Aiki14

"I operated very consistently within the ethics guidelines I had" - Henry Paulson

Sun, 09 Aug 2009 14:35:00 -0400

Nothing I have ever read about Henry Paulson suggests he would be the kind of guy I would want to have a beer with. In fact the same can be said for nearly all of the high ranking Goldman sachs men who have found their way into “Public Service”. As it turns out I don’t go out for beers with my buddies all that often, but it seems this is the way to get across to the general public how one feels about a public figure. In the elections of G.W. Bush both times he was well ahead of his opponents on the “have a beer with” metric, and Mr. Obama chose to mediate his recent meeting with the Professor and the Policeman over a couple of brewski’s.

My impression of Mr. Paulson is that of an ambush killer, and a cutthroat guy you’d turn your back on at extreme risk. It seems the culture at Goldman forces the guys who make it to the top to have these qualities. Reading Charles Gasparino’s account of the Richard Grasso affair in his book “Blood on the Street” re-affirmed these feelings. As more and more information comes out regarding the whole of our current economic crisis nothing I have read, and none of his public statements lead me to conclude anything else.

Recent articles in both the blogosphere and mainstream media have called into question Mr. Paulsons ethics and actions and implied his conflicts of interest may have been a motive for his actions preceding and during the crisis. My inclination is to believe this to be the case so take the following as influenced by that bias.

Some facts:
Mr Paulson was Assistant Secretary of Defense during the Nixon Administration (1970-72), and left that position to serve as assistant to John Ehrlichman during the events of the Watergate scandal (1972-73)
He joined Goldman right after that in 1974 and became partner in 1982, managing partner in 1988, Co-Head of Investment banking in 1990, COO in 1994, and CEO in 1998. He Resigned from Goldman in 2005
He became Secretary of the Treasury in may of 2006.

In 2004, at the request of the major Wall Street investment houses—including Goldman, then headed by Paulson—the SEC agreed unanimously to release the major investment houses from the net capital rule, the requirement that their brokerages hold reserve capital that limited their leverage and risk exposure

In August 2007, Secretary Paulson explained that U.S. subprime mortgage fallout remained largely contained due to the strongest global economy in decade

On Friday March 14, 2008 Bear Stearns corp CEO Alan Schwartz was told by Mr. Paulson and Mr. Bernanke that he had to sell the firm by the opening of the asian markets the following monday. J.P. Morgan merged the firm into itself for $2/share (later changed to $10/sh)

On July 20, 2008, after the failure of IndyMac bank, Paulson reassured the public by saying, “it’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”
On August 10, 2008, Secretary Paulson told NBC’s Meet the Press that he had no plans to inject any capital into Fannie mae and Freddie Mac. On September 7, 2008, both Fannie Mae and Freddie Mac went into conservatorship.
Lehman brothers filed for Chapter 11 bankruptcy on Monday September 15th 2008
Now up to this point Mr Paulson was confident and upbeat in his public statements. He also was fine with, and in fact orchestrated to a great deal the demise of two of Goldmans primary competition. No talks of bailouts or stimulus plans were being discussed publicly.

Now we come to the sequence of events that gives me pause.
On Sept 12th Goldman stock closed at 154.21. Over the course of the next two trading days the market was unbelievably jittery and by the 17th the S&P had lost a couple hundred points and GS was at 114.50. Talk all over the street was Armageddon. On Sept 18th GS opened at 106 and by 11am was at 86.31 (a 5yr+ low). It was reported by CNBC (Gasparino) that Mr. Paulson had left Treasury and was heading to a meeting with Mr. Bernanke and members of congress at Speaker Pelosi’s office. It was assumed to be to discuss an economic stimulus package of mammoth proportions, GS went up to 120 before settling to close at 108.
Apparently Mr. Paulson was fine with letting his former competitors to swing on the economic gallows but was in full Battle mode when his alma mater was being fitted for a hood and noose. Does this constitute a conflict of interest? In and of itself, no. The market as a whole was going down the tubes that day and he could certainly make the case that that was his motivation.

Evidence:
Mr Paulson who had previously not supported any direct bailouts of individual companies was an architect of the AIG bailout. It can be argued that the number one beneficiary of this was not even AIG itself but Goldman Sachs.

On Sept 17th 2008 Mr Paulson was granted a waiver from the ethics ban on contacting his former firm (Attributed to Reuters in the Washington Post today http://www.washingtonpost.com/wp-dyn/content/article/2009/08/09/AR2009080901081.html ) but also in the article linked is a report based on a Freedom of Information Act request showing Mr. Paulson spoke to Mr. Blankfein (Goldman CEO Lloyd Blankfein) prior to being granted the waiver, and even more times to John Mack (CEO of Morgan Stanley and to whom the ethics ban would have also applied at the time).

Mr. Paulsons actions in the Bank of America incident also call into question his ethics. A disturbing allegation is the one that Paulson largely confirmed at the hearing that he, and possibly others including Federal Reserve Chairman Ben Bernanke, pressured Bank of America CEO to deceive BofA shareholders and not report the extent of losses at Merrill Lynch at the time BofA was attempting to acquire it. According to testimony before New York state Attorney General Andrew Cuomo, Lewis was seriously considering backing out of the deal, under a “Material Adverse Change”clause in the merger agreement, because of bigger losses than predicted on Merrill’s balance sheet. According to Lewis, Paulson said, “we would remove the board and management” if BofA did so. So Lewis and the BofA board backed down.
Republican Congressman Cliff Stearns, during Mr. Paulsons recent testimony before congress, attacked Mr. Paulson for a “Bait and switch” when he used the original bailout not to purchase toxic debt but to bail out financial institutions. Here’s a quote from Congressman Stearns “You came here and you said this two and a half page bill that you wanted $750 billion dollars, then immediately after you got approval from Congress you changed it, you baited us and you switched it, and then you started giving money to these institutions”. During earlier congressional testimony Mr. Paulson had stated “that there would be martial law, civil unrest and even food riots if they did not pass the bailout bill”. ( Here’s a link to an article from Prison planet http://www.prisonplanet.com/stearns-crucifies-paulson-on-bailout-bait-and-switch.html )

Remember, Mr. Paulson’s initial plan for $750 billion included giving himself unparalleled power and nearly total control of the funds. That alone is fascinating, so astonishingly brash as to raise eyebrows.

