30 April 2008

What I Learned Losing a Million Dollars - Lessons from Failure, Part 1

I was first made aware of this book by Nassim Nicholas Taleb in his recent bestseller The Black Swan. On page 105, Taleb reviews the shared traits of successful, hotshot millionaires, and the graveyard of failures: courage, risk taking, and optimism. Taleb dismisses the differences between successes' and failures' skills and attributes success to luck. In the midst of this bold statement, the following aside and footnote caught my attention:

"Readers would not pay $26.95 for a story of failure, even if you convinced them that it had more useful tricks than a story of success.*"

*The best noncharlatanic finance book I know is called What I Learned Losing a Million Dollars, by D. Paul and B. Moynihan. The authors had to self-publish the book.

Taleb is a provocative thinker, even though his rambling style prevents many of his ideas from taking purchase in my head. Three things from The Black Swan still loiter around the gray matter:
1. The scalability of some professions over others, specifically law is not scalable unless you're a John Edwards-type (Damn!);
2. The relative frequency of Black Swan events like LTCM, Bear Stearns, 9/11, etc.; and
3. The desire to read the Taleb-endorsed, self-published book on failure by someone named D. Paul.

After several months of library searches, and setting up a saved search on Alibris, I finally got my hands on a copy for a handsome sum about 3x the cover price.

The first half of the book is Jim Paul's personal story, from school to the Army to the trading floor. Eventually, he ruins fifteen years of building up his career and reputation in two-and-one-half months of soybean oil trading. As you can tell by how quickly I glossed over sixty pages of a book that barely makes it past page 170, all the first third does is establish the author's background and bona fides. While that's important, it could've been achieved in an About The Author page. It's another rags-to-riches story told in an easy-to-read style that breezes by because it's just not that compelling. Jim Paul is no Michael Lewis.

Paul wanted to recover from his disastrous bean oil position, and he turned to successful traders and investors like Peter Lynch, William O'Neill, Michael Steinhardt, and Warren Buffett. Paul failed to discover any real consistency in thought amongst these good and great men. With that in mind, here's the hook that draws the reader into the second half of Paul's book:
Obviously, there is no secret way to make money because the pros have done it using very different, and often contradictory, approaches. Learning how not to lose money is more important than learning how to make money. Unfortunately, the pros didn't explain how to go about acquiring this skill. So I decided to study loss in general, and my losses in particular, to see if I could determine the root causes of losing money in the markets.

In the coming days, I'll review and analyze Jim Paul's lessons that arose from his financial failures.

24 April 2008


The Daily News reported the hypothetical possibility that Mike Bloomberg may buy the New York Times. After his term ends. Which would mean sometime in 2010.

Mayor Bloomberg has been encouraged by advisers in his inner circle to consider making a bid for the Old Gray Lady after he leaves office, Newsweek magazine reports.

A source with close ties to the billionaire media magnate told the magazine that a friendly Bloomberg News-New York Times merger appealed to the mayor's sense of "civic-mindedness."

"It is clearly a brand that Bloomberg could help preserve and that he cares about immensely ... and could pay a competitive price" for, the source said of The Times.

Bloomberg declined to comment on the matter. But it is not the first time the idea has been put forth.

Wall Street Journal managing editor Paul Steiger raised the prospect of a Bloomberg News-Times marriage in a January column marking his departure from The Journal, which is published by Rupert Murdoch.

2010 is a long way off to ponder establishing a position in a takeover target. Unlike the Bancroft family who recently relinquished ownership of the WSJ, the Sulzbergers control and actively run the Times.

It doesn't help that NYT shares are now priced at almost $21 after falling below $14 in January.

Perhaps I can set up Blogger to automatically repost this in December 2009. That's when I'd even consider looking at NYT (as an investment; I look at the nytimes.com several times a day).

Weak Dollar + Rising Interest Rates = End of Bear Rally?

Avner Mandelman in The Globe and Mail wrote an interesting column back on April 12 (a Saturday) on former Fed chair Paul Volcker's public criticism of Helicopter Ben's current Fed.

