To trade/invest successfully, think like a fundamentalist; trade like a technician. It is obviously imperative that we understand the economic fundamentals that will drive a market higher or lower, but we must understand the technicals as well. When we do, then and only then can we, or should we, trade. If the market fundamentals as we understand them are bullish and the trend is down, it is illogical to buy; conversely, if the fundamentals as we understand them are bearish but the market’s trend is up, it is illogical to sell that market short. Ah, but if we understand the market’s fundamentals to be bullish and if the trend is up, it is even more illogicalnot to trade bullishly. |
Archives of “economic fundamentals” tag
rssGame Theory Over: Bank Of France's Noyer Says Britain Should Be Downgraded, Not France
To anyone who doubted that the gloves are now fully off between France and Britain, we bring you exhibit A: Speaking in an interview with local newspaper Le Telegramme de Brest to be published later on Thursday, Bank of France head and ECB member Christian Noyer saidthat a downgrade of France’s AAA credit rating would not be justified and ratings agencies are making decisions based more on politics than economics and questioned whether the use of ratings agencies to guide investors was still valid. “In the arguments they (ratings agencies) present, there are more political arguments than economic ones,” said Noyer, the head of the Bank of France and a member of the ECB’s governing council. “The downgrade does not appear to me to be justified when considering economic fundamentals,” Noyer said. “Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping.” The bolded sentence confirms two things: i) that the Nash equilibrium in Europe is now fatally broken, because when you have the head of one central bank doing all he can to throw another central bank under the bus, that’s pretty much game (theory) over; and ii) when he said that “the agencies have become incomprehensible and irrational. They threaten even when states have taken strong and positive decisions. One could think that the use of agencies to guide investors is no longer valid.” it proves that this amateur has no more understanding of basic finance than your generic Reuters blogger, both of whom apparently fail to comprehend that there are several hundred thousand bond and loan indentures in the real world, not the world of “S&P has no credibility so ignore it”, which are loaded with covenants discussing springing liens, rating indexed interest levels and collateral thresholds, all of which are based on a sovereign and corporate rating, and all come into play in a completely unpredictable way (hint AIG – the reason why AIG imploded was because a rating agency downgrade unleashed a terminal margin call) when there is a rating downgrade. Such as that of France in a few hours to days top. (more…)
Trading Psychology Observations
-From working with developing traders, I’d say that 90% don’t/can’t sustain the process of keeping a substantive journal. Among the group that does journal, well over 90% of the entries are about themselves and their P/L. I almost never see journal entries devoted to figuring out markets.
-A sizable proportion of traders who have been having problems are trading methods and patterns that used to work, but are no longer operative. The inability to change with changing markets affects traders intraday (when volume/volatility/trend patterns shift) and over longer time frames (when intermarket patterns shift).
-Some traders habitually look for tops in a rising market and bottoms in a falling one. There’s much to be said for countertrend methods, but not when the need to be right exceeds the need to make money.
-An underrated element in trading success is mental flexibility: the ability to shift views and perceptions as new data enter the marketplace. It takes a certain lack of ego to form a strong view and then modify it in the face of new evidence.
-Many traders fail because they’re focused on what the market *should* be doing, rather than on what it *is* doing. The stock market leads, not follows, economic fundamentals. Some of the best investment opportunities occur when markets are looking past news, positive or negative.
IMF Seeking Boost In Lending Cap By $250 Billion To $1 Trillion
In the latest sign yet that things in the world are roughly 25% worse than expected (give or take), the FT reports that the IMF will seek an imminent rise in its lending cap from $750 billion to $1 trillion to build safety nets that could prevent financial crises. “Even when not in a time of crisis, a big fund, likely to intervene massively, is something that can help prevent crises,” Dominique Strauss-Kahn, the IMF managing director told the Financial Times. “Just because the financing role decreases, doesn’t mean we don’t need to have huge firepower … a $1,000bn fund is a correct forecast.” At this point it is glaringly obvious that without the explicit support of the various central banks and of such fake international but really US organizations as the IMF, the already prevalent liquidity crisis would simply destroy the world. The troubling theme is that instead of taking away incremental worries, we have now gotten to the point where one bailout, like a butterfly in China, merely requires 10 more down the road. Alas, instead of a virtuous Keynesian dynamic, this is anything but.
Some more on the IMF’s feeble attempt at justifying the need for its exploding funding requirements, as well as its own attempt to validate that all is well:
South Korea, as this year’s president of the Group of 20 leading economies, is helping craft the plan. Seoul hopes to convince the G20 countries to back the increased IMF funding at a summit in South Korea in November. The G20 meeting in London in 2009 tripled IMF resources from $250bn. A US official said Washington was sympathetic to improved safety nets but needed more details on the Korean-IMF plan.
South Korean economists forged the plan because of their own bitter experience of their currency and stock market plunging in 2008. In spite of robust economic fundamentals, Seoul needed to be rescued from a dangerous liquidity shortfall by swaps from the US, Japan and China. (more…)
McMillan et al., Investments
Investments: Principles of Portfolio and Equity Analysis, coedited by Michael G. McMillan, Jerald E. Pinto, Wendy L. Pirie, and Gerhard Van de Venter (Wiley, 2011), was written for financial analysts as well as aspiring financial analysts. Part of the CFA Institute’s book series, it is a weighty tome of more than 600 pages. In twelve chapters it covers such topics as market organization and structure, security market indices, market efficiency, portfolio management, portfolio risk and return, portfolio planning and construction, equity securities, industry and company analysis, equity valuation, equity market valuation, and technical analysis. There is also a separate paperback workbook with problems and solutions.
I debated what to focus on in this post and finally decided to look at two methods for valuing equity markets. The assumption is that, whatever the short-term effects of momentum, “economic fundamentals will ultimately dictate secular equity market price trends.” (p. 470) (For those who read yesterday’s post, this assumption is in sync with the theory of Frydman and Goldberg.)
First is the neoclassical approach to growth accounting, which uses the Cobb-Douglas production function to “measure the contribution of different factors—usually broadly defined as capital and labor—to economic growth and, indirectly, to compute the rate of an economy’s technological progress.” In imprecise and non-mathematical terms, the percentage growth in real output (or GDP) can be decomposed into its components: growth in total factor productivity (a measure of the level of technology), growth in the capital stock, and growth in the labor output. Applying this model to the Chinese economy, the authors of the chapter suggest that Chinese economic growth will eventually moderate; nonetheless, they project a near-term growth rate of 9.25%. They arrive at this by adding total factor productivity of 2.5%, a growth in capital stock of 12% times a value of 0.5 for the output elasticity of capital—that is, 6%, and a labor force growth of 1.5% times a value of 0.5 for the output elasticity of labor—or 0.75%. An ultimately sustainable growth rate might be 4.25% [1.25% + (0.5 x 6%) + (0.5 X 0%)]. (more…)