ZIRP… Excuse me…

You may be familiar with ZIRP, our “zero interest rate policy”, and that Ben Bernanke announced yesterday that the banking infrastructure will enjoy at least two more years of free money.  I enjoyed an insightful clip from Larry Levin, who had this to say about it:

“But I don’t believe that; I deem today’s FOMC statement to mean ZIRP is here forever.  Said another way, we are following the path of Japan.  The country is in such a mess that the Fed’s prior TRILLIONS of “liquidity” has done absolutely nothing – but they’ll keep doing it anyway.

When the FOMC statement was released there was the usual back and forth trade; however, the market did not like the lack of a direct QE3 comment - initially.  The S&P was slammed to a new daily low but didn’t stay there for long.
Once the low was in, Goldman Sachs gave its trading desk and all who listen to it the “buy signal” it wanted.  In a note to clients Goldman said…

The committee adopted an even easier policy stance than expected. First, the committee now anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate "at least through mid-2013" instead of "for an extended period." Although some form of strengthening of the guidance language was expected and the new guidance remains conditional on the economic outlook, we see this step as a dovish surprise. Three members--Fisher, Kocherlakota and Plosser--dissented from this decision, the largest number of dissents since November 1992.

Moreover, the committee effectively signaled an easing bias saying that it discussed "the range of policy tools necessary to promote a stronger economic recovery" and that it "is prepared to employ these tools as appropriate." In our view, this leaves open the possibility of further asset purchases ("QE3") should the economic outlook deteriorate further from here.

When this was released, the S&P was roughly at 1107.00 and immediately went up.  By the close the S&P exploded an additional 69.00-points!

Although the Fed is constantly saying the economy is on the mend (read: lying), it apparently sucks so badly that we need ZIRP for at least two more years.  Additionally, you will find these uplifting comments in the FOMC release…

• “moderated” (the economy)
• “flattened out” (spending)
• “considerably lower” (growth)
• “deterioration” (economic indicators)
• “downside risk” (to the future)

No but really, it’s all good!”

Well, Mr. Levin doesn’t pull any punches, and it’s one of the reasons I like reading his point of view.  At some point the endless market manipulation will have to stop and we will have to deal with the reality of our economy.  I don’t think that’s a political statement… just a fact.

Good Trading…

SPX Falls Below 200-day MA…

After a couple of attempts at the 200-day moving average (in June), this time the SPX made a bold statement.  Today’s massive close down clearly broke through this common point of support, as well as taking out the recent lows from June.  Not to mention, that’s a heckuva big red bar. 

From a pure probability perspective, so many red bars together – seven in a row - would call for a bounce in the short term.  I would guess we will see it tomorrow or the next day.  But beyond that, “Look out below”!

The markets seem to finally be responding to our country’s dismal economic conditions.  With the debt ceiling crisis side-stepped we might expect a rally.  This massive sell-off in the face of that news tells me that investors are aware of the ugly big picture.  Hold on to your britches.

Good Trading…

Puda Coal Bailout…

If you have been tracking the nightmare that is PUDA you will know that this is just the sort of bailout I’m looking for.  My portfolio took a radical hit due to a position in PUDA being completely devalued and then trading halted.  This was all due to some unethical and illegal actions by the CEO, which you can read about here.
The interesting development, is that the CEO offered to buy out all of the shareholders at a price of $12.  This offer, which was proposed a few weeks ago, I never really too seriously.  I’m pretty sure we can’t trust a guy who embezzled half the assets of the company to turn up and give shareholders a 20% return on their investment.  I figured it was just a smoke screen to get attention off his actions.  Interestingly, it seems to have been taken seriously by the board.  They are now proceeding with due diligence as though there is some promise of it actually happening.

“Puda Coal Inc announced that its Independent Committee has retained Cowen and Company, LLC and Morgan Joseph TriArtisan LLC as financial advisors in connection with the previously announced proposed preliminary buy-out offer made by Mr Ming Zhao the Chairman of Puda Coal to acquire all outstanding shares of common stock of the Company. In response to the offer, the Board of Directors of the Company authorized the Independent Committee to review and evaluate the proposal and, if appropriate, negotiate its terms and take any other action in connection therewith.
In a series of conference calls and e-mail communications over the past several weeks with lawyers from Shearman & Sterling, Mr Zhao's legal counsel, the Independent Committee has requested a draft Merger Agreement and information and documentation from Mr Zhao, including documentation relating to all Mr Zhao's transactions involving Puda Coal and its subsidiaries, that will enable the Independent Committee to evaluate Mr Zhao's preliminary proposal.”

It almost sounds like there is something serious here, although I’m still highly pessimistic.  You know, if it sounds too good to be true…  I’m still considering this a loss, but I have no choice but to hold the shares since trading is halted.  For now, I’ll move on and just keep one eye on it.
Good Trading…

Quantitative Trading in the News

The NY Times reported that Morgan Stanley's productive quantitative trading program was going to be spun off into a seperate company. Apparently Morgan Stanley will retain a share of the new company, which will be called PDT Advisors, derived from the previously called Process Driven Trading unit.

That's a good way to think of quant trading, or system trading. It really is a process, and trades (IMO) should be driven that way. I guess it works too... The PDT unit has been one of the most profitable for Morgan Stanley over the past decade. From the article:

The strategy has been immensely profitable for Morgan Stanley. The Process Driven Trading unit generated an estimated $4 billion in profits in the 10 years through 2006, according to Scott Patterson’s book, “The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It” (Crown Business, 2010). Those gains were after the unit took a 20 percent slice, according to the book. That means that Mr. Muller and his team were paid about $1 billion over a decade, making them among the most highly paid executives in the firm.

Good Trading...

Trading Systems in the News...

The NY Times did an interesting story yesterday about automated trading systems. These systems have been around for a long time, but it highlighted something interesting to me. Just like we have different kinds of discretionary traders - for example, fundamental or technical - we have automated trading that matches the respective ilks.

Much of what I've written on this blog has been all about automated trading, but my flavor has to do with technical analysis patterns... those reflected by price and volume. The NYT article was all about automated scouring of publications for sentiment data, or words that might reflect fundamental changes.

There was recently a similar article in the Wall Street Journal about Twitter trading. The concept is quite similar in that traders use Twitter to gather fundamental or sentiment "tips" that might help them make the right call. At least one British based hedge fund even intends to use Twitter posts to guide them in investing their clients money.

All of this is fascinating, and it will be interesting to see how it all plays out. One question that remains is how these things would have performed historically. Since Twitter and many other electronic publications haven't been around that long it's hard to say how well they would have performed historically.

Good Trading...