Trading Report: Setting the Scene

Let me begin my setting the scene.

The Thesis: I believe that the best (only?) trade or even long term position right now is commodities. Yes, we're in an ungodly recession, depression, whatever kind of -ession you want to call it. Yes, it will get significantly worse. (Not going to talk my book, but believe that. Hell, residential RE and the attendant issues are not fully resolved.) However, there is a certain level of demand for commodities, especially oil, that will put a floor under their prices. It could be argued that in the high 30s, West Texas Intermediate crude oil is free. Not cheap - free! Even at the worst prices of summer 2008, oil was cheaper than water (another mis-priced natural resource).

The Security: The PowerShares DB Crude Oil Double Long ETN aka DXO.

Now that you have some background on my thinking and the stock I used to express my views, the next few posts will explain the mistakes that I see. If you happen to notice others, by all means, let me know in the comments. My goal is to both help my own understanding of my mistakes so I don't repeat them, and to share that experience with others, so that they avoid them (or at least correct them sooner).

Until next time...

Trading Report: Learning from Mistakes

This will be a short series about the mistakes I made on my purchases of DXO through January. By the time it was all done and I was out, I lost about $6000 total. Very expensive tuition, indeed. I am completely responsible for the outcome. This is trading. We're not able to will the market to do what we think it should. We're here to make bets on certain outcomes, and exercise risk management for the situations where those outcomes do not come to fruition in the expected time frame.

I will break this series up into parts based on my experiences and the lessons learned from those mistakes. I hope that others learn something from them, but the best teacher IS experience. Sucks, don't it?

Watch for the hook...

My Letter to Steny Hoyer about H.R. 1068, the "Let Wall Street Pay for Wall Street’s Bailout Act of 2009"

Below, you will find the text of the letter I just e-mailed to Steny Hoyer, the Democratic congressman from the Fifth Congressional District of Maryland. It is unedited. Amazingly, I managed not to curse. I will be following this up with phone calls.

If you haven't heard, H.R. 1068 can also be known as the "Let Wall Street Pay for Wall Street's Bailout Act of 2009". Of course, this legislation, like all the crap coming out of DC these days, lands squarely on regular investors like you and me. These fuckwits really deserve a bullet for their intentional destruction of this once great nation. And if this is how Oregon's congressman likes to treat investors and traders, that state should fall into the Pacific Ocean along with California. What a bunch of losers!

I don't normally talk about politics here because I honestly could care less about the subject. It's all legal crime and evidence of how Americans are handing over their Constitutional freedoms to the cock knocker with the best sob story. However, this horrible excuse for legislation will affect everyone, myself included, who hasn't yet escaped from this sinking ship of a nation. This legislation needs to be murdered outright, not modified, not amended, but simply killed. It is terrible for anyone who owns, or would own, any kind of security. And we all know that once a tax is levied, the government has no incentive to get rid of the revenue. (It took 108 years to PARTIALLY kill the Federal telephone excise tax which was originally levied to pay for the Spanish-American War!) Item 8 under Section 2 is a blatant lie!

Anyway, I hope you enjoy. Without further ado...

Representative Hoyer,

I am writing to lodge an official complaint about, and to implore you to do ANYTHING and EVERYTHING in your power to kill H.R. 1068., also known as the "Let Wall Street Pay for Wall Street’s Bailout Act of 2009".

As you must be well aware, the first rule of taxes is "whatever you want less of, tax". I'm sure higher cigarette taxes discourage casual smokers from engaging in an activity that is harmful to themselves. The hardcore, committed smokers are willing to trade the tax money for their fix. The government collects tax revenue on that transaction. But I would posit that much smoking has been ended or prevented due to the increase in cost associated with taxes on cigarettes. Probably way more success has been had by increasing the economic cost of smoking than by highlighting the physical damage done by smoking.

Clearly, by proffering such an absurd piece of legislation, your colleague Rep. Peter DeFazio [D-OR] seeks to discourage securities trading and investing in the United States. I'm sure there are other countries, other stock/options/commodities/futures exchanges outside of the United States which would proudly take up that business, since you and your colleagues seem so interested in giving it away. So please tell me, is killing the trading of securities what you and the Democratic Party want for this country? This is "change that disgusts me", quite honestly.