Conclusion:
While none of these, nor in fact all of these things in total, are proof of a conflict of interest, or compromised ethics, I believe they are enough to warrant a congressional investigation and or proceedings by the Department of Justice into Mr. Paulson’s actions. I also believe some of the information coming to light now puts the veracity of Mr. Paulson’s sworn testimony before Congress in doubt and warrants investigation into potential charges of perjury or contempt.

Calls to Mr. Paulson to discuss this matter over a couple of Stella Artois were not returned.

Aiki14

Twitter Attacked

Thu, 06 Aug 2009 14:00:00 -0400

I am not a tech guy at all, if it wasn’t for my buddy Jeremy I wouldn’t have this blog, I don’t know a bit from a byte and have no idea of how the stuff I write on this screen gets to you the reader. I use macs predominantly but I use PC’s to trade and to do the video’s for StockTwitsTV.

Today Twitter was attacked by some unknown entity in what is known as a Denial of Services Attack. That’s been explained to me as a concerted effort to flood the computers that host Twitter with so much data that they cannot perform their function of connecting you and me for our 140 character interactions.

I have been instructed by the good folks who installed and manage my trading platform that I should under no circumstances use that computer to surf the web. Even with state of the art anti virus, anti malware, and anti who the hell knows they cannot guarantee the safety of my data or the continuity of operation if I do.

Why is this? And what does it have to do with todays twitter attack?

There are in this world a group of characters who spend a lot of time attempting for nefarious purposes to obtain our information, steal our money, or disrupt our lives by using computer technology against us. They range from the stereotypical zit faced teenage loser to organized crime groups, to enemy government agencies. Now I know you already know this and we all do to one degree or another.

Here’s my point, it’s no longer, and in fact hasn’t been for a long time, some kid hacking into a company site to play some new game. There are people bent on serious malace who are a serious threat to everyone. Nobody short of Ted Kaszinsky in his deep woods hovel is not connected in some ways to the internet. No business, no commerce, no medicine, no anything in this modern era is not connected. When these miscreants do their misdeeds it effects everybody and in some cases it can make peoples lives miserable. It’s time to stop treating these internet attacks as minor insults and recognize the threat they are to our society and stomp them out. Make a real effort to catch these clowns and punish them in meaningful ways. Robbing my bank account via computerized attack is akin to breaking into my house and robbing me, the punishment should be the same and the effort to mete out that punishment should be the same.

Here are my suggestions:

1) Put a ransom on the hacker, catch a hacker win a prize. For every deviant hacker there a computer geek at MIT who wishes he could be a cyber sheriff. Turn these guys loose on the bad guys and make it pay off for them if they catch them. If the geek at Cal Tech catches a bad guy buy him a better hard drive and throw in a hooker, make it a public spectacle and you’ll have these guys beating down the doors looking for the bad guys.

2) Long prison sentences for the cyber criminals, in nasty texas jails run by that Joe Arpaio guy. But offer them the chance to reduce their sentence significantly if they catch other hackers. And make it very public, pillory these slime balls, and make heroes out of them if they turn their efforts to the good of society.

3) There is probably already a government agency to combat this stuff if the attacks are against the defense department or the air traffic control system, but I don’t know it’s name. I should, but it isn’t my fault, they don’t advertise. We need Eliot Ness out there in front of this popping off a few rounds with his Tommy gun and hanging with super models

4) if it’s an enemy government we need to consider it an act of war and perform a denial of service attack on them either with cyber weaponry or old fashion John Wayne and Audie Murphy stuff.

The next time I have to go 2 or 3 hours without StockTwits I want to see the cyber equivalent of Dresden circa 13 Feb 1945, or I am gonna be pissed.

NO ADMISSION OF ANY WRONG DOING

Wed, 05 Aug 2009 12:24:14 -0400

When the SEC raises charges against a firm and the firm agrees to settle the matter for a certain amount of money, most of the time they pay the fine with NO ADMISSION OF ANY WRONG DOING. As I mentioned in my previous post to this blog, Bank of America agreed to a settlement with the SEC for $33 million dollars, and they did so with NO ADMISSION OF ANY WRONG DOING. The reason I am raising my voice (in the blog/texting manner of capitalization) is this is particularly irritating to me. I realize that asking the recipients of these actions to “man up” and admit wrong doing is akin to asking a coward to act with conspicuous gallantry, and about as likely to occur, but can’t the SEC force the issue a little? Like multiply the fine if they want to play that game? I guess not. Just the fact that the SEC is gathering the intestinal fortitude to charge these companies is a deviation from their modus operandi of promethian proportions. Our regulating agencies have let us down to such a degree over the last decade or so that this is looked at as an act of resolve. How pathetic.

Even more egregious than the B of A settlement is this. I pause here for dramatic effect…

General Electric settled a case with the SEC for $50 million for “Misleading the Public” by committing accounting violations. NO ADMISSION OF ANY WRONG DOING was made, and the SEC has agreed not to name the executives involved. I will put this piece of information into storage so that any time a GE executive announces he or she is leaving to go elsewhere I can point out that he or she might be among the executives whose honesty is in doubt and who are of dubious character. Since we are not going to find out who is responsible all must be assumed to fall into these categories untl proven otherwise.

The alleged accounting violations ranged widely.

