Michael Covel: Trend Following News

For an assortment of reasons, there was no exact Turtle student number back when Dennis hired his crew. Even among Turtles it is debated today. My paperback version of “The Complete TurtleTrader” comes out in February and the subtitle has been changed to say 23 Turtles on the cover. That is the common number thrown around after all these years, but if I had my way I would have said “20+” instead of “23″. Call me anal or call me picky, but all aspiring writers should know that publishers often take steps that authors are not completely on board with! Oddly, the areas where publishers always get mucked up in are book titles and book cover design. Generally, they steer clear of what’s between the covers. I could definitely write a book on writing and publishing a book.

The regulatory and marketing term often applied to trend following traders is managed futures. Of course managed futures can refer to more than just the strategy of trend following trading, but the vast majority of managed futures funds are trend following based. Why bring this up? There is a thread on linkedin where a debate over the “managed futures” name is ongoing. I personally think the term managed futures says almost nothing to the average investor and or trader. It causes constant confusion. To me a term should describe the trading strategy, not an instrument traded, especially if the goal is to create awareness.

While I know of no way to take this information and make trading decisions, I can say there is pain ahead for many people in their daily lives. Some of the cushy “government-to-do-nothing” jobs will most likely implode.

Update: After just posting the above comment, I saw this. Looks like government jobs attached to that big nipple in DC are going to be all the rage. What a depressing existence!

Michael Lewis lays the current mess right at the feet of the government. While that is true he seems to not address who the government is — us. We are the government. Bottom line, all of the things not done by the government, described so clearly by Lewis, were not done because we the people did not want them done. Why the short term focus? That’s the American way. American’s want it quick. They want to believe it will be quick, but it’s never quick. So as long as the American public spends so much of their time hunting for equality of results, process to get there be damned, we will continue to have the government (us) do dumb things.

An old classmate found me recently on Facebook. She was a math whiz back in the day and has ended up at a big mutual fund. Once she had seen what I was up to she asked if I was familiar with CQA. I said, no.

She responded:

Chicago Quantitative Alliance. Lots of those wicked smart quant institutional money managers are in it. it is a spin off from the Q Group which has the fathers of the wicked smart quant guys in it.

I responded:

The only wicked smart quants I know made money in October and November 08. We talking same people?

She responded:

Good point. I do know one…worked for him in xxx. And then do you count the people that got great packages when they got laid off as wicked smart quants too?

This interchange was another great example of how under the radar systematic trend following traders still are even in 2009. Even for people knee deep in Wall Street, trend followers are an unknown quantity.

Some favorites that make a good start to the new year:

I had the opportunity to see this presentation from original Turtle Liz Cheval in person, but since most people were not there that day in Chicago I am sure her online presentation will prove just as educational.

From the Boston Globe comes an article about economists trying to figure out how they went so wrong in 2008. An excerpt:

The vast majority of us, after all, are not experts. But academic economists are. And with very few exceptions, they did not predict the crisis, either. Some warned of a housing bubble, but almost none foresaw the resulting cataclysm. An entire field of experts dedicated to studying the behavior of markets failed to anticipate what may prove to be the biggest economic collapse of our lifetime. And, now that we’re in the middle of it, many frankly admit that they’re not sure how to prevent things from getting worse. As a result, there’s a sense among some economists that, as they try to figure out how to fix the economy, they are also trying to fix their own profession. The discussion has played out in blog posts and opinion pieces, in congressional testimony and at conferences and in working papers. A field that has increasingly been defined, at least in the public eye, by quirky studies explaining the economics of our everyday lives - most famously in the best-selling book “Freakonomics” - has turned decisively, in the last couple months, to more traditional economic turf. And at economics powerhouses like Harvard, MIT, and the University of Chicago, faculty lunch discussions that once might have centered on theoretical questions and the finer points of Bayesian analysis are now given over to dissecting bailout plans. Long-held ideas - about the stability of the business cycle, the resilience of markets, and the power of monetary policy - are being challenged. “Everyone that I know in economics, and particularly in the worlds of academic finance and academic macroeconomics, is going back to the drawing board,” says David Laibson, a Harvard economist. “There are very, very, very few economists who can be proud.”

