Bill Cara’s Blog for January 8, 2010 [See POST-CLOSE REPORT]

Good morning.

DB - Upgraded to Buy @ UBS

I think I've figured it out. The market will continue to advance until the world encounters such a devastating black swan that generates so much selling that it overwhelms the Fed Hedge Fund's ability to stop the decline. But I think "normal bad news" just won't move things in any dramatic way.

Here's why: in the current low volume environment, the Fed Hedge Fund can beat back the current level of traders interested in shorting - especially now that 9 months have passed without any major declines.

My belief is, given a clever computer algorithm, a reasonable amount of firepower, and a high enough short interest, a computer could apply that firepower at a tipping point (such as a news item release, such as "good pending home sales numbers" - situations that are ripe for short squeezes. It might even make money - but it doesn't need to, it just needs to be "revenue neutral."

Citing "national security" the Fed could develop a rather complete picture on the overall level of short interest and stops from each of the market makers. A regulator could easily make that information a requirement from its market makers. They might even have this information real time. They don't need it from everyone - just 20-30% of the volume would be good enough.

Multiplying the effort is the clever market makers who would watch the Fed Hedge Fund's actions and follow along behind them, giving new meaning to the advice "don't fight the Fed."

Lastly, tack on various stop-tripping tactics, such as periodic major gap-up opens in selected stocks and/or momentary flash highs at the open, and you have a recipe for a continuous melt up such as we have seen lately.

I don't pretend to be an expert trader like Bill. But when he says repeatedly this environment is nothing like he's ever seen before, I listen. And, I am an expert software engineer, and in my experience this kind of program is not only possible, it is something that given enough time and experimentation, I could develop in a reasonable amount of time were I employed by the PPT to move the stock market back up to pre-crash levels "by any means necessary" - all in the name of national security, of course.

After all, who would possibly complain? Short sellers? When all the voters are mom and pop and folks who depend on their pension fund's stock market returns?

Of course, corporate insiders and wall street folks "in the know" get rich along the way too - Goldman's streak of 100M dollar days - but would you rather have all those 401ks and pension funds drained dry? That sure sounds like a national security issue to me.

I mean, we handed trillions to wall street. What's a little market manipulation done in the name of saving pensions of retirees?

Circumstantially here, we have:
* means - Fed firepower, a hypothetical but not too difficult-to-develop computer program
* motive - manipulating the market back to pre-crash levels "saves the pensions and retirement funds for all americans"; in addition, given all the bailouts we've seen, why would we think the equity market is somehow sacrosanct?
* opportunity - Fed is in a position to demand information, execute trades through proxies, and is secretive

So I have to ask myself, do I really want to go short anymore, and fight the Fed?

At the same time, do I want to support the long case, when I know
a) it's morally corrupt and
b) the coming black swan will absolutely crush all of this deck-chair-rearrangement game in the fullness of time

This is probably not news to the experienced traders who participate on this forum, but the following article provides an interesting insight into one way programmatic HFT has corrupted the markets.

Sub-Pennying

Other articles on this site describe how HFT programs can crash markets. An example of this was yesterday in the trading of RMBS.

And note to davidfairtex - this goes right to the situation you describe about programmatic manipulation of the markets.

Beautiful post!

And pre-market trading in TLT/TBT has responded accordingly. But more muted than one might expect.

Dollar and oil down, bonds and PMs up.

AMAT - Upgraded to Buy @ Needham. PT = $18

APA - Howard Weil Resumes Coverage with a Market Perform. PT Raised from $108 to $113

GRMN - Upgraded to Sector Perform @ RBC. PT = $33

KO - Downgraded to Neutral @ JP Morgan

WFMI - Soleil Initiates Coverage with a Hold. PT = $29

Started as a buy by Dahlman Rose this morning. Up 3.5% this morning to $2.64. (Note-my cost $2.25 area)

The markets seem to be holding up fairly well even in the face of unexpected news. The financials seem to be holding up even better than the S&P/DJI. I have to agree with the meltup theory - nothing seems to shake the market. If I look at the SPY, it looks extended, but the daily uptrend is still intact - we bounced off short-term support at around 113.25. We aren't anywhere close to that yet today. Melt-up continues.

Bounced right off support this morning. For all those who deny the value of tech analysis. ;)

Lesson learned. It is ok to buy a news driven pop if that pop is caused by the news that a company discovered the cure for cancer(:.
Bob

http://www.jugglingdynamite.com/blog/_archives/201...

Number 2 (and others),

What about the bond market are you looking at?

(I'm a absolute novice when it comes to bonds.)

Thanks!