Inappropriate application of accounting rules to certain short term loans the company received, allowing it to book $200million in additional profits
Improper accounting for sales of commercial aircraft spare parts, boosting earnings by $585million
Reporting sales of trains (they make locomotives) that hadn’t occurred yet accelerating $370million in revenue
GE said it corrected its financial statements and spent $200million in legal and accounting expenses to fix the problems raised by the SEC
So $50mil fines, $200mil to accountants and lawyers and $1,155,000,000 in additional profits. That’ll teach them a lesson. Oh yeah, nothing like being spanked with a $905million dollar profit for teaching these bad boys to track the straight and narrow. This is the business equivalent of getting a ticket for driving on the wrong side of the road and causing an accident, and getting a summons that entitles you to a Ferrari. Hello… SEC… you getting this? Of course not.

This has a personal effect on me, I put client and firm money into GE debt instruments last november. A significant amount in fact by my standards. I did this based on information that now turns out to be not just erroneous but fraudulent. And because I am not a lame SEC apparachik I am calling it fraudulent, I am not accepting the NO ADMISSION OF ANY WRONG DOING nonsense.

If the markets are to be considered truly free and fair (I can hear you laughing so knock it off) we cannot accept this NO ADMISSION OF ANY WRONG DOING bulls***. It’s an insult to us as citizens and as market participants and it is propping up a bunch of liars and scoundrels. It’s outrageous, it’s a robbery in broad daylight, and it’s wrong. Plain and simple wrong. Tonight like every night these executives will walk out of their offices and get in their cars and go home, while there are increasing numbers of hard working Americans of high moral character without jobs, cars or homes. They should be perp walked to a 5 by 9 at the gray bar hotel, or at the very least they should be shamed by the public revelation of their dishonesty, and their dishonor. The SEC, our representatives in this disgrace, by allowing this to go unpunished in a meaningful way shares that dishonor.

Reactions To The BAC Matter

Mon, 03 Aug 2009 14:47:59 -0400

Today Bank of America was charged by the SEC for making materially false statements in the matters surrounding the Acquisition of Merrill Lynch. Ken Lewis told Congress on 12 feb 2009 he had “no authority” over the lavish bonuses Merrill Lynch gave out days before its taxpayer-financed takeover by BofA was finalized - but documents appear to show he signed off on the payouts.
The merger agreement that Lewis signed Sept. 15 specifically authorized bonuses of up to $5.8 billion to Merrill employees.

Mr. Lewis testified before congress that agreements to pay executive bonuses were in place prior to the acquisition. when questioned by Congresswoman Carolyn Maloney (D-Manhattan) he stated:
“My … involvement was very limited,” Lewis said. “[Merrill] had a separate board, separate compensation committee and we had no authority to tell them what to do; just urge them what to do. So we did urge.”The following is excerpted from a Wall st. Journal article by Kara Scanell:
The SEC alleges that Bank of America told investors in proxy documents on the Merrill acquisition that Merrill agreed it would not pay bonuses or other compensation to executives before the takeover deal was closed without Bank of America’s consent.
In truth, according to the SEC, Bank of America had already “contractually authorized” Merrill to pay $5.8 billion in bonuses.
Robert Khuzami, director of the SEC’s Division of Enforcement, said in a statement: “Failing to disclose that a struggling company will pay out billions of dollars in performance bonuses obviously violates that duty and warrants the significant financial penalty imposed by today’s settlement.”

Instantaneously announced (ok 40 minutes later) was that the case was settled for $33million, without BAC admitting any wrongdoing, how does this happen? How is it possible this didn’t leak out in any way prior to the announcement? Also if this is settled without any admission of wrongdoing does Mr. Lewis get off the hook? Or are charges by the NY Attorney General and/or Congress likely to follow?
I’d like to see answers to all of these questions.

Also of note is that all this was released on up day. Surely that’s no coincidence, and then they announce all kinds of management changes. This has the look of a professional public relations firm pulling the strings. How many players in this made sure it occurred in the right way for BAC and the market. The SEC certainly had to be complicit as no way this was settled in 40 minutes. BAC surely is as they were awfully ready for the settlement and the announcement of the management changes.

Once again it has the appearance that the big guys get off easy and the little guy gets the shaft. It will be interesting to see if large share blocks traded just before the 2 announcements.

I am also amazed on a general market note that there was not a whole lot of reaction in the market to this news. Hardly a hiccup in fact.

Numbers

Sun, 02 Aug 2009 13:56:00 -0400

Trading and investing are numbers game. Today I am going to examine two ways I see numbers and their effects on, and relationship to my way of going about this game.

First is the numbers we use to base our assumptions, rationales, and theories on. This group of numbers are generally grouped into the category of “Data”. Second is the numbers we use to attempt to gain an edge and hopefully to profit on a regular basis. This group of numbers fall into the category of “Statistics”.

For the sake of ease of writing this I am going to use the term “trading” where I could use “trading and investing” unless there is a reason to differentiate the two. So when you see “trading” assume I am referring to both unless I say I am not.

In my trading I rely on a very large amount of data provided by numerous sources. Whether it’s the trade price and volume from the exchanges I use to assemble charts to the numbers in the reports from companies in their quarterly or annual reports to the data the government supplies in their economic reports. I spend a lot of time analysing this data so I can determine what my course of action will be and my guess is if you’re reading this, you are as well. The trustworthiness of this data is critical to my being able to make these determinations and I dedicate a fair amount of effort to ensure this is the case.

Lately this data is proving more and more difficult to verify as accurate. In fact, as I’ll attempt to point out here, it has become questionable on many fronts. Data from the exchanges, while still extremely accurate, no longer tells the whole story. Due to the inception of markets outside the exchanges such as dark pools and crossing networks the data from the exchanges is rapidly becoming a smaller percentage of the total picture. Corporate reports are subject to more and more doubt as accounting standards change and regulatory oversight is hamstrung by budget cuts and a larger pool of companies to oversee. And government reports are subject to political forces, changes in methodologies, and unreliability of the data used to compile them. The GDP report from friday (31 July 2009) included revisions to the previous reports going back decades.

