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The Joy Of Looking Backwards

The other day whilst pulling into my gym I hit a magpie. Not a brilliant start to the workout since my favourite alarm clock is the sound of magpies singing and I have made friends with all the magpies in my area – obviously not the one I ran over. I only knew I had hit it because I saw it in my rear vision mirror, anything that literally runs under a car cannot be seen in advance, you only know after the event. The reason I bring up this tale of ornithological genocide is that whilst having a glance at what markets had done over night a news item popped up in the corner of the screen boldly claiming alarm at the level of margin debt that is powering particularly the US  stockmarket. My initial thought was so what, as was my second thought but I used to occasionally look at margin debt and the cost of seat sales on the NYSE just as something to look at. So I thought I would take a look and being too lazy to generate my own chart I found someone else’S. The chart below comes from Advisors Perspective and it shows the level of margin debt compared to the S&P500.

Margin Debt

As you can see the level of margin debt is at a higher level than at any point in history and you can also see that peaks in margin debt seem to be positively correlated with market peaks. However, my initial thought still stands….so what. The reason I have such an opinion can be found in my rather one sided run in with a magpie. I only knew I had hit it by looking in the rear vision mirror – looking backwards post an event tells you a lot about the event after the fact. It tells you nothing about the actual occurrence of the event since you were blind to that. This is true of indicators such as margin debt, forward PE’s, the VIX and any other host of things that seem at fist blush to be correlated with or predictive of the market. But we can only see that margin debt and market peaks might be correlated by looking back and trying to find a pattern.

The notion that margin debt is at a record high is largely an irrelevancy since it has been at record levels since late 2013 and since that time the market has advanced almost 25%. If you had taken margin debt as a forward or leading indicator then you would have exited the market three years ago. Back in the day when I first started this journey it was almost impossible to get closing prices from overseas – the information was obviously available just not transmittable. Now the information is not only available it is available in torrents of noise and this sort of data is part of the noise. There is very little signal involved and someday margin debt might still be at a record level and markets turn south but it will still only be something you see in your rear vision mirror.

Momentum investing confirmed as a truly Australian phenomenon

This piece got sent to me yesterday and I have to admit I have only scanned it. But my take way from it is the belief that momentum investing in Australia is rife because stocks can move by very large amounts. My off the top of my head feeling might be that this is a function of the very poor liquidity of the local market not a particular strategy.

I will have a bit more of a think about this over the next few days.

The Best Investors In The World Aren’t Special And Neither Are You

One of the great things about investing is the many ways that people approach it. Throughout history it’s been shown that hundreds (if not more) ways have been used to turn a profit within the stock market…. Whether you use fundamentals, technicals, astrology, or hire a monkey to throw a dart. However, one commonality among those that have risen to the top of our field have had one thing in common: They follow a process. The Market Wizard series by Jack Schwager has countless examples of this, with many of the investors echoing each other in their adherence to following a defined discipline.

More here – Andrew Thrasher – Technical Analysis

PS: My view is that the majority of people fail at the majority of things they attempt because they dont understand that success is built around process. It is not built around making it up as you go along.

GBP Flash Crash

The most interesting thing to happen in markets for sometime was the GBP flash crash that occurred last week. I only caught the tail end of the crash as I saw some of my GBP puts leap ten fold in value and then settle back down. Which was followed by me going WTF? was that all about. Much has been written about the causes of the crash, everything from a fat fingered trader to a rogue algorithm have been blamed. To be honest I have no idea which hypothesis is correct and I doubt anyone will know for certain unless someone puts their hand up and takes responsibility.

There are two things I find interesting about this sort of event. Firstly, because it occurred in the FX market the implications for and interest of most people is limited. This is not like a flash crash that happens in an equities market and everyone suddenly begins to panic about machines making markets untradeable. Secondly, much of the commentary missed the point that the GBP has been in decline for some time. On the charts below I have highlighted the Brexit vote with the vertical red line. As you can see the GBP begin its decline almost a year earlier. All of these smaller shocks are occurring within the background of an existing downtrend.


The bottom line is that the overall trend matters the most – everything else is simply noise that does in a perverse way seems to be designed to deliberately trip up the trader.


S&P/ASX 50

I mentioned in this piece that I should get around to looking at the original versus current components of the S&P/ASX 200 just to get a sense of index turnover. As a prelude to this I cobbled together a rough first look at the S&P/ASX 50 to see how much what I would consider to be a fairly stable index turns over. Those cells coloured in orange are original components that do not appear in the current index for whatever reason and those in yellow are common to both the original and current index.. This is a quick effort so I am bound to have missed something but if you needed proof of concept that indices turnover a great deal then this does give you a good idea of how much things change.


Well……This Seems Familar

As I watch my position in lean hogs gyrate in the wind I was reminded of these episode of the King of Queens. If you are not having a long breakfast skip to 15:20 for the most relevant piece and avoid the last few minutes since it is the usual childish American ending.



The Loneliness of the Short-Seller

Betting against the market is not worth the expense, either. To take a short position, traders sell borrowed stock in a company they think is overvalued with the hope of buying it back at a lower price. If the stock price goes up instead, short-sellers have to buy more stock in order to “cover” the position, which in turn pushes prices higher. Over the last several years, traders have hemorrhaged money on such bets, reporting percentage losses that are sometimes in the double digits, according to data compiled by HFR, a research firm.

In 2014, more than $1.3 billion flowed out of short-biased funds, a result of losses and investors withdrawing their money, according to HFR estimates. Within the universe of 8,431 hedge funds, there are only 17 that are short-biased, according to HFR data. (The Financial Times earlier reported on the HFR data.)

Hedge funds that shorted certain high-flying stocks have been pulverized. Take Tesla, the maker of luxury electric cars. For years, it was a favorite among short-sellers, who questioned everything from its business model to its forecasts for revenues. Despite the pessimism, the stock suddenly gained more than 600 percent from early 2013 until September of last year. The share price has since come down slightly, but at around $260 a share it is still much higher than the roughly $30 a share it traded before the run-up.

“It’s been an extremely difficult period for many short-biased managers, as negative performance during this prolonged bull market has led to capital outflows, forcing some to throw in the towel as others struggle to keep the lights on,” said Joseph Larucci, a co-founder of the hedge fund advisory firm Aksia.

More here – The New York Times

PS: Part of the issue is the story people tell themselves regarding an individual stock – the story becomes all consuming in the face of reality and is used as a form of internal justification. This is the ultimate in ego defensiveness. There was nothing intrinsically wrong with short selling stock such as Tesla but only when it warranted short selling. And as you can from the chart below those times were few and far between. To be blunt – narrative is bullshit.

Screen Shot 2015-06-24 at 9.13.57 am

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