Friday, December 17, 2010

Picower Estate Settles For $7 billion

AP source: Madoff trustee gets $7B settlement
AP source: Madoff trustee reaches $7B settlement with estate of Fla. philanthropist

NEW YORK (AP) -- The trustee recovering money for Bernard Madoff's burned investors has reached a $7.2 billion settlement with the estate of a Florida philanthropist and businessman.

The figure was provided Friday to The Associated Press by a person familiar with the civil case against the estate of Jeffry Picower. The person was not authorized to speak publicly about the settlement and spoke on condition of anonymity.

Court-appointed trustee Irving Picard planned an announcement Friday in Manhattan.

Picower drowned after suffering a heart attack in the swimming pool of his Palm Beach, Fla., mansion on Oct. 25, 2009.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

NEW YORK (AP) -- The trustee recovering money for Bernard Madoff's burned investors has reached a settlement with the estate of a Florida philanthropist and businessman who made billions of dollars off the fraud.

Court-appointed trustee Irving Picard planned an announcement Friday in Manhattan about the estate of Jeffry Picower, who drowned after suffering a heart attack in the swimming pool of his Palm Beach, Fla., mansion on Oct. 25, 2009.

The amount of the settlement was not immediately made public.

Picower, who was 67 when he died, invested many years ago with Madoff. Picard's investigators said that, over time, he withdrew about $7 billion in bogus profits from his accounts. That amounts to more than a third of the dollars that disappeared in the scandal.

That money was supposedly made on stock trades, but authorities said that in reality it was simply stolen from other investors.

Picower's lawyers claimed he knew nothing about the scheme, but the trustee argued in court papers that he must have known that his returns were "implausibly high" and based on fraud.

Lawyers for Picower's estate have been in negotiations with the trustee for some time.

After Picower drowned, his will revealed that he had earmarked most of his fortune for charity, but his widow said in a statement that the family wished to return some of it to Madoff's victims through "a fair and generous settlement."

A huge charitable foundation that Picower had created with part of his fortune closed in 2009 after its assets were wiped out in the Madoff fraud.

It had donated hundreds of millions of dollars to colleges, libraries and other nonprofit groups.

Monday, December 13, 2010

Bernie Madoff Memoribilia: Price Plumets?

From timesonline

Madoff memorabilia sells for $1m, but watches fail to make their markChristine Seib in New York
Authorities in the United States have raised more than $1 million (£600,000) for victims of Bernard Madoff’s $65 billion Ponzi scheme after buyers paid as much as 20 times the estimates at an auction of goods that belonged to the swindler and his wife, Ruth.

Lester Miller, 77, a businessman from St Louis, Missouri, spent about $100,000 on pieces of Mrs Madoff’s jewellery, including a gold charm bracelet for which he paid $3,500, $2,500 above the estimate. He told The New York Times that he would distribute the jewellery among his daughters and granddaughters on a cruise to Mexico this weekend.

He said that he also planned to tell his granddaughters that there was a lesson to be learnt from the Madoffs: “If it’s too good to be true, it’s not right.”

Less sparkly items also excited bidders. A ring buoy from Mr Madoff’s yacht, named Bull, was valued at a maximum of $160 but fetched $7,500, while a set of three T-shirts with the Bull insignia, estimated at between $120 and $210, went for $1,300.

Buyers clamour for Madoff’s trophy properties
Dave Goodboy, who works for a New York-based hedge fund, was the proud new owner of the buoy, which he described as a Wall Street version of a relic from the Titanic.

Bidders were less enamoured with watches than the Madoffs had been. One of the prize lots — a Rolex Monoblocco, also known as the Prisoner’s Watch because the timepieces were sold to British prisoners of war during the Second World War — sold for $65,000, far below the maximum of $87,500 at which it had been valued.

Auctioneers withdrew the sale of a 1935 Rolex watch that had been valued at up to $54,000 after bids did not go higher than $35,000.

Some buyers were waiting for more esoteric items to come up for sale. Chuck Jones, who bought two wine coolers for $250, told The New York Times that he was biding his time until a lock of the swindler’s hair appeared on eBay or the like.

About 700 people packed into the ballroom of the New York Sheraton on Saturday to snap up pieces of Wall Street history, as Gaston & Sheehan, the Texan auctioneers, put 189 lots of the Madoffs’ property on the block. A further 1,000 people were bidding online for the goods, which had been seized by the US Marshals Service when they took possession of the Madoffs’ properties in Manhattan, Montauk and Palm Beach. The properties and possessions were forfeited by the Madoffs as part of the sentencing for his 20-year fraud.

Lark Mason, who was observing the auction, said: “They didn’t buy the things they were passionate about, they just wanted more and more.”

A blue satin New York Mets baseball jacket with the name Madoff stitched across the back had been valued at between $500 and $700 but went for $14,500.

Two pairs of Cartier diamond earrings owned by Mrs Madoff were sold for $70,000 each, far above their $9,800 and $21,400 estimates.

The Great American Wikigeek Bluff

originally published:

Wikileak's lead geek, Julian Assange made the threat that he intends to release information that will bring down a large American bank or two. Provided his success in terrorizing governments with the same rhetoric and actions, Assange's statement is being taken seriously by the financial sector. The media discovered Wikileak's earlier suggestions that they have an entire hard drive of data on Bank of America (NYSE:BAC) that they plan on making public. This finding has made many believe it is Bank of America (NYSE:BAC) that is the specific target of Wikileaks. However, Assange has never specifically named the institutions involved in his banking sector threat. Despite the nebulous nature of his statements, Bank of America (NYSE:BAC) shares retreated when the rumor first hit the wire. In fact, according to Fox Business Network's Senior Correcpondent, Charles Gasparino reported that Bank of America (NYSE:BAC) has set up a war room to deal with any potential fall out from the threatened Wikileak releases. Supposedly, this war room is concerned about the Countrywide acquisition in 2008, mortgage creation, and the Merrill Lynch deal.

While these three situations are sketchy, there isn't much we don't already know. The stock market appears to shrugging off Assange's threats as the financial sector has been on sharp move higher since the initial rumor hit the Street. The only way this threatened data dump will have any effect on the stock market is if the information is truly shocking. I mean nuclear bomb level material. I strongly doubt that this is the case, thus believe Wikileak's is bluffing about the severity of what they have. We have been through a lot with the financial meltdown, its going to take tremendously shocking news to create further ill effects. Smart investors will use any Wikigeek rumor driven pullbacks as opportunities to buy in the financial sector. As the famous Wall Street axiom states, sell the rumor, buy the news.

Thursday, December 09, 2010

Short Euro Now

It's time. We entered short EUR/USD when the 1.3397 figure was broken on the downside. Expecting a major drop here as the USD gains strength. Sub 1.20000 is the target.

Monday, December 06, 2010

Gold: Be Very Afraid

Gold, that storehouse of value, has had an amazing bull run over the last two years. Gold prices have nearly doubled since 2008, and it’s up more than 25% this year alone. The financial press is full of praises for gold investing and every day I notice another gold broker ad on the TV or radio attempting to attract more buyers to the yellow metal. The public has started to notice and are piling into this supposed can’t-lose-investment in untold numbers.

Gold bugs point out that prices are still well below the inflation adjusted high of $2300 per oz hit in 1980. Some of the more optimistic gold bugs are even calling for prices to eventually hit $5000 per oz before this move is over. They cite worldwide economic turmoil and potential debasement of the currency as prime reasons for the massive bull market to continue. Even analysts from respected investment houses have jumped on the bullish bandwagon. Goldman Sachs has recently issued a statement calling for gold to continue climbing into 2012 with a target price of $1750 per oz.

While many signs point toward further up-moves in price, I would suggest extreme caution in going long at these levels. It’s a basic tenant of the markets that when most are saying one thing its time to start thinking the opposite way. Remember, these firms are heavily invested in gold and are likely talking their book. John Nadler, senior analyst at Kitco Metals told that all these Wall Street buy recommendations remind him of the speculation in 2008 that drove oil to record heights.

“I don’t think gold is an opportunity at $1400 per oz. Just because the price has been above $1000 per oz for the last 14 months, everyone thinks this is a new paradigm. It’s very similar to what we heard about oil a couple of years ago,” Nadler stated.

The fact is that gold costs around $400 per oz to $500 per oz to produce and is trading near triple this cost. If that doesn’t signal a momentum bubble, I don’t know what does. In addition, the daily chart pattern looks like a double top may form in the $1424 range at the previous high. Can gold go higher? Absolutely. Is it a sure thing? No way. I believe its time to start looking to hedge your holdings or get ready to go short in the near future. You don’t want to get caught buying the top tick, or holding the bag.

Read more:

Saturday, December 04, 2010

Will A Wiki Leak Sink USS Bank of America?, a controversial dumping ground for government and corporate secrets, has made it known that it intends to make public information that it says will sink a major U.S. bank. WikiLeak founder Julian Assange stated on Tuesday that he intends to release this data sometime in 2011, fueling rumors on Wall Street that Assange is specifically targeting Bank Of America (NYSE: BAC) with an entire hard drive of negative information. This rumor sent the bank’s stock tumbling upon its publication.  However, it has since stabilized and was actually trading positively on Thursday.  The old “sell the rumor, buy the fact” mantra may be accurate in this case.

