December 2010
Dorn’s take on FAD
In the early hours of yesterday morning, I picked up the phone and heard a woman sobbing loudly.I did not recognize the phone number or the voice, so I knew it was not a relative or friend.Still half-awake, I asked her how I could help her.It was yet another tale of sorrow, struggle and the inability to make ends meet. She was a single woman who lost her job and turned to scalping in the DJIA mini-futures to make enough money to save her house and pay her bills.She had been trying for four years to trade and was losing steadily. Her equity was going down every day and she was desperate to understand why.
“Why?How can this happen to me?I am smart, educated, good with numbers and even trained myself to be a professional blackjack player. I trade one contract and every time I lose money, I go into a total tailspin.I get so emotional that I can’t recover.I thinkI need some kind of medication to get me through thisbecause I am at the end of my rope.
I backtest my system every time I change it and I change it often.When I trade on paper, I make good money, but as soon as I go into the markets, I lose. If I had my job back or any other job, I would leave trading in a heartbeat.I don’t know what to do. Please help me?”
In less than ten minutes, I heard almost every mistake a trader can make.Almost.
Symptoms:
Trading with “scared” money Trading from a state of desperation and fear Ruled by emotions and unable to take a loss Changing her trading plan often Trying to be perfect Looking for medication to deal with emotional issues over trading Adopting a trading technique (scalping one futures contract) that is beyond her level of trading competence Attached to the outcome of each trade Not committed to the process of learning to trade-using trading as a temporary “stop-gap” source of income until something else becomes available. Acting out personal dramas in the financial markets
Diagnosis:
Financial Anxiety Disorder ( FAD) with depressive components, leading to maladaptive trading behavior.
Possible gambling addiction. (Not enough information to confirm or deny)
Treatment:
Stop trading and look elsewhere for a source of income.
Find a competent, compassionate, communicative and transparent financial advisor to help with this aspect of her life.
Increase social or family support to mitigate isolation.
Begin a regular program of yoga to reduce anxiety.
Thanks and Good Trading!
Janice
Janice Dorn, M.D, Ph.D.
Dec 23 2010
A X’mas Wish
Here is a poem for X’mas and I wish to share this from my friend Dr Janice Dorn:
Merry Christmas, Ana, and every blessing to you and yours!
Love,Janice
A Christmas Wish
By William Michaelian
What do I want for Christmas?
Nothing to buy, nothing to sell.
Family gatherings. Laughter. Music.
Multitudes of happy children, warm and fed.
An end to the current war, and to all wars.
Water in the well, food on the table.
Companionship for the lonely.
Solitude for those in search of calm.
Understanding for the prisoner.
Compassion for those who judge.
Strength for the belittled.
Comfort for the torn.
I want what everyone wants,
But believes can never happen.
Truth instead of lies.
Generosity instead of greed.
Knowledge instead of fear.
Modesty instead of arrogance.
An open heart, an open mind.
To follow Life where it leads,
With gratitude for hard times
And what they teach,
And, when good times come,
To pass them on for others to enjoy.
But if these things are too much to ask,
If I am silly or have somehow missed the point,
There is still one thing I would like to see.
A giant teddy bear for the wide-eyed world.
Roundup of 2010
Counting down to Christmas and 2011, we are also mindful of:
A Year end View from Bob Eisenbeis
December 18, 2010
Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com. He may be reached at Bob.Eisenbeis@cumber.com.
It is year-end and time to look ahead to where the economy is going. The path has already been largely charted for the coming year. Congress has passed an extension of the Bush tax cuts and also extended unemployment benefits. The budget cost of this de facto tax-stimulus package is estimated at $800 billion, not because of increased spending but because of its implications for reduced tax revenues. At the same time, Congress also kicked the budget decision on funding of the government down the road until February or so, when the new Congress is in place. The implications here are mixed in terms of sector impacts.
