marketsurfer

Big Banks Screw Disabled Veterans

2011-01-27T12:26:00.002-05:00

This is truly unreal. Regardless of what Dimon says, the foreclosure machine is out of control

From the NY Times, by Diana B. Henriques

In violation of a law intended to protect active military personnel from creditors, agents of Deutsche Bank foreclosed on his small Michigan house, forcing Sergeant Hurley’s wife, Brandie, and her two young children to move out and find shelter elsewhere.

When the sergeant returned in December 2005, he drove past the densely wooded riverfront property outside Hartford, Mich. The peaceful little home was still there — winter birds still darted over the gazebo he had built near the water’s edge — but it almost certainly would never be his again. Less than two months before his return from the war, the bank’s agents sold the property to a buyer in Chicago for $76,000.

Since then, Sergeant Hurley has been on an odyssey through the legal system, with little hope of a happy ending — indeed, the foreclosure that cost him his home may also cost him his marriage. “Brandie took this very badly,” said Sergeant Hurley, 45, a plainspoken man who was disabled in Iraq and is now unemployed. “We’re trying to piece it together.”

In March 2009, a federal judge ruled that the bank’s foreclosure in 2004 violated federal law but the battle did not end there for Sergeant Hurley.

Typically, banks respond quickly to public reports of errors affecting military families. But today, more than six years after the illegal foreclosure, Deutsche Bank Trust Company and its primary co-defendant, a Morgan Stanley subsidiary called Saxon Mortgage Services, are still in court disputing whether Sergeant Hurley is owed significant damages. Exhibits show that at least 100 other military mortgages are being serviced for Deutsche Bank, but it is not clear whether other service members have been affected by the policy that resulted in the Hurley foreclosure.

A spokesman for Deutsche Bank declined to comment, noting that Saxon had handled the litigation on its behalf. A spokesman for Morgan Stanley, which bought Saxon in 2006, said that Saxon had revised its policy to ensure that it complied with the law and was willing to make “reasonable accommodations” to settle disputes, “especially for our servicemen and women.” But the Hurley litigation has continued, he said, because of a “fundamental disagreement between the parties over damages.”

In court papers, lawyers for Saxon and the bank assert the sergeant is entitled to recover no more than the fair market value of his lost home. His lawyers argue that the defendants should pay much more than that — including an award of punitive damages to deter big lenders from future violations of the law. The law is called the Servicemembers Civil Relief Act, and it protects service members on active duty from many of the legal consequences of their forced absence.

Even though some of the nation’s military families have been sending their breadwinners into war zones for almost a decade, some of the nation’s biggest lenders are still fumbling one the basic elements of this law — its foreclosure protections.

Under the law, only a judge can authorize a foreclosure on a protected service member’s home, even in states where court orders are not required for civilian foreclosures, and the judge can act only after a hearing where the military homeowner is represented. The law also caps a protected service member’s mortgage rate at 6 percent.

By 2005, violations of the civil relief act were being reported all across the country, some involving prominent banks like Wells Fargo and Citigroup. Publicity about the violations spared some military families from foreclosure, prompted both banks to promise better compliance and put lenders on notice that service members were entitled to special relief.

But the message apparently did not get through. By 2006, a Marine captain in South Carolina was doing battle with JPMorgan Chase to get the mortgage interest rate reductions the act requires. Chase eventually reviewed its policies and, earlier this month, acknowledged it had overcharged thousands of military families on their mortgages and improperly foreclosed on 14 of them. After a public apology, Chase began mailing out about $2 million in refunds and working to reverse the foreclosures.

For armed forces in a war zone, a foreclosure back home is both a family crisis and a potentially deadly distraction from the military mission, military consumer advocates say.

“It can be devastating,” said Holly Petraeus, the wife of Gen. David Petraeus and the leader of a team that is creating an office to serve military families within a new Consumer Financial Protection Bureau.

“It is a terrible situation for the family at home and for the service member abroad, who feels helpless,” Mrs. Petraeus said. “I would hope that the recent problems will be a wake-up call for all banks to review their policies and be sure they comply with the act.”

Chase’s response, however belated, is in sharp contrast to the approach taken by Deutsche Bank and Saxon in the Hurley case.

"Goldman Sachs, Heaven Help Them"-- Says Jim Simons

2011-01-25T08:59:00.005-05:00

A slip of the lip from Jim Simons ??

Will Larry Page Ruin Google?

2011-01-24T13:51:00.003-05:00

originally published by Beacon Equity Research
http://www.beaconequity.com/will-larry-page-ruin-google-buy-sell-or-hold-2011-01-24/

Google (Nasdaq:GOOG) is clearly one of the greatest success stories of all time. This once tiny, private company focused on the then esoteric subject of internet search has morphed into one of the most valuable and pivotal firms of our era. Entrenched in the public's collective unconsciousness, the very name of the company has become a popular verb indicating a worth far greater than even its billions of market valuation. With recent blow out positive earnings and growth, it appeared that nothing could stop this modern day juggernaut and its well chosen management team. However, this it appears that the positive sentiment may be changing due to a shakeup in management.

The current CEO Eric Schmidt is being replaced by one of the company's co founders, Larry Page. Schmidt is moving into an executive chairman role, which seems more symbolic than actual hands on. In fact, The New Yorker reported that he plans on exiting Google(Nasdaq:GOOG) completely after a year. It's important to remember that Schmidt is responsible for growing Google into the behemoth it is today. Although Larry Page and Sergey Brin created the company, it was Schmidt who ran the day to day operations during the massive growth. Even worse news hit the wire when it was announced that he plans on selling $335 million in shares this year, his first sale in 3 years. Does this indicate that the top is in place for the iconic search engine? Schmidt has indicated a desire to go into a career in television. I say good for him, but what's going to happen to Google?

There is much trepidation on the Street regarding Larry Page being capable of his new Google role starting April 4th. The stock market has already indicated its displeasure with the change. Shares have reversed their entire earning announcement driven gains. They are currently trading down by nearly one percent on the second trading day of the week after the announcement. The next technical support level exists at $598.67 on the 50 day moving average. The question is, will Larry Page be able to restore confidence in the brand or is this the start of a downward slide for Google?

Get Ready For The Light Pools

2011-01-24T12:33:00.000-05:00

The following article by Jim McTague of Barrons clearly indicates a change is in the works for dark pools. Credit Suisse's revolutionary Light Pool, launched in April, endeavors to shut out high frequency traders. Will this market altering change result in across the board transparency improvement? Will it collapse upon itself due to lack of volume? Time will tell....

http://finance.yahoo.com/banking-budgeting/article/111903/shutting-out-the-new-traders?mod=bb-budgeting&sec=topStories&pos=4&asset=&ccode=
Yummy, yummy! The good news for high-frequency traders is that juicy retail sheep again are grazing in the domestic equities market, just waiting for the slaughter.

The latest data show the first major weekly inflow of retail investment money into domestic equity funds since the flash crash this past May. These investors plunked down $3.8 billion into the equity funds the week ending Jan. 12, according to the Investment Company Institute. During 2010, they withdrew an estimated $82 billion, in part because they were spooked by the flash crash, when the Dow plunged more than 700 points in 10 minutes and then climbed 300 points in the next 10. That thrill ride was aided and abetted by high-frequency traders using over-clocked computers to front-run panicked retail investors.

These traders program their computers to buy and sell millions of shares of stock every minute, based on short-term trends, not the underlying fundamentals of the companies. Risk-averse to an extreme, their goal is to make a penny or so on each trade. It's easier for a machine to predict correctly if it is looking ahead only by a second or two. If the traders execute the same trades simultaneously, they can trigger dramatic market swings.

High-frequency trading firms love to buy from and sell to "dumb" individual and institutional investors. Individuals tend to place market orders rather than using limit orders at or below the bid price. Thus, they pay the maximum. As for mutual funds and other institutional investors, they are easily front-run by the new trading operations, which have faster access to market data as well as faster trading computers. If the funds are buying a particular stock, the traders' computers can detect this activity, buy up shares ahead of the fund and sell it back to the fund for a profit of a cent or two. This runs up the costs for mutual fund investors.

THE SECURITIES AND EXCHANGE COMMISSION has been mulling some curbs on high-frequency trading to shield long-term investors. But the plodding agency likely will take a year or two to enact any changes, and by then the math whizzes at the trading firms will have figured out another way to make chops out of the retail and institutional lambs.

Fortunately, there is a promising free-market response. Credit Suisse in March will launch what it calls the Light Pool, a trading venue for mutual funds and institutional investors that purposely puts high-frequency traders at a disadvantage. This is revolutionary. High-frequency traders are courted by the 13 major stock exchanges because they deliver trading volume and pay big bucks for concierge services, like the direct data feeds from the exchanges that give them a crucial informational head start of several milliseconds. Dan Mathisson, managing director of Credit Suisse's advanced-execution services, says the trading firms will have to route trades to the Light Pool through an outside stock exchange. "That extra hop could add 100-to-200 milliseconds to a trade, enough time to be very discouraging to high-frequency traders," he says.

High-frequency firms claim they bring benefits to the market, such as liquidity, and thatcritics exaggerate their alleged abuses. Yet Light Pool is getting strong indications of interest from institutional investors. Sal Arnuk of Themis Trading in Chatham, N.J., compares the new venue to the "tipping of a hat" to criticisms of the new traders that he and colleague Joe Saluzzi raised in 2008.

Too bad there's no Light Pool for individuals yet. Out among the wolves, they're apt to get eaten up again and again.

Carlos Slim Says Gates & Buffet Are FOS Regarding Charity

2011-01-20T12:52:00.003-05:00

The world's wealthiest man, Mexican Carlos Slim is rejecting Bill Gates and Warren Buffet's pleas to give his wealth to charity. Instead, Carlos rightly believes that capitalists serve society better by fighting poverty directly via creating jobs and opportunities--- not by charity. Finally, a bright light to counteract the buffett/gates nonsense. The following is an article by CNBC on Mr. Slim.

Carlos Slim, the world's wealthiest man, is bullish on Mexico and says he is staying in the country despite the dramatic rise in violence. And a mansion that he bought in New York is too big to live in-it's purely for investment.

In a wide-ranging interview, the telecom magnate also put to rest rumors about a large mining acquisition, explained his rationale for buying nearly $200 million in New York real estate, and why he is not making the pledge to give away half his wealth like Warren Buffett and Bill Gates.

A wave of violence has left more than 30,000 dead in three years in the Latin American country, as President Felipe Calderon wages an all-out war against the countrys drug cartels. As a result, Mexican executives, especially those living near the US border are said to be moving to places like Texas and Florida.

Slim says he is not one of them. Instead he is investing heavily in Mexico, buying real estate and just this month spinning off two companies that are newly listed on the Mexican Stock Exchange.

In fact, he says those choosing not to invest in Mexico are making a big mistake: They will lose. "If they are already here, they will lose market share. If they are not here they will lose a very big market. We are 110-112 million people, and growing the economy," Slim says.

On donating half his fortune to charity, which other billionaires like Buffett and Gates are doing, Slim says it's the wrong way to resolve the world's problems.

"What we need to do as businessmen, is to help to solve the problems, the social problems," he explains. "To fight poverty, but not by charity"

In addition, he says, donating the money to charity will result in huge tax deductions, depriving governments of much-needed tax revenue.

"I think it will be a big mistake that companies like Microsoft (NASDAQ: msft), Apple (NASDAQ: aapl)-the leaders of the world in technology-be sold by the founders to put the cash to fund charities. They shouldn't. It is more important that they continue manage the companies."

As for his recent purchase of a mansion on Fifth Avenue in New York for $44 million, he scoffed at the notion that someone would live there, suggesting that it was too big, because it has at least eight floors. Instead, he is going to turn it into several apartments and perhaps lease part of the building to a restaurant at the street level.

Slim himself lives in a modest home in Mexico City and says he doesn't like owning homes outside the country because they are too much of a headache. He says he would rather stay in a hotel.

Slim said rumors that he wants to buy the Fresnillo mining company, listed in London, are completely untrue. Slim already has a mining company that he just spun off and listed on the Mexican stock exchange this month, Minera Frisco. Its products include zinc, silver, and gold.

He is very pleased with his investment in The New York Times (NYSE:NYT - News) he says, and is not interested in trying to buy the company in the way that Rupert Murdoch bought Wall Street Journal owner Dow Jones. Slim owns 10 million shares and lent the company $250 million with a 14 percent interest rate in late 2009.

He is making $35 million in interest payments alone every year. Plus, he received warrants giving him the rights to 15.9 million shares.

"It was a financial investment. We made a convertible bond, a bond with warrants. We are very happy with the formula," he says.

Slim added, "We are not asking them how the business is going. We are looking from the outside. What they are going to do? What are their plans? We are not asking about that. We know that they are doing a good job."

When it comes to his telecom companies, his next goal is broadband penetration levels of up to 70 percent in Latin America. Currently the number stands at less than 20 percent. Now that wireless penetration is nearing 100 percent or more (because some people have more than one phone), the next step is to be able to provide internet connections via smart phones on a large scale.

Billy Walters: The Greatest Sports Gambler Of All Time

2011-01-18T17:20:00.001-05:00

Thor Beats High Frequency Traders To A Pulp

2011-01-17T13:08:00.002-05:00

It was only a matter of time before latency arbitrage ran its course, in case you did't know. According to the article below from The Globe & Mail, Canada's Royal Bank RBC has revealed a system named aptly enough, Thor, that beats the HFT boys at their own game.

http://m.theglobeandmail.com/globe-investor/putting-the-hammer-to-high-frequency-traders/article1871294/?service=mobile

Kelly Reynolds has found a way to turn the tables on high-frequency traders who have been using their speed advantage to grab profits from slower investors.

As the head trader at Hillsdale Investment Management in Toronto, she sees a lot of offers to buy or sell stocks that she knows are from high-frequency traders, firms that use ultra-fast computers to trade stocks thousands of times a day to make money from tiny market changes. She also knows that the HFTs are bluffing: their orders are an attempt to get her to reveal what she wants to buy and sell.

High-frequency traders can then use their faster computers to exploit that information. Once they know Ms. Reynolds or any other investor wants to buy shares of a particular company, they can quickly pull back their offer to sell it to them – only to resubmit it later a fraction of a second later at a less attractive price.

Such bait-and-switch strategies, often grouped under the fancy term “latency arbitrage,” are believed to generate billions a year in profit for high-frequency traders. Critics say those profits come at the expense of longer-term investors such as mutual funds that don’t have the technology to match the speed of high-speed trading firms, which now account for an estimated 30 per cent of stock trading in Canada, and more than 50 per cent in the U.S.

Ms. Reynolds, however, is a test user of a new technology that is just being unveiled by the brokerage arm of Royal Bank of Canada that she says has neutralized that strategy. The new system is built as a specific countermeasure to high-frequency traders, and Ms. Reynolds says that she’s now able to grab those bluff orders before the HFTs can withdraw them – every time. The RBC system is “very, very impressive,” she says.

RBC has applied for a patent on the system, known as Thor. The system has been in development for two years, with RBC adding about 80 people to its electronic trading team as part of the initiative, including some people from the HFT industry.

The HFT strategy of placing and then cancelling orders to gain an information advantage “just created an un-level playing field,” said Greg Mills, head of RBC’s global equity division. “We sought to build a product to try to solve” the unfair advantage.

The result, Thor, is a new twist on a stock-market technology called a smart order router.

In these days of multiple stock markets in every country, brokers such as RBC use smart order routers to blast out orders to all of the trading venues. Want to buy 10,000 shares of XYZ Co. at $10? The router scours the Toronto Stock Exchange, Alpha, Pure and other Canadian markets to find any shares that are on offer at that price. One common type of router, the spray router, then sends out orders for stock on offer on different markets simultaneously.

However, those orders don’t all get to markets at the same time. Some have longer distances to travel. Others travel down slower wires. As a result, the orders arrive in each market at a different time. The differences are only thousandths of a second, but the technology used by high-frequency traders is so fast that their computers can see orders hitting one market and jump ahead to adjust bids and offers on other markets, in order to buy or sell at a better price.

“As a trader, there’s a frustration around feeling like you’re being gamed,” and that led to the research that resulted in the Thor system, said Brad Katsuyama, RBC’s head of global electronic sales and trading and one of the developers.

The Thor system counteracts that gaming by staggering the orders it sends out to ensure they arrive at every market as close to simultaneously as possible. That gives the HFTs no chance to react.

The system continually monitors the time it takes for an order to get from RBC’s computers to five Canadian markets, as well as 13 U.S. markets, and adjusts the timing of orders to compensate for variances. In Canada, the difference between the fastest and the slowest is as little as 10 one-thousandths of a second. Thor has been able to shrink that to as little as 350 millionths of a second, Mr. Mills said. RBC hopes the technology will allow it to gain market share in the business of trading equities.

Still, it's an open question how long it can stay ahead in the technology arms race with the high-frequency traders, who focus on technology first and foremost. The whole HFT business is built around being faster and on continually improving technology, meaning Thor may not be enough to neutralize HFTs for long.

“It probably won’t be long-lived,” Hillsdale’s Ms. Reynolds said. “Everybody is going to have to get to this point, where their routers are as capable as the high-frequency traders out there [but] they’re going to keep developing better and better technology.”

Mr. Mills said he recognizes that, but already RBC has managed to get the difference in arrival times at different exchanges down close to a limit that nobody, not even high-frequency traders, has found a way around.

“It’s rapidly approaching the speed of light,” he said

Sallie Mae Managing Your Loans----Are You Crazy?

2011-01-16T14:27:00.001-05:00

The Savings Game: Getting out from under student loan debt
By Anya Kamenetz
Tribune Media Services
Recently, a young woman named Kelli Space made headlines for setting up a website at TwoHundredThou.com begging the world to help with her student loan debt.

Kelli was the first in her family to go to college, which may explain why nobody warned her about the dangers of student debt. Her loans, both federal and private, for her undergraduate degree at Northwestern University total $200,000.

That’s enough to buy a first house, or almost ten times the $24,000 that the average graduate takes home with their diploma. So far, Kelli’s collected a few thousand dollars in donations and a lot of negative feedback for asking for a handout. But I have a few words of advice for her and anyone else in over their head with student loans.

1) Don’t panic and don’t disappear.
It is easy to “forget” about your student loans, especially while the six-month grace period is still in effect after graduation, but this is a really bad idea long term.

continue reading here: http://economy.kansascity.com/?q=node/9397

How To Build A Winning Trading System: A Chat With Nelson Freeburg

2011-01-03T16:52:00.005-05:00

Dave: Welcome, Nelson.

Nelson: Thanks; it’s a pleasure!

