Archives of “liquidity” tag

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Mark Cuban’s post mortem on Facebook

  
  Education
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His latest take on the facebook IPO is here. His points are in bold.

1. Say goodbye to the individual investor on Wall Street. Mr. Cuban argues that because the media hyped the FB IPO that Wall Street is to blame. OK, I agree the IPO was hyped. But is that Wall Streets fault? Isn’t it the media’s fault? Isn’t it the buyers fault for not doing their due diligence? Didn’t Morgan Stanley spend millions propping up the stock the first day?

No one has long term success by reading any single piece of media, especially without knowing the writers intentions.

Here is a brief explanation on how the market works. If there are more buyers than sellers it goes up or vice versa. Or more important right now, if they have the means to buy.

2. The Valuation Bubble in Silicon Valley is bursting – but not for the reasons you think. The idea of private investment seems great but the execution is far off. The value of any market is liquidity. That has to be one of the important factors when making an investment. You know why futures are gaining popularity and what will eventually lead to their demise? A central market place and the lack thereof. Their spawns will kill the market and liquidity. The less central a market place the more likely the forces within that market are able to take control.

Mark agrees with me on liquidity but my interpretation is that he makes an argument against his point not for it. Didn’t the public market do a much better job at pricing? Didn’t the private market fail more dramatically than the public is this case? (Some one that knows the details better than I, when they went public did private shares get converted 1 to 1? If it did not get converted 1 to 1 let me know and I will gladly change it)

I believe Shark Tank is a great reason why Wall Street will always exist. I do not feel bad for the euntrepreuners and or the Sharks. Each assume the other person will add value. Wall Street assumes the same thing but to more people But as Mr. Cuban already knows, not everyone can win. But would they do better if there were 10 sharks or 100 sharks? Would more companies get funded?

If you allow people to be stupid, they will continue to be stupid. Howard Lindzon wrote a post as well that I disagreed with on the basis of access. They are both a lot more successful than I so I could be wrong. Also both of those guys should know that you are more likely to get screwed privately than publicly. I think this might be changing but it hasn’t yet. Open is not bad, closed is not bad, bad is bad. Liquidity and cash is always king, deeper markets should lead to better pricing. (more…)

Finicky Traders are Good Traders

  
  Education
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In trading focus is crucial. You have to know who you are as a trader and exactly what your method and trading plan is, and you must follow it.  In trading discipline makes money, focus makes money, monster stocks make money, while risk management allows you to keep the money that you have made. You could say you must be finicky  to be a good trader.

Here are the areas to be finicky about:

  1. A good trader is picky about the methodology they decide to trade, they study diligently to see what works  before they begin trading.
  2. Be very picky about the stocks you trade, only trade the very best monster stocks long and only short the absolute biggest junk stocks.
  3. Being picky about your entry point is crucial, stick with your plan, buy only when the odds are in your favor for winning.
  4. You can not just trade any amount of stock, you have to be picky about the quantity of shares you trade and base it on your risk management guidelines.
  5. Be very picky about who you follow on twitter, look for a teacher not a stock picker, beware of big egos. (more…)

Tim Backshall On Europe: "Default Now Or Default Later" As EuroStat Complains That Greece Is Still Withholding Critical Data

  
Analysis, Economy, Education
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There is one major problem with putting houses of card back together – they tend to fall…over and over. And while abundant liquidity in May and June served as an artificial prop to return European core and PIIGS spreads to previous levels merely as mean reversion algos took holds, the second time around won’t be as lucky. CDR’s Tim Backshall was on the Strategy Session today, discussing the key trends in sovereign products over the past few months, noting the declining liquidity in both sovereign cash and derivative exposure (we will refresh on the DTCC sovereign data later after its weekly Tuesday update). Yet the most interesting observation by Backshall is the declining halflife of risk-on episodes, which much like the SNB’s (now declining) interventions, are having less of an impact on the market, as ever worsening fundamentals can only be swept under the carpet for so long before they really start stinking up the place, and indeed, as Tim points out at 5:30 into the interview, even the IMF now realizes that soon the eventual second domino will fall, and it is better the be prepared (via the previously discussed infinitely expanded credit line), than to have to scramble in the last minute as was necessary in May. In other words, the storm clouds are gathering and only fools will invest in risk asset without getting some additional clarity on what is happening in Europe. The bottom line as Backshall asks is: “do they default now or default later.” And that pretty much sums it up. Buy stocks at your own peril.

Incidentally all this is happening as we read in an exclusive Bloomberg piece that “four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt” and that EuroStat still has not received the required disclosure about just how fake (or real) the Greek debt situation truly is. When one steps back and ponders just how bad (and unknown) the situation in Europe is, and that stocks are unchanged for the year, one must conclude, as Dylan Grice does every week, that the lunatics have truly taken over the asylum.

