The Credit Crisis Financial Stocks Short Journal

A frequent bull point is to say that 50% of the S&P revenues comes from overseas so the market is in better shape than some think going forward. I dont believe thats totally right, I dont have the numbers but a chunk of that 50% comes from Europe and Japan which are in as bad condition as in the US. I would not be surprised to find out that revenues from high growth asia and latin america is only 25% of S&P revenues
 
Lacy Hunt calling for 1.3% 10y UST
http://www.hoisingtonmgt.com/pdf/HIM2009Q2NP.pdf

His scenario(Japanification of the US economy) is one that I choose to mainly ignore, if it happens it will be a bonus to my macro bets but I dont count on it(I dont count on a sudden reversal of financial conditions and a return of depression talk either)

I rather take care of my downside, which are V shaped recoveries, sudden burst of inflation expectations, etc
 
I've been reviewing Victor Niederhoffer arguments against trendfollowing and seeing what Michael Covel had to say and I got to say, he does a very poor job at defending TF. I'm doing this for educational purposes, I consider one of my strengths that I'm not loyal to beliefs, I can change my mind if I get new data

The covel argument is basically
-Victor blew up
-There are plenty of TF fund managers who made a lot of money

The first one is irrelevant since VN arguments are basically statistical in nature(and can be made by anyone), the second, VN argued

"The author apparently has no understanding that if you select from among the top funds from the top traders in a group that the results will appear to be strong. Nor does he seem to appreciate the importance of randomness in explaining the results of the selected trend followers: trends they caught, selected funds reported, money under management and years started and stopped."

And this seems correct.
If I select 1000 traders to trade based on astrology I bet 10 on them will have good long-term records. I bet they also will be the ones who were mostly long equities and fixed income in the last 30 years(capturing the premium). So the reason they were succesful didnt had much to do with astrology but with capturing the premium and upward drift on leverage and being short less often than other people(by having a lucky system that just happened to keep them short less often, or got lucky and shorted at the right times)
The 'good' traders will also have funds that went bad but got closed down and dissapeared in history

There does seem to be an empirical 'mometum' effect in markets(I plan to read some studies on this, Eugene Fame seem to have done some work on this area) and thats why I haven't made my mind fully in this issue. But I got to say Covel who is supposed to be the main guru doesnt do a good job at all, maybe he doesnt have a background in statistics(I dont have either) so he feels handicaped in trying to outsmart VN but he should hire someone to do that if he is dead sure he is correct.

I shot him a PM though
 
i am in a good mood. This is how I multyiplied my account several times. Game has changed since. Presume one can derive logic from chart.

me adapted now...
 

Attachments

Here's the study showing the momentum exists in the stock market

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=299107

"Underlying the efficient market hypothesis is the notion that if any predictable
patterns exist in returns, investors will quickly act to exploit them, until the source of
predictability is eliminated. However, this does not seem to be the case for either stock
return or earnings based momentum strategies. Both strategies have been well-known
and were well-publicized by at least the early 1990s, but both continue to generate excess
profits.
The momentum effect is quite pervasive and it is very unlikely that it can be
explained by risk. The profits from momentum strategies have generated consistently
positive returns for at least the last 60 years in the United States including the 1990s, a
period that was not included in the original momentum tests. Momentum profits have
also been found in most major developed markets throughout the world. The only
notable exception is Japan, where there is very weak and statistically insignificant
evidence of momentum.
We would argue that the momentum effect represents perhaps the strongest
evidence against the efficient markets hypothesis."
 
Quote from Daal:

VN argued

"The author apparently has no understanding that if you select from among the top funds from the top traders in a group that the results will appear to be strong. Nor does he seem to appreciate the importance of randomness in explaining the results of the selected trend followers: trends they caught, selected funds reported, money under management and years started and stopped."
More...
With that type of "death knell" argument VN can kill the discussion about any type of trading methodology: Global Macro, Value Investing, Short Term Trading, Carry, Merger Arb, Fixed Income Arb. Simply argue the results are a statistical artifact and tainted with survivorship bias and POOF end of discussion!

In fact, the next logical step would be to argue one can not generate any alpha and outperform the markets, as markets are perfectly efficient and random. Why don't we call it "The Efficient Market Hypothesis" :cool:
 
Here's Victor's main points against trendfollowing

"I have been the butt of abuse and scorn from the trend followers for many years. One such abusive letter apparently sparked the writer's note. Aside from my other limitations, the trend following followers apparently find my refusal to believe in the value of any fixed systems a negative. They also apparently don't like the serial correlation coefficients I periodically report that test the basic tenets of the trend following canon.