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Of particular interest to me was the bevy of headlines touting the “Better than expected” 2nd quarter 2009 GDP numbers. An “advance” of minus 1% was .5% better than analysts expected and this was seen as great news in places like the NY Times. One must note that the previous quarter numbers were adjusted downward by .9%, and if that happens again it would mean the numbers were worse than analysts expected. Previously in this Blog I have urged readers to remember when judging the words of pundits and talking heads, that they must be assumed to be talking their own book until proven otherwise. The same should be assumed when the government provides these reports, albeit to perhaps a lesser degree. The folks who put these reports out are under tremendous pressure to support the position of the powers that be, and combined with the fact that previous reports have been revised almost every time, and almost always in a manner that suggests the original was inaccurate in favor of the position of the powers that be, must make us take pause at the numbers and view them with a skeptical eye.
Worse yet, if we don’t take the time to drill down into the raw numbers, we have to rely on the aforementioned pundits and talking heads to do it for us. This now adds a second order slant to the data, compounding for us the difficulty of good analysis upon which to base our trading decisions.

When I make decisions on where to place my trading capital, and how much of it to place, I am attempting to gain a statistical advantage that results in a consistent profit. I realize going in that nobody wins every time, and in fact it is likely that most active participants in the market lose most of the time. As a believer in the “plan your trade, trade your plan” theory I look to develop a strategy that can be tested to show a consistent profit and to do this I use statistical analysis. Most people who come into this business concentrate on the ability to do Technical or Fundamental analysis, and if you go to the StockTwits recommended list you will find folks whose skill at this is nothing short of amazing. I have found in my professional experience that unless these things are combined with a robust risk management strategy the end outcome is poor. When a technician advises me of a set up he believes is advantageous, before I make a trading decision I want to know just how predictive this set up is. A good example that is easy to visualize are the Gap plays, if a stock gaps up or down at open, what percentage of the time does the gap fill. A beginner will fade the gap, but the pro will know ahead of time, what % of the time this company fills gaps, what % of the time the gap fills in the sector, industry, and broad market, what factors influence the %, and are they present for this trade. The pro will also take note of the times the gap didn’t fill and how much of a move was necessary to tell him the position is not viable. After all that the amount of capital to dedicate to the position is determined, and entry and exit points are determined.

So where are the statistics? The Edge?

My point here is not to teach a statistics course, but to point out that knowledge of statistics, and using them effectively, is a skill that differentiates the average from the excellent. Most people do not really understand statistics, and make conclusions that seem sensible but are actually erroneous and lead to negative outcomes. The closer an event is to statistical certainty (Lowest possible risk) the more money I will put toward the position, that’s risk management. If my inability to understand statistics causes me to underestimate the risk and over capitalize the position I will eventually suffer. If you watch the show Deal or no Deal you will see the average folks inability to grasp statistics resulting in poor outcomes. The banker is giving the contestants the choice of continuing on or taking the amount that statistics tell is the most likely outcome based on the amounts left in the cases and the choices required to be made. Most contestants end up with less than the bankers maximum offer.

To conclude, I would urge the reader to do two things:

1) Maintain a healthy skepticism with regard to the reliability of the numbers presented to you
and
2) Learn to use the numbers in such a fashion as to gain the edge you need to prosper in this business

These things take time and effort, but they don’t call it “the hardest way in the world to make easy money” for nothing.

Good luck and Good trading

aiki14

StockTwits, One Mans Opinion

Sat, 25 Jul 2009 12:47:00 -0400

StockTwits

Aside from my parents and a few friends from “real life” the overwhelming majority of the folks who read this blog are people who found me through my association with Stocktwits. Before I go any further allow me to say the following, I came across StockTwits in February of this year by a recommendation from my friend Horace Kent, a contributor at the Online Traders Forum (OTF) http://www.onlinetradersforum.com , I had never used Twitter before that and in fact had never participated in any social media website. With the exception of the folks who posted on OTF I did not know any of the people in the StockTwits community.

Now after six months I’d like to share my feelings with you. If you’re expecting this to be a puff piece, you’re gonna be unsurprised. I am really in the honeymoon stage now and am still quite amazed at this social media concept in general and at StockTwits in particular.
I have had the opportunity to meet and become friends with two of the three guys that are the braintrust behind StockTwits, Howard Lindzen ( http://twitter.com/howardlindzen ) and Phil Pearlman ( http://twitter.com/ppearlman ) and they have afforded me the outlet on StockTwitsTV to share my opinions and express my inner hamminess, and in fact it was an intern at StockTwits who obtained the aiki14.com web address for me to host this blog.

Above I referred to the StockTwits community. A year ago the concept of an “online community” was not part of my lexicon, and it was recently brought to my attention by an old dear friend that I derided her back in the day for believing that any of the words on the screen were written by actual people. Images of drooling knuckledraggers, pedophiles, and predators, typing with one hand in chat rooms, or hyper geeks conversing about cobol programming was about the extent of my feelings on the matter.

StockTwits has opened up my mind on this matter. In the last few months I have had the chance to meet many of the contributors, and hopefully many of you reading this blog. I have also met quite a few folks who contribute to the blogosphere. My experience in this regard is overwhelmingly positive and now number many of these folks as friends.

Two things that really amaze me about these people:
The generosity they exhibit with regard to their time and information
The high level of discourse that can be found

If you watch the video’s on StockTwitsTV other than the one’s I do, you’ll see a bunch of fellows who are offering an amazing product, asking nothing in return, which requires an amazing level of skill and time to put together. This is actionable information that can make or save you money, produced by guys who have proven track records. When you compare it to the dreck offered in the mainstream media, it is nothing short of incredible. Give me an honest guy with a webcam giving me the straight dope, over a glossy overproduced bunch of dopes any day.

