Thursday, 15 January 2009

(Don't) make me a trader

Did anyone watch ‘Million Dollar Traders’ on BBC2 last night? If not, and you want a laugh, and you’re in the UK, it’s worth catching up with on the BBC iPlayer. Eight beginner traders with no previous experience were put in charge of $1m of someone else’s money, and left to get on with it after a two week induction programme.

I sat through it with bemusement and horror. Anyone who traded through the scary markets of summer 2008 will recognise some of the mistakes. One character bought British Gas – at 1204p – remember those prices? He did it just as the gas price peaked and then watched it lose 5% in about 5 minutes. Another decided to have a flutter on HBOS around the rights issue (a tactic I was guilty of) and then watched it collapse. Another bought Bradford and Bingley, about a month before they went to virtually zero. One had the (good) idea of shorting BA as the oil price spiked but only risked £2/ a point (or 200 shares) when her maximum trade size was up to £50/pt. It’s always good to start small and see what happens, but no-one seemed to suggest that if the trade was working she might want to add to her position.

On another morning everyone simultaneously went short and within 5 minutes they’d blown up 2 grand – not one person thought that having the odd long position to hedge their shorts might be a good idea.

And presiding over this fiasco was invisible, almost always absent hedge fund manager Lex Van Dam. There’s a name to conjure with. I think I should change my name to Lex Rabbit. He’d left a 29-year old sidekick in a glass office, who occasionally emerged to shout at the traders, particularly after Lex had got cross on the phone about how much of his money they were blowing up. There didn’t seem to be much ongoing coaching or support, nor did any of the traders seem to be discussing their ideas with the rest of the team. The guy who was in charge didn’t come round and chat to people about how they were getting on very much. And the traders mainly they sat around reading the FT, taking long lunches and staring at the screen in horror – now that’s something I can identify with. But it was a pretty scary idea to put 8 complete beginners in charge of $1m and let them loose in the worst bear market in 60 years.

They only seemed to be trading equities; no currencies, no indices, no commodities. It might have seemed to be a sensible strategy to limit the asset classes these novices were working with, and certainly made the world of trading more accessible to the viewer. But to be trying to run an equity-only fund, even if you could go short, in the summer of 2008 wouldn’t be a picnic for anyone. I’m amazed that Lex risked $1m of ‘his own money’ on this . It was less like Curtis Faith’s ‘Way of the Turtle’ and more like ‘Way of the Fool’ (I was going to say ‘idiot’ but I thought that would be a bit unfair and rude – it wasn’t those guys’ fault).

I don’t know really if the foolishness was more to do with Lex’s appetite for serious risk, or the lack of preparation the traders had. I’m sure some of them will come out in better shape than others. And it’s not a scenario I’d wish on anyone, although I’d had loved to have got my hands on some of Lex’s cash to trade with last year!

Everyone, except for Lex and his sidekick, seemed remarkably relaxed as the markets collapsed around their ears. Anyway it’s worth a look and most of you will recognise some of the scenarios all too well. A good lesson in ‘spot the mistakes’.

Trading Update

Talking of mistakes, I should probably have left those housebuilders and banks alone – Taylor Wimpey are sitting back roughly where I started, having had a round trip yesterday afternoon into more than £100 of profit and back again. I closed out most of the position and have left a small long in Barratt and Taylor Wimpey running. Apart from what I wrote earlier, the other reason for sticking with Taylor Wimpey (that is, if they survive) is that they have a US operation and may be one of the beneficiaries of an Obama housing stimulus package. But I won’t risk holding them below 18p a share. I’ve set wide stops on the banks (they’re just in at £2 a point) and I’m seeing them as a foolish hedge for the size of my short index position.

Game’s results were good but not good enough for the market, so that long has gone now too, and I closed out Activision yesterday for a £50 profit. I’ve kept my long DSG going for now, and I’m still short of Tesco.

The key thing I’ll be watching, when I get a chance, over the next few days, is the dollaryen and euroyen cross. If they spike up that may be a signal to close out my index and gold shorts and consider going long again. But for now, I’m happiest being mainly short, in small amounts. And my long dollar currency trades are galloping on, for now.

Tuesday, 13 January 2009

Don’t splash the cash, Flash

I’m moving into a busy period at work, and this has coincided with a retrenchment in stocks, as more and more grim earnings and gloomy outlooks hit the headlines. So I’ve cut back my exposure on the long side, reducing the number of positions I’m running, so hopefully I don’t come home to nasty shocks. My overall position is ‘neutral’, – I have sufficient long equity positions left but I also have two short index positions running – short S&P from 910 and short FTSE from 4515, to which I added a Dow short on Monday evening.

