Suspicion confirmed

May proves cruelest month for hedge funds Suspicion


By Sam Jones, Hedge Fund Correspondent



Published: June 8 2010 20:07
Last updated: June 8 2010 20:07



On May 6, days after the EU moved to implement a huge €750bn bail-out package and on the eve of the UK’s knife-edge general election, traders at the world’s biggest hedge funds watched as wonderland numbers flickered across their screens.



Shares in Procter & Gamble plummeted 37 per cent on no news. Blue chip corporates traded for cents. In minutes the US Dow fell more than 9 per cent – its second-biggest intraday movement, after the great crash of 1929. Prices bounced back after this so-called “flash crash”, but confidence didn’t.



May has been the worst month for the average hedge fund since the collapse of Lehman Brothers in October 2008, according to industry data out on Tuesday – and for many it is a reminder that, in spite of 18 months of bullish markets, the world is still walking a financial tightrope.



Indeed, to some hedge fund traders’ eyes, the way individual names moved during the now infamous May 6 movements in the Dow was disconcertingly similar to the events of August 2007 – when previously imperceptible subprime jitters in the credit markets translated into a mass computerised dumping of stocks by the giant quantitative hedge funds AQR, Renaissance Capital and Goldman’s Global Alpha fund.



Though no explanation was forthcoming for the causes of the flash crash, it was, in the days that followed, painted as a freak event – idiosyncratic and technical.



EDITOR’S CHOICE

In depth: Hedge funds - Jun-08UK’s Europe minister vows to defend City - Jun-08Hedge funds win G20 support - Jun-07Fallen star RAB picks itself up with a reformed structure - May-23Hendry takes big bet on China crash - May-21Hedge funds losing the Ucits battle - May-11Scant comfort was available for many hedge funds, though. On the Thursday and Friday of the first week of May, some lost billions.



From its newly opened offices in Geneva, traders for BlueTrend, the $10bn quantitative fund run by Brazilian financial engineer Leda Braga, saw the flagship portfolio dive 7.5 per cent – a loss of nearly a billion dollars – in the first week of May alone. BlueTrend closed May down 8.5 per cent, unable to recover.



For some funds, May was not merely on a par with but worse than October 2008.



According to Hedge Fund Research information published on Tuesday, the average hedge fund lost 2.26 per cent in May. Every single hedge fund strategy lost money during the month. And in many cases, it was the biggest and best-known hedge funds – such as BlueTrend – that suffered the most.



Paulson & Co – perhaps after its phenomenally successful shorting of the US subprime market in 2007 and 2008, the best known hedge fund in the world – was among those hit hard. The firm’s flagship Advantage fund, which alone manages close to $7bn, closed the month down 4.8 per cent. Worst hit, however, was the manager’s Recovery fund – set up in early 2009 to capitalise on the bounce-back of the global economy. The $7bn fund dropped 8.7 per cent in May, though it remains up 14.35 per cent so far this year.



The losses are noteworthy not so much for their size, or the concern they might have caused investors, but rather because they caught so many off guard and were so widespread.



The first half of the month was marked by a growing panic from many of the largest funds to delever and unwind their biggest positions. April had caught many off guard. During that month, funds had been increasingly confident of their positions and outlook in global markets – not least as far as the eurozone was concerned. For many, April was a month to hammer home their advantage by bulking up their positions.



For macro funds, which trade on global economic imbalances, the eurozone’s difficulties were a godsend. Funds piled into “differentiation trades” – typically short the euro, and long Asian or Latin American currencies and equities. They were undone by the size of their positions.



“As problems in Europe grew, many market participants including banks and hedge funds began to try and derisk the other leg of their short euro trade – the large, long emerging markets positions – and they all rushed out at once,” says Jamil Samaha at CQS, a large London credit hedge fund.



The effect was a sudden fall in Asian markets that triggered a vicious cycle of derisking. Losses on macro funds’ long-Asian plays far outstripped gains on their short-euro positions.



Some global macro funds were able to staunch the losses, others were not. Brevan Howard, Europe’s largest macro hedge fund, saw its flagship vehicle down 0.7 per cent as of May 21. Paul Tudor Jones’ BVI Global fund closed the month down 2.26 per cent. Moore Capital, however, saw its flagship fund lose 7.7 per cent.



“There were movements in credit during May that were greater than anything we saw after Lehmans,” says a manager at one of the world’s biggest credit traders. “The banks were panicked. They were marking positions to the bone and we were marking some big losses mid-month.”



The effect cycled into the bond markets. Hedge funds specialising in convertible arbitrage were hit hard, according to brokers. As funds looked to hedge their risks, they bought CDS protection en masse, forcing spreads wider and only further exacerbating the cost of hedging. The only choice was to dump the underlying instruments.



In the words of one hedge fund manager, May was “a wilderness of mirrors” – when the many uncertainties and unknowns of an overstretched market became impossible to square.



