Click chart to enlargeGary's portfolio has been running for one week, and as of 2:00pm today, all 5 of his shorts were profitable. Only one of his longs was profitable (AFAM). Overall, he is down 5.5% on the week, a little better than the S&P500 index's loss of 5.9%.
What hurt Gary this week was that all of his long positions were entered after huge run-ups. We personally would have waited for a pullback on all of them before buying, but for this first experiment, we're not intervening with stock timing, layering into and out of positions or distinguishing between small and large caps. We're starting this experiment with Gary being as simple-minded as possible to see if the system itself has merit despite gross error. Over time, Gary's short term timing should not matter nearly as much as it did the first week.
The chart above is the chart of Gary's worst performing long, LPHI. We posted it because it may be of interest to traders who are willing to take larger risks than we are. It has fallen over 16% since Gary's purchase on Monday, yet still remains in an uptrend. In a bull market, the charts we buy look something like this. We do not buy individual stocks in a bear market.
Because Gary's long picks are smaller companies than his shorts, his portfolio is better suited for a bull market, as some readers have pointed out. Small caps tend to be more volatile, often amplifying the broader trend of the averages. This would mean that Gary's longs will drop a larger percentage than his shorts during a bear, and would rally a larger percentage than his shorts during a bull. His portfolio has a long bias in this sense. If Gary's portfolio, with all of its inherent flaws, does work out to give him an edge over the indexes over time, we'll genetically mutate Gary to fix his flaws and will eventually start taking his investment advice.
After all, for all of his mistakes, he did manage to beat the S&P this week, with a fully invested portfolio, which was not such an easy task.
45 comments:
Add a second chimp Gary v 2.0, who buys a credit default swap on SPY and writes a credit default swap on Gary v 1.0. Now that is a profitable gary.
Anon that's up 63% YTD, why not post with a handle so we could track your comments better?
Hi,
I've got a personal question for traders in general.
Does anyone here trade for a living? I was considering it, and was wondering if it works out for anyone.
BTW, nice posts snot! I respect all of your ideas (regardless of whether you predict correctly / incorrectly).
Here is some of my posts on NOV. 4:
I don't think this rally has leg any longer. This is too fast. We are still in the BEAR market. Traders or investors look past any bad news: Factory order, Unemployment... Today is last rally of this market will have and tomorrow will be different ball game for wallstreet when eveything set in... and market will sell on the news. Take SHORT here FXP is good start.
November 4, 2008 1:23 PM
I also predict DOW can not past OCT. 14 high. and couple more posts regarding the DOW and my prediction for DOW.
I will post some information regarding the DJX and SPX Here is for tomorrow after I am doing some research tonight...
and your name/identity is ?
:-)
Just for haha's, let me post my prediction for the coming days:
tomorow's employment numbers are not as bad as everyone thinks
and the market stages a rally at least back to 9500-10300 in the next few weeks
I think everyone should have to post with a handle, or put their name in place.
and Anon with all the caps reminds me of the wild claims and predictions we see on the ldk board from people who are trying to get buyers into a stock..
Post with a name and build your reputation if you want people to listen...
Agree with Nico.. Expectations have already moved down several notchs and anything else will be a positive. I'm guessing brief tank on the numbers followed by rally. Sell the news.
Myabe is "Buy the news" because we have sell the rumors.
Friday's typically don't end well. Even if there is a rally, it usually reverses into the close.
Seems like the Jobs report was already priced in the last couple of days. 6.5% is only slightly worse than estimates. Bad news is projections of 8.5% next year. I've been traveling a lot lately and everywhere I go people are losing jobs, confidence, etc. Sounds like the 70's again if you are old enough to remember. In the words of Cheech and Chong: it's tough all over.
i cannot fathom price action of fxp this am. ddm up slightly this am, ~.50 and fxp was down $15? i thought about shorting fxp at $100 yesterday, would have been a killer.
Yes, the market was extremely oversold the past 2 days which would explain the bounce today
the question to ask is if we can hold on to this
conorsh:
"Post with a name and build your reputation if you want people to listen"
I agree with conorsh, I am much more likely to listen or take someone seriously if he/she doesn't hide his identity
FXP double shorts FXI. FXI is up 8% or so as I type, thus FXP is down 17%. You've got to watch China. DXD double shorts the DOW. Have a good one everyone.
Obvious but still interesting correlation between vehicle sales and gas prices. Look at truck sales in particular.
