The Life and Times of the Financial Markets
A top-down view of the things we do.
Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.
Most things in life are cyclical; seasons, business trends, even moods. It's the seamless evolution of nature, an ebb and flow that is evident in everything from oceans to natural disasters to weather patterns.
Nestled within that overarching context is our rhythm; health and sickness, smiles and sadness, laughter and tears. For financial professionals, that also includes what we often refer to as feel. There are times when we can see the rotation of the baseball as it approaches home plate, and other times when we can't seem to get out of our own way.
On each of the last two Fridays, I flattened my trading risk into the weekend; in between those sessions, of course, I was personally flattened by something I wouldn't wish on my worst enemy. Now that I'm back on my feet, I've been attempting to wrap my head around the world's wildest reality show that is more commonly known as the global capital markets.
True to the nature of the beast, 2012 has been a year of ebb and flow. I was quite bullish -- or, I traded solely from the long side -- from December, when most folks were bearish, until S&P 1360. I made bank on stocks like Research In Motion (RIMM), which jumped 40%, market proxies like the S&P, and perhaps most importantly, I avoided getting caught on the short side as the tape screamed higher.
As I sat back to appreciate the single best start in my 21-year career, my previously stated S&P 1360 price target arrived -- just as the world shifted course and screamed, "Get into the Market!" "This is perfect," I thought to myself, "the path of maximum frustration!" I layered into shorts, traded around a negative bias, and over the next month, just as Mercury Retrograde arrived, proceeded to give back most, if not all, of my year. Stay humble or the market will do it for you, indeed.
I stayed the course -- sometimes bigger, sometimes smaller, but always quick with my trigger to press weakness. I was rewarded with that strategy when April arrived and grinded back toward my high-water mark, before taking a long-awaited deep breath and adopting a more balanced approach with lighter size and tighter risk parameters. I took some nicks and cuts over the last few weeks and currently find myself in the midst of a good -- but not great -- trading year.
Why the history? To understand where we are, we must appreciate how we got here. To be honest, I opted to flatten on Friday (with the exception of a token position in Banco Santander (STD), some currently worthless Research In Motion May 15 calls (I don't sell options under $0.50) and a spate of "special situations" that are too small to mention in this space) because the price action has been very impressive. I respect -- but try not to defer to -- what I see, so I erred to the side of dear prudence, for better or for worse.
The article that caught my eye last night, after one of the better days I've had in the relatively short time I've been a dad and a step-dad, was this ditty from Bloomberg. And I quote (emphasis mine):
Wait -- there was one? An aggregate survey of price targets is the highest since October 2007-- and you know what happened then; this, this, this, this, this, this, this and this -- yet those who base their predictions on these price targets are offering that we're closer to the apex then then nadir. And you wonder why you're confused? I'm telling ya, Dr. Sean Maguire would make a killing in this environment!
Where do I fall on that spectrum? Well, I'm on record saying that 2012 will be a tale of two tapes -- with S&P 1360 potentially serving as the toggle (which was a variant view in December) and I'm wrong in that regard. We've traded as high as S&P 1420 and there is the potential within our probability spectrum of returns that we could trade beyond that in the last eight months of the year. The truth is, I don't know; all I can do is read the leaves, assimilate the information, make an educated assumption on forward policy (which is new to the post-2008 crisis world), and operate in a manner consistent with my personal risk profile and time horizons (as must you).
I will say this: We've injected upwards of $10,000,000,000,000 (10 trillion) of stimulus in one form or another into the US financial market system (note: I didn't say US free-market capitalism) and we're churning out an anemic 2.2% GDP growth. I'm not a math major but that sure seems like a less-than-stellar return on capital. Yes, I understand there is another side to this trade -- who knows what this would look like if the government sat idly by -- but we must trade the tape we have, not the tape we want.
I maintain that the unintended consequences of our current policy will manifest through social mood, our longstanding belief that societal acrimony would shift to social unrest and result in geopolitical strife, and I've seen nothing evolve that alters that view -- quite the contrary, actually.
I also subscribe to the view that on the other side of this process of price discovery, we'll enjoy generational prosperity led by a millennial generation that doesn't know the difference between experience and skills. Yes, a phoenix will arise from this scorched earth and those eggs are hatching as we speak
From here to there? We must live life to the fullest, appreciate each and every moment, and take the good with the bad while affecting the former and accepting the latter. We will each define our own path and our actions will ripple through a society that is the sum of the parts.
In terms of the tape, I intend to put one foot in front of the other, manage risk rather than chase reward, and apply the same stair-step functionality that has served me in such good stead over the course of my career; we will, as always, walk that walk each day on our real-time Buzz & Banter (click here for a free two-week trial).
And at the end of the day, when that closing bell tolls, I plan to maximize the single greatest investment in my portfolio of life -- that of quality time with my friends and family. And that is advice I'm more than happy to share.
May peace be with you.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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