While WikiLeaks obviously has the potential to embarrass governments, does the Web site actually have the power to do anymore damage to the U.S. banking sector than has already been done?  We’re well aware of the banking crisis, what possible information could be on that supposed hard drive that the public doesn’t already know?  Bank of America has already been beat to hell by the banking crisis, and the bank’s purchase of the toxic Countrywide Mortgage Company and subsequent $45 billion bail-out has made it the poster boy for what’s wrong with the banking business.  While the bank has paid back the bail out funds, the bad taste still remains.

In my opinion, the information on that hard drive would have to show extreme criminal behavior and or a conspiracy to defraud for it to have any impact at all the stock price.  Rumors are very powerful things on the Street of Dreams; however, their impact rarely lasts long.   Clearly, being a buyer after the WikiLeaks rumor knocked down the stock price would have been a smart move.  In fact, my opinion is, Bank of America remains a smart investment decision.

Thursday, December 02, 2010

Wells Fargo Busted For Overdraft Fee Timing

Remember the mutual fund timing scandal? It rocked a couple of hedgees and others using this edge illegally. Well, a similar thing is happening now in the banking industry. I call it "Overdraft Fee Timing" and it looks like Wells Fargo may be the first bank to come under pressure for this anti consumer, greedy and down right nasty practice. What happens is banks shuffle and time your withdrawals in such a way to maximize their overdraft fees. If you ever watch how charges hit your account, you will clearly see what I mean. There is no question the process is manipulated and timed to the institutions advantage. It's high time that someone stands up and demands a refund of all the money stolen from consumers from overdraft fee timing. I am happy to see things have started to move in this direction per the article below. WHERE ARE THE CLASS ACTION LAWYERS?? THIS LOOKS LIKE A SLAM DUNK!

The following article by Marian Wang was originally published by

Read: Documents Reveal One Bank’s Plan to Squeeze Customers for More Overdrafts
by Marian Wang
ProPublica, Dec. 1, 2010, 11 a.m.
10 Comments Republish E-mail

Your e-mail

Your name

Friends’ e-mail(s) max 10, separated by commas

Personal message
A Wells Fargo bank branch in Berkeley, Calif. (Justin Sullivan/Getty Images)
In recent months, rules from the Federal Reserve [1] have made it harder for banks to impose hefty overdraft fees when customers try to make debit transactions or ATM withdrawals without enough money in their checking accounts.

Before the rule change, banks could automatically sign up customers for what they often referred to as overdraft coverage or overdraft protection. The so-called “protection,” it’s worth emphasizing, isn’t from overdraft fees themselves—it’s from the potential embarrassment or hassle that comes when a transaction is rejected due to insufficient funds. The “protection” also allows the bank to collect hefty fees for covering such transactions.

But if the past is any indication, banks will go to great lengths to protect those fees, which are big business. As the New York Times recently reported, banks make more on those fees [2] than they do on penalties from credit cards.

To give a glimpse of just how hard banks have worked to keep overdraft fees flowing, we review some internal e-mails and memos from earlier in the decade that Wells Fargo turned over in response to a class-action lawsuit in federal court in San Francisco. The documents—which we’ve loaded into our document viewer— sometimes veer into banker-speak, but we’ve tried to translate as needed.

“We are currently analyzing the change in frequency of overdrafts,” Wells Fargo Executive Vice President Ken Zimmerman wrote in an April 2005 e-mail [3]. The cause for concern at the time? An unexplained decline in revenue from overdrafts.

Zimmerman noted in a later e-mail [4] that they’d analyzed the decline and “if there is good news to be had,” it is that it was probably due to “increases in both the volume and size of tax refunds [5].” The tax refunds, especially when directly deposited to consumers’ bank accounts, had provided an additional cushion of cash that protected many consumers from overdrawing their accounts for a period of time, but customers would eventually resume “normal OD [overdraft] behavior [6]” after the “excess balances are depleted.”

This was good news, according to Zimmerman, because it defied the bank’s earlier suspicions. Several years before, Wells Fargo began to re-engineer the way it processed checking transactions in order to maximize the number of overdraft fees it could charge consumers. The bank was afraid that the small segment of customers that overdraft the most—the “high-OD customer segments”—would notice and react.

“Given our dependence on a small set of OD consumers [7] (4% generate 40% of total OD/NSF revenue),” Zimmerman wrote, “a small change in behavior within this group can cause a large change in revenue.”

What Wells did is by now well known: It engineered its processing of transactions to mix together different types of transactions—debit-card purchases, checks, and automated clearing house transactions—and reordered each transaction to be processed from the largest to the smallest at the close of every business day.

The changes, referred to as “Sort Order Optimization [8]” and implemented in 2001, were intended to maximize the number of fees potentially incurred by the smaller transactions that would be processed later. An August 2002 bank memo marked “HIGHLY CONFIDENTIAL” shows that this initiative was projected to boost Wells Fargo’s fee revenue by more than $40 million annually [9].

The bank had also extended what it called a “shadow line” of credit to consumers using debit cards or making ATM withdrawals, triggering more fees where previously these transactions would have just been declined. These initiatives, as part of a series of changes, were expected to together generate an additional $138 million in overdraft revenue for the bank each year, according to the bank’s memo.

For Wells Fargo, boosted revenues weren’t the official rationale, of course. One bank document explained that the changes in posting order would yield the following benefits to consumers:

More of a customer’s high dollar items will be paid, which we believe are the transactions a customer feels are most important (e.g., mortgage or rent).

In court, U.S. District Judge William Alsip didn’t buy the bank’s arguments. In a 90-page ruling against Wells Fargo, he said the bank had acted in bad faith and that its “true motives” for re-engineering its processing of transactions were “gouging and profiteering.” The ruling came down on August 10—the same day Wells Fargo told investors [10] that the Fed’s new rules on overdrafts would cost the company $500 million in fee revenue [11].

A Wells Fargo spokeswoman told me that the company is disappointed with the judge’s ruling and is appealing the decision. “We believe Wells Fargo’s method of processing transactions has been appropriate and consistent with customer’s interests and the laws and rules of governing regulatory authorities.” She also said that Wells Fargo—like many banks—offers a type of overdraft program that lets consumers link checking accounts to eligible credit cards or savings accounts to cover overdrafts, and the fees for this type of protection are typically smaller than the standard overdraft fees.

Several months have passed since the ruling against Wells Fargo and the implementation of the Federal Reserve’s new overdraft rules, but as TIME magazine notes, statistics on how many consumers have signed up for the banks’ “overdraft protection” vary depending on who you ask [12].

Consumer Reports—which has told consumers, “Don’t opt in! [13]” in order to avoid the hefty fees that were once automatic—released a poll earlier this month that found that only 22 percent of bank customers [14] chose to opt-in. An August survey by the American Bankers Association, however, put that figure higher—at 46 percent [15]—but still lower than the figure quoted by the Wall Street Journal last week: a whopping 75 percent [16]—meaning that three-quarters of bank customers supposedly chose overdraft fees over declined transactions.

What the surveys by Consumer Reports and Moebs Services—the bank-industry consulting firm whose survey was cited by the Journal—both agree on is that previous experience with overdrafts doesn’t seem to deter customers from opting in to overdraft coverage services that allow banks to keep collecting these fees, which often cost $35 or more for each transaction.

The Federal Reserve currently requires consumers to opt in to bank programs that charge fees for debit and ATM overdrafts, but it still allows banks to charge the fees by default when automated debit transactions and checks overdraw checking accounts. Last week, the Federal Deposit Insurance Corporation, which oversees state-charted banks, issued guidance to banks on how to curb abuses of overdraft protection programs [17] and help customers who chronically overdraft to find better alternatives and avoid hefty fees.

Stop, Google, Stop !!!

I remember trading back in the late 1990s; anything with a .com name would command an unbelievable valuation and stock price. Getting in on one of these IPOs was considered the holy grail of investing. Companies with zero sales and negative revenue but a good business plan could command $100′s of millions in investment dollars. Sky high stock prices had no basis in reality and the stock market soon learned a harsh economic lesson when the bubble burst.

Google’s (Nasdaq: GOOG) recent $6 billion offer for local online coupon company Groupon reminds me of the start of the Internet bubble – though there’s one big difference: the stock market is rejecting the deal. Have investors finally learned the hard earned lessons of the bubble bursting scenario? Are stock investors today far more sophisticated than they were at the turn of the 21st century? Well, it sure looks like it. Google plummeted 25 points when its offer for Groupon was made official. This represents about $8 billion in lost market valuation for the search engine giant. Hmmmm, the buy-out offer is for about $6 billion and the acquirer’s market value plummets by around $8 billion when the deal is announced? It looks like investors are sending a clear message to the buy out team at Google and the message is, DON’T DO IT.

