Short Funds Need to Blow Up before the Market Bottoms

I could only begin chuckle as I think about how many Long Only and Long Bias funds Blew up and closed their doors within the past 12 months. This has obviously created some forced selling from firms who need to liquidate their positions. For the Market to truly turn around and be in the next "Bull Market", Ultra Bearish Funds need to blow up as well. When you burrow stock to short, your broker locates the stock and then "lends" it too you. To cover your short you need to actually buy back the stock in the market, hopefully for a lower price.

The situation too keep an eye on is a short selling fund blowing up due to a rally in the market that forces huge amounts of forced buying. It may sound a bit strange to hear the words "Forced Buying". For the market to truly turn Bears who shorted too much stock at the lower price levels need to feel some real pain.


For a true "Market Bottom" we need to clearly see the other side of the coin. The scramble to buy stocks needs to be as intense as the broad based selling that has occurred over the past 12 months. Until then the Bears will continue to sell Rallies and maintain control of the markets.

But would this short blow up even make the news? I highly doubt it. No one really complains when stocks go up.

When will these Government and Stimulus Packages End?

What the Hell is going on here? When will these government Bailouts and Stimulus Packages end?

The Fed has expanded their Balance sheet from 800 Billion Dollars less a year ago to 2.2 Trillion Dollars today. The Fed has slashed interest rates to a new target of 0% to .25 % the lowest in its history. The talk of systemic risk and avoiding the collapse of the entire financial system is the justification used for government intervention. That sounds reasonable enough. Who wants to see the entire financial system and economy collapse to bring about "The Great Depression 2".

The economic situation is calling for every industry to reach out and seek government help in what has become a race to convince the government why they need money, and exactly how much.

President Elect Barack Obama has called for a massive new stimulus ranging from 700 Billion to even up to a staggering 1 Trillion Dollars. The Strategy of racking up debt to stimulate businesses, consumers, credit and the housing market is what the government is relying on.

This leaves many questions unanswered. First will this actually work? What are the long term consequences of such a monetary policy? How will hitting the printing press and creating new money affect the value of the US dollar? What are the real costs of this monetary and stimulus to the American Tax Payers? For every Dollar of this Stimulus how much actually goes towards the intended purpose? How are the government agencies going to be held accountable for the use of this money? How is the Government going to promote entrepreneurship, innovation and prosperity by giving money away?

Finally the question no one wants to ask is: What happens if this does not work?

Trading Range

I really don't have much to say about the current market. The Trading Range seems to be firmly established at 800 to 900 ish on the S&P 500 Index futures and 8,000 and 9,000 ish on the dow jones.

I am not really suited that well to these types of markets thought I try my best and I am always getting better. In the mean time I get chopped around make a little money and lose a little less trading options.

Trending markets tend to allow my profits to run a bit further. My inclination is that we start towards S and P 1000 and Dow 10,000 into the last days of 2008. We shall see what happens.

If these indexes fail resistance I will look for shorting opps. If they keep moving up I am going to stay "cautiously bullish".

Credit Default Swaps. Too Big To Fail. Too Big To Bail Out.

The Credit Default Swap Market is estimated at $60 Trillion Dollars to $75 Trillion Dollars. The Current US Stock Market Capitalization is between $7 and $10 Trillion Dollars now. The Credit Default Swap Market is enormous and posses many unknown risks to the global financial system.

60 Minutes did a great piece about how this market compared with the old "Bucket Shops" that allowed customers to place large leveraged bets on stocks without much capital. Many people think this is the reason for the stock market crash of 1929. The States drafted legislation to prohibit these Bucket Shops. Then came of Commodity Futures and Modernization act of 2000.

This eliminated the old bucket shop laws and allowed the Credit Default Swap Market to flourish. The New Act Eliminated the enforcement of these "Bucket Shop" Laws. The Regulators created these laws after the 1929 financial crisis to prevent another crisis. The Regulators of our time undid these regulations to allow the markets to be free. They reasoned in our modern advanced financial society, large institutions had the intelligence and economic incentive to effectively manage risk, and they did not need outdated, burdensome government regulations to inhibit the flow of capital and compromise the sanctity and prosperity of the free markets.

A Credit Default Swap is an insurance policy to speculate on the default of a company. Since these are legally classified as "swap" contracts, and not actual "insurance" contracts, none of the collateral and minimum capital reserve rules of the insurance industry apply. This was intentional on the part of those who lobbied for this legislation. No one in a swap transaction is required to post much of any collateral to cover the risk of a credit event actually happening.

We know now that many of the people who wrote these contracts do not have the ability to actually pay on these claims. These Contracts were all sold by the Largest Financial Institutions, they were the cause of death for Bear Sterns, Lehman Brothers, and the cost of Billions of Dollars in write downs for too many companies to name.

Because of tricky accounting laws these swaps were written using special investment vehicles and other "off balance sheet" type of stuff. The words Off Balance Sheet even to the layest of lay people sound dubiously suspicious. It is so obvious this tactic was mean to deceive and cloud what should be clear black and white accounting rules, standards, and practices it is blatantly insulting.

The Markets are adjusting constantly with each new piece of data and information to reprice the risks and effect of these mysterious credit default swaps, special investment vehicles, mortgage backed securities, and other opaque, illiquid, hard to value, and even harder to sell securities.

It is going to be necessary for a central clearing house to stand behind the credit default swap market. The Chicago Mercantile Exchange (CME) and The Intercontinental Futures Exchange (ICE) are both licking their chops in anticipation of a new government regulated market for the swaps, and have both made proposals. Increased transparency and accountability in this market is essential for the survival and evolution of capitalism. The Obama Economic Team is going to have to handle this sticky task when they take office this January.

The Credit Default Swap Market is both Too Big To Fail and Too Big To Bail out.

Yes you read that last sentence properly. There is not enough money available for any government anywhere on earth to "inject capital", "provide liquidity" or really help ease these markets. Adding more money is not an option. These markets need to work themselves out on their own, for better or for worse. No one really knows for sure how everything is going to play out.

In 5 years from now you could be buying your girlfriend the newest designer purse as a surprise luxury treat, or stealing an old ladies purse to quiet your stomach rumblings to eat. Only time will tell.

A Girl I used to Love

I had to get this out of my system. This blog is used for mostly me posting trading tips and lessons I want to enforce within myself. But It's official Title is "Trading and Beyond". So Here is some Beyond.

If she reads this she will surely know these words are meant for her.

"Yesterday she was the one I pushed away. Today I can't find any words to say.
It hurts too much to think of her anymore. When I saw her last night my heart dropped to the floor.

And now I don't even know what I can do.
The hurt I caused her I know I can never undo.
I will probably never ever find another love so true.

I had with you everything I could ever want or need, I ask again and again god why couldn't I see?

She gave everything of her self to me. How Naive, blind and selfish could one man be?

Was I too young? Was I just too Dumb?
Was she the girl for me?
Was she the one?

It's now so clear to me that she was. Because no one else I've ever met does it like she does. She's Sassy, So Funny and Very Sexy too. But Now there is not anything that I can do.

I want her back so bad and it hurts, but what I did to her was so much worse.
I know she'll never be able to forgive me. And I know she will never ever forget.

But on the real...she is the most beautiful, funny, and interesting girl I have ever met."

Get Long. Lows Retested and Held.

Covered Shorts today at 1:30 PM EST. I Had such a small amount of options day trade buying power in my account I did not get long.