US Auto Sales Source: WSJ
Very nice close!
This would seem to me that we have not seen the bottom:
"The falloff in October business activity was remarkable. The Institute for Supply Management's indexes for both manufacturing and nonmanufacturing fell sharply. The latter hit a record low, while the factory gauge fell to a 26-year low. A majority of the companies surveyed in both sectors said they had been affected by the financial-market turmoil. The plunge in the ISM's index of export orders, also to an all-time low, was especially worrisome for future growth. It suggests exports, the largest single contributor to demand growth this year, are about to cave in under the weight of a global recession and a stronger dollar.
Weak demand isn't the only brake on business expansion. All sources of funding, including profits, debt, and equity, have either dried up or become too costly. Internal funds are shrinking as profits fall. So far in the fourth quarter, the ratio of negative to positive earnings guidance from companies is twice the long-run average, says Thomson Reuters (TRI), and the slowdown overseas further worsens the outlook. Over the past year the $81 billion rise in profits from abroad has cushioned the $197 billion drop in domestic earnings. That support will fade next year as domestic profits remain weak."
BusinessWeek
fxp may not be a safe hedge for ddm anymore. i bought the nosedive at the close, but trying to lighten up right now:
China said preparing stimulus package as economy slows
3:56p ET November 7, 2008 (MarketWatch)
SAN FRANCISCO (MarketWatch) -- The Chinese government is preparing an economic stimulus package to jump-start slowing economic growth, Chinese official media reported Friday.
The "large" economic stimulus package will be released after the decision is made at the annual Central Economic Working Conference slated for late November in Beijing, the China Daily reported on its Web site Friday, citing the Hong Kong-based Wen Wei Po newspaper. It did not specify how large the package could be.
China's Finance Minister Xie Xuren was reportedly called back from an international economic conference in Peru this week before the meeting began, following orders from Beijing to help resolve problems at home.
Xie left Trujillo, Peru, where Asia-Pacific Economic Cooperation finance officials are meeting this week, shortly after arriving at 11:00 a.m. on Nov. 5, Gladys Otero de Swinnen, protocol director for the conference, told Bloomberg.
"Investors should be prepared for massive policy stimulus and sudden policy announcements," said Merrill Lynch economists T.J. Bond and Ting Lu.
"As the global outlook deteriorates, we expect Chinese macro policy to turn increasingly aggressive. This is a key theme for China and indeed, the entire Asian region," the Hong Kong economists said in a note to clients Friday.
According to Nouriel Roubini in his November 4 commentary titled: "The Rising Risk of a Hard Landing in China: The Two Engines of Global Growth - the US and China - are Now Stalling."
In recent years, "the global economy has been running on two engines, the US on the consumption side and China on the production side, both lifting the global economy." As the world's "consumer of first and last resort," the latest macro data show this engine has effectively shut down. "More worrisome," increasing signs show China is also stalling.
Their latest macro data are mixed but all point to "a sharp deceleration of economic growth." Now at 9% compared to past 12% years. At risk is a potential "hard landing" that for China would mean around 5 - 6% growth and not the 9 - 10% it needs to absorb its 24 million new workers annually. Various "macro indicators suggest that China is indeed headed towards a hard landing." It's not good news for America, and in combination, aren't good news for world economies.
One year ago, Chinese exports to the US grew at an annualized 20% rate. The most recent trade data show zero growth, but "the worst is still to come in the next few quarters" as US consumption is falling and is expected to continue declining. In addition, nearly all advanced economies face severe recession that will slow China's growth further.
Monetary policy may prove ineffective, and analysts disagree about fiscal measures. As export demand falls, the country is committed to more infrastructure and other spending and has a huge (near-$2 trillion) foreign currency war chest to do it. But Roubini believes fiscal stimulus will be limited at best. Because of the combined effects of Olympics spending, natural disasters, and social strife in the West, a large budget hole was created. Other factors are in play as well such as a turnover decline in local property markets. Lower fees and taxes have resulted that, in turn, have delayed some industrial development plans.
A "hard landing" may also increase the amount of non-performing loans from "the still mostly public state banks....Once net exports go bust and real investment sharply falls we will see a massive surge in non-performing loans that financed low return and marginal investment projects. The ensuing fiscal costs of cleaning up the banking system could be really high."
An additional factor comes from Michael Pettis - a leading Chinese economy expert. That a tax revenue surge "in the last 4 years has been more than matched by (a) surge in spending so that if revenue growth diminishes (or reverses) it might not be easy to slow spending growth proportionately. Contingent liabilities from non-performing loans could also reduce resources available for a fiscal stimulus."