-Dave

Despite the rally back in Tech, Transport, RUT, I noticed that $TRIN is elevated and down volume has increased in % against up volume throughout the morning. Something is afoot?

I think after setting the discount rate to zero they now try the get the VIX to zero.

http://bit.ly/7svYhE

I know its not a company but maybe they should just delist it.

it capitalizes on assets that are mispriced, both too high and too low. And, importantly, it lowers the risk if you are wrong. Employing a contrarian investment strategy doesn't insure investment success, but it is a good place to start ".. Bill Fleckenstein...

Says Tim Was Not Involved In AIG Email Fiasco, http://www.zerohedge.com/print/52963

How much more can we take? How much?

With the buck off 0.64%, the following sectors have:

The pump:
* oil equipment
* gold miners
* semiconductors
* oil, gold, silver

The dump:
* REITs
* Financials

This set of sector moves makes sense.

Yet in the overall market, the melt-up continues once again. The market started down -4.5, recovered almost immediately - at the same time the dollar made a nice move UP, and is now positive. When the Fed Hedge Fund can do this with just a couple of servers in a "revenue neutral" manner, why not? Why not have the market go up instead of down? If you were President and you could control the situation, what would you choose?

Took a good sized position a few minutes after Vadym mentioned it yesterday afternoon, got greedy and held this morning after watching it hit $4 and booked my profits this afternoon for a 38.5% gain. Now, if I were attending the conference next week, I'd buy him a drink!

Now is a perfect time to be getting into real estate in America.

The narrowing spread between the Fannie 30yr Bond and the 10yr Treasury is now the lowest in 17 years. Pension funds and foreign treasuries like to buy bonds and treasuries because they have been 'safe' with similar yields and risk. The pattern has been disrupted by our US guberment who has been buying up 30 year coupons and upset the tracking of coupons and treasuries. (Besides investors becoming increasingly concerned about the 'ahem' value and ROI of our financial vehicles.)

The Fed has essentially bought interest rates down by lowering the spread. Nowadays, it would cost you on average, 3 points to buy that benefit (to lower your interest rate by 1%) which equals a real fee that your government is paying for you, Mr or Mrs homebuyer or refinancer, on your behalf. 3 points on a $250,00 loan is $7,500.

It is estimated this equals about $14,000 in benefits between the buydown and tax credit for first time buyers. The difference in 5% and 6% over 30 years in interest payments on a $250,000 loan is worth $56,452.09 over the life of the loan. Factor in the lower sale prices and you do the math. By May 1, 2010, the tax credits go away (veterans have longer) so expect this party to end around that date. Just in time for summer sales to get pumped. Perhaps time to adjust your HB&B window of opportunity.

If you are buying or refinancing, just be ready for the new improved and confusing RESPA laws, 3 page 2010 GFE and "Mother, may I" process that makes getting a mortgage these days feel like running a long distance marathon.

Hi Loannet - I have been trying to figure out the new good faith estimate for days now and still don't really have a clue, and like you I do this for a business. Borrowers hate the presentation, and all it really does is help to eliminate bad actors who I understand have mostly left the business. Like the HVCC (Home Valuation Code of Conduct) I expect this nonsense to get repealed when the "Hope & Change's" unintended consequences comes to the forefront.
I wonder which companies may stand to benefit most from the latest Hope & Change waste of taxpayer funds to promote clean energy - I expect the best use would not be grants (tax credits), but rather loan guarantees for real clean energy like nuclear, but I don't think that would fit the bill for real Hope & Change political backers. It would seem none of them understand a base load capacity vs. a peak load capacity provided by the real "green" electrical sources of hydro & fission. Happy Trading All

"The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort."

http://tiny.cc/jAZhn

Hi All - Of course this is at the urging of Goldman & Morgan et.al. so they can benefit from the cash flow stream on this type of conversion plan. Just like changes in the mortgage business - all intended to direct the business to the larger banks - who as we have seen relative to credit card fees & unreasonable card rate hikes will only hurt customers and our free market system for the benefit of Wall Street and the leftist elite. Happy Trading

Thats 17.5B of consumer spending that just vanished from earnings reports.

So when they report record profits and sales, should i suspect the Fed to also be buying built up inventory from Amazon.com?

I'll give it a shot. but at this time i believe it's too risky to trade any relevant amount of money. And i wasn't serious about buying a gun and bullets. although its a constitutional right.

I highly doubt a correction here at these levels will be an orderly one. the only chart that attracted me lately was DRYS basing, http://bit.ly/7v3LZT.