Yesterday I posted a list of people I follow on Stocktwits that during the previous week made me think (no easy task because I am constitutionally resistant to it). On several topics I was either prompted to give an opinion on a complicated subject, or my opinion on a subject was challenged in a very articulate and well thought out manner. What followed in each case was a conversation involving several individuals that was, in my opinion, intelligent, genuine, and courteous. Compare this to the degenerative crosstalk of book talking ideologues which always seems to end in a shouting match on the “mainstream media”.

Many of the folks who regularly post to the StockTwits stream have blogs or websites not affiliated with StockTwits, and I would never have found them if I hadn’t found them there. You can find some of the best information available anywhere among these outlets and I urge you to check out the offerings by the folks you see on StockTwits. The quality of these blogs and sites ranges from the tee shirt selling, country music singing, cheesy book writing, self promoting swindler to the professional money manager with legitimate and sterling credentials, so I refer you back to my earlier blog on Bias for help in determining which are worth your time.

Wow Jim, this StockTwits thing seems perfect, a virtual St. Thomas More’s Utopia.
Ok, I deserved that, looking back on this essay, it’s clear I am a StockTwits fanboy, but lets have a look at a couple negatives:
There are, despite the herculean efforts of the aforementioned brain trust, still folks of nefarious character that leak through. Individuals who, for reasons of psychiatric disfunction ranging from the need for an ego boost to out and out dementia, greed, or just a desire to see others as miserable as them, post insulting, vitriolic, misleading, self serving, inane, insane, or bizarre tweets. I don’t think a week has gone by since I have been posting where Phil Pearlman hasn’t had to send me a DM (direct message) telling me to tone it down or catch my breath (my particular psychiatric disorder appears to be a predilection towards argumentativeness).
The thing that sets me off the most are the folks who post claims of success without any backing up of the claim. In some egregious cases this is in conjunction with an attempt to lure you into a paid service that they offer. If you follow the stream for a while you will see the claims of glory from these folks who never seem to make a bad trade or an incorrect prediction. If the market continues to go up, I guarantee you will see more and more of these folks as bull markets breed “geniuses” in great numbers. An easy way to filter these guys out is to never accept any claim of a success that wasn’t posted prior to or at the time of the trade or prediction, in fact, assume any such claim as an attempt to sucker you into something. Maybe as simple as gaining your respect, or as nefarious as getting your money. Double your suspicion if the individual is selling something, if the guy who’s bragging about “having to take a 10% profit on $F” and that his long term portfolio is “up 314% on $F” and he sells a stock picking or investment service you must conclude he’s a con man.

As intelligent adults we filter out the bad and make use of the good. The large majority of the folks who stick around and the information they provide on StockTwits falls into the latter category. I have found my association with the community to be extremely rewarding and I have used information I obtained on Stocktwits to the benefit of my personal trading and to the benefit of my professional trading and investing. That is a profound thing as I see it, and a thing of great value. It is also a rare thing indeed in this world.

As a regular feature of this blog, I am going to keep a record of the Tweets and Tweeters that have caused me to think during the week. Things that make me think, or even better challenge my thinking on a subject are of great value to me. I will post those things here on the weekend and hopefully they will also be of value to you.

Aiki14

PAIN

Tue, 21 Jul 2009 03:50:54 -0400

Pain

Yesterday I watched my cat Edison jump up on the counter and walk across the stovetop. It’s one of those flat glass type ones and he sat down right in the middle of it and gave me the look that said “how bout adding some fresh water to my bowl, or do I have to get it myself”.

Years ago, I purchased some stock in a small company from Florida that imported various products from China, it was trading around a buck and seemed to me to be sensible and I bought a large stake by my standards at the time. I followed it in the newspaper everyday as it went higher and higher and eventually reached over $8. I was newly married at the time and needed household stuff so I sold out and used the money for what we needed.

We have a garden and in it we grow all kinds of stuff including over the last few years some awesome habanero peppers. Our oldest daughter loves green peppers, always has, will eat them like I eat Doritos, as a snack (As you can see Intellect and good sense skip a generation). She picked a small pepper off one of the plants and took a bite like you would of a sweet green pepper (maybe that skipping a generation proposition is incorrect) and I watched with an evil grin as nothing happened and she finished it and left.

The cat got his water, I made some easy money, my daughter enjoyed a snack.

I took precautions to prevent the cat from being able to reach the countertop, every other $1 stock I bought for years after tanked, and the next pepper my daughter picked off the very same plant was so hot a tiny bite required about 20 minutes of eating wonder bread and drinking about 6 gallons of water, milk and soda to stop the crying.

The cat’s the cat, and it’s my job to see he doesn’t get hurt around the house, so I have to make sure there is nothing he can climb that would allow him to get to the countertop, which I did. But if I am not vigilant he undoubtedly will jump up onto the stovetop again. I don’t buy penny stocks anymore, and my daughter asks if it’s “one of those hell peppers” before she takes a bite.

We humans are interesting, we are motivated by success, and we learn from pain.

Every lesson I have learned that makes me a successful investor and trader today is the result of enduring painful lessons. I was gleefully thinking I was a genius as I strolled into home depot with my fat wallet after selling out of that one stock. What I had done was set myself up for a painful lesson in the future that I was less ready for or expectant of. In fact I made several more blunders after that because I had succeeded on that one. Had I endured a little pain I would have learned (one would hope) a lesson that would have spared me much more pain down the road. Having spent a great deal of my life in this game and associating with other folks of similar ilk, I have come upon the realization that this is a commonality that successful traders share. I have not met a single one with any time in the game that did not share this sentiment. The richest, most successful people I know all seem to share an affinity for relaying the stories of pain they overcame much more so than triumphs they achieved. Pressure makes Diamonds, a life without pain makes you Paris Hilton, if you think the latter is a more attractive path than the former, I hope your ancestors didn’t, otherwise refer to the above.

Now I embrace my pain, I realize the difference between the battle hardened veteran and the green recruit can be measured by the pain he has endured. Now don’t get me wrong, I am no masochist, one thing pain has taught me over the years is pain sucks, but I am also cognizant of the fact, and it is a fact, that in this game as in life, pain is coming at some point. Since it is inevitable that we will experience it, and we all agree that it sucks, we must acknowledge it, learn from it, or it gets worse.

