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Gaining a Trading Edge by Thinking a Few Steps Ahead

Alexander P Morris — Sat, 07 Apr 2012 00:55:48 +0000

In late 2011, once the market bounced off its early October lows, there was increasing chatter over how it’s probably too early for a real full-blown European debt crisis at that point in time, and how the “powers that be” would likely run the market higher into the new year. But, the real “tell” would be how the markets behaved come the new year, and that’s when all hell would likely break loose all over again. I too began to think that while the rest of 2011 may lead to a good bounce in the markets, early 2012 could bring back some real turmoil.

Then a thought struck me. Between all the blog posts, newspapers, and television media pundits calling for a “let’s see how January goes” moment – hey, even I myself was thinking the same thing… What if, with all of us worrying over that same possibility, January turned out just fine – a perfect “non-event”? And heck, even Ben Bernanke was probably worried about the new year, and we all know what that leads to: more cheap money and credit would likely be dumped right back into the markets at the first hint of trouble.

So as 2011 came to a close, while I did sell a few positions just in case, I decided to leave most of my longer-term positions as is. And, while hindsight is always 20/20, that did turn out to be a great decision. Of course, we never know for sure, and that’s why traders and investors must consistently practice sound risk management. One must always protect against the times we miss. And it not only serves to protect and preserve your bankroll, but it also helps provide the clarity and peace of mind necessary – an edge in itself – to properly consider and evaluate the information available to you. Worrying if your over-leveraged position might blow up in your face is not going to help you make a smart decision.

Traders and investors alike must always be open to taking every piece of relevant information into consideration, including our own preconceived notions and biases. As Ray Dalio of Bridgewater Associates once said “I constantly want to know what I don’t know. I want to know when I am wrong. And it helps when someone points it out.” While it certainly helps if someone else points it out, we can also objectively look at our own thought process, feelings, and emotions and consider how they too may be wrong or dangerously biased. This in itself becomes part of a valid trading edge. Everything counts, and we are often our own worst enemy in most endeavors we pursue. As in playing chess or poker, those players who patiently take a step back in order to “see the bigger picture” and contemplate the best moves will, in the long-run, always triumph over those less savvy players just itching to make a move.

We should always ask ourselves what do other traders think they know. What are they worried about or afraid of and to what extent? Am I starting to feel worried or nervous myself, and are these thoughts rational and based on sound reasoning? There was a great line in the movie Margin Call when CEO Tuld (played by Jeremy Irons) says “It’s not panicking if you’re the first one out the door.” Granted, no one (and no firm) should ever be leveraged to that extent in the first place, but from his “clear” perspective the mortgage game was up. And you certainly don’t want to be the one panicking out at the bottom of a move, with or without margin calls over your head.

Am I afraid that if don’t buy some stock tanking like a “falling knife” right now, I’ll miss the huge bounce coming right around the corner? Is it possible many other traders are thinking the same way? The reality is that it’s rarely “too late” to get a better price when buying into a crashing stock. When the price action settles down, stabilizes, and starts to rebound, the stock will probably still be priced below your initial entry. Sometimes our own feelings can give us strong clues as to what the “crowd” is thinking as well. There was no need to predict ahead of time that October 4^th, 2011 would be the low of the last crisis and panic. However, through awareness of our own feelings, astute observation into the collective thoughts of others, and by watching the price action in relation to the current headlines, we are continually provided with clues as to what is more likely to happen next. For example, each time new headlines appeared about Greece and its debt problems, the chatter they generated seemed to lead to increasingly complacent market action and behavior. There would be short-lived dips that would quickly recover, as if no one really cared any more.

And more recently, how has the market reacted as we’re hitting new multi-year highs? Ironically, the VIX (fear) index (and even more so, the publicly traded VXX index based on the VIX futures) has been acting more fearful of a potential coming crash the higher the market goes. Markets don’t generally crash right after making new highs, unless they’ve just gone through a high-volume blow-off top. I recently read a study analyzing future market behavior when there are strong upward moves in both the VIX/VXX and the overall market in the same day. The study showed that it has lead to even stronger upward price action in the near future. And so far in 2012, that’s exactly how things have played out in the market. But human behavior is not rational, and memory of the recent volatile past is still imprinted in traders’ minds. So with each new high in the market, traders buy the VIX products expecting a crash that never materializes, and are then hit over the head with some of the highest levels of contango (the huge cost of rolling over current futures and options contracts to the next month) the VIX market has ever experienced. And of course, traders are also greeted with another leg up in the market as well. Never has it been easier for me to explain or visualize the term “climbing a wall of worry”.

