Sunday, October 29, 2017

Hirsch, Stock Trader’s Almanac 2018

The Stock Trader’s Almanac is now in its fifty-first edition. It remains a must for traders who use seasonal factors to time the market.

The spiral bound, navy-covered almanac opens flat for easy access to its data or for jotting down notes. The format remains essentially the same as in previous years, with a calendar section, a directory of trading patterns and databank, and a strategy planning and record keeping section. The calendar section has on facing pages historical data on market performance (verso) and a week’s worth of calendar entries (recto). January’s verso pages, for example, give the month’s vital statistics, January’s first five days as an early warning system, the January barometer (which has had only nine significant errors in 67 years, including 2009, 2010, 2014, and 2016, so it may be losing some of its predictive power), and the January barometer in graphic form since 1950. Each trading day’s entry on the recto pages includes the probability, based on a 21-year lookback period, that the Dow, S&P, and Nasdaq will rise. Particularly favorable days (based on the performance of the S&P) are flagged with a bull icon; particularly unfavorable trading days get a bear icon. A witch icon appears on monthly option expiration days. At the bottom of each entry is an apt quotation. There’s about a five-square-inch space in which to write.

The Stock Trader’s Almanac pays particular attention to the presidential cycle, and the prospect for 2018 is mixed. “Midterm election years have been the second worst year of the four-year cycle, while eighth years of decades have been the second best, so 2018 promises to be laced with cross-currents.” On the negative side, “in the last 14 midterm election years, bear markets began or were in progress nine times.” But if the market sinks in 2018, it might provide an excellent buying opportunity because, ”from the midterm low to the pre-election year high, the Dow has gained nearly 50% on average since 1914.”

What other seasonals are powerful? The best six months strategy has a good track record. “Investing in the Dow Jones Industrial Average between November 1st and April 30th each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950.”

The first trading day of the month is uncommonly strong (save in 2014). Beginning in 1997, the Dow gained a total of 6352 points in 238 first days, for an average daily point gain of 26.69. The other 4733 days gained 7232 points, only 1.53 on average.

This almanac is chock full of data that will delight those traders who believe that past is prologue. Even those who are skeptical have to pay attention to data that seasonal traders rely on and that therefore tend to move markets.

Wednesday, October 25, 2017

Bayoumi, Unfinished Business

Do we need yet another book on the financial crisis? For those who take banking regulation in the European Union and the United States seriously, the answer is yes. In Unfinished Business (Yale University Press, 2017) Tamim Bayoumi, a deputy director at the IMF, delves into, in the words of the subtitle, “the unexplored causes of the financial crisis and the lessons yet to be learned.” He shows that the Euro crisis and the U.S. housing crash were “parasitically intertwined.”

Policymakers were deluded by the efficient markets hypothesis into thinking that financial markets were largely self-regulating. And they were overconfident in the effectiveness of monetary policy. For instance, after the 1980s, when the U.S. experienced a noticeable decrease in the volatility of output (the “great moderation”), conventional wisdom attributed most of this moderation to better monetary policy. And after the technology bubble popped in 2001, the Federal Reserve “ascribed the limited impact on the US economy to its swift monetary response.” So why, if there was a major downturn in house prices, wouldn’t the Fed be able to do the same thing again?

Policymakers in the U.S. and Europe were not only overconfident in their ability to contain crises. They also adopted a stance of benign neglect, “the view that countries should look after their own internal affairs and that the benefits from cooperating with other countries are too small to be worth the trouble.” They were convinced that financial market spillovers between countries were small. “Across the North Atlantic, the main consequence of benign neglect was that policymakers missed the implications of increasing external financing of the US and Euro area periphery housing booms.”

Bayoumi extends his analysis by offering a history of the international monetary system in five crises: the collapse of the Bretton Woods fixed exchange rate system, the Latin American debt crisis, the European exchange rate mechanism crisis, the Asian crisis, and the North Atlantic crisis (which in many respects was “an amalgam of these earlier experiences”).

In the wake of the financial crisis regulations were imposed on banks in the U.S. and Europe. But “many deeper weaknesses remain.” There is, in the words of the author, “still an awful lot of unfinished business.”