Nonetheless, fiscal measures are being implemented but so far just modestly, and the "big question is (can China) increase (the amount enough) if a quick order hard landing were to occur." Roubini believes likely not because "moving a massive amount of economic resources from the tradeable (to the non-tradeable infrastructure) sector will take time...." He sees China decelerating to a 2009 7% growth rate - "just a notch above a 6% hard landing (and) an even worse outcome cannot be ruled out...."
In addition, "a hard landing in China will have severe effects on growth in emerging market economies in Asia, Africa and Latin America as Chinese demand for raw materials and intermediate inputs has been a major source of economic growth for emerging markets and commodity exporters....Thus, global growth - at market prices - will be close to zero in Q 3 of 2008, likely negative in Q 4 and well into negative territory in 2009. So brace yourself for an ugly and protracted global economic contraction" next year.
Bearish comments out of the Fed’s Lockhart: Signs of improving credit markets may be a “false dawn”. Problems will surely get worse.
- The junk bond market agrees with that statement. Junk bonds (high yiled corporates) have not recovered since the late September sell off. Mutual funds that invest in these are at historic lows, with yields that are not keeping equal inverse pace with the NAV declines.
Credit Card Bond Sales at Zero, First Time Since 1993 (Update1)
By Sarah Mulholland
Nov. 5 (Bloomberg) -- Credit card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, as investors shunned the debt amid the global credit freeze.
A weakening job market and a looming recession are making it harder for consumers to make monthly payments, eroding confidence among investors about the safety of credit-card-backed bonds. It's the first month since April 1993 that there have been no sales, according to Wachovia Corp. data. Issuers sold $17.1 billion of the debt in October 2007, the data show.
``Nobody is eager to put money to work given the uncertainty in the market,'' said James Grady, a managing director at Deutsche Bank AG's asset management unit. ``When you think it can't get worse, it continues to get worse. There is not a demand'' for these bonds.
Top-rated credit card-backed securities maturing in three years traded at a gap, or spread, of 475 basis points over the London interbank offered rate, or Libor, during the week ended Oct. 30, JPMorgan Chase & Co. data show, 25 basis points higher than the previous week. The debt was trading at 50 basis points more than Libor in January.
The higher cost to sell the bonds makes it more expensive for banks and credit card companies to fund loans to customers. New York-based American Express Co. paid 160 basis points more than Libor at a Sept. 11 sale of the securities compared with 30 basis points over the benchmark at a similar sale in October 2007, Bloomberg data show.
Job Losses
One-third of employers in October planned to trim payrolls in the next six months, while 17 percent projected an increase in hiring, the National Association for Business Economics said on Nov. 3, the biggest disparity since the economy emerged from the last official recession in 2002.
U.S. credit-card lenders may report record high customer defaults in 2009, Fitch Rating said in a Nov. 3 statement.
Consumer confidence fell in October by the most on record, according to the Reuters/University of Michigan final index, signaling a further pull back in spending.
Consumer spending, which comprises about 70 percent of the U.S. economy, dropped at a 3.1 percent annual pace in the third quarter, the first decline since 1991 and the biggest since 1980, the Commerce Department said last week.
The slowdown caused the economy to contract last quarter at the fastest pace since the 2001 recession. U.S. retail sales may have fallen for the first time in seven months in October, the International Council of Shopping Centers said yesterday.
Debt Sales
Sales of credit card asset-backed debt are down 29 percent to $60.3 billion from a year ago, according to JPMorgan.
American Express used the Federal Reserve's commercial facility program for the first time on Oct. 29 as available funding shrank.
The lender is slashing 10 percent of its work force as part of a plan to cut costs as cardholders failed to repay loans at almost twice the rate of a year earlier. The job cuts ``will help us to manage through one of the most challenging economic environments we've seen in many decades,'' Chief Executive Officer Kenneth Chenault said in an Oct. 30 statement.
American Express was forced to set aside $1.4 billion for loan losses, according to an Oct. 30 statement.
American Express has lost 47 percent of its market value this year on concern that higher funding costs and rising defaults will hurt profit. The shares fell $1.99, or 6.7 percent, to $27.83 today in New York Stock Exchange composite trading.
Bank of America Corp., JPMorgan and Citigroup Inc. also rely on the asset-backed market to fund their credit card portfolios, but the banks' large deposit bases give the firms another option to fund originations, Deutsche Bank's Grady said.
