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DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING

1. Never, Ever, Ever, Under Any Circumstance, Add to
a Losing Position
… not ever, not never! Adding to losing positions is

trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to
ruin. Count on it!

2. Trade Like a Wizened Mercenary Soldier: We
must fight on the winning side, not on the side we may believe to be correct
economically.

3. Mental Capital Trumps Real Capital: Capital
comes in two types, mental and real, and the former is far more valuable than
the latter. Holding losing positions costs measurable real capital, but it costs
immeasurable mental capital.

4. This Is Not a Business of Buying Low and Selling
High
; it is, however, a business of buying high and selling higher.

Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or
Neutral,
 and in bear markets, one can only be short or neutral. This may

seem self-evident; few understand it however, and fewer still embrace it.

6. “Markets Can Remain Illogical Far Longer Than You
or I Can Remain Solvent.” 
These are Keynes’ words, and illogic does often

reign, despite what the academics would have us believe. (more…)

The Chart Angle Delusion

“The lack of intrinsic meaning of angles on a bar chart has significance even for chart-oriented traders who do not employ angles. How sharply a trend slopes on a chart is often a psychological consideration in making a trade. If you fall prey to this influence, you’re letting the chart maker’s practical and aesthetic considerations impinge on your trading. Any trend can be made to look either gentle or steep by adjusting the price scale. ”

– William Eckhardt, New Market Wizards

If you use price action as a filter — and visually interpret charts as part of your process — how do you guard against the chart angle delusion?

One potential remedy is focusing on hard inputs that are independent of chart aesthetics. High and low point successions, moving average crosses, and volatility expansion / contraction (changes in average trading range) are three examples.

Another helpful practice is deliberately viewing more horizontally extended (flattened) charts in tandem with the main view (as such mutes the ‘exciting angle’ temptation)…

Japanese Public Debt 2X GDP With Deflation Threat

In summary, Japan has “$9.5 Trillion in public debt”, 2x GDP (192% 2009 estimate, #2 behind Zimbabwe at 3x from CIA.gov) with threats of deflation and falling wages. This is after 2 lost deflationary decades and a loss of 75% on the NIKKEI index since 1990 (39,000 to 9,700 today, 1st chart below). The good news is, most of Japan’s public debt is held domestically in Japanese Yen. Some analysts believe US Treasuries could end up like Japanese Government Bonds (JGBs) and catch a bid even with hardcore reflationary policies (see David Rosenberg’s debate on March, 2010). What about the S&P, would it follow the NIKKEI’s footsteps in a deflationary environment?  Or is the US economic machine too strong for that to happen.A 75% drop in the S&P from the October 2007 peak would be around 400, which is David Tice’s S&P target. What are the odds. Paul Krugman had an op-ed in the New York Times today titled The Third Depression. Hopefully Gold and the S&P move in tandem from here if more $ printing is coming. The 10-Year US Treasury Note is trading at $122 resistance in an ascending triangle (Chart 2) and I’m going to see what happens with the $USD at its 50 day moving average tomorrow.


Fear empty flats in China's property bubble

How many flats in China are sitting empty? The media recently floated a story — denied by power companies — that 64.5 million urban electricity meters registered zero consumption over a recent, six-month period. That led to a theory that China has enough empty apartments to house 200 million people.

Statistical transparency is lacking in this area, so the truth about empty apartments remains under wraps. Publishing accurate data should be of the highest priority, since the size of the nation’s unused apartment stock is perhaps the most important measure of the extent and seriousness of China’s property-market bubble. Indeed, it’s a grave concern for policy making, since unpublished data may indicate not only a price bubble but a quantity bubble burdening the market.

Real estate is prone to price bubbles because unique factors restrict its supply response. Inflated prices have been the mark of most modern-day property bubbles. Price bubbles occur frequently and can last a long time.

In the 1980s, Tokyo saw a tremendous rise in property prices not in tandem with supply. The Hong Kong property market experienced a similar phenomenon in the 1990s.

One reason for limited supply is that property development is subject to government regulations, especially local rules. Established communities usually restrict building heights and density, for example, making it virtually impossible for mature communities to increase supply quickly. London, which is now experiencing a price bubble, and Tokyo in the past are cities that tightly control building heights.

Second, infrastructure development takes time and is always relative to land availability. Even in an island-city such as Singapore, land can be reclaimed from the sea at low costs, pointing to the correlation between land and infrastructure. But when property prices are high, and even when money is available for infrastructure development, one should be cautious about plunging in for fear that property prices could later fall. Thus, even over extended periods of time, property supplies may not respond to price increases.