Finally, the Fed has reaffirmed its commitment to increase its Treasury holdings by $600 billion. QE2 is Chairman Bernanke’s bet that the credit channel will work. He and Columbia colleague Mark Gertler wrote about it several years ago. Bernanke hopes it will come through and be the policy conduit for increasing economic growth where other channels have failed. The bet – and it is a very big bet – is that at some point banks will stop hoarding excess reserves and begin lending. After which businesses will finally begin hiring.
There are a lot of if’s here, especially since small businesses, according to the National Federation of Independent Business (NFIB), are cautious about their hiring and expansion plans. Additionally, the claims of politicians notwithstanding, small business access to credit is not regarded by NFIB respondents as a major impediment to expansion, and loan demand is low because demand is low.
Small business job creation is the key to overall job growth, not that of large businesses. Historically, large businesses are not engines of job creation, and they are not likely to be swayed by photo ops and one-on-ones with the President to expand employment. Small business employment decisions are being impacted by lack of demand and uncertainty. Uncertainty about regulation. Uncertainty about taxes. Uncertainty about healthcare costs, which now seems on its way to the Supreme Court, just to name a few.
Due to policy lags it will be well into 2011 before we have concrete evidence as to how the fiscal and monetary policies will play out and what the impacts are on job creation. In the meantime, the real economy continues gradually to improve. Consumers are finally beginning to spend, consumer sentiment is slowly improving, new claims for unemployment insurance are somewhat improved, recent surveys of manufacturing have surged, and the trade deficit is improving marginally. All of this is consistent with an economic scenario of modest growth and job creation.
The most recent surveys of economists suggest they have upped their real GDP projections for 2011 to about 4%. This is probably too optimistic and is somewhat higher than the FOMC’s central-tendency projections of from 3% to 3.6% for real growth next year. Unemployment is also projected by the FOMC to improve by about half a percentage point. Note that the FOMC’s projection takes into account the expected impact of the additional $600 billion of quantitative easing.
What does all this mean for job-creation prospects? Here are some facts. According to the Employment Survey, job losses peaked at 8.363 million jobs in December of 2009. This is six months after the official end of the recession. Since then the real economy has grown a little more than 2% on a year-over-year basis and has added a net of about 951 thousand jobs as of November 2010. This job growth is consistent with, but somewhat on the low side, of what one might expect for our economy, based upon history. Our estimates are that a US economy that grows at 2% per year will create, on average, about 1.2 million jobs. For all of 2010, the low-side estimate is about 1 million. Note that we still have a month yet to go, since the data in hand only go through November.
If the economy were to grow next year at the FOMC’s expected rate of from 3% to 3.6%, then we could look for about 2 to 2.5 million more jobs to be created. This translates to about 200 thousand jobs per month, plus or minus about 35K. Because of recent productivity growth and structural shifts in our economy, the lower estimate is probably more likely than the more optimistic scenarios. This would not be enough to bring the unemployment rate down significantly, since the labor force is expected to grow about 180K per month next year.
This rather sobering job-creation prospect has significant implications for politics and economic policy. Politicians and policy makers will be obsessed with jobs, and more so the closer we get to election season. The Iowa caucuses are scheduled for February 2012, but the jockeying will begin next summer. By then perceptions of how well politicians have responded to the need for jobs will be entrenched in voters’ minds. For this coming election, jobs equate to votes, either for hopefuls to get into office or for incumbents to stay there.
Now, I have already suggested that the economic and job outcomes are essentially already baked into the cake. This means that what will actually count is what politicians say, how partisan the environment is, how the parties react in terms of getting the US’s fiscal house in order, and how all of this plays with voters. The present administration’s fate may already be decided, in the sense there is little that can be done to affect significantly the job outcomes. Instead, a second term will depend upon how angry the public remains and how it reacts to what the new Congress does.
What does all this mean for financial markets and investment strategies? It means that uncertainty will be the dominant theme. As economists, we tend to believe that financial markets are efficient, that asset prices reflect all available information, and that risks are appropriately priced. Presently, however, financial markets appear to be dysfunctional. Pricing anomalies abound across markets. This is true in the fixed-income space and for municipal bonds in particular. Is this evidence for us to conclude that markets are no longer working, that people are irrational, or what?