I intend to keep trading. I will of course watch the market keenly and be ready to sell on a moments notice. I enjoy trying to make a few dollars.

Sorry it took me some time to read your links, thank you. I did like your articles and agree with the need to learn and not to find excuses. However, The "thin Markets" are disqualified and that what we currently have. I agree with "TRADE WHAT YOU SEE, NOT WHAT YOU THINK". Except you see the charts reflecting the situation, where I see the situation creating the charts - technical vs. behavioral. It does take quite a bit of learning to filter the noise and study the situation, and, of course, ones social position has big influence.

Technical analysis may or may not reflect current political direction. I just wanted to know if old technical methods still generate positive results.

"Except you see the charts reflecting the situation, where I see the situation creating the charts - technical vs. behavioral."

Ummm... :)

Last thing I want to do is to engage in semantics, but if situation creates the charts, don't charts reflect the situation by definition? :)

Also, technical vs behavioral? Charts reflect mass psychology and behavior - and conduce certain behavior - which in turn again gets reflected in chart - etc, in never-ending feedback-feedforward loop. Technicals are just the tools to read the behavior, nothing more.

Please note that by this I mean only the behavior of the forces engaged in trading, not the broader definition involving political landscape. While everything is connected to everything else, one can't broaden the scope of analysis endlessly, there must be some reasonable limit necessary and sufficient for making timely decisions. I make this additional comment because of this remark: Technical analysis may or may not reflect current political direction" - it's a bit beyond the scope I discuss.

Well, that's exactly what "Trade what you see, not what you think" addresses. When available information (and our interpretation of it) dictates one course of action while chart says otherwise, that slogan governs a trader to go with chart. The practical outcome of trading based on one's model vs based on chart action in the only valid criteria by which one can make that choice. Mine is made 12 years ago, which is when and why I came up with the slogan.

Talk about an issue of capital markets and social equity; the world's largest sugar processor, ethanol producer Cosan, has been found by Brazil's gov't to be engaged in practises resembling slavery with certain of its workers.

Brazil's national development bank (BNDES has pulled its loans to the company.

http://www.bloomberg.com/apps/news?pid=20601086&si...

I've been skeptical of some "social equity" mutual funds, but I don't think I'll buy shares in CZZ, thank you ... If the US ever repeals its import tariffs on ethanol, I wouldn't be surprised to see a special ban on CZZ's production.

OK, so it's a week past end-of-year.

Portfolio was split into two halves on March 4, 2009. The buy-and-hold half was all-in Fidelity Select funds until mid-May- in cash since then. The trading half was more or less all-in 3x ultra longs until mid-May- pretty much just scalped the ultra shorts since then.

Total return on all portfolios: 81.75%. Not least due to wife's insistence on long-only strategies over the past few weeks, mainly in AA, ALY, SLW, C.

Best wishes to all for the Year of the Tiger.

(If I'd had the guts to hold the 3x ultra longs all year? Even I don't want to know.)

Luggie,

Feel free to commiserate directly. I have attended 3 training sessions on the 2010 GFE and another next week. The experts all have different opinions. The umpteenth software updates to handle the new forms has bugs too....lovely! If it's it's any consolation lenders are confused also.

Hope and Change benefits IMHO are well intended ill considered and will have unintended consequences mark my words. I think the biggest current market threat is 'peak money'. Kaimu is just waiting for that resounding crashing sound followed by...silence? screams? his loudest HA!?

Hi Jock - Darn it, I own this one. Nice news on Terrane - not too sure about entry/exit on this one pending details for the project funding mechanisms. Happy Trading

Vad, the funny thing is, my rant about a controlled market and your assertion "things are working the way they always have" live together quite nicely. Here's how:

The programs that trade are nothing more than one of your scanners that detect one of your forming patterns, and then on sensitive stocks in particular situations, they act to convert the pattern into a breakout.

Fed Hedge Fund does not have enough firepower to do "whatever they want" - nobody does. Instead they rely on using the various pressure points and sensitive areas of the charts to tip a close-run situation in a direction they want. "GIve me a fulcrum and I will move the world."

At least that's how I'd write the program. And if I didn't have to make money on it, I'd have it trigger in a lot more situations.

If this happens often enough, across the market, in aggregate it moves the entire market in the desired direction slowly over time.

And once the scalpers figure out this is happening, they adapt and start to unconsciously support this movement, so even less firepower needs to be used. It gets a life of its own.

So for those of us who want to be swing traders, unless we want to go long (which is risky right now), we're pretty well stuck, hence the rants. The scalpers, since they're out at end of day, for them the risk is clear, bounded, and (honestly) quite minimal.

