The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

I met Joe Fahmy a few years ago (at a StockTwits event) and I have been impressed with his trading skills and diligence in refining his craft. He has been trading for 16 years, and has developed a rigorous investment strategy. As a hedge fund manager, he has successfully outperformed the markets for the past 13 quarters. You can read more about him at the end of this post.

His writing tends to be a little technical and chart focused; We spent some time chatting on the phone last week about his approach, and I suggested breaking a few topics into bite size, easy to understand, bullet points. This is the first of what hopefully turns into an ongoing series.

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When should traders be in or out of the market?

There are times when traders should NOT be in the market. There are other times when the market is rocking and traders should get aggressive. How can you tell the difference? Here are 5 helpful tips.

Note: I’m a trader, not an investor. I am looking for superior out-performance by being in the best stocks I can find during healthy times.

1) Accumulation and Distribution Days: When should traders go to cash? Follow the big boys! The big institutions control the market, so pay attention to their actions by tracking accumulation and distribution days. When institutional selling builds up over a short period of time (2-4 weeks) AND leading stocks start to break down, that is a great sign to start raising cash. Why? Because 4 out of 5 stocks move in the general direction of the market. I don’t care how good the company is, when the market’s in a downtrend, you don’t want to fight it.

2) Uptrends and Downtrends: Don’t get caught up with the terms Bull and Bear market. Just recognize if we are in an uptrend or a downtrend. For example, use the 50-day moving average on the NASDAQ Composite as a general indicator to be in or out of the market. Above the line usually means we’re in an uptrend and it’s a green light to be in stocks…below the line, downtrend and red light.

3) Scale In: When conditions start to improve, SLOWLY scale back in. There’s no reason to rush. Take a few positions and test the waters. If the rally is for real, there will be PLENTY OF TIME to make money. If you are wrong, at least you can get out quick with minimal damage and protect your portfolio. Think Defense First!

4) Buy the Strongest Earnings & Sales Growth: When markets are in a confirmed uptrend, what stocks should you buy? Be in the best! Don’t settle for low rate stocks. Look for companies that have strong earnings and sales growth. Why be in dead-money stocks with little growth potential? We’re in this to make money, right? So be in stocks that have a higher probability of moving up!

5) Fundamentals AND Technicals: Why does it only have to be one or the other? Why not USE BOTH! We want as many factors as possible in our favor when trading the market. Therefore, start with strong fundamental companies AND combine the proper technical timing to identify ideal entry points to effect your best risk vs reward trades.

These are my 5 measures for when to be in or out of the market. Note I do not rely on a single factor, but instead use multiple disciplines to facilitate trading, protect my capital and maximize returns.

Using every weapon available significantly improves your chances of surviving — and thiving — as a trader.

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Fahmy holds seminars for active traders who want to improve their returns (I will be discussing trader psychology and cognitive errors at the next NY seminar). Readers of the Big Picture who are interested will get a $500 discount on the full day event. Go to TradingBigWinners.com and enter the promotional code: “bigpicture500” for either the Los Angeles (2/18) or the New York (3/3) seminars. (I am only speaking at the NY event, and cannot get to the LA event — maybe next time).

February, 2012

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Dear Mark Zuckerberg,

Congratulations on your IPO filing. We understand that you are faced with a difficult decision soon on where to list your stock. You have probably heard from your bankers that the NASDAQ exchange is for tech savvy companies like Google and Apple and the NYSE is where the blue chip companies like GE and Caterpillar choose to list. You may think that the NASDAQ market is more of an electronic exchange where dealers place competing bids and offers to help facilitate institutional client trades. You may look at financial television and see scenes from the NYSE and think that the NYSE market is more of a floor based auction model where your stock would trade at a “post” on the exchange. You may be thinking that regardless of which exchange you pick, your stock will help investors create wealth for themselves by investing in your company for the long-term.

We hate to break the bad news to you but the fact is, in today’s market, it doesn’t matter where you list. Your stock is about to become one of the biggest casino chips on Wall Street. Ever hear the terms rebate arbitrage or latency arbitrage? Ever hear of colocation? Do you know what an exchange private data feed is? How about an actionable IOI or a dark pool? We bet you have probably never heard of these terms (maybe you have been too busy coding lately or ducking those Winklevoss twins). These terms are really what stock trading is all about nowadays.