I prefer to think that what we are presently seeing is not irrationality but rather the logical manifestations of uncertainty. The noted economist Frank Knight taught us the difference between risk and uncertainty. Risk means that we know or have reasonably reliable estimates of the probabilities of returns and events occurring, and therefore can make reasoned judgments on how to price those risks.
Uncertainty is when we don’t know or do not have estimates of the probability distributions characterizing risk. Under uncertainty conditions, many investors don’t know how to evaluate their exposures and make what appear to be irrational pricing decisions. Many others simply throw up their hands and exit the marketplace. Such events create opportunities for the savvy investor and bargains if one does one’s homework and can distinguish risk from uncertainty.
As long as the political, fiscal, and monetary policy uncertainties persist, we think market anomalies will persist. The failure to extend the Build America Bonds introduces great uncertainty, for example, into the municipal bond space; and that, combined with concern about the fiscal situation of many municipalities, has caused many uninformed investors either to leave the market or to demand untypically high interest rates for what are actually sound credits. For informed investors, however, such behavior creates opportunities.
Understanding the inherent quality of assets and the ability of obligors to pay is critical to separating risk from uncertainty when devising investment strategies. That is how to capitalize on asset mispricing, preserve capital, lock in returns, and hedge risks. Other commentaries from Cumberland’s portfolio managers will discuss how we approach such a marketplace.
Bob Eisenbeis, Chief Monetary Economist, email: bob.eisenbeis@cumber.com
Hedge Funds an Alternative
With institutional hedge funds, there are layers of fees to pay irrespective of performance.
Private hedge fund managers like the legendary Ed Seykota only gets paid with performance of say about 30% on profits when the fund is closed usually 3 -5 years, unless a certain percentage of capital is lost eg 30%, then the fund will be closed prematurely. If they do not perform, they do not get paid at all.
I wish to add in passing that my mentor Ray Barros who has been very successful in his private hedge funds, also follows the footstep of Ed Seykota in rewarding himself only if he performs well.
His Barros Swing methodology enabled him to produce a Value Added Measurement Index (VAMI) from A$1000 in 1990 to over A$500,000 in September 2010.
Track records can be read at:
http://tradingsuccess.com/blog/about-ray-barros
3 factors of Success
The Three Phases of …
All Economics Are Local
By Kevin Brekke, Editor, Casey Research
The title of this article borrows from that old adage about politics uttered by former Speaker of the House Tip O’Neill, and refers to a recent study out of The Brookings Institution that shows that all economic recoveries as well as politics are local.
Prepared by the Metropolitan Policy Program at Brookings, the study examines 150 of the world’s largest metropolitan economies in 53 countries from 1993 to 2010. As expected, the 150 metro areas profiled are highly diverse, with per-capita measures of Gross Value Added (roughly the equivalent of per-capita GDP) ranging from under $1,000 in Hyderabad and Kolkata, India, to $70,000 in San Jose, U.S.A., and Zurich, Switzerland.
The cities were ranked based on two measures – economic output and employment – and during three economic time periods the study defines as: pre-recession 1993-2007; recession year of minimum growth 2007-2010; and recovery 2009-2010.
As many of you are probably already thinking, the measures of economic output and employment are somewhat codependent. In that regard, the authors are careful to point out an important distinction, noting that:
“Although the ranking indicators [economic output and employment] depend to some degree on one another, they do not always move in unison. On the one hand, some metros that appear quite good on income growth may not generate new jobs, reflecting increased productivity but not necessarily growing employment opportunities. On the other hand, metros can grow employment, but not the type of employment that boosts incomes and standards of living for the broader population.”
The full report draws some very interesting conclusions about growth opportunities in the years ahead, and I highly recommend you give it a read. For those time-stressed readers amongst us – and who isn’t these days with so much to read and so little time – I suggest you start with the executive summary and then a quick review of the report’s charts and tables that will give you a good idea of the main points made in the report. You can access the report via the link above.