The trading curve.

  
  Education
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Initiation-  Every trader comes in thinking they will make money, in fact if they have never traded, they probably have convinced themselves fully. They spend time looking for all the answers in charts but it is in the process. It seems like easy money.  It is not easy but it is probably the best way to make money.  The best of anything takes more work.

Wearing off of novelty– This is a critical time for any trader.  This is where the hole gets deeper or ideally the trader stops and starts to work more efficient.  Process and not charts. This is the motivation to understand what trading really is and who they really are. (more…)

Top 10 Lessons from the Lehman Collapse

  
  Education
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Sunday is the five year anniversary of the bankruptcy of Lehman.  So what have we learnt?

1 – Bank executives lie…

…they also got paid huge amounts, weren’t as smart as they thought they were and those that ended up at the top tended to be deeply flawed individuals…

On Sept 10 in a conference call with investors, days before Lehman collapsed, Dick Fuld clearly stated to his shareholders that “no new capital was needed” and that “real estate and investments were properly valued”. Yet only five days later, Lehman filed for bankruptcy.

 

At a congressional Committee just a few weeks later, Dick Fuld was defiant. He stood by his “no new capital was needed” statement: “no sir, we did not mislead investors”. And he added that “we (made) disclosures that we believed were accurate”. If no new capital was needed why did Lehman go bust five days later? And if he didn’t know the financial position of Lehman what was he doing as CEO?

As part of the Congressional Committee hearings, Dick Fuld was allowed to make a presentation before he was questioned. These are his exact words as to the cause of Lehman’s demise:

“Naked short sellers targeted financial institutions and spread rumours and false information. The impact of this market manipulation became self-fulfilling as short sellers drove down the stock prices of financial firms. The ratings agencies lowered their ratings because lower stock prices made it harder to raise capital and (it) reduced financial flexibility. The downgrades in turn caused lenders and counter parties to reduce credit lines and then demand more collateral which increased liquidity pressures. At Lehman Bros the crisis in confidence that permeated the markets lead to an extraordinary run on the bank. In the end despite all of our efforts we were overwhelmed.” (more…)

MANAGING RISK

  
  Education
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Well, perhaps the best way is to emulate some of the trading principles used by the pundits of yesteryear who beat the stock market no matter the emotions and mechanics of the institutional herd. For instance:

Bernard Baruch – Some 70 years ago, he would research a stock, buy it, and then each time the stock rose 10% from his purchase price, buy an additional amount equal to his first purchase. If the stock began declining he would sell everything he had bought when the drop equaled 10% of its top price …

Baron Rothschild – His success formula was centered on the famous quote attributed to him – “I never buy at the bottom and I always sell too soon.” …

Jesse Livermore – This legendary speculator profited enormously by calling the various 1921 – 1927 advances correctly. In 1929 he reasoned that the market was overvalued, but finally gave up and became bullish near the top in the fall of that infamous year.

He quickly cut his losses, however, and switched to the “short side.” Livermore listed three major points for his success:

1. Sensitivity to mob psychology

2. Willingness to take a loss

3. Liquidity, meaning that stock positions should not be taken that cannot be sold in 15 minutes “At the market” …

Addison Cammack – A stockbroker from Kentucky who swore by the two-point stop-loss rule. “If you’re wrong,” he said, “you might as well be wrong by two points as ten.” He followed this method successfully and was one of the few bears to make a fortune on Wall Street and keep it …

Interestingly, all of these disciplines have one thing in common. They all adhere to Benjamin Graham’s mantra, “The essence of portfolio management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.”

10 Things I’ve Learned About Markets

  
Analysis, Education
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1. “There is no such thing as easy money”

2. Events that you think are affected by cardinal announcements like the employment numbers at 8:30 am on Friday are often known to many participants before the announcement

3. Markets that have little liquidity are almost impossible to profit from.

4. When the stock market is way down, policy makers take notice and do what they can to remedy the situation.

5. The market puts infinitely more emphasis on ephemeral announcements that it should.

6. It is good to go against the trend followers after they have become committed.

7. The one constant, is that the less you pay in commissions, and bid asked spread, the more money you’ll end up with at end of day. Too often, a trader makes a fortune on the prices showing when he makes a trade, and ends up losing everything in the rake and grind above.

8. It is good to take out the canes and hobble down to wall street at the close of days when there is a panic.

9. A meme about the relation between today’s events and those of x years ago is totally random but it is best not to stand in the way of it until it is realized by the majorit of susceptibles

10. All higher forms of math and statistics are useless in uncovering regularities.

Hedge Fund Managers' Vernacular

  
Analysis, Education, Life
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As there is a considerable amount of industry-specific jargon used in Hedge Fund Managers’ monthly reports, please see the below glossary to explain some of the more arcane terminology.