I rarely dedicate much time to analyze winning trades, I book the profit, and move on. Alright I allow a little smug self congratulations, but I try not to let it take hold for long. I do spend much time doing forensic analysis of losing trades or market conditions that go against my thesis, because it prevents repetition of errors at least in theory, maybe minimizes repetition of errors is the fact.

What can we conclude from this? First is that pain is coming, so you better be ready for it and make provisions to minimize it if you can. Second that it must be viewed as an opportunity to learn, and in an odd sort of way, to prosper over the long haul. Remember the words of Jeff Macke “Getting in a losing position doesn’t kill you, staying in a losing position kills you” and accept your pain and use it for your long term gain.

Just as a corollary to the above, I wish to point out the following:
On Twitter, in the various trading and investing forums, and even on my beloved StockTwits, there are the Geniuses, the Uber Guru’s, who never seem to have a losing trade. One particular individual even talks of thousands of consecutive winning trades. Well if you buy into my above thesis, two things must logically follow, 1 is they are unique in the annals of history in their towering intellect and with powers and abilities far beyond those of mortal men, or 2 they are lying, maybe for pure egoistic reasons, or they are trying to sell you something. The aforementioned guy will even sell you cheesy tee shirts, his low rent fiction, or country music CD’s on his website.

Aiki14

No cats were harmed in the making of this blog

Bias

Sat, 18 Jul 2009 22:50:20 -0400

Bias

According to Merriam-Webster - an inclination of temperament or outlook ; especially : a personal and sometimes unreasoned judgment

I have always held a bias towards bullishness, I guess it’s just innate in my personality. One of the things that has helped me as a trader and investor is knowing this and adjusting my thinking to account for it.

An interesting thing about bias is how many traders or investors can be described as bulls or bears. When CNBC announced that legendary Uber Bear, Dr. Doom himself, Nuriel Roubini had suddenly become bullish, I was gobsmacked. As I said elsewhere, this is akin to hearing Mother Theresa was seen beating a child.
One of my favorite characters in the world of investing is Dr. Bob Froelich of Deutchebank, you used to see him a lot on CNBC. Bob is an Uber Bull, a genuinely optimistic guy whose life story lends itself to a confidence that things will work out in the long run. If Bob predicted a down market long term I would suspect the real Dr. Froelich had been abducted by aliens and replaced by a golem.

The time when bias is most evident is during bull markets, I believe this is a result of a majority of persons believing things get better over time, sort of a positivism inherent in our cultural zeitgeist. It manifests itself in ways that I find utterly fascinating. Folks come out of the woodwork with delusions of genius because they are bulls in bull markets. They seem to have the zeal of the mob, Wagners “Flight of the Valkyries” their battle hymn. On the other side, during bear markets the predominant attitude of the bears is more righteousness, a sort of “I told you so” smugness. Theirs is the zeal of the prophet of doom, a faith like adherence to the oncoming apocalypse. Their battle hymn is the dirge, the funeral march.

The fact that we are a social species, leads to group think, and thus the two positions are self reinforcing. The bulls gather strength and number until at some point the maximum sustainable number is attained, the last retail straggler comes giddily into the herd as it confidently charges over the precipice. The bears gather their numbers more subtly, lead by the prophets, the masses of war weary victims capitulating to the capricious market. The difference is the majority of this group, rather than taking short positions, expresses their surrender by selling out.

I offer CNBC as evidence of the above in this way, In 2006-2007 my friend Dr. Froelich was a constant presence on CNBC and Dr. Roubini was a fringe character unknown to all but the most serious of us wonks. I’d love to plot a chart of CNBC mentions of these two folks versus the S&P. I will posit that it’s a trailing indicator though. Also of note is that as bear markets wash out investors, and therefore CNBC viewers, it is in their best interest to see the market roll up. In light of this, their bias has the potential to be intentional, and is a topic for another essay.

OK so where am I going with this?
Well if you examine this closely you find that it is a perfect system to separate the most people from their money. Lets look at two types of players and their two subtypes. Bulls and Bears, leaders and masses.
The Bull leader, trumpeting the bull cause, buy buy buy, is fully invested and full of bluster bordering on hubris in Oct 2007 (DJIA 11000).
The Bear Leader, screams from the tunnel of oncoming trains, is fully short in Oct 08 (DJIA 9000)
The Bull masses hear the leader but they are timid, they remember the bad times but they’ve missed this rally, they see the leaders, the CNBC pundits, now in full flourish, and they want their piece, they’re fully invested in Oct of 2008 (DJIA 14000)
The Bear Masses are crushed, they see their 401k is down 50% or worse, the investments they made when they got into that Scottrade acct because their brother in law was raking it in in 2008 are gone, they see the CNBC pundits predicting end of the world scenarios, they are totally out of the market in Mar of 2009. (DJIA 7000)
Now here is the rub, the masses are only one group, the same group, just at different times in the cycle they change from one side to the other. As Bernard Baruch said, “The main purpose of the market is to make fools of as many men as possible”, so the masses repeatedly switch to where the most damage can be done to them. The Bull and Bear leaders may survive if they maxed out enough in their time to sustain themselves, Dr’s Roubini and Froelich are probably ok, they are very smart fellows and during their times they are wildly successful, for the less talented it’s unlikely. They are generally replaced by younger versions of themselves, and the cycle begins anew.

Who’s left? The Unbiased, or since I am not a believer that such an individual exists, those who can reduce their bias to the point where it doesn’t impede their ability to profit in any market. I believe that if you wish to succeed in the market (and if you don’t, call me and I’ll see you achieve you’re goal), you need to understand you have a bias, and develop a methodology that limits the effects it has on your trading or investing. Backtest it in all market conditions, and when you’re sure it works stick to it with rigid discipline.