Dave: Let’s start at the beginning. What first got you interested in trading system development?

Nelson: Almost no one in the field of systematic trading started out as a trader. Even some of the best known names in the profession began in different fields. Gerald Appel was a psychiatric social worker. Martin Zweig was a professor of academic finance. The late Bruce Babcock, who popularized dozens of mechanical timing strategies, was an assistant district attorney (who helped prosecute Charles Manson).

Dave: Wow, that's a shocker. I would have never guessed that is the case. Charlie Manson, the market? More similarities than we would like to admit! (laughter all around). Seriously, did researchers from these diverse fields reach any common conclusions?

Nelson: When all of these people eventually turned their attention to money management, they reached a common conclusion. Buy-and-hold investing simply does not work. There may be periods when the stock market goes straight up. But the good times are offset by frequent bear markets.

Dave: How do the systematic traders earn more than simple buy-and-hold strategies?

Nelson: One way to capture the gains and avoid the risks is to use conventional technical analysis—familiar tools like charting, candlesticks, trendline analysis, etc. But there is a lot of subjectivity involved in interpreting chart formations, breakouts, volume patterns, and so forth. This puts a lot of negative psychological pressure on the trader. Furthermore, there is no easy way to back test trading methods that rely on intuition and judgment.

Dave: Correct; technical analysis is generally very subjective, often an art instead of a science.

Nelson: Yes, so the alternative is mechanical timing methods. Explicit trading rules can be reliably tested in great historical depth. If they don’t work, all you’ve lost is time and effort. You don’t lose real money. Furthermore, much of the doubt and fear inherent in subjective trading is eliminated when the entry and exit rules are specified in advance and rest on sound principles of price behavior.

Dave: How did you start being interested in systematic trading?

Nelson: I was working on a Ph.D. in world politics at Columbia University in the late 1970s. My specialty was strategic arms control. I would use formulas and models to simulate the effects of thermonuclear war. (Please understand, I was trying to REDUCE the odds of such catastrophe.) Around that time, gold and silver were on a historic bull run. My cousin, a professional commodity trader, introduced me to the joys and passion of trading. And I was hooked…just like that.

Dave: You were a scientist, I see. Did you give up on the world politics studies?

Nelson: I quit researching world politics and shifted to the study of price behavior. Like many of us, I had my ups and downs as a chartist. Sometimes the chart patterns worked, other times they didn’t. Meanwhile, around this same time, the personal computer made its appearance. It became much easier to develop and test mechanical timing strategies. For ten years I researched computerized timing methods, trading all along. In 1991, I started Formula Research to share my quantitative findings. We started out with a small but discerning group (including Zweig, Appel and Paul Jones). Today we serve institutional money managers and private investors in 27 countries.

Dave: Let's give systematic trading a clear definition. How exactly do you define systematic trading?

Nelson: It’s simply rule-based trading. Investment decisions are based on specified entry and exit conditions defined in advance. With a systematic timing model, if we all have access the same price data, we should generate identical signal histories—a feat not possible with trading by judgment.

Dave: What are the basic components of a trading system?

Nelson: As is often (correctly) pointed out, some of the best trading systems are the simplest. You just need an entry rule to get you in the market and an exit rule to get you out.

Dave: Interesting, particularly in light of all the "quant shops" opening up.

Nelson: By the way, all things being equal, simpler is indeed better. But I would not exclude in principle trading strategies which embrace more nuance and are therefore more complex.

Dave: Are all trading systems basically the same?

Nelson: Most trend-following systems are surprisingly similar in their governing logic. They will feature distinctive stops, filters, and other individual variations But over a test period going back decades, the equity curves will track each other closely.

Dave: What about intraday systems?

Nelson: As for S&P daytrading trading systems, my friends at Futures Truth have tested dozens of intraday models. They note that almost all S&P daytrading systems incorporate an intraday breakout entry (trend-following) as well as a reversal entry (countertrend). In essence, while S&P daytrading system vary in detail, many adhere to this same dual structure.

Dave: That similarity can be very broad. Is the inner logic basically the same also?

Nelson: No, that is where the differences lay. I must have several hundred trading systems in my personal library of timing strategies. In terms of the logic and structure of these systems, there is a wealth of diversity.

Dave: Do system entry and exit rules rely on the same logic?

Nelson: Oh yeah. But the entry and exit rules don’t have to symmetrical. For instance, one of the best long-term stock market timing strategies ever developed (in this case by the distinguished market analyst Martin Pring) uses asymmetrical entry and exit logic. You buy stocks when the S&P 500 is above its 12-month moving average AND the yield on 90-day commercial paper is below its 12-month smoothing. You sell and exit to the money market when EITHER indicator crosses its 12-month average in the opposite direction.

Dave: When developing a system—is back testing a viable method to determine its potential success?

Nelson: Back-testing is not just viable, it’s indispensable.

Dave: Is there specific criteria that you use to analyze whether a system is successful? In other words, what gains should a system produce in relation to drawdowns?

Nelson: Well, the ratio of return to drawdown will vary greatly depending on how much back-testing is done. The greater the extent of historical testing, the lower the gain in relation to the drawdown.

Dave: Should all traders use the same evaluation techniques?

Nelson: Most institutional analysts evaluate an investment strategy by looking at its compound annual return and maximum draw down on a percentage basis. If the strategy offers a higher compound annual return than the S&P 500 while limiting maximum drawdown to, say, 15% of equity, that would be a promising start. By contrast, in commodity trading, most analysts look at the gains and draw down on a dollar basis. Here a good benchmark is to limit draw down to under 10-15% of net profit.

Dave: Are most trading systems trend based?

Nelson: Many successful trading systems are exclusively trend-following. Others are both counter-trend and trend-sensitive. I would say that most trading systems have a trend-following component.

Dave: How specifically do you determine and define trend?

Nelson: Timing models use many different ways to define a trend: Moving average crossovers, percent swing reversals, channel breakouts including Donchian, Bollinger or Keltner Bands; Wilder’s Parabolic and Volatility formulas. Some people even use countertrend indicators like to RSI to identify a trend. For example, you buy when RSI climbs above 50 and sell on a cross below 50.

Dave: Are there inherent flaws that must be dealt with when determining trend?

Nelson: Well, the main weakness of a trend-following strategy is its susceptibility to false signals. With most purely trend-following systems, the percentage of winning trades is 40%-45%.

Dave: Is there away around the issues with trend-based systems?

Nelson: The only way I know of to reduce whipsaws is to add some external filter. A good example is the Pring stock market strategy I described above. You can only go long stocks when the price trend is bullish and the monetary trend is bullish (as represented by lower commercial paper yields). But when you add such a fundamentally-inspired component, it is imperative that your exit be exclusively trend-following. Why? Because eventually that monetary filter is going to fail. (See Japan in the 1990s, the U.S. in the 1930s).

Dave: Recently, several of the huge trend funds have been suffering large drawdowns. Is this implicit in the system OR is the system probably being managed poorly?
Nelson: I believe strongly that these recurring lapses are inevitable when you bet everything on a strictly trend-following model. Periodic losses come with the territory, no matter how well the investment managers execute their strategy.

Dave: What other aspects, other than trend, can a trading system be based on?

Nelson: You can use countertrend strategies to try to anticipate tops and bottoms. In other words, you rely on indicators like stochastics and RSI to identify overbought and oversold conditions. You can also add fundamental, sentiment, intermarket or other indicators external to the actual price data to supplement and reinforce your ability to capture the trend.

Dave: Getting practical, let's design a basic trading system. First, how much data is needed before we start?

Nelson: In a word, you need a representative data sample, one that incorporates strong trends up, weak trends up, strong trends down, weak trends down, and extended periods of congestion. How much data you need will depend on the time frame and the market. A long-term weekly system for institutional stock investors will require data in greater historical depth than an S&P daytrading system that uses 1-minute bars.

Dave: After the data is gathered, what's the first step?

Nelson: You first have to decide whether the system will be general in nature, designed to trade a diverse portfolio of commodities or stocks. Alternatively, you could develop a profitable strategy that only trades one sector, say energy products or stock index futures.

Dave: Let's go over each of those versions.

Nelson: Sure, if you are trading a diverse portfolio of commodities (Option I above), you will probably use a trend-following strategy. You need historical price data and a testing platform that is capable of simulation across a portfolio of markets in dynamic interaction. If your system is designed to trade a single market or sector (Option II above), say the S&P 500 futures, you will need to decide whether you want to add any predictive inputs to complement whatever price-based logic you start out with.

Dave: OK, what's the next step?

Nelson: The next step is build your system using only a restricted sample of the data. Once your method works on this finite segment of price history, you can test it on the out-of-sample data you prudently reserved for confirmation.

Dave: The Monte Carlo simulation model?

Nelson: Yes, exactly.

Dave: Are transaction costs included in the output?

Nelson: Yes, especially in short-term commodity testing.

Dave: What about slippage?

Nelson: Ditto.

Dave: How does an effective system handle slippage and transaction costs?

Nelson: Slippage and commissions become more significant constraints as the time frame is scaled to progressively lower intervals, which increases trading activity. If you have a long-term institutional stock market strategy that trades three times a year, you don’t have to worry as much about transaction costs. But if you are developing an intraday trading system for the S&P 500 with 30 entries per day, you will find slippage and commissions to be a major, possibly lethal burden. You must find a way to filter out most of the poor trades.

Dave: Are the above simple system guidelines applicable to most systems?

Nelson: Well, the same general principles apply.

Dave: Wrapping this up, what is the most critical aspect of a trading system?

Nelson: The same as your evaluation of any portfolio manager or investment program. You have to minimize drawdown in relation to investment gains.

Dave: How can our members reach you should they be interested in getting started in system trading?

Nelson: We would be happy to send anyone an information package that includes a sample issue of Formula Research and a digest of all of our timing models. The easiest way to receive it is by emailing us at sigma20@midsouth.rr.com. If you want us to physically mail you the package, just call us at (800) 720-1080 begin_of_the_skype_highlighting (800) 720-1080 end_of_the_skype_highlighting or (901) 756-8607 begin_of_the_skype_highlighting (901) 756-8607 end_of_the_skype_highlighting. I have a modest website (www.formularesearch.com), but I’m too busy doing the actual research to focus much on marketing.

Dave: We are almost out of time. Any final thoughts?

Nelson: Well, the key to system building is testing, re-testing and more testing.

Dave: Thank you for your time today!

Nelson: Thank you, Dave!

Nelson Freeburg is editor of FORMULA RESEARCH, a financial letter that develops systematic investment models for stocks and bonds.

When he first came to the financial markets, Nelson was pursuing a Ph.D. in world politics at Columbia University. Wholly taken by the excitement and promise of trading, Nelson said good-bye to the academic life. Soon the markets would give him an education. Despite reading widely in finance, Nelson's investment results fell short of expectation.

Determined to persevere, Nelson began researching the markets full-time. Eventually he would build a financial database that reaches back to the last century--and from this, a library of advanced trading strategies. Today Nelson uses these timing models to advise institutional clients and manage his own investments.

Fifteen years ago Nelson started FORMULA RESEARCH, where he began sharing his findings with a small nucleus of traders. With time the research effort found a wider following. Today FORMULA RESEARCH serves over investors in 27 countries, including many of the leading names in global trading and finance.

Leveraged ETF's: 3X The Pleasure or 3x The Pain?

2011-01-03T14:05:00.003-05:00

Originally published by http://www.tradingmarkets.com/etfs/trading-lessons/leveraged-etfs-3-times-the-pleasure-or-3-times-the-pain-743557.html

Much has changed in the world of leveraged ETFs since my last piece on the topic, Leveraged ETFs: Portfolio Salvation or Damnation. First the number of leveraged and inverse products has exploded to over 120 with $30 billion in assets as of October, 2009.

They have become among the highest traded securities in history. For example, The Wall Street Journal reported that Direxion Financial Bear 3x Shares (FAZ | PowerRating) traded 23 million shares on February 25th 2009 with only 2 million shares issued at the time. One can extrapolate that the holding time averaged just 34 minutes. Major problems arose during 2009 with these new products. Several produced returns the opposite of what they were designed to do while others greatly disappointed investors with lackluster performance over the longer term.
Basically, many investors did not read the fine print stating that the returns are daily based on the underlying instruments. As in any leveraged instrument, daily rebalancing is required to keep the product tracking the underlying. It is due to this rebalancing that the cumulative returns do not match the daily returns. In other words, if you hold leveraged ETFs for more than a day, some unexpected and even crazy things can happen.

As you could expect with such a popular product, the regulators quickly began to issue warnings about the suitability of these volatile shares for retail investors who plan on holding for more than one day. In June 2009, FINRA issued a notice stating that they are generally unsuitable for retail investors. However, they quickly refined this broad statement in July 2009 stating, in part, that some sophisticated trading strategies may require leveraged or inverse ETFs to be held longer than a day.

In fact, regulators have ramped up their investigation to such a degree that four large financial institutions have been subpoenaed to reveal their leveraged/inverse ETF marketing materials. In August, the SEC and FINRA issued an alert warning investors that the daily return objectives do not match the longer term returns of the products. Steps were taken in December 2009 to increase the margin requirements for investors using margin to buy leveraged or inverse ETFs. Whenever there is some confusion and money involved, lawsuits can be expected. More than a few class actions suits have been filed due to the misleading marketing of these securities.
Academics and regulators are still debating the suitability of leveraged or inverse ETFs for retail investors. Some are of the opinion that they are far inferior to other leveraged tools such as derivatives. While others insist they are a solid product for informed, sophisticated investors.

Regardless of the disparity of opinion, these products remain ultra popular among investors. Studies have been done seeming to indicate that these instruments can be held profitably over the time. One method suggested that longer term investors need to monitor both the cumulative underlying return and the funds return. If these returns start to diverge, portfolio alterations need to take place once a certain percentage of separation occurs.

Despite the issues, some exciting changes are on the near horizon. For instance, Direxion is looking to market leveraged ETFs that rebalance monthly instead of daily. The fact remains that these instruments have their place but need to be fully understood or the pleasure of investing will quickly turn to the pain of loss.

Picower Estate Settles For $7 billion

2010-12-17T11:00:00.002-05:00

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.

Bernie Madoff Memoribilia: Price Plumets?

2010-12-13T19:21:00.003-05:00

From timesonline

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6917830.ece

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

2010-12-13T12:44:00.003-05:00

originally published: http://www.beaconequity.com/the-great-american-wikigeek-bluff-2010-12-13/

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.

Short Euro Now

2010-12-09T14:08:00.002-05:00

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.

Gold: Be Very Afraid

2010-12-06T12:37:00.002-05:00

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 MarketWatch.com 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: http://www.beaconequity.com/gold-dont-get-caught-holding-the-bag-2010-12-06/#ixzz17M0oht7f

Will A Wiki Leak Sink USS Bank of America?

2010-12-04T16:26:00.001-05:00

WikiLeaks.com, 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.

Wells Fargo Busted For Overdraft Fee Timing

2010-12-02T19:28:00.004-05:00

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 ProPublica.org

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

http://www.federalreserve.gov/consumerinfo/wyntk_overdraft.htm
http://www.nytimes.com/2009/09/09/your-money/credit-and-debit-cards/09debit.html
http://www.propublica.org/documents/item/wells-fargo-emails-discussing-weakness-in-overdraft-revenue#document/p2
http://www.propublica.org/documents/item/wells-fargo-emails-discussing-weakness-in-overdraft-revenue
http://www.propublica.org/documents/item/wells-fargo-emails-discussing-weakness-in-overdraft-revenue#document/p1/a5246
http://www.propublica.org/documents/item/wells-fargo-emails-discussing-weakness-in-overdraft-revenue#document/p1/a5247
http://www.propublica.org/documents/item/wells-fargo-emails-discussing-weakness-in-overdraft-revenue#document/p2/a5248
http://www.propublica.org/documents/item/wells-fargo-memo-about-transaction-processing-changes#document/p3/a5243
http://www.propublica.org/documents/item/wells-fargo-memo-about-transaction-processing-changes#document/p4
http://www.oregonlive.com/business/index.ssf/2010/08/judge_orders_wells_fargo_to_pa.html
http://www.reuters.com/article/idUSSGE67906M20100810
http://money.blogs.time.com/2010/11/29/debit-card-overdraft-protection-how-many-customers-actually-opted-in/
http://blogs.consumerreports.org/money/2010/08/ignore-bank-plea-stay-debit-card-overdraft-program-opt-out-atm-transactions-penalties-fees-.html
http://www.prnewswire.com/news-releases/consumer-reports-poll-only-22-percent-of-bank-customers-have-opted-in-for-debit-card-overdraft-protection-108467514.html
http://www.aba.com/Press+Room/083110OverdraftProtection.htm
http://online.wsj.com/article/SB10001424052748703678404575636884207120508.html
http://latimesblogs.latimes.com/money_co/2010/11/fdic-banks-overdraft-protection-fees.html

Stop, Google, Stop !!!

2010-12-02T10:39:00.002-05:00

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: http://www.beaconequity.com/googles-biggest-mistake-2010-12-02/#ixzz16y92D92w

It's Time To Buy Ireland

2010-11-23T11:03:00.005-05:00

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!

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

2010-11-22T13:46:00.004-05:00

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

2010-11-20T17:03:00.002-05:00

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.......

We Are Short & Marc Faber Agrees

2010-11-19T09:23:00.003-05:00

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.

Surf Alert: Time To Short !

2010-11-18T15:28:00.003-05:00

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!!

Has Altucher Gone Off The Deep End?

2010-11-07T19:04:00.006-05:00

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.

The World's Best ETF Web Site

2010-10-26T08:11:00.003-05:00

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:

MorningStar.com

Yahoo Finance.com

Index Universe.com

Trading Markets.com

Market Watch.com

ETF Trends.com

ETF Database.com

ETF Guide.com

Here is a review of the basic background of each of the sites.

MorningStar.com: 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

Marketwatch.com: 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 Database.com: 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 Universe.com: 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 Trends.com: 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 Markets.com: 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 Guide.com: 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.

The War Of The Super Repeaters

2010-10-25T10:54:00.004-05:00

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

http://www.nanex.net/FlashCrash/CCircleDay.html

Do It Yourself Statistical Arbitrage

2010-10-25T10:21:00.005-05:00

originally published on "realworldtrading.com" 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

Is Debt The New Slavery?