Monday, October 23, 2017

Watkins, The Complete Guide to Successful Financial Markets Trading

For many years Simon Watkins was a senior Forex trader, eventually becoming director of Forex at the Bank of Montreal and head of Forex institutional sales for Credit Lyonnais. His extensive Forex experience informs his markets overview in The Complete Guide to Successful Financial Markets Trading (ADVFN Books, 2017).

Watkins takes the reader through foreign exchange, equities, commodities, and bond trading. He then turns to technical analysis, risk/reward management and hedging, risk-on/risk-off and other correlations, and key risks on the horizon. All this in about 265 pages, including many illustrative charts.

The book’s strength is its top-down and markets correlation analysis. By taking a macro perspective for the most part, it complements most books on trading. And it does this surprisingly well.

The author doesn’t offer an in-depth study of any of the many topics he addresses, but he points to vital connections among them. This is something that most traders and investors ignore, often to their detriment.

Wednesday, October 18, 2017

Crawford, How Not to Get Rich

Let me explain right away what this strangely titled book is about. Its full title and subtitle are How Not to Get Rich: The Financial Misadventures of Mark Twain (Houghton Mifflin Harcourt, 2017). Alan Pell Crawford follows Mark Twain, the consummate investing pechvogel, from one doomed scheme to the next. “Twain’s passion wasn’t to work in a print shop, pilot riverboats, write for newspapers, or even—as he would do in his twenties—prospect for gold and silver out West. Twain’s goal was to make money and then make even more money. Writing books was just a means to an end.”

Twain married well, far above his station, though primarily for love, it would seem. In his thirties, he had nothing to recommend him save a bestselling book he had written (The Innocents Abroad) that “some people found amusing.” But with his marriage he finally “had money to burn.” He lived in a mansion in Buffalo, a wedding present, and was lent $25,000 to buy a third share in the Buffalo Daily Express. With the death of his wife’s father, eight months after the marriage, Twain and his bride inherited $250,000—some $4.4 million today.

Twain and his wife stayed in Buffalo for only about a year before departing for Hartford. The house they built, described as a “brick-kiln gone crazy, the outside ginger-breaded with woodwork, as a baker sugar-ornaments the top and side of a fruit loaf,” was assessed at $1,420,000 in today’s dollars. The Twains entertained lavishly, spending more than $100,000 a year on food and drink.

Twain was productive during the Hartford years, both as a writer and as an inventor. (The penchant for invention seems to have been in the Twain blood; both his father and his brother tried their hand at inventing, unsuccessfully.) His invention was a self-pasting scrapbook, on which he may have made more than a million dollars.

And he started investing, first in the Hartford Accident Insurance Company, which at the end of 18 months “went to pieces.” He passed up the opportunity to invest in the National Bell Telephone Company, whose share price in June was $110 and by December had shot up to $995. But he put money into the New York Vaporizer Company, which was a dud. And he bought four-fifths of the patent for Kaolotype, a process for book illustration that turned out to be a fraud.

Twain poured a lot of money into a publishing company that failed. But by far his worst investment was in the Paige Compositor, a typesetting machine that was “a marvel of complexity” and that was finally abandoned.

As his assets dwindled away and his creditors hovered, Twain paced the floor at night. He said: “I am terribly tired of business, by nature and disposition unfit for it.”

Twain’s good fortune was to meet Henry Huttleston Rogers, “one of the most ruthless tycoons of his day.” “At his peak, Rogers would have been worth $40.9 billion in today’s money, outranking even his contemporary J.P. Morgan.” Rogers had Twain transfer all of his assets to his wife and then steered the publishing company into voluntary bankruptcy. The compositor company was dissolved.

Twain went on an international lecture tour to pay back some of his debts. Rogers handled his money, paying back debts and making savvy investments on Twain’s behalf. When Twain died in 1910, his estate was appraised at more than $11 million in today’s dollars.

Despite all of his business failures, Twain told a group of alumni from Eastern Business College in Poughkeepsie in 1901 that he had been “well served … through the years by his own mad and endless determination to make a great fortune.”