``True finance companies are in a less advantageous position,'' Grady said. ``Their funding costs will be considerably higher.''
To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net
Sorry for the long posts but I had to :-)
This is getting very interesting.
Today looked like a Dead Cat bounce.
-Bought more FXP at closing.
Just thought I'd leave you guys with some more food for thought:
http://seekingalpha.com/article/104120-the-perversion-of-american-capitalism?source=yahoo
I don't necessarily agree with his buy recommendations, but think that on the macro scale he may be on to something. Although I'm 100% cash at the moment, I think that soon I'll be shorting like crazy. It may be the only chance to make some decent money for a while.
Snot, it must be tremendously frustrating to spend so much effort to barely break even. (Assuming your goal is to make lots of money.) Isn't the problem with a balanced, or hedged, position such as yours that one side always removes the gain from the other? I know its safer, but in the end it doesn't seem like you are going anywhere. If you think the market is going to tank, why not just let it, then go in with preserved capital and buy on the cheap. Instead, there is all this constant monkeying around trying to discern the markets' whim.
looks like i am the only bull in a sea of bears.
theres some food for thought: I didnt know bears could survive in salt water!!
I am mildly bullish too at this time. They painted a higher low on the SPY chart. It now looks bullish and on an up-trend channel after a "healthy correction" in the past few days.
For FXP, I mentioned before that it should not be used as a hedge for US equities, as the Americans really do not know what is going on over there. The Chinese people by-and-large trust the government. Market there might really rally hard on government invervention, or rumors of such. I also mentioned that FXP is a long-term short, not a long-term hold based purely on arbitrage theory.
What do you guys think about replacing FXP with SRS in the "Snot strategy"?
Lightsource
hk22- In the future if you could please list the link of articles you like instead of posting the entire things it would make it much easier for the rest of us. To put multiple incredibly long articles in a "comments" section is pain in the arse both to read and to have to scroll through. I'm sure most that are interested in reading them would rather read on a full screen instead of this tiny panel anyway.
Thank you.
lightsource - interesting idea. Even though they are both 2x, FXP is more volatile hence more potentially profitable than the SDS. However YTD, SDS is up 66% vs. breakeven for FXP. I wonder what Snot thinks?
It's time to go long SSO & FXI. You're playing with fire on SDS & FXP this late in the game. Especially FXP, that one is more like playing with Uranium than with fire.
Irene, Sorry for creating any inconvenience .
Just trying to help.
anyways, regarding Pergamon's latest post for going long I believe that is playing with fire.
Governments can't hold the market back; they can only channel it. The public expects them to actually save the day just as they did after the 1987 equity crash, the 1991 real-estate crash and the 1994 junk-bond crash, yet none of those blowups involved an equity, credit, commodity and currency crash all rolled up in one.
Governments' effort to recapitalize banks experiencing a run of deleveraging is not trivial. They will back up banks to the minimum required for solvency, but not anywhere close to their previous free-lending glory. This is why capital is at a standstill and why any business plan dependent on credit is now suspect.
It will literally take a miracle to solve this mess. Cross your fingers, and hope that a rollback to 1995 is as bad as it gets.
Here's some of our favorite shorts:
Shorts Graph
FXP and EEV have the widest range.
Some food for your thoughts:
I strongly advise you to read the entire article.
http://www.marketoracle.co.uk/Article7198.html
sbbuilder, for whatever it is worth, Snot may be only dead even since June 1st, but the DOW is down about 29% since then, so it isn't quite like he has been treading water. Sure, everyone could have made money shorting the market since June 1st, but how many of us did? How many of us predicted the crash and put our money on the line? I didn't. Snot's method will work in any kind of market depending on how you tinker with the percentages. He has it weighted to survive the bears and thrive in the bulls. For the first half of the year, using his strategy for uptrending ferts, Snot is up over 30%.
Evidence of how the governments are trying to channel the downtrend:
Japan: Oct 28
Japan brought forward restrictions on short selling of shares after stocks in Tokyo extended declines to the lowest levels since October 1982.
Since that ^N255 has been going up.
USA: Oct 9
The Securities and Exchange Commission's ban on short selling, which it initiated Sept. 18 as an emergency order to help stabilize the tumultuous market, has finally been lifted.
During that time the market stabilized.
But Look at what happened after Oct 9.
The market went into a free fall.