Groupon is a thriving, fast growing business that earns about $500 million per year. This is unlike the typical non-revenue producing dream companies of the Internet bubble. However, Google’s $6 billion offer represents more than 10x earnings; an excessively high offer in anyone’s book. Groupon is a great idea that has cracked the local market. Regardless of the concept, what is Google really getting for its money? Future revenue for Groupon could easily exceed $1 billion per year but there are no barriers to entry for competitors. Their idea has been done on a small scale, off line for many years. Why doesn’t Google just launch its own or buy one of the dozen or so competitors in the same space? It would cost a fraction of the price, and with Google’s marketing power, Groupon would likely soon be playing second fiddle. Unless there is some type of proprietary information that investors are not privy to yet, Google could be making its biggest mistake ever.

Read more:

Tuesday, November 23, 2010

It's Time To Buy Ireland

We nailed the downwave in the Dow Jones via the YM contract. Continuing to hold short at this time. I see substantial opportunity right now in the Irish banks--primarily in the two most beaten down, IRE and IAB. The following is a brief piece I did for another site, enjoy!

"I'll rather be screwed by the IMF" reads a line of Irish produced protest undergarments. The Irish people are angry at the condition of their government and economy. Long a land of political turmoil, the banking and credit crisis has turned the common bickering into utter chaos and fear. The European Union EU has stepped into the fray pressuring the struggling country to immediately approve an austerity budget in order to trigger an EU/IMF rescue package. Prime Minister, Brian Cowen, is fighting to allow the new budget become law on December, 7th. However, the drastic wage and other cuts demanded have infuriated the opposition who are demanding he step down. The next several weeks are going to be touch and go as the situation moves beyond the boiling point and something snaps.

There is substantial positive potential for investors in the Irish chaos. Wise investors/traders understand that the maximum profits are earned from investing into the seemingly worst of times. It is my belief that this may be one of those times for the Irish banks.

Central bank governor, Patrick Honahan, told Reuters, The banks are for sale as far as I am concerned, I've been an advocate for a number of years for small countries to have foreign owners for their banks." Wow! Combine this statement with the massive drop of the ADR's The Bank of Ireland (NYSE:IRE) and Allied Irish Bank (NYSE: AIB) and the edge is definitely on the long side with both these stocks. There may be some additional pain to come in the near term, but my bet is both these banks will be trading higher within the next year. In fact, I wouldn't be surprised at all if these two stocks tripled in value in the next 12 months. Good luck!

Monday, November 22, 2010

Healthmed Svc: In Play Now..Classic Pump& Dump?

Healthmed Services Ltd (Pink Sheets: HEME) is a development stage company with the stated goal of releasing healthcare focused applications for Apple’s iPad. The company utilizes strong facts about its market and perceived need for the iPad applications in the medical field. These stated facts include expectations that healthcare spending will reach $4.5 trillion by 2019; anticipation that iPad sales will climb to 57 million by 2015; and forecasts that 20% of all health-care professionals will incorporate the iPad into their practice.

Responding to this need, Healthmed set out to develop applications for the iPad that would permit it to interface with desktop PCs, allowing medical records to be remotely transmitted directly into the health care professional’s computer. In other words, the goal is to create remote access client software for the iPad designed for the medical field. The applications are named Virtual Vantage and Neural Vantage. By putting all of this information together, along with catchy names, it truly paints a positive future for the company. After all, how difficult could it be to develop this software?

Well, reality is far different than the perceived facts. Healthmed just filed a form 8K with the SEC stating that the company has been ripped off by its software developer, Team TFZR, which was hired for an upfront payment of $600,000 to develop the Virtual Vantage and Neural Vantage software. The payment reflects the total value of the contract.

Interestingly, it was an oral contract and Team TFZR now demands more money for the software. Something doesn’t smell right here for sure. What kind of company would enter into an oral agreement for $600,000 without anything in writing? Furthermore, paying for software development in a lump sum is an unusual practice. It is generally paid for in stages as milestones are reached.

In addition, the CEO recently stepped down and Healthmed changed PR firms. This move paints a bleak picture for the future. The stock price plummeted to $0.04 per share on the heels of this release, and Internet message boards were alive with chatter from irate investors voicing their anger and pending class action suits.

The tank in share price didn’t last long, however. This morning the company issued a dud of a press release linking back to the company’s Web site, which is void of any information regarding its supposed product launch.

Could this be another pump and dump claim? Whether it’s a sham or not, the stock has doubled in morning trading, spiking up to 75% on the “news,” and the odds that this Pink Sheet is running a legit show are seemingly slim

Saturday, November 20, 2010

One life to live but we're doing it wrong you see
Got my brother down 'cause it's nothing to me
Everyone’s saying that it's wrong to cheat
But there’s no other way to get my life on easy street.......

Friday, November 19, 2010

We Are Short & Marc Faber Agrees

Shorts were triggered when the YM dipped below the trigger price earlier. I am fully expecting this to be a long term hold short. It looks like guru Marc Faber agrees with the position. The following is a short piece I did for a research firm on faber, gurus and their broken clock way of being right.

Marc Faber: Broken Clock Guru Or Market Wizard?

Every crisis in America seems to push another financial guru to the forefront. Everyone from WD Gann & Jessie Livermore to Robert Prechter & Jim Rogers have had their moments being heralded as the present day Nostradamus of the stock market. The funny thing is, these gurus are only recognized when their calls are correct. For example, Prechter has been saying the same thing for so long, the ever changing cycles of the stock market are sure to prove him right at one time or another. When he nails a prediction, he gets tons of financial press, and then when wrong he quietly fades off into the background. Jim Rogers, although someone who has my utmost respect, is another guru who has been saying the same thing for many, many years. His mantra of buy commodities looks like it has finally proven itself correct. The current poster boy for financial gurus is Marc Faber. Faber is an uber intelligent economist, fund manager and financial newsletter writer. His Gloom, Doom and Boom report has become hugely popular recently due to a series of correct macro calls on the economy. Is this just another example of a broken clock guru having his day in the sun, or does he have exceptional insight into our economic future? Well, let's take a look at the facts.

The first thing to ask when evaluating the potential worth of any financial guru is, does this person manage money? While actually being in the fund management trenches ads credibility and distinguishes one in a positive way from the thousands of empty suit talking heads with nothing on the line, you always need to keep in mind that these money managing gurus may be talking their book. This means they are subtlety or not so subtlety promoting their positions. Jim Roger's commodity bullishness is an example of this talking of his book. Marc Faber manages money and acts as an advisor to several funds. Is he "talking his book"? I don't know, but its important to keep in mind these inherent biases when money managers become gurus.

The next thing to look at is the guru's track record. Marc Faber's track record has been uncannily accurate, save for a few major mistakes. He correctly called the run up in gold, the Federal bail out, and oil price surge. However, a call he made in 2007 on CNBC when he said that if the Fed cuts rates from 5% to 0, the DJIA would rocket to 50,000 and the US dollar would become worthless. Well, he couldn't have been more wrong. The DJIA dropped by over 50% and the US dollar rocketed higher by 20% during the interest rate cuts.

Is Marc Faber correct with his current call of a big drop in the stock market and a bubble in commodities and gold? Is he a broken clock guru or a true market wizard? We will know the answer in the fullness of time.

Thursday, November 18, 2010

Surf Alert: Time To Short !

Our system is screaming to short the DJIA via the YM very soon. 11137 is the go short level. I am projecting a sweet short term melt down should this level be breached on the downside. Government Motors IPO is whithering on the vine right now. This does not bode well, Good Luck!!

Sunday, November 07, 2010

Has Altucher Gone Off The Deep End?

James Altucher is angry and down on day trading. He recently wrote a scathing article explaining his 8 reasons not to daytrade. Let me premise this piece by stating that James is a friend of mine and I find many of his market insights to be brilliant. In addition, his "How To Trade Like A Hedge Fund" book is a classic in the field with real practical advice that actually works in the market.

With this said, Is his latest anti day trading rant simply a publicity stunt for his new website; or has he gone off the deep end in a clever design of self destruction?

Well, let's first take a look at each of his points to see if what he says even makes sense.

1. Suicide: James seems to believe that losing money forces folks to commit suicide. What? Perhaps, if you are predisposed to suicide in the first place, taking a loss in the market will push you over the edge. However, anything will if you are predisposed. That guy who cut you off in traffic, getting a divorce, just about anything can push the predisposed to suicide. James, with all due respect, this is a moronic claim.

2. You'll overeat: This is another absolutely non correlated statement. Overeating has nothing to do with trading. For someone that has made a living from finding correlations in the market, to make this kind of statement is truly bizarre. Overeaters will find reasons to overeat trading related or not.

3. Your eyes go bad:
This is more of an effect of age than of looking at screens to day trade. If your eyes are going bad, go see an eye doctor, don't quit trading.