First, I am a small trader. I already pay significant commissions through my broker, and short term capital gains taxes on my trading earnings. Fine. Imposing a 0.25% tax on sales and purchases would greatly reduce my ability to conduct my business of trading. In fact, it would actively DISCOURAGE me from this activity. I know I am not alone, and many small traders would either stop trading or seek ways to avoid owning the tax to the US Federal Government at all.

Second, this act would DECREASE market liquidity. If buyers and sellers are DECREASED in number, prices of securities will reflect that by going DOWN. You and any other congressional representatives who vote for this act will be contributing to the death of American stock markets. Prices will fall, buyers will strike, and sellers will spend more time and effort seeking to devise clever ways around paying in order to exit a losing position. How are any of these desirable? Liquidity will move to other exchanges around the world. Private companies will have less motivation to become publicly traded.

Taxing transactions will, by definition, reduce the number of transactions. That means less commission revenue for broker/dealers, clearing and settlement companies, administrators, and others in the financial ecosystem. It will also create market distortions by increasing the bid/asked spread on securities and creating more arbitrage opportunities for the savviest and fastest entities. Basically, this act, if signed into law, will force small players out of the market, decrease liquidity and price discovery, and hand more advantage to large players who can exploit the information available. Instead of democratizing investing and trading, it will further stratify that world, handing even more advantage to the already privileged and powerful.

Third, if this tax is imposed, and as I read the current legislation, it will be assessed against transactions of all sorts, including against securities held in retirement accounts. This would violate the existing tax provisions on tax deferred accounts such as 401(k), IRA/Roth IRA and other retirement accounts. That is how the current legislation is worded - very broadly. Do the Congress and the President want to increase taxes on already battered retirement funds? Wouldn't that DIS-INCENTIVIZE saving? Is that something the Congress, the Democratic Party, and the President want to do - reduce long term savings, especially retirement saving, by individuals? What about Rep. Donna Edwards [D-MD].

Fourth, I voted Democratic in the past election. The Democratic Party is clearly showing why it neither deserves nor wants my support. If this act becomes law, I will do my best to prevent Democrats from ever serving in economically important roles within local, state or Federal government ever again, because clearly you, Rep. Edwards, and the party you both represent are our ENEMIES - enemies of the people you say you are serving, enemies of the citizens of this once great country.

Finally, let me say that this incident is making me very clear where Rep. DeFazio's, Rep. Edwards' and your interests lie, and it is not with people like me. Should the "Let Wall Street Pay for Wall Street’s Bailout Act of 2009" pass into law, another personal mission of mine will become to prevent you and your cohorts from ever "serving" US - we, the people - ever again.

P.S.: Do your pensions get assessed this tax? I'm sure you'll find some way to make sure your absurdly large pensions will be privileged and protected to, won't they? How is Congress any different from Wall Street, with similarly large golden parachutes? You make me sick!

Recessions & Recency Bias

Over at Infectious Greed, Paul posted this interesting chart the other day. It illustrates how few people currently working in American society have any real experience with a severe recession. The number is pretty small indeed. Take a look.

Even someone 45 years old probably was not in the workforce, or barely in the workforce, in 1981 - 1982. There are going to be a lot of people unpleasantly surprised by the extent of this downturn, as if there haven't been enough already.

What I found most interesting is the comment from rdd regarding the best things he took away from the experience. (He mentions entering the workforce in 1981, just in time for the second half of the infamous early '80s double dip recession.) Needless to say, I agree completely with his lessons. The one that stands out most vividly is to develop skills that others don't have. One of the biggest - if not THE biggest - secrets to success I have encountered is being able to do that which other's can't, or even better, won't. If you are the one who will, you make yourself that much more indispensable. Use people's laziness to your benefit.

That is all.

Trading Report: First Swing Trade = WIN!

Anyway, I *think* that's the correct term. And it was a success!

On Wednesday, I bought 100 shares of TBT, the ProShares UltraShort Lehman 20 Year Treasury ETF, as a short play on US Treasuries. (Over the longer term, I think the outlook for Treasuries is grim, so TBT might be a decent longer term hold.)