The report’s conclusion is what I want to briefly focus on here. Let’s start by looking at the 30 metro areas that have done best during the recovery years as defined in the report:
| 1. Istanbul | 16. Kolkata |
| 2. Shenzhen | 17. Chennai |
| 3. Lima | 18. Tianjin |
| 5. Singapore | 19. Buenos Aires |
| 6. Shanghai | 20. Jakarta |
| 7. Guangzhou | 21. Belo Horizonte |
| 8. Beijing | 22. Belo Horizonte |
| 9. Manila | 23. Kuala Lumpur |
| 10. Rio de Janeiro | 24. Riyadh |
| 11. Hyderabad | 26. Austin |
| 12. Mumbai | 27. Montreal |
| 13. Bangalore | 28. Alexandria |
| 14. Melbourne | 29. Cairo |
| 15. Guadalajara | 30. Hong Kong |
Only three cities within what might be termed “Western economies” made the list: Austin, Montreal, and Melbourne. Of the next 30 cities, 14 are from Western economies. And some of the U.S. cities that made the top 60 might surprise you, like St. Louis and Detroit.
It also becomes clear that a good showing in the pre-recession period did not necessarily ensure that a city would undergo a quick recovery. A good counter-example of this is Istanbul. Ranked #1 during the recovery, Istanbul was #143 in the recession and #44 pre-recession.
The concluding remarks in the report are important for no other reason than that they underscore a point we have been making for some time. That is that the economies in Asia and Latin America will continue as increasingly formidable opponents in the quest to grab a larger share of world growth. Quoting from the report:
- “The real story, however, was the continued rise of lower-income metros outside the U.S. and Europe relative to others. A look at the first year of the worldwide recovery from the metro perspective reveals a highly uneven landscape, but one in which lower income regions are clearly leading the way even more than before as centers of global economic growth.”
And,
- “The past two decades have seen lower-income metro areas in the global East [Asia] and South [Latin America] “close the gap” with higher-income metros in Europe and the United States, and the worldwide economic upheaval has only accelerated the shift in growth toward metros in those rising regions of the world.”
This positive assessment on the outlook for Latin America supports some of the general observations made by our senior metals analyst Louis James, who’s worn out a good set of boots lately evaluating the mining opportunities in that region. As he points out in the last several issues of the International Speculator, certain Latin American countries both on and off the radar of mining investors are realizing the benefits of freer markets, less regulation, and lower taxes as they look for ways to grow their economies. And mining not only promises employment, but jobs that pay above the local prevailing wage and can raise the standard of living of surrounding communities.
TRT @ Pomo
Location of Traders Round Table : Pomo Mall, Singapore
Traders Round Table (TRT) is a community of traders and investors who seek to help their fellow traders and investors by providing a holistic, broad-based financial investment and trading education, mentorship and psychology.
TRT’s mission is to help people to be more successful in Creating – Enhancing – Protecting their wealth in the financial markets, and to build up a community of active traders and investors, committed to succeed in the financial markets.
TRT was founded on the recognition that people of all ages and background need customized and practical guidance in developing their financial knowledge and skills in order to reach their defined financial goals.
TRT brings decades of hands-on experience, training, and education by its founding members and associates. TRT will also leverage on third-party financial education experts.
TRT provides physical facilities in addition to event planning, marketing and administrative support to community members, instructors and guest speakers.
Founder
Thomas Saw is a practitioner trader and investor with over 2 decades of trading and investing experience. He has actively sought to enlighten and coach his fellow traders and investors on the reality and practicality of trading and investing as a means to their financial freedom. Thomas’ passion has led him to be:
Founder of Traders Round Table – TRT is a traders and investing community whose mission is to help people to be more successful in Creating – Enhancing – Protecting their wealth in the financial markets.
Founder and ex-Owner of Online Trading Academy (OTA) Singapore (2007 – 2009). OTA is the world leader in professional education for traders.