2010-10-21T14:07:00.004-05:00

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: http://www.cnn.com/video/#/video/us/2010/09/23/inam.trailer.almighty.debt.cnn

All Your Homes Are Belong To Us

2010-10-19T08:16:00.005-05:00

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
1
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
2
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.
Questions?
• Send repurchase letter questions to our mailbox at IRMRepurchaseResponses@wellsfargo.com. 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.
Scenario
Action/test performed by Wells Fargo
How you can help
1
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
Scenario
Action/test performed by Wells Fargo
How you can help
2
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
Scenario
Action/test performed by Wells Fargo
How you can help:
3
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.
4
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
Scenario
Action/test performed by Wells Fargo
How you can help:
5
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
Scenario
Action/test performed by Wells Fargo
How you can help:
6
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)?
7
Compliance
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

An Insider Chat With World Renowned Option Expert Charles Cottle

2010-10-16T12:08:00.004-05:00

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 atwww.riskdoctor.com 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.

Technical Analysis Killer App?

2010-10-07T13:18:00.002-05:00

One often hears the term "killer app" in the high tech world. It refers to any program or application that becomes a necessary part of the platform. In other words, the system just isn't the same with out this application.

Developing the killer app is the goal for most programmers. Everyone now seems focused on the next killer app for Apple's iPhone platform. Traders are also constantly on the search for the next Holy Grail indicator or killer app that will place the odds of success solidly on their side.

In an earlier article, I talked about how the 2-period Relative Strength Index (RSI(2)) is an excellent short term indicator for stock trading (if you missed it, read it here). Our research has taken the basic building blocks of the RSI(2) concept to build a true killer app technical analysis tool.

This tweaked usage of the RSI(2) concept is known as the Cumulative RSIs Strategy. It's a very simple method that has proven itself over extensive testing to be a true killer app in the world of indicators.

Cumulative RSIs are a running daily total of RSI(2) readings. Basically, one adds up the daily RSI(2) figures to get the cumulative reading. The strategy was tested on the SPY from inception to December, 31 2007. The results were impressive. Using a 2-day Cumulative RSI(2) reading of less than 35, 88% of the trading signals proved correct.

In fact, after tweaking the parameters a little, the system nailed almost all of the SPY gains over these 15 years but was only exposed to the market less than 20 % of the time.

You can find further details of these tests in Larry Connors' book "Short Term Trading Strategies That Work".

Does this system work for stocks or is it simply an index based method? We discovered that if you would lower the Cumulative RSI(2) to 10, 69% of the stocks tested showed profits.

Stock Market Breadth: Another Bogus TA Theory??

2010-10-05T15:23:00.002-05:00

One of the most popular and widely quoted technical analysis tools is called Market Breadth. Barely a day goes by without the financial media mentioning this indicator. Market Breadth measures the number of stocks advancing over the number of stocks declining during each session. The Market Breadth theory states that the market is believed to be healthy if advancers outnumber decliners. The wider this spread becomes, the more likely the market is to continuing advancing per the traditional theory. The opposite is also an accepted tenant of Wall Street. When declining issues outnumber advancing issues, the market is believed to be weak thus due for decline. This Market Breadth theory is well entrenched in the minds of most financial professionals as well as retail investors. A cursory internet search reveals that it is by far the dominant idea regarding Market Breadth.

We decided to take this well accepted theory, that seems to make perfect sense, and put it through vigorous, statistically valid tests. What we discovered is quite surprising. Not only is the accepted idea wrong, the opposite proved to be true. An 8 year period was tested revealing that the traditional wisdom could not be more wrong. We tested advancing issues being greater than declining issues for multiple days in a row, as well as, sessions that advancing issues outnumbered declining issues by a 2 to 1 and 3 to 1 margin. The results of the tests left no ambiguity, traditional wisdom is completely wrong. Here is what was found out.

Consecutive days of declining issues greater than advancing issues on the NYSE has led to higher prices short term. We considered one week to be short term for purposes of the testing. The testing also discovered that significant underperformance occurs when advancing issues outnumber declining issues when the market is trading under its 200 day Simple Moving Average. Another finding that flies in the face of conventional wisdom is that weak breadth days outperform strong breadth days over the short term.

It makes so much more sense to trade on the side of statistics and solid testing than to merely accept Wall Street’s often wrong wisdom.

Hedge Fund: Do It Yourself

2010-10-03T18:06:00.004-05:00

Inspired by Vanity Fair's recent piece on how to be a hedge fund honcho, thought I would republish my interview with hedge fund lawyer, Hannah Terhune

Traders and money managers often dream about one day running their own hedge fund, managing large sums of money, and competing head to head with the world’s top traders. For many, this dream remains an unfulfilled desire since they really don’t know where to begin. My guest this week will answer your questions, simplify this often complex subject, and point you in the right direction.

Hannah Terhune is chief attorney and member manager of Capital Management Services Group.com, Inc. Get ready for a tours de force education!

Dave: Greetings Hannah, Thank you for joining me today. Let’s start right at the beginning. Exactly what is a hedge fund?

Hannah: Although there is no universally accepted definition of the term hedge fund,” the term generally is used to refer to an entity that holds a pool of securities and perhaps other assets, whose interests are not sold in a registered public offering and which are not registered as an investment company under the Investment Company Act. Alfred Winslow Jones is credited with establishing one of the first hedge funds as a private partnership in 1949. That hedge fund invested in equities and used leverage and short selling to “hedge” the portfolio’s exposure to movements of the corporate equity markets. Over time, hedge funds began to diversify their investment portfolios to include other financial instruments and engage in a wider variety of investment strategies. Today, in addition to trading equities, hedge funds may trade fixed income securities, convertible securities, currencies, exchange-traded futures, over-the-counter derivatives, futures contracts, commodity options and other non-securities investments. Furthermore, hedge funds today may or may not utilize the hedging and arbitrage strategies that hedge funds historically employed, and many engage in relatively traditional, long-only equity strategies. In short, the term generally identifies an entity that holds a pool of securities and perhaps other assets that does not register its securities offerings under the Securities Act and which is not registered as an investment company under the Investment Company Act. Hedge funds are also characterized by their fee structure, which compensates the adviser based upon a percentage of the hedge fund’s capital gains and capital appreciation. Hedge fund advisory personnel often invest significant amounts of their own money into the hedge funds that they manage. As discussed in the Report, although similar to hedge funds, there are other unregistered pools of investments, including venture capital funds, private equity funds and commodity pools that generally are not categorized as hedge funds. Hedge funds are often compared to registered investment companies. In addition, unregistered investment pools, such as venture capital funds, private equity funds and commodity pools, are sometimes referred to as hedge funds. Although all of these investment vehicles are similar in that they accept investors’ money and generally invest it on a collective basis, they also have characteristics that distinguish them from hedge funds.

Dave: When did this concept originate? Briefly, what’s the history?
Hannah: Hedge funds, while representing a relatively small portion of the U.S. financial markets, have grown significantly in size and influence in recent years. The SEC recognized over 30 years ago that hedge fund trading raises special concerns with respect to their impact on the securities markets. The growth in hedge funds has been fueled primarily by the increased interest of institutional investors such as pension plans, endowments and foundations seeking to diversify their portfolios with investments in vehicles that feature absolute return strategies – flexible investment strategies which hedge fund advisers use to pursue positive returns in both declining and rising securities markets, while generally attempting to protect investment principal. In addition, funds of hedge funds (“FOHF”), which invest substantially all of their assets in other hedge funds, have also fueled this growth.

Dave: What are the parts of a hedge fund?
Hannah: The parts of a hedge fund include the private placement memorandum, the subscription agreement, and the operating agreement for the fund. Hedge fund advisers typically provide information to investors during an investor’s initial due diligence review of the fund, although some, more proprietary, information may not be provided until after the investor has made a capital commitment to the fund, if at all. Most hedge funds provide written information to their investors in the form of a private offering memorandum or private placement memorandum (“PPM”). This reflects market practice and the expectations of the sophisticated investors who typically invest in hedge funds. It also reflects the realization of the sponsors and their attorneys that the exemptions from the registration and prospectus delivery provisions of Section 5 of the Securities Act available under Section 4(2) of the Securities Act and Rule 506 there under do not extend to the antifraud provisions of the federal securities laws. The disclosures furnished to investors serve as protection to the principals against liability under the antifraud provisions. Some of the information may be disclosed less formally in one-on-one conversations between investors and the hedge fund adviser. Hedge fund advisers may also provide information to hedge fund investors in the form of letters, conference calls and financial statements. In addition, some hedge fund advisers may provide prospective investors with access to their prime brokers and other service providers, such as administrators, both during the investor’s initial due diligence of the hedge fund and subsequently.

Hedge fund investors must often spend significant resources, frequently hiring a consultant or a private investigation firm, to discover or verify information about the background and reputation of a hedge fund adviser. In practice, even very large and sophisticated investors often have little leverage in setting terms of their investment and accessing information about hedge funds and their advisers. As a matter of practice, hedge funds generally provide investors with a PPM before an investment is made. As with any other offering solely to accredited investors, there are no specific disclosure requirements that pertain to the PPM under Section 4(2) or Rule 506. While we are not passing on the adequacy and content of PPM disclosure generally, we note that certain basic information about the hedge fund’s adviser and the hedge fund is typically disclosed. The information disclosed in PPMs varies from adviser to adviser, however, and often is general in scope. PPMs generally discuss in broad terms the fund’s investment strategies and practices. They also typically disclose that the hedge fund’s investment adviser may invest fund assets in illiquid, difficult-to-value securities and that the adviser reserves the discretion to value such securities as it believes appropriate under the circumstances. The PPM also may disclose that the adviser may exercise its discretion to invest fund assets outside the stated strategy or strategies. PPMs also generally discuss qualifications and procedures for a prospective investor to become a limited partner, as well as provide information about the hedge fund’s operations. For example, PPMs generally discuss fund expenses, allocations of gains and losses, tax aspects of investing in the fund and may incorporate the hedge fund’s financial statements. PPMs disclose any lock-up period that new investors must observe, as well as laying out the specifics for when investors will be able to redeem some or all of their investments out of the hedge fund. PPMs also may name frequently used service providers to the fund. PPMs may generally disclose potential conflicts of interest to investors, frequently under the heading of “risk factors.” A hedge fund’s PPM may note that the fund’s valuation practices give rise to an inherent conflict of interest because the level of fees that the investment adviser earns is based on the value of the fund’s portfolio holdings as determined by the fund’s adviser. PPMs also may discuss potential conflicts arising from the adviser’s “side-by-side management” of multiple accounts, including the hedge fund, private accounts, proprietary accounts and registered investment companies. A hedge fund’s PPM may also disclose the investment adviser’s conflicts in allocating its time and certain investment opportunities among its clients. Some PPMs spell out allocation policies with respect to limited investment opportunities in great detail, while others may list, and only briefly discuss, the factors on which such allocations will be decided. PPMs also often provide information concerning the use of affiliated services providers, including affiliated broker-dealers. Some PPMs also may note that the hedge fund may direct brokerage business to, and use other services of, firms that introduce investors to the fund. PPMs may disclose that the adviser may use soft dollars to pay for research and other services used by the adviser to benefit other accounts that it manages, and may further disclose that soft dollars.

Dave: Are these documents boiler plate or created individually for each fund?

Hannah: They are created individually for each client.

Dave: Does this paperwork need to be filed with the SEC or anyone?
Hannah: Form D is filed with the SEC and other forms may be required to be filed with each state where investors are located.

Dave: What is the definition of “accredited investor”?
Hannah: The safe harbor protection most often relied upon by hedge funds under Rule 506 exempts offerings that are made exclusively to “accredited investors.” Issuers are permitted under these provisions to sell securities to an unlimited number of “accredited investors.” In addition, if the offering is made only to accredited investors, no specific information is required to be provided to prospective investors. The term “accredited investors” is defined to include: Individuals who have a net worth, or joint worth with their spouse, above $1,000,000, or have income above $200,000 in the last two years (or joint income with their spouse above $300,000) and a reasonable expectation of reaching the same income level in the year of investment; or are directors, officers or general partners of the hedge fund or its general partner; and Certain institutional investors, including: banks; savings and loan associations; registered brokers, dealers and investment companies; licensed small business investment companies; corporations, partnerships, limited liability companies and business trusts with more than $5,000,000 in assets; and many, if not most, employee benefit plans and trusts with more than $5,000,000 in assets.

Dave: Does everyone who invests in a hedge fund need to be an “accredited investor” or high net worth individual?
Hannah: No.

Dave: I have several friends who would love to invest in a hedge fund, but don’t meet the above criteria. Is there anyway around the regulation?
Hannah: Yes, non accredited investors can invest in a hedge fund. It depends on the fund manager’s discretion.

Dave: Does the manager need to have a Series 7 or other licenses?
Hannah: No, a Series 7 is not relevant to this discussion.

Dave: How about registration? Does the manager need to register with the SEC?
Hannah: Yes, in certain cases, given recent law changes.

Dave: Does the manager need to register in the state the fund is domiciled in?
Hannah: Form D needs to filed with the SEC.

Dave: What about the funds trader (s). Do they need to register with anyone?
Hannah: Yes, in certain cases. This requires a state-by-state determination. A fund manager must sign up with their state as the investment adviser if they have less than $25 million under management. Between $25 million and under $30 million under management, the fund manager may choose the regulator—either the state or the SEC. If the fund manager has more than $30 million under management, the fund manager would need to register with the SEC as an investment adviser.

Dave: What if the investors are from different states? Does the manager need to register in every state an investor is from?

Hannah: Yes, usually a notice filing is required as long as they are registered in another state or with the SEC.

Dave: Is this in all cases? What about very small start up funds?
Hannah: It depends on the state and the structure the fund manager opts to use.

Dave: Is there anyway to legally avoid registration?
Hannah: You either have to register or you fall within an exemption.

Dave: If the manager is a CTA does he still need to register as a fund manager?
Hannah: The difference between a CPO and a CTA is that a CTA manages individual accounts, while a CPO manages only the hedge fund, or Pool. Few of our clients remain interested in the CTA option once they realize the administrative hassle associated with managing the separate accounts. No sponsor is needed to take the Series 3 exam. The Series 3 exam is given under the auspices of the NASD’s testing program. Two different testing services provide their services to the NASD.
Unlike a traditional hedge fund (where the SEC may end up being a regulator if enough money is under management), the government regulator that may associated with CPOs is the CFTC—the Commodity Futures Trading Commission.

The CFTC has allowed the National Futures Association (NFA) to become the primary regulator of futures and commodity products (as a Self-Regulatory Organization, similar to the NASD’s status with the SEC). It is my opinion that the NFA is a very effective and competent regulator.

Dave: How about if the manager has a series 7. Is registration still required?
Hannah: A Series 7 is of no particular value to either an RIA or a CPO. If someone has a current Series 7 (they’ve been registered within the past two years with a broker/dealer), they can choose to take the Series 66 instead of the Series 65. The Series 7 plus the Series 66 is always (in all states) equivalent to the Series 65. After two years of not being with a broker/dealer, all prior registrations (such as a Series 7) expire and are no longer valid. Similarly, if someone previously passed the Series 65 but has not had it registered with either a broker/dealer or an investment advisory firm, the exam has expired and will need to be taken again. Some states will not consider someone for investment advisory status unless they were previously registered as a Series 7 with a broker/dealer.

Dave: Ok, now that we have the basics out of the way. What’s the first step someone should take before launching a fund?

Dave: Is there a minimum capital amount that you feel is needed before launch?
Hannah: No.

Dave: What about someone who does not have any investors yet, who just wants to set up the fund structure for the future?

Set up an incubator fund? I know your firm runs some type of “hedge fund incubator” Can you explain what this is?
Hannah: It’s a start up process for a prospective fund manager to develop and document a track record that could be legally marketed to prospective investors when he or she is ready to open the fund to outside investors.

Dave: Do you actually do capital introductions?
Hannah: Yes, often, as a professional courtesy to our clients. We do not accept referral fees from non lawyers, as we are prohibited from accepting such fees by the rules governing the practice of law. We have an extensive network of contacts worldwide. We endeavor to set up our clients for success and look toward a long term relationship as well as build global relationships.

Dave: How about hooking a fledging manager up with a prime broker?

Hannah: Yes, as a professional courtesy to our clients. We do not accept referral fees from non lawyers, as we are prohibited from accepting such fees by the rules governing the practice of law. We have an extensive network of contacts worldwide. We endeavor to set up our clients for success and look toward a long term relationship.

Dave: I see, your firm is really a “one stop shop”. Do you do the back office stuff too?
Hannah: Yes, of course.

Dave: While we are on this topic, what is a “back office”?
Hannah: Many clients are accustomed to being one-person businesses, trading from their home office. They are interested in trading for others to leverage their knowledge and make more money, but they don't want to change how they work. They don't want to have to hire accountants and secretaries, or rent an office or gain tons of paperwork. They don't want to spend their days with attorneys, accountants, consultants and business operation hassles. We provide a full service, virtual Web-based and e-commerce solution takes all the hassle out of entering the hedge fund business. Clients can continue working from home, without any of the above mentioned hassles. We handle all of the charges to your investors for the management fees and the performance allocations as well as prepares the statements for investors. Most of clients use our hedge fund accounting services on a monthly basis; others on a weekly, quarterly, annually basis, or whenever they like. The work product includes NAV, performance records, brokerage statement reconciliation, advisory fee billing, performance allocation, investor changes, and other related reports generated from the software programs.

Dave: When the fund grows, are there capital levels or partner numbers that need to be watched? What I mean is, is there additional regulation, registration, et al on a 100 million dollar fund than there is on a 250k startup?
Hannah: No.

Dave: Recently, I have noticed a proliferation of off shore funds. What exactly is an off shore fund? What reasons would a manager want to set up an off shore fund?

Hannah: The word “offshore” has a certain mystique to many. Offshore hedge funds are investment vehicles organized in offshore financial centers (“OFC”). OFCs are countries that cater to the establishment and administration of mutual and hedge funds (“funds”). Offshore funds offer securities primarily to non-U.S. investors and to U.S. tax-exempt investors (e.g., retirement plans, pension plans, universities, hospitals, etc.). U.S. money managers who have significant potential investors outside the United States and tax-exempt investors typically create offshore funds. In many OFCs, the low costs setting up a company along with a kind tax environment make them attractive to establishing funds. Offshore hedge funds are typically organized as corporations in countries such as the Cayman Islands, British Virgin Islands, the Bahamas, Panama, the Netherlands Antilles or Bermuda. Offshore funds generally attract investment of U.S. tax-exempt entities, such as pension funds, charitable trusts, foundations and endowments, as well as non-U.S. residents. U.S. tax-exempt investors favor investments in offshore hedge funds because they may be subject to taxation if they invest in domestic limited partnership hedge funds. Offshore hedge funds may be organized by foreign financial institutions or by U.S. financial institutions or their affiliates. Sales of interests in the United States in offshore hedge funds are subject to the registration and antifraud provisions of the federal securities laws. Offshore hedge funds typically contract with an investment adviser, which may employ a U.S. entity to serve as sub adviser. An offshore hedge fund often has an independent fund administrator, also located offshore, that may assist the hedge fund’s adviser to value securities and calculate the fund’s net asset value, maintain fund records, process investor transactions, handle fund accounting and perform other services. An offshore hedge fund sponsor typically appoints a board of directors to provide oversight activities for the fund. These funds, especially those formed more recently, may have directors who are independent of the investment adviser.