Maybe the problem is not the economists, but rather the reverence they have been afforded by society. They clearly are not experts in the very areas they profess to be. At least trend traders admit from the beginning they don’t know, which results in the oh so silly notion of their reacting to events instead of the unreachable prediction goal pumped at the ivory towers.

The real reason many people are still happy in the face of market blowouts? This article is one opinion why. Another reason? Consider:

Cool interactive graphic showing up and down nature of markets over 2008.

Read.

One of the reasons I enjpy writing about (defending) trend following is its longevity. There are some track records out there covering decades that just make me go “wow”. Its hard to poke holes in the performance of some. Longevity helps to keep this type of situation from occurring. Yes, that is a sports example, but the analysis that pokes holes in Steve Nash’s two MVP awards is the kind of thinking you need to do all the time to make money in any entrepreneurial endeavor over an extended period.

Probably not the best of odds for the professor’s prediction coming true.

From the press today comes an excerpt that caught my eye:

Illinois’ constitution does not require a governor to leave office when charged with corruption. Moreover, as governor, Mr. Blagojevich could legally make a Senate appointment even if he were in prison.

Blagojevich is a goon clearly, but who in Illinois is going to take credit for crafting laws that could allow him to appoint a United States Senator while sitting in lock up?

Mark Goulston lays out the Madoff appeal.

I am not sure I will become a Twitter devotee, but I just might. Just signed up. For those not familiar with Twitter, it is a free social networking and micro-blogging service that allows its users to send and read other users’ updates (otherwise known as tweets), which are text-based posts of up to 140 characters in length - that can also be easily delivered to mobile devices. You can sign up to follow my Twitter posts here.

Michael Gibbons’ view on “trend“.

Article.

Jim Cramer’s predictions for 2008:

What follows are my top-ten financial predictions for 2008—some mortal locks, others long shots, in that order.

1. Goldman Sachs makes more money than every other brokerage firm in New York combined and finishes the year at $300 a share. Not a prediction—an inevitability. In fact, it’s only January, and I think it’s already come true.

2. Oil goes much higher, maybe as much as $125 a barrel. That sends gasoline to $5 a gallon, even at those terrific service stations outside the Holland Tunnel. Pundits keep blaming the endless rise on geopolitics, but in the latter half of 2007, we saw reduced tension in Iraq, Iran, and Venezuela, plus flat-out production by the Saudis and the Russians, and all that happened is the price went from the $70s to the $90s. We are running out of oil more quickly than people can imagine, and that means great returns for oil companies. Just buy the stock of the company you filled up at today or buy a driller (Transocean’s my favorite), then sit back and make money. The odds oil will rise? Two to 1. The $125-per-barrel target might be pushing it, but higher oil is pretty much a sure thing.

3. The Fed arranges an Arabic Heimlich maneuver on Citigroup, so the banking giant doesn’t choke on the worst mortgage portfolio in the country. Rather than face the demise of the biggest U.S. bank, and the panic its fall could trigger, Congress looks the other way as Arab investors buy 51 percent of the somnambulant bank. Unfortunately for Citigroup, I’d lay 3 to 1 on this happening. I say “unfortunately,” but I shouldn’t. It’s unfortunate that a proud institution basically has to give up its autonomy, but its stock would go up considerably once it got that capital.

4. Verizon becomes your cable provider. In one of the most remarkable frog-to-prince transformations I’ve seen, Verizon CEO Ivan Seidenberg offers an alternative, Fios, that is better and cheaper than anything Time Warner, Cablevision, or Comcast can produce. Throw in Verizon’s growing cell-phone business and growth accelerates dramatically, making VZ the best-performing stock in the Dow Jones averages. Time Warner and Comcast hit new lows, and the retreat of cable begins. Sorry, cable guys: We’re looking at 4 to 1 here.

5. In the first real debacle of the private-equity era, Cerberus Capital Management, the quiet hedge-fund king, fails in its bid to resuscitate Chrysler—not a surprising turn, given that it picked Bob “I ruined Home Depot and all I got was $200 million” Nardelli to run the country’s worst car company. The combination of Chrysler and the 51 percent of GM’s lousy mortgage business that it paid top dollar for forces former Treasury secretary John Snow to seek a bailout for Cerberus. Amazingly, given the love of hedge-fund contributions by both parties, Congress agrees and writes checks for billions to save Cerberus’ wealthy investors. Call the Chrysler failure a lock. The bailout? I’d say 5 to 1.