[L]ast week Mr. Volcker spoke his mind bluntly. He said, in effect, that the current Fed is not doing its job.

This would have been unusual enough. But Mr. Volcker went further. Not only is the Fed not doing its job, he said, but it is doing the wrong job: It is defending the economy and the market, instead of defending the dollar. And just to stick the knife in, Mr. Volcker added that this bad job now will make the real job - defending the greenback - much harder later. It'll cause even greater economic suffering.

The impetus of the column is not merely that a politician who should know better spoke out of turn, but that the current bear rally is indeed only that, a temporary upward move in a market facing the overdue need to strengthen the dollar.

Will rates indeed rise? I have no doubt they must. Not now, perhaps, but at the end of this year or the beginning of 2009, with a new president in the White House. The stock market, which usually looks six to nine months ahead, already understands this and may soon react. In fact, when Mr. Volcker's words sink in, the markets are likely to sink as this bear market rally ends.

For surely you understand we are still in a bear market - and only in the beginning of it? Yes, we are experiencing a rally, and like most bear rallies, it is sharp and spiky. But when bear rallies end, they leave a lot of spiked bulls behind - and this rally should be no different. When it is over - in the next few weeks, methinks - the waterfall could continue, as the market begins to digest the inevitability of higher inflation and higher interest rates ahead.

Against all protocol, Mr. Volcker just went out on a limb and warned you of this. I urge you to heed his words.

23 April 2008

Overbought Condition of the S&P 500

Here is another way of looking at overbought/oversold stocks, albeit in a broader context (S&P 500) than my usual focus on the Dow 30. The following is from the Bespoke Investment Group blog, posted on April 18, care of The Kirk Report:

Overbought Stocks in the S&P 500
Currently, 47.8% of companies in the S&P 500 are trading in overbought territory. Overbought levels are met when a stock's price moves more than one standard deviation above its 50-day moving average. As shown below, this many companies haven't been overbought (green line) since the market peaked back in early October. Likewise, the last time so few stocks were oversold was also early October.

Below we highlight stocks in the S&P 500 that are the most overbought. When individual stocks get this overheated, the risk/reward tradeoff begins to favor the risk side in the short term. As shown, ETN is the most overbought, trading 4.29 standard deviations above its 50-day moving average. ETN is followed by ALTR, GD, NSC and BLL. Other notables on the list include CAT, SLB, ORCL, HAL and DD.
Regardless of whether these overbought levels cause a pullback next week, after the declines that we've had since late 2007, it's a relief to know that stocks can in fact go up.

Looking at the Overbought/Oversold chart, you can see that the percentage of stocks in the S&P 500 that were overbought approached ~60% during the big bull run of last April through June, and approached ~65% in October at the market peak. The recent market rally has not returned to those levels, but this is another interesting and useful piece of data to keep in the back of my mind, and accessible on this blog.

SHRPQ - Comment on the Sharper Image Liquidation

I don't have any substantive analysis on the soon-to-be-liquidating '80's relic. But as I perused MarketWatch earlier today, some joker added this comment to MW's story :

That's a shame as I liked my Sharper Image air purifier. The steroids I take make me really gassy and the ozone masked the smell quite well. What is a girl supposed to do now?

This certainly helps lighten the mood on a rough market day.


The Chinese government cut the "stamp duty" tax on equity trades today, reducing it to 0.1 percent, from 0.3 percent. Chinese shares trading here rallied on this news. And FXP took a hit.

Some choice explanation from Bloomberg:

``The government is trying to put a floor on the market,'' said Tony Hann, who helps manage $5 billion of investments in emerging markets at WestLB Asset Management in London. ``That will cause it to rally.''

Brokerages such as Citic Securities Co. may advance the most as the tax reduction boosts trading, Hann said. Transactions on the two main stock exchanges slipped from a weekly average of 14.7 billion shares in 2007 to 6.3 billion shares last week.
The stamp assessment was tripled last year in an attempt to cool a rally that was drawing more than 300,000 new investors a day. The CSI 300 Index surged sixfold in 2006 and 2007 before slumping this year on concern government efforts to stem
inflation will curb earnings growth.

