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Freaky Thursday Potpourri


The great thing about trading is that, at the end of the day, price is the ultimate arbiter.


Tonight's the night
We'll make history
Honey, you and I
And Ill take any risk to tie back the hands of time

So here we are, two days away from our three day play and the bovine are cutting a rug to the tune of all-time highs. Where, you ask? The DJIA, Trannies, NYSE Composite, Mid-Caps, Russell, BKX, Cyclicals (CYC), NYSE A-D line and emerging markets (EEM), for starters, as the rising tide lifts all ships. Yes, to read a rag or view the tube shares a tale that life has never been better. Indeed, according to the world's biggest thermometer that is the stock market, these are the best of times.

The great thing about trading is that, at the end of the day, price is the ultimate arbiter. There's no debating how fabu the action has been or where prices have arrived. I will offer, however, several random thoughts, in no particular order, that might lend perspective to the flickering fray. I am currently light and tight with regard to my risk profile as I ready for a few margaritas with my favorite Grandmother in Florida. In that vein, I scribe these vibes without vice or virtue and hope they add value to your thought process.

  • Asset class deflation vs. dollar devaluation? Sure feels that way. As the dollar breaks lower, rebuffed at the technical toggle we were monitoring, asset classes have been buoyed by the rising tide. Does this "matter" for stateside holders? Only on a global, absolute worth basis. I can assure you this, however-it "matters" to foreign holders of dollar denominated securities and THAT matters in the context of globalization (and its evil twin, Nationalization).

  • The Best of Times? For some, sure. They're called the "haves" and they're increasingly insulated from day-to day-agita. On the other side of the spectrum, a short skip over what was once the middle class, it doesn't seem like nirvana. Big Ben said yesterday that inflation concerns are beginning to diminish. I suppose that's true as long as you don't drive, aren't in school and have a clean bill of health.

  • Is it me or does the market catch a bid every time Dubya speaks? I think we might have to map out that correlation, if for no other reason than acute curiosity. Or paranoia, take your pick.

  • Who wasn't invited to yesterday's soiree? The drillers, which got Punk'd again right at resistance.

  • Call me crazy (you crazy!) but I would offer that if you lock these levels of volatility in for the rest of 2007, you're gonna be one very happy camper by the time we turn the calendar anew.

  • I don't know about you, but I always enjoy reading Mr. Practical.

  • With BKX 119 in the rear-view, does S&P 1450 become the new bovine backstop for long-sided tries? It does if (A) you're a bull, (B) that's how you trade and (C) you stay disciplined and don't rationalize your risk.

  • Is anyone else looking forward to March Madness?

Minyan Mailbags!


To answer your own question regarding your metals trade, in my opinion I think you may be a little imprudent selling some of your position. Why? Because (1) If you believe the metals are in a bull market, why not stay with it? (2) I understand taking profits after a major bull move, but, it hasn't happened yet. Doesn't your short term trade put you at risk of missing the next move as well as cost you more in the way of commissions, cost of re-entry, etc.? Moreover, the XAU is higher again today.

Please tell me what is the thought process of a Professional Trader, I'm interested in knowing.

Minyan Rob

Minyan Rob,

Good question and although there are no blanket answers, I'll try to tackle this one.

First, it's tough to view making sales and locking profits as "imprudent." I've been a steadfast bull in this sector, both in my trading and investment account, and flattened the former into the FOMC and the latter (to my cores) more recently. One quick look at the chart suggests that both horizons have a time and a place.

You're correct that trying to trade a self-proclaimed secular bull is "cute" and has costs, such as commission. Where I would slightly disagree is in the broader definition of "costs," as my penance has been of the opportunity variety rather than getting squeezed on the short side (opportunities are made up easier than losses)

While hindsight provides clarity and style is subjective (I could have used trailing stops), I will offer that I simply chose to step to the sidelines on some risk. There is no shame in admitting that profits have no pride. I, like you, am juggling alotta balls and rather than guess or press, I've simply exercised my constitutional right to be patient.

Hope this helps.

The Following Mailbag is being shared courtesy of my good buddy, Scott "there ain't gonna be a whiffle ball rematch" Reamer...

Prof. Reamer -

I always have a problem understanding what makes gold go up. Is it mainly the inverse relationship between gold and the dollar? If that's the case then if it is also an inflation hedge, that would mean rates would have to be raised and the dollar would rise. Help me out on this one.

Minyan Jason


The correlation between gold and the US dollar index (DXY) (the average of six major currencies vs. the USD) is minus 0.42 over the last two years, minus 0.44 over the last nine years and minus 0.28 over the last 17 years. A +1 correlation means perfect correlation (gold goes up, dollar goes up), a -1 correlation means perfectly anti-correlated (dollar goes up, gold goes down), and a 0 correlation means no correlation whatsoever. What the above tells you is that the widely held belief that gold goes up when the dollar goes down is not supported by the statistics: a -0.28 correlation is a weak correlation at best and is certainly within the normal volatility that these two date series exhibit.

So, in the US
, M3 has gone up by something like 207% over the last 20 years while gold has gone up in USD terms by 58%. So has gold been a hedge against inflation over this time frame? Of course not - stocks have been a better hedge against inflation than gold, and property even more of a hedge than that. But that is not to say that gold doesn't have its uses: gold will likely be a fantastic wealth preservation vehicle once the fiat currency regime (the post Bretton Woods system with the US as global economic hegemon) comes to a grinding and ignominious end (a certainty approaching 1 on the probability scale - timing less certain). I would encourage you to read the book The Golden Constant by Roy W Jastram - it makes the unintuitive case (with a look over the historical data from 1560-1976) that gold performs better (in appreciation terms) under deflationary regimes rather than inflationary ones, thus throwing a significant wrench into the idea that gold protects under inflationary regimes (dollar down, gold up).

As for the 'reason' why gold acts as it does, I would only point you to the ideas presented by Amos Tversky and Dan Kahneman whose research on behavioral finance tells us that economic agents make persistently irrational decisions - my hypothesis is that they are using their limbic systems rather than their cortexes and thus are driven by emotion and not a utility-maximizing function. This has massive implications for understanding WHY markets behave as they do. I couldn't encourage you more to investigate this idea further.

And finally, the Following Buzz took place yesterday between 3:00 PM and 4:00 PM by Professor Lance Lewis:

Honey You, are my Golden Star, Don't You Go Away…

8.5 million Canadian warrants for Golden Star (GSS) (strike of $4.60 CA or roughly $3.95 US) expire at the close today. With that overhead supply being removed as of tomorrow, it will be interesting to see what GSS does, especially given where it is positioned on the charts.

It's not a coincidence that this level (comparable to the strike of those warrants) has repelled every rally over the past three years...

See the chart here

(position in GSS)

Have a great weekend, Minyans, and fare ye well.

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Positions in financials, metals, GSS
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