4. Social life: James seems to believe that if you trade, you can't have a social life. This is another ridiculous statement. Many traders socialize during and after the trading day. Yes, day trading attracts its fair share of hermit types. However, they are hermits prior to day trading. If you like to socialize, trading simply adds to your social life, it does not take away from it

5. Blood pressure: I guess if you don't have the right psychological make up to handle losses, day trading may increase your blood pressure. However, any stress will raise your blood pressure if you can't handle it. This has nothing to do with trading. If you have high blood pressure, see a doctor.

6. Nothing Productive:
This could be said about anything. He intimates that building a website is a productive endeavor. How is this anymore productive than trading? It can be argued that many jobs are not productive in the traditional sense. This statement is off the mark.

7. No career:
Another ridiculous claim. Day trading is a much of a career than anything else. Sure you need to be able to adapt to survive, but that goes for most all other jobs. Can your edge end? Sure, it probably will, however you need to be able to create new edges to truly make day trading a career. Many survive in the business, you can be one of them.

8. It's Impossible: What James? If I recall, you made a nice living with trading both for your own account and for others via your fund. It's difficult, particularly in this market, but it isn’t impossible. You know this, James!

The truth is day trading is changing. You need to be able change and adapt to survive. Yes, it's a difficult way to make a living but it’s the perfect career choice if you possess the internal fortitude to make it work. My bet is Althucher's rant is simply a publicity stunt for his web site. He is simply too bright to actually believe what he has written. Come on James, your book and insights have helped many day traders succeed. Accept your contributions, don't try to destroy others dreams.

Tuesday, October 26, 2010

The World's Best ETF Web Site

ETF's are the new rage in investor circles. Correspondingly, a plethora of websites have sprung up to serve this growing interest. Which sites are worthwhile and which ones are a waste of time? I took a close look at 8 of the top sites based on traffic. The following are my findings.

8 ETF internet sites have been identified as the most popular ones.

The sites that will be evaluated are, in no particular order:








Here is a review of the basic background of each of the sites. Founded in 1983 by Joe Mansueto, as an independent investment research company. The firm has grown to provide data on 300,000 investment products including ETFs. They provide several proprietary tools to help investors understand their investments.

Yahoo Finance: A sub site of the Yahoo brand launched in 1983. They are considered to be the top financial and research website in the United States. The site serves over 18 million visitors per month with financial news, quotes, company reports, ETF information, message boards, and a few hosted tools for personal financial management. They also provide aggregated information from dozens of partner sites keeping the content timely A large market news site owned by Dow Jones. Dow Jones is the leading provider of market news in the world. They own the Wall Street Journal, Barrons and various index names, among many other financial properties. The site contains a massive amount of up to date business and market news to over 6 million monthly visitors.

ETF This site is published by a news media site called Accelerize News Media Inc. The parent companies goal is to provide users with comprehensive on line media solutions to reach specific audiences. News served with a side of education is the sites tagline. September was the latest news story posted on the home page. This site appears to be purely a news aggregation website with an ETF theme.

Index A news and research site containing up to date news, opinion and original research. Originally founded by proprietary trading pioneer, Steven Schoenfeld and Jim Wiandt, the site has expanded to a worldwide informational source. It focuses on index funds, ETFs, index derivatives, and passive strategies using these tools. This site provides a deep resource of study for those who want to delve into the inner workings of index products.
ETF This site was founded by author and asset manager, Tom Lydon in 2005. It contains up to date news stories mostly bylined by Mr.Lydon, educational material and an ETF analyzer. The ETF analyzer is a graph showing the past performance of each ETF and basic technical levels. It is always up to date and provides Mr.Lydon’s insights into the world of ETFs.

Trading Founded by Larry Connors, this site provides news, opinion and strategies targeted at the individual investor. Its home page is updated multiple times daily with actionable and current news and strategies. There is a deep resource of educational material from the very simple to that geared toward the sophisticated investor. What separates Trading Markets is their daily specific trade calls and actionable material. The contributors to the site are all market professionals with most being very active traders. This assures that the opinions and ideas provided by the contributors are current and up to date. It is geared toward the active investor with a tag line, “Making Great Traders”.

ETF Founded in 2003, this site contains up to date market news, a little education content and a subscription based ETF portfolio.

When evaluating any informational source, the first thing needed to be asked is how long have they been in business? The internet is full of sites with dubious value. Particularly, in the investment field, it’s important to know that an informational source has weathered several market cycles without closing their doors. Of the 8 leading ETF sites, only Morningstar, MarketWatch, Yahoo Finance and TradingMarkets have been in business longer than 7 years. In fact, startups ETF Database and ETF Trends have only been around a little over 2 and 5 years respectively. Although it’s important to note that older isn’t necessarily better. However, longevity in the internet business is a clear sign of doing something right.
All of the sites provide articles about ETFs. The question becomes is the information something that can be used to help make investment decisions? While most of the leading sites contain excellent data points and facts about ETFs, when it comes to current, up to date and actionable information they usually fail to deliver.

How to evaluate the value of the article content comes down to the investors goals. Is the reader just looking to increase knowledge? If this is the case, then any of the sites will serve the purpose. However, if the investor is seeking actionable, up to date information that teaches how, where, when and why to trade ETFs, the choices slim down considerably.

One must consider if the site actively operates a model portfolio. This is critical because it clearly reveals if the site actually has experience in the real world of trading and investments. While a model portfolio is far removed from an actual cash based investment portfolio. It can and will determine if the philosophy and tactics espoused by the site actually work in real life. Two of the leading ETF sites provide a model portfolio proving that the proprietors are more than simple internet entrepreneurs trying to catch the latest trend.

Another question to ask is does the site maintain a historic record of its recommended trades? This is critical in order to determine if the content is purely theoretical or actually work in real life. In the financial world there are many armchair investors and traders, some of whom appear highly learned. However, when put to the test of the real market, these untested theories often fail. Only a proven, well documented and complete historic record can separate the ETF dreamers from the actual practioners.

Backtesting is a major concept in professional investing circles. Backtesting is the proving of investment ideas over the long term via historical data. Backtesting determines if the theory has real world relevance over time. While a successful backtest will not guarantee success going forward with real money, it can and does clearly show what doesn’t and will not work. A successful back test is often the first step in evaluating trading strategies. It’s important that the backtest include enough historic data to determine the strategies viability across most market conditions. It is often referred to as quantification in academically minded groups. Only one of these sites provides a historic, backtested record of its suggested trades.

Backtesting means little if the site does not share the historic record with the users. This allows the investor to observe how the strategies develop overtime. It should show the good, bad and ugly of the winning and losing strategies. As can be guessed, the only site that provides backtesting also has a clear historic record of the results.

The most important point for many investors, does the site provide actual ETF entry signals? In other words, does the site provide real life, actionable, specific trade calls? The symbol and price level must be provided so that the investor can follow along with the trade in a real or practice portfolio. Without providing this critical information, trade recommendations are vague and easily tweaked to appear successful regardless of actual results. Once again, only one of the 8 sites is willing to put its reputation on the line by providing actual, clearly defined entry signals

As any investor knows, selling the investment is how profits are made real. Trading and investing is far more than simply buying and holding without selling. In fact, trillions of dollars are made but never realized as investors often hold when price drops back from the highs. Selling is the critical factor that determines how much an investment will make or even often if it will make a profit at all. To be actionable, selling recommendations must include specific price or technical level so the investor knows when to take profits or cut losses. Only one of the listed 8 most popular ETF sites provide when to sell information. As can be guessed, it’s the same site that provides specific entry criteria.

An important distinction is whether or not a service is based on the concept of trend following. Trend following often looks good in hindsight showing theoretical profits while the real life execution of such a strategy remains nebulous. Statisticians call this the hindsight bias. Trend following is a feel good method that looks great until it is actually placed into action. Trend followers often miss moves in reality that their theoretical models indicate were caught. This is dangerous ground for a trader/investor often resulting in getting enough multiple small losses to quickly deplete your investment capital. The site that provides entry and exit signals is the same one whose methods are not built upon the shaky, feel good ground of trend following. This sites methods are built upon long term, statistically valid tests and actual real life practice.

Who uses each of the services is another due diligence question to ask prior to trusting the information. Do professional money managers, proprietary traders, and full time investors use the information contained within the site when making decisions? Is the site more geared to weekend hobbyists playing with their lunch money? While it’s difficult to say as an absolute, we know that out of the 8 sites, 3 have a proven and active professional audience. These sites are Morningstar, Yahoo Finance, and TradingMarkets.

The last thing to be determined is there ongoing support from the site? Many of these sites are set up to basically run by themselves providing very little additional help for the investor than what is apparent. Does the site offer ongoing educational and actionable courses/materials that keep up to date with the ever changing world of ETF’s? Several of these sites look stale without much updating or refreshing of the material. Only one of the listed sites appears to be constantly updated with actionable suggestions while on the cutting edge of ETFs evolution.

Monday, October 25, 2010

The War Of The Super Repeaters

Nanex has some cool "crop circle" shots of super repeaters fighting for dominance. A real battle of the quants, without the fashion show!

Do It Yourself Statistical Arbitrage

originally published on "" in 2004

The following is a chat I had with one of Bright Trading's top traders. Enjoy!

