Monthly Archives: December 2014

Jeremy Grantham GMO 3Q letter

GMO chief investment strategist, Jeremy Grantham is out with the firm’s latest missive to investors; the GMO quarterly letter for 3Q 2009 is available at the GMO website and at Zero Hedge.

For a quick preview, here are some excerpts from Business Insider:

The idea behind my forecast six months ago was that regardless of the fundamentals, there would be a sharp rally [to S&P 1000-1100]. After a very large decline and a period of somewhat blind panic, it is simply the nature of the beast. Exhibit 1 shows my favorite example of a last hurrah after the first leg of the 1929 crash…

Today there has been so much more varied encouragement for a rally than existed in 1930. The higher prices preceding this crash (that were far above both trend and fair value) had lasted for many years; from 1996 through 2001 and from 2003 through mid-2008.

This time, we also saw history’s greatest stimulus program, desperate bailouts, and clear promises of years of low rates. As mentioned six months ago, in the third year of the Presidential Cycle, a tiny fraction of the current level of moral hazard and easy money has done its typically great job of driving equity markets and speculation higher.

In total, therefore, it should be no surprise to historians that this rally has handsomely beaten 46%, and would probably have done so whether the actual economic recovery was deemed a pleasant surprise or not.

Looking at previous “last hurrahs,” it should also have been expected that any rally this time would be tilted toward risk-taking and, the more stimulus and moral hazard, the bigger the tilt. I must say, though, that I never expected such an extreme tilt to risk-taking: it’s practically a cliff! Never mess with the Fed, I guess…

Catch the full report at the links above. Should be an insightful read, as always.

Related articles and posts:

1. Jeremy Grantham: first TV interview – Finance Trends.

2. Seasoned investors search for value – Finance Trends.

3. Grantham profiles in Barron’s, Financial Times – Finance Trends.

Puplava: listen to what the markets are saying

While catching up with Chris Puplava’s latest market update last night, I had to stop and share some of his words with our followers on Twitter

Read the opening of Chris’ article, “Stop Talking and Start Listening!”. You’ll find some worthwhile comments on interpreting data and the importance of maintaining accountability in one’s market calls. 

…Far too often investment managers and economists spend more time espousing their views and then defending them until eventually proven right (“I was just early”), rather than spending more time analyzing their assumptions and being honest enough to say, “I WAS WRONG!” and then moving forward. 

Part of the problem is that they create a view and then find evidence to support their views rather than starting from the bottom up by collecting an exhaustive amount of data and then summarizing the collective message rather than their views. 

Basically, listen to the message of the markets and then interpret those messages rather than telling the markets what they should be doing. What the market IS doing is far more important than what you think the market SHOULD be doing” 

This is an excellent summary of one of the biggest problems I see in the 24/7 cycle of market commentary and trading. People have become too enamored of their own market view/”thesis” and too concerned about the risk to their reputations to come out and admit they’re wrong.

Of course, if you are tied to a certain view or position and can’t admit you are wrong, it could have an adverse effect on your trading or investing returns. Some people may hesitate to cut their losses on a bad trade or reverse their position (say, by going from short to long on a certain security or asset) if they’ve anchored themselves to a privately held or publicly expressed view.

Now that blogs and real-time social networks have allowed us all to become “mini-pundits”, the risk of spouting off in public and ignoring the message of the markets has shifted down from media stars and big-name fund managers to the rest of us. 

But guess what? That also provides us with an opportunity to face the music and occasionally admit we were wrong about something, which may actually help build trust with our audience (and in ourselves) in the long-term. 

Because let’s face it: no one wants to listen to someone who is never wrong and is always (magically) right. Why? Simple. Such people don’t exist, oracles and sages of mythology aside.

Now back to the macro view. Despite some well-known recent calls for recession from ECRI and others, Puplava feels the markets and economy are in “bullish harmony” and are sending us a message that there is no bear market or recession ahead. Take a look at the article and examine the arguments for yourself. 

And remember, hold yourself accountable for your own market actions and judgements. Try not to impose your views on the market, and try to be flexible in your trading, especially when it comes to admitting you are wrong about something. Your thinking and your results might improve!

Related articles and posts

1. Zen and the Art of Trading.

2. What makes a great trader? Managing risk.

Niall Ferguson on entrepreneurial freedom and innovation

I am presently watching Niall Ferguson speak on entrepreneurial freedom in the global financial system, a presentation given at the St. Gallen Symposium 2010.

According to Professor Ferguson, the innovations brought about during the industrial revolution not only increased the efficiencies of goods manufacturing, it also made it easier for the very people who made those goods to buy more. These advances in economic ingenuity and processes are at the heart of rising living standards and economic growth.

Ferguson begins this lecture with some frank talk about Americans’ delusions over their rapidly rising wealth twice over a ten year period (first in the dot com bubble, followed by the real estate boom); he then moves on to address the realities of economic decoupling, as seen in the recession in the developed world vs. slowing growth in developing economies.

