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11 Things I’ve Learned About Markets

  
  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. It’s bad to try to make money the same way several days in a row

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

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

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

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

8. 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.

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

10. 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

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

With $1 Trillion In Loans, The ECB Is The Biggest Guarantor Of European Banks

  
Analysis, Economy, Education
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Today’s lower than expected interest in the 3-month LTRO operation was supposed to indicate a sign of stability for European banks. Nothing could be further from the truth. In an article which recaps a variety of data points presented here previously, the FT summarizes that European banks continue to exist solely due to a record and unprecedented $1 trillion in emergency loans issued to Europe’s commercial banks. In turn, almost 40% of this liquidity is then recycled, and stored back with the ECB, as the very same banks have no trust whatsoever in any of their peers. In short: no matter what the Stress Tests indicate, the European financial system is now in a worse condition than ever in history, including the days just after Lehman.

From the FT:

The ECB is currently lending close to €900bn ($1,098bn, £728bn) to eurozone commercial banks, jumping to near-record levels since the creation of the central bank 11 years ago. This now matches cross-border lending between commercial banks in the 16-nation currency zone, according to JPMorgan.

Although lending between domestic banks represents the lion’s share of the estimated €6,300bn market, the ECB has become essential as a lifeline to the weaker of the 3,000 banks in the eurozone.

At least some people still have the guts to laugh in the face of JCT’s propaganda:

 
 

Paul Griffiths, global head of fixed income at Aberdeen Asset Managers, says: “Without financial support many banks would struggle. It would take a brave man to turn the ECB taps off.”

Summarizing just how critical the ECB’s role is in the proper functioning of European banks:

 
 

Since Lehman Brothers collapsed in September 2008, lending by the ECB to eurozone banks has risen sharply as it has offered unlimited loans and extended its liquidity operations. This has seen the sum it lends to the banks rise from about €500bn before the Lehman crisis to today’s near record levels.

As well as the offer of unlimited loans, the ECB has bought €55bn in eurozone government bonds and €60.2bn in eurozone covered bonds in an effort to revive the eurozone economy and boost sentiment.

However, fear still stalks the markets. Interbank dealers say credit blocks remain on Spanish and Greek banks because they are seen as too risky to lend to.

The fear of lending to other banks because they may fail to repay loans is also reflected in the large sums of cash being deposited at the ECB overnight.

In spite of offering only 0.25 per cent for deposits, commercial banks parked €305bn at the ECB on Monday night because they prefer the safety of placing their money with the central bank rather than lending to other banks at higher rates. Before the Lehman crisis, overnight deposits at the ECB were typically less than €10bn.

And a pretty chart showing just how contrary to fact are all European claims that all shall be well.

At this point it is worth reminding that the Fed is a paragon of transparency and openness when compared to the infinitely more nebulous ECB. One thing that can be assumed with certainty for both central banks, however, is that this $1 trillion+ in cash lent out is backstopped by some of the most toxic paper in existence. The collateral received in exchange for the cash, which in turn forms the asset side of the ECB’s balance sheet, is also the guarantor of the money in circulation in the eurozone, and is the implicit baker of the value of the Euro. Next time you wonder why more and more people are calling for EURCHF parity, keep in mind that almost a hundred billion in Greek bonds is just part of the worthless recourse backing that piece of paper in your transatlantic wallet.

A great quote

  
  Education
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I’m sure every trader has run into some kind of negativity from know-it-all chodes who just don’t get what this subject is about – it goes something along the lines of “What good does it actually do? You are just stealing other peoples money?” blah blah *yawn* blah….

Here’s a great quote from a book I’m reading “Hedge Fund Edge” that demolishes their complaints:

“Principle 7: Develop a Love and Respect for Trading, Free Markets, and Individual Liberty and Initiative.

Profits are just the gravy. When they test a group of traders, one of the traits that almost all successful traders and investors share is a deep understanding of how trading and investing is part of the process that allows humankind to progress. Even day-traders provide critical liquidity that allows others to hedge, companies to raise capital, and investors to invest with limited risk. Stock selection allows investors to become second-level venture capital firms, with their demand helping provide access to financing in areas where the people need capital most. The more you understand the remarkable way in which freedom and free association work to produce economic gain and real progress for humankind from new innovations and technologies, the more likely you are to feel a strong sense of purpose at being a part of such an incredible system. And the stronger your sense that your efforts are creating something good that is bigger than yourself, the more committed, enriched, excited, and innovative you will become.”

… so put that in your pipe and smoke it.

Can A Trader be a do-gooder?

  
  Education
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It occurs to me that the only way in which a trader can become more than a completely selfish, self-enriching, narcissistic person is to trade well enough so that you can manage other people’s money and thus saving these investors from crooks and charlatans (provided you are convinced you are not a crook and charlatan yourself).

Other traders have advanced other arguments in favor of trading. But I am not convinced by them.

They say that we provide liquidity to other long-term investors who may need to liquidate their investments. But then, this applies only to mean-reversal strategies. Momentum strategies take away liquidity from the market, and in some cases exacerbating price bubbles. Certainly not something your grandma would approve.

Others argue that momentum strategies help disseminate information about companies through quick price movements. But can’t we just watch Blue Channels? Do we really need some devious insiders to convey that information to the rest of us through price movements?

No, I think that independent trading should serve only one purpose (besides short-term self-sustenance): as training and preparation to become a fund manager. Once you graduated from independent trading, you then enter into the grand contest among all fund managers to see who can best serve and protect investors’ assets, (and be rewarded according to your standing in this contest.)

I know, this is the idealistic way to look at things. Serving and protecting seem to be what policemen should be doing, not traders. But as in quantitative trading, I think it helps one becomes more successful in one’s activities by having a simple guiding principle or model. And it doesn’t hurt that in this case, the principle would also be conscience-nourishing!

Mark Cuban Calls the Stock Market a “Platform for Hackers”

  
Analysis, Education
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The following article from yesterday’s Wall Street Journal is a great follow up to my post from yesterday, Computers on Wall Street are Buying and Selling to Themselves!.  Mark Cuban, who wrote software himself, may have a bit more knowledge on the matter than some D.C. prostitute regulator, so I am sure they have contacted him to get his thoughts on the matter.  As I have said for years now, when the public loses all faith in their “leaders”(corporate and political), they lose faith in the system itself.  No economy can ever dynamically grow and increase standards of living absent a belief in the rule of law.  This is precisely why the U.S. will never be a strong, vibrant and upstanding society again until we take out our own trash, rather than pointing fingers abroad and blasting drones at civilians from 10,000 feet.

Key quotes from Mark Cuban on the computer dominated stock market:

I came to realize that the stock market no longer knew what business it was in. I wrote a blog that basically said that the markets for equities of all kinds had evolved to a platform for hackers.

As far as narrowing spreads, that’s absolutely true, but in absolute terms what does it translate into? For the individual investor it might save them a quarter a month. So what? Relative to the risk that’s the worst tradeoff in the history of tradeoffs (more…)

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