Your stock will now be traded by high frequency traders who have an average holding period of 22 seconds. The majority of them won’t care about your earnings, or your new “likey like” button that you just launched. They won’t care about how many gazillion users you just signed up or how many eyeballs are on your site. They will only care about flipping your stock for a very small profit – millions of times per day. They will only care about getting paid a rebate 1/3 penny per share to “add liquidity” in your stock. They are not looking to invest in Facebook, they are looking at it as a tool to help them make money in their high speed arbitrage world.

Before you make your decision on where to list, also keep in mind that one third of your stock will be traded in dark pools that are off-exchange and away from the public’s eye . Know that even though the spread in your stock will be one penny (most of the time), your stock will not necessarily be liquid. Sure your stock will trade a lot of volume, but this is not the same as liquidity. Know that when your stock starts to move around intraday by 3-5%, there will be no one to call to ask what is going on.

You may be thinking now, how did this happen? How did the stock market get so screwed up? What ever happened to the goals of capital raising and investor protection? Well, it’s a long story. One that is much too long for this letter. Maybe if you have some time, give us a call and we’ll explain what happened.

Best of luck on the IPO. If you pick the NYSE, know that the podium looks much bigger on television.

Sincerely,
Themis Trading

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Joseph Saluzzi (jsaluzzi-at-ThemisTrading.com) and Sal L. Arnuk (sarnuk-at-ThemisTrading.com) are co-heads of the equity trading desk at Themis Trading LLC (www.themistrading.com), an independent, no conflict agency brokerage firm specializing in trading listed and OTC equities for institutions. Prior to founding Themis, Sal and Joe worked for more than 10 years at Instinet Corporation, pioneers in the field of electronic trading, and at Morgan Stanley.

Shanghai’s channel surfing Panda bears are speaking with a little higher pitch this weekend after getting their ‘hood caught in a vicious squeeze and reversal. The stock index has bounced 8.7 percent off its January 6th lows after falling 31 percent from last April’s 12-month high.  The Shanghai was down 39 percent from its August ‘09 post-crash high before reversing earlier this month.  Hugh Hendry nailed it.

We don’t know if the bottom is in but it seems clear to us the government doesn’t want the stock market to fall any further. They have unleashed the Dragon on the bears with a series of policies to prop up the market.

Christopher Wood’s excellent Greed & Fear piece wrote this past week,

Speaking of monetary easing, there has continued to be a lack of significant monetary easing in China. Still investors received more signals this week that the PRC does not want the local stock market to go any lower with the announcement of increased quota for QFIIs.

Thus, the China Securities Regulatory Commission reported on Monday that it granted 14 foreign investors QFII licenses in December, compared with 15 licenses granted in the first 11 months of 2011. The State Administration of Foreign Exchange (SAFE) has also approved US$950m in new QFII quotas since October following a five-month hiatus since May (see Figure 4). The local press also reported on Wednesday that the QFII quota will be increased significantly from the current US$30bn limit.

Meanwhile, investors should expect more reserve requirement cuts with the latest data on foreign exchange reserves showing that capital has continued to flow out of the country. Thus, foreign exchange reserves fell by US$92.6bn or 2.8% in the last two months of 2011, after increasing US$72.1bn in October. Still the main purpose of any RRR cut will be to offset the effect of such outflows, just as the numerous RRR hikes since November 2010 were designed to sterilise the impact of hot money inflows.

Stock trading in mainland China will be closed all of next week and Monday through Wednesday in Hong Kong for the New Year holiday as the country effectively shuts down during this period.  We will be monitoring labor demand from Chinese factories when workers return from the holiday and will watching how the Shanghai trades with respect to further monetary measures.

The index has reclaimed the 50-day moving average and it does look and feel  like a break above the upper bound of the Shanghai’s classic downward channel is in the cards when the market reopens.  Disciplined traders will, of course, wait for confirmation before acting, but, a break-out would further boost confidence in risk markets and commodities.