6. Google continues its dominance and becomes one of the top three companies in the U.S. in market capitalization. It doubles its advertising share, at the expense of television and print. It also successfully challenges Microsoft for operating-system dominance. Microsoft calls for a government investigation of Google’s power, but no one cares because Microsoft is just too hated for anyone in Washington to champion. The stock roars to $1,000. I like Google enough to put this one at 7 to 1. If you use an $800 target, make it 5 to 2.

7. European companies, eyeing the weak dollar, snap up New York real estate, and offer to buy Merrill Lynch and JPMorgan. John Thain and Jamie Dimon, the companies’ respective CEOs, agree to the bids (Thain sold a chunk of stock to a foreign entity just last week). Colgate, Clorox, Whirlpool, and Black & Decker get snapped up, too. All six companies’ stock prices head north. Lots of moving parts, but let’s put the odds of at least one of these deals happening at 3 to 1. A perfect Pick Six pays 50 to 1.

8. Apple completes its dominance of the music business, as the music producers decide no longer to produce new CDs. It’s just too expensive for them. Warner Music Group files for bankruptcy. Apple goes to $300. Okay, these may not be 2008 events, but they will happen, sooner rather than later. This year: 25 to 1. Next year: 5 to 1.

9. The New York Times, after spending several hundred million dollars buying back its stock while it was in the $30s and $40s, slashes its dividend in half because of a cash shortage. The stock drops to $10. To save the world’s greatest newspaper, the company accepts a buyout offer from Mayor Michael Bloomberg at $20 a share. Don’t be so quick to scoff: The cash is spare change for Bloomberg, who, don’t forget, already owns a small media company. I’d say the $10 share price is even money. That’s how bad it is at the Times. The Bloomberg buyout is probably a 100-to-1 shot, but may be less if he decides not to run for president and needs something else to do this year.

10. An Army of the Foreclosed marches on the White House, then launches a siege at the Federal Reserve, before camping out in front of the Washington Monument. The army demands relief from eviction. Bernanke, recognizing that he did nothing to regulate the mortgage mess in 2006 and then did not cut rates fast enough in ’07, resigns. The siege ends, the new guy slashes rates, and the market takes off. Here, the odds are 1,000 to 1 (as Marx taught us, people have a hard time losing their chains). But if Bernanke or a future Fed chair does cut rates meaningfully, here’s a sure bet: That’s the time to start buying.

Can’t wait for the 2009 predictions.

Long Term Capital Management was the beginning.

The debate rages.

What a sham. An excerpt:

As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes. Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer. Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

Call him liberal. Call him conservative. Call him libertarian. It doesn’t matter, he is usually right on the money. Tom Friedman’s latest opionion is on target. An excerpt:

I had a bad day last Friday, but it was an all-too-typical day for America. It actually started well, on Kau Sai Chau, an island off Hong Kong, where I stood on a rocky hilltop overlooking the South China Sea and talked to my wife back in Maryland, static-free, using a friend’s Chinese cellphone. A few hours later, I took off from Hong Kong’s ultramodern airport after riding out there from downtown on a sleek high-speed train — with wireless connectivity that was so good I was able to surf the Web the whole way on my laptop. Landing at Kennedy Airport from Hong Kong was, as I’ve argued before, like going from the Jetsons to the Flintstones. The ugly, low-ceilinged arrival hall was cramped, and using a luggage cart cost $3. (Couldn’t we at least supply foreign visitors with a free luggage cart, like other major airports in the world?) As I looked around at this dingy room, it reminded of somewhere I had been before. Then I remembered: It was the luggage hall in the old Hong Kong Kai Tak Airport. It closed in 1998. The next day I went to Penn Station, where the escalators down to the tracks are so narrow that they seem to have been designed before suitcases were invented. The disgusting track-side platforms apparently have not been cleaned since World War II. I took the Acela, America’s sorry excuse for a bullet train, from New York to Washington. Along the way, I tried to use my cellphone to conduct an interview and my conversation was interrupted by three dropped calls within one 15-minute span. All I could think to myself was: If we’re so smart, why are other people living so much better than us?

Hong Kong’s airport is awesome, but I am not sure it is better than Tokyo’s or Singapore’s. Plus I have not seen Beijing’s new airport yet, which is said to be over the top. That said, Friedman is on the money - America is behind - big time.