I'm thinking I should either become a scalper, or stand aside. I'll probably stand aside, except for a few longs I like and some Taleb-inspired puts for when that Black Swan hits.

Isn't it great how we can both be right?

Dr Strangelove,

I don't take candy or Kool-Aid from politicians. You never know where they've been!

http://tinyurl.com/y8tknlx

Horizon Bank was shut down and handed over to local S&L Washington Federal Savings today. The only blessing is keeping their resources in local hands. Over commitment to construction and real estate development were named as reasons for their demise.

NYUGrad & Vad,

As Vad suggested the 24/7 barrage of news can be overwhelmingly depressing. Also his simply, but not always easy, advice to trade what you see (the road not the map) and watch for a definite trend changer of some kind.

Most of my biggest losses have come from "knowing" prices were unreal. After 20 years (1969-1989) as a buy and holder, I "knew" the prices during the tech boom were idiotic, stayed with shares of companies with real earnings and missed most of the decade.

I did average over 10% per year from 1983 to 2007 after I was allowed to managed my own retirement account by picking well run companies and setting stops. I made money in 1987 with stops, but bought back in a bit too soon.

I made money with the 2000 plunge for the same reason.

I have only done a little short term trading (small amounts) and am half in cash while waiting for the TOG that is sure to come out of the present charade (large amounts). For the record: My other half is in corp bonds with 7% or more yld. and a mutual fund (PRPFX) which is gold, Treasuries and blue chip stocks. Anything which is not sell stop protected has a mental stop and I am willing to dump at any time.

Patience is the hardest thing for me to manage. I want to be aware of what is happening, but it ALWAYS takes far longer for the overall market to react to stupid policies than I think it "should".

Just an observation, NYUGrad (not a criticism) it appears to me you are too quick to play a hunch with an image for the outcome. Been there. Life has seldom gone the way I want it to, but the surprises keep us interested :-)

Best wishes. (End of sermon from the old Grym)

Hi Jock - Although C. Jeannes & Co. (GG) opt out of joint venture they still sit in the cat bird seat as major shareholder thereby eliminating other major interest. Not sure how TRX can possibly fund the development short of massive dilution and I expect the smart money while loving Mt. Milligan economics is taking a wait and see to evalutate how Terrane intends to come up with $800mm to prepare for initial production. Probably one to take a position on, but who knows? Perhaps they can sell Berg to get the wheel rolling on funding. Happy Trading

Black swans appear and disappear at will.

Is it possible that a black swan cleverly embedded itself into the widely expected financial crisis of '08, and caused the sell-off to deepen into March of '09?

In which case, it may have disappeared in the Winter of '09.

And was followed by the rarest of white swans, which is to say that the subsequent 10-month rally was/is a rare but expected reaction.

I'm not sure I'd be looking for a black swan again anytime soon. JMO.

In tomorrow's NYT Magazine, Roger Lowenstein notes that "morality" is expected of home-owners, but not of Morgan Stanley, which just "walked" on a mortgage covering 5 office buildings Morgan owned.

Sure, home-owners have signed a promissory note. The penalty for default is surrendering the home. He urges home-owners to make their business decision just as coldly as did Morgan Stanley.

Very bold notion, and with seemingly large consequences on the eve of a new round of interest-rate-resets on a whole category of mortgages

http://www.nytimes.com/2010/01/10/magazine/10FOB-w...

PS: Isn't it curious that the name Morgan appears in 2 HB&B's! Ghosts of the rapacious financier ...

Vad -

You are right, I believe the Fed is doing exactly what a competent trader would do. My guess is, with the added advantage of knowing where our stops are, knowing in real time the aggregate size of our short positions, they aren't required to make a profit, and they have a few trillion dollars to work with. And I suspect they don't get margin calls either. They aren't omnipotent by any means, but they are definitely a force to be respected. I'm guessing they don't fight the tape either, but they do tip the scales at important moments. And without a profit motive, they can make break-even trades that end up effectively transferring money from the stopped out shorts to the longs.

You suggested that if the Fed were on the job, the market would become more predictable, and that we should thank them for that profit opportunity. So the market has definitely become more predictable. It has gone up, up, and higher up, for the last 10 months. And I think Goldman is thankful. Goldman HAS made regular sizable profits. Their predictable profits are an indication that I'm right. Not proof - just part of that circumstantial case I referred to before. If YOU KNEW the Fed was providing a put, a real put on the market, you too could go long, stay long, and make a mint of money. I think it is quite possible that Goldman has done just that.