Dave: I am joined by professional trader Darren Clifford. Darren came to us with very high recommendations from expert trader and industry icon, Don Bright. Don explains that Darren is on the cutting edge of daytrading methods and techniques. Let's get started. How are you today, Darren?

Darren: I'm doing great, thank you for having me Dave.

Dave: Why don't we start out by learning a bit about yourself and what started you in the market. Your basic evolution as a trader to where you are now.

Darren: Sure, it would be my pleasure. I started in the market about two and half years ago. I graduated with a masters degree in economics. I specialized in financial mathematical modelling.. I didn't even know that this career existed and that you can be a professional trader. On the recommendation of a friend, I went to check out what they were doing over at Bright Trading . Once I saw it, I called them up and began my career. I had to start like a lot of traders, by borrowing money from family to get involved with trading. I started with $5000 as a sponsored trader. I lost that couple of times before I became consistent and successful.

Dave: Did you start out as a discretionary trader, or did you follow Bright guidelines at the beginning.

Darren: I was very fortunate to start in the office in Langley, British Columbia. Rob Friesen, the office manager, a great experienced trader himself does a lot of trading with a specific trading strategy called, Pair Trading. I was able to sit, learning from him to soak up his knowledge,in my first couple of months on the job. That really helped, so I wasn't necessarily on my own. From there I have gone on to be more established and take in more trading strategies that they teach at Bright. Bob Bright is now my mentor, a person whom I trust and keep in contact with in my trading.

Dave: I know Bob has quite a reputation on the street. He is known as being one of the smartest guys out there in the business of daytrading. You mentioned Pair Trading. What exactly is Pair Trading?

Darren: Pair Trading is when you are trading from a hedged position. I would be looking at two correlated stocks like Coke (NYSE:KO - News) and Pepsi NYSE:PEP. I may buy one, and short the other to play the price differential between the two. This allows the trade to be a lot more stable and a lot more predictable. There are a lot of old school traders who crave and love volatility and they just wish the markets would move again. As a professional trader, I don't care a bit about volatility, I care about predictability. Even if something is highly predictable in small patterns, I can trade it in a lot bigger size to make my money out of it. If something is moving all over the place, yet I can't predict where it is moving, it is going to be trouble and I can be losing a lot of money.

Dave: What do you look for when you are setting up a pair trade?

Darren: The first place I will look is intuition. You can go through the NYSE and you may see two companies like Citibank and Harley Davidson. They are both highly correlated with each other. Statistically this may be true, but intuitively give me a justification why Citibank and Harley Davidson are correlated.

Dave: Would there be a justification? To me there wouldn't be any at all. Perhaps when people are happy they buy Harley's and charge up their Citibank credit cards. Other than that, I can see no correlation.

Darren: They are both stocks on the NYSE. They both react to the market but that is where the correlation ends. Because of that, intuitive reason is not there. It is something I would say. Though statistically you may be able to come up with a great model for these two stocks to trade against each other. Intuitively it does not work. The place that we really look would be for Citibank is JP Morgan, Bank One, maybe Bank of America., for Coke, Pepsi.

Dave: Let's take the Coke and Pepsi example. What is the next step after you find a pair that is intuitively correct.

Darren: So now you come up with a pair that is intuitive and it makes common sense. The next step is looking at exactly how they trade with each other. Traditionally, when you have a sector like Coke and Pepsi, there isn't anyone else. There really is only two of them. What you see is that some companies like this don't trade as correlated as you expect. This is due to the money that may flow out of one company is actually flowing into the other one. Yes, we may like the soft drink industry, but right now we favor Pepsi more than we favor Coke;or now we favor Coke more than Pepsi. You can actually see anti-correlated movement even though they are in the same sector. After we have gone through the intuitive basis we take a look at statistically and historically how they traded.

Dave: You do this using technical analysis? You put the pair on a chart?

Darren: Absolutely, we put them on charts and take a look at the correlation between the two stocks. We see if they have traded within a range or some sort of pattern with each other. The big test is when you see news events happened with one of your stocks, and how the stock behaves. For example, you are looking for something that says, 'Coke moved up $4 this morning, did Pepsi move too?" " Did Pepsi move at least $2?" You are looking for a real sign that you have a knowledge based industry, meaning that company sympathy is actually going to occur. When people see coke rally they figure they should buy Pepsi.

Dave: Now specifically, when you set up the chart, is it a daily chart?

Darren: Well, as professional trader you have to appreciate that I trade every time frame. From short,short term to longer term.

Dave: When you say short term do you mean a tick chart?

Darren: Everything from a tick chart, a one minute bar chart, all the way up to a daily, or even a weekly chart. As a professional, I take advantage of every edge that is available to me. This means I may be holding a smaller position for a long time trying to get $5-6, as an investment out of it, or I may be taking a larger position for a shorter amount, trying to take 5-6 cents out of it. For each one of those trades I need to have a justification for my entrance, and I need to make sure I am looking at the appropriate time frame that I am analyzing for actually making that trade.

Dave: Let's talk about the difference between trading and analysis. When you are performing the analysis on a stock pair, is there a specific time frame that you use?

Darren: I will look at everything from the last 1000 days that it has traded on down. You are almost talking about 5 years there, anywhere down to the last couple of minutes. I prefer to take a look at, on the technical aspect of it, most of my trades intra day, then the last 20 days of data.

Dave: What type of chart do you use?

Darren: Generally a candlestick chart with a moving average and some Bollinger bands.

Dave: I know you trade with a theory that trys to develop each pair as an individual business model. Please elaborate a little on this idea.

Darren: This is something that should apply to all trading strategies regardless of if you are pair trading, momentum trading or something else. Every time you approach the market, you are an independent business person. This is your job, this is your company, you are a trader. As you know, every company before it starts has a business plan.

Dave: Ok, so this is what you mean when you treat each pair as an individual business? The trade itself has its own plan.

Darren: Absolutely, even the small scalp have a plan. They are just like micro-buisiness. This is the place where I take profits, this is where I exit, this is where I take a loss. Everything has a known entry and exit before I even begin. This way I am trying to take the emotion out of it.

Dave: Is this a written plan, or is it something you do mentally?

Darren: For my new traders, absolutely it is written. Even their small trades I have them write down where they are planning to enter and exit. For the shorter term trades, the less likely I am to write it down. But for the longer term trades, everything is written down.

Dave: The other word for pair trading is statistical arbitrage. Does that refer to a reversion to the mean type strategy?

Darren: Well, within a pair, you have to appreciate that there is actually a reversion that should occur. The natural way that free market economics works is that you should have a leader in every sector who has all the technologies, then these technologies being adopted by the secondary companies in the sector. You constantly see one company taking advantage of new technology, and taking a lead with their stock price.The other companies within that sector adapt to the new technology and catch up with the leader.

Dave: Like a follow the leader idea?

Darren: Absolutely, it's free market economics at work. You get a new technology that assists them, then it comes back to equilibrium, or at least starts reverting back. This is something that does not actually occur within the individual stocks. Mathematical modeling of the stock market as a whole, is said to be a random walk. While there is an upward drift to it. The idea is that we are going to go up in time but there is no reason that since the market rallied up 1000 points in the Dow that we should actually see it come back down. Within a pair, there is a reason that says when one company rallies $20 ahead of another company they will go back into line. Here is one reason why, the other company is going to take a look at what their peer is doing, adopt the successful technologies to catch up.

Dave: Let's say we are following a pair that has had very strong correlation within the last 20 days, I am just using this as an example. That all of a sudden they veer off. Lets say Coke starts going up, and Pepsi starts going down. In a situation like that would you then short the stock that is going up and buy the stock that is going down, betting that they are going to come back into correlation? Or does it all depend?

Darren: There are exceptions to every rule, but on average my trading strategy tends to be . I am fading moves so I'll take the opposite side in this case. If Coke pulls back like it has, which has happened in the last couple of months, I am buying Coke and selling Pepsi. I am expecting it to revert back to a mean between the two companies.

Dave: You guys take pair trading to what seems to be the next level. You go beyond the simple pair into 3, 4 and even 6 way trades. Can you explain?

Darren: One of the most profitable strategies we have is trading one company against a second company. Going into a sector like oil where there are an assortment of similar companies that do similar things. Then you start looking at them and ranking them fundamentally, and technically. I then get myself a list of these companies I want to buy, and those companies that I want to short.. What this allows me to do is take a position in a basket going long and take a position in a basket going short. Say you have maybe $500,000 in capital, as a new trader. Then be able to transfer the risk based on which one is actually performing well and which one is not. It allows you to move in and out of the different stocks between all six of them. You can capture within the basis of the relationship the predictability that is there, but you are getting more volatility to capture bigger moves and more of the moves.

Dave: Ok I see, you are limited to your capital as to how many stocks you can do this with across a sector?

Darren: Absolutely

Dave: How many different stocks have you ever traded at one time, using this method? Have you gone as far as almost creating a small index?

Darren: Probably the biggest I have done is a 5-way pair. Two companies long, two companies short, and one company as neutral as the middle, where I either long or short it. It allows you to play all five against one another. If one really rallies, you are able to sell another and buy more of that and are able to hedge it. It really works out well for me.