I believe that if there are trends, then the standard statistical methods for detecting same, i.e., correlograms, regressions, runs and turning point tests, arima estimates, variance ratio tests, and non-linear extensions of same will show them.

Such tests as I have run do not reveal any systematic departures from randomness. Nor if they did would I believe they were predictive, especially in the light of the principle of ever changing cycles about which I have written extensively.

Doubtless there is a drift in the overall level of stock prices. And certain fund managers who are biased in that direction should certainly be able to capture some of that drift to the extent that the times they are short or out of the market don't override it. However, this is not supportive of trend following in my book.

Similarly, there certainly has been over the last 30 years a strong upward movement in fixed income prices. To the extent that a person was long during this period, especially if on leverage, there is very good reason to believe that they would have made money, especially if they limited their shorts to a moiete.

Many of the criticisms of my views on trend following point to the great big boys who say they follow trends. To the extent that those big boys are not counterbalanced by others bigs who have lost, I attribute much of the success of the selected bigs to being net long leveraged in fixed income and stocks during the relevant periods.

I have no firm belief as to whether such things as trends in individual stocks exist. The statistical problem is too complex for me because of a paucity of independent data points, and the difficulties of maintaining an operational prospective file.

Neither do I have much conviction as to whether trends exist in commodities or foreign exchange. The overall negative returns to the public in such fields seem to be of so vast a magnitude that it would not be a fruitful line of inquiry.

If I found such trends through the normal statistical methods, I would suspect them as a lure of the invisible evil hand to bring in big money to follow trends after a little money has been made by following them, the same way human imposters work in other fields. I believe that such a tendency for trend followers to lose with relatively big money after making with smaller amounts is a feature of all fixed systems. And it's guaranteed to happen by the law of ever-changing cycles.

The main substantive objection to my views that I have found in the past, other than that trend followers know many people who make money following trends (a view which is self-reported and selective and non-systematic, and thus open to some of the objections of those of the letter-writer), is that they themselves follow trends and charts and make much money doing it. What is not seen by these in my views is what they would have made with their natural instincts if they did not use trend following as one of their planks. This is a difficult argument for them to understand or to confirm or deny.

My views on trend following are always open to new evidence, and new ways of looking at the subject. I solicit and will publish all views on this subject in the spirit of free inquiry and mutual education."
 
Quote from Daal:Neither do I have much conviction as to whether trends exist in commodities or foreign exchange. The overall negative returns to the public in such fields seem to be of so vast a magnitude that it would not be a ruitful line of inquiry.
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Negative returns to the public in commodities and currencies? Is he smoking crack? Clearly trying to dissect Niederhoffer's opinion on trendfollowing is a waste of time. Niederhoffer is way too focussed on stocks and equities.

The time is better spent backtesting 25 years worth of data oneself and drawing ones own conclusions.
 
Quote from makloda:

Clearly trying to dissect Niederhoffer's opinion on trendfollowing is a waste of time
More...

I have to say I underestimated VN level of intelligence and understanding, probably due his past failures, frequent arrogance and his connection with a certain ET poster who always seemed more interested in getting attention than anything else

But he does makes interesting points, lots of things he says can't countered at all. Some of them can, like this one

"Dave: Are you able to support this view with actual numbers?

Victor: In my book Education of a Speculator, I report that the correlation between weekly stock price changes in the S&P futures during the 1990's is approximately -0. 08. The correlation between daily changes is approximately -0.04 over almost all relevant periods. The chances of a rise following a series of 2, 3, 4 or more consecutive declines, in stocks, is approximately 10% higher than normal. Therefore, trend followers in the stock market averages would appear to be playing in a game heavily stacked against them. "

What he seem to be missing is that correlations dont tell you about the 'magnitude' of the moves, lets say one buys one day because it seems that a large up trend is about to start. Even though the correlation would be negative and is likely the market will mean revert in case it doesnt you might be able to capture a large move(above the long-term upward drift in the market) that offsets the initial slighly unfavorable odds
The correlations dont tell you about the mathematical expectation, although it can affect it

However he is right that one cant say 'this has been a 60% rally and the trend is up, its more likely the market will rise tomorrow after adjusting for its natural tendency to go up', that is not right since the market has a tendency to mean revert. However one CAN say 'assuming that momentum inefficiency doesnt go away(assuming it exists), being long in the monster rally has a higher expectation than short, even adjusting for the updrift tendency of the stock market'
 
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