Alas, none of the great unwashed were so informed, so we weren't able to avail ourselves of this opportunity. And I'm guessing the opportunity won't last forever. And the unwashed will not be told when the Fed is no longer on the job. Sucks to be them.

Lastly, I think you're right - I probably shouldn't "know" that a black swan will hit, but its my strong belief that one will. As you point out, this affects my perception of risk of holding stocks overnight, which makes it difficult for me to hold long positions for any serious length of time without a hedge in place. It's why my performance over the last six months has been spotty.

Now how do I respond? Jump on board the long Fed Bandwagon while it's still rolling, and hope I can jump off in time to avoid the gap-down black swan? Or do I stand aside?

I know, I could become a scalper, but that's just not where I want to go. Not because I doubt it makes money - you're living proof. I just don't want to pay such close attention to the moment by moment movements.

As for the rest of it, your comments are always valued by me.

Dave,

two points I'd like to add a few words to.

1."Alas, none of the great unwashed were so informed, so we weren't able to avail ourselves of this opportunity. And I'm guessing the opportunity won't last forever. And the unwashed will not be told when the Fed is no longer on the job. Sucks to be them."

See, this implies that in order to take the right side in the market one must know what Powers That Be are doing. It's just not so. My original point was and still is (and you no doubt remember whole piece of discussion in Nassau devoted to that): there is no way to possess all the information related to the price movement and most importantly - it's not necessary. Trading decisions are NOT based on predictions or on knowing. They are based on recognizable situations being repeated, and standard responses to those situations. In this sense, charts carry all the information one needs in order to make one's decisions.

Please understand that I don't repeatedly object on this just because I like to object (although if you listen to my wife, that's about the most prominent of my traits). It's just that this goes to the very core of my trading philosophy. Everything I do myself and teach others is based on this cornerstone: tape tells you everything you need to know in order to make a trade.

2. You ask very valid question: what position do I take now if I can't see this market as long, not sure about shorting and don't want to go to lower time frames? I have just the answer: NOTHING. Trading is not about being in the market all the time. Trading is about jumping when opportunity presents itself - whatever opportunity is in terms of your trading system. Not knowing your trading system, I can't tell you anything more but I can tell that you don't see anything recognizable at this point. That means stay away, observe and wait for something you know how to trade to emerge. What is it for you? If you don't have an answer, you don't have a trading system.

You beat me to my comment Davefairtex, in negating the certainty that a black swan event "will" happen - because this an application of objective knowledge which I believe Taleb is critical of in his chef d'oeuvre.

Yet it creates a paradox in the sense that I noted a passage in Taleb's book comparing the person who went about their business without consideration for a black swan event (think Ben Bernanke et al.) with the person who did. A paradox in that preparing for a black swan event at some point becomes a self-fulfilling prophecy or an application of objective knowledge (I know that a black swan even WILL occur at any moment). The same ontology or worldview that is being criticised is being applied to the task at hand.

I suggest this last comment because Taleb is perhaps as much luck as anything else in his idea of the black swan. Like Meredith Whitney, he was on the mark one time and has now become the "go to" person. In some ways they share a feature with that other prophet of the moment, Rubini, in that they are to a certain extent one trick ponies, particularly as his idea is applied to real world scenarios. Evidence of this is Taleb's reported failure to make money applying his idea in his own hedge fund following his success:

"Taleb created his own hedge fund, Empirica, designed to help other hedge funds hedge their risks by using a refined form of his options wins – running small losses in quiet times and winning big in turbulent markets. It did okay but, after a good first year, performed poorly when the market went though a quiet spell. He’s still involved in the markets, but mainly as a hobby – like chess."

http://business.timesonline.co.uk/tol/business/eco...

Note as well the limitations of what Taleb calls black swan events:

"the full global implications of the sub-prime-driven credit crunch became clear. The world banking system still teeters on the edge of meltdown. Taleb had been vindicated. “It was my greatest vindication. But to me that wasn’t a black swan; it was a white swan. I knew it would happen and I said so. It was a black swan to Ben Bernanke [the chairman of the Federal Reserve]."

This was not a black swan event to the likes of Bill Cara and other astute traders. In fact, Taleb has a name for the likes of Bill, Vad and the pit traders he used to work with - fat tony. (I'll leave readers to discern the nature of fat tony - end page 2/top page 3). The point being that these skeptical traders apply the number 1 rule of Taleb's approach to the financial trading of black swan events - risk management.