In reality, it is the unexpected shocks that lead to the most “real” fear. Especially where credit and leverage is concerned, it is these quick shocks that are most likely to catch firms (such as MF Global) unprepared and caught with their pants down. But the more time that goes by with an event in the forefront, the longer the world has to deal with it, adjust by preparing for the worst, and “get used to” the new norm. Just remember back to the Japanese nuclear crisis, the BP oil spill, or even more recently, the fears over a massively understated Greek CDS credit event once the ISDA declared the Greek bond “re-pricing” a credit event. Banks, governments, and central banks have now had upwards of eight months to deal with the possibility of messy CDS defaults. While there were some pundits calling for the possibility of three trillion dollars worth of losses versus the three or so billion claimed, it was likely that “the powers that be” had all the time they needed to deal with these issues. And, believe it or not, the ISDA CDS auction also came to pass without incident. That’s not to say there aren’t plenty of roaches crawling around everywhere. But just as Countrywide Financial and Morgan Stanley were rolled into Bank of America to perhaps conceal a much worst debacle in the sub-prime mortgage market, the “powers that be” have likely had enough time to take similar measures to deal with any more potential blow-ups in the Greek bond market (well, at least for the time being).

In conclusion, always consider all the information available to you, be aware of what you don’t know, and consider where you might be flat-out wrong. Seek to develop the focus and patience to position yourself in the best possible way, as opposed to merely trying to capture the next small wiggle. Instead of missing out or being incorrectly positioned, you may provide yourself a much better chance to capture a nice chunk of the real move about to appear just around the bend.

Why People Don’t Buy Gold, and Why it’s Stupid to Think for Yourself

Alexander P Morris — Sat, 26 Mar 2011 20:50:14 +0000

Why people don’t buy gold, and why it would have been smart to buy a house at the top of the market, so long as everyone else was doing it, and famous well-known economists like Alan Greenspan, Ben Bernanke, and others said real-estate would never go down. Learn why it’s stupid to think for yourself. Very funny video, and with our current state of affairs, sadly quite true…

On the other hand, it also helps explain why there is so much opportunity in the markets, as people make the same mistakes over and over again, as they try to avoid “feeling stupid”, or being called “strange and weird”.

Note: Posting this video wasn’t meant to suggest that NOW is the best time to buy gold (alas, it is already up over 6 fold over 10 years), and in fact in the past I’ve suggested that silver would likely be an even better investment longer term (as does seem to be the case so far). However, perhaps for the real point… don’t be one of the lemmings running out to buy it when everyone’s finally talking about what a great investment it is and how it too can’t ever go down. There is a time and cycle for everything. In the meantime, study, research, make up your own mind, and possibly consider picking some up when it’s unfavorable or unfashionable to do so. (You can also check out some of the related links I posted below).

As Benjamin Graham once said, “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

“Fear the Boom and Bust” a Hayek vs. Keynes Rap Anthem

Alexander P Morris — Fri, 19 Nov 2010 01:25:22 +0000

I had posted this awesome rap video on my facebook page earlier this year, but never got around to making a blog post about it. Another great video that lays out the craziness of the “boom and bust” cycle in modern economies. What’s more crazy is that the twisted version of Keynesian economics pursued by governments today would have Keynes himself rolling in his grave in disgust. Somehow politicians conveniently forgot that key little detail that governments are supposed to SAVE when times are good. Instead, politicians spend like nuts in good times, and SPEND LIKE MANIACS when times are bad. Why let such key details interfere with the opportunity for politicians to promote their own agendas… Enjoy the show!

ps. If you enjoyed this video, be sure to check out the links below for the sequel!