He then offers a quick rundown of the factors which brought on the recent financial crisis, leading up to a historical overview of the industrial revolution and the efficiencies created by the “entrepreneur-driven process”. Where industrial technologies and industrial processes were successfully spread, they came about mainly as a result of risk taking by entrepreneurs.

Relentless innovation and competition from entrepreneurs have driven down the costs of manufactured goods ever since. Schumpeter’s description of the process of “creative destruction” speaks to the realities of economic survival; according to the evolutionary mode of thought, there are businesses and business models that, not unlike a species doomed to extinction, are not supposed to survive.

Unfortunately, we seem to face some very real threats to the workings of this spontaneous cycle of innovation and renewal. The long-term economic prosperity that has come about as a result is also in danger, says Ferguson.

What are the principal threats to entrepreneurial freedom and innovation? Let’s tune in and find out.

Academic Essay Topics

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Friedrich Hayek on Keynes (1978 interview)

F.A. Hayek discusses John Maynard Keynes in this 1978 interview clip.

Trader Interviews: Overcoming Your Fear of Pulling the Trigger

Archer pulling bow and arrow taking aimTim Bourquin at TraderInterviews.com brings us this helpful discussion with top trading psychologists on, “How to Overcome the Fear of “Pulling the Trigger” On a Trade”

The full interview (and transcript) with Dr. Brett Steenbarger, Dr. Doug Hirschhorn, and Dr. Gary Dayton has been made available for free, so click through to check it out anytime. 

Here are a few key insights from Tim’s discussion with these trading MDs. Now, not all of the interviewees agree on each and every Q+A topic, but there are some very interesting common threads running through each of the 3 interview segments. 

  • The interview begins with Tim asking Brett Steenbarger why some traders may have problems “pulling the trigger” on their trade ideas. Dr. Brett points out that we must first correctly diagnose the problem before offering a solution. In his view, there are likely two main reasons, one being a trader’s lack of confidence (setup ideas haven’t been tested, etc.).   
  • Paper trading and simulation with real market data, followed by live trading with small amounts of money, may offer the proper testing and experience-building trials a trader needs to build his skills and confidence (Steenbarger’s view).
  • Performance anxiety is the 2nd problem highlighted by Steenbarger. He mentions some visualization exercises which can prepare athletes and traders for the anxiety of performing in a high-pressure environment. You should also focus on the process of trading, rather than the outcome of each individual trade.
  • Dr. Doug Hirschhorn tells us that a lack of personal trust is behind a trader’s failure to pull the trigger on trades. He does not favor paper trading, but says traders should trade smaller sizes to practice building their skills and get comfortable with their market and style.  
  • Traders who get over the fear of failure more quickly tend to look at the larger statistical picture. They begin to see beyond the individual trades immediately at hand and instead look out to the next 100 trades, the collective picture of their longer-term trading process. 
  • Increasing one’s trade size, getting bigger in a winning position, is another major theme in improving trading performance. Dr. Hirschhorn briefly offers his perspective here, and this is an area we may want to explore and study further.    
  • Tim’s talk with Dr. Gary Dayton delves into the issue of dealing with fear and emotions in trading.  As Dr. Dayton points out, we cannot remove our thoughts and feelings from our daily work. He discusses the idea of practicing “mindfulness”, which teaches us to defuse our emotions and be aware of what the mind is telling us (since our thoughts are impermanent and often inconsistent).

As you can see, there are some common threads running through this discussion. Anxiety, lack of experience or methods testing, and lack of preparation may hinder the trading process and lead to a fear of “pulling the trigger”.   

These are issues I’ve had to deal with (and continue to work on) in my return to trading. What we can do, as businesslike speculators, is focus on defining our method/style and our edge.    

We also need some sort of learning process to help us begin to get comfortable with our chosen trading style. Whether it’s some sort of realistic simulation or a “start small” process that has us trading real money with smaller position sizes, it seems some form of real-time trading education is key to building confidence and overcoming the fear of pulling the trigger.  
  
Have you faced these problems in trading? What have you done to overcome your fears? Share your experiences with us.    

If you’re enjoying these posts and would like to see more, please subscribe to our free RSS updates and follow Finance Trends in real-time on Twitter and StockTwits. You can also check out our related posts below for more market wisdom and trading insights.  

Photo creditStudent Archer, via U of Iowa digital library.  

Related articles and posts:  

1. Zen and the Art of Trading.  

2. Mark Minervini interview: define and refine your approach.  

3. What Makes a Great Trader? Managing Risk

Jim Rogers on CNBC, Fox Business

Jim Rogers appeared on CNBC recently to speak about the G-20 meeting, investments, and the notion (myth) of systemic risk at AIG, GM, et al. Thanks to my friend Dave in NYC for the heads up on this clip.

I have to tell you, I watched this CNBC clip right after I saw a YouTube clip of Jim Rogers on Fox Business, and that almost made CNBC and Maria Bartiromo look charming and well-informed by comparison.