Dave: Sounds like a good way to avoid taxes. Does the manager of a fund domiciled off shore still need to pay capital gain taxes, etc?
Hannah: The Do’s and Don’t of offshore funds are can be summed up as follows:

Do: Consider setting up an offshore fund is you manage money for either foreign and/or U.S. tax-exempt individuals and businesses. Under U.S. income tax laws, a tax-exempt organization (such as an ERISA plan, a foundation or an endowment) engaging in an investment strategy that involves borrowing money is liable for a tax on “unrelated business taxable income” (“UBTI”), notwithstanding its tax-exempt status. The UBTI tax can be avoided by the tax-exempt entity by investing in non-U.S. corporate structures (i.e., offshore hedge funds).

Don’t: Go offshore to avoid U.S. taxation. This is the wrong reason to consider an offshore fund. In short, setting up an offshore fund is not a tax minimization strategy as U.S. citizens, resident aliens (e.g., green card holders) are taxable on their worldwide income. The U.S. tax results depend on the nationality and domicile of the fund manager and his or her management company.

Dave: Am I able to set up an off shore fund without ever even visiting the country?
Hannah: Yes, of course. Our firm liaisons with foreign legal counsel. Everything is handled on a turnkey basis. You don’t need to stop trading or take a break from the markets. Just call us as we will work around your trading schedule.

Dave: What countries are most hospitable to off shore funds?

Hannah: Investment fund managers typically create offshore funds in Caribbean OFCs, although a European offshore entity may be more appropriate if a significant number of European investors are involved. Funds legally domiciled in OFCs hold around half of the hedge fund assets reported by the TASS hedge fund data base, with the British Virgin Island and the Cayman Islands being the most popular location. It has been estimated that over half of the world’s funds are incorporated in the British Virgin Islands However, management of funds is often conducted in or near major international financial centers such as London and New York although the actual fund is registered in an OFC. Ask where a hedge fund is domiciled and you are likely to hear the name of a handful of places worldwide. In the United States, domestic hedge fund businesses tend to cluster in a few states, in particular California, Delaware, Connecticut, Illinois, New Jersey, New York and Texas. Each state has different tax and regulatory laws. Outside the United States, several centers in the Caribbean and Europe present different benefits and costs to fund managers. Regulatory burdens and expenses can be worth bearing, depending on the nature of the investment vehicle and its clients.

Dave: Is there anywhere you would avoid and why?
Hannah: Any country lacking monetary or political stability.

Dave: Moving onto the next structure. Master-Feeder funds. What are they?
Hannah: The corporate structure of a hedge fund depends primarily on whether the fund is organized under U.S. law (“domestic hedge fund”) or under foreign law and located outside of the United States (“offshore hedge fund”). The investment adviser of a domestic hedge fund often operates a related offshore hedge fund, either as a separate hedge fund or often by employing a “master-feeder” structure that allows for the unified management of multiple pools of assets for investors in different taxable categories. The master/feeder fund structure allows the investment manager to collectively manage money for varying types of investors in different investment vehicles without having to allocate trades and while producing similar performance returns for the same strategies. Feeder funds invest fund assets in a master fund that has the same investment strategy as the feeder fund. The master fund, structured as a partnership, engages in all trading activity. In today's trading environment, a master/feeder structure will includes a US limited partnership or limited liability company for US investors and a foreign corporation for foreign investors and US tax-exempt organizations. The typical investors in an offshore hedge fund structured as a corporation will be foreign investors, US tax-exempt entities, and offshore funds of funds. Although certain organizations, such as qualified retirement plans, generally are exempt from federal income tax, unrelated business taxable income (UBTI) passed through partnerships to tax-exempt partners is subject to that tax. UBTI is income from regularly carrying on a trade or business that is not substantially related to the organization's exempt purpose. UBTI excludes various types of income such as dividends, interest, royalties, rents from real property (and incidental rent from personal property), and gains from the disposition of capital assets, unless the income is from "debt-financed property," which is any property that is held to produce income with respect to which there is acquisition indebtedness (such as margin debt). As a fund's income attributable to debt-financed property allocable to tax-exempt partners may constitute UBTI to them, tax-exempt investors generally refrain from investing in offshore hedge funds classified as partnerships that expect to engage in leveraged trading strategies. As a result, fund sponsors organize separate offshore hedge funds for tax-exempt investors and have such corporate funds participate in the master-feeder fund structure. If US individual investors participate in an offshore hedge fund structured as a corporation, they may be exposed to onerous tax rules applicable to controlled foreign corporations, foreign personal holding companies, or a passive foreign investment companies (PFIC). To attract US individual investors, fund sponsors organize separate hedge funds that elect to be treated as partnerships for US tax purposes so that these investors receive favorable tax treatment. These funds participate in the master/feeder structure. Under the US entity classification (i.e., check-the-box) rules, an offshore hedge fund can elect to be treated as a partnership for US tax purposes by filing Form 8832, "Entity Classification Election," so long as the fund is not one of several enumerated entities that are required to be treated as corporations.

Arch Crawford: Monster Bear On The Way!?

2010-08-27T07:43:00.005-05:00

The following is an interview I did in 2005 with Arch Crawford. A colorful and fascinating character in the market's lexicon. Read the full interview prior to casting judgement. He just called for the mother of all bear markets to start on July 26th, 2010. What he calls the "Cardinal Climax". His DJIA stops are at 11466. time will tell, Enjoy!

I fully realize that this is a highly controversial and unusual subject, however, Arch has one of the best
documented historic records for correct market calls of any market analyst. In fact, over the last 3 and 6
month time frames,Timer Digest, has ranked him #3 of all market letter writers. Jump on board for a
journey into this esoteric subject!

Dave: How are you today, Arch?

Arch: Very well, thank you.

Dave: Let's start at the beginning. What first got you interested in the financial markets?

Arch: I always loved numbers as a child and used to extract square roots for fun and I saw my Father
looking in the paper and there's this whole page of numbers. I loved the numbers so I started watching the
stock market, pulling out stocks under $10 through the A's, B's and halfway through through the C's--and
there were a lot of them in 1954. The methods I studied were basically technical. In 1960, I kept a chart of
US Steel --there was a big steel strike--and I kept the headlines on the chart. And it made no sense
whatsoever.

Dave: There was no correlation between the headline and the stock movement?

Arch: Exactly. One of the first books I read was Darvas' How I Made $2 Million In The Stock Market. He
was a dancer and he used a simple trend-following method. A couple of years later I went to work for
Merrill Lynch in Raleigh N.C., putting up prices on a chalkboard and 2-3 months after that they got an
electronic board and I became an assistant in the cage.
Dave: This is the early '60s?
Arch: Yes, this is 1961. I had been studying math and physics at the University of North Carolina and I
started off with really great grades and they were beginning to drift lower and lower and I figured I would
go do what I wanted to do before I got thrown out, so I left while I still had decent grades. I told Merrill
Lynch "This is what I want to do with my life, send me to New York" and they said,"don't be ridiculous."
So later, after I'd been there a while I said I quit, I'm going to New York and look for a job. They said
"Don't do that, we'll transfer you." They said "What department would you like?" and I told them technical
research. They sent me right up to the research department but the technical things I was doing at that time
was I was actually drawing the weekly charts of Merrill Lynch's industry specialists and that took me three
days to do 45 charts. While I was in Raleigh the commodity guy there got me Edwards & McGee and they
were getting the trendline charts from Commodity Research Bureau and it had 600 charts every week. I
use to draw all the lines and supports and resistance and trendlines and look at the moving averages and
make a projection as to what was going to happen and go back and look at last week's while I'm doing this
week's and see what worked out and what didn't. I'm self-taught from that standpoint, using Edwards &
McGee. I was spending every night in the library. I made friends with the librarian--an elderly Irish lady--
and I bought lottery tickets from her, so she let me stay in the library at night and lock it up at 12:00. I was
looking at the chart of the market and it was beginning to form a multiple head and shoulder top pattern.

Dave: When you say the market, you mean the Dow?

Arch: The Dow Jones, yes. I said if this pattern remains symmetrical, the market will top in the middle of
December and it will crash next year in 1962. It topped in the middle of December. It finished the head
and shoulder top and broke down on April 13, the day Kennedy made the steel companies roll back the
price increases. That broke the neckline and it started down and then it drifted down and rallied a bit and
drifted down and rallied a bit and then started turning very nasty and we went into the crash of '62. And I
was going around saying "it's going to crash" and I got the nickname "Crash Crawford." And then it
actually did it--the worst crash since 1929.
Dave: That was your first major accurate prediction?
Arch: Yes. I also turned 21 in the meantime on April 17th and inherited $1000 from a sweet aunt who had
died and I put it all in puts and made seven times my money, so that was my beginning.

Dave: How did you go from being a technical analyst to a financial astrologer?

Arch: On the day before my birthday, in 1963, the Wall Street Journal had a front-page article about three
guys who were predicting the market using astrology. The credible one was Lt. Cmdr. David Williams
who had been head of the purchasing department for Con Ed for 40 years and a Lt Cmdr in the Navy in
the Big War and he was a fine gentleman. Williams had written a pamphlet called Astro-economics in
1955. I went out and bought it. Next to that pamphlet in this metaphysical bookstore was Donald Bradley's
Stock Market Prediction and he had developed a model using all two-planet pairs. I started keeping his
model by hand and--thank God for computers! It was a lot of calculation but it was worth it. The market
would follow that line for several months and then if would go off and do something else and for several
months it would be off of that line and then it would come back onto it sometime later.

Dave: What particular planets?

Arch: All of them. Ten counting the Sun and moon. The Moon didn't count in them because it was too
quick. What I found in following that for a while was that when there is a large configuration involving
several planets it becomes what the Mandelbrot set, the chaos people, call a "strange attractor" which
would take the market up or down to the date of this large configuration was most exact or to the last
aspect between whatever planets were involved and then the market would turn and go the other way.

Dave: When you say configuration, what do you mean?

Arch: A number of planets in harmonic relationship. A harmonic relationship of one means two planets
have the same longitude in space.

Dave: They're in line with each other

Arch: Yes. Looking out from Earth, they're in the same place. A harmonic of two is like a full Moon
where one is opposite the other separating the sky into two different parts, the left half and the right half.
The second harmonic is 180 degrees, which is one-half of the 360 degree circle, and the third harmonic is
120 degrees which is one-third of the 260 degree circle. So a trine is 120 degrees and a square is 90
degrees. These are the ones most traditional astrologers use.

Dave: You noticed that these configurations would affect the market,am I following you?

Arch: Oh absolutely. When several planets are involved instead of just these two-planet pairs, it becomes
a unique event and that's what makes it a strange attractor and the market will pull up to that day and then
down or down to that day and then up.

Dave: How many times a month do these strange attractors occur?

Arch: Two to three times a year on a good year. Other than that they follow the Bradley somewhat.

Dave: You found David Williams' pamphlet and the Bradley book...

Arch: First I got a book of planetary positions and I noticed when they were in the one-third and one-sixth
harmonic harmonic the market tended to go up and when they were in the second and fourth harmonic it
tended to go down. That's what I entered into my notes and that's what Williams said in his book. In terms
of statistics there are so many factors involved that a lot of scientists can look at this and they will say
"Ahh, there are not statistically meaningful" but you can combine them in two or three or four cycles
together and they become extremely meaningful.

Dave: These strange attractors that occur two to three times per year... is it something that changes the
trend of the market?

Arch: Yes. It'll either take them up to that day and drop it or down to that day and rally it.

Dave: This really sounds crazy. What's the theory behind the concept? Why does it seem to work?

Arch: You got me. The closest I know about was from another guy named John Nelson, who was a radio
propagation specialist for RCA Corporation, and they put him on the top of a building with a telescope
and said "figure out when the darn sunspots are going to blow up" because before the days of the satellites
they were sending dataflow across the North Atlantic. When the sunspots hit they had to switch to sending
to South America and then over to Africa and then back up to Europe and it was time consuming and
costly so they wanted to know when these things were going to happen. Nelson by regular cyclical means
got up to a 65% accuracy rate which was not satisfactory at all and someone said "why dont you look at
the planetary alignment around the sun at the times of these sunspots because that may give you a handle
on what you want to look at." So he took the 13 worst magnetic storms on the Earth that were on record
with RCA and drew the horoscope heliocentric chart--heliocentric meaning the Sun in the middle. He was
totally blown away by all the harmonic ratios in the days that these sunspots popped off in a big way.
Dave: So it's basically somehow affecting the magnetic field which in turn is affecting people's behavior?
Arch: Yes. Nelson and I figured that if there is a powerful alignment heliocentrically they'll blow the
sunspots out and if it happens to be a high tidal force--a new Moon or full Moon--then the ionized layer of
the Earth's atmosphere will be brought down close to the Earth and make people crazy.

Dave: Let me see if I follow you. It affects people's emotions--making them feel elated--therefore they
will buy stocks, and when they're depressed hit they will sell stocks?

Arch:When the electrons hit it tends to be depressive and when the protons hit hit it tends to be elating and
so if you get a major solar flare it tends to throw a lot of heavy protons but the electrons get there first so
the first couple of days the market drops and then when the protons get there it goes screaming the heck
up. But there are a lot of complications with that. In the 1987 crash, there were the largest number of
electrons hitting the atmosphere that I had ever seen for the longest period of time. When the electrons got
over 1 to the third per cubic centimeter, that's when the market started coming apart. It proceeded on down
on Friday--of course that was options expiration--and crashed on more Monday. The strategy at that time
was if the market went down a certain amount you sell S&P futures are you are protected to whatever
level. The system they had would protect you down to five standard deviations from normal. Monday, it
was a seven standard deviation event and the whole system was threatening to come down.

Dave: What happened the day after that?

Arch: The next morning it was down like another 200 points in 15 minutes with hardly any stocks open.
The Fed said "anybody comes in from Wall Street that wants money, give it to them" and the market came
roaring back and was positive by 10:00.

Dave: Let's talk about another astrological event--the eclipse. Are there any correlations between market
movements and eclipses?

Arch: Yes. They are the most powerful events, taken individually. W.D. Gann wrote seven books about
the market and he was an astrologer but he rarely said anything specifically about astrology in all of those
books.

Dave: He was very vague in everything he wrote.

Arch: Well he was very secretive about it and swore the people around him to secrecy relative to
astrology. David Williams actually introduced me to a friend of his who had worked for Gann and he said
"Yeah he swore us to secrecy but we didn't know anything anyway." (laughs)

Dave: What happens during a solar eclipse?

Arch: The solar eclipse tends to have a longer-term effect, not necessarily so much on the day it happens--
in other words it will be a more important event, but the lunar eclipse tends to be more dramatic for one
day or two days.

Dave: How many eclipses are there per year?

Arch: There are 3-5 eclipses per year. Around the time of the 1987 crash, The Wall Street Journal ran an
article about a guy who had come up with a Mayan calendar date that was very important, and that was
supposed to be August 17 and all the new new age people were going to sacred sites and dancing and
drumming and praying and meditating and doing what they do. It was called the "Harmonic
Convergence." It was supposed to be this Mayan date. Well I looked at this date and I didn't see anything.
I looked forward and here seven days later was the tightest 5-body conjunction in at least 800 years and
they were all visible bodies. And I said "that is what the Mayans were talking about." I said "this market
will peak on August 24, give or take three days, after which we will have a horrendous crash." The market
peaked at Noon on August 25 and it dropped and dropped and it stopped and turned violently on the day
of the solar eclipse on the Fall equinox and it had the biggest up-day in history, to that date, in points. It
broke down in the morning, scared the heck out of traders, turned around and had the biggest up-day in
history. Then it rallied for two weeks; at the top of that rally we had the biggest earthquake in Southern
California in at least seven years and two days later we had the lunar eclipse, which was the biggest down
day in history to date. So the lunar eclipse touched off the earthquake.

Dave: Does astro work the same across all markets?

Arch: These are things that act on emotion and it depends on what markets are moving emotionally at the
time. Another thing I discovered in calculating these cycles was the Mars/Uranus cycle and it's just about
a two year cycle. The market does not crash every two years but every crash that's taken place in the last
100 years took place in the same 40% of that cycle...every one. So I watch those periods whether we are
technically weak or strong, whether we are set up for a possible bad time or not. I said on September 4,
2001 "this market may crash by October 5." The week after the towers fell we had the worst percentage
decline since the fall of France in 1940. I also said that there was an event--I think it was Mercury
changing direction on the Fall equinox which was September 21--and I said that may make that timeframe
more important than normal, and that was the low actually, the 21st--within one day I think Friday was the
low and the equinox was Saturday morning. Also, in that September 4, 2001 letter I said the United States
will be at war around the weekend of the 7th or 8th of September
Dave: Impressive. What do you see for the near future?
Arch: There was nobody else--astrologer or psychic or card reader or anybody else--that had anything
close to that. We are not in that crash period now but the Bradley model shows a high around the middle
of July and goes down all the rest of this year. I think it looks pretty bad right now and it could turn down
right now. We may have a hard hit for 2-3 days next week and then a rally into July, which may or may
not make a higher high and then down the rest of the year. The next crash cycle takes place from August
'06 to March '07.

Dave: When you say crash cycle, you mean a major 1987 style event?

Arch: Yes, The Mars/Uranus cycle, where every crash has taken place.

Dave: What do you see for gold?

Arch: I believe gold will hit a high maybe Monday and will then drop into the summer and after that we
will have a super up-move in it beginning around Labor Day and going for close to a year. Gold, oil,
silver, metals, CRB Index generally. Inflation hedges are ruled by Neptune for whatever reason. I've never
paid any attention to rulership they were telling me that when Saturn came up to 0 degrees Leo the price
of gold would drop because Saturn is contractive and I said that's horsepuckey. Well, the day that Saturn
hit Leo the IMF announced it would sell tons and tons of gold over months and months of time and it was
the only limit move that year. But, it was the day Saturn hit in apparent right ascension, which is the way
astronomers look at the sky, not ecliptic longitude, which is the way astrologers look at the sky. So I
learned a little about rulership stuff and I said "Oh my God." Why should some rulership thing work? I
don't know...

Dave: Is the rulership something astrologers learned from the ancients?