``China is literally trying to pump up their stock market,'' said Jack Ablin, who oversees more than $60 billion as chief investment officer at Harris Private Bank in Chicago. ``They fear that a crash could have a deleterious effect on the attitudes of their middle class.''

I added a small number of shares to my beaten-down FXP position at $65.50, for a new cost basis of $90.25.

21 April 2008

RSI(2) and RSI(14) Chart for 3/31-4/18

Looking back over the past three weeks of trading, the Dow was significantly overbought on 4/1, and gradually moved to oversold territory by 4/14 before quickly returning to the overbought realm on 4/18. Today's market was mixed, with the Dow retreating slightly and the NASDAQ continuing further into the overbought range.

The Pig mistakenly failed to lighten his short position in mid-April--I hope to rectify that when the chart cells turn green.

16 April 2008

XLF or UYG? - Fast Money Focusing on Financials

Apparently, Fast Money talked up the financials right when I started pondering 'em on Monday night:

On CNBC's "Fast Money" TV show, Guy Adami noted that Wachovia Bank (WB - Cramer's Take - Stockpickr) had cut its dividend. He said that previously, the bank had said there was no reason for it to cut its dividend, but that he has learned to be skeptical of what the CEOs of financial firms say. Despite the bad report, the stock is setting up for a trade on the long side with a tight stop.

Karen Finerman said she wouldn't go near the financials, but if she had to go one way or another, she would be long the sector.

Jeff Macke said that it might be worth it to buy Citigroup (C - Cramer's Take - Stockpickr) or the Financial Select Sector SPDR (XLF - Cramer's Take - Stockpickr) on dips.

Pete Najarian said that $24.50 is a level of support for the XLF. He said that because the fund reached that level today, he's rotating back into calls. He said there may be more room to the downside, but the $24-to-$27 range has been working in the XLF.

He said he wasn't sure about the prospects for Bank of America (BAC - Cramer's Take - Stockpickr) or Wells Fargo (WFC - Cramer's Take - Stockpickr). On the other hand, he said USBancorp (USB - Cramer's Take - Stockpickr) should be a good investment, even if it is a little more conservative and boring.

Adami said it's all right for investors to get long anything as long as they have a well-defined exit.

Not having watched the actual broadcast, all I can do is glean the Fast Money gang's sentiment from this recap. They seem wary of more downside, but are cautiously optimistic. The entry trade in the financials is "almost there." I can hear Porkins repeating, "Stay on target."

XLF is the sector-diversified choice for Macke and Najarian that will protect against individual names blowing up like the Death Star. Should I consider XLF instead of UYG?

Looking at data from Google Finance, I see that XLF has an average daily volume of 151M shares traded, versus 12M for UYG. Liquidity is good for both holdings, but XLF is clearly the preferred issue in the marketplace.

Over the past year, XLF has traded between $22.29 and $38.15 a share. The difference between the 52-week high and low is $15.86. If you divide that into the 52-week low value of $22.29, you'll get .71. In other words, XLF has traded at prices up to 71% off its 52-week low over the past year.

UYG has traded between $24.01 and $72.96 a share. The difference between the 52-week high and low is $48.95. Dividing that value into the 52-week low of $24.01 comes to 2.04. UYG has traded up to 204% off its 52-week low.

XLF looks good if you can't stomach the extra volatility. Volatility, schmolatility. On the next dip, Macke may buy XLF, but I'll be otherwise distracted by some ugly UYG.

14 April 2008

UYG - Ultra-Long Financials When I Feel the Urge to Go Long

Above is the chart for UYG, Proshares' ultra-long financial sector ETF. This sector has been rightfully punished by the market for its components' indiscretions, forays into now-illiquid markets, and other eff-ups.

