03 August 2015 - 11:36 am
One narrative we’ve been building on for quite some time is the idea that both stocks and bonds have been propped up by a perpetual bid from price insensitive buyers. Put simply, it really doesn’t matter how overvalued something is if your primary concern is something other than maximizing your return on investment.
Take corporate buybacks for instance. Both equity-linked compensation and the market’s tendency to focus on quarterly results at the expense of the bigger picture have compelled corporate management teams to develop a dangerously myopic strategy that revolves around tapping corporate credit markets for cheap cash and plowing the proceeds into EPS-inflating buybacks. Whether or not this is the best use of cash is certainly debatable but when the goal is to manage earnings and appease stockholders, that doesn’t matter, and indeed, companies have an abysmal record when it comes to buying back shares at levels that later prove to be quite expensive.
In America, the price insensitive corporate management bid simply replaced the monthly flow the market lost when the Fed – the most price insensitive of all buyers – began to taper its asset purchases. Of course QE in all its various iterations playing out across the globe, is price insensitive buying taken to its logical extreme. With the ECB’s PSPP for instance, limits on the percentage of an individual issue that NCBs are allowed to own apply to nominal amounts meaning that, to the extent NCBs can buy bonds at a premium to par, they can effectively buy fewer bonds than they otherwise would have and still hit their purchase targets. In other words, if you overpay, it’s easier to stay under the issue cap when supply is scarce in eligible paper. So in some respects, the more EMU central banks pay for the bonds they purchase, the better.
In Japan, the BoJ has amassed an elephantine balance sheet full of ETFs and because one cannot classify stocks as “held to maturity”, Haruhiko Kuroda’s equity plunge protection is effectively a self-feeding loop – that is, the more stocks the central bank owns, the more it must buy in order to protect its balance sheet from the damage it would suffer were equities to sell off. >> Read More
Quotes by Ed Seykota
1. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money.
2. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk.
3. If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.
4. I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.
5. Before I enter a trade, I set stops at a point at which the chart sours. >> Read More
From a very young age, we are ingrained with a powerful short-term reward system. We are taught to eat on day one and we get the reward of satisfying our hunger. This immediate gratification teaches us to always eat when we are hungry.
As we began with our education, we are rewarded when we do well in our exams and tests, by going up grade levels.
And as you get better with our grades, we soon realize that we get more approval from parents, teachers, and peers.
This gives us the reason to study very hard before we take an exam. Because we get the assurance that we’ll receive a better grade from it. As we enter the job-market, a day’s work is rewarded with a monthly salary.
In many cases, an immediate commission is rewarded for each sale we make – or it is aggregated into a bonus at the end of the year.
How all off this reflects on trading?
Very small percentage of people makes a real income and success out of trading. >> Read More
The NYSE crashed and almost nobody noticed (for a few minutes) because market levels were stable (and because retail is long gone). Why? Because most trading these days is done via derivatives anyway on exchanges like the CME, where one specific program may be the buyer of last reserve today: the CBIP.
What is the CBIP (first discused here)? Here is a reminder.
1. What is the Central Bank Incentive Program?
The Central Bank Incentive Program (“CBIP”) allows Qualified Participants to receive discounted fees for their proprietary trading of CME Group products. All trading activity under the CBIP must be conducted directly through accounts registered to the Qualified Participant or separate accounts managed by a third party on behalf of the Qualified Participant. Qualified Participants receive discounted fees on CME, CBOT, and NYMEX products and COMEX futures products for electronic trading only. Qualified Participant will receive discounted fees January 1, 2015 through December 31, 2015.
2. How does an applicant qualify for the CBIP? >> Read More
Bunds are ripping higher in response to news that the Greek delegation did not, in fact, have a new set of proposals for the Eurogroup to consider.
But weirdly, with the exception of Portuguese bonds, which have just turned slightly negative, and Greek government bonds, which left the building a long time ago, the rest of the European government bond market is pushing higher too. This is not how this market is supposed to work, writes Katie Martin.
Typically, if traders and investors are worried enough to pile into the safety of Bunds, then they shun the riskier stuff. So the following makes little instinctive sense:
- Bund yields are down 12.5 basis points to 0.637 per cent.