Interesting Economist cover this week with a series of articles on state sponsored

multinational corporations as the new model for capitalism.    We find it interesting, however, that China is attempting to prop up equities by deregulation and lifting restrictions on foreign investors.  This while developed markets become more and more distorted with massive quantitative easing money printing and negative real interest rates.  China also has negative real interest rates, by the way.

We’re now wondering if markets will ever clear again. Conventional metrics are tossed aside and market signals will become increasingly difficult to discern and read as the interventions drag on in this Year of the Dragon – and the Draghi!

Asset bubbles, anyone?  Who said this business was easy.

(click here if charts are not observable)

HFT shrinks spreads and provides liquidity. You’ve heard it all a thousand times, and more. It’s good for you; take your Soma! Honestly, today when investors hear those words, they are wise to the propaganda, and they discount it appropriately. The only “defense” thrown up by the for-profit exchanges’ catering to HFT at each and every turn, is that they have done so for our collective good. Because of that platitude!

But what if it weren’t true? I mean like really not true; like what if an academic study came out and stuff? What if such a study came out and demonstrated that HFT did NOT shrink spreads after all, because when you take trade sizes into account, effective spreads are in fact quite similar to the past!

We introduce into evidence: The Impact of High Frequency Trading on Stock Market Liquidity Measures, by Soohun Kim and Dermot Murphy. They have examined a somewhat liquid instrument, the S&P 500 ETF, SPY during different time periods. Using four independent models

Glosten and Harris (1988), Sadka (2006), Huang and Stoll (1997), and Madhavan, Richardson and Roomans (1997)

that each calculate the effective spread, all four models underestimate the spreads from 2007-2009 by 41 – 46%. Stated differently, spreads between 1997 and 2009 are actually quite similar when you account for size of trades.

Here are some nice tidbits from the study, although we encourage you to read it, as it is very readable right up until the letters and equations and sigmas and symbol thingies:

“In 1997-2006, the average size of a trade is 2,700 shares (with a standard deviation of 15,000 shares), while in 2007-2009, it is only 400 shares [we insert that the average trade size is now under 200 shares] (with a standard deviation of 6,600 shares). At the same time, the average number of consecutive buys or sells has increased from four to twelve. This corroborates our story that it is becoming increasingly common for traders to split their large orders into many smaller orders, in order to minimize price impact.”

“The spread is underestimated because empirical market microstructure models only identify the price impact of a single trade, when we should be identifying the cumulative price impact of many small trades”

“We see that, for the SPY, the average number of seconds between trades has steadily decreased over time, from 67.5 seconds in 1997 to 0.1 seconds in 2009. This decrease is likely because of the sheer increase in the number of transactions over time: on average, there were about 200 buy and sell transactions, each, in 1997, while there were about 250,000 in 2009. The average volume, in shares, has increased from 400,000 shares to 130.0 million shares.”

“If we collapse consecutive buy or sell orders into a single transaction by summing over volume, we find that little has changed from the early to late sample periods – the size, variation and distribution of these collapsed trades stays somewhat stable over time.”

So, umm yeah. Maybe all along we should have been focusing, not on the size changes in spreads, but rather the size changes of their noses, instead.

Source:
Themis Trading Blog
January 19, 2012

Joseph Saluzzi (jsaluzzi-at-ThemisTrading.com) and Sal L. Arnuk (sarnuk-at-ThemisTrading.com) are co-heads of the equity trading desk at Themis Trading LLC (www.themistrading.com), an independent, no conflict agency brokerage firm specializing in trading listed and OTC equities for institutions. Prior to founding Themis, Sal and Joe worked for more than 10 years at Instinet Corporation, pioneers in the field of electronic trading, and at Morgan Stanley.