Hong Kong doesn’t have height restrictions like London or Tokyo. Nor does it have infrastructure or land shortages. But a government policy limiting land supply created scarcity before 1997, setting the stage for a bubble. The subsequent catalysts for higher prices were loose monetary conditions imported from the United States through Hong Kong’s currency peg to the dollar. Even though prices were rising, the government chose not to increase supply, leading to a price bubble.

Thus, demand for property also rises under eased monetary conditions, and climbing price momentum attracts speculative demand. If monetary conditions remain loose for a while, credit access can sustain this kind of speculative demand. This points to a need for the Chinese government to adjust its property-market policies as well as interest rates to reduce speculation and steer the market out of a looming bubble crisis.

It’s been said many times that China is experiencing a nationwide urban property price bubble. High prices in major cities where most of the country’s property value is concentrated cannot be explained rationally.

Rising rents are a little easier to explain, however, even in the face of empty flats everywhere. Some blame intermediaries for ramping up the market, but this explanation is hard to stick in China’s fragmented intermediary real-estate industry. Instead, inflation expectation is probably driving current rent increases: Property owners anticipate spending more in the future remodeling flats to compensate for renter wear-and-tear, so they charge higher rents now to plan for higher costs.

Quantity pump

What especially distinguishes China’s property bubble, however, is an unprecedented amount of living space. This huge stock of empty flats equals the nation’s quantity bubble.

Quantity bubbles are less common than price bubbles, and they don’t last as long. Rising supply usually exerts downward pressure on prices, although an influx of money can hold up prices even when supply is rising.

A price bubble can damage an economy in three ways. First, it usually leads to a banking crisis. As the market trades at ever-higher prices, buyers borrow more against the same property. Banks that maintain the same lending cushion with, say, a 30% down-payment rule suffer losses when prices fall below that level. A banking system in crisis cannot lend normally, and the economy suffers collateral damage due to dysfunctional banking.

Second, the wealth effect leads to excessive consumption during a bubble. The payback weakens an economy for several years.

And third, bubble-induced demand distorts the supply side. When inflated industries go down with a bubble burst, it takes time for other industries to rise in an economy in their place.

A quantity bubble is sometimes a construction bubble, and it fizzles out when a building cycle turns over, crashing prices as soon as new supply becomes available. This is what happened to a commercial property bubble in the United States in the late 1980s, triggering a bank crisis when it burst and prompting the Federal Reserve to maintain a loose monetary policy that helped the banking system heal.

Quantity and price bubbles may grow together. Southeast Asia, for example, experienced a quantity-cum-price bubble that lasted several years in the 1990s. As regional currencies were pegged to the dollar, loose monetary conditions were imported from the United States, fueling a property bubble. Due to few restrictions on urban development, rising prices led to massive increases in supply. Liquidity inflow fueled speculative demand. But when U.S. monetary policy tightened, the market crashed and triggered the Asian Financial Crisis.

The latest experience in the U.S. market was mainly based on a price bubble, although some cities such as Las Vegas and Miami saw quantity bubbles as well. The U.S. government quickly recapitalized its banking system, limiting the direct effect of the banking crisis on the economy. Current weakness can be explained mainly by the wealth effect and employment losses in bubble-inflated industries.

When Taiwan experienced a price-cum-quantity bubble in the late 1980s, analysts determined the number of empty flats by obtaining electricity meter data from the power supplier, leading many to conclude that about 15% of all flats were empty. Today, some analysts are trying the same tactic in China. But Taiwan’s housing conditions are less complex. Getting to the core of China’s data requires more calculating.

Housing types, for example, must be considered. China’s urban housing stock is mainly split between old, public housing built for company or government employees, and some 60 million units of private housing built over the past 10 years. Property developers are now building about 20 million private flats, and local government-owned land banks may be good for another 20 million to 30 million.

About 1 billion square meters worth of public housing (or about 14 million, 70-square-meter units) have been torn down, leaving about 9 billion square meters of this type of living space nationwide.

Moreover, companies and government agencies are still building apartments for employees. This practice has slowed but remains significant in many cities even today. It’s hard to tell how many of these newer flats are out there.

There are similar unknowns about dormitories, such as factory dormitories that house workers from rural areas who migrate to manufacturing regions. Most of China’s more than 200 million migrant workers may be living in such dormitories.

Not all commercial property is market-driven, since certain people with connections or other advantages may own rental apartments that tend to have high vacancy rates and should be taken into account when calculating market excess.

Another consideration is that massive quantities of housing have been springing up in rural communities near major cities. And when farmland is rezoned for urban development, the region’s housing starts falling into the urban category. (more…)

These 16 Rules Will Make You A Better Trader

1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!

 2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.16

3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This is Not a Business of Buying Low and Selling High: It is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it, however, and fewer still embrace it. 

6. “Markets Can Remain lllogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe. (more…)

Trading Wisdom

WISDOMDo more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.”

Don’t trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don’t care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analyses, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.

When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.