If you don’t think you have a bias, I think you’re wrong, but I admit a serious bias against that position.

I cannot recommend a specific method for reducing bias, there may be different methods depending on the bias itself for all I know. I guess this all fits in under the rubric of trading psychology. A couple of folks who’s writings on the subject that I have found useful are:

Dr. Brett Steenbarger http://becomeyourowntradingcoach.blogspot.com/ and on twitter http://twitter.com/steenbab
Denise Shull http://traderpsyches.com/ and on twitter http://twitter.com/traderpsyches

It important to realize that bias is everywhere, and it comes in both intentional and unintentional forms. One must cleanse oneself internally of the latter and one must guard against being influenced by both in the information one relies upon to make decisions.

More on the bias of others, in an upcoming essay.

Aiki14

A few places for Information

Fri, 17 Jul 2009 17:28:28 -0400

I thought it would be helpful to list some websites I use for trading and investing information.

I do not list any blogs or blogsites here primarily because I am pretty new to the world of bloggers and have not done enough due diligence to recommend anyone yet. I have begun to read a few and am beginning to form some opinions, but they will have to wait a while before I opine on that subject.

I also do not list any sites that tout stocks as I do not read any nor would I recommend anyone doing so.

General Business and Financial News, Print:

I subscribe to the print and online versions of the following because I still like having a newspaper or two around the house. Helps during the winter for starting the fireplace as well. Of the three I would say IBD has the most actionable information, but the era of these publications is fading.

Investors Business Daily http://www.investors.com

The Wall Street Journal http://online.wsj.com/home-page

Barrons http://online.barrons.com/home-page

General Business and Financial News, Web:

Bloomberg http://www.bloomberg.com/index.html?Intro=intro

Seeking Alpha http://seekingalpha.com/

Specific Sector/Industry Info:

I subscribe to the premium content of many of the following, and you will have to decide if there is enough reason to justify the expense for doing so for yourself. The free content varies by site but almost all have some value.

WTRG Economics- Oil http://www.wtrg.com/index.html#Crude

Oil Online- Oil http://www.oilonline.com/

Kitco- Precious metals http://www.kitco.com/

Monex- Precious Metals http://www.monex.com/

Hard Assets Investor- Commodities http://www.hardassetsinvestor.com/index.php

Infomine- Mining Info and Technology http://www.infomine.com/

Mining magazine- Mining Info http://magazine.mining.com

Steel Guru- Iron and Steel http://steelguru.com/

Metal Bulletin- Iron Ore http://www.mbironoreindex.com/Default.aspx

Vesseltracker- Shipping http://www.vesseltracker.com/app

RailFax- North American Rail Shipping http://railfax.transmatch.com/

Financial Information:

Earnings.com- Earnings Reports and calander of events http//www.earnings.com

FINRA- Financial Industry Regulating Agency http://www.finra.org/index.htm

Securities and Exchange Commission- Official word on all things securities http://www.sec.gov/

U.S. Dept of Treasury- US Gov’t Agency that issues Treasury Securities http://www.ustreas.gov/

The Federal Reserve- The Fed http://federalreserveonline.org/

St Louis Fed- Part of the Federal Reserve system (added here because of the economic data they manage) http://research.stlouisfed.org/fred2/

The Securities Law Home Page- legal Issues http://www.seclaw.com/Welcome.shtml

Hoovers- Corporate Info http://www.hoovers.com/

SitMo- Financial Engineering References http://www.sitmo.com/

The Ludwig Von Mises Institute- The Austrian School and More http://mises.org/

Trading and Investing resources:

NASDAQ Trader https://www.nasdaqtrader.com/

Investing in Bonds http://www.investinginbonds.com/

Traders Audio (If you need the feel, this is the greatest, and the guy who runs it is a good guy) http://www.tradersaudio.com/index.html

Advanced Trading http://www.advancedtrading.com/index.jhtml;jsessionid=M4R05U3OEL0JAQSNDLOSKH0CJUNN2JVN#undefined

Pivot Point Calculator http://www.mypivots.com/calculators/pivot-point-calculator.aspx

The Pattern Site http://www.thepatternsite.com/

Exchange sites:

NASDAQ http://www.nasdaq.com/

NYSE Euronext http://www.nyse.com/press/1191407641943.html

Every Exchange on the Planet, and much more from Rutgers http://www.libraries.rutgers.edu/rul/rr_gateway/research_guides/busi/stocks.shtml

Misc:

I have posted regularly on only two forums since I found the existence of such things and I want to post them here because I have learned a tremendous amount from the great people who post there. They also have the benefit of really great proprietors and I am thankful they take the time to keep them running.

The first and the one which I have the deepest connection to is the Online Traders Forum which is run by my friend from the igloo in the great white north Thierry Martin.

http://www.onlinetradersforum.com/ and on twitter http://twitter.com/TradersForum

The second is one I found fairly recently, and found the folks there to be amazingly generous with their time and information

http://www.freetradingvideos.com/default.asp and on twitter http://twitter.com/FreeTradingVids

I would suggest you follow the folks I follow on Twitter, every one has posted something I found of value, and many are simply amazing resources.

And finally, the folks who post on Stocktwits, which I have found to be a most incredible group of individuals and a truly valuable resource in and of itself. I can’t remember the last time I got any news from a “professional” outlet before it was posted on Stocktwits. And in a somewhat self promoting statement, I would like to point out the folks who appear on StocktwisTV. Each one is a professional with a proven track record who takes the time to provide info that you won’t find anywhere else, and they do it for free. I recommend you make use of this resource because actionable information, brought to you in real time, for free is a very rare thing.

Have a resource I didn’t mention, or a correction? Why not leave it in a comment below?