Ex-President of Options Traders Club of Singapore (2005 – 2007). OTCS is a non-profit trading club.
Thomas’ holistic approach to trading-investing is to use multiple financial instruments, multiple time-frames and multiple methodologies, while micro-managing Risk. He also knows how to help people become better traders and investors as he can fully relate with the average trader who starts out from the bottom and goes through the school of hard knocks.
Co-Founder
Ray Barros is a professional trader, fund manager, author, and educator. He is currently trading with a Fund of more than A$500 million. Since he started trading more than thirty years ago, his track record reflects a whopping 39 percent per annum return on a compounded basis. This means a hypothetical investment of $1,000 returned over $300,000 in the period between 1990 and July 2010.
Ray is also the author of ‘The Nature of Trends’ published by Wiley Press. Ray has been regularly featured in regional newspapers and publications like Sydney Morning Herald, Your Trading Edge Magazine, Business Times, and Smart Investor. He has also appeared on numerous TV stations including CNBC and Bloomberg.
Recent seminar sponsored by Phillips Capital
http://www.youtube.com/watch?v=LkqE5K9ouNQ
Co-Founder
Garth G. Shibles has been investing successfully in the US and global markets for over 20 years. He has been a US based NASD registered independent advisor and has completed a variety of license requirements.
He has also worked in Government and corporate America consulting in the IT and telecommunications sector. He has degrees from four major US universities and colleges.
Nostalgia of London
I would like to share this post by my friend David Kotok , Chairman of GIC. I am also hopeful of joining GIC conference in Rome next April, a city I have yet to visit apart from stopping over at the airport when a student in London. It will be a working holiday for me, a Busman holiday and Roman holiday!
Report from London – by David
December 9, 2010 (9 p.m. London time) It’s rare to start a commentary with a restaurant review but tonight’s feast justifies raves. Pearl Restaurant, 252 High Holborne, London, telephone +44 (0) 20 7829 7000, deserves 5 stars for superb service, exquisitely delicious cuisine, ambiance and a welcoming attitude to this weary traveler.
They teased with imaginative canapés that burst with flavor in the mouth. Three seared scallops, accompanied by a parsley puree joined chicken oysters and the garlic puree to complete round one. Venison, moist and pink, with a beet puree were joined by a hot tart of thinly sliced beets atop ground venison placed on a creamed Swiss chard completed round two. A delicious full bodied glass of Gigondas accompanied each round. Tonight’s culinary delight proves you can get a great meal in London. You can find the Pearl Restaurant next to the Renaissance Hotel Chancery Court. Enjoy!
Traffic in London is a mess. Forty thousand students carrying signs which read, “F**K FEES” have tied up the town into knots. They seem to feel they are entitled to free education with no requirement to repay a student loan. The politics are clear. A political party won parliamentary seats by promising the continuation of the student subsidy. Now it wants to change the rules. Hence, students and others claim politicians lied to them. There is turmoil in British politics. It reminds me and some friends at the FT of the days when George Bush No. 1 said, “read my lips” and, subsequently, lost his re-election.
In the UK, monetary policy remains frozen at the level of QE already established. Budgetary constraints, real estate valuation declines and the forthcoming regulatory constraints occupy the thoughts of the financial community. Uncertainty here is high.
One discussion this afternoon focused on the intense bond market sell-off which Americans view as the rise in yields on the 10-year Treasury note.
We discussed it at some length. Little noted in America, but apparent to global observers, is that the phenomenon is worldwide. The Japanese 10-year government bond rose in yield by about the same percentage as the US benchmark 10-year Treasury note.
The Euro benchmark, the German Bund, did about the same. So did the British benchmark.
In meetings today we speculated that the sell-off is not a US only phenomenon. We speculated that it is more than a reaction to Bernanke’s QE2. If all benchmark 10-year debt is selling off by about the same amount in price change, could it be that this selling is the reallocation of globally indexed funds away from sovereign debt and into something else?