Quantitative Easing Video Explains Q.E.2 in terms everyone can understand – with Transcript

Alexander P Morris — Mon, 15 Nov 2010 19:48:37 +0000

This awesome and quick video explains quantitative easing in a simple and easy way for everyone to understand, and it’ll keep you laughing (or crying) the whole way through…

One note, granted this video hits heavily on Ben Bernanke, it’s certainly not all his fault – not by a long shot. Living beyond our means can only go on so far, and politicians are more than happy to take advantage of public sentiment to fulfill their own agendas and help their “friends” through gargantuan spending programs and greater controls enacted under the guise of serving the “greater good”.

Martin Armstrong on Market Predictions and Objective vs Subjective Analysis

Alexander P Morris — Wed, 11 Nov 2009 08:01:52 +0000

Martin Armstrong is the author of the Economic Confidence Model based on an 8.6 year business cycle theory inspired by the work of Nikolai Kondratieff. Two years ago, the cycle once again accurately predicted the peak of the last economic cycle years in advance. February 26, 2007 yielded some of the tightest credit spreads ever (easy access to credit), and the housing market had already begun its sharp decline.

He is currently in prison, indicted in 1999 on charges of defrauding Japanese investors. His trial would have made more sense had it taken place in “Alice in Wonderland”. Without getting into all the details here, just the fact that he was in jail for seven years for contempt of court should be enough to make any American cringe and wonder how that’s possible in the great ‘ole USA. He finally caved in and plead guilty in 2007 to the fraud charge. In return, he was given an additional five year prison term in addition to the seven he had already served! Now, if this were any ordinary American schmo, perhaps he could be written off for one reason or another as just another guy with a crazy “they’re out to get me” sob story. However, when you look deeper into the facts, and then consider that Mr. Armstrong was also one of the most respected financial research advisers to scores of powerful figures from central bank executives to heads of multinational corporations to heads of state, it really makes you wonder what’s going on with the “Rule of Law” — the real glue that holds our country together. Armstrong even authored the most insightful and thorough analysis of the 1929 crash ever assembled on behalf of the Reagan administration in the ’80s.

From his jail cell, Martin Armstrong continues to write some of the most insightful and interesting essays I’ve come across on a variety of topics from market cycles, to rule of law, to the history and cycles of politics and war. Since he has access to little more than an old typewriter (and no whiteout), you must understandably have a bit of patience with his “what I’m thinking about now” writing style. Would I be showing my age if I can still recall the nightmare of using a typewriter for school papers? It’s horrible.

Regardless, I’ve learned more useful knowledge about world history (and our own history) from Armstrong’s essays than I ever learned in school. And it’s more fascinating than you can even imagine. Everything’s been done and tried before. And here’s some food for thought… in the six thousand or so years of civilized history, can anyone find one example where socialism actually succeeded with a happy ending? But I guess that’s why most politicians don’t bother to learn any of history’s lessons. It would just interfere with their agendas and other questionable motives.

The following text is an excerpt from Martin Armstrong’s latest essay entitled “Objective vs Subjective Analysis” (pages 10-12). I’ve also taken the liberty of making some small corrections here and there to make the text more readable while still hopefully maintaining Mr. Armstrong’s full meaning and intent.

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Bailouts, Lifelines, and Bank Rescues will cost $23 Trillion!

Alexander P Morris — Wed, 22 Jul 2009 15:32:01 +0000

If you spent a million dollars a day since the birth of Christ, it still wouldn’t even amount to ONE trillion dollars. However, a series of bailouts, bank rescues and other economic lifelines could end up costing the federal government as much as $23 trillion, the U.S. government’s watchdog over the effort says – a staggering amount that is nearly double the nation’s entire economic output for a year, with our most recent GDP figures coming in just over $14 trillion.

That’s more than the total amount spent by the U.S. on all the wars it has ever spent, even accounting for inflation. By comparison, going to the moon in 1969 cost an estimated $237 billion in current dollars, and the entire Depression-era Roosevelt relief program came in at $500 billion (according to Jim Bianco of Bianco Research).

These figures are considered worst-case scenarios, and that’s where we find the most humorous part of this story. According to Treasury spokesman Andrew Williams, “The $23.7 trillion estimate generally includes programs at the hypothetical maximum size envisioned when they were established. It was never likely that all these programs would be ‘maxed out’ at the same time.”