While I originally planned to make the trade a day trade, I was compelled by market factors to hold the position through the close. (Basically, it closed marginally above my entry at $45.00.) I placed an initial stop at $44.75 so that should the ETF drop, my loss was capped at $0.25 per share, or $25 total. If the opportunity presented itself, I would reset my stop to capture some of the upside while not tracking the market all day.

Well, opportunity REALLY presented itself on Thursday, 12 February. When I checked in around 12:15 PM EST, TBT was around $45.62. Thus, I reset my stop to $45.30. After checking in again around 12:30 PM, I reset the stop to $45.60 (with TBT trading in the $45.90 area). By 1:45 PM, my stop was executed and all 100 shares were sold for $45.60 as TBT made its way back to the $45.20 - $45.20 range. While it eventually closed at $45.96, I didn't re-trade it.

So, for the entire experiment, a $60 gross profit (not including commissions or taxes). While it's not a lot, I am still in the early stages of trading, and I don't have huge amounts of capital so I have to be prudent. But I am happy with the initial results.

(And remember boys and girls, this is not investment or trading advice. I'm just relaying to you what I did. You need to make your own decisions, based on your own research. Don't blame me if you try something I did and it blows up on you. That's your own situation to deal with. I take responsibility for my own successes and failures. Do you do the same for yours?)

Until the next trade, peace!

My Response to Crooked Timber's Analysis of "Wall Street"

This one I have put off for a while, with no really good reason for doing so other than being busy. However, after buying the 20th anniversary edition of "Wall Street" (my 2nd favorite movie of all time!) on DVD and watching it over and over, I found this analysis on crookedtimber.org and felt compelled to respond to it. I think several components of the review seriously overlook basic facts established in the film. So let's start at the top.

First, I don't disagree with the ultimate hypothesis of this review -- that Gordon Gekko was ultimately acquitted on all charges of securities fraud. Bud Fox, on the other hand, I'm not so sure about. While I see the author's point, I think some of Bud's actions were clearly illegal.

In the second part of this review, I plan to examine some things about Gekko that are critical to my understanding of the man and his motivations. Part II will encompass more of what is considered a movie review.

The first 2 points as laid out by our author only minimally trouble me. The first big problem is with the 3rd of the 6 "general areas" of charges against Gordon Gekko -- trading in Fairchild Foods, Rorker Electronics and Morningstar. Bud Fox does not bribe the owner of Marsala Maintenance to get a job which allows him to wander through the offices of Roger Barnes' firm late at night. In fact, he proposes to Mr. Panos, the aforementioned owner, an arrangement in which he would make an equity investment into Marsala. His exact words, at 57:10 (20th Anniversary Edition on DVD), are "Let me ask you something - what would you say to some working capital and a partner?" He then goes on to lay out his idea, noting that Panos' business is so good that he doesn't have the resources to keep up with his current book of business, not to mention the business that Bud can bring in. You'll also note that Bud walks through the site with clipboard and pen, appearing to evaluate various facets of the business and performance of its employees. At no time does he even deign to pretend to be cleaning. He's an investor monitoring and managing his investment, or at least, that's the image he seeks to portray.

Clearly, Bud has broken the law by reproducing files of Marsala Maintenance's client. There can be no doubt about that. But his gaining access to the offices cleaned by Marsala Maintenance, Roger Barnes' included, are legal under the arrangement he proposes to Panos. Whether that is the actual deal, or some variant thereof, which Panos agreed to, we cannot know. However, you can even call it a bribe. But it was not a bribe just to become an employee. He had the money to at least backup some of his claims, and Panos, being an intelligent businessman, made a business deal to expand his operation.

The 4th general area that this review covers is the conduct (or lack thereof?) surrounding Teldar Paper. This is on Gekko's radar long before he encounters Bud Fox, so there is no impact. Bud is an observer to these proceedings. I will note the mention that Teldar Paper being "leveraged to the hilt, like some piss-poor Latin American country" also has nothing to do with Gekko. In fact, it is probably a large reason that Teldar is position to be raided by Gekko. This is the fault of the then-current management, Cromwell (played by Richard Dysart of "L.A. Law" fame) and his staff. How he could even use this point to implore the current shareholders in Teldar to turn down Gekko's tender is beyond me. It's really an indictment of his poor management. So I agree generally with our author regarding this point.