- Italian yields are down 7 basis points at 2.3 per cent.
- Spanish yields are down 6.6 basis points at 2.29 per cent.
- Portuguese yields are up, very slightly, by 0.6 basis points at 3.154 per cent.
Attempts to figure this out with several traders have so far produced responses including “I wish I knew… no clue”, “I don’t understand it”, and “you’re not the only one asking”.
So that’s great.
One somewhat more sensible explanation from a strategist is that the drop in stocks and commodities seems to be supporting bonds across the board.
1) Resilience - Successful traders take risk. Successful traders are sometimes wrong. Successful traders take hits. Successful traders learn from the hits, get up, and move on. They are resilient. They succeed, as Churchill observes, by moving from failure to failure with enthusiasm.
2) Selectivity - Successful traders have clear criteria for what makes good trade ideas. They also have separate criteria for what turns good ideas into good trades. They don’t watch everything, and they certainly don’t trade everything. They wait for good ideas to become good trades.
3) Calling - Successful traders have an uncanny sense that this is what they’re meant to be doing. It’s not a job, and it’s not a career for them. It’s a calling. That’s the only thing that can keep people searching and re-searching, banging away for good ideas and good trades. And it’s the only thing that enables them to gain the immersive pattern recognition experience that separates them from average traders.
To be sure, there are other success ingredients, from discipline to creativity. What I see among the traders listed above, as well as those I work with, is an unusual combination of these three factors. It’s a pleasure and a true education to study successful people. There is much more to success than avoiding failure.
Even after this somewhat catastrophic drop, BofAML warns the Chinese market looks expensive. Deleveraging is likely far from over, they add, concluding that the market is a “falling knife” and only direct buying by the government will mark the bottom.
Bottom likely when govt becomes buyer of last resort
After reaching a peak of 5,166 on Jun 12, SHCOMP declined sharply by almost 30% to 3,687 within three weeks. The ferociousness of the sell-off even took us by surprise – although we have a 3,600 target for the index, we thought it would take another six months to get there. Given the momentum, the market bottom is highly unpredictable.As a result, we suggest investors stay on the sidelines for the time being. A few points worth highlighting:
The market is now a “falling knife”: even after all the government directed marketsupporting measures since last Saturday, including comb rate/RRR cuts, CSRC’s loosening of margin lending control & its cracking down on shorting activities, and organized commentaries from high profile local fund managers, the market still dropped sharply on four of the last five trading days and fell decisively through the psychologically important 4,000 level for SHCOMP. The market has clearly lost its nerve and many investors appear to be rushing to exit.
Drastic times calls for drastic measures: the government still has a few policies up its sleeve: it may get affiliated funds such as Huijin and the pension fund to buy, CSRC may suspend IPOs, insurance companies may be encouraged to enter into the market, MoF may cut stamp duty on stock transactions, and PBoC may announce more easing measures, among other possibilities. However, whether or when these policies can stabilize market sentiment is highly uncertain in our view – margin call pressure from unauthorized margin facilities appears enormous; even for those investors not under any immediate margin call pressure, they need to be convinced that the market will go up meaningfully for their leveraged positions to break even (due to high funding costs).
Deleveraging in the market is likely far from over: margin outstanding only declined moderately from the peak of Rmb2.3tr on June 18 to Rmb2.1tr by July 2. Deleveraging from unregulated margin channels is likely to be more substantial. Nevertheless, looking at the relatively subdued turnover in recent days, we doubt a significant portion of the positions had been unwound. The 10% limit-down rule is delaying a market clearance.
>> Read More
A fund that was the biggest short in Shanghai copper has closed out of the position as China’s equity markets continue to drop.
Position data from the Shanghai Futures Exchange shows Chaos Ternary Futures, a unit of fund Shanghai Chaos Investment, is no longer in the top 20 holders of short copper contracts today
A woman at the fund’s market department who did not want to give her name said this week it was operating normally.
The fund was rumoured to be behind a dramatic plunge in the price of copper in January to its lowest levels in over five years, which happened while traders in London were asleep.
That highlighted the firepower of Chinese funds in commodities, just as western funds have closed or withdrawn from the sector. >> Read More