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Some of the largest high frequency traders were born out of the derivatives industry. The co-founders of GETCO were both involved in the options and futures business on the floor of the CBOE and CME before starting their HFT “market making” firm. It is not surprising that the Futures Industry Association created a splinter group called the FIA Principal Traders Group which is basically a lobbying arm for HFT firms. Check out their list of latency sensitive members . It’s also not surprising to us when we see a former executive from a futures exchange stand up to defend HFT. This time around Leo Melamed, former chairman of the CME, (let’s just call him Uncle Leo) is at it again and he is standing up for the rights of “cheetah” traders. Uncle Leo is no impartial observer and has a vested stake in the game. He is known to some as the “father of financial futures” and is an advisor to the CME (which of course benefits tremendously from HFT “arbitrageurs”). He is also a consultant to Infinium Capital Management. You may remember Infinium Capital for their recent “computer malfunctions” which caused their algorithms to start buying up crude oil futures. They were fined the whopping sum of $850,000 by the CME for “failing to supervise” their systems for these violations. In his FT article titled Protect HFT cheetahs from regulatory poachers , Uncle Leo talks about the usual evolutionary spirit of HFT, its ability to be that great spread shrinking machine and of course the creator of tons of liquidity. Uncle Leo also does some good old fashioned flag waving in his piece:

“Our nation’s futures markets are an outstanding example of “American Exceptionalism”. They are a crucible for innovation and job creation. They represent an American natural resource. It is the duty of the CFTC not only to keep up with the market cheetahs, but as Teddy Roosevelt admonished in a different context, they must also treat our natural resources “as assets which it must turn over to the next generation increased and not impaired in value”.

We have never heard the term “job creation” used from HFT defenders. Maybe they are trying a new route since their tired old defenses do not seem to be working. And then to invoke the words of Teddy Roosevelt and compare HFT to “natural resources” is a stretch even beyond what the most twisted, next generation SOES-bandit could ever imagine. While its true that the futures market is critical to the success of our financial markets, it’s also true that these markets have been hijacked by the hyper-speed, nanosecond speculator.  And what exactly does an HFT trader do to get the title of “an American natural resource”? Uncle Leo tells us that “their principal objective is to take advantage of minute discrepancies in prices.” Well, that sure sounds like it benefits every American and we all should be thankful for these scalpers. It sure sounds like scalping minute price discrepancies is healthy for capital formation and job creation. But what happens when times get tough and volatility spikes, where will these “American natural resources” traders be then? We all know the answer to that question but somehow Uncle Leo forgot to tell us about that.

Over the years, I have become friendly with Mebane Faber, co-founder and the Chief Investment Officer of Cambria Investment Management. He manages an ETF called the Cambria Global Tactical ETF (GTAA).

Back in 2007, Meb authored an excellent paper titled “A Quantitative Approach to Tactical Asset Allocation.” It was published in the Journal of Wealth Management, Spring 2007.

That analysis tested and reviewed simple timing models, using a 10-month moving average on various asset classes as a signal to enter and exit asset holdings. Compared with traditional “Buy & Hold” investing, the performance improvements across all asset classes were quite significant.  The methodology has the advantage of being objective, unemotional and mechanical (fee free to insert “first wife” joke here).

The timing strategy works as an effective risk management tool that enabled investors to miss most of the fall in major bear markets. It also captured a significant portion of the subsequent rally. Signals were infrequent, not prone to false positives, and avoided “whiplash” – the many false buy and sell signals that typically plague timing systems.

As an example, look at the 2007-09 bear market. It peaked in October 2007 at 14,100, and bottomed in March 2009 at 6,500. Using the 10 Month Moving Average, traders would have exited the Dow Jones Industrials ~12,650 (1/31/08), and avoided the next 6,000 points down. The re-entry was July 31, 2009, at 9100.

Improving the methodology

I describe this quantitative method as symmetrical: The identical signal that triggers exits (markets breaking below their 10-month MA) also triggers entries (markets breaking above their 10-month MA).

However, in my experience, market tops and bottoms, are asymmetrical. They have very different characteristics in terms of timing, investor psychology, trading activity, market breadth, economic factors, and internal metrics. Tops are much more of a process, as buyers slowly lose their ardor for equities. Bottoms are more of an event, as sellers capitulate and dump holdings. Hence, tops develop over longer periods of time, while bottoms tend towards a faster more climactic event.