That’s interesting… I mean, what are the odds that something like this could ever happen?! Somehow the universe likes to test us on the one in a billion odds that everything will likely happen at the same time, especially where money is concerned. Perhaps that’s because when you combine monetary weapons of mass destruction such as huge leverage, unlimited reckless spending, wild levels of borrowing, and a non-stop printing press, history has proven over and over again that there is always a day of reckoning, usually triggered by a single event that causes all the other dominoes to collapse one after the other in a giant waterfall-type debacle.

But once it’s here, watch for all the news stories blaming speculators, or republicans, or democrats, or the rich, or the Chinese, or whoever else would make a good target for finger-pointing away from those who are always responsible. The real culprits usually include most politicians (democrats and republicans), along with the secret group of people you’ll never hear about who control them through bribes lobbying, favors, or simply because they are too powerful, wealthy, and politically well-connected to risk alienating.

If the democrats screw things up, the republicans will come in and continue the same ‘ole game. When they screw up, it goes right back to the same few democrats that are once again presented to the public for “consideration”. And thus the circle of destruction continues, with no one having any accountability beyond their ability to slip past the next election.

Don’t worry, though, the odds that all their shenanigans backfiring on us all at the same time is virtually nil. Just like when Ben Bernanke flat out told us that he had no doubt the subprime crisis would be easily contained, with little spillover or no to other areas of the economy. Uh oh, I suppose “virtual nil” still means there is a chance…

Remembering Those Who Died for Our Independence

Alexander P Morris — Sun, 05 Jul 2009 00:50:09 +0000

The Declaration of Independence by John Trumbull (1795). Trumbull's famous painting is often identified as a depiction of the signing of the Declaration, but it actually shows the drafting committee presenting its work to the Congress.

It’s always wise to remember the price people paid to provide us with so many of the freedoms that we take completely for granted today. Especially in these times when our civil rights are being stripped away one after another by the government “elite” all in the name of protecting us from terrorists, banksters, panics, and ponzi schemes often created and orchestrated by those same people behind the scenes. Bernie Madoff has been given 150 years in jail for orchestrating a huge ponzi scheme. But who will go to jail when the greatest ponzi schemes of all time go bust? Who will pay when the monetary system collapses into hyperinflation and the social security and medicare systems collapse altogether? Instead, they’ll probably give the same people who helped cause the problems kudos for “saving” us from the mess, along with a few more trillion dollars of some new currency to help “save us” from themselves…

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Join Ron Paul’s Drive to Audit the Fed and Shut it Down with HR 1207

Alexander P Morris — Tue, 26 May 2009 03:54:23 +0000

With many Americans slowly waking up to the reality that our government and banking system are entirely under the control of a criminal elite of private bankster crooks, Ron Paul has once again taken it upon himself to push for an audit of the Federal Reserve, the outcome of which would likely be so incomprehensibly shocking that the Fed may finally be forced to shut down for the greater good of our country and its citizens.

The Federal Reserve was originally created under the guise of being an “impartial” entity separate from the government that could be called upon to stabilize our economy in times of panic, while protecting and maintaining free market principles. The sick twisted irony is that the Fed is the precise antithesis of what free markets are really about. And since the Fed’s inception, it has done nothing but DESTABILIZE our economy with increased volatility by manipulating interest rates, along with leverage ratios used by the banks (in cahoots with those who control the Fed and the SEC).

It still boggles my mind that the SEC implemented the “Pattern Day Trader” rule to “protect the little guy” by forcing more active traders and investors to maintain at least $25,000 in a trading account or face severe trading restrictions. I guess the SEC also forgot that they came into power largely because a big part of the 1929 crash was caused by the extension of 10:1 credit to investors (which couldn’t have happened without the Fed’s easy money policies). So to make amends, the SEC goes on to serve and protect “the little guy” some more by allowing ONLY the largest (and most politically-connected) “too big to fail” investment banks pump up their balance sheets with over 40:1 leverage.

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From Tax Day Tea Parties and Tax Freedom Day, it’s time to Pass Me The Pork!