Taleb's thinking is evolving into a strand of philosophy which is pertinent to raise - in my mind at least - because of a run in I had with Vad pertaining to my persistent, erroneous or what was perceived to be otherwise irrelevant questioning of how the market functions. First, allow me to quote a passage of Taleb's "Black Swan":

"Surprisingly, the book that influenced me was not written by someone in the thinking business but by a journalist: William Shirer's 'Berlin Diary: The Journal of a Foreign Correspondent: 1934-41'... . How? Simply, the diary purported to describe the events as *they were taking place*, not after. The journal was purportedly written without Shirer knowing what was going to happen next... . Some comments here and there were quite illuminating, particularly those concerning the French belief that Hitler was a transitory phenomenon, which explained their lack of preperation and subsequent rapid capitulation. One would suppose that people living through the beginning of WW2 had an inkling that something momentous was taking place. Not at all." (pg. 13-14).

Having just completed a degree and enjoying the luxury of soon being able to study another one, it has come as a rather jolting experience to realise the limitations of this learning as it applies to trading. One can infer from the opening chapter of Black Swan Taleb's appreciation for a sort of antiknowledge - perhaps encapsulated in the idea that instead of only valuing data or knowledge that validates our conceptions or ideas (the basis of economics or our history books for example) a skeptical empiricist might instead value those data or ideas that invalidate their knowledge.

The connection to Vad's "trade what you see, not what you think" slogan became clear in my mind when I read this. It became clear to me that my "knowledge" - or acquisition of, has no place in this skeptical empiricism. I must learn differently. I value most highly the losses I make (in paper trading), so that I learn to avoid these until my risk management is sufficiently controlled that positive feedback - profits - then become a realizable outcome.

Vad has made it easier for me by going through significant financial pain learning by trial and error and many, many hours of research. It is distilled in a small number of setups which has been conveniently published in a book. Although Taleb takes credit for the idea - and that's some nice credit he earns for each hours speech he does $$ - IMO Vad appears to be not far behind Taleb in applying Black Swan principles to his trading, without always harping on about the possibilities of black swans. They occur or they don't, the trend changes or it doesn't, and one reacts accordingly in their trading. Like the war diary above that so influenced Taleb because it wasn't subject to the revisionism that tends to happen with time, I am learning that there is no presupposition of events - nothing HAS to happen - I simply learn to react with them as they occur, change and reoccur on a daily basis in order to gain what I want from the market - money.

Whereas Taleb used puts as a risk management tool, daytraders keep their money on the sidelines and out of the firing line (a much simpler strategy for this non-mathematically inclined trader). With Bill being in the game 30 years, it looks like he's been applying Taleb's principals long before Taleb was heard of - I don't know. But I do begin to understand that it's the fat Tonys who rule the marketplace - be they daytraders, fund managers or the pit traders and their Fed masters. The mass public make the erroneous decisions based on a similarly (perhaps woefully?) faulty knowledge and their trades are the ones that I get to profit from if I eliminate my own faulty thinking.

Perhaps this long winded passage has been blindingly obvious or clear as mud, but it has helped bring clarity to my idea of what trading should be about.

JMTCW. Enjoy your (very cold?) Sunday.

How's that for timing - Swiss Re completed a $150 million catastrophe bond sale for California Earthquake Insurance on Jan 6th, bring their total of such sales to $2.1 Billion of coverage since 2001. Tonights 6.5 eathquake may be a harbinger of more to come. I wouldn't want to be a holder of Swiss Re on Monday morning.

Keen is an outspoke critique of mainstream economic thought, and I like to keep tabs on him, and am to this extent having my first serious read of economics through his book.

Note at the bottom of page the paper publications for the year. One of them caught my eye - Household Debt: The Final Stage in an Artificially Extended Ponzi Bubble. Keen has taken a model of credit money creation and added ponzi speculative financing to it (such speculative financing being an important element of US/Aus economies since 1987) to derive a comparative analysis of economic activity with and without ponzi financing:

http://www.debtdeflation.com/blogs/

Have a great weekend. 3 basketball games to coach this weekend...as my mentor used to say about coaching girls' basketball, "it's a soap opera every day." At least none of us coaches have daughters on the team.

http://ronsen.blogspot.com/2010/01/saturday-mornin...

http://ronsen.blogspot.com/2010/01/sunday-morning-...

Best guesstimates for 2010 indicate another 200-300 regional banks will be shuttered on Fridays and opened again at 9 AM Monday morning.
No worry though, HB&B are standing in line to put their shingle over the door just as soon as fed regulators drop the green flag!

Vad, here's what's going on.

I'm actually not doing terribly. While leaning short, I've managed to tread water because I also go long in selected areas, which in the end seem to have largely balanced out. Since I'm a swing trader though, I take more risk than you do, because my situation is vulnerable to the infamous gap-up open. So instead of being at risk for losing a small amount for a given entry, I end up losing a rather larger amount due to the gap up open.

