some money along the way but never really capitalizing fully on such a large and drastic move because I didn't have the wherewithal to foresee such incredible events. I shorted Lehman through levels but never thought it would literally go bankrupt. Likewise for the other financial stocks I traded day in and day out. Now a year later, I am determined not to fall victim to Taleb's "retrospective predictability". Retrospective predictability is defined as: "a happening that, after the fact, our human nature enables us to accept by concocting explanations that make it seem predictable." Traders are probably the worst culprits of this fallacy. If I am honest with myself, I never saw this coming.
Starting my career in trading just before a vicious bear market was one of the luckiest beginnings I think one could have in this career. I was in a position to profit from falling prices and saw firsthand, and participated in events that I never dreamed were possible. Everyone knows a major bank can go bankrupt in theory, but it's entirely different to know it's possible because I traded it. I believe the last two years will prove to be incredibly valuable on my path towards portfolio management. I now understand what John Maynard Keynes meant when he said, "There is nothing so dangerous as the pursuit of a rational investment policy in an irrational world." The educational lessons 2008 provided cannot be taught in a classroom. Yet, they were the most powerful and will stay with me for the rest of my life.
Disclosure: No relevant positions.
Critique of Malkiel on Mutual Fund Performance Consistency
While many would find it silly to defend mutual fund managers with their typical 80% underperformance, this is not entirely our purpose. Malkiel is arguing that star portfolio managers typically cannot and will not repeat their past performances. As any seasoned investor knows, past performance is not indicative of future results. And, insofar as Malkiel is attempting to sway investors not to chase mutual fund returns, we certainly agree. Too many investors switch in and out of mutual funds chasing the latest hot manager. Any serious financial advisor can inform one of the perils of this strategy.
Yet, Malkiel's general argument that managers cannot repeat their performance sorely misses a crucial point. An efficient market hypothesis and the random walk theory would imply that manager outperformance in one period will just as likely result in a underperformance in the next period. Many traders and investors can outperform in one period by luck or by taking excessive risk. But, they will subsequently give those profits back in the next period as their luck runs out or the risk comes back to hurt them. Most investors will see their positive alpha one year quickly turn into a negative alpha the next year. Malkiel is defeating his own point by showing that the managers beat, and then held their gains.
The tables in the book show that managers can outperform. Outperformance comes from a manager beating the market during a given period and managing to keep those gains through future periods. No manager needs to beat the market every year. It is an extremely rare manager that can consistently beat the market year over year over year. Most usually, a manager will have a great idea, deviate from market weightings, possibly beat the market and then go back to matching the market. A manager who continually tries to execute less than his best ideas is likely to give back his gains.
The two charts below show how a manger beating in one period and nearly matching the market in the next period still handily beat the market returns. The charts show the return of a hypothetical $10,000 investment based on the above tables.
Disclosure: No relevant positions.
Reduce Leverage In Oil
After a year and a half of incredibly volatile oil prices, the recent rally had Congressmen clammering once again for increased regulation. Throughout 2007 and into 2008, crude oil prices saw a 150% increase before topping out just under $150 per barrel. As the bubble popped, traders ran for the exits and prices collapsed 75% dropping nearly $120 per barrel. Yet, the volatility had yet to end as March saw oil prices begin to rally eventually gaining over 100%. What is causing all this volatility?
It seems rather difficult to believe that supply/demand dynamics of the physical commodity are truly at play here. Something does need to change in this market. A stable, functioning commodity market is crucial to the global economy and especially now in a time of turmoil. Price stability must be achieved for the efficient functioning of the millions of businesses dependent on commodity prices.
The massive use of leverage in futures markets is causing exacerbated price swings unreflective of the supply/demand dynamics. The original intents of leverage were practical as the markets were dominated by hedgers. Reducing the upfront cost to a business hedging its risk was warranted. The business then received delivery or delivered the commodity as per the contract.
Now, the markets are radically different. Speculators dominate futures markets and fewer than 5% of contracts actually result in an exchange of the physical commodity. The leverage ratios are similar to what the stock market saw during the Great Depression.
Are we repeating the same mistakes of the Depression? Do our current rules stimulate massive price swings? It seems likely. The liquidity in most futures markets is not an issue. With margin requirements between 5-15% on most commodity contracts, speculators are given very high leverage enabling the herd to exaggerate every move in price up or down. In a market so incredibly important to the well-being of our economy, it seems silly to allow for these leverage levels. A margin requirement of 50% as enforced in the stock market seems reasonable. Special exemption could be made for those delivering or receiving delivery to not hinder business operations of hedgers. Otherwise, let's take back our commodity markets from these unneeded uncertainties.
Disclosure: No relevant positions.