I enjoyed good shorts from S and P 1000 down to 838.

My Bias is to Long Side here for the near term.

I suspect this Rally will provide an easy trade on the long side. The Dow and S and P 500 both broke through, retested, and then ripped up well past the October Lows to cap off big swings. The market is now looking worthy of buying. Wait for a Pull Back and start grabbinwg some long bias positions on companies that are not broken. I will obviously short again if need be.

Always Leave em feeling Upset about what they Did, or Didn't Do.

There seems to be a natural tendency of the Financial Markets to preoccupy investors with the regret of past investment decisions. The Market will Always Leave many people feeling Upset about what they Did or Didn't Do. This Psychological burden is powerful if you let it trap you.

The Hindsight Bias and being able to see exactly what happened to your investment ideas you did not go through with, or actual investments you did not cut losses or take profits on, can create tremendous problems for traders.

Using the gift and curse of Hindsight I now realize The Market does not preoccupy investors and traders. Investors and Traders preoccupy themselves with these regrets. I was not being completely objective, and speaking from my own subjective view. Warren Buffett says "The Market is there to serve you, not to instruct you". The market is a 24-7 all you can eat Vegas Buffet. It is not your drill Sergent, dictator and decision maker. The market is a mirror of your mind, and what you are feeling inside. Its not a scary market. You are Scared.

If you allow the market to upset you about what you DID DO or DID NOT DO you cannot objectively observe the market in the present tense. Allowing feelings of past mistakes, losses, frustration, and failures into the present tense creates negative energy and a downward spiral of doom. Don't go there.

Letting Go of Fear

If we cannot trust ourselves to do the what is in our best interests and take action then we will always trade based on Fear. If we trade based on the Fear of Loss or the Fear of Missing out we will lose our money.

The only way to not be scared and be able to do what is necessary is to have the right set of beliefs. The beliefs we have about ourselves and the market determines our market experience. The right belief structure is key to getting what you want out of the market. Our beliefs about reality shape our own unique experience of the market. We need a belief structure that is effective in the market environment. For example: We believe when a trade goes against us, it makes more sense to sell it than come up for reasons on why it is not doing what we wanted to, hoping it does, and allowing ourselves to lose money.

We are forced to move towards evaluating ourselves and our own ineffective thoughts, beliefs, behaviors, and results. People do not always do what they intend to do, what is in their best interests and what makes just plain common sense.

It all Comes down to the choosing to create the conditions that allow you to trade without the negative constraints of Fear. The choice is yours. If we can see the person we want to be in our mind, and have the courage to step into the present and act accordingly we will be rewarded.

No Business is "Too Big to Fail". The Auto Industry Should NOT Be Bailed out.

The Titanic was not too Big to Sink. No Business can become "Too Big To Fail".

The Government has taken stakes in Banks and Insurance Companies using the Federal Balance Sheet to supply Private Interests with Capital and Liquidity. The Government is now getting called on from everyone for a "Bailout".

Now the Automotive Industry wants to be bailed out. How much tax payer money should we risk? And how safe is this Money? Who really knows? General Motors, Ford and Chrysler all want to be next in line to receive a government Bail Out.

A Bail out may be justified in dire circumstances to prevent a systemic global financial collapse by providing emergency relief and intervention to markets, but not in the case of supporting an obsolete industry such as the automotive business.

Back 50 years ago it was very hard to break into the car business. That is not the case any more. Technology and telecommunications has enabled manufactures to survey suppliers around the globe to find the best value on components. It is relatively easy to outsource the manufacture and production of vehicles. I could start my own car company for a sum of money significantly less than 10,20,30,40,or 50 years ago. Every year the process is likely becoming cheaper and cheaper. There are now literally thousands of car manufactures competing for your business all across the globe.

This is Good News for consumers who are ultimately going to get more value per every dollar they spend. And it is Bad News for companies in the business, more competition puts pressure on Margins. The car business is no longer a high margin specialty business. Technology and increased access to "turn key" design, fabrication, and production processes has changed the playing field.

In our New Global Economy it does not make any sense to subsidize and put on Life support business models of companies that are doomed to fail.

If the car companies wanted federal money they should need to do something that benefits all the members of our society such as electric cars, hybrids, solar, compressed natural gas, improved fuel economy, ect. They money should not be put into failing enterprises. The problem with the car companies is rooted in a failed business model. The last thing it needs is more money.

Money should be allocated to research, and development for companies that can create new industries, products, and sustainable jobs. Money should not be put into failing businesses and business models just for the sake of sustaining a business that is not profitable, and cannot be profitable at any time in the future without government support.

Please Get the Election Over With

Please Get this over with. We have 10 days left.

If you are a Black Man and you make less than 250k per year and you are voting for Mccain/Palin I have got absolutely no Respect for you. You need be voting Obama.

John Mccain is a War Hero. He says we are all his friends. I don't know anyone who really has that many friends. John Mccain is 72 and is the oldest man running for President ever. He's a Republican and so was George W. Bush who has one of the lowest approval rating ever. Making it nearly impossible for another White Man to be president for at least 4 years. John Mccain picked Alaska Governor Sara Palin as his VP. Palin looks very nice, but I can't believe that she is ready to be the President should something happen to Mccain. What exactly does the vice President do Mrs. Palin? Mccain is throwing the kitchen sink at Obama campaigning and nothing seems to be sticking. This campaign is still believes that Roe v. Wade should be overturned, Invade Iran, put more money into Iraq, help special needs kids, and "Drill baby Drill" to solve our energy problems. We use 25% of the Worlds oil and only have 4% in our reserves, that's not going to help much. And no one is gonna be drilling now for oil under $70 a barrel. At $145 it almost seemed smart.

The Economic Crisis, Trillions of Dollars of National Debt, Housing Meltdown, Various Government Bail Outs, Stock Market Declines, and Bitter People will fuel Obama to Victory. If you look at the polls you can see Obama will be the next president of the USA. The return to Populous Politics is bigger than either candidate.

Both Candidates have suggested we need to find alternative energy solutions with wind, solar, clean coal, nuclear, bio fuels, compressed natural gas, and improved fuel economy for existing sources of fossil fuels. Over History Candidates have spoke Large and Delivered small on actually solving our energy issues.

Barack Obama speaks well, Oprah Winfrey, Warren Buffett and Colin Powell have got his back. He is charismatic, energized and a master of rhetoric. He says he is ready Increase Taxes on Income, Dividends, and Capital Gains. Which is surely not going to help the struggling stock market. Obama does have some good energy and I think he could be a strong agent of change, but who really knows? I am used to seeing former Detroit Mayor Kwame Kilpatrick on local TV being arrested. But he was the Hip Hop Mayor. Is Obama going to show up in the White House with a grill, rolling on 24s, blowing kush, and sipping on Colt 45 fighting off lawsuits from some hood rat Babys Momma? I don't think so. He is actually whiter than me. Barack Obama wants to tax the "Rich." Thats sounds ok with me today, but what exactly is Rich? It is a slippery slope. Once Obama starts taxing, when will he stop? Who knows? That's the drawback. He may tax and Spend like wild.

Get Ready for President Obama in 2008.

Back on Track

Thanks to doing what I know to work, I have recovered about 10% from my large draw down. Thanks to some nimble trading in AAPL computer Put Options I am clawing my way back. Having the confidence in your ability to do the right thing is key.