Ambac's case is is just another evidence that selling is not quite finished yet.
"Meanwhile, $1.1 billion of the company's $9.9 billion fixed income investment portfolio is backed by short-term investments which may be sold to shore up cash," it added.
http://www.reuters.com/article/marketsNews/idUSN0631058920081106
also Hedge Funds are not done liquidating their positions to raise capital.
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20081109/REG/811079955
and btw, two more banks went belly up this past 2 days.
China announces $586 billion stimulus plan.
http://biz.yahoo.com/ap/081109/as_china_stimulus_package.html
I would call this decisive, an advantage of being socialist in times of crisis. Compare this to the half-hearted bailout package that got debated in the congress over and over, growing from 3 pages to 300 pages with all sorts of strings attached. See the difference?
Again, FXP is a wrong hedge for US equities.
I think Asia will lead the market up this week.
- Lightsource
Thanks for all the interesting info, hk22. Roubini's prediction for China's new growth rate are the lowest we've seen, but that's no suprise coming from him.
Lightsource, you may be right short term that there will be a temporary decoupling between Asia and the U.S. as Asia announces bailouts, but we believe this disconnection will play out in short bursts rather than on a macro scale. i.e., after the initial rallies, FXI's performace will once again mirror the Dow, making FXP a viable hedge for the U.S. We'll take a look at SRS as a hedge. We were drawn to FXP because a small dose of it goes such a long way during the worst of times.
Sbbuilder, this market has been very frustrating for us. We've been trying to get most of our capital invested at the bottom without losing anything. So far, we've just been breaking even. But the market has been going lower, so in that case, we're in a better position than we were in on June 1st even though we haven't made a dime. For better or worse, we have a long bias because we cannot short individual stocks in these retirement accounts. Our strength is not in bear markets, but rather in trading channels during the bulls. We would probably be equally well off sitting on the sidelines during bear markets, but we're too drawn to the market to completely walk away. Staying "in the game" is the best way to keep involved closely enough to notice when things are turning around, and to pick up on which sectors are leading the turn.
Looks like FXP and EEV will get hammered this week as Asia rallies. Another break even week for us. Gary will probably be the only winner over the long run with his long strength, short weakness bias.
I agree with both Snot and Lightsource that with this news Asia will most likely lead world markets up next week. I posted yesterday afternoon that it was time to go long FXP (and SSO) and low and behold today China announces a stimulus package almost as large as the USA's.
Whatever your theories are hk22, they will be superceded by this news next week. I'm not saying it's the end of the China Bear, but I bet FXP takes a huge hit early next week which will of course drive FXI higher. The news of this might also bode well for US equities, which of course bodes well for SSO (and DDM Snot!)
And if FXP drops down to the mid 60s on a knee jerk selloff reaction I'll be a buyer because like I said I don't believe this ends China's Bear but I bet it stuns it pretty handily over the short term (next 1-2 weeks?)
Whatever the outcome it's going to make Monday's open much more fun than it was on track to be!
aargh, what a mess. after i posted the china bailout article,i only sold 1/4 my fxp, since the article said they would announce later this month. watch fxp open in 50's monday. do you think ddm will rise enough to balance it out? my fxp:ddm ratio is 1:10. i have yet to get a profit with fxp, despite daytrading it for weeks. it seems to take a huge hit right at the close, or if i am out of it, it opens $20 higher.
well look at it this way:
"The package announced today, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, the State Council said."
That is what a government is supposed to do anyway, right?
The only difference is that they are emphasizing their job making it sound like a stimulus package.
How many more jobs this is going to create anyways? Is that going to be enough?
And that we all have to see.
What's more interesting is that the China article was on Bloomberg's Braking News sector, on the main page.
Now its gone.
Pergamon, This package is far far bigger than the US stimulus package which was only $100bn. The US bailout is bigger alright but that cash is going to go straight into bank reserves and wont be creating jobs or working its way through the economy unless the car makers get their way. The chinese stimulus is a direct injection into the economy, creating jobs, buying product, regenerating business that was not there yesterday.
Personally i think it is a much better system than the US stimulus which as far as i can see had no noticeable impact and was probably spent paying down credit card debt.
Of course given that i'm holding a huge amount of shares and options in the largest supplier of solar power to the domestic chinese market i'm a little biased..
Sniper
DJ future down 324 ??
is there any bad news?
http://www.cnbc.com/id/17689937/site/14081545/
they almost always do the opposite of what the futures predict form what i can see...
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