Thus, a ripe place to explore for possibly improving the original quantitative methodology might be on the entry side. Is it possible to identify a better entry than the 10 month MA?

I have been discussing this with Meb, and we plan on exploring a variety of factors related to (in alphabetical order): Earnings, economic data, Fed funds, insider buying, market price, reversions, sentiment, trend, valuation, volatility, and yield curve. If anything comes of this, we will publish our findings at SSRN or some other suitable journal.

Question: What other metrics are worthy of market timing exploration? If Traders use a 10  month MA as their exit, what might enhance their entry price?

The goal is an entry determined by a systematic, objective, data driven, metric, with modest drawdowns and limited false signals.

Feel free to add any ideas, suggestions, research, metrics . . .

Today’s list of geegaws and gadgets are geared for the Trader on your shopping list. (Our earlier list is here)

The odds are he (statistically) is stressed out, a little worried about his industry (and possibly his job), and unfortunately, making less in 2011 than he did in 2009 or ’10.

These are the items to brighten up his holiday.

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• Trading/Wall Street Movies: After a long day in the turret, what can be more relaxing than kicking back and watching films about trading? Here are 4 recommended flicks for your keyboard jockey:
-Eddie Murphy Trading Places ($6) Only tangentially related to trading, but filled with lots of oft quoted lines, this comedy is good for everyone.
-Wall Street ($14) Blue Horseshoe loves Anacott Steel Made in 1987, back when the US had an SEC, an entity that once enforced security laws. Dated, but watchable. Skip the 2010 version — its unwatchable.
-Boiler Room ($6) Know a retail stock jockey? This gritty flick will show him what the bad old days were like in the land of penny stocks. A cautionary tale with a great cast.
-Glengary Glen Ross ($8.50) For the Institutional Sales Trader in your life. Give him this DVD, but no coffee — Coffee’s for closers only.
-Margin Call Still in theaters, it has already been called the greatest Wall Street movie ever made.

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• Quiet Revolution: 30 Years of Windham Hill ($28) Your trader dude stressed out? He needs to pour himself a stiff one, and chill out to this collection of acoustically rooted mellowness that is a blend of folk, classical and jazz. The upside is he will relax from the day’s tensions. The downside is his heart may not realize that this is supposed to occur in Humans and assume he is dead.

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• Ted Baker Ties: £50

Years ago, I was wearing a Ted Baker tie to a Fox News shooting. Just before we shot, I went to change into something much less loud. The director stopped me, saying “TV washes everything out, and a bright fun tie will really pop. It works well — Trust me on this.”

I did, and now all of my favorite ties come from Ted Baker. They are bright, colorful and fun. If you must wear a noose around your neck for work, well then this is the way to go.

Note the link is to the UK site, which has a much more extensive collection than does the US site.

And for you bargain hunters, you can find Ted Baker on sale at Century 21 — normally $89, on sale for $30-40.

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• Spa Massage De-Stress Muscle Release: $125-190  This deeply restorative treatment is specifically designed for tight, stressed and aching muscles. Too many hours spent sitting on the trading desk leaves your  body stiff, tight and painful.

Swedish and cross muscle fiber massage techniques with stretching and draining are combined with essential oils known for their beneficial effects on the circulation.

Try the Nickel Spa for Men: They do massages, manicure/pedicures, facials, and the infamous “Boyzillian” (if you have to ask, you don’t want to know).

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• Led Zeppelin: Complete Studio Recordings ($94) What’s that you say? Your guy relaxes buy banging heads, not chillaxing? Well then, he can go back to the beginning of hard rock, with the often imitated, never duplicated, king of guitar driven music.

Led Zeppelin’s work is the central fact of 1970s rock & roll; These remastered recordings — by Jimmy Page himself — are pristine versions of the Zep that your favorite rockers grew up playing air guitar to.

The Rosetta stone of album rock.

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• Books for the Trader’s Library Three different book shelves for the different traders in your life.