After my draw down I was losing that confidence. I took a break and did some sleeping in during a few days. I then came to the market refreshed, objective and ready.

Working Harder through a draw down is NOT the way to go. This is the path to Disaster. I have been down that road before, and its not where you want to go. Put some distance between yourself and the market. Obviously what you are doing is NOT working.

Negative Emotions such as Fear, Anger, Greed and Frustration projected from your Brain that shapes your observation of the market is not going to return anything positive into your account. These Emotions are carried around by losing traders. I allowed myself to be influenced by them to my own demise before realizing an effective way to operate in the market environment.

Positive Emotions such as Happiness, Confidence, Peace, and Acceptance are projected from your Brain to the Universe will allow you to see the market more clearly and honestly. These are the Emotions that equip the attitudes of Winning Traders.

If your Trading Charged with the Negative Emotions I would bet you are going to losing money and your mind. If you are Trading Charged with the Positive Emotions you are ready to succeed, get laid and get paid.

Burned Out

After Over Trading Dow Jones Index Futures for approximately 16 hours per day over the the last 10 Wild Trading Days I have made then Lost Thousands of Dollars. Notice that no new updates were made to the blog during this time. I literally could not take my eyes off the screen.

I am taking a minute off until I feel refreshed and ready to trade again.
After talking with one of my friends I realized that I can be 100% and alert for 8 or 9 hours hours no problem, but as for 16 I am not a machine.

Today I lost a thousand dollars by putting in an order to short and not realizing the order came back marked "Too Late too Cancel" and that the order was indeed filled. I did not have my usual audio alerts on and missed the sounds of the notice and the order. I placed the order, realized it sucked and then clicked on cancel order. I went back to staring at screens looking at graphs. When I glanced over at my account balance I noticed it was moving (I was flat) and lower than before. It took me a while to realize that I was filled Short Dow Jones Index Futures as the market was Ripping up and Rallying. After I came to my senses I covered. I did what anyone would do then, I called my Broker to complain.

I spent so much emotional, physical and financial energy lately trying to force trades and make more and more money as fast as I could. I had no litmus test for when to cut myself off. I did not recognize and consider my physical performance or personal happiness. I suffered a draw down over the last 10 days of Negative -27.35% from my accounts peak and all time futures trading high balance. Money Which I had in my possession and did not take proper profits on.

During this time I broke my own rules on Risk Management and Position Sizing. I neglected The Mathematics of Trading, and I did not keep detailed records of my trades.

Don't feel bad for me. This was my fault. I take full responsibility.
Don't worry about me. I know what needs to be done. Happy Trading.

NAV now $323.06

This is sadly the last NAV post I will make on this Blog. Due to varying investment terms with each individual share holders it is no longer be applicable. I may continue to post my personal Net Asset Value price after speaking with my legal counsel.


I hit $354.29, and stabilized at $323.06. The reason is because I have only been going Long and Short on Options only for the fund. These past weeks the implied volatility on the options purchased was so expensive on some of my losing trades I could not get back all of the gains. My draw down from my accounts peak was 8.8%. This is a bit embarrassing for me. I bought some Spy calls and got smashed on the High implied volatility prices I paid. My Trading is always more profitable in the second end of the month because I go Net Long or Short Delta using puts and calls in front months contracts. Options prices will be coming down slightly due to a lower time value component. I am looking forward to the end of this expiration cycle.

The Thin Line Between Success and Failure

In Life there seems to be a thin line between Love and Hate. Anyone who has been in a relationship can testify to this fact. One minute you and your girl are kissing, cuddling and pledging your undying love for each other. The next minute she is screaming at you, slapping you across the face, and saying how much she hates you.

As Winthrop says to Valentine in the movie Trading Places "In the Pits you make No Friends and Take No Prisoners. One minute your Up half a Million in soybeans, the Next they are repossessing your Bentley and your Kids aren't Going to College".

In Trading there is a very thin between Success and Failure. The reason for this is because a Trader can choose to take a position size that is too large just one time, and this will undo months and even years of good decisions.

This is similar to the saying that reputations can take a life time to build and only minutes to destroy. Lets say you did everything right in your life, then one Sunday you are at church and decide to drop your pants in front of the congregation and put your testicles on the shoulder of some nice old lady. One bad decision like this and everything good you have done will be long forgotten. You will forever be seen differently by everyone due this extreme act of perversion.

When Traders are Trading at home by themselves they have nothing but their own rules and discipline as their safety net. All it takes is one time not following these rules to lose everything you have worked so hard for. At Professional Trading Firms the Risk Manager will make sure you don't lose too much money, and will cut off your trading before you lose too much of your allotted equity. At Home Traders Do Not have anyone else to prevent us from Self Destruction.

The thin line between Success and Failure comes down to what you choose to focus on. The people who fail focus on how much money they can make, and how fast. The Traders who succeed focus on Managing Risks, and Following their plan.

The Profits, Winnings and Money Making will care of themselves if you focus on just managing the Risks in Trading. This approach seems backwards to people who have not developed the right Trading Psychology. They feel that if they don't primarily focus on Making Money they will miss it. This is exactly why most Traders lose their money.

The Successful Traders always welcome more and more idiots to the Game who are drawn by the lure of Big, Fast, and Easy Money.


In the End all we can do is take responsibility for ourselves and our own actions. In Trading we are all Lone Wolves and we do not really have any "friends" in the traditional sense of the word.

Many Firms and Friends Disappear due to the Wild Markets

Bear Sterns, Lehman Brothers, Indy Mac Bank are Gone. Merrill Lynch was merged with Bank of America by the Federal Government. AIG was taken over by the Federal Government. Goldman Sachs and Morgan Stanley are now Commercial Banks.

If such drastic changes can happen to the largest financial companies the damage it can do to individual investors and traders can be far worse.

My friend AL the "investor" had build a great stock portfolio made up of stocks like FCX, RIO, TRA, TNP, VIP, CSCO, EMC, STP, GE, BYD, TIE, DSX, ABX, NEM, ect. He told me these were "Good" companies. He believed he owned "good" companies because the Media may cover or mention such names more frequently. He has never read the financial statements of these companies. He was emotionally attached to the idea of these companies, and would say things like "they have good assets". When we first met he told me he used both fundamental and technical analysis. After many meetings with AL trying to convince him to invest money with me, it was clear that AL had fallen in love with his portfolio. He thought he had put too much work into his stock portfolio to sell some of his holdings. Every time I suggested to sell a stock based on Technical Analysis he would argue with me the selling was overdone, and it should be supported around a certain level. I was not convinced. Anything Bearish that I would say about the markets he would refuse to believe. Being Wrong was too uncomfortable for him to confront. He had no risk management. He let large percentages of his stock portfolio move against him. During the Bull Market his portfolio performed very well.

My other friends who considered themselves "Traders" suffered far more traumatic and larger losses than AL in this volatile market. These Traders have lost virtually all of their funds, and perhaps even more if they were operating using burrowed money. The mistake these Traders made was not using effective risk management methods. They made a prediction that the markets would bounce, got long, added to their losing positions, and watched their accounts deplete themselves. I went long around the same time as some of these Traders, recognized I was wrong, and covered my positions after my max loss limit was hit. I was obviously concerned for the financial fate of my friends, and gave the best advice I could. Ultimately people make their own decisions, and these Traders chose their fate. My Phone calls and text messages to these Traders have not been returned.