My entries have actually been pretty good. I enter, and I'm either stopped out with a small loss, or I do well enough during the rest of the day. Emotionally for me, its fine, I can take the stop, its not a deal at all. It's the days that follow that cause me trouble, especially the gap up opens.

To complicate matters, often the gap up open is deceptive. It gaps up to my stop, trips it, and then rapidly (within 5 minutes - or even immediately) resumes trading down at yesterday's close. This has happened frequently enough in the past so I had to adapt my trading style to use "mental stops" which take more discipline, and require that I actually pay attention to the market all the time, which in my timezone is annoying because market open is at 930 pm, which means I have no social life at all. Occasionally my discipline slips, but not often.

For whatever reason, my longs have not suffered from such gap-tactics. Perhaps its the lack of interest in gunning the long stops by the big players (incl. the Fed Hedge Fund), perhaps its just the trend. I don't know. I don't think I am dramatically more disciplined or smarter long than short.

In addition to entry points, buying and selling and the like, I also like to try and understand what is going on in general, to understand the environment in which I am operating. Sometimes I get an epiphany (or what I think is an epiphany) and I write it up. That's what this was. Its less of a rant, and more of my sense as to what is going on. Sure there's an emotional content - I'm kind of against "unfair" in general, but that was less about trading and more about the specifics of our operating environment.

So to continue - In another part of your post, you stated "this implies that in order to take the right side in the market one must know what Powers That Be are doing."

I wasn't implying that at all. I have said - in each and every one of my posts I've made on this subject - that you are living proof that inside information is not required to consistently make money. As a result, I must confess to feeling some frustration about you reading into what I'm writing things I didn't say, or intend to imply. I"m not sure if its just my bad writing, or your bad reading. :)

I believe the market is corrupt, and that certain companies and individuals have access to information which dramatically helps their performance in the market. I also believe that you make money by reading the tape and using your trading system. Both statements CAN be true at the same time.

I'll try from a different angle. I do not believe that inside information is REQUIRED for trading success. However, possessing such information does take away the uncertainty of the marketplace for those that have such information. It dramatically improves performance, and it requires much less skill to trade.

And, I believe such a thing is going on, right now. I believe the system is corrupt.

As for my action items, I will have to think upon how I approach the situation and how my assessment of the trading environment (especially for me, a swing trader) affects how I want to do business. And as you and others have pointed out, sometimes the best thing to do is - nothing at all.

One last note. You can tell your wife that I value your objections. They make me think and cause me to examine what I'm really thinking. After all, why spend energy engaging each other if it doesn't lead to growth and improvement?

From my vantage point; there are a whole flock of black swans taking flight.... a few more insider assasinations in the past month... several other technological disclosures manifesting in unlikely places, including some very publicly revealing demonstrations and equally revealing official denials... a few more financial/military/Industrial complex insiders leaving the country on holiday for points abroad and conspicuously not returning...and ominous rumblings behind the scenes in Washington over the Obama presidency... blinking red warning lights across the board... This could get very interesting and very messy in a hurry. Hang on to your hats folks, there are strong winds a blowing!....

Luggie -

Thanx for your thoughts. Might not Goldcorp also sell their shares to a senior whom they didn't regard as a major competitor? or even a financial player partnered with a miner? or swap shares for a property adjacent to one of theirs?

Thanks 2nd_ave. Glad you found it valuable.

I do think there are differences in the level of corruption in systems run by people - things are more nuanced than the simple statement that "human systems are all corrupt." Furthermore, those nuances are useful in helping us to see what is to come down the line.

Try this on for size. Things go in cycles. The system gradually gets more corrupt as time goes on. Finally, when corruption is at its most intense, there is a disaster which harms a large number of people. Following this, if the disaster is large enough, an examination period follows, and if you are fortunate, a remedy is constructed that cleans the system up. The system is still corrupt, but much, much less so. Rinse, repeat.

Where we are in that cycle is in the middle of one of those disaster phases. Unfortunately, the first disaster wasn't great enough, so we were not motivated enough to construct an actual remedy. What's more, even more corruption was used to get the system functioning again. This just tells me the next disaster will have to be more dramatic than the last one until there is general agreement to have a real examination and then remedy.

Given my view of where we are in this cycle, a disaster is all but certain to arrive. Given that level of corruption is increasing rather than decreasing, and that the cans have merely been kicked down the road, the next disaster will strike sooner rather than later, and it will be even more dramatic than the last one.

What form will it take?