Sunday, October 8, 2017

The Crossley ID Guide: Waterfowl

Back in 2011 I reviewed The Crossley ID Guide: Eastern Birds. In that post I suggested some ways in which identifying a bird is similar to identifying a good trading opportunity. It’s not as much of a stretch as you might think.

Richard Crossley has now published his fourth flexibound guide, this one to waterfowl. Like his previous books, it features gorgeous, lifelike compositions that are “painted in pixels.” It shows North American ducks, geese, and swans in their natural seasonal settings (winter/spring and summer/fall) as well as in flight. The illustrations also include juveniles at various stages of development. There are some mystery birds to identify, with answers provided. The second half of the book is text written by Paul Baicich and Jessie Barry, giving a detailed account of each species. All in all, about 500 pages of absolutely wonderful material

If you are a birder or a hunter, this book definitely belongs on your bookshelf. It is available at Crossley’s site.

Wednesday, October 4, 2017

Burchard, High Performance Habits

Most self-help books fail because they offer easy paths to success. Brendon Burchard’s High Performance Habits: How Extraordinary People Became That Way (Hay House, 2017) describes what it takes to become a person who creates ever-increasing levels of both well-being and external success over the long term. And it takes a lot.

Many factors can affect your long-term success—luck and timing, for instance. But Burchard sets out six things that “are under your control and improve your performance more than anything else we’ve measured.” First, seek clarity on who you want to be, how you want to interact with others, what you want, and what will bring you the greatest meaning. Second, generate energy so that you can maintain focus, effort, and well-being. Third, raise the necessity for exceptional performance, tapping into the reasons you absolutely must perform well. Fourth, increase productivity in your primary field of interest, focusing on prolific quality output. Fifth, develop influence with those around you. And sixth, demonstrate courage.

Burchard’s HP6 go beyond the usual nostrums: work hard, be passionate, focus on your strengths, practice a lot, stick to it, and be grateful. You can be a grateful hard worker and still be on the bottom of the pile. Or you can be passionate and practice a lot—and burn out.

Some of Burchard’s suggestions seem hokey, but for the most part they ring true. I, of course, haven’t tried the vast majority of them. I just finished reading the book, after all. But what’s the worst that can happen? That you do nothing, just keep going the way you always have. Unless, of course, you’re already a consistently high performer.

Sunday, October 1, 2017

Carver, Smart Portfolios

Robert Carver, author of Systematic Trading, has turned his attention to the thorny problem of portfolio construction. In Smart Portfolios: A Practical Guide to Building and Maintaining Intelligent Investment Portfolios (Harriman House, 2017) he deals with such topics as how to blend assets with different levels of risk, the reasons that forecasting returns is so difficult, and how to calculate the true costs of your investments.

One problem that investors face is that not only is the future uncertain, the past is as well. This is a point that Carver drives home multiple times. He shows, for instance, that “the uncertainty of the past is largest for risk-adjusted returns. We can be 95% confident that the estimated relative Sharpe Ratio (SR) of the two assets was within a range of around 0.5 SR units. For US stocks and bonds this uncertainty range is -0.16 to 0.36. This is a huge degree of estimation error: our estimates of Sharpe Ratio are effectively worthless.” By contrast, “the uncertainty of standard deviation estimates is much lower than for the Sharpe Ratio,” and “in typical financial data estimates of bond and equity correlations are 95% likely to be within a range of around one-third (actual range -0.12 to 0.21).”

To manage the problem of past parameter uncertainty in portfolio construction, he assumes that risk-adjusted returns are identical for all assets, he uses risk weighting to account for differences in asset volatility, and he employs a technique he calls handcrafting to handle correlations sensibly.

In over 500 pages Carver takes the reader through both theoretical considerations and practical applications. He shows how to build a smart portfolio top-down, contingent on portfolio size, from an institutional investor to a person with $40,000. He introduces two forecasting models (momentum and yield) to aid in the construction of a portfolio. And he addresses the need for maintenance, such as smart rebalancing and portfolio repair.

Smart Portfolios is a sophisticated but not overly technical treatment of a topic that every investor has to come to grips with. As such, it is a recommended read.