Buffett Buys stake in Goldman Sachs

Warren Buffett the Richest man in the World, and Greatest Investor ever bought $5 billion of perpetual preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years.

Goldman is offering 2.5 Billion NEW Shares of Common Stock. This is dillutive to the current float of Goldman Sachs and Effectively makes each current common share worth less. This was a less talked about in many of the Goldman/Buffett Headlines.

Buffett did not get to be the richest man in the world by investing in businesses and giving the existing owners and shareholders the best deal.

How far can the Government Go? and Will this actually help the Markets?

Here are the facts:

The Government has vowed to bail out any financial institution that is "too big too fail". Many Financial Institutions of all shapes and sizes are in serious trouble. The numbers they are trying to run are crippled. Global equities markets have been on a percipitious decline for the last 10 months. Credit is becoming harder and harder to come by. Banks are no longer lending each other money with open arms. Extension of Credit and the ability to pay back a loan is key to our economy functioning. Housing prices have been falling, due to the massive over building and speculation due to very low interest rates and cheap money for years and years. The Government can literally cover the 1 trillion dollar tab of all of the bad mortgage paper.

Here is what I think will happen......

The Gov will put all of the garbage loans into one company and funds its money losing operations attempting to help stabilize the mortgage finance and credit markets.

Will this Help the Markets? Sure. The Government is going the distance and is committed to solving the problems. They are doing what they can to prevent a total immediate collapse.

However, the process for stocks to be richly valued as an asset class again is going to take some time. As Traders we must recognize when any financial instrument is attracting more excited and emotional Sellers than Buyers, or vice versa.

The Government is here to do the ugly job of assisting the market, how ever they can. If it happens to burden tax payers to fend off a "systematic collapse", then that is just the price we must pay. We Don't have a Choice.

Free Markets are not Free. The Rewards are Privatized and the Risks are Socialized. This is how it is, and we can't do much about.

Little Kids with AK 47's

Why are little foriegn kids with AK 47's so funny to me?

NAV from $100 to $240 from August 1st to September 17th 2008

The Net Asset Value of Modad Derivatives LLC from August 1st 2008 to September 17th 2008 increased from $100.00 per share to $240.00 dollars per share. That is a 140% return in less than two months.

If $100,000 was Invested on August 1st 2008 that is $240,000 today.

This was thanks to effective Risk Management, consistent use of my equity curve, and buying puts on Research in Motion RIMM, Apple Computers AAPL, and The S&P 500 Index SPY.

How does the stock chart of your Broker Dealer Look?

Teaching Nigerian Kids to Trade Options and Futures

I am going to Africa one day to set up a Proprietary Trading Firm to tech Nigerians how to Trade Options and Futures. We will seed these Traders and give them equity as they deserve it. This could be something that alters the entire socioeconomic alchemy of the World as we know it. People have always been giving to a charities and it has not solved their host of problems. Perhaps giving them the skills to to something useful is the key. Maybe these Kids are the next Goldman Sachs?

Thoughts on CNBC

CNBC is easily the most popular cable financial news network in the world. The exciting, entertaining and cutting edge format of the network is second to none. With Market Coverage 24 hours per day during the trading session and many well known on air personalities and commentators, and with shows like Mad Money and Fast Money CNBC is truly "Where Business Turns First".

CNBC is like a water. All Humans need water to survive, but if they are thrown into a pool of water and can't swim then they will drown. Investors and Traders need to know what is going on. CNBC is a great place for such information. CNBC is a never ending flow of information, opinions and commentary. If we actually followed the recommendations of the people on CNBC we are always going to be late to the party, on the other side of the trade with someone else who knows more than us, and having too many diluted low quality ideas. How can anyone make sense of all this information?

Many Investor types end up buying stock in the so called "Leading Companies" after hearing about them some how from some one on CNBC. If the Stock price declines, they hold because their investment is in a "Solid Company" with great Assets, Products, ect. This makes the Investor feel comfortable, well informed and savvy.

The purpose of CNBC for public companies is to promote their stock, and tell the investing community their story.

The Good News: These Public Relations campaigns can turn people on to some great investments they would other wise not know about.

The Bad News: These are Public Relations campaigns. They are designed to highlight the "Good" in the businesses. The Annual Report is for the Risk Disclosures and all of the not so fun things to talk about.

CNBC makes Traders and Investors into Celebrities. They glamorize the life style of Trading, Wall Street and Money Management. CNBC simply provides Entertainment in the form of Financial Information. Many people think this is what it's all about. The good life is what they want, so CNBC is what they focus on. CNBC becomes their primary source of strategies and information.

The primary focus of Traders should be Risk Management and Money Management, not CNBC. Shows on CNBC such as Mad Money and Fast Money occupy parking space in the minds of helpless Traders.

Steak Dinners and Crappy Returns

If any Financial Sales person ever offers to take you out for dinner/and or Lunch at a fancy Steak Restaurant do 3 things.

1) Take advantage of their generous offer. It is a fact that food tastes better when you don't pay for it.

2) Order the most expensive item on the menu. Never order Chicken, Burgers or just a Salad. Remember you are not paying. Go for the Big Ticket Items. Casually Order a $60 dollar steak, appetizers and alcoholic beverages like its a $5 dollar foot long from Subway with chips and coca cola.

3) Beware of crappy returns if you actually follow their "Investment" advice and buy into what they are selling. Listen to their pitch and run the numbers yourself.

Did you really think that because some guy called to tell you that you and 5 friends have won a free lunch, that he is capable managing millions of dollars?

A new study found, The more often Series 7 Registered Reps take prospects out for lunches/dinners, the more likely the returns will be lower than those of the major market averages.

The Top Investment Managers don't need to impress people with Fillet Mignon, Prime Rib, and Lamb Chops.

Executive Order 12631--Working Group on Financial Markets

The Government manipulates stock and futures market prices to maintain investor confidence in times of market stress. The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 ("Black Monday") to give recommendations for legislative and private sector solutions for "enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence"

Read on for yourself. Here is the proof.


Executive Order 12631--Working Group on Financial Markets

Source: The provisions of Executive Order 12631 of Mar. 18, 1988, appear at 53 FR 9421, 3 CFR, 1988 Comp., p. 559, unless otherwise noted.

By virtue of the authority vested in me as President by the Constitution and laws of the United States of America, and in order to establish a Working Group on Financial Markets, it is hereby ordered as follows:

Section 1. Establishment. (a) There is hereby established a Working Group on Financial Markets (Working Group). The Working Group shall be composed of:
(1) the Secretary of the Treasury, or his designee;
(2) the Chairman of the Board of Governors of the Federal Reserve System, or his designee;
(3) the Chairman of the Securities and Exchange Commission, or his designee; and
(4) the Chairman of the Commodity Futures Trading Commission, or her designee.
(b) The Secretary of the Treasury, or his designee, shall be the Chairman of the Working Group.
Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence, the Working Group shall identify and consider:
(1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and
(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.
(b) The Working Group shall consult, as appropriate, with representatives of the various exchanges, clearinghouses, self-regulatory bodies, and with major market participants to determine private sector solutions wherever possible.
(c) The Working Group shall report to the President initially within 60 days (and periodically thereafter) on its progress and, if appropriate, its views on any recommended legislative changes.
Sec. 3. Administration. (a) The heads of Executive departments, agencies, and independent instrumentalities shall, to the extent permitted by law, provide the Working Group such information as it may require for the purpose of carrying out this Order.
(b) Members of the Working Group shall serve without additional compensation for their work on the Working Group.
(c) To the extent permitted by law and subject to the availability of funds therefore, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.

