The Most Important Work We’ve Ever Done…

March 1, 2013
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How about that Italian political crisis? Finally something new is happening in markets (but not really). What happened in Europe was inevitable – it was just a matter of waiting for the other shoe to drop.

As we noted some time back, prediction is all too often a fool’s errand (versus an odds-and-probability based process that does not rely on crystal balls). But certain outcomes can be predicted, in a broad macro sense, based on realities of human nature and how economic systems work.

In that light Europe’s reality has been, and continues to be, a growing clash between the rage of the citizenry being subjected to harsh “austerity,” and the grim determination of political leaders to impose it.

In a dictatorship or authoritarian system, the will of the people can be subverted, or even crushed, on a permanent basis. (See Korea, North.) But in a democracy, unpalatable economic choices, especially ones that amount to “pain and more pain with no foreseeable ending,” can and do run into outrage that expresses itself via the ballot box.

This is why Italy’s brewing political crisis was unpredictable relative to specifics, but highly predictable in broad terms. With ever increasing pressure on the periphery countries — including mass unemployment, service cutbacks, mounting debt burdens, and so on — it was only a matter of time before a Beppe Grillo (or someone of his ilk, in Italy or elsewhere) rose up and shouted with the people’s lungs: “Enough!”

We’ve not written about macro in some time because the themes have become so repetitive. It’s the same basic story, over and over:

  1. Central bank stimulus and promises propping everything up
  2. Macro headwinds threatening to derail the recovery
  3. Recovery-based optimism pushing through anyway
  4. Every few weeks, a new crisis spot-testing bulls’ faith
  5. Return to step 1

The mix of events is very interesting, to be sure.

But the wash keeps coming out the same way…

So when will the narrative change, and the bull run turn definitively bearish? Don’t know, don’t care. We are paying attention and trading actively, of course…  but we don’t have to “care” in terms of needing to know advance times, dates etc. because our process-based methodology does not work that way. Our market interpretations are rule-based and quantitative enough to let us know, in definable non-fuzzy terms, what constitutes a true shift in conditions based on what really matters (which ultimately means price).

In that regard, the tide may (emphasis on “may”) in fact be turning, as evidenced by internals… Friday, the first day of March, registered the largest batch of tradable bearish setups we’ve seen in months. (Long setups, in contrast, being few and far between.)

If you must have forward-looking opinions at this juncture, here are some opinions worth checking out — both for legitimate insight and, to a lesser degree, comedic value:

  • Dalio / Bridgewater betting on stocks (Bloomberg)
  • Faber: Stocks set for possibe repeat of 1987 (YahooFin)
  • Ken Heebner sells short $300 million worth of US Treasury bonds (Bloomberg)
  • Gary Shilling: Why You Should Sell Stocks and Buy Treasurys (Forbes)
  • The Case Against Commodities and Emerging Markets (Behavioral Macro)

The last one (from Behavioral Macro) is the most useful, in our humble opinion, because it is the most empirical — based on observation of market participants (and price action) more so than the reading of tea leaves.

Not long ago we wrote about the folly of Bill Ackman’s Herbalife short. Since then the plot has thickened, with private equity godfather Carl Icahn taking a big revenge stake in the stock.

Meanwhile JC Penney (JCP), another Ackman super-holding, cratered 17% on a big earnings miss after booking what BI calls “possibly… the worst same-store sales decline of a major retailer in industry history.”

Ouch…

Normally there isn’t much value in schadenfreude (a German word meaning “pleasure in the misfortunes of others.”) But the below excerpt from Vanity Fair sheds light on why Ackman, in addition to being a poster boy for lack of risk control, could have his picture show up in the dictionary next to “sanctimonious jerk:”

It’s Ackman’s perceived arrogance that gets to his critics. “The story I hear from everybody is that one can’t help but be intrigued by the guy, just because he’s somewhat larger than life, but then one realizes he’s just pompous and arrogant and seems to have been born without the gene that perceives and measures risk,” says Chapman. “He seems to look at other members of society, even legends such as Carl Icahn, as some kind of sub-species. The disgusted, annoyed look on his face when confronted by the masses beneath him is like one you’d expect to see [from someone] confronted by a homeless person who hadn’t showered in weeks. You can almost see him puckering his nostrils so he doesn’t have to smell these inferior creatures. It’s truly bizarre, given that his failures—Target, Borders, JCPenney, Gotham Golf, First Union Real Estate, and others—prove he’s as fallible as the next guy. Yet, from what I hear, he behaves that way with just about everybody.”

Another hedge-funder describes the problem he has with Ackman in more measured tones. “There is a saying in this business: ‘Often wrong, never in doubt.’ Ackman personifies it He is very smart—but he lets you know it. And he combines that with this sort of noblesse oblige that lots of people find offensive—me, generally not. On top of that he is pointlessly, needlessly competitive every time he opens his mouth. Do you know about the Ackman cycling trip with Dan Loeb?”

The cycling trip story is here… as Larry Hite said in Market Wizards, if you don’t take a hard look at risk, then risk will take you.

Bon Chance Monsieur Ackman…

To quickly touch on poker — where we apply a trading-inspired cash game and tournament methodology — the big prize continues to move closer… we had two near-misses at a WSOP circuit-stop main event at Caesar’s in Las Vegas. In Flight A and Flight B yours truly (JS) had two deep runs and two “coolers” aka tough beats — the first time pocket aces all-in preflop called by deep stack pocket tens hitting a set, and in the second flight, a set of sixes on the flop running into a flopped nut flush (with no way to get away from it).

Bad luck to be sure, but in poker as in life, ya gotta win some flips — though when you’re good not nearly as many… to a certain degree all you can do is put yourself in position for a turbo boost of positive N (our term for tournament luck) at the right time, and then let skill plus fate do the rest.

And when the cards are running well, allowing all toolsets to be utilized, it’s like the ten-man fight scene in “Ip Man” (see video clip here) — the combination of training and opportunity makes you unstoppable. (The same is ten times as true in trading…)

The next two events we’ll be tackling are the Grand Sierra Pot of Gold main event (March 8th through 10th, structure here) and Atlantis WPT Main Event (March 22-24th, structure here). Shoot us an email if you’ll be in town…

Moving on, the MT Driver’s Manual is taking shape — and it’s some of the most important work we’ve ever done. To truly become a successful trader, you have to have the optimal psychology and a trained mind… This is what we are exploring in our opening three-part series, the MT Trading Psychology Field Guide.

Part I of the Trading Psychology Field Guide – “transformation” — has already been released. Here are some of the reactions:

Great reading. Thank you… [N.B.]

Fabulous to say the least. Can’t wait for number 2…. [J.M.]

I truly appreciate the materials in Part 1; no truer words can be written regarding the mentality and psychology of trading…. [S.L.]

The second installment will be even more powerful. We will also be releasing a podcast this weekend (for those who would prefer to listen rather than read), and then delivering parts II and III.

The meta-goal of the Driver’s Manual is to deliver everything that’s needed to shape winning traders — or to take already successful traders and elevate their success — brick by brick, from the ground up.

If you would like to join in, all you have to do is join the DM mailing list. The Trading Psychology Field Guide is free… and we feel justified in saying the materials within could not only change your trading results forever, but possibly change your life. (If you think that’s hyperbole, let us know after you’ve read it…)

Click on this link to sign up and receive the Driver’s Manual materials — and Trading Psychology Field Guide, at no cost or obligation — via email!

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p.p.s. If you haven't already, check out the Strategic Intelligence Report!


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