The question for managers now, though, is how to make back money and where the crisis will go next – a quandary that depends on whether May’s events were an aberration, or the beginning of a new secular bear market.

Copyright The Financial Times Limited 2010.

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William Tell's Daily Aimed Market Forecast - For 6/11/2010

A complimentary copy of William Tell's Daily Aimed Market Forecast (Excerpts below) can be downloaded from the William Tell sharesite found through the side menu... enjoy! WT

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William Tell's Daily Aimed Market Forecast - For 6/10/2010

A complimentary copy of William Tell's Daily Aimed Market Forecast (Excerpts below) can be downloaded from the William Tell sharesite found through the side menu... enjoy!  WT

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Yes Affirmation! FT Rules!

Yes all in one felt swoop FT confirms my assertions about the origin of the Flash Crash in the John Henry and the Steam Shovel and several other posts in the last few weeks, except that the selling started a couple of months earlier than the Flash Crash and now hedgies are dumping and running cause the clients are freakin walkin.  Blue heron losing $1 Billion after the fund was only open for 1 week!  Zoikes!  Now it appears that the majority of the hedge funds were caught flatfooted, by the Flash Crash as I suspected several of the big guys were, but who was selling in March and April?  Chanos?  Einhorn? RenTec aka Simons?  we'll know when we see the return data at the end of this month.

May proves cruellest month for hedge funds


By Sam Jones, Hedge Fund Correspondent



Published: June 8 2010 20:07
Last updated: June 8 2010 20:07



On May 6, days after the EU moved to implement a huge €750bn bail-out package and on the eve of the UK’s knife-edge general election, traders at the world’s biggest hedge funds watched as wonderland numbers flickered across their screens.



Shares in Procter & Gamble plummeted 37 per cent on no news. Blue chip corporates traded for cents. In minutes the US Dow fell more than 9 per cent – its second-biggest intraday movement, after the great crash of 1929. Prices bounced back after this so-called “flash crash”, but confidence didn’t.



May has been the worst month for the average hedge fund since the collapse of Lehman Brothers in October 2008, according to industry data out on Tuesday – and for many it is a reminder that, in spite of 18 months of bullish markets, the world is still walking a financial tightrope.



Indeed, to some hedge fund traders’ eyes, the way individual names moved during the now infamous May 6 movements in the Dow was disconcertingly similar to the events of August 2007 – when previously imperceptible subprime jitters in the credit markets translated into a mass computerised dumping of stocks by the giant quantitative hedge funds AQR, Renaissance Capital and Goldman’s Global Alpha fund.



Though no explanation was forthcoming for the causes of the flash crash, it was, in the days that followed, painted as a freak event – idiosyncratic and technical.



Scant comfort was available for many hedge funds, though. On the Thursday and Friday of the first week of May, some lost billions.



From its newly opened offices in Geneva, traders for BlueTrend, the $10bn quantitative fund run by Brazilian financial engineer Leda Braga, saw the flagship portfolio dive 7.5 per cent – a loss of nearly a billion dollars – in the first week of May alone. BlueTrend closed May down 8.5 per cent, unable to recover.



For some funds, May was not merely on a par with but worse than October 2008.



According to Hedge Fund Research information published on Tuesday, the average hedge fund lost 2.26 per cent in May. Every single hedge fund strategy lost money during the month. And in many cases, it was the biggest and best-known hedge funds – such as BlueTrend – that suffered the most.



Paulson & Co – perhaps after its phenomenally successful shorting of the US subprime market in 2007 and 2008, the best known hedge fund in the world – was among those hit hard. The firm’s flagship Advantage fund, which alone manages close to $7bn, closed the month down 4.8 per cent. Worst hit, however, was the manager’s Recovery fund – set up in early 2009 to capitalise on the bounce-back of the global economy. The $7bn fund dropped 8.7 per cent in May, though it remains up 14.35 per cent so far this year.



The losses are noteworthy not so much for their size, or the concern they might have caused investors, but rather because they caught so many off guard and were so widespread.



The first half of the month was marked by a growing panic from many of the largest funds to delever and unwind their biggest positions. April had caught many off guard. During that month, funds had been increasingly confident of their positions and outlook in global markets – not least as far as the eurozone was concerned. For many, April was a month to hammer home their advantage by bulking up their positions.



For macro funds, which trade on global economic imbalances, the eurozone’s difficulties were a godsend. Funds piled into “differentiation trades” – typically short the euro, and long Asian or Latin American currencies and equities. They were undone by the size of their positions.



“As problems in Europe grew, many market participants including banks and hedge funds began to try and derisk the other leg of their short euro trade – the large, long emerging markets positions – and they all rushed out at once,” says Jamil Samaha at CQS, a large London credit hedge fund.



The effect was a sudden fall in Asian markets that triggered a vicious cycle of derisking. Losses on macro funds’ long-Asian plays far outstripped gains on their short-euro positions.