Dave: I know you said earlier that volatility doesn't really matter to you, but is there any way you can play these pairs as a momentum trader would?

Darren: Well you can always trend trade a pair. You can setup your pair just like you would an individual stock. The type of thing you are looking for is higher highs and lower lows, buying on pullbacks. You can even do traditional technical analysis, things like MACD, and RSI, put them on the pair themselves. Now with doing this you can actually look at everything a regular trend trader would be looking for. I want my long stock to have increased volume on its up days, buying that to continue more of the trend, and hedging that off with some other stock that you want to go in short that is not showing momentum characteristics.

Dave: Okay, lets get off of pair trading and get onto another one of your strategies. I know Don is really big on a strategy called "opening orders". Do you guys utilize this method?

Darren: Absolutely, but I do have to revert back to pair trading here. One of the things that we do on our open is we use them within a pair trading context. For example, if I see an extreme open on one stock, I'll take a look at its peers to see what its peers are doing. If I see Coke is gapping down $1, not only will I be buying Coke, but I am going to sell Pepsi against it.

Dave: For our members that may not know anything about "opening orders" Please give me a brief tutorial and explain the concept.

Darren: Basically, you are fading opening gaps on the expected price on the stocks open. You are looking at a stock like General Electric. It generally is a market performing stock and it behaves correlated to the S&P 500. You watch the futures contract of the S&P 500 in the morning to see if the futures contract is up .5%, you expect GE to be up .5%. Now if GE opens up 1.5% you are going to short it. You are going to fade that extreme open of General Electric. If GE opens down .5% you would buy it. You would say it opened below where you would expect it to in comparison to the S&P 500.

Dave: You are placing multiple orders above and below the price? So you are basically enveloping the price?

Darren: Basically enveloping the expected opening price. Taking a look at the morning, and we have automated programs that do it, all the way up to about one minute before the opening bell. I will look at if the S&P futures contracts have moved, and the E-minis right now, where I expect the market to open. Using that information I make an estimate of where I think my stock should open, and that is where I envelope.

Dave: Once the order executed, do you just take it for a couple of ticks or do you take it for as long as it will go?

Darren: To do the entry is actually a very easy thing for an experienced trader, once you get into the habit of it. The entry side is always the place where traders have difficulty. This is what being an experienced trader really means. When you do get in to a position, how you manage getting out. There are times where you just take it for a couple ticks, there are times where you pair it off, there are times where you turn around and just take a loss as soon as you can. It all depends what you see on the tape.

Dave: How many opening orders do you throw out in the morning?

Darren: On any given morning I may have 600 open orders out there.

Dave: Wow, obviously this is something that is computerized?

Darren: It all depends on the approach you are taking. Some people who just like focusing on the broad market, and focus the strategy on five different pairs and only five pairs. Everyday they do the same stocks over and over again. But they become very familiar with their stocks.While I am putting an order quite away from the expected opening price, they may be looking at putting it five cents from the expected opening price, and not get in. They become a lot more aggressive to get more fills.

Dave: Let me see if I understand you. You place your order five cents away from the opening price and if you get filled you are betting the momentum would carry that price forward resulting in profits?

Darren: No, not exactly, let's say you are looking at a stock that closed at $40. You expect it to open at $40.50 the next morning because the S&P is up quite a ways. Then what I am doing is taking a price like $41, and I am shorting. At a price like $39.50 I am buying.If I get the $41 short then I expect it to come back down to that expected open price of $40.50. So in that case I have faded the gap open.

Dave: Man, it looks to me, if you have 600 orders out there, often, when you try to fade a gap, the stock will just keep ripping. Is this the case?

Darren: It happens more often than I would like it to happen. That is when the advantage of being an experienced trader comes in. If I see an opening price of $41 where I have sold it and I notice that, first off, going through that open is an indicator to me that it wasn't as good as I thought it was. It should be that the opening is quite often the extreme for the day for a lot of stocks. So that should be a great trade, I should see some instant gratification there to it and if I don't see some resistance building on that opening price and others aren't coming in and saying 'Wow, I missed the plane, I need to get it up here at this price,' then it is probably better off getting out. If I do get into a position where it is running hard against me, I'll find another stock that is sympathetic to it and I'll buy twice as much to balance out the position and turn a profit.

Dave: Buying the stock that is sympathetic to the one that is ripping against you. Do you have software or some sort of program to instantly locate these candidates?

Darren: I have a quote window on my screen that tells me what all the pairs in a sector are doing. If I do hit something like Citibank, and I am struggling with that open, I can just glance at my screen. If Citibank is up a dollar, JP Morgan is up 50 cents, Bank of America is flat. Well maybe JP Morgan is moving much more sympathetically to Citibank.

Dave: I know that you guys have software that specializes in finding gaps. Tell me a little about your gap system.

Darren: Absolutely. If you take this strategy of enveloping that we have been doing at the open, and carry it forward into the middle of the day. In this case, what you are looking at is gaps. Traders are paid on the NYSE in one of two ways: 1. Finding inefficiency, something that is undervalued or overvalued that shouldn't be. 2. We are trying to take on the roll of a market maker which is to provide liquidity. This is a service to the market, and over the long term you should get paid for it. What we are doing is putting envelope orders out around the last print of the stock, so that if it gaps 20 cents or 25 cents, you are providing liquidity for that gap. This strategy is something that, especially if you go back to the late 90s, early 2000 period, the way that the market was behaving, was probably one of the most successful strategies that was there for our traders. They were able to provide liquidity in situations that were trading, and if things did not work they had the other side to sympathetically use to make sure they were not getting overly hurt.

Dave: This has been a very insightful conversation. Is there anything you would like to leave us with?

Darren: We do offer some mentoring and training up here with our company. You can look at our website . There is a group of us, so feel free to look us up. We are always looking to improve what we are doing and to help the trading community.

Dave: Do you have remote traders?

Darren: Absolutely, we have traders all across North America and some internationally.

Dave: To trade in Canada, do you need to have a series 7?

Darren: Yes, you do need to have a series 7. Currently the only province we have license to trade in Canada is British Columbia and that is because we all trade through Bright. That is the province Bright is licensed to trade in. We do have a number of traders here. Our Langley office is actually our second largest office.

Dave: What is the minimum capital contribution from a trader?

Darren: A mentor trader through us is $10,000 as a minimum capitol contribution. You do come spend two months time with us in British Columbia

Thursday, October 21, 2010

Is Debt The New Slavery?

At 9:00 PM EST this evening CNN will air Almighty Debt. "Fighting Debt From The Pulpit" A Black in America special documentary. The pastor featured akins debt to being worse than slavery. While there are certainly correlations between being a slave to debt and real slavery, one must never forget that one was voluntary and one was forced. Comparing the two is ridiculous and only serves to demean those who actually have suffered under true slavery. There is a huge difference, CNN. While debt can be debilatating to many, debt is due to personal choice regardless of your race or education level. It is disturbing to see people blame everyone but themselves for their predictiment. The American legal system has a tool known as bankruptcy that is designed to help those who got in over their head. America believes in second even third chances, too bad the media insists on wallowing in the negative. Wonder what their true agenda is? See the trailer here:

Tuesday, October 19, 2010

All Your Homes Are Belong To Us

Reading the attached insider memo from Wells Fargo sent a chill up my spine. It appears they are preparing an aggressive and vicious counter attack against underwater home owners who are challenging the legality and validity of their mortgage contract. While they are certainly legally permitted to challenge challenges to their paperwork, some of the things listed are clearly out of line. An example is the appraisal reevaluation. At the time of the note, the bank trusted and used an outside appraisal company. Now it appears they will be determining the past value based on inside analysts to search for appraisal fraud. Property appraisal is an art not a science--- going down this road will only give the banks the power to twist things anyway they wish. This is simply just one example of the viciousness of the memo against the public. Politicians and banks need to think long and hard before allowing or implementing draconian measures against an already stressed public. "All your homes are belong to us", says Wells Fargo regardless of legality it seems. This is how rebellions and revolutions happen. Don't say you were not warned.