Account Blow Ups

The Account Blow Up is a dramatic and devastating event that most likely every trader will experience before they develop an effective strategy for success.

The Account Blow Up on an equity curve Looks Similar to a stock chart of a Stock in decline like Fannie, Freddie, or Lehman. I am willing to bet most Traders who have Blow ups do not actively use equity curves. I blew up before I used an equity curve.

The Pressure of Trying to Make Returns can be too much for some Traders. They always feel pressured to work hard and they end up trading too often. They feel the need to trade all of the time. Traders will always develop elaborate reasons on why the market should move their way. They will also likely look for guidance from the Media such as CNBC and Bloomberg. They trade without a plan. Their attempts at success become more desperate and hopeless. They do not take any time off from losing money. They Take on Too Many low quality positions. They only focus on How they need to make money, and How much money they can make. They Hold onto Losing Trades and Add more money into them. They Sell Winners too soon, over and over again. They look back at all of the Trades they missed, and the money they lost and feel sorry for themselves.

They literally cannot stop themselves from account destruction. The Reason is because they do not follow any type of Risk Management.

Who knows what to Believe? Lehman Files for Bankruptcy. Bank of America for Merrill Lynch? What about AIG and Washington Mutual?

Lehman Brothers officially declared on Sunday that they will seek Bankruptcy protection. After Bank of America, and Barclays decided they were not interested.

Bank of America for Merrill? "people inside the company" from Merrill Lynch are allegedly in talks with Bank of America for a $25 to $30 per share buyout offer. This seems crazy to me with what we know about the prices of other similar money losing portfolios. How can these news sources even report such speculation?

AIG is trying to stave off credit downgrades that would force it to post more than $13 billion in collateral. They are seeking capital from buyout firms Kohlberg Kravis Roberts & Co, J.C. Flowers & Co, and China Investment Bank said "a person familiar with the situation"

No one seems to be talking about Washington Mutual, at least for now. Who is going to bail them out?

This sitution is getting worse before it gets better. The Night is Always the Darkest before the Dawn.

From Bail Out Hopes to Bankruptcy Court, Lehman Brothers is Running out of Time

The most powerful financial decision makers in the World gathered at the New York Federal Reserve Bank in New York over the weekend and could not reach a deal to save Lehman Brothers.

Here are some key points of the deal that almost was:

(1) A consortium of Major Financial Institutions throw in $3 Billion Dollars each to help absorb the losses of the $85 Billion Real Estate portfolio of Lehman Brothers, to help stabilize the market is those securities.
(2) For $5 Billion Dollars some one could buy just the Investment Bank and Asset Management Business.
(3) No Federal Funding or assistance of any kind is available.

The Banks could not agree on who was going to get the "Good" Lehman Assets, and who would be responsible for losses on the toxic mortgage assets.

Financial firms have started ``netting'' Lehman trades on credit, equity, interest-rate, foreign exchange, and commodity derivatives, according to a statement from the International Swaps and Derivatives Association e-mailed to Bloomberg News.

``ISDA confirms a netting trading session will take place between 2 p.m. and 4 p.m. New York time for over-the-counter derivatives,'' the ISDA said. ``Trades are contingent on a bankruptcy filing at or before 11:59 p.m. New York time, Sunday, Sept. 14, 2008. If there is no filing, the trades cease to exist.''

Barclays Plc, the U.K.'s third- biggest bank, said it abandoned talks to buy Lehman, contending it couldn't obtain guarantees to protect against potential losses at the U.S. securities firm.

Lehman may be the First Big Well Known Investment Bank that is actually allowed to fail. If the Brokers and Banks can work together to essentially take the other sides of the Over the counter trades they had with Lehman, the damage can be mitigated as much as possible. This is not going to be a pretty solution, however it is practical, necessary, and the only viable option to prevent a serious market meltdown.

Expect Monday to be an interesting day in the markets.

Meredith Whitney-The Bears Goldilocks Goddess of Doom and Gloom

Obviously not all Financial Analysts give investors bad information. Some Large Brokerage Firm Analysts make bold market calls that are unpopular, shockingly accurate, and exceptionally profitable for the people who listen.

Meredith Whitney is one such analyst. Whitney, Managing Director of Oppenheimer & Co appears regularly on CNBC, Bloomberg and Fox News. She correctly called the Credit Crisis and warned of Billions of Dollars in Write Downs in the pipeline from the Largest Banks and Broker Dealers. She was Bearish and accurate on the fall of Citigroup in Oct of 2007. She cooly defeneded her opinions on Television in the face of the Dog and Pony show of the Wall Street Promotion Machine hundreds of times.

If you have ever shorted a financial stock or purchased puts hoping the stock would go to zero in a few weeks, then she is your kinda gal.

The Question now is whether Whitney will be able to successfuly call a Bottom in the Macro Economy and the Equity Markets. When she does call a bottom take notice because it will likley move the markets.

Lehman Brothers-Take Over or Take Under?

Today the Wall Street Journal reported that Bank of America is in talks with Lehman Brothers about buying the Investment Bank.

Is the equity going to "Taken Over" for a Higher price than the $4 dollar stock?

Is the common stock going to be "Taken Under" to virtually zero to do the deal?

The Market is waiting to see how the people in the know are valuing the equity portion and stock capitalization of the largest broker dealers. High leverage, and illiquid money losing mortgage backed securities could actually deplete all of the firms equity, driving the value of the common stock to zero.

The terms of this deal will shine light on the portfolio's current pricing. The market is looking to Lehman Brothers to gauge demand for these hard to value, and even harder to liquidate mortgage backed securities.

It should be a Fun weekend for all involved. The Deadline is Monday September 15th 2008 before Asia opens.



It seems Some type of deal will be done to ensure the markets remain orderly no matter how ugly it is for Lehman Brothers common stock holders.

How Analysts and the Media Screwed "Investors" with Lehman Brothers

This is How Analysts and the Media trick people into buying stocks when the institutions are selling and exiting from their positions. Many Analysts Firms go through this process of Writing Reports, Changing Price Targets, Upgrades and Downgrades and Appearing on TV to promote their clients interests. They are getting out when you are getting in. Here is just one such story.

The talk on and off the street is none other than Lehman Brothers. LEH has dropped over 80% from last year. The Stock has been on tailspin due to Ultra Leverage from a Massive portfolio of Mort age Backed and Real Estate Securities that are all but Illiquid.

Dick Bove, Analyst with Ladenburg Thalmann made a Brilliant call telling people to Buy LEH around $20 on the rumor that a South Korean Bank may want to "Buy out" the stock. He notoriously and wrongly called the bottom of financials on every business news channel (CNBC, Bloomberg, who actually watches Fox?)at the Beginning of the real financial calamity. This was months Before the Government was Bailing out Fannie and Freddie, taking over Indy Mac, and Lehman Brothers troubles today.

Bove's job is to help the institutions get out of their LEH shares and get dumb people into them. It is NOT to help the Public Make money by doing what he advises.

Bove's ratings on the stocks he covers is actually designed to encourage people to invest more and more money into their losing trades.

This guy literally has people selling the lows and buying the highs.

How does this Happen?

Step 1. This nice Looking old man who looks like Santa Claus in a Business Suit Comes on CNBC.