Alexander P Morris — Wed, 15 Apr 2009 18:31:34 +0000

What better way to introduce vlogolution’s new PassMeThePork channel than on TAX DAY! It’s that fun-filled day of the year when Americans aren’t sure if they want to celebrate completing their 25 hour+ annual final exam-like tax forms, or cry and whine over how much of their hard-earned money was just raped from them.

To add insult to injury, isn’t it great to know you’ll be helping pay off just a bit of the huge PORK spending and bailouts of our friendly government and the royal fat-cat elite that control them?! I guess paying taxes on earnings isn’t so bad if it’s all because of a taxpayer bailout anyway. Oh wait, how many of these guys haven’t even bother to pay their full taxes anyway! Eh hem, Mr. Geithner (Treasury Secretary and Head of the IRS).

So maybe by now you’re thinking… with so many crooks, so many schemes, so much sheistery, isn’t it time they Pass Me The Pork, #$%&$! With our brand new channel, along with a completely revamped website, we can now easily blog, create videos, and create a friendly community of Porkypines to “pop the pork”! By following closely, we’ll find the pork, debunk the pork, slice the pork, and find astute tricks on how best to grab a piece of the pork for ourselves. So PORK YOU, Hank Paulson, Vikram Pandit – Citigroup, Martin Sullivan – AIG, Franklin Raines – Fannie Mae, Rahm Emanuel – Freddie Mac, Bernie Madoff, Ben Bernanke, Alan Greenspan, oh how we could go on, …

We’re also in the midst of Tax Freedom Day, which is the number of days of the year that an average American works to pay off their “government obligations” as good little lemmings do. For those in the higher tax brackets, would you believe they work well into June before making a few bucks for themselves?! Maybe more Americans would wake up if they didn’t get paid at all until Tax Freedom Day. Those living in Connecticut (120 days), New Jersey (119 days), New York (115 days), and California (110 days) will be proud to know that they are the TOP average tax payers out of all fifty states (congrats to Connecticut for being in first place as the most expensive of all – perhaps all those hedge fund salaries tipped the scale a bit). On average, this year taxes will amount to 28.2% of our income, or 103 days of work per person.

If this upsets you enough to stretch out of your easy chair, you may want to participate in one of the many Tax Day Tea Parties occurring today. In New York City, there will be one at City Hall from 7pm to 9pm. These rallies have been organized in cities and towns across the nation, and it’s amazing how they’ve received almost no press coverage whatsoever! Gives you a clue to who owns and controls the media…

So far the pundits have still been talking down the stock market. This has helped many stocks do nothing but continue moving higher while the average investor is frozen like a deer in the headlights. Just watch out when the pundits start talking again how stocks are the place to be. Don’t think another test of the lows is out of the question… Given the market’s current price action, it’s just very unlikely to happen for at least the next few months. Banks still have yet to pony up true values on many of their holdings, and it’s still amazing how easily the media accepts “brighter outlooks” from the same people who were completely clueless, wrong, and/or outright lied throughout the entire meltdown.

On a final note, talk about how complacent we’ve all become, in 1773 the tea tax that was protested at the Boston Tea Party was approximately 3%. Today, the average American pays as much as 70% of their total income in taxes (income, sales, gas, utility, etc)! So, hmmm, beer and TV, or… take a stand… Well, I dunno, I guess I’ll just have to think about it over a nice cold beer…

The Truth about the Federal Reserve – Money out of Nothing

Alexander P Morris — Mon, 08 Oct 2007 22:00:00 +0000

The Federal Reserve is neither Federal nor a Reserve. Owned by a corrupt group of International Bankers, it is a privately owned monopoly, largely responsible for creating America’s National Debt. It is also a parasitic and unnecessary entity that literally creates American currency out of nothing and then collects interest on the backs of taxpayers for doing so.

SO WHO OWNS THE FEDERAL RESERVE? The Rothschilds of London and Berlin; Lazard Brothers of Paris; Israel Moses Seif of Italy; Kuhn, Loeb and Warburg of Germany; and the Lehman Brothers, Goldman Sachs and the Rockefeller families.