Cutting the retailers down to size

I’ve taken profits on a lot of my retail longs except for Game Group and DSG – I’m waiting for results – Tuesday morning for Game and DSG. So no more Sainsburys for me at the moment. I’ve added to my short position in Tesco – it’s just a hunch. I’m not sure that their results, also due out on Tuesday morning, will hold up. I doubt they’ll hold market share. They’re already trading on a P/E ratio of 13.4, which looks a bit high to me, given that profits this year are likely to be heavily squeezed. On the other hand, wholesale prices will be tumbling so there are plenty of opportunities to offer good deals – I saw a 50p loaf of bread the other day. But Tesco are squeezed between the deep discounters and the more upmarket rivals, with a big overseas empire that is vulnerable to local competitors. And they have a lot of debt.

Leaving Gold in the cold

My long Gold trade got chucked out this morning for a loss of over £150. So I’m not trading back into that for the moment. The dollar is continuing to strengthen and I don’t fancy buying gold when the dollar looks so hot. I may revise my view if Gold gets back and holds above the 830 level; as I’ve argued before, I think there may be some case for buying gold on the grounds of countering currency debasement. If the purchasing power of money decreases because the government pumps money into the economy through quantitative easing, and borrowing is cheap, and demand goes up, then costs can escalate into hyperinflation, because money is effectively worth less. So in that scenario buying gold as a ‘store of value’ might make sense. But it depends on banks being willing to lend and I’m not sure I see a serious thaw in the credit markets. In the meantime businesses are laying off staff and going to the wall every day.

So if we continue to see a deflationary environment (and I’m sticking to a prediction of oil at $25 - $30 a barrel between now and the middle of the year, but haven’t quite managed to trade it), why would you buy any commodity futures? One could equally argue that there isn’t any reason for gold to stay so high, given how much all the other commodities have collapsed. So it’s a difficult call – deflation now, and inflation later, as governments print money?

In the meantime gold could drop back even further, tracking dollar strength and the falling oil price, so I put on a small short when it held below 826 this afternoon. Looking at the chart, if gold can’t regain and hold the 829 – 833 level then it could easily slide to 800 - 815 or below, and it’s made continuously ‘lower highs’ over the last nine months, which suggests, after today’s massive move, that a longer term downtrend is intact. One interpretation of that is in this chart.

The way the euro is dropping against the yen and the dollar tells me that cash is still king – traders are nervous and risk appetite is low. So I’m sticking with my short EURUSD and short EURGBP positions, which have made me a bundle already, and I see no reason to close them at the moment.

If we see signs of inflationary pressure, that might be a moment to begin to short the dollar. But right now I can’t find evidence for this view. Inflation would depend on people actually getting out, spending and lending money. In this environment cash preservation and debt reduction (deleveraging) seems to be the order of the day. In the UK, I can imagine that as lower interest rates work through, some sort of recovery in consumption might be on the cards by mid-year. That’s why I have some bullishness on some underperforming retailers like Debenhams, DSG and Topps Tiles who are still trading at dirt cheap levels – so if they can survive, they could be great buys, if you’re willing to gamble that in six to nine months the recession will bottom out and that they’ll make arrangements with their creditors to stay afloat in the meantime. But rising unemployment will be a real drag on spending, so consumer stocks are very risky to buy right now – and that’s reflected in their apparently cheap prices.

Keeping it small and simple

Because I’m not going to have so much time to trade over the next couple of weeks, I’m trying to keep it simple and scale back, running much less risk than I have been over the last few weeks.

I have, however, added to my longs in cheap housebuilders Barratt and Taylor Wimpey (who are due to give a trading update on Tuesday morning but who have been on the verge of restructuring their debt covenants). And I speculatively bought into a couple of UK banks on Monday morning. There’s a rumour doing the rounds that the government is on the verge of creating a ‘bad bank’ in which the banks’ bad assets can be chucked – which could be positive for lending and liquidity – so I’m expecting a bit of a bounce – and that could also be good for the housebuilders, particularly those that are trading at multi-year lows.

In general I’m taking cash off the trading table, and waiting to see how the earnings figures out of the US look over the next few days. I’d rather keep my money in reserve for now. If earnings look bad but not terminally bad I may switch round and go back long, particularly with the potential for a bit of Obama-inspired optimism over the next few weeks.