Arch: The ancients had it pretty much locked up in terms of what was supposed to happen theoretically in
those times, yes.

Dave: Arch, we're almost out of time. I look forward to speaking with you again soon.

Arch: It's been fun and I always enjoy talking about this work; it's meant a lot to me for many many years.

Schonfeld's Warning Shot: Death of Day Trading??

2010-07-07T16:38:00.002-05:00

Steven Schonfeld, of the hugely succesful day trading firm, Schonfeld Securities, has just laid off a substantial portion of his traders. Citing an inability to compete with HFT firms and succesful black box type operations. Is this a warning shot making it clear that day trading as we know it is over? Is it simply one old line firm admitting they can't compete any longer? Is it just a strategic move by Schonfeld to up profits? Time will tell, but one thing is for sure-- when Steven Schonfeld speaks I strongly suggest listening....

Here is the letter sent out to Schonfeld's traders:

‘On December 5, 1988 we started Schonfeld Securities. Very soon after, we started hiring prop traders, and many years later formed “Opus Trading Fund”.

Prop trading has always been and will always be an extremely important part of our business and certainly the one that is closest to our hearts. The best Schonfeld traders will always have a place to trade and the capital to maximize their earnings potential. We are committed to them and will always strive to provide an environment for them to succeed. Sadly, however, we are re-thinking the notion that less skilled and less successful traders can be here forever without producing sufficiently for themselves and the firm.

For over 21 years we have always done everything we could, with the traders' best interests in mind, to provide careers and opportunities for our traders.

We have always cared more than you could imagine for your careers, happiness, well being and future.

We truly admired many of your passions for trading and for the markets. Over the years we have stood by you and you have stood by us as well. There has been real loyalty on both ends and don’t ever think we took your loyalty for granted for one second.

Bull and bear markets come and go. Good trading markets come and go. But unfortunately, our vision of the future of trading has changed. It is getting much tougher for traders to make a living or get by. The direct competition from black boxes, stat arb and high frequency trading which continues to grow at exponential rates is here to stay and has caused us to change our outlook for lesser skilled traders.

Based on the above competitive changes to the trading arena, we feel we are doing an injustice to both our lesser skilled traders and the firm by keeping them around. At best, they will barely get by and that’s not why we are in his business or what they should be here for.

Unfortunately the career of trading is not a good option for lesser skilled traders going forward. We will be letting go many of these traders over the next 6-12 months. It is with deep regret and the hardest thing we have had to do since the inception of the firm in 1988. It truly saddens us to do this, but we are doing the traders who will not be making a living going forward a favor, so they can venture into different careers.

It is even more painful since many of you have been so loyal and really good guys.

To those of you that we ultimately let go, we deeply apologize but whether you understand it immediately or not, it truly is best for you.

After discussions with the managers and exhaustive quantitative research our objective will be to reduce the number of traders we have down to those that we believe will make a great or very good living trading for years and years to come with the necessary skills needed.

The traders who are newer to trading will be given some extra time to potentially have their skills stand out. The days of a trader making a living by generating $50k to $75k of adjusted gross annually are over. There is room for only highly motivated, skilled and developing traders that can add value to each other and the firm.

Once again, we wish it was different and are extremely sorry for those that don’t make it.

Goldman SEC Witch Hunt?

2010-04-18T15:56:00.007-05:00

Is Goldman innocent of the SEC accusations in the ABACUS 2007-ACI CDO transaction? I would argue that the SEC may have over stepped its bounds in filing the suit. Both sides of the deal are extremely sophisticated investors. We are not dealing with mom and pop dabblers here. Goldman hired a firm to review and approve the legality of the deal prior to execution. Needless to say, it passed the test. Since when does Wall Street ever disclose the otherside of a transaction's information? Never, in fact, it would be totally wrong. Goldman claims to have lost money on the transaction to the tune of up to $90 million. The question is was there fraud in putting together the transaction? If housing maintained its value, the CDO would have been profitable. Could have anyone been able to predict when the market would collapse?

It appears to me that the the SEC may be using this case to TEST their regulatory ability for the coming changes in financial regulation against the biggest fish in the pond. It will be interesting to see how this plays out. My bets are on Goldman.

From Bloomberg:

By Christine Harper
April 17 (Bloomberg) -- Goldman Sachs Group Inc.’s efforts
to burnish its reputation just got a lot tougher.
Chairman and Chief Executive Officer Lloyd Blankfein, 55,
spent the last year defending the firm against criticism from
politicians and pundits, who decried Goldman Sachs’s profit in
the aftermath of the financial crisis and its sale of mortgage
securities that went sour. Now the U.S. Securities and Exchange
Commission is charging the company with fraud.
On Goldman Sachs’s list of business principles, “clients’
interests always come first” ranks highest. The SEC paints a
different picture. The firm failed to tell investors when
selling them a so-called collateralized debt obligation tied to
mortgages that the package had been designed to fail by hedge
fund Paulson & Co., which profited from the losses, the agency
alleged. Goldman Sachs said it will contest the case, calling it
“completely unfounded in law and fact.” Shareholders weren’t
comforted: The stock plunged the most in more than a year.
“The risk is long-term reputational,” said Benjamin
Wallace, an analyst at Grimes & Co. in Westborough,
Massachusetts, which manages $900 million and doesn’t own
Goldman Sachs stock. “People are going to be more inclined to
look at Goldman Sachs and think, ‘Who’s on the other side of
this trade?’”
Goldman Sachs sank 13 percent to $160.70 in New York Stock
Exchange composite trading, the biggest one-day percentage
decline since January 2009. The cost to buy insurance against a
default on Goldman Sachs debt jumped 35 basis points, or 0.35
percentage point, to 130.5 basis points in the biggest increase
in a year.

‘Worst-Case Liability’

The suit’s financial cost to Goldman Sachs, whose $13.4
billion profit last year set a record for a Wall Street
securities firm, is likely to be manageable and a settlement is
unlikely before 2011, according to Brad Hintz, an analyst at
Sanford C. Bernstein & Co. in New York.
The “worst-case liability” if the SEC case succeeds would
be $706.5 million hit to net income, or $1.20 in earnings per
share, Hintz estimated in a note to investors yesterday. Follow-
on claims from investors will “face a challenging hurdle”
because the securities were sold in a private placement only
available to sophisticated investors, Hintz said.
Some analysts said that a more important problem is that
the SEC’s focus on Goldman Sachs shows the firm is under a
harsher political and regulatory spotlight than competitors.

Goldman Agenda

Although the SEC warned Goldman Sachs last year that it was
investigating this transaction and might eventually file
charges, the regulator didn’t notify the firm that it planned to
file the suit yesterday, according to a person close to the
firm. People within the company interpreted it as a sign the SEC
has become unusually adversarial, the person said.
“At the moment, it looks as if the SEC is pursuing an
agenda aimed specifically at Goldman,” Chris Kotowski, a
managing director at Oppenheimer & Co. in New York, wrote in a
note to clients. “We believe that GS is probably vulnerable to
more charges and outsized fines, and we are for now downgrading
the stock to perform from outperform.”
Reactions to the SEC suit on Capitol Hill underscored
Goldman Sachs’s role as a lightning rod for political outrage.
Senate Banking Committee Chairman Christopher Dodd, a
Connecticut Democrat, said the case demonstrates the need for
Wall Street reform. House Minority Leader John Boehner, an Ohio
Republican, said the SEC suit provides further reason to oppose
the Democrats’ legislation.

Blankfein’s Prospects

“These are very serious charges against a key supporter of
President Obama’s bill to create a permanent Wall Street bailout
fund,” Boehner said in a statement after the SEC case was
announced. The bill “gives Goldman Sachs and other big Wall
Street banks a perpetual, taxpayer-funded safety net by
designating them ‘too big to fail.’”
Corporate customers and institutional investors will
continue to rely on Goldman Sachs and the company’s business is
likely to survive and thrive, said Richard Bove, an analyst at
Rochdale Securities in Lutz, Florida. Still, he said Blankfein
and Chief Financial Officer David Viniar, 54, may need to step
down “for the devastating decline in this company’s persona.”
“These men are brilliant and capable but this situation is
now out of hand,” Bove, who recommends buying Goldman Sachs
shares, said in a note to investors. “There is a deep bench at
Goldman and these executives, despite their capabilities, can be
replaced.”
Lucas van Praag, a spokesman for Goldman Sachs in New York,
declined to comment.

Questions for Viniar

Blankfein, who has worked at Goldman Sachs since joining
its commodities division, J. Aron & Co., in 1982, succeeded
Henry Paulson as chairman and CEO in 2006 when Paulson left to
become Treasury Secretary in the Bush administration. The next
year, Goldman Sachs set a Wall Street profit record helped by
bearish bets on subprime mortgage investments. Blankfein
received a $67.9 million bonus, an all-time high for the CEO of
a securities firm.
Viniar, the firm’s chief financial officer since 1999, is
one of the most public faces of Goldman Sachs. He fields
questions from analysts and investors on the firm’s results
every quarter. He’s slated to face their questions again next
week, when Goldman reports first-quarter figures.
In their annual letter to shareholders last week, Blankfein
and Goldman Sachs President Gary Cohn said most of the firm’s
business is aimed at serving sophisticated clients capable of
making their own decisions.

Tourre and Paulson

“The investors who transacted with Goldman Sachs in CDOs
in 2007, as in prior years, were primarily large, global
financial institutions, insurance companies and hedge funds,”
the letter said. The firm “did not know whether the value of
the instruments we sold would increase or decrease.”
That contrasts with the SEC’s allegations. The suit says
Fabrice Tourre, a 31-year-old vice president at Goldman Sachs,
knew that the Paulson hedge fund firm had helped select the
assets backing a collateralized debt obligation called Abacus
2007-AC1, even as Paulson planned to bet on it failing. The SEC
says Tourre misled a collateral manager, ACA Management LLC, and
an investor, IKB Deutsche Industriebank AG, about Paulson’s
role.
“Marketing materials for Abacus 2007-AC1 were false and
misleading because they represented that ACA selected the
reference portfolio while omitting any mention that Paulson, a
party with economic interests adverse to CDO investors, played a
significant role in the selection of the reference portfolio,”
the SEC argues.

‘Cynical, Savage’

Tourre, reached yesterday at his office in London, where he
is now an executive director, declined to comment. Annette
Littmann, a spokeswoman for Duesseldorf-based IKB, said “IKB is
aware of the SEC’s lawsuit and supported the SEC upon request.”
The SEC’s accusations may fuel critics’ claims that the
firm put its own interests ahead of clients’ and profited from
practices that led to the financial crisis.
“Goldman Sachs said they sold only to sophisticated
investors, but the damage they did was so pervasive that
unsophisticated investors got snared in their web too,” said
Janet Tavakoli, president of Tavakoli Structured Finance Inc. in
Chicago.
Christopher Whalen, a bank analyst at Torrance, California-
based Institutional Risk Analytics, told investors yesterday
that “this litigation exposes the cynical, savage culture of
Wall Street that allows a dealer to commit fraud on one customer
to benefit another.”

‘Out of Character’

William Cohan, a former investment banker who is writing a
book about Goldman Sachs, said the accusations are surprising
because the firm generally is diligent when it comes to legal
disclosures. That the suit names none of Tourre’s superiors may
signal that senior management can escape blame, he said.
“It just strikes me as being entirely out of the firm’s
character, as much as people like to hate them, because they are
much too careful on the whole legal front and disclosure
front,” Cohan said in an interview.
The SEC has “only named a VP, it’s not going up the chain
here at the moment, so I think that’s an important distinction
to make,” Cohan said. “There are bad apples in any firm.”
In a statement, Goldman Sachs made what it called “four
critical points” in its defense against the SEC’s accusations.
The first was that Goldman Sachs itself lost more than $90
million because it had an investment in the deal that
overwhelmed the $15 million it made in fees.

Paulson Statement

The firm said it provided “extensive disclosure” to IKB
and ACA about the risk of the underlying mortgage securities. It
said that ACA, whose $951 million investment made it the most
exposed to risk, selected the portfolio. And the firm disputed
the SEC’s accusation that Goldman Sachs told ACA that Paulson &
Co. was going to be an investor in the CDO.
Paulson’s firm, which hasn’t been charged with any
wrongdoing, said in a statement that “ACA as collateral manager
had sole authority over the selection of all collateral in the
CDO” and that Paulson didn’t “sponsor or initiate” Goldman’s
Abacus program. The fund says that while it did purchase credit
protection from Goldman Sachs on some Abacus securities, it
wasn’t involved in the marketing.
Goldman Sachs’s loyalty to clients has been questioned
before. E-mails released by congressional investigators earlier
this week show that Washington Mutual Inc.’s former CEO, Kerry
Killinger, didn’t want to hire a Goldman Sachs banker in 2007 to
help with the bank’s credit problems before it collapsed.

Best Models, Brightest Minds

“They are smart, but this is swimming with sharks,”
Killinger wrote in an Oct. 12, 2007, e-mail to a deputy. “They
were shorting mortgages big time while they were giving CfC
advice,” he added, referring to Countrywide Financial Corp.,
the home lender that ran short of cash the same year.
One investor said that perception hasn’t prevented Goldman
Sachs from winning client business before and he doesn’t think
it will now.
“There’s that cachet that they’ve had that not only are
they the smartest guys in the room, but they might be playing
you,” said Peter Sorrentino, a senior portfolio manager at
Huntington Asset Advisors in Cincinnati, which manages about $13
billion, including Goldman Sachs stock. Still, “the people at
Goldman really do have the best models, they do have the
brightest minds” and they will keep winning clients.
He said the market reaction to the SEC’s suit probably
reflects fear that wider criminal charges could follow, and
represents a good opportunity to buy the stock.
“I’m just happy that it wasn’t the FBI kicking in the
door,” Sorrentino said.

*T
For Related News and Information:
On Goldman and legal issues: GS US TCNI LAW
On Goldman and CDOs: GS US TCNI CDO
Top finance news: FTOP
*T

--With assistance from Shannon Harrington, Bob Ivry, Bradley
Keoun, Dawn Kopecki, Matthew Leising and Michael Moore in New
York, Joshua Gallu in Washington, and Jann Bettinga in
Frankfurt. Editors: Robert Friedman, Otis Bilodeau.

To contact the reporter on this story:
Christine Harper in New York at +1-212-617-5983 or
charper@bloomberg.net

To contact the editor responsible for this story:
Alec McCabe at +1-212-617-4175 or
amccabe@bloomberg.net.

Companies:
GS US
573991Z US

Categories:
NI BNK
NI SCR
NI FIN
NI US
NI NY
NI LAW
NI GOV
NI SEC
NI ABS
NI BON
NI CRIME
NI CRUNCH
NI COS
NI MARKETS
NI GEN

7 Critical Stocks For Monday

2010-04-16T16:23:00.003-05:00

Investors can expect another full plate of important earnings on Monday. Leading indicators and several T-bill auctions complete the economic release picture. Stocks plunged today after the SEC accused Wall Street heavyweight, Goldman Sachs of fraud in the Abacus CDO transaction. The allegations focused on supposed misstatement of facts. Financial shares led today's sharp sell off. Even Mother Nature roared with the bears as a volcanic ash cloud disrupted airline transportation worldwide. The U.S. dollar was the beneficiary of the selling as capital sought the safety of the Greenback. The DJIA plunged 125.91, the tech heavy Nasdaq fell 34.43, and the S&P 500 gave back 19.54.

Here Are 7 Stocks You Need To Know For Monday.

Citigroup (NYSE:C - News) is expecting to break even at an EPS of zero prior to the opening bell. The Stock PowerRating for C is 3.

Controversial defense contractor, Halliburton Company (NYSE:HAL - News), has analysts awaiting a, before the bell, EPS of 25 cents. The Stock PowerRating for HAL is 5.

Drug kingpin, Eli Lilly and Company (NYSE:LLY - News), is looking at an EPS of $1.10 prior the 9:30 AM EST market opening. The Stock PowerRating for LLY is 5.

Computer stalwart, International Business Machines (NYSE:IBM - News), reports after the close with a forecast EPS of $1.93. The Stock PowerRating for IBM is 5.

A 95 cent loss awaits investors in Zions Bancorp (NasdaqGS:ZION - News) after the closing bell. The Stock PowerRating for ZION is 2.

Goldman Sachs (NYSE:GS - News) is vigorously defending itself from SEC CDO trade fraud allegations. The Stock PowerRating for GS is 4.

Bank of America (NYSE:BAC - News) posted its first gains in three quarters on loan loss declines and investment banking. The Stock PowerRating for BAC is 3.

The Mother Of All Bulls!!!

2010-04-14T09:08:00.002-05:00

The mother of all bull markets is upon us! As you know, we went LONG on April 6th and have continued to hold the positions. We believe that JPM's earnings this morning are a precursor to a monster upmove in stocks. We are fully expecting the DJIA highs to be taken out by April 15th, 2012,on the outside. It may be much sooner!

Staying Long DJIA

2010-04-12T21:00:00.002-05:00

All Out Longs Triggered! Long DJIA

2010-04-06T18:31:00.002-05:00

Today's pull back in the DJIA triggered our system to go ALL IN longs with the YM contract. We are aggressively long from 10903 YM. To the MOON, ALICE !!

Emergency Fed Meeting: Bull Killer Or April Fools?

2010-04-05T07:17:00.002-05:00

On Friday, April 1st, I was advised that the Federal Reserve Board will be holding a previously unannounced meeting to review and determine advance and discount interest rates on Monday, April 5th at 11:30 AM. I was first notified of the meeting by the notorious and very controversial economic and hedge fund blog, Zero Hedge. Without hesitation, I instantly thought this was some kind of April Fools joke by a prankster embedded inside Zero Hedge. I know these guys are dialed into some fairly high levels of information flow but being April Fool’s day it had to be a joke, right? The FOMC minutes are on Tuesday, why on earth would a meeting be needed on Monday unless some kind of major change is underway? Checking the major news outlets over the weekend, I have found nothing about this meeting. However, multiple blogs and trading sites have picked up on the news. Feeling very concerned, I went directly to the Federal Reserve’s website to confirm or deny this troubling rumor. Lo and behold, I discovered that the meeting is actually taking place! The following is directly from the Feds site: http://www.federalreserve.gov/boarddocs/meetings/2010/20100405/advancedexp.htm

Advance Notice of a Meeting
under Expedited Procedures
It is anticipated that a closed meeting of the Board of Governors of the Federal Reserve System at 11:30 a.m. on Monday, April 5, 2010, will be held under expedited procedures, as set forth in section 26lb.7 of the Board's Rules Regarding Public Observation of Meetings, at the Board's offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.
Meeting date: April 5, 2010
Matters to be Considered:
1. Review and determination by the Board of Governors of the advance and discount rates to be charged by Federal Reserve Banks.
A final announcement of matters considered under expedited procedures will be available in the Board's Freedom of Information and Public Affairs Offices and on the Board's Web site following the closed meeting.
For more information please contact: Michelle Smith, Director, or Dave Skidmore, Assistant to the Board, Office of Board Members at 202-452-2955.
Supplementary Information: You may call 202-452-3206 beginning at approximately 5 p.m. two business days before this meeting for a recorded announcement of any bank and bank holding company applications scheduled for the meeting; or you may contact the Board's Web site at http://www.federalreserve.gov for an electronic announcement about applications and other expedited items, as well as procedural and other information about the meeting.
Dated: April 1, 2010

Unless Ben Bernanke and the boys are playing some kind of prank, it looks like this meeting is actually going to be happening. Traders need to be extremely vigilant Monday morning until the results of the meeting are known. A rate change sending the markets into chaos may be the short term fruit. Be extremely cautious!!