The Newbie Trader (Starter pack)
1 Stock Market Wizards: Interviews with America’s Top Stock Traders
2 Reminiscences of a Stock Operator
3 How I Trade and Invest in Stocks and Bonds

The Historian
1 Bull: A History of the Boom and Bust, 1982-2004
2 Black Monday: The Catastrophe of October 19, 1987
3 Extraordinary Popular Delusions & the Madness of Crowds

The Technician
1. Technical Analysis from A to Z
2. Encyclopedia of Chart Patterns
3. Japanese Candlestick Charting

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• Padron Anniversary Series 1926 Exclusivo ($250/case) For the cigar smoker on your list, I suggest one of my favorite smokes. Consistently top rated by Cigar Aficionado & frequently named top 5 Cigar of the Year, a fast delightful smoke.

Spark ‘em up with the Lotus 21 Twin Flame Torch Lighter ($47) — A great piece of hardware (I own two)

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• Buy! Sell! $85  from KAL, the cartoonist for the Economist, this classic 2 panel cartoon laughingly depicts how the crowd moves from buying to selling and back.

C’mon, we’re all sick of that cliched Bull and Bear print fighting it out in the street in front of the of NYSE.

Instead, try one of these prints, each with a contrarian behavioral message.

-Avoid the Crowd $125 from Gaping Void’s Hugh McLeod.

Don’t just stand out from the crowd — avoid the crowd altogether.

And yes, both of these hang in my office.

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• Yoga ($50-250) is a great way to focus your mind, relax, and get in the right state for the day ahead.

It works for, amongst other folks, bond king Bill Gross, whose shop runs a ~trillion dollar sin fixed income.

You should be able to purchase a gift certificate from a local studio. In NYC, try Pure Yoga — one of the top rated studios over the past few years.

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• Herman Miller Embody Chair ($1100-1700) Embody lets your body move and keeps you well supported. Blood circulates better, heart rate goes down, more oxygen flows to the brain, and there is no distracting discomfort or physical constraint. The ideal trader’s chair, allowing the mind to work best when the body is unconstrained.

In assorted features, colors and materials.

If you have to sit all day, you might as well do it in style, and support your back at the same time.

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• Bethpage Black Golf Course: Its not easy to get a tee time at the home of one of the toughest courses on the US Open tour, but it can be done.

Especially if you are willing to take a day off from trading and go midweek — Weekdays (18 Holes): $130.00

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• CineMassive Trio Gemini 17D 6 Screen holder : $1,749

This entry-level (?!) six screen display has a crisp, clear digital signal, a full, rich digital canvas that will provide you with the full view of any picture. Designed to provide an immersive experience, allowing your trader to visualize a large amount of information at once.

Using a multi-screen display for the first time is often described as feeling like having received a new lobe of brain.

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• Caddy for a Cure:  ($5,000 and up) For the avid golfer who is having an especially good year.

Caddy for the Cure gives an opportunity to spend the day caddying for one of the world’s best golfers at an official PGA TOUR tournament. Select a player from the PGA TOUR events list; You either “Buy It Now” at the price listed, or make your best offer.

The guys I know who did this lost their minds, saying it was the greatest experience on a golf course they ever had.

And, 100% of the proceeds goes to charity.

Nothing endures but change.

-Heraclitus, Lives of the Philosophers by Diogenes Laertius

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As the year slowly draws to a close, you may notice some change in the air. Not the annual, nostalgic-laced look-backs that are so ubiquitous around this time of year, but rather, actual shifts in the underlying firmament of our world.

Consider each of the following as an early warning that your expectations may not be met — unless you are expecting surprises:

• Santa Clause Rally: Saint Nick has yet to appear on Wall and Broad this year. If Santa “passes over” the houses of traders this year, I fear we could see 10 plagues in 2012.

• Earnings: Always look great at record, cyclical peaks. But what will they do if the major economies of the world fall into recessions? A 20-30% drop is certainly possible.

• Economy:  Continues to show signs of softening. Job creation almost is keeping up with population growth, unemployment is ticking down because workers are leaving the labor pool. Retail sales, despite the NRF spin, are poised to disappoint.

• Gold: This could be the biggest disappointment of the year. The Gold pullback has some traders declaring this to be the end of the bull run. Who knew the shiny yellow metal could turn into a lump of coal?