Think of yourself as a Persian Gulf fund. You usually hold foreign sovereign debt in proportion to an index or benchmark. Now you want to reduce your exposure to some of the countries in the index. You either have to sell proportionately from all of the countries in the index or you will face a concentration that violates your index or benchmark. Worldwide sell-off in benchmark sovereign debt suggests this reallocation is underway. Otherwise, how can you account for the Japanese government bond, the German Bund and the US Treasury note all moving in a correlated way?
Many foreign holdings are routed through London. Reports show these securities as sourced in the UK. However, everyone here knows the origins of these monies are not British.
It has been a long two days and we must finish preparing for a CNBC interview tomorrow morning. Goodnight.
David R. Kotok, Chairman and Chief Investment Officer
Cumberland Advisors
2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236
614 Landis Avenue, Vineland, NJ 08360-8007
1-800-257-7013 http://www.cumber.com
Intuitive Trading
Cross ref from
Trading and Intuition
BarroMetrics Views: Trading and Intuition
There is a debate at the moment between proponents of ‘rational mind’ decisions and ‘intuition’. Each has its advocates and each side claims that it is correct. As an example of the clash read: ‘The Invisible Gorilla‘ and ‘Blink‘.
It seems to me that both miss the point. It’s true that our brain is not perfect:
- We suffer from heuristics e.g. hindsight bias
- We have difficulty with probability
- Logic sometimes escapes us
But the brain is still an amazing piece of equipment. In my view, we need both sides of the brain.
The intuitive side is perfect for making decisions in situations we have encountered before and have a pattern of success in dealing with them (especially where a fast decision is required); the rational side when we need to think through a problem.
For trading, I pay close attention to my feelings because they often warn me of situations my left brain has missed. At the same time, I need to be aware that the feelings may be a result of the triggering of my ‘fight, flight or freeze’ response.
The current S&P position is an ideal one to discuss this subject.
Momentum, structure and sentiment all are suggesting a top is in place. But part of me says: “Whoa…don’t you believe it. This has all the signs of a fakeout.’ Examining the feelings I find it is wedded to two reasons:
- Seasonality and Kress Cycles suggest that we should move up at this time; and
- The buy signal that triggered this move in the 12-month is not one that sees a ‘Death Zone Trade’ see Figure 1.
A sell signal here would be unusual both in terms of time and structure. That being the case, if it occurs it would likely be a sell signal of some strength. So my feelings warned me not to get caught up with the strength of the down move and topping patterns; my left brain warned me that my reluctance to acknowledge ‘a top’, may be because I am wedded to my ‘1966 to 1982 is repeatiing’ scenario.
I resolved the dilemma by making a left-brain decision after taking all of my feelings into consideration. How did I do this? – See my post on http://tradingsuccess.com/barrotwitter/. I find that optimal trading requires the use of both sides of our brain with full awareness of each sides’ strengths and weaknesses.
FIGURE 1 12-Month Swing
Added by Idkit
Facebook will change Business Forever
So stated by Mark Zuckerberg, founder of Facebook, who has launched Facebook Deals, a new service that will transform the way businesses reach customers. True or true?
Smartphone users who donwload FB’s application can check in to a physical location eg their local coffee shop and get a reward, such as a 50% discount just to show up.
At his presentation, he uses words like ‘revolution’ and ‘disruption’, saying: “Our goal is to make everything social”.
He expounded on his world view and vision, saying” If you look 5 years out, every industry is going to be rethought in a social way.”
“You care so much more about your friends. It’s not an intellectual thing. It’s hard-wired into humans that you need to focus on what the people around you are doing. It’s this very visceral, deep thing. That, I think, is the structural thing that is going to make it so that all these industries change.” He told David Gells.
We’ll see
What Z is talking about is a new way of organizing and navigating information.
FB has more than 500m active users with expected revenue of at least $1.5B this year.
What has endowed FB with a new confidence is a more subtle transformation. FB is becoming people’s homepage, email system and more. FB is becoming the virtual driver’s license, house keys and passport for those travelling around the web with its “socail graph”.