Talk about painful; I actually felt dumber for having seen this Fox Business segment. This was not due to Jim Rogers, who was amazingly patient in explaining (again and again) why he felt the way that he does about the economy and the US government’s panoply of failed rescue policies.

Rather, the pain I felt was due to the horribly shrill and moronic teleprompter reader who insisted on shouting her talking points back at Rogers, in a full display of the intellectual dishonesty and willful ignorance which are, sadly, so evident in America today. So, fair warning if you decide to watch it.

Tim Knight on the “Big Picture”

Checking out a new post at Tim Knight’s blog, Slope of Hope, entitled, “Big Picture”.

As you can probably guess from the title, Tim has a rather definite bigger picture view of the markets and the economy. Let’s just say that he’s not convinced about the merits of the government’s much heralded stimulus efforts.

Here’s an excerpt from Tim’s post:

One of the nicest compliments I ever received was from Tom Sosnoff (the co-founder of thinkorswim) who told an audience, “the thing I like about Tim, as opposed to a lot of other technicians, is that he actually has an opinion.”

That I do! Oftentimes I will read newsletters or speeches where technicians will carefully word things so that “either A is going to happen or B is going to happen”. This way, no matter what direction the market goes, they are safe. (“As I predicted, “B is going to happen”, and it has!)

I believe the historic levels of government intervention and interference in what used to be a free market is going to have disastrous consequences.

I believe that the United States government, in collusion with financial institutions that have very close ties to the government, has embraced short-term solutions that will create long-term pain. In short, I think the market is going to be in much worse shape in 2014 compared to 2009...”

Go check out the full post, along with Tim’s comments on the possible future direction of the major averages, at the link above (hat tip to Bear Mountain Bull).

John Paulson’s new gold fund + lessons

It’s been a big week for the cottage industry of John Paulson-watching.

The Paulson & Co. fund manager is set to launch a dedicated gold and gold mining equity-focused fund at the start of next year, in which he’ll invest $250 million of his own money.

You may recall that Paulson’s earlier forays into gold ignited a new rush into gold by hedge funds and investors piggybacking on the trades of sophisticated hedge fund managers. JP’s new fund signals his continued positive outlook for the precious metals sector over the intermediate to long-term.

That’s not all that’s happening in the world of John Paulson. Investors have pored over his firm’s recent 13-F filing and letter to investors, while his comments on Bank of America (Paulson & Co.’s largest position in the financials sector) have fueled publicity over a divergence of opinion with bank analyst Meredith Whitney on the stock’s outlook.

Plus, there are gathering opinions on Gregory Zuckerman’s new book, “The Greatest Trade Ever”, which details the fund’s (now legendary) short subprime CDS bet, and its role in pushing Paulson & Co. into the investment world limelight.

If that’s not enough, you can also catch Zuckerman’s recent Wall St. Journal piece adapted from that book, or check out Eric Jackson’s fine article, “What John Paulson could teach us”. This is one I’m currently reading, and it contains some great insights on the team (including Paolo Pellegrini) that put together Paulson & Co.’s housing trade strategy. Do take a look.

Related articles and posts:

1. John Paulson: The man who made too much – Portfolio.com.

2. John Paulson in Bloomberg Markets – Finance Trends.

Hedgeye: The Principled One

There is so much good material waiting in the cue on the subjects of Greece, sovereign debt, and currency speculation, but here’s the piece I want to share with you today.

It comes from Keith McCullough at Hedgeye and his post takes on the idea that, once again, “evil speculators” are somehow to blame for the fundamental economic problems of a country’s own making.

An excerpt from, “The Principled One”:

The other George (Papandreou) is the Prime Minister of Greece. Since the Chinese told him to go fly his levered-up bureaucratic kite, Papandreou has been on a PR tour since Friday when he visited Germany.

Along the way, somehow he convinced France’s Nicholas Sarkozy that “speculators are creating malicious rumors” about his country. With some political wind from the left at his back, he took it up a notch ahead of meeting with Geithner today in Washington and called whoever he can’t see “unprincipled speculators.” George, you have to be kidding me. You have no idea what you don’t know.

First of all, hearing politicians talk about markets is like watching a southern belle try to ice fish. So I won’t waste time on ripping this poor guy a new one for using the word “speculator.” That would be too easy.

It is this concept of “principles” that really has my arthritic hockey knuckles hammering on the keyboard this morning. What, almighty Principled One, in God’s good name is “principled” about levering-up your country’s balance sheet to 100% debt to GDP and a 12.4% deficit to GDP ratio?…”

Go read the whole thing.

And let’s not hold our breath waiting for lying politicians to make these false accusations and verbal attacks in the presence of such “unprincipled speculators”. In an honest society, you might get a sock to the face or a challenge from your opponent for soiling their honor in such an underhanded way.

Related articles and posts:

1. Jim Rogers: Greece bankruptcy good for Euro – Finance Trends.

2. Greece presses US to crack down on “speculators” – Bloomberg.

3. Sorry, Greece, your crisis not caused by speculators – Clusterstock.