The Rise Of Triple Leveraged ETF's

2010-03-26T13:36:00.003-05:00

With the bull in full effect, I thought it was apropo to revisit my intro brief on
3X ETFs

I work with a niche fund of funds and hedge fund advisory business. We are always on the outlook for new managers and strategies that provide the edge our clients demand in this difficult environment. Earlier in the year, several managers approached me with complex arbitrage strategies with ETFs.

One stated that the new triple leveraged funds from Direxion will work amazingly well with his rocket science type tactics. After the initial surprise of learning that these products even existed wore off, I decided to look a little deeper into these ultra leveraged ETFs.

If cutting edge fund managers were looking at them, perhaps opportunities exist within these esoteric products for the average trader. Let's take a closer look at these aggressive leveraged animals and see how they can be used to boost your portfolio returns.

Are you new to exchange-traded funds (ETFs)? Be sure to read our ETF primer, ETF Basics: What You Need to Know About Exchange-Traded Funds.

Direxion is the primary firm that offers the tripled leverage ETF products. They have been operating for 11 years and first introduced the so called triple leverage index fund in 2006. However, just in May of this year, they rolled out an entire suite of these products across a wide range of underlying indexes. I stated "so called" due to the fact that these ETFs are leveraged within 50 basis points of the 300X leverage, therefore the common name is a bit of a misnomer.

However, it's a good marketing tool for the products, and they are the highest levered ETFs available to investors. What this means is for every point the underlying instrument/index moves, these products move 2.5 to 3.5 times that amount. For example, if the S&P 500 moves one point up, the ETF moves 2.5 to 3.5% points. As you can imagine this leads to wild gains and losses for traders speculating with these tools. They are becoming very popular among traders with the most traded ones approaching 10 million per day.

The heaviest traded ones include the Direxion Large Cap Bear 3x Shares ( BGZ | Quote | Chart | News | PowerRating), the Direxion Large Cap Bull 3X Shares ( BGU | Quote | Chart | News | PowerRating) and the Direxion Financial Bull 3x Shares ( FAS | Quote | Chart | News | PowerRating). This final one is appropriate ticker name with the first 3 letters of the word FAST! Direxion classifies the ETFs as Bull or Bear. They further break the categories down into Domestic Bull, Domestic Bear, International Bull, International Bear, Commodity, Currency Bull, Currency Bear, Fixed Income Bull, Fixed Income Bear, and finally the basic Money Market fund. There are several funds under each of these categories, except the Money Market fund, of course. As you can see, there is something for almost every trader in this fund family. Not all of the funds are 250 times levered; here is a screen shot of the Direxion page showing the exact funds, their symbols and leverage amount: http://www.direxionfunds.com/products.html.

Why would a trader use these types of products? As you can imagine, the returns have been shocking in both directions this year. One of the bullish domestic index funds is down over 80% this year and, as you can expect, the bearish domestic names are up over 100%. The simplest reason traders would add these products to their portfolio of tools are to magnify gains when speculating in the market. Less capital goes further, more bangs for your buck, so to speak. However, it's critical to ALWAYS keep in mind that this kind of leverage, or any leverage for that matter, is a two edged sword. You can lose just as fast as you can win when trading these volatile products. Several of the other reasons tripled leveraged ETFs make sense include:

Hedging - Purchasing tripled leverage ETFs inversely correlated to your holdings will allow you to correctly hedge against adverse moves with less capital outlay than hedging with less levered instruments.
Portable Alpha - This hedge fund sounding strategy is simply adding diversification while maintaining the same exposure. Leverage is utilized to free up capital with the proceeds invested in non correlated investments to decrease volatility. The tripled Levered ETFs are ideal tools for this goal.
Long Short Relative Value - A great tactic to use to smooth volatility in your portfolio. The concept is similar to pair trading where a long position is taken in the ETF that is believed to be headed up, and a short position placed in an ETF thought to be heading downward. The tripled leverage ETFs allow this strategy with less cash outlay for the same exposure.
As I mentioned, at the start of this article, there are many sophisticated strategies that can be utilized with these tools. Tripled leveraged ETFs can enhance your portfolio but they can easily destroy it, if used in the wrong way. Every trader should look closely at these offerings but do so with caution!

Leveraged ETF's: Triple Pleasure Or Triple Pain ?

2010-03-25T08:31:00.002-05:00

Much has changed in the world of leveraged ETF’s since my last piece on the topic, Leveraged ETF’s: Portfolio Salvation or Damnation. First the number of leveraged and inverse products has exploded to over 120 with $30 billion in assets as of October, 2009. They have become among the highest traded securities in history. For example, The Wall Street Journal reported that Direxion’s Financial Bear 3X traded 23 million shares on February 25th 2009 with only 2 million shares issued at the time. One can extrapolate that the holding time averaged just 34 minutes. Major problems arose during 2009 with these new products. Several produced returns the opposite of what they were designed to do while others greatly disappointed investors with lack luster performance over the longer term. Basically, many investors did not read the fine print stating that the returns are daily based on the underlying instruments. As in any leveraged instrument, daily rebalancing is required to keep the product tracking the underlying. It is due to this rebalancing that the cumulative returns do not match the daily returns. In other words, if you hold leveraged ETF’s for more than a day, some unexpected and even crazy things can happen.

As you could expect with such a popular product, the regulators quickly began to issue warnings about the suitability of these volatile shares for retail investors who plan on holding for more than one day. In June, 2009, FINRA issued a notice stating that they are generally unsuitable for retail investors. However, they quickly refined this broad statement in July, 2009 stating, in part, that some sophisticated trading strategies may require leveraged or inverse ETF’s to be held longer than a day. In fact, regulators have ramped up their investigation to such a degree that four large financial institutions have been subpoenaed to reveal their leveraged/inverse ETF marketing material. In August, the SEC and FINRA issued an alert warning investors that the daily return objectives do not match the longer term returns of the products. Steps were taken in December of 2009 to increase the margin requirements for investors using margin to buy leveraged or inverse ETF’s. Whenever there is some confusion and money involved, lawsuits can be expected. More than a few class actions suits have been filed due to the misleading marketing of these securities.

Academics and regulators are still debating the suitability of leveraged or inverse ETF’s for retail investors. Some are of the opinion that they are far inferior to other leveraged tools such as derivatives. While others insist they are a solid product for informed, sophisticated investors.

Regardless of the disparity of opinion, these products remain ultra popular among investors. Studies have been done seeming to indicate that these instruments can be held profitably over the time. One method suggested that longer term investors need to monitor both the cumulative underlying return and the funds return. If these returns start to diverge, portfolio alterations need to take place once a certain percentage of separation occurs.

Despite the issues, some exciting changes are on the near horizon. For instance, Direxion is looking to market leveraged ETF’s that rebalance monthly instead of daily.
The fact remains that these instruments have their place but need to be fully understood or the pleasure of investing will quickly turn to the pain of loss.

Rogue Economist Martin Armstrong Warns From Prison

2010-03-22T08:08:00.004-05:00

Rogue econonomist or criminal? Martin Armstrong issues another dire warning from deep inside a federal prison. What if.......?

http://www.martinarmstrong.org/economic_projections.htm

Beware Of The White Swan

2010-03-19T13:17:00.005-05:00

Ever since Nassim Taleb popularized the term Black Swan to refer to an unexpected, surprising event; it has become a must use phrase in the investment lexicon. However, not many talk about the Black Swan's potentially more insideous cousin, the White Swan. The White Swan is an economic event that everyone sees coming, there is no surprise, however few do anything to properly prepare. Interest rate hikes is the near term White Swan event. India just raised rates sending shivers throughout the world's bullish stock community. Simply put, rates have no where to go but up. Despite the recent inflation quashing data, the Fed will find another reason to raise rates. It's going to happen, it's just a question of when.

Trading Is Miserable, Give It Up Now: A Chat With James Altucher

2010-03-18T09:51:00.003-05:00

Dave: I see you did not come from a trading background, but rather from high tech. Do you believe this enabled you to gain an edge on the traditional trader?

James: In the mid 90s I started a web services firm called Reset which made websites for mostly entertainment companies. We made websites for, among others, Warner Brothers, Sony, HBO, New Line Cinema, Bad Boy Records, Interscope Records, and others. Before that, I went to both undergrad and grad school in Computer Science and also spent some time working at HBO.
The tech background helped when developing the software to model different market conditions quickly. Any situation or idea I had to model was easy to prototype with software. None of this stuff is rocket science and even a slight background in software is enough to help one model almost any situation.
The business background is more important. When starting a business, as with trading, you have to deal with pain, stress, and failure, in a variety of unpredictable situations. A friend once told me the quote, “if you only make 51% correct decisions when starting a business then you will be wildly successful.” The same holds true for trading.

Dave: OK, so your computer background led you to develop data models for the markets. These models enabled you to properly test multiple assumptions and beliefs about trading. What was the most surprising thing you found out from this testing?

James: I went through a phase where my eyes were filled with dollar signs like in a comic book. The first system I ever played with was Larry Williams' OOPS system. At first it seemed like a money machine to me. But then reality hits and although the OOPS system (buying gap downs on assets when they breach the prior day low to the upside) is a great system, it’s better as a starting point for exploring your own ideas. I guess the main idea I found is that countertrend trading is a lot better than going with the trend. Philosophically, “the trend is your friend” is very pleasing almost from a Zen perspective but doesn’t really work well in practice. That said, I always find myself feeling oddly relaxed when reading interviews with trend-followers like in the Covel book. But perhaps that’s the problem with it.

Dave: Are there any technical indicators that stood up to your rigorous testing, and if so, what are they?

James: The problem with any technical indicator is that they are all nice little packages that look very simple on the outside but when you dig deeper you find that they are made up a lot of assumptions and parameters that lead to the curve-fitting accusations. In general, all back testing is curve fitting but anything you can do to avoid this (i.e. don’t use technical indicators) helps deal with this.
Dave: What I found most interesting from your research is the fact that there is very little predictive qualities in candlestick patterns. This flies in the face of conventional trading wisdom. They simply do not work anymore. What do you attribute this to?

James: Too much money thrown into trading the markets. There are about 10,000 smart people at least (most likely much more) testing and trading for themselves, for hedge funds, for prop firms, for mutual funds, for market makers, etc). The basics are done.

Dave: What software do you use for testing market assumptions?

James: Wealth-Lab

Dave: How difficult is it to write the code for Wealth Lab. Is it something a non-programmer trader can do?

James: When I was in 6th grade I once answered a question the teacher posed by starting off saying “that’s easy” and she slapped me right in the face and called on someone else to answer. She said, “Never say that.” That said, “it's easy.” A lot of people shy away from WL because they use a Pascal-like language to build their chart scripts. However, the language they use wouldn’t even qualify to be a prequel to Computer Science 101 in high school. Its easy to learn, particularly when modifying any of the thousands of chart scripts posted to their site. I have no financial relationship with their company although I’m kicking myself for not trying harder to invest my wife’s hard-earned money in their company before they were bought by Fidelity.

Dave: Ok, lets jump into the meat of this interview. In your book, Trade Like A Hedge Fund, you go over 20 primary hedge fund trading strategies. I am going to focus on 4 of these strategies that I found most fascinating. The first one, Buying Bankruptcies, really opened my eyes to the potential in this method. Please tell our members about this strategy and why it works.

James: Typically, when a company declares bankruptcy, the stock is halted by the exchanges so the company has time to disseminate the news of their downfall. Note that it’s NEVER a surprise when a company declares bankruptcy. It's not like Worldcom was a $50 stock and then they whipped out a Chapter 11 filing while everyone was asleep. By that point Worldcom was the subject of dozens of lawsuits, headlines every day about corruption, all executives being fired, and the debt was trading for pennies on the dollar. The stock itself was around 10 cents on bankruptcy day.
Everyone who was going to bet on this bankruptcy was already short the stock. Not only were they short, but probably almost every executive was short the stock in order to hedge their worthless shares. And everyone who was long the stock as an investment had already most likely sold the stock by this point. Certainly all mutual funds were out of it by this time (they never hold a 10 cent stock).
So what happens, when a stock declares bankruptcy, it’s halted, and then the halt is lifted later that day. Well, nobody is selling (because they all already sold) and everyone is covering their shorts (the worst has already happened and it's not going to get any worse). So these stocks tend to double or triple in value within 2-3 days, as happened in the case of Worldcom, Enron, FAO Schwartz, and countless other mega-cap bankruptcies.

Dave: Along the same lines, you also suggest trading stocks that are going to be deleted from the indexes. Most people trade stocks that are being added to the index, as do the index funds. This deletion concept seems odd to me. How do you play deletions from the indexes?

James: We buy the day the stock is deleted, right (we hope) when all the irrational selling pressure being placed on the stock by index funds selling, is over. The same concepts apply as in the bankruptcy system.

Dave: The 200-day moving average is one of the most talked about and utilized technical indicator. Does the 200-day MA work in the traditional manner and what is the best way to use the 200-day MA?
James: So many media pundits use the 200-day MA to make a meaningless point to fill up airtime that its lost all value as a technical indicator.
Dave: What can you tell our members about trading gaps ? Does the traditional wisdom that gaps fill stand up to testing?
James: Gaps are the physical representation in the markets of the concepts of “fear” and “greed”. When there is fear, a stock gaps down. When there is greed, a stock gaps up. Most books talk about exhaustion gaps, continuation gaps, etc without ever demonstrating how to determine which gaps are which. Testing is the way to determine this and take advantage of the fear and greed associated with these moves. Normally I only like to trade gap downs. Gap ups tend to keep going. And who am I to get in the way of people’s passion?

Dave: Interesting, so going short is not the opposite of going long. Can you elaborate on this concept?

James: Let's look at the basic facts. Short selling doesn’t even work in a bear market. If you look over the past 15 years, almost any time the Nasdaq 100 index moved up over 4% or more in a day occurred during the bear market years of 2000-2002.
Another example is to look at the CSFB Dedicated Short Bias index made up of hedge funds that only short stocks. As a group they had a negative return in 2001. So the best short sellers ever, guys who spend 25 hours a day trying to short stocks and make people’s lives miserable, had a negative return in one of the worst bear market years ever. They stink.

Dave: The extreme convertible arbitrage certainly has the sexiest name. What is ECA and how can a trader utilize this complex sounding technique?

James: I love this strategy personally and it works great in bear market years such as 2002. It combines the concepts of mean reversion with ideas in convert arbitrage. The basic idea is that you find a stock that has been tanking (for instance, all the energy stocks in 2002) and you go long the preferred of that stock (if it exists) and short the stock. For instance, AES-C, the preferred of AES, was offering a 20% yield while AES was diving on fears of bankruptcy. A deeper dive on the stock showed that all of AES’s operations in other countries has debt that was non-recourse to the parent company, meaning that the preferred wouldn’t be effected and AES was most likely safe from bankruptcy, securing the 20% yield. That said, if AES went bankrupt then the stock would continue to plummet, making the short work out. The key is determining the proper ratio between the preferred and the common and for that you need a combination of backtesting and an understanding of the fundamentals.

Dave: Are there any final words you would like to leave us with?

James: Trading is the most miserable thing you can ever do with your life. Give it up now.

Dave: Wow, this has really been an insightful discussion. Thank you for joining us !
James: Dave, good luck with your venture and thanks for letting me do this.

What Bernie Madoff Couldn't Steal

2010-03-17T14:30:00.002-05:00

A refreshing and uplifting change of pace:

Taming The Runaway Bull & 3 HOT Stocks

2010-03-17T10:31:00.002-05:00

http://www.tradingmarkets.com/stocks/commentary/taming-the-runaway-bull-3-powerratings-stocks-853037.html

Talk about overextended! We have now witnessed 14 trading days in a row without a significant pullback. The DJIA is surging toward its yearly high of 10729 with 10700 being the only significant resistance level on the cash Dow between here and there.

It's very likely the upper figure will be taken out today, judging by the early trading action. Some market technicians are expecting this giant double top pattern to play out as the longer term high. This would occur right around the 10729 area as price can not make it much higher than the previous high prior to a significant pullback.

Other market analysts are expecting stocks to break right above this double top technical level, moving ever higher. Interestingly, the DJIA remains 451 points below its 200 day Simple Moving Average.

Fundamentally, I don't think things could be much more bullish. The FOMC statement was almost a mirror copy of the previous one. In fact, if you place the statements side by side, most of the words are even the same, give and take several specific actions.

The important thing to understand is that the Fed had a positive tone about the economy. In other words the government is happy with the progress thus far in the recovery. If any lessons were learned over the last several years, it would be one should not fight Fed sentiment. A positive, market friendly Federal Reserve will win the day over many perceived market bearish issues.

How do you go about profiting and taming this runaway bull market in the short term? It's important to remember that individual stocks do not follow the overall market tic for tic.

In fact, some follow the overall trend, others buck the trend. The key is to locate those companies showing short term weakness, yet still in a longer term uptrend. We have developed an easy to use, 3 step system to help you locate shares ready for short term gains regardless of overall market conditions.

The first and most critical step is to only look at stocks trading above their 200-day Simple Moving Average. This assures that a strong, long term up trend is in place, increasing the odds that you are not buying into a falling knife or catching a stock in a death spiral.

The second step is to drill deeper into the list locating stocks that have fallen 5 or more days in a row or experienced 5 plus consecutive lower lows. Yes, you heard me right, fallen 5 or more days in a row. I know this is counter-intuitive of conventional wisdom of buying stocks as they climb higher. However, our studies have clearly proven that stocks are more likely to increase in value after a period of down days than after a period of up days.

The third and final step is a combination of whittling the list down even further by looking for names whose 2-period RSI (RSI(2)) is less than 3 (for additional information on this proven indicator click here) and the Stock PowerRating is 8 or higher.