Have a good Weekend,

Aiki14

Mr. Paulson returns to Washington

Thu, 16 Jul 2009 09:24:34 -0400

Henry Paulson, former Treasury Secretary, former Goldman Sachs Chairman, is going to appear before our elected officials today. This should be interesting indeed. For those who may not be following this Theatre Americana let me bring you up to speed. A while back the economy was on the edge of a precipice with one foot over and one foot on a banana peel. BSC (Bear Sterns) and LEH (Lehman Brothers) were already at the bottom, vultures picking at their carcasses in a way only the specific genus of Vulturis Wallstreetensis can do. The mothership ( Merrill Lynch) was pierced by the toxic derivative torpedoes and was heading towards Davy Jones Locker. The stock market was in a nosedive and the powers that be were scared, not just a little scared either, I am talking dog in thunderstorm piddling on the carpet scared. I’ll admit it, I was scared too, thankfully the carpet was unstained at the Gobetz household, but when the market began to take GS down that day, I was long, as Barry Ritholtz says, Pitchforks and Torches. Mr. Paulson, with multi trillion dollar bailout plan in hand flew across town in his golden chariot (part of the Golden Parachute he received when he left Goldman) to meet Fed Chairman Bernanke and select members of congress. Word of this meeting was reported on CNBC by Charlie Gasparino ( I went long GS while he was still talking for the best day of 2008 for me) and the market turned around and went back up to close the day up.

The events that occurred at that meeting and over the subsequent weekend are the topics of todays congressional inquiry. BAC (Bank of America) lead by Ken Lewis bought Merrill in a deal rushed through and Merrill was absorbed into B of A faster than a ham sandwich into Rosie O’donnell. Here’s where the fun begins, after the deal Merrill’s CEO and frankenbroker John Thain (himself a former GS honcho) noticed they had forgot to mention a few billion in toxic assets. Mr Lewis could have opted out of the deal at this point but didn’t. Mr Paulson and Mr Bernanke are alleged to have put pressure on Mr. Lewis to suck it up and sign on the dotted line. Mr. Lewis either was incompetent and acted against his shareholders, or was “pressured” into signing, his testimony and public statements has indicated both and neither depending on when and where he made them.

I must admit before I proceed here that I am not a Paulson fan, I worked for Merrill and found it to be a really great place to earn a living and many great people who worked there were clobbered by the fall of the company, and I am a huge fan of Dick Grasso the hero CEO of NYSE who’s actions during the 9/11 events in my opinion define the term hero as far as we in the financial world can aspire to. Mr Paulsons actions in these events, and to the degree he caused these events have given me the impression of a modern day vampire, and I am quite sure he does not cast a reflection.

Previously Mr. Bernanke and Mr. Lewis have appeared before the committee, and it’s been a comedic tour de force as our elected officials have acted in a partisan manner, asked some of the stupidest questions I have ever seen, grandstanded for political points, and in one particularly egregious moment Maxine Waters (D-Cal) asked Mr. Bernanke about his tenure as CEO of Goldman (mistaking him for Mr. Paulson). Equally bizzarre Rep Bachman (R-MN) asked questions so incoherent Mr. Bernanke had to ask WTF she was talking about.

I am hoping for Mr. Paulson, who is a notorious stutterer when under pressure, to melt down and dissolve into a puddle while screaming “I’m m’m’melting, I’m m’m’melting” but more likely he will grow a tail and horns and a lake of fire will appear under the GS logo and the apocalypse will begin.

Let the fun begin.

Aiki14

Risks of 3X ETF's

Wed, 15 Jul 2009 06:33:58 -0400

Reading FA (Financial Advisor) magazine this morning and came across the Direxions advertisement. For anyone who doesn’t know, Direxions is the company that brings us the 3X ETF’s. In small print near the bottom it says the following:

“The use of leverage by a fund means the Funds are riskier than alternatives which do not use leverage. The risks associated with the funds are detailed in the prospectuses which include adverse market condition risk, advisers investment strategy risk, aggressive investment technique risk, concentration risk, counterparty risk, credit and lower-quality debt securities risk, equity securities risk, currency exchange risk, daily correlation risk, daily rebalancing and market volatility risk, depository receipt risk, foreign and emerging markets securities risk, sector securities risk, interest rate risk, inverse correlation risk, leverage risk, market risk, non-diversification risk, shorting risk, small and mid cap companies risk, tracking error risk, and special risks of exchange-traded funds, market timing activity and high portfolio turnover risk, investing in other investment companies and ETFs risk, commodities securities risk, geographic concentration risk, valuation time risk, derivatives risk, commodity-linked derivatives risk, wholly-owned subsidiary risk, tax risk, options and futures contracts risk, security selection risk, Debt instrument risk, Gain limitation risk, U.S. Government Securities risk, and special risks of Exchange-Traded Funds.”

I can imagine the meeting where the lawyers came up with this list, a group of weasily characters endeavoring to cover all their bases like a grounds crew rolling out the risk tarp. I am surprised they didn’t include risk of risks risk.

Reading that disclaimer I am wondering if just owning one of their products voids your life insurance policy. There are fewer risks in being an astronaut, a rodeo clown, or one of those guys that paints suspension bridges. I can hear this conversation between the rodeo clown and his investment advisor:

Zeke: Sure, I have the “gored by a ton of angry pot roast risk” but I am really scared of this “special risks of Exchange Traded Funds”, I mean what is that exactly.

Murray Lynch FA: That’s either a “guy in dark suit jumping out of window, landing on your head risk” or a “shady opaque weirdly constructed underlying product risk”. Luckily for you I have this “Helmet of Diversity” which protects you from both, with the splatter stain rider you’re totally safe.

Zeke: Check please! I’ll take my chances with “Scene of the Crash”.

If any one has a fast and easy methodology to assess and value the risk of these products please have yourself checked by a psychiatric professional or take care to avoid Kryptonite.

"The idea is to try to give all the information to help others to judge the value of your..."

Tue, 14 Jul 2009 16:51:13 -0400

“The idea is to try to give all the information to help others to judge the value of your contribution; not just the information that leads to judgment in one particular direction or another _ Richard P. Feynman”