My short position in the overall market remains strongly-held. Charles Kirk, over at his namesake site, bolstered my market viewpoint this morning with the following comment:

With key technicals breaking down on Friday, the market is vulnerable for at least another test of the March lows. The key will be whether investors keep getting more unexpected bad news above and beyond what they already anticipate this week. The combination of this week's inflationary data and earnings will be pivotal.

However, I want to be ready for the opportunity to go long if the market does indeed break down, test the March lows, and encourage me to liquidate my short positions.

Beyond broader market ETF's like QLD and DDM, I think eventually establishing a short-to-intermediate term position in the financials could be a profitable move.

Here's a link to the daily top 10 holdings of UYG. And here's the top 10 holdings as of last Friday:

as of 4/11/08 Top 10 Holdings | Show All
Security Description Weight

As of today's close, each of these companies were affected by the Wachovia announcement of its need to raise $7B in additional capital. The RSI(2) for these stocks fell to deeply oversold levels:

AIG - 2
AXP - 1
BAC - 0
BK - 13
C - 5
GS - 2
JPM - 0
USB - 10
WB - 12
WFC - 1

UYG also had its RSI(2) fall to 1.

So, why buy UYG when all of these components are oversold and volatile?

Since February 1, these companies have traded anywhere from 10-40% off their peak values. The main draw of UYG would normally be its 2X volatility, but in this market, the diversity of names is just as important. I want some protection from an individual name blowing up, like the aforementioned Wachovia.

I'll track UYG, and will establish a position if the market affords the opportunity. The charts below (of the top 10 holdings of UYG in portfolio-weighted order) show the financials sector is already enticingly oversold, but bearish stocks (and sectors) can remain oversold for extensive periods of time.

12 April 2008

Dow Candlestick and RSI(2)/RSI(14) Chart

I have made no trades for a while, as the market finally turned downward, thanks to GE surprising Wall Street with its crap earnings. Currently, at today's closing prices, my positions in DXD and QID are basically back to where I entered into them. FXP, well, that's still underwater, for now.

It's interesting to see that the Dow was unable to break out of the top end of the range, as shown in the above annotated candlestick chart. Now that earnings season is underway, and Dow components like AA and GE have disappointed, I'm still confident that the market is headed back towards the bottom of the range (11,800).

Moving onto my RSI(2)/RSI(14) chart, you may notice that today's move placed 20 out of 30 Dow components into green oversold territory. While this may seem extreme, if you look at the April 1 column, you'll see that 28 out of 30 components were in red overbought territory.

Confirmation of the FXP Position

Here's the key graph from this recent MarketWatch story on the Hang Seng:

Andrew To, sales director at Tai Fook Securities, said the market was in an "overbought" zone after rising nearly 4,000 points in the past two weeks and faced profit-taking pressure. "Some analysts expect the beginning of another bull run would take the Hang Seng index to 26,000 or even higher. My personal view is that (the recent rally) is just a big technical rebound, rather than a turnaround, in the current bear phase," said To.

02 April 2008

The Market Is Swinging Like Roger Stone

This market is swinging like Roger Stone.

The Dow climbed skyward today, adding 391 points. The chart below shows the sudden shift in market sentiment for the start of the second quarter of 2008.

The above chart also shows how volatile the market's been, bouncing up and down.

The chart below shows the 2-day RSI readings for the Dow and some ETF's for the last three trading days. You should be able to recognize without clicking on the image that the cells have swung from mostly green to overbought red overnight. I'm using overnight in the sense of someone on a three-day bender would think of overnight.

How did I react to this shot to the upside?

After a couple choice swears, I added to my prematurely purchased FXP position...prematurely. I had orders filled at $88.06 and at $84.79, lowering my cost basis to $91.49.

And I temporarily sold off the ALB position at $36.60, as I did not care for the lackluster price action in ALB. I think the market could have been playing a bit of an April Fool's joke on the bulls. Even after today, I think the overall bear trend is ongoing. Hopefully, I can re-establish my position in ALB soon enough, at a better price.