The Stock PowerRatings are a statistically based tool that is built upon 14 years of studies into the inner nature of stock prices. It ranks stocks on a scale of 1 to 10 with one being the most volatile and least likely for short term gains and 10 proven to be the most probable for gains over the next 5 days. In fact, 10 rated stocks have shown to have a 14.7 to 1 margin of outperforming the average stock in the short term.

The stocks that fulfill each of the above steps have proven in extensive, statistically valid studies to possess solid odds of increasing in value over the 1 day, 2 day and 1 week time frame.

Here are 3 companies fitting each and every of the above steps:

Sonic Solutions ( SNIC | Quote | Chart | News | PowerRating)

Sequenom Inc ( SQNM | Quote | Chart | News | PowerRating)

Cytori Therapeutics Inc ( CYTX | Quote | Chart | News | PowerRating)

High Probability Trading: The VIX Does Not Work Except When it Does | TradingMarkets.com

2010-03-17T10:15:00.000-05:00

High Probability Trading: The VIX Does Not Work Except When it Does | TradingMarkets.com

Sold Short With Manuel Asensio

2010-03-14T17:15:00.003-05:00

The following is a transcript of a chat I had with short seller extraordinire, Manuel Asensio

We are truly privileged to be joined today by short seller extraordinaire and corporate fraud buster, Manuel Asensio. In 1996, he started the internet's first private internet site devoted to investor advocacy and critical commentary on publicly traded stocks. This site's 8 year public record is the best, fully audited recommendation record ever compiled by a Wall Street firm. His mission is to hunt down and expose companies that he believes are defrauding investors. Manuel has great lessons to teach us concerning short selling, corporate fraud, and the future of the financial markets… Let's get started!

Dave: Great to meet you, Manny.

Manuel: Thank you for having me here.

Dave: Let's begin with a little history about yourself. Can you give me a brief background, where you are from, education, what first sparked your interest in the markets-those kind of things.

Manuel: The thing many people enjoy mentioning, both the press and the many stakeholders in our transactions, is that I am Cuban. Well, that I am. In fact, all of my family is Cuban except my wife and she's from St. Maarten in the Caribbean, so that is close. I got my undergraduate degree at Wharton and graduate degree from Harvard. I began trading stocks in my first year at Harvard in 1979. I started as a way to earn money on my savings while I was at school full time. 17 years later, in 1996, I initiated my first investor advocacy (what some call "short sell") transaction in the market for General Nutrition stock. We went on to do 26 other highly successful investor advocacy transactions, back-to-back in a row, all of them extremely well documented in the press, on the wires and live on the Internet.

Dave: Very interesting. Was there a specific event or happening that caused you to focus on short selling?

Manuel: I did not participate in the great bull market that began essentially right after I graduated Harvard Business School in 1982 up through 1996. I was an investment banker during this time, and did not invest actively in stock. Asensio & Company, Inc., the former NASD member firm I ran for 10 years, was formed in 1992. During the first 4 years we were not short selling. I saw a great opportunity to profit from mis-priced overvalued securities, which we called "grossly overvalued". We published a definition of what we called a "grossly overvalued" security in early 1997 just after we got started. I read it recently and was impressed that every one of the 27 securities in our transactions conformed to that definition. Before we started, no other investor, much less an NASD member firm, had ever questioned public companies disclosures and their stock promotions that way we did. When the profits rolled in, we merely expanded. We put more and more money into research and developing extremely structured research methods. The result, I think, we proved that hard, smart, honest work, and adherence to principles of fundamental values, pays well, even on Wall Street.

Dave: Can you explain your definition of "grossly overvalued" securities?

Manuel: There are occasions when a stock can trade for prolonged periods of time at valuations that are far in excess of any economically justifiable level. Some of these stocks are what we called "grossly overvalued." For us to label a stock grossly overvalued, we must be unable to find any remotely possible outcome that can provide an investor with a non-risk adjusted return. In other words, even ignoring risk in assuming that the best possible outcome will occur, the stock's present price does not allow investors to realize positive return. When we believe investor's returns is undisputably negative, we label a stock grossly overvalued.

Dave: Many investors have ethical issues with the concept of short selling, thinking it's bad for the economy. How do you answer these critics?

Manuel: Americans are becoming aware of the great cost to their economy of excessive stock promotion. Look at the 2000 recession. Investors are rightfully beginning to question whose side the securities industries self-regulators are on. But I am still surprised when I speak to people about the meaning of Dick Grasso and Eliot Spitzer. After all, Eliot's job is to chase state criminals not Wall Street bandits, he doesn't have the specialized staff of the SEC, NYSE or NASD-so why was he able to break the mutual fund and Internet scandals and not them? Even the media has begun to understand that they can not blindly trust public companies and their stock promoters. Things changed somewhat after Enron, Winstar, Global Crossing, and WorldCom and Eliot's successful Internet fraud prosecution. There is a lot of work to do. But I am no longer the right person to ask. People know me and my work now. However, I still run into the same old "well you are a short seller, so why would I listen to you?" when I call on local papers about some hometown stock scam. These days, I just smile and remind myself that it's part of the job.

Dave: You call your style "Activist Short Selling." What do you mean by this?

Manuel: We talk to the press, we issue reports, we respond to company statements. And we know the subject matter to great depths. It's hard to imagine the number of analysts, brokers, bankers, members of the press, and even regulators, AMEX Richard Syron, who were stakeholders and sore losers in those 27 transactions we did from 1996 to 2003. These are the people who called the shots. They buy cheap, create the game and sell before it's over. Our opponents were large. Before we invented the term "Activist Short Selling" these people called us "hostile and adversarial" and they insisted the short sellers had no right to promote their positions. Stock promoters like and want to protect their monopoly. They get to tell stories and short sellers have to be silent. Activist short selling is the exact opposite. I am glad that we were successful enough to be the first short sellers to challenge the status quo.

You know I like to say that there are two things that are certain. One is that man has faults and can always do better. The second is that the status quo is always wrong.

Dave: When one shorts a stock, aren't they theoretically taking on unlimited risk? Most of our members are active traders, how would you suggest they protect themselves from this potential unlimited risk while shorting?

Manuel: No. it is absolutely NOT true that short selling has unlimited risk. That is an excellent example of the regulatory bias towards stock promoters. You can not lose more than the value to the account. And that's the same risk you take in buying stock. Emotionally and psychologically being short, for many, even large, experienced professional investors, is more difficult. I understand that. But the risk is no different. Do your work, know your risk. Manage your positions and your money-but above all know the value of your holdings.

Dave: Those are excellent points. Is there a simple way our members can "know the value of their holdings"?

Manuel: We calculate intrinsic value, not the market value. There is a difference between these two figures. Many people would say that this is contrary to the efficient markets theory. However, that is not accurate. It reinforces the efficient market theory. It is important that your members judge their equity holdings based on the intrinsic value and not the market value.

Dave: When evaluating a potential company to short, what specifically do you look for?

Manuel: We seek a comfortable margin of safety and a well defined end point. An outcome that we can predict with great certainty. A company and group of stock promoters who are saying the wrong things about that outcome. A stock price that shows signs that most people believe the story is also very important.

Dave: You use the term "stock promoter" often. Just to clarify, you are not just talking about the archetypical boiler room type promoter, but rather the Morgan Stanleys, Paine Webbers, and Legg Mason's of the world---is this correct?

Manuel: I use the term stock promoter to refer to underwriters, analysts, and sell side firms. They lump all of us together as short sellers so I feel comfortable referring to all of them as stock promoters.

Dave: Do you use technical factors at all when determine what to short?

Manuel: Yes

Dave: Can you be more specific, what technical indicators do you use?

Manuel: We will sometimes select a target for research based on technical sell signals. We find Technical Analysis a good starting point. However, we WILL NOT trade or select a target based on technicals. Our best performers (shorts) have looked very strong technically. We are always driven by fundamentals.

Dave: You started your investor advocacy and short selling at the beginning of the internet bubble, most short sellers got wiped out during this period. 25 out of the 26 stocks you placed strong sells on declined dramatically. Your record is incredible--- are there still opportunities like this in the market?

Manuel: Absolutely. Our record is unique and remarkable. Our one loss is PolyMedica. It is the only one of our trades that relied on politicians and we learned that politicians don't care about protecting Medicare. PolyMedica is a shameful situation.

Of course the same biases that caused us problems also created our opportunities. After all, regulatory barriers to short selling limited competition and regulatory support of questionable public companies, when was the last time you heard of an NASD action against a company for misrepresentation, expanded our target market.

Dave: Are you able to share one or several companies you are looking at presently to short?

Manuel: Absolutely. Energy Conversion Devices, Inc. (NasdaqNM:ENER - News) and KFX Inc. (NYSE:KFX - News). These are very questionable companies. They are using higher oil prices in their promotions.

Dave: Are you still strictly a short seller or have you balanced your approach since 2000?

Manuel: We have always been heavily invested in risk arb deals with wide spreads and distress. We manage these investments in the same way we manage our short investments-with intensive, deep fundamental research efforts.

Dave: What do you mean when you say "risk arb"? Please explain this tactic.

Manuel: We mean event-driven investing. Companies engaged in corporate events, including takeover bids, is what we mean by risk arb.

Dave: You have interesting views on the recent presidential campaign. You look at it as a phony stock promotion. Can you explain this idea?

Manuel: The similarities in tactics used to get people to buy your stock and vote for you are endless. In both, the game is sell the promise and to get people to believe you despite the facts. Many Americans believe Bush will do a better job-for them. It doesn't matter whether he does or does not. Nor does it matter how he did it. He got elected. This race looked to me just like a battle between a short seller and a stock promoter.

Dave: Perception is more important in politics and the stock market than reality?

Manuel: Yes.

Dave: I find your views on how easily how easily the media can be manipulated by phony stock promoters fascinating. What do you attribute this to? Do you think it is desperation for a good story or what?

Manuel: It's a function of economic interest and raw numbers. Short sellers don't buy ads. Newspapers don't have a problem with helping a company promote itself but always feel used, and at risk, if they take a short story. Even the best editor writing about the worse company will allow the company to tell its story no matter how bogus. They believe it's in the interest of fairness and that the public will be able to make their own judgments. But in practice they always tilt heavily toward the public company and its many stakeholders.

The media bias against shorting will be difficult to change. There is no short selling lobby group. There is no short selling trade organization or public relations effort. The new asensio.com web site is using my past work to foster awareness and to lobby congress to eliminate the regulatory bias against short sellers. I am a realist, expansionary economic policies will always foster speculation. The Fed created money but doesn't watch who gets the goodies. Stock promotion is a very legitimate and essential business. Without it there would be no short sellers.

Dave: You recently provided a specific example of the NY times being scammed. It was a mining company. Can you elaborate?

Manuel: I have a great deal of respect for The New York Times. I understand what they were trying to do. It involved the cause of a bankruptcy and the loss of employee benefits. It's hard. It takes time and experience. The Times certainly has both. But on this one they didn't do their homework.

Dave: I know you like the having a revolutionary public persona--Che Guevara is one of your heroes. How does Che and his revolutionaries relate to what you do in the market?

Manuel: Did you see the Motorcycle Diaries? I have had a set of experiences that few business people enjoin. I have had some very big fights and not just with the companies we've shorted. But with their big time investors and brokers, and with conflicted regulators, who also happened to have been my own regulators. That's tough. And the media was no cake walk either. There were many reporters who used our information for their benefit and then sided with their big boy friends against us without blinking an eye. There are far more profitable, easier businesses. Did I choose it or did it choose me?

Dave: I will make it a point to see the Motorcycle Diaries. Thank you for the recommendation, Give us a brief synopsis of the movie plot and how it relates to what you do.

Manuel: It's a story of a young Che Guevara. Che turned down positions of power to do what he thought was right. He could of easily been a limousine revolutionary but instead suffered tremendously for what he believed was the correct and proper thing to do.

Dave: Wow, some of your investor advocacy has landed you in hot water. You expose' on Hemispherx caused you to face more than $1 billion in legal liability. That is HUGE! Perhaps one of the largest cases ever against an individual. What happened in this case?

Manuel: We won all seven of our cases. Never paid a single cent to settle any of them. Only Hemipherx, the most fraudulent of the 27, had the audacity to push the matter to trial-twice. And they lost, twice.

Dave: Do you forsee the US economy improving or declining and why?

Manuel: There is more risk in the U. S. economy than there has ever been in my career. I had never been bearish on the economy since I graduated from Harvard in 1982. The 2002 recovery was fueled by the largest, most rapidly expanding budget deficit ever created by a government. America's deficit is the largest its ever been as a percentage of GNP and in absolute dollar terms. And the trade deficit, despite the drop in the dollar, is widening. These are all important issues.

Dave: I know you are presenting a 3 step deregulation plan to Congress as an attempt to better the US equity markets. What are the 3 steps and what do you hope to accomplish with this plan?

Manuel: The securities and legal systems in the US contain numerous provisions that create liability for investment advocate positions. The opposite is true for public companies and their stock promoters. Our plan is simply to level the playing field. Regulations are rarely the answer in securities matters. By eliminating the borrowing requirement and down tick rules, which are the single most questionable and most harmful regulation. These regulations cause harmful excessive stock prices and must be eliminated. We want to provide coverage under rule 10b to investor advocates and eliminate limits on first amendment protection related to value of US securities. The US markets would be far fairer for investors and far less susceptible to industry abuses. I believe that if the US public, not just investors, were to become aware of the benefits of the Asensio 3 step plan, it would become law. However, it is difficult since the industry effectively controls both congressional committees that oversee the SEC.

Dave: Are you working on any current projects? What is your focus in 2004?

Manuel: We are always working on research, early stage right through maintenance. We are concerned about the dollar. So we are working with hard assets. This is new to us. We are working with coal, propane and heating oil distribution, lumber and energy technology.

Dave: Do you have any final words for our members?

Manuel: Always enjoy yourselves and have lots and lots of fun!!

Dave: Thank you for joining us, it has been a pleasure

Seven Critical Stocks For Monday

2010-03-14T15:01:00.001-05:00

A wet and windy weekend on the isle of Nantucket. Time to get back to work.

We have the Long Term Purchases reading as well as several T Bill Auctions to observe on Monday. Several earnings announcement will wrap up the session. Friday witnessed stocks flowing gently between positive and negative readings through out the day. Opposing currents of a decline in Consumer Confidence and an increase in Retail Sales resulted in a bull bear stalemate. Finally, the session ended mixed with the DJIA up 12.85, the tech heavy Nasdaq given back .80 and the broad based S&P 500 easing lower by .25.

Here are 7 stocks you need to know for Monday

37 cents is the expected figure for AAON Inc AAON prior to the open

Internet retailer, Overstock.com OSTK, has forecasters awaiting an EPS of 45 cents before the bell

Banking kingpin, UBS AG UBS, expects to see an EPS of 25 cents before trading starts

Pfizer Inc PFE disappointed investors when its new cancer drug failed function as expected

Positive retail sales lifted shares of luxury retailer, Tiffany’s TIF

Potash Corp POT raised its first quarter earnings forecast

Friday Recap

2010-03-12T08:19:00.004-05:00

It's a rainy day here on the banks of the Hudson River overlooking Midtown. Some are saying up to 4 inches of the wet stuff is on the way. Being in the high 40's, it sure is better than another snow attack. It's raining on the US Dollar as well. We caught a very nice move higher from 1.3666, when longs were triggered for the first time since early January 2010. Holding longs at this time in the EUR/USD, expectating additional weakness in the USD due to a variety of fundmental and technical reasons. A convergence that triggered the longs shows no signs of abating. Made a little trading the DJIA but failed to catch any big waves. Currently flat the DJIA at this time. Flattened out the SIRI short with a small profit. I have a cool chat with short seller extraordinaire, Manny Assensio coming up soon for the weekend. Enjoy !!!

The New Short Selling Rules

2010-03-11T08:18:00.002-05:00

Short selling is the practice of borrowing shares from ones broker with the goal of price dropping then selling the borrowed shares, capturing the difference in price as profit. The practice has always had its supporters and detractors. Supporters believe that shorting adds liquidity, provides more opportunity for investors and lowers trading costs. Detractors state that unfettered short selling causes volatility spikes, market panics and crashes.

As late as 2007, the SEC moved to eliminate the depression era uptick rule providing greater freedom to short to short selling traders. The uptick rule only allowed you to short a stock after an uptick, or upward move in price. Although savvy traders had methods called conversions or bullets to legally work around this rule, the elimination of the rule opened up shorting to many more traders and stock situations.

The more rabid among the anti-short selling tribe draws correlations between the squashing of the uptick rule and the fall of Bear Sterns and Lehman Brothers. In the new rule, the SEC attempts to placate the anti-short sellers without causing too much adverse effect on the stock market.

Fortunately, the SEC is finally stating that it understand the true benefits of short selling. The new regulation prohibits short selling of any stock after it has experienced a 10% or greater decline. The rule would go into effect the day of the decline and last until one day after the drop. Why did they choose 10% as the threshold? My research canâ€™t find any studies or empirical data that support this figure.

The new regulation will go into law in 60 days and the exchanges have 6 months to implement it. While I donâ€™t support any governmental interference into the functioning of the free market, this regulation appears to be the least onerous of the possibilities. Given the fact that there is a loud, vocal minority within the government calling for the total elimination of short selling, traders and the free market itself got off the hook easy this time.

This rule will not affect most traders, even those who short regularly. As you know, we believe in shorting into strength, not weakness. In fact, empirical studies have found time and time again that odds are better for successful shorting when a stock is overbought showing strength. If you follow the basic rule of shorting into strength, the new regulations should have zero effect on your day to day trading activities.

Surf Alert: SHORT THE USD NOW !!

2010-03-10T11:54:00.002-05:00

US Dollar shorts have been triggered. We are long the EUR/USD pair at 1.3666.

Trend Following: A Fast Way To The Poor House?