Things seldom happen the same way twice. Will this next disaster be another slow grind downhill as in 2008? I'm guessing, probably not. Fed Hedge Fund has the technology to stop that from happening. How do I know this? I heard it from our Treasury Secretary:

"We are not going to have a second wave of financial crisis," Geithner said in an interview with National Public Radio. "We cannot afford to let the country live again with a risk that we are going to have another series of events like we had last year. That is not something that is acceptable. We will do what is necessary to prevent that and that is completely within our capacity to prevent" he said.

When viewed with my new lens, I must conclude that the Fed is on the job, and will protect us from a repeat of last year. Geithner said so, with great conviction. And I believe him. Those particular series of events will not happen again.

So how do we get a disaster big enough to overwhelm last year's interventions? Think about that for a moment. TPTB have made sure the tire won't spring a slow leak. As a result, given that a disaster is inevitable with the current level of corruption and the number of cans that were kicked down the road, it will have to be a massive blowout.

Heck if I know what the particulars of that would be. Will there be time for me to get on board that train when it leaves the station? Perhaps - perhaps not. What's more, I'd bet the market will be "closed for repairs" while they figure out how to respond. One thing I learned last year was, if the rules (such as having a market open every day) are inconvenient, the answer is always to simply change the rules. Shorting got you down? Ok, shorting is now illegal.

Oh, before I forget - happy new year everybody! :)

Dave,

two thumbs up. One of the best insights I've read in a good while.

Geithner is correct... But, what he won't bring up, is the coming Funding Crisis. Bill Fleckenstein has been discussing this ( funding crisis ) for many months now, along with our Bill ( Cara ), who so wonderfully touched on this in todays blog. In my mind, this will be the tidal wave that crashes on the markets. If I could project, in my very humble opinion, the pecrception of this crisis will begin to unfold this coming Fall. All governments exist on taxes, just as parasite feasts on its host. It will be interesting times, for sure...

enjoying your thoughts Dave, although I'd suggest market intervention/closure would be the least of our issues as we kick this can down the road. We've already got mass unemployment which cannot be reduced while it is the household sector that is deleveraging.

At the same time the banks are leveraging up again, along with their central bank benefactors:

http://www.bloomberg.com/apps/news?pid=20601087&si...

Logically the crash is bigger the next time, as you pointed out. Our wealth takes a hit unless it is strategically invested, in all probabilities. (Steve Keen had an interesting paper on economic cycles with ponzi speculative financing thrown into the mixture)

What concerns me more is in what Kaimu refers to as the anti-riot payments or welfare payments. If govts. can't afford to make their anti-riot payments, or these payments are no longer sufficient in order to quell the anger, what does govt. do next?

Rioting has spread from Athens to the south of Italy, as racism rears its ugly head against African workers, often illegal, being targeted by someone with a grudge. No one speaks about the gypsies across Europe; they are the modern Jew - universally loathed. France is always a tinderbox ready to ignite. Indians are being repeatedly targeted for violence in Melbourne, Australia, as their rising standard of living (they're studying in Australian universities) is clashing with whatever grievances the locals have.

Your outlook is manifesting itself in society already, while those in power try (or think about how) to patch up the sinking ship:

http://www.bloomberg.com/apps/news?pid=20601109&si...

I don't wish to predict the future, but am fascinated to watch this as it happens. I suspect half the problem is how we define ourselves as well; the remnants of nationalism have yet to be swept away from the table of political ideas.

Observing the application of international relations theory I learnt at uni is, and will be, most enlightening.

Dave,

"...I'd bet the market will be "closed for repairs" while they figure out how to respond. One thing I learned last year was, if the rules (such as having a market open every day) are inconvenient, the answer is always to simply change the rules. Shorting got you down? Ok, shorting is now illegal."

This is exactly what turned out to be my black swan last year — the banning of shorts on certain (guess who) banks.

This is not a new strategy, only a new tactic. As you say the next will be different in some way and since they make the rules we cannot stop it.

We can, however, we alert and ready to turn it to our advantage (for a short time I expect).

We know of some past techniques:

• Gold confiscation

• Change which stocks are micro-managed

One I read recently is the possibility of freezing money market accounts.

Another possibility — use of debit cards with an expiration date for welfare, Social Security and unemployment payments.

And, of course, the all encompassing tax bite — on trades, purchases of selected goods and services... they have no one enforcing the Constitution so property rights and all freedoms are in jeopardy.

Look to the style of Nazi Germany — first make it a law, then enforce it so others are "just following orders."

Example One: "You vill buy health insurance of our choosing! OR ELSE!"