Wells Fargo Funding
Repurchase and Rescission Process Overview
October15, 2010
This information is for use by mortgage professionals only and should not be distributed to or used by
consumers or other third-parties. Information is accurate as of date of printing and is subject to change
without notice. © 2010 Wells Fargo Bank, N.A. All Rights Reserved.
A New Reality for Repurchase and Rescission Requests
In today’s mortgage market, repurchase and rescission requests from investors and mortgage insurance companies (MI companies) have become commonplace. This has been driven by the increase in delinquent borrower accounts, as well as the liquidation of foreclosed properties. These macro-economic changes have prompted increased investigation into potential breaches of representations and warranties.
Wells Fargo is committed – just like you are - to honoring contractual obligations with investors and mortgage insurance (MI) companies*. We want to ensure that the resolution process for Repurchase and Rescissions is as smooth and swift as possible.
Some demands can be rectified simply by obtaining missing documents. But more often, as you know, the demand process is more complex. Demands are generally received in connection with misrepresentation of income, occupancy, employment, or regarding undisclosed debt or mortgages, and valuation concerns.
Improvements to the Process
Because of the complexity of each demand, the numerous ways to resolve them, and the seriousness of these issues to both of our businesses, Wells Fargo is taking steps to improve the demand process.
Here are some changes and tools we’re implementing to improve the process:
 Enhancing communication and collaboration with our clients by:
o Engaging you as early as possible.
o Working closely with you to clear deficiencies discovered on the loan during investor audits.
 Repurchase and Rescission Scenarios Exhibit – This document provides insight on how Wells Fargo approaches many of the most common demand issues.
 Improving our demand process (outlined below), effective October 18, 2010
*In this communication, investors and MI companies are collectively referred to as “investors” and reference will be made to both repurchase demands and MI rescissions jointly as “demands”.
Overview of Wells Fargo’s Demand Process – Effective October 18, 2010
Step 1
Wells Fargo receives a deficiency notice or demand from the investor. Typically, Wells Fargo has 60 days to resolve the issue.
Step 2
Wells Fargo notifies the Seller and provides supporting documentation when available. At this time, the Seller is given twenty-one calendar days to provide an explanation, facts or documentation to demonstrate that the mortgage loan complies with the requirements. If the Seller does not respond within 14 days of the initial notice, Wells Fargo will follow up with the Seller.

(Continued on page 2)
Wells Fargo Funding
Repurchase and Rescission Process Overview
October15, 2010
This information is for use by mortgage professionals only and should not be distributed to or used by
consumers or other third-parties. Information is accurate as of date of printing and is subject to change
without notice. © 2010 Wells Fargo Bank, N.A. All Rights Reserved.
Overview of Wells Fargo’s Demand Process (Continued)
Step 3
Wells Fargo will begin internal research (concurrently with Step 2) to resolve the loan issues. During this process, Wells Fargo will determine if there is a missing document and if the document can be located.
For all other issues, Wells Fargo will perform research to determine if there is evidence that proves or disproves the validity of the issue. For example, if the investor provided a review appraisal indicating a value deviation, Wells Fargo will order an independent appraisal review of the origination appraisal and the investor’s review appraisal from a third party vendor.
Step 4
The Seller responds to Wells Fargo’s request and either agrees with the investor’s findings or provides an explanation, missing documents or information for Wells Fargo to utilize in drafting an appeal to the demand or MI rescission notification.
If an appeal is not practical, based on all the information collected, Wells Fargo will notify the Seller, allowing them a final opportunity to provide additional documentation.
If an appeal is submitted to an investor, the Seller will be notified of the result of the appeal. If the Seller provided a response that specifically addressed the investor's issues and the investor deems the information to be insufficient to rescind the repurchase demand or MI rescission, the Seller will be given seven (7) calendar days to provide new documentation to support a second appeal. (Please note: Even if documents are provided by the Seller, the appeal may not be successful).
If attempts to refute the demand or MI rescission are unsuccessful, Wells Fargo will be obligated to repurchase the loan from the investor or accept the MI rescission. Likewise, Wells Fargo will issue a demand to the Seller for the repurchase of the mortgage loan pursuant to the provisions of the Loan Purchase Agreement or reimbursement for costs and expenses, if applicable.
• Send repurchase letter questions to our mailbox at The mailbox is monitored daily with replies to inquiries completed within 3 business days, or
• You may contact a member of your regional sales team.

Shared Vision, Shared SuccessSM. Together, we can achieve long-term industry success. Learn more today.
Wells Fargo Funding
Repurchase and Rescission Scenarios Exhibit
Page 1 of 6
When an MI rescission or repurchase demand is received by our Wells Fargo Repurchase Operations team, Wells Fargo will research the issues to determine if there was a breach of a representation or warranty, or non-compliance with a term of the Mortgage Insurance policy.
 If there is no breach, the analyst will appeal the repurchase demand or MI company decision.
 If there is a breach, the analyst will recommend the loan for repurchase. If the loan is recommended for repurchase, the recommendation is escalated for a second level review. The final determination to repurchase or appeal the demand is made in the second level review.
The matrix on the following pages provides insight into how Wells Fargo analysts review each demand to help determine if there is a breach of a representation and warranty. Examples provided in the matrix are not all inclusive, but represent some of the more common and complicated types of MI rescissions or repurchase demands.
Note: This information is provided as general guidance only and does not change, alter or modify any contractual obligations between Wells Fargo and the Correspondent Seller. Individual cases may vary. Information provided below is subject to change at any time and without notice.
Action/test performed by Wells Fargo
How you can help
Undisclosed Debt
Definition: The borrower has additional debt that was obtained prior to the closing of the subject loan, but it is not reflected on the origination credit report or application. It is not included in the qualifying ratios for the subject loan.
 Was debt included in the original underwriting calculations?
 What date was the debt opened? If it was opened in the same month as the loan closing date, the exact date must be verified to ensure that the debt was opened prior to closing.
 Does the new DTI, including the undisclosed debt, exceed the allowable DTI for the program?
 Provide evidence that the debt was included in the qualifying debt ratio.
 Provide documentation that the debt was opened after the subject loan closing date.
 Provide debt ratio calculations documenting that the debt ratio would have remained at an acceptable level.
 Provide documentation that the debt or a portion of the debt was eligible for exclusion from the debt ratio (e.g. provide lease if the property was a rental).
Wells Fargo Funding
Repurchase and Rescission Scenarios Exhibit
Page 2 of 6
Action/test performed by Wells Fargo
How you can help
Occupancy Misrepresentation
Definition: The occupancy of the subject property is misrepresented in an effort to obtain more favorable financing options.
The decision to repurchase for this breach is based on an evaluation or weighting of the evidence presented. As a general principle, Wells Fargo considers occupancy misrepresentation documented if the answer is “yes” to at least two of the following:
Closing Documentation
1. Does the appraisal indicate that the property is tenant-occupied?
2. Is the homeowner’s declaration page reflecting a landlord policy?
3. For a refinance - is the documentation provided to verify income and/or assets reflecting a different address for the borrower?
4. Is the distance between the subject property and the borrower’s employment unreasonable for commuting?
Post-closing Documentation
5. Is the property tax statement for the borrower reflecting a different mailing address?
6. Did the borrower change their mailing address for servicing communication?
7. Does a reverse directory search of the borrower’s home phone reflect a different home address?
8. Is there documented verification that the utilities are not and have not been in the borrower’s name?
9. Are there public records (driver’s license, voter registration, homestead exemption) that indicate the borrower never moved into the property?
10. Do the bankruptcy discharge papers indicate a different home address for the borrower for the timeframe following closing?
11. Is there documented communication between the borrower and a third party investigator indicating the borrower never occupied the subject property?
 Provide documentation that proves that the borrower occupied/ occupies the subject property.
 If the borrower intended to occupy the property, but did not, provide an explanation for the extenuating circumstances that prohibited the borrower from moving into the property.
 Offer an explanation and documentation to refute the evidence provided (e.g. the address that the borrower is utilizing for servicing correspondence and property tax records is actually their business address).
Wells Fargo Funding
Repurchase and Rescission Scenarios Exhibit
Page 3 of 6
Action/test performed by Wells Fargo
How you can help:
Income Misrepresentation
Definition: The income information and/or documentation that were provided at origination were either altered or falsified.
 Does the new income documentation provided reflect the same time period as the 1003 application?
 Is the new income documentation re-verifiable? If re-verification is not possible, is the investor’s documentation clear and complete?
 Was the original documentation altered or falsified?
 Does the DTI utilizing the new income exceed an allowable DTI for the program?
 Provide documentation that the verification provided does not represent the same time period as the 1003 application.
 Provide new documentation (verbal or written) that supports the original income documentation.
Employment Misrepresentation
Definition: The employment status (self employed vs. W-2; Full time vs. Part time), dates or job title are misrepresented on the loan application and supporting documentation.
 Does the documentation provided reflect the same time period as the 1003?
 Are the differences in employment substantial? E.g. was the verified profession essentially the same as the stated profession (supervisor vs. manager).
 Is the documentation re-verifiable? If re-verification is not possible, is the investor’s documentation clear and complete?
 Provide documentation that the verification provided does not represent the same time period as the application.
 Provide new documentation that supports the original verification.
Wells Fargo Funding
Repurchase and Rescission Scenarios Exhibit
Page 4 of 6
Action/test performed by Wells Fargo
How you can help:
Valuation/Appraisal Misrepresentation
Definition: The original appraiser did not follow USPAP or FIRREA standards when developing the origination appraisal.
Wells Fargo will order an independent third party review of the origination appraisal and the review appraisal from a vendor (at Wells Fargo expense).
As part of the review process, the vendor will:
 Obtain a property detail report for the subject property that contains an aerial photo of the subject property and additional sales,
 Verify the sale date, price and history for all sales referenced within any of the appraisal reports provided,
 Verify the appraiser’s licensure,
 Ensure that the appraiser was appropriately licensed as of the effective date of the appraisal and make note if the license had been revoked at any time,
 Analyze market conditions as of the effective date of the appraisal and pull additional market trend data if necessary,
 Summarize all items of note, in the form of an e-mail, to be addressed by the original appraiser. MLS sheets for the sales that have been utilized will also be requested, in addition to any other additional local market support that is available. Items of note will include, but are not limited to:
o Concerns or discrepancies noted by the local market review,
o Concerns noted within the MI Rescission letter or Demand Request,
o Reviewer concerns not noted by the local market review or rescission letter.
After a response is received from the original appraiser, the vendor makes a determination about whether or not the value was supported as of the effective date of the appraisal.
The Wells Fargo analyst will determine the following:
 Does the review support the original value?
 Does the reviewer state that the original appraisal contains USPAP or FIRREA violations?
 Encourage the origination appraiser to provide the Wells Fargo vendor with all requested documentation.
 Provide an independent review appraisal that supports the original appraisal.
Wells Fargo Funding
Repurchase and Rescission Scenarios Exhibit
Page 5 of 6
Action/test performed by Wells Fargo
How you can help:
Missing Docs
Definition: One or more required documents were not delivered to the investor.
 Was the document applicable or required?
 Can the document be located on the Wells Fargo imaging system?
 Can the document be retrieved by contacting the original provider (e.g. missing title policy)?
 Provide the document that is being requested.
 Provide evidence that the document was not required or applicable.
 Can the document be retrieved by contacting the original provider or a third party vendor (e.g. missing title policy)?
Definition: Investor determines that the loan did not meet State, Federal or Agency guidelines or regulations.
Wells Fargo’s Compliance Department will conduct a compliance review specific to the compliance issue raised by the investor.
Their review includes:
 A determination as to whether the cited regulation applies to the loan,
 Testing the loan according to the appropriate regulations.
Wells Fargo determines the following:
 Did the loan pass the compliance test?
 If the loan did not pass, do the specified regulations provide for a curing of the issue?
 Provide the original compliance testing calculations and results indicating a pass for the issue identified by the investor.
 Provide evidence that the regulation is not applicable to the loan.
 Provide proof that the issue was cured prior to delivery, if allowable and applicable.
 Provide documentation to prove that