2010-03-09T10:19:00.008-05:00

The concept of trend following is often one of the first strategies new traders learn when discovering the financial markets. Several well written and convincing mass market books preach strongly about the superiority of the trend following method. On the surface it appears that nothing could be easier than catching a trend. The basic premise of trend following is that stock strength begets strength and stock weakness leads to more weakness. A series of higher highs and higher lows identifies an up trend. A series of lower highs and lower lows is a sure sign of a downtrend. The strategy, as defined in the books by the same name, teaches that once the investor identifies the trend, trades are placed in the direction of the trend. In other words, one would buy a stock that has exhibited an uptrend on the price chart. A stock downtrending would be shorted. While this is definitely a feel good investing method and it appears to work for some large, well diversified hedge funds, trend following can spell disaster for the investor. First, it is a non quantified, unspecific trading system. For example, just how many up moves increase the odds that the next move will be in the same direction? My personal favorite example of why trend following makes little sense when examined is as follows. If you flip a coin and heads comes up 6 times in a row, are you in heads trend? Secondly, when the trend following criteria is tested it fails miserably. We tested the S&P 500 over a 15 year period to determine if an edge actually exists going with the perceived trend. What was discovered is quite the opposite of what the proponents of trend following teach. The SPY and NDX were used as the test vehicles. The market actually lost money within one week after 3 or more consecutive days of higher highs. The opposite was also proven true. 3, 4, and 5 days in a row of lower lows leads to outperformance over 1 day, 2 days and 1 week time frames. In fact, multiple day lows FAR outperformed multiple day highs. Similar results were found when the Nasdaq 100 was tested. In other words, we clearly discovered that there is no edge whatsoever to trend following when trading stocks. Remember its often the ideas that make the least sense at first glance that are proven edge providers when investing.

Managing The Profits: More To Come ??

2010-03-09T08:02:00.005-05:00

A nice downwave was caught in the DJIA yesterday and pre-open this morning. However the 10500 area in the YM contract acted as support triggering a bounce. Stops are at 10543 with the 3 minute break rule in full effect. If the support at 10500 breaks , we may get a scenerio similar to the posted chart from 2007--- much wealth was made on that day by shorts. It's a tough call here if the support will hold on the secondary test. The plan for today, if stopped out, is to trade the following channel 10497 to 10563--- untill then STAY SHORT !!

Some fishy business may be going on between Obama and the Greeks regarding regulation of hedge funds. It seems all populist Obama needs is a reason to clamp down across the board. Let's hope this isnt the impetus......

The Bears Are Back In Town: Shorting DJIA

2010-03-08T11:02:00.002-05:00

The Bears Are Back In Town.....

It couldn't have happened on a nicer day weatherwise.

I am stepping outside of the standard system trades. Short the YM at 10560. Very very bearish sentiment inside the street. Taking this extremely seriously here.
Closing SIRI long at 92 cents. Will reenter after this potential storm passes.
Good luck!!

7 Critical Stocks For Monday

2010-03-08T08:24:00.004-05:00

Looks like the perfect day in Manhattan. Central Park is full of early morning joggers and the birds are chirping happily. There is a peaceful spring feeling in the air from the center of the known universe. Let's go do what happens!

Monday is a sparse day for economic announcements but investors can anticipate several T Bill auctions with a small serving of earnings news. The Non Farm Payroll figure pleasantly surprised the bulls today triggering an across the board buying frenzy. Stocks surged higher on the better than expected employment news and decent consumer credit figures. The VIX or fear index reacted in kind plummeting ever lower on the session. The DJIA surged 122.06, the tech heavy Nasdaq advanced 34.04, and the broad based S&P 500 climbed 15.72.

Here are 7 stocks you need to know for Monday

H&R Block HRB announces its EPS after the close with a forecast number of 15 cents

A 27 cent loss awaits investors in MAKO Surgical MAKO after the close

TiVo TIVO is looking at a 12 cent loss after the days last trade

Apple APPL releases its iPad device in the United States on April 3rd

Google GOOG bought DocVerse an application that allows the sharing of Microsoft MSFT Office programs over the internet

Staffing companies such as Monster Worldwide MWW benefited positively from the employment news

Nailed It !

2010-03-05T15:30:00.003-05:00

Euro Killer NFP Release

The 3rd system entry was the charm. We rode a nice upwave in the YM today and are looking to close the position by the 4:00PM close. Holding SIRI long awaiting the expected impetus. The NFP gave some life to the USD this morning and provided a bullish tenor for the day. Have a great weekend!!

Long DJIA, Long SIRI--Bullish Friday??

2010-03-05T09:07:00.002-05:00

The Non Farm Payroll report surprised positively this morning pushing the YM above the upper neo surf line of 10463. The system has triggered long with entry at 10471. Interestingly, and unfortunately for the longs, the round figure of 10500 stopped the YM advance cold. Remaining long SIRI. Good luck!!

7 Critical Stocks For Friday

2010-03-04T18:17:00.002-05:00

The much anticipated Non Farm Payroll report hits the wire Friday with an expected figure of negative 56 thousand. A few earnings announcements will cap off the generally lack luster investment week. Stocks climbed higher in a lazy, low volume trading day Thursday. Financials led the advance while the US Dollar gained against the Euro. Precious metals fell on the USD’s strength while the Volatility Index dropped lower as melancholy settled on stocks. The DJIA advanced 47.38. the tech heavy Nasdaq climbed 11.63 and the broad based S&P 500 gained 4.18

Assisted Living Concepts ALC expects to see an EPS of 34 cents before the bell

18 cents is the forecast EPS for Eagle Rock Energy Partners EROC after the close

New Gold Inc NGD has analysts awaiting an EPS of 6 cents prior to the opening bell

UBS upgraded Coca Cola KO to Buy

Capital One COF was downgraded to neutral at Sun Trust Robinson Humprey

TiVo TIVO won a critical patent suit against Dish Network DISH

Steven Schonfeld: Millionaire Maker

2010-03-04T15:00:00.005-05:00

The following is a chat I had with Steven Schonfeld in 2005---- the founder of Schonfeld Securities. His firm was/is the premiment proprietary trading firms of all time. Many multi millionaires were bred by trading for this firm in the 1990's. Guys that started with nothing and by using the firms technology and leverage changed their lives forever. This is an inspiring interview from the man who started it all.

Photo courtesy of Forbes

Today I am privileged to be
joined by Steven Schonfeld. Steven is the founder and CEO of the Schonfeld
Group. His firm trades over 150 million shares and completes over 500,000 transactions
daily. He is a true revolutionary and innovator in the world of day trading.
Dave:
Welcome, Steven, thank you for joining me today.

Steven: Hello Dave.

Dave:
Let's start the very beginning. What first sparked your interest in the market?

Steven:
Well, I was a teenager when I first got interested. We had a stock market
class in high school and I had always been into strategies, like gambling at the
casinos, race tracks, or poker. I felt that the market was a bigger and better
game. After college, I became a stockbroker at around 23 years old.

Dave:
I know you were one of the top brokers, at Pru Bache, for about seven years. You
must have been making a serious salary and bonus. What made you want to go out
on your own?

Steven:
Growing up, I always felt that I was very entrepreneurial. When working at the
brokerage, I got to build up my capital base, but part of my goal in life was I
wanted to be an owner and see the other side and do actual trading in the
market. The electronic method of trading stocks had just recently been
introduced in the â€˜80s, and things were becoming more electronic overall.
Computer power to assess and analyze market data was coming into its early
stages. Since I always loved reading percentages and statistics, I saw a
natural fit with trading. In addition to that, after the crash of â€˜87 I felt
that proprietary trading could be pretty big for the next few years and I gave
that a shot.

Dave:
You really got started at the ground floor of proprietary trading?

Steven:
Yes.

Dave: Whatâ€™s the difference between a proprietary
firm, a professional firm and a retail direct access firm?

Steven: A
proprietary trading firm backs its traders 100% with its own capital. Retail
trading firms house customers who are trading their own personal capital. At
Schonfeld Group, we support both types of traders. Professional trading is a
broad term that generally defines any trader, whether proprietary or retail who
earns his or her living as a trader. Schonfeld Group aims to be a place where
both types of professional traders can have a successful, profitable career.

Dave:
Did Level II data exist back then?

Steven:
We did mostly New York stocks, but there was also level II at the time for
over-the-counter stocks.

Dave:
Did Schonfeld grow steadily through the 1990s, or did growth fluctuate at times?

Steven: Very
steadily. From 1988 on for years we grew very steadily. We always tried to make
it not too fast, not too slow, but moderately strong growth.

Dave:
At your peak, how many traders worked for Schonfeld?

Steven:
I think it was about 1100 proprietary traders. We have had about 4000-4500
traders come through the doors in the last 17 years.

Dave:
Is it strictly in the office trading, or are there remote traders as well?

Steven:
We have remote and also office. We are looking to grow our remote trading. It
is setup for the traders to be in office for a while, at least 6-7 months and
then go back to trade out of their home or another office.

Dave:
You basically start everyone out in the office for a couple months?

Steven:
For the most part, yes. But if someone has some sort of a track record they can
by all means start out remote.

Dave:
I am personally friends with several of your traders during the late 1990â€™s.
Some of the stories they tell are simply amazing. Are you able to share any of
these stories?

Steven: From 1999, 2000,and the first quarter of 2000, which was 2 1/4 years of trading. In that
period, the trader compensation, how much I paid my traders was $685 million.
Thatâ€™s the best way I can illustrate those times.

Dave:
Wow, that is truly mind boggling! Were you guys the first proprietary firm of
the modern era?

Steven:
As far as I know, yes.

Dave:
I know we witnessed a shake-up in trading firms after 2000, but now there seems
to be a new boom starting. Do you think this relates to anything in particular?

Steven: I guess
part of it is from the number of years of trading. Through time, weaker firms
fell apart from the tough trading and there were very few firms left. Now new
players are going back in. Possibly, there is a bull market, or at least one
coming in the next few years, people are preparing for it. The newer crop of
people are trying to get in now that werenâ€™t around back then.

Dave:
Is there a difference between a daytrader today, and a daytrader in the late
90s?

Steven:
Not that different. Maybe some are more computer literate, maybe more
mathematical.

Dave:
How about strategy and tactics. How have they changed?

Steven:
In relation to strategy, itâ€™s a whole new ball game. There use to be tons of
volatility and many volatile stocks. Nowadays, you have to really have to
narrow in on the really volatile stocks of the day, instead of trading the same
stock over and over again.

Dave:
How do your traders locate these volatile â€œstocks of the dayâ€?

Steven:
We provide all of our traders with a proprietary technology weâ€™ve developed
called SchonSite. Itâ€™s a filtering tool that uses Schonfeld Groupâ€™s own
proprietary variables to help our retail and proprietary traders research and
identify stocks and trends that will support the strategies theyâ€™re using.

Dave: Are traders today holding the trade longer
then they did back in the 1990â€™s, or is the time frame pretty much the same?

Steven:
When we talk about holding time, we have an enormous amount of studies of all
the trades that have been done in our firm, and it really depends on the stock.
Scalping can be within seconds, and yet some scalpers are holding for 5 to 15
minutes today.

Dave:
I know Schonfeld has put a lot of effort behind training traders, can you tell
me a bit about your training program?

Steven:
The program is very different for a new trader than it is for an experienced
trader. What we have is statistics, studies, report cards, video broadcasting,
and, a quant group who gives out enormous amounts of information about
strategies.

Dave: Do you prefer someone who is new and knows
nothing, or do you prefer someone who is experienced?

Steven:
Really, I would take both

Dave:
Does the banning of bullets change your trading tactics at all?

Steven:
Not materially, or too involved, but there were some scalpers that got affected more
than other traders.

Dave:
Do you have an opinion on the new threshold rule ?

Steve:

There are a lot of variables and its too early to tell how it will effect traders.

Dave:
What is your view of the day trading industry as of today?

Steven:

I still think we are in the doldrums. Volatility is unbelievably low, and in low
volatility its tough to make a lot of money. On the other hand, its also tough
to lose a lot of money. Unfortunately, many traders arenâ€™t making what they use
to make in the past. The most important thing right now is to stay in the game
and work on honing their skills like control, discipline, and strategies.

Dave:

What do you think is responsible for this low volatility?

Steven:

Volatility is low because of a lack of retail volume in the market as a
percentage of overall volume. Also, the influx of competing black boxes in the
market is resulting in fewer big swings.

Dave:

Judging from what I witnessed at the 2005
NYC traders expo, some of the larger, full service firms like Fidelity are
courting the lagging retail market. Seems like someone is predicting retail
coming back in a big way. Whatâ€™s your opinion?

Steven:

I think the retail market will grow slowly until there is another bull market.
Then we will see it take off in a much bigger way.

Dave:

If retail comes back, leading to an increase in volatility, do you foresee a new
â€˜golden eraâ€ in daytrading?

Steven:

More like a silver era. I think we will see another good chapter for active
trading, though not as golden as before. Retail will come back with the next
bull market. However, the black boxes that trade against retail volume are here
to stay. This is a big change in the environment since the last golden era of
active trading.

Dave:

I can't wait for those days again! We are out of time. Thank you for joining
me today, Steven.

Steven:

Thank you, Dave.

Stopped Out YM Flat Holding SIRI Long

2010-03-04T09:12:00.003-05:00

The second false system entry in a row for the YM system. Stopped out with a 20 point loss. The channel is still in full effect. I am expecting a down day today in the market and the system should fire short once again. However, I am not going to anticipatory trade and will wait for the entry signal. Remember the lower Neo Surf Channel line is 10363 in the YM. Continuing to hold SIRI long from 88 cents with a stop now at 90 cents. Best Wishes!!

7 Must Know Stocks For Thursday

2010-03-03T17:24:00.002-05:00

Jobless Claims and Factory Orders will liven things up on Thursday for investors. Several major names reporting earnings will add to the volatile nature of the session. Stocks got off to a strong start this morning. The Fed’s Beige Book cast a quick pale on the day indicating less growth than expected in most Federal regions. Speculation ran rampant of the Fed being forced to keep interest rates low due to the muted growth picture. Shares closed mixed on the session with the DJIA falling 9.22 , the Nasdaq easing lower by .11 and the S&P 500 gaining just .48.

Here are 7 stocks you need to know for Thursday

Teekay Tankers TNK float their EPS before the open with an expected figure of 17 cents

Edgy retailer, Urban Outfitters URBN, has analysts expecting an EPS of 40 cents prior to the trading day

Hot and juicy burger chain, Wendys International WEN, reports before the bell with a forecast EPS of 3 cents

21 cents is the expected EPS for Del Monte Foods Company DLM prior to trading

Muffler kings, Midas Inc MDS, reports before the opening bell with a forecast EPS of 8 cents

Joy Global JOYG reported earnings beating most estimates today

Orders are up big for furniture retailer, Ethan Allen Interiors ETH, who reported a 25% increase

Follow Us On Stocktwits !!

2010-03-03T17:23:00.000-05:00

10363 YM: Touched Not Broken Staying FLAT

2010-03-03T15:36:00.003-05:00

Wow, another super close call with the YM Neo Surf Death Channel. Uncannily, the lower line at 10363 acted nicely as support. Some of you trade the bounces off the channel lines. This method of channel trading would have yielded a nice reward thus far today. We are FLAT YM presently. LONG SIRI

Holding SIRI Long: $1.00 Breaks Today?

2010-03-03T10:24:00.004-05:00

Our SIRI entry yesterday at 88 cents is performing nicely. I am expecting Sirius Radio to break the survival critical $1.00 market today or very soon. Time will tell, stay tuned!

7 Critical Stocks For Today

2010-03-03T08:14:00.003-05:00

The ADP Employment Report will hit the wire first thing Wednesday morning potentially setting the tone for the day. A multitude of important earnings announcements including several from big box retail discount chains will add to the midweek flavor. Positive international news emanating from Greece combined with strong US merger activity led to a modest up close. The DJIA was the laggard due to selling in Microsoft, International Business Machines and Hewlett Packard. The DJIA added 1.81, the tech heavy Nasdaq climbed 7.22 and the broad based S&P 500 eased higher by 2.59.

Here are 7 stocks you need to know for Wednesday

An expected loss of 64 cents/share is awaiting investors in Take-Two Interactive Software, Inc TTWO after the close

Long time pet supply retailer, PETsMart Inc PETM reports after the final trade with a forecast EPS of 56 cents

Athletic shoe retail purveyor, Foot Locker inc FL, has analysts looking for 25 cents after the closing bell

8 cents/share is the consensus for rib eatery, Famous Dave’s DAVE upon the close

Insurance company, Progressive Corp PGR, reports during the trading day forecasting an EPS of 37 cents

Costco COST is looking at 71 cents/share prior to the trading day

96 cents/share is the expected figure for big box retail discount club BJ’s Wholesale Club BJ prior to trading

Neo Surf YM Death Channel

2010-03-02T18:24:00.002-05:00

Tne Neo Surf Death Channel has emerged on the YM 10463 to 10363. Long above, short below and FLAT in the channel.

Flat YM

Long SIRI

Out & Flat YM

2010-03-02T15:40:00.002-05:00

Stopped out of the YM longs with loss. Can't win them all!

Will recalculate neo surf channel this evening and jump back into the fray.

SIRI-- Long Now !! Unique Opportunity

2010-03-02T12:22:00.005-05:00

We rarely make stock picks on this blog. However, this is a unique exception. Entered SiriusXM Radio long at 88 cents. There are a multitude of reasons, both fundamental and technical. I am expecting this trade to be a longer term hold. Very confident at this time. Stay tuned!

Long And Strong Dow-- March 2nd

2010-03-02T08:40:00.003-05:00

The Neo Surf system triggered Long in the YM at 10407 with an entry at 10411. Almost perfect! The stops are at 10393. Remember, when we trade the system, the goal is to catch the BIG WAVES with no time frame on the trade. Looking for at least 100 points in the YM with this entry. I am confident fundamentally in the bullish nature of the trade. Strong European and Asian data should continue to add to the optimism. LONG AND STRONG !!

Trading The DJIA

2010-03-01T11:44:00.003-05:00

The current NEO SURF channel in the DJIA YM futures is 10407 to 10323. Long above, short below entering only after a 3 minute break of the channel line.

Munger Has Lost His Mind

2010-02-23T14:10:00.008-05:00

“There are periods of history when the visions of madmen and dope fiends are a better guide to reality than the common-sense interpretation of data available to the so-called normal mind. This is one such period, if you haven’t noticed already.”

-Robert Shea, Robert Anton Wilson, “The Illuminatus Trilogy”

One would expect someone of Mr. Mungers statue to provide solutions to the ills facing the United States. Unfortunately, he provided quite the opposite.
In a twisted parable called "Basicland", The Oracles long time business partner, Charles Munger lays out what he sees as the end of American Capitalism. This manifesto appears to be a last ditch effort to outshine Warren in the PR wars. Perhaps, Mr. Munger has forgotten about innovation and how greed will work in positive ways. I disagree with him 100% and find this rant rather ridiculous to say the least. An ill fated attempt for the old guy to be remembered. I think it's going to backfire in a big way. The capitalistic spirit will prevail over the neighsayers and cynics....... Time will tell.

Here is the essay from Slate for those who missed it:

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.

Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.

In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.

The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.

As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.

A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.

Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil.

But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.
Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.

But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."

The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."

Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.

And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.

How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.

Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy.
Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.
The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.

The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.

Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.

Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.

As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland

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