More »Recession Over? Certainly Not Yet...
The unemployment rate ticked up to 9.5% last month with a loss of 467,000 jobs. Sorry Dennis but our "cowardly" blogger friends are correct:the recession is far from over. Slightly slower declines while an improvement do not signal expansion. Tell the 467,000 who got pink slips last month that the great recession is over...
More »Google Trends Data as a Stock Market Indicator
Google Trends is a feature recently released from the Google empire. The Google Trends site allows users to mine through search data back to 2004 studying the broad patterns in search volume of particular words and phrases. Our study looks at the relative volume search for the phrase "market crash" from 2004 to the present. The spikes in search volume for "market crash" are compared with the Standard & Poor's 500 and the CBOE Volatility Index.
The charts below paint a very interesting picture. The charts highlights the 4 major spikes in search volume from 2007 to the present. The data between 2004 and 2007 show no spike above the 200% level. Coincidentally, the VIX had not registered a reading over 20% both indicating a time of calm in the equity markets. Yet, 2007 is when things got interesting.
The end of February 2007 saw a 4.7% drop in the S&P 500 based on weekly price data. This drop was not unlike the 4.4% drop seen less than a year earlier in May of 2006 but the VIX and Trends data did not see spikes in that drop. So, why was the February 2007 drop different? The VIX offered no noticeable indication of change, not breaking through the previous highs of the last 4 years. Yet, the Trends data on "market crash" showed an increased reading of 270%. Investors seemed to begin worrying about the coming turn in the markets long before the top. The spike and subsequent rapid drop signaled a good time to enter equities for renewed momentum to the upside.
The next large spike occurred the week of January 22, 2008 after the S&P 500 had dropped 17.1% from the October 1, 2007 weekly high. Search queries on "market crash" rose to 230% above average. The rapid decline in search volume the following week offered another time for a decent entry into stocks for the next couple months. The VIX indicator did not provide much worthy of analysis during this time.
Massive declines in equity prices were seen towards the end of 2008. As the markets plummeted, searches for "market crash" jumped to 725% over the average by the week of October 6, 2008. The next 2 weeks saw a dramatic crash in search volume. The data very rapidly reflected the stabilizing of equity prices. The VIX was a useful measurement during the time as well but the readjustment to price stabilization was much slower.
The final spike worth studying occurred the week of March 2, 2009, when the searches registered 190% above average and the equity market bottomed. The ensuing quick drop in searches once again signaled an excellent time to be a buyer of equities while the VIX gave no such clues.
Could Google Trends data become a robust stock market indicator in the future? As most indicators of market sentiment are painfully lagging, Google Trends may be a great sentiment indicator, especially considering its rapid adjustment to changing moods. The advantages are numerous as the data reflects real search queries and not surveys, covers an absolutely massive audience and does not require participants to know they are even participating. The data hits the true hearts and minds of investors across the globe.
The data show that after a large spike in queries and a subsequent rapid decline, investors would have been well-advised to buy shares in equities. Clearly, the data do not point to when to sell stocks but have offered the most attractive entries on every decline in the markets over the past 2 years. Also, the data did not indicate that each bottom was the ultimate bottom in prices but gave investors a much better level to buy than just randomly buying as stocks fell. Waiting for a top in the search query spike and investing two weeks later appears to have worked very well during this bear market.
At the very least, the Google Trends data seem much more useful than the often quoted CBOE Volatility Index which showed strong inverse correlation to the market but did not offer much by way of forecasting of future prices. Perhaps the future could see more on this topic as the study on market participant sentiment continues on. If this is the bottom and stocks continue their ascent, it will be quite interesting to watch for a spike in "bull market" queries.
Disclosure: No relevant positions.
More »Follow the Smart Money: Green!
Where is smart money heading as the market turns? A large amount of capital is racing to the clean energy sector as investors see a new wave of innovation and the possibility of explosive growth. The path to a sustainable energy strategy is likely transformational to the world economy. The transition from a carbon-based energy economy to one of alternatives seems inevitable and only a matter of time. The difficultly lies in entering the field at the right time so as not to be too early or too late to the upcoming wave. Yet, the tide seems to be incoming. Where should recent graduates look for employment? Green technology!
Tags:
PBD, clean technology, green energy
Jun 29 04:00 pm
|
Link
|
Comment!
Instituations see major growth in the clean energy sector over the coming years. The Obama administration appears to be committed to implementing a clean energy investment plan. To achieve his administration's goal of generating 25% of energy from renewable sources by 2025, they will be making unprecedented investments in renewable energies. While expectations have been reduced with the current economic downturn, 75% of institutional investors see increased investment over the next 3 years.
More »