Saturday, October 16, 2010

An Insider Chat With World Renowned Option Expert Charles Cottle

Dave: Let's start off by getting a bit of history about yourself. I know you have had tons of experience in and around the option markets. What first got you interested in options?

Charles: I was an accountant. I use to track the transactions of my clients and I got very interested in the workings of options. I then had the opportunity to visit a friend who was trading on the floor. This was an amazing new world that I never even knew existed, even though my office was just down the street for years. I worked at a family accounting firm during the summers. At this point, I was a year out of college and I visited the floor. Several of my friends were starting to trade futures. Futures did not attract me, but options seemed intriguing. It seemed like you really could control the risk. I went to a free seminar and came back to the office and said "I'm giving a years notice to this family business of 65 years." Then I went down to become a trader.

Dave: Wow, that took some nerve leaving the security of the family office. We are talking about Chicago and the CBOE?

Charles: Correct.

Dave: What was your evolution on the floor? Did you start out as a clerk or did you step right into trading?

Charles: I stepped right into trading. I read a few books and figured I didn't have to go that route. The market told me differently, because 6 months later I lost all my money. I just didn't understand things. I thought when the customers were buying I could just take the other side and bet against them. I had no idea on how to take on an inventory of options. The other guys in the pits seemed to be so emotionless about every single trade they made. I was riding on every single contract that I had. I was basically hoping, praying and doing all the wrong things.

Dave: What was the path between being a losing trader and the thinkorswim brokerage launch?

Charles: There was a lot of in between. I went back to trading and I was a clerk for a while. I latched onto a fellow who was leaving his job. He was a Spread Hunter for some market makers on the floor. He wanted to become a market maker and needed to replace himself. I got the nod that he would train me. This is about the time that I was offered a job by someone who would eventually back the owners of thinkorswim. I turned that down because I was on a mission to learn everything that there was to know about options. I let Tom Sosnoff get the job, he now runs thinkorswim. We have had a very long friendship. At that point I went down to the Board of Trade to trade. I traded for many years and then Tony Saliba started The International Trading Institute and I wanted to take a breather in the late 80s, I decided to gallivant around Europe and when the new electronic exchanges were sprouting up, I started teaching market making in Europe. I wrote all the course material for The International Trading Institute and delivered all the content to the banks in Germany, Spain, Austria, and Denmark. That was about a five year tour of duty for me. Two of the years were in Europe, then I was in Madrid for four or five months, spent four or five months in Sweden and just had wonderful time. I learned a lot about electronic trading.

Dave: Is that the impetus for your book, Options---Perception and Deception and Coulda Woulda, Shoulda? Which by the way, I consider the best options book ever written.

Charles: Thank you. Yes, and for thinkorswim. I dreamt up the concept of thinkorswim after that whole journey, Tom came up with the name. I called Tom with the idea after waiting to hear from companies like E*Trade concerning my concept. Tom said, "Hey we can do that." But he was not anxious to build spreading into the platform. I insisted to build the spreading technology if he wanted me to come on board. I still have the email from 1999,about a year before we even started the business, saying "Though I am inclined to believe and agree with you that spreading is the way to go, the CBOE is going to have their one-year anniversary for the last time they had a spread. They are going to have that party next week."

Dave: I hope he was joking. Tom can be a character!

Charles: Yes, It was a funny joke. However, I insisted and he said that we would build it. When we built it, we had built it before even I could accept an order. So the day they opened their doors electronically, we were firing spreads into the exchange! Today about 90% of thinkorswim business is spread orders.

Dave: Earlier you mentioned the term, Spread Hunter, can you explain to our members what this is?

Charles: Well, before all these computers that had software that scans the market to hunt down certain spread criteria, we had to manually pull them up to see if there were any good spreads in the market.

Dave: So you were actually looking for spreads to put on, not searching for existing spreads to knock out.

Charles: Exactly.

Dave: Many traders are scared of options, do you have any words of advice to someone just starting in options and learning the options language?

Charles: I agree with you. It is a scary thing, especially if someone doesn't learn it properly. That is why in the first paragraph of both of my books it says, "Stay away from options." Then in the second paragraph it says, "Oh, you are still here? You better educate yourself because there are a lot of things that can blindside you." In my book there is more about losing money than there is about making money. The way that I go about teaching it is by a market makers standpoint. I found through revamping Options: Perception and Deception was a book for market makers into a retail product that we gave as the Think or Swim guide to options which is now available for download at no cost. If you jump right into the last chapter of it, which in the new version is the first chapter, you will see an email dialogue for two months with somebody. A lot of the jargon and nomenclature addressed there in the normal conversation of email back and forth as I help this fellow manage his first electronic trade. To support that, the first chapter is called "Picking Up Where The Rest Leave Off: Synthetics." It dives right into using synTools and boxTools. These synthetics are where the market makers can turn around the way they look at the position and understand it a whole lot better. For example, one of the first examples in the book is the covered write which is a very popular thing. You ask the same person who is excited about doing covered writes, "Would you sell naked puts?" The answer is 'No.' But you can prove to them, using these market-maker tools that I have assembled that have been used on the floor for decades, they see that it is exactly the same thing as a short put, penny for penny.

Dave: What exactly do you mean when you say 'synthetic?'

Charles: Well, it's something that is equivalent to something else. You have a package of two different items that emulate or impersonate another one. For example, a long stock and a short call behave the same way as a short put. So if you have the long stock and the short call, and I had a short put, you and I would have the same future. We would have the same profit and loss outcome.

Dave: You are creating something by combining two or more things, mirroring the result. Am I understanding?

Charles: Yes, that is exactly right.

Dave: Let's go a little deeper and look at several different market conditions and discuss which option strategy would work best for each condition.

Charles: That is the idea behind thinkorswim. The idea where you had to teach people about spreading because back then in the late 90s and early 2000, in that era, premiums were so high that you can only sell premium if you wanted to make money. But selling naked premium was prohibited from a risk and margin standpoint. The only thing else was to buy the option. Well, buying the option was prohibitive because it was too costly. So what's left, Spreading. Limited risk, short premium is a very good way to consistently make money, but you have to have in your arsenal of tools that are able to take advantage of any market. Buying long premium, one usually has to be really right. It's probably best to use a vertical in most situations.

Dave: Long premium is just betting on the stock going up with a call?

Charles: Well, that is one way, but you can also buy put premium. You can also buy straddle or strangle premium which is buying for both directions. You are buying a call and a put so you can take advantage of a move in either direction.

Dave: Many people reading may not know what you mean by 'vertical.' Please explain what you mean by this term.

Charles: Sure. A vertical is an option position composed of either all calls or all puts with long options and short options at two different strikes. The options are all on the same stock and of the same expiration, with the quantity of long options and quantity of short options netting to zero.

Dave: Would one use a vertical if they are bullish--or bearish on the stock?

Charles: Both. There are long call verticals.