* Challenging conditions = double-digit down month

* Cautiously optimistic = single-digit down month

* Constrained risk profile = we bottled it at the bottom

* Alpha = imaginary friends

* Beta = punting

* Alternative Beta = punting in stuff we can’t spell

* Negative gamma = we lost money, but it wasn’t our fault

* Positive gamma = we lost money, but it wasn’t our fault

* Theta/Kappa = our research department has been on a junket

* Negative correlation = everyone else made money

* Prudent cut in leverage = we went to Antigua for our holidays

* Liquidity issues = “Thank-you for calling XYZ International Capital Markets. Unfortunately all our sales operatives are receiving their P45s at present. Your call is important to us, so please try again later, perhaps if there is ever another bull market in this rubbish…”

* Re-optimised portfolio = we threw out the baby, bathwater and the bath

* With hindsight… = ouch

* Healthy growth in AUM = how bad must the opposition be?

* Modest outflows = they wanted to redeem the lot, but our small print is world-class

* Material outflows = would anyone like to re-invest in my new minicab venture?

Trading lessons from the road

  
  Education
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Two lessons from the road:

– It only takes a small slip-up to create big negative effects. Conversely, the road to success in many of life’s ventures seems to be more incremental. Think of the engineering behind cars, space shuttles etc. One small error can lead to total disaster, but for everything to work, so many things have to be ‘right’. A related pattern is the  carry trade in the currency market, where returns are incremental as the high yielding currencies slowly appreciate, but when we witness episodes of carry trade unwinding, things are not nearly as orderly.

– Missing my junction would be less of a problem if I was less tired and fatigued, because I would feel less downhearted at having to do the additional driving. However, it is when we have energy and are wide awake that we are least likely to miss our junctions, and we are more likely to miss them when we least want to. This reminds me of insurance not working when it comes to claiming, of correlations heading to one in times of crisis, and of markets being flush with liquidity, only for it to dry up right when it counts.

A Bankrupt BP – Worse For The Financial World Than Lehman Brothers?

  
Analysis, Economy, Education
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The BP crisis in the Gulf of Mexico has rightfully been analysed (mostly) from the ecological perspective. People’s lives and livelihoods are in grave danger. But that focus has equally masked something very serious from a financial perspective, in my opinion, that could lead to an acceleration of the crisis brought about by the Lehman implosion.
 
People are seriously underestimating how much liquidity in the global financial world is dependent on a solvent BP. BP extends credit – through trading and finance. They extend the amounts, quality and duration of credit a bank could only dream of. The Gold community should think about the financial muscle behind a company with 100+ years of proven oil and gas reserves. Think about that in comparison with what a bank, with few tangible assets, (truly, not allegedly) possesses (no wonder they all started trading for a living!). Then think about what happens if BP goes under. This is no bank. With proven reserves and wells in the ground, equity in fields all over the planet, in terms of credit quality and credit provision – nothing can match an oil major. God only knows how many assets around the planet are dependent on credit and finance extended from BP. It is likely to dwarf any banking entity in multiples.
 
And at the heart of it all are those dreadful OTC derivatives again! Banks try and lean on major oil companies because they have exactly the kind of credit-worthiness that they themselves lack. In fact, major oil companies, conversely, spend large amounts of time both denying Banks credit and trying to get Bank risk off of their books in their trading operations. Oil companies have always mistrusted bank creditworthiness and have largely considered the banking industry a bad financial joke. Banks plead with oil companies to let them trade beyond one year in duration. Banks even used to do losing trades with oil companies simply to get them on their trading register… a foot in the door so that they could subsequently beg for an extension in credit size and duration.
 
For the banks, all trading was based on what the early derivatives giant, Bankers Trust, named their trading system: RAROC – or, Risk Adjusted Return on Credit. Trading is a function of credit bequeathed, mixed with the risk of the (trading) position. As trading and credit are intertwined, we might do well to remember what might happen to global liquidity and markets if BP suffers what many believe to be its deserved fate of bankruptcy. The Intercontinental Exchange (ICE) has already been and will be further undermined by BP’s distress. They are one of the only “hard asset” entities backing up this so-called exchange.
 
If BP does go bust (regardless of whether it is deserved), and even if it is just badly wounded and the US entity is allowed to fail, the long-term OTC derivatives in the oil, refined products and natural gas markets that get nullified could be catastrophic. These will kick-back into the banking system. BP is the primary player on the long-end of the energy curve. How exposed are Goldman sub J. Aron, Morgan Stanley and JPM? Probably hugely. Now credit has been cut to BP. Counter-parties will not accept their name beyond one year in duration. This is unheard of. A giant is on the ropes. If he falls, the very earth may shake as he hits the ground. (more…)

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