The 5th general area is Gekko's conduct regarding a buyout of Bluestar. Our author seems to have missed the conversation that Bud and Carl (his father) have around the 1:00:00 mark where Carl informs Bud that the "damn fare wars are killing us" and that he's losing 5 of his men to layoffs. The FAA decision is just one of many affecting the outcome for Blue Star. All it did was increase the airline's chances for success. The author (Daniel) also presupposes that Gekko's intentions at the outset were less than honorable. However, I think we can discount that theory based on the outcome of the meeting at Bud's apartment. Gekko is more than willing to let Bud carry the ball in courting the unions. He also proposes a buyout with employee stock ownership provisions and other incentives for success. Only after Carl lambastes the idea do we see the change in Gekko's enthusiasm. He is obviously crestfallen. Now, none of this is to say that Gekko did not have the breakup idea in his back pocket the whole time, but I think the breakup was not how he intended to enter into the deal. Instead, it became his way of making lemonade from the situation.

Daniel's thesis that Bud committed fraud in his dealings with Gekko regarding Bluestar is plausible. Since I am not a securities lawyer (especially in the late 80s, as I was 12 when the movie was released), I can't say.

I won't address the 6th general area, as my feelings are generally in line with Daniel's.

So that's it. Bud Fox, an ambitious young stockbroker breaks several laws in order to curry favor with the high powered financier he idolizes, until his own world is threatened by his ambitions. He then has a change of heart and turns on his mentor. While ethically, Gekko's actions are questionable, I think they are far from being illegal overall, while Bud Fox has quite clearly crossed the line into illegality.

If you made it this far, you're probably wondering why I wrote this. Honestly, when I found the crookedtimber.org analysis, I was searching generally for information about the movie and stumbled upon it. However, if you watch the movie closely, as I have innumerable times, the points I make above stand out like a sort thumb compared to our reviewer's analysis. This was my attempt at setting the record straight.

In part II, I'll delve into what I think is the motivation behind Gekko. Until then...

Trading Report: Preamble

I'm going to discuss the first few trades I've made, both paper and real, as an exercise in metacognition. Along with actually generating real income via trading now, I want to improve my abilities and generate more income in the future. Hopefully, this process will further my trading education and support that goal (for starters).

First of all, I am now clear that I seek to enter any trading day on which I actually trade (with real money) with a goal to net at least $1000 from my trading. Otherwise, not only is it uninteresting, but it really isn't worth my time to risk the capital. This may mean I don't enter into the market with as much frequency as I might otherwise, but it does 2 other things which I think are critical. First, it gives me a specific goal to keep in mind whenever I do enter the market. Second, it gives me more time to practice my evaluation skills and paper trading without feeling like I have to risk capital.

My first successful trade (and really my first trade ever) was 2000 shares of the PowerShares DB Crude Oil Double Long Exchange Traded Note (ETN) -- known as DXO -- which I bought a few days before the end of 2008 and sold about 2 weeks later, for a pre-tax net of about $960. Not bad for a first trade, especially one that was completely unplanned. I wanted to start accumulating DXO and figured that my entry at $2.20 per share was fairly good. (The day that purchase occurred, I had a limit order at $2.10 which was totally missed because DXO gapped up about $0.13 at the open.)

Since that first trade, I've made a few smaller trades, mostly buying DXO at prices ranging from about $2.40 to $2.82, and even a short sale on IYR (if I recall correctly) which netted approximately $60. Currently, I've fairly inactive, just holding back and observing. I've a few theses which I'm tracking and just getting comfortable with trading. I welcome any ideas, suggestions, or tips (such as brokers and tools, as I am looking to change to a new broker with better tools - primarily real time charts - soon).

You can follow my trades (and other musings) by following me via Twitter, as that's where they tend to get announced first.

Until next time...