• International Affairs: From the Arab Spring to the mess in the Euro-zone to Iran’s nuclear ambitions, the world is getting ever more complex, challenging and difficult. 2011 could be the most confusing and complicated set of events in many decades. Macro investors are having enormous challenges navigating. It is unlikely to get any easier in 2012.

• Oil:  Seems to sliding with all of the other commodities. OPEC seems to be ready to pump more to offset falling prices (Someone should give them an Econ primer). The usual suspects will declare how good this effect is for the consumer, while ignoring the cause:  Recession in Europe, a potential recession in the US, and a huge slowdown in production in Asia.

• Psychology: Most investors continue to operating out of the rear view mirrors. They have been damaged by the 3 boom & busts — Tech, Housing, Stocks — of the past decade. If commodities succumb as well, it will have a pernicious effect on their outlook.

• Politics: The corruption of Congress is now taken for granted, as their single digit approval numbers reach record lows. Perhaps more surprising is the lack of leadership on both sides of the aisle. President Obama arrived with great fanfare but disappointed anyone who hoped for change from the Bush bailouts (I blame Rubin’s proteges, Summers & Geithner for that). Despite the  incumbent being vulnerable, the other side seems unable to nominates anyone “Presidential” — or at least capable of garnering a majority of GOP supporters.

The bottom line remains simply this: If you ever made the mistake of believing you could rely on forecasts as to what is coming next, that error in thinking should be all but eradicated as of now. And for those of you smart enough not to have relied on Wall Street’s forecasts, for God’s sake, don’t start now . . .

Don’t be fooled by noise about reforming Insider Trading rules for Congress — its a scam, with lots of loopholes, says Yale law prof Jonathan Macey.

First, the background:

“Members of Congress already get better health insurance and retirement benefits than other Americans. They are about to get better insider trading laws as well.

Several academic studies show that the investment portfolios of congressmen and senators consistently outperform stock indices like the Dow and the S&P 500, as well as the portfolios of virtually all professional investors. Congressmen do better to an extent that is statistically significant, according to [a 2004] study . . . The trading is widespread.

These results are not due to luck or the financial acumen of elected officials. They can be explained only by insider trading based on the nonpublic information that politicians obtain in the course of their official duties.”

Now for the kicker:

“Congress’s rules would be clear and precise. And not too broad; in fact they are too narrow. For example, the proposed rules in the Stock bill are directed only at information related to pending legislation. It would appear that inside information obtained by a congressman during a regulatory briefing, or in another context unrelated to pending legislation, would not be covered . . .

If the law passes in its current form, insider trading by Congress will not become illegal. I predict such trading will increase because the rules of the game will be clearer. Most significantly, the rule proposed for Congress would not involve the same murky inquiry into whether a trader owed or breached a “fiduciary duty” to the source of the information that required that he refrain from trading.”

Is this what is meant by “Doing the people’s business?” No wonder why Congress’s approval ratings are at 9% — a record low.

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Source:
Congress’s Phony Insider-Trading Reform
Jonathan Macey
WSJ, DECEMBER 13, 2011  
http://online.wsj.com/article/SB10001424052970203413304577088881987346976.html

Last year, I put together a full run of Trading Rules & Aphorisms.

Here is the latest updated version:

• Livermores Seven Trading Lessons

• Bob Farrell’s 10 Rules for Investing

• James Montier’s Seven Immutable Laws of Investing

• Richard Rhodes’ 12 Trading Rules

• John Murphy’s Ten Laws of Technical Trading

• Six Rules of Michael Steinhardt

• Art Huprich’s Market Truisms and Axioms

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

• Lessons from Merrill Lynch

• Rosie’s Rules to Remember

• In Defense of the “Old Always” (Montier)

• Lessons Learned from 37 Years of Futures Trading

• Richard Russell’s The Power of Compounding

My (Ritholtz) own rules

• Rules for Shorting

• 15 Inviolable Rules for Dealing with Wall Street

• 10 Psychological, Valuation, Adapative Investing Rules

• The Zen of Trading

After this run, I plan on updating this list every quarter . . .

Books after the jump

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