Step 2. He Tells you why the Financials should bottom now as they are rallying. Bove says the financials will lead a turn around in the economy of 6 months down the line, so buy now. This no time to sit on the sidelines. The Rally is BIG. But the Rally is NOT Based on Fundamentals. You Buy, the stocks go up for a few days, then it starts going down and fast.

Step 3. Bove says buy more. He publishes antoher glowing report. He Does even more TV interviews. He liked it at $80. He loves it at $40. And At $20 its a steal. Now LEH is at $7. Who knew Making money was so easy.

Here are Boves calls on LEH. From Punk Ziegel to Landburg Thalmann he was always wrong for anyone actually following his calls. Source: www.Briefing.com

29-Aug-06 Punk, Ziegel & Co Down Buy/Mrkt Perform $117/127
12-Jan-07 Punk, Ziegel & Co Reiterated Accumulate $84 $91
05-Mar-07 Punk, Ziegel & Co Down Accumulate/Market Perform
14-Mar-07 Punk, Ziegel & Co Reiterated Market Perform $91 $81
12-Jun-07 Punk, Ziegel & Co Reiterated Market Perform $81 $86
18-Jul-07 Punk, Ziegel & Co Downgraded Market Perform Sell
07-Aug-07 Punk, Ziegel & Co Reiterated Sell $86 $59
15-Nov-07 Punk, Ziegel & Co Upgraded Sell Market Perform
04-Dec-07 Punk, Ziegel & Co Downgraded Market Perform Sell
14-Dec-07 Punk, Ziegel & Co Reiterated Sell $68 $61
04-Feb-08 Punk, Ziegel & Co Upgraded Market Perform Buy
08-Feb-08 Punk, Ziegel & Co Reiterated Buy $61 $71
29-Feb-08 Punk, Ziegel & Co Reiterated Buy $71 $65
19-Mar-08 Punk, Ziegel & Co Reiterated Buy $53 $51
01-Apr-08 Punk, Ziegel & Co Reiterated Buy $51 $46
21-May-08 Ladenburg Thalmann Reiterated Neutral $48 $38
22-May-08 Ladenburg Thalmann Downgraded Neutral Sell $38 $35
06-Aug-08 Ladenburg Thalmann Reiterated Neutral $27 $23
21-Aug-08 Ladenburg Thalmann Upgraded Neutral Buy $23 $20

LEH Chart-1 year.



By listening to Bove you would have never made any money and lost virtually ever thing you had invested. By using simple risk Management guidelines you would have been out of any losing trades far before they would cost you so much money.

Don't Ever tell me you lost a lot of Money

If you are Trading according to proper Risk/Reward Management Strategies you should never Lose a lot of money, At least at any one time.

If your losing over a long series (15-20) of Trades and Bad judgments, and told me that you "lost a lot of money" I may even feel bad for you.

But when its over 1 day, and you say utter those words, its clear you are not using an equity curve or following any real risk management plan.

Holding a Trade for "a lot" of money losing negative equity movement will drain all of your money eventually.
You should only Hold Winning Trades for Large amounts of time, or for "a lot" of Gains. This is why your Trading.


This Message was Brought to you by the Fine People of Risk Management, Inc.


Remember Friends Don't Let Friends Hold onto Losing Trades and Sell Winners To Soon.

The Mathematics of Trading

When I first started Trading I did not calculate much of anything regarding my system into Mathematical terms. As a kid I never liked math class. I could care less when two trains are on separate tracks when they will pass each other if they are 240 miles apart, and Train A is going 100 miles per hour and Train B is going 80 Miles per hour.

Maybe I should have paid more attention in math class. Good Trading is all about the Mathematics of your System, and specifically your Risk Management Rules. When I first started Trading I did not have a Mathematical Plan or a Risk Management System. I focused on Fundamental analysis, by reading books on Warren Buffett. Then Technical with charts, moving averages,software, and data. Then I read books on the Psychology of Trading. This all did for me all of nothing in the practical trading.

After coming across a book called Way of the Turtle by Curtis Faith I decided to calculate the mathematics of my Trading. For more specific advice please consult the book. I don't enjoy math enough to break it all down here on the web, even for too many detailed examples.

When getting into the Trading World I did not even consider math relevant to trading except to calculate my business expenses and trading profits. I thought that if I Traded according to my "system", then the math would "work itself out". I was wrong. I learned about the Mathematics of Trading the Expensive Way.

The Key is not to Expose too large of a percentage of your account to negative equity price movements.

You don't need to figure out the different risks that are in the market for your different positions, and over think what is happening in the market. You Don't need to over complicate the Situation. Simplicity is your friend.

You only Need to know 3 things

What % of Capital to Risk in any Trade
How to exit if the trade becomes Unprofitable
How to exit if the trade becomes Profitable

1. What % of your Capital to risk per Trade

First and by far the most important. At Risk means exposed positions to closed markets, and maximum loss of total account on a percentage basis. If Trader A lets his net account balance decline by 20% before exiting trades, then his account will be completely wiped out after only 4 more losing Trades. Trader B risks only 2% of his account on any Trade. Trader A has 5 Shots to figure out Trading. Trader B has 50 Chances to catch a big winner. You need to figure how much you can risk, and lose at least 10 times in a row. The self insurance policy of adequate capital reserves is your key to future profits, so it must be protected at all costs. You need to figure out exactly how many shares, contracts, ect that you can buy or sell at any time.

2. How to exit if the trade becomes Unprofitable

The main problem for the majority of Traders, and it can be the most devastating to your financial Statements. After you have followed Step 1, move on towards step 2. If you skip step 1 you could have losing trades with so much % of your account you won't need step 2. Step 2 is Simple. If any Trade decreases a percentage of your entire account equity to your max risk limit always exit immediately.

3. How to exit if the trade becomes Profitable

This is what we call a "High Quality" Problem. We all Trade to find the Winners. Mathematically how much reward can you expect based on how far the stock has moved in the past? How much extra Financial risk is in the Trade now that its winning? The Problem for most Traders is they get into winning Trades, and end up getting out too soon. Many Traders take a Large position size, and try to grab a few points. Essentially Risking more for Less. This also affects the way they trade. They are more prone to make Trading Errors.

The Mathematics of Profit Taking

If you are holding onto your losing Trades longer than your winning Trades it is going to be impossible for you to make any money. Setting Price Percentage upward Targets can work. You need to do the math yourself and the work.

You need to know what % of your net account are you going to take profits on. If you set a 2% stop Loss per trade, and booked profits after winning 8% moves, then you could have 3 for 1 losing Trades, and still be up 2% overall. If you could do this every day, compound interest would reward you handsomely.

If your taking 20% or more losses and cutting winners after 10%, that math clearly does not work out in your favor. You need twice as many winners as losers just to break even. The math will not work for you regardless of your method of analysis. Or your execution.

The Art of Profit Taking

After you understand the basic math on profit taking for your "system" you can always fine tune your process and presence in an the trading environment to Maximize your profits. This is can offer as much of a challenge as you would like. There are markets Trading anything and eveything 24 hours a day. The possibilities are endless.

Treasury Bails out Fannie and Freddie. Equity races to Zero

It was obvious from the a brief glance at the financial statements of Fannie and Freddie that the "common stock" was basically worth nothing. Barrons almost killed Fannie And Freddie with the article declaring to the reading Public they have negative equity values of about (-$50) Billion Dollars a peice. All Hopes of getting private capital to invest was done. These people had lost enough money already. The Stocks bounced and rallied hard to over 100% in a week on the annocements the government was "working on a resuce plan".

Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart yesterday placed the two firms in a government-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent. Paulson even said the equity holders would likley not likely make their money back. Who ever is not out of these stocks now will likely just watch these babies drift to around zero Dollars soon, as I suggested in a previous Blog Post.




The Traders figured the Gov was going to save the stocks. They Bought Large Amounts of the Cheap Shares. Uh oh. The government guarantees the debt obligations of the company. The Key is so these companies can continue to buy mortgages and housing market does not collapse any further. The government needed to do something to Protect Fannie and Fannie bondholders, which include many pension funds, foreign central banks and mutual funds.

``This action should lead to an increased availability of mortgage financing, which will help achieve stability in housing,'' Bank of America Corp. Chief Executive Officer Kenneth Lewis.

Only time will tell if this is a Band Aid or a Long Term Solution to the Housing Market Melt Down. Happy Trading.

When are House Prices Gonna Bottom?

Today someone asked me "When do I think the Housing Market Will Turn Around"?
The answer is so simple it is easy to miss. When Houses are affordable again, then the Housing Market will turn around. When a people are able to buy houses in their desired area according to the general level of welfare.

It is hard to value a house as an asset. Your Bank calls it is an Asset, But it does not produce any income. It is actually a "Liability".

The Pyramid of Multiple Layers of Massive Leverage, Inflated Prices and Illiquid Nature of the Housing Market is a process that needs to play out. Perhaps 5 Years.

If house Prices dropped including forecloses and bank sales by 50% I would buy a house. That's how cheap I think houses are now. That's My opinion, I could be wrong. If we watch the signs of the Housing Market we should be able to see it turn.

The housing market is not like Trading Forex with massive Leverage after US government data with no stop loss. The Destruction happens slower.

I would not buy a House In New Orleans. I would love to visit. But to own property there serves no purpose for me, or joy because I would not want it to get flooded. Perhaps there are areas of the world inhabitable by our changing weather patters.

To Stimulate our economy we need something BIG to happen like T. Boone Picken's Plan for Wind Farms and Comp Natural Gas. Energy Independence and Boom in building the new infrastructure for Gas Stations.

Cheap Gasonline and Alternative Energy Do not go Hand in Hand-At Least not at First

Cheap Gasoline and Alternative Energy Do not go Hand in Hand-At Least not at First.

Everyone seems to be complaining these days about high gas prices, the need simultaneously lower gas prices and develop new, clean, alternative sources of energy. Both Political Candidates in this Election are promising lower Gas Prices, Development of Alternative Energies, and a "Solution to America's Energy Crisis".

Let's explore why this will not work. When gasoline and Oil Prices are high it creates the incentive to develop new energy sources. With Oil well over $100 dollars per barrel, and gasoline well over $3.50 per gallon, we seem to want to have our cake and eat it too.

If we were in Venezuela with gas at around 12 cents per gallon, what incentive do people have to invest money into developing new sources of Energy? None! It is too cost prohibitive. To make the Investments in developing new sources of Energy the Investors are going to want to know they are going to make their money back, and have a return on their investment. If gas was $1.00 per gallon in America we would not care about conserving energy at all.

Proponents of more oil drilling to lower prices and develop clean, alternative energy sources, are not consistent. There is no economic incentive to invest the Trillions of Dollars in Alternative fuels if the costs will not be recouped.

The High Oil and Gas prices are good for Americans! It encourages innovation, and spurs investments, and new ideas. As Oil Prices go higher, MORE incentive is created to develop alternatives, as oil prices go lower there LESS incentive. The term "Alternative Energy" is what it sounds like, and Alternative to conventional energy (Oil). The Alternative needs to be competitive in price. It is more difficult for it to be competitive with Lower Oil Prices, rather than Higher.

Since the World Oil Supply is running out anyways, and other fuels like Compressed Natural Gas are Clean Burning and abundant in America we obviously need to explore other options.

Lets assume that Oil Companies have invested profits from high oil into new energy Alternatives, and formed a viable new energy solution, such as Compressed Natural Gas, electric power, or solar, complete with new cars, and refueling/charging stations. If the fuel was truly an "Alternative" to oil, then even with a finite supply of oil, the price would have much less demand side pressure. This scenario is a long way off. So for now Higher Oil prices are going to be the only thing that spurs investment in Alternative Fuels, ironically Higher Oil Prices will be the catalyst that leads to the development of new Fuels.

*Note that I did not include any Environmental incentive in this argument. Currently I am assuming this is an economic argument only, since we do not have clear environmental regulations and mandates for development of Alternative Energy. Obviously there is always clear Environmental incentive to develop Alternative Energy. In Reality economic factors drive investment more than Environmental*

Traders Prepare for Gustav

Hurricane Gustav has been the talk of the News wires this entire Labor Day Weekend. The New York Mercantile Exchange (NYMEX) opened up trading for a special session today to allow Traders to adjust positions pre-Gustov. Oil gained 1.67 for October Devilry to $117.13 a Barrel, Gasoline gained 6.58 cents or 2.3% to $2.92, and Natural Gas fell 6.1 cents or 0.8% to 7.882 per million British Thermal Units.

I am Long VLO SEP 34 Calls in preparation for Gustav. I except that the refining sector, among the worst performers of the last 12 months will receive a huge boost from the storm. When the refining capacity drops, the refiners can operate with much better margins. Even if oil prices rise, the refiners margins will increase substantially.

Look at stocks like VLO, TSO, and WNR. If the stocks behave as I anticipate, I will start buying more calls come next week Tuesday.

Why Trading is NOT like Gambling. Why Gambling is NOT like Trading.

It gets me very upset when Someone wrongly draws an Analogy from Investments/Trading into the World of Gambling, saying "they are the same thing". They conclude this because both are events where money is wagered and money can be gained or lost. But that is where the similarities end.

I was recently making small talk with a fellow at the Airport when waiting to hop aboard a plane. He inquired about what I do for living. I told him I was an Options Trader. He scuffed at me, look at me as if I was lower than scum and proceeded to explain to me how "Trading was Gambling". I brought up numerous well known Investors and Traders such as: Warren Buffett, George Soros, Bill Gross, Eddie Lampert, John Paulson, Bill Ackman, ect. He replied those people were "Lucky".

In a vain attempt to explain to him Why and How the two were different (for my own amusement, to change his mind, and because I had an hour to kill) I proceeded to argue.

(1)Gambling creates a new financial risk, when no previous risk existed merely for the sake of that risk. If we decide to bet on a coin flip which has a 50% chance of coming up Heads or Tails we are creating a new risk.

(2)In Trading, one party assumes a financial risk that already exists for the purpose of a financial gain. If I buy a stock from you that you want to sell, I am taking on risk that was already in the market place. You may say its a new risk to me, which it is, however the risk would have been taken on by someone your broker matches up on the other end of the trade. The risk is constant in Trading and waiting to be assumed by someone.

(3)In Gambling the odds are fixed and calculated. That is why Casinos exist. They Systematically know the odds on every single game over a series of wagers. For Example: The house edge on a bet on a random number of an American Roulette Wheel (a game I would never play) is 5.3%. You will lose an average of 5.3 cents on every dollar bet. This is a non debatable fact.

(4)In Trading no precise odds of one event happening can be calculated. People may say they can use historical volatility models and other data sets to predict odds, perhaps they can come somewhat close. Long Term Capital Management tried to calculate such odds, and it did not work out too well for them. Trading odds are not exact. Trading odds are based on variety of factors and variables that occur outside of the game such as breaking news, government data, interest rate decisions, analyst reports, market sentiment, insider activity, natural disasters, order flow, ect. These variables cannot be accounted for, and therefore cannot be calculated.

(5)Gambling Events are one time occurrences, and are non-continuous. After the flip of the coin, roll or the dice or spin of the wheel, the game is over. The player must make a conscious decision to wager new money and begin playing a new game. He must become an active loser, and decide to play again, and again.

(6)Trading Events are continuous and Never ending. The Market is always in motion. Even when the Market is closed, news is happening and being priced into the market. When in a Trade, the market participant decides when to enter, how long to stay in, and when to exit. In gambling these rules are very clearly defined. The Trader does not have to choose to do anything. He can lose money for doing nothing. The market can take all of this money and more if he stays in a losing position for too long.



While this post may serve as a good argument as to Why Trading is NOT like Gambling and Why Gambling is NOT like Trading, many people just cannot understand it. The fellow in the airport surely could not. In fact, He did not offer any other counter arguments except using circular reasoning to restate his conclusion.

In the future I would advise just agreeing with the person and not wasting time debating them. Just tell them they are right, and you are wrong, and go back to doing something useful.

Risk Control, Money Management-The Keys to Success

The two key concepts to trading success are Risk Control and Money Management. It is a fact that about 95% of all Traders do not make money in the markets, in fact they lose money. The remaining 5% of Traders happily take the money from the losing Traders accounts and are among the wealthiest people on the planet.

The reason that most Traders fail is because they do not have any type of Risk Control and Do Not Follow a system of Money Management.

Many Traders decide to arbitrarily Risk more less of their Capital Based on how they feel about a trade, Whether they have been winning or losing lately, and How much money they want to Make, instead of carefully considering the mathematics of their actions and following a Trading Plan.

Mark Douglass in his Book Trading in The Zone identifies the essential word to best describe Trading as "Contradiction". The reason is because in the Trading Environment events are unlimited and continuous, there are no formal rules or regulations that govern our behavior. We must make our own rules. Then we must follow all of these rules ourselves. The Rules in the "Trading World" are directly contrary to all of the rules we learn in the "Real World" and to our own human emotions.

Most people are attracted to Trading because of this "Freedom" from having to work for a someone else, to be Creative, to work when and how they want, and to have the potential for eye popping income. However, These Freedoms do not Translate into how one must conduct themselves to operate a Successful Trading Business.

To be successful the Trader must develop a Mathematical system of allocating capital, controlling risks, and managing his account to generate a consistent stream of profits. This means you can't just make up your own rules as you go along, and decide to break your own rules when ever you want.

If the Trader does not have a Trading Plan and Specific Risk Control and Money Management Guidelines, it is only a matter of time before they lose all of their money.

Mccain losses the election by picking Palin

Just when it looked like the Democrats were losing strength leave it to John Mccain to blow the chances for the Republicans with one Pick. By Picking Sara Palin for his Vice President I believe blew the chances for the Republicans.

The Average age for White Men in America is 75.29 years. John Mccain turned 72 years old today. So according to the Average, Mccain would die within his first term in office. If this did happen he would leave the reins to former Alaska Governor Sara Palin.

Just when all the Republicans had to do what pick a credible VP Mccain drops the ball by picking Palin. I now favor the Democrats hands down. Despite the Obama/Biden and Obasa/Binladen post the Republicans now dealt the fatal blow to themselves.

Obama/Biden looks like Osama Bin Laden

Yet another blow has been dealt to the Democratic Party with the name on the party ticket. Quite possibly the most hated and hunted man in America, Osama Bin Laden is just 4 letters away from "Obama/Biden" right inside your voting both.

On the Obama/Biden Ticket all you need to do is subtract a "B" add an "S" to get "Osama". On Biden's name you need to add "N" "L" "A" to get "Bin Laden".

Why is this a problem? Because of the way our brains read and interpret information.
We do not read every letter in a word, or in a straight line, but rather in a sequence of movements (jumps). Our brains scan information an quickly make connections, and associations.

When we see "Obama/Biden" it looks a lot to our brains subconsciously like "Osama Bin Laden". We would obviously not vote for "Osama Bin Laden" for President. I think the "Obama/Biden" ticket becomes increasingly more difficult to get into the oval office due to this fact. "Obama/Clinton" sounds less evasive and more Presidential.

To vote for "Mccain/(any name)" sounds a lot less risky and familiar than "Obama/Biden". The problem is that most people will not even know why they fear "Obama/Biden". It is on a subconscious level, and is not something they will have the time to logically consider.

The Opposite of What to Do

I made these rules because sometimes following the "Traditional Trading Rules" is hard to do. People are rebellious and don't like to be told what to do. So this is list of the exact opposite things to do. Just read over them to see how ridiculous they are, and maybe it will motivate you to "Do the Right thing".

(1)Don't have a Trading Plan. Trade haphazardly and without a clear purpose. That way if something goes wrong, its not clearly defined, and the fore its not really your responsibility.

(2)Don't Set Limits or Use Stops. Enter the Market without the Slightest Clue as to when you are going to Exit. Just get in. Have no idea where the market is likely to go. Just do what feels right.

(3)Ride your Losers and Hope they will come back. When you are in a losing Trade, Just hope that it comes back. If that does not work Pray. Pray to your God. If that does not work Pray to a new god. Keep trying to pray to new gods until the market starts coming your way. If that does not work try Scientology.

(4)Add money to your losing trades. Throw Good money after bad. If your trade is going against you, what better way to lower your cost then to add more money. If the Trade Comes back again, then you make that much more money. If it keeps losing you money, add more money until the trade starts working. If it does not work Repeat step 3.

(5)Sell your Winning Trades too Soon. As soon as you have a Winning Trade book your Profits immediately. Even though the market is rewarding you by putting money into your account, take those profits and be fearful that you are wrong. It is much better to sell Winners fast and Ride Losers Long.

Always Hope your Losing Trades will come back, and be Fearful your Winning Trades will reverse on you. This is a Crucial Step. The Good news is that your natural human instincts and emotions will guide you in this direction anyways.

(6)Focus on what you want to happen, Not What is most likely to happen. Don't worry about what the market is likely to do. Just keep focusing on what you want to happen. If you are long find all of the ways why the market should be going up. If you are short find all of the ways why the market should be going down. If you try very hard to visualize the market doing what you want, it will happen. Don't listen to anyone who has a different opinion than you. Remember they are always wrong and you are always right.

(7)Find someone or something to Blame if the Market does not go your Way. Get Angry. Throw your Furniture at the Walls, Blame the news, Kick your Dog, Scream, get emotional, get upset. Blame your Broker, Blame your Spouse, Blame your friends, Blame your Computer, Blame your Parents, Blame the weather. Just do not ever take responsibility for anything yourself.

(8)Keep doing what is not working. If something is not working, keep hoping that it will work. Then proceed to Repeat these steps until something changes.

(9)Watch CNBC and Bloomberg all day long. Who better to give you trading advice than from people who never trade on their own? Or from guest contributors who have a vested interest in promoting their positions? These people are obviously experts or else they would not be on Television. Glue yourself to the Television and Soak up the infinite Wisdom of these financial Geniuses.