Some global macro funds were able to staunch the losses, others were not. Brevan Howard, Europe’s largest macro hedge fund, saw its flagship vehicle down 0.7 per cent as of May 21. Paul Tudor Jones’ BVI Global fund closed the month down 2.26 per cent. Moore Capital, however, saw its flagship fund lose 7.7 per cent.



“There were movements in credit during May that were greater than anything we saw after Lehmans,” says a manager at one of the world’s biggest credit traders. “The banks were panicked. They were marking positions to the bone and we were marking some big losses mid-month.”



The effect cycled into the bond markets. Hedge funds specialising in convertible arbitrage were hit hard, according to brokers. As funds looked to hedge their risks, they bought CDS protection en masse, forcing spreads wider and only further exacerbating the cost of hedging. The only choice was to dump the underlying instruments.



In the words of one hedge fund manager, May was “a wilderness of mirrors” – when the many uncertainties and unknowns of an overstretched market became impossible to square.



The question for managers now, though, is how to make back money and where the crisis will go next – a quandary that depends on whether May’s events were an aberration, or the beginning of a new secular bear market.

Copyright The Financial Times Limited 2010.

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William Tell's Daily Aimed Market Forecast

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BIGGS, BUFFET, FINK, and WIEN, LLC.

Over the last two or three weeks each of these guys has touted that the market is ready to "Rock and Roll" and apparently this is like the four sided slow song or a lullaby, each has spoken on their belief that the bear market is over done, and there are lots of bargains out there. 

So I'd like to know which of one of these guys was buying on Friday, because according to them that would have been a great opportunity to buy when everyone was piling up against the door to get out. 

The reason why I know that they weren't buying anything was that the activity was this.. ZERO.  Gee looks like the tide went out and they were all swimming with no trunks.  These guys aren't buying they are selling and if they are buying they are stupider than I thought. 

Really these guys are traders so they are always either talking up their book or trying to ease out of it.  Einhorn, Chanos (Short) et al.  appear to be more effective at talking up  their book, than the Hedge Fund of BBFW.  I have a lot of respect for these guys, but it is clearly evident no one has been buying much of anything the last two days.  So I smell low tide.

Bear Options at Record as Wien Says Stocks to Rally (Update2)


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By Jeff Kearns and Rita Nazareth



June 7 (Bloomberg) -- Confidence in stocks is sinking to record lows in the options market even with the U.S. economy poised for its fastest growth in six years, a sign to Blackstone Group LP’s Byron Wien that it’s time to buy.



Contracts that pay off should the benchmark index for U.S. stocks plunge more than 23 percent from its April high cost 75 percent more than those speculating on gains, the biggest premium ever, according to data compiled by Bloomberg and OptionMetrics LLC. The 10-day average difference exceeded 50 percent 34 times since 1996. In those cases, the Standard & Poor’s 500 Index gained a median 7.2 percent in six months.



Wien says the gap shows Europe’s debt crisis caused too much pessimism in the U.S., where S&P 500 companies are forecast to post 38 percent profit growth in two years. Rising demand for insurance shows investors unwilling to sell stocks have hedged against losses, according to New York-based Morgan Stanley.



“People are trying to protect themselves and they are willing to overpay for it,” said Wien, 77, the Blackstone adviser who foresaw last year’s gains in stocks and oil and predicts the S&P 500 will rally to 1,300 before ending 2010 little changed. “Bearishness is high. The best time to buy stocks is when the level of bearishness is at a peak.”



Bank of America Corp. and the Oil Services Holders Trust are among stocks with bearish options priced highest relative to bullish ones, according to data compiled by Bloomberg. So-called two-month skew for the Charlotte, North Carolina-based lender and the energy exchange-traded fund exceeds 38 percent, data compiled by Bloomberg show.



Employment Disappoints



U.S. equities fell last week, with the S&P 500 dropping 2.3 percent to 1,064.88, as a Labor Department report showed private employers added 41,000 jobs in May, 77 percent fewer than the median forecasts of economists surveyed by Bloomberg. The stock index extended its 2010 retreat to 4.5 percent. The S&P 500 lost 1.4 percent to 1,050.47 today as Google Inc. and Apple Inc. led a drop in technology shares and Goldman Sachs Group Inc. was subpoenaed in the financial-crisis investigation.



Profits for S&P 500 companies are projected to rise 17 percent in 2010 and 18 percent next year, estimates from more than 2,000 analysts compiled by Bloomberg show. The index trades at 13.1 times 2010 per-share earnings forecasts, compared with an average 16.4 times reported income since 1954. Economists predict gross domestic product will expand 3.2 percent this year, the most since 3.6 percent in 204, the data show.



23% Retreat



The 10-day average premium for options that pay off should the S&P 500 decline to 940 jumped to 75.7 percent on May 27 and remains within a percentage point of the record, based on data compiled by Bloomberg and OptionMetrics, a New York-based provider of options market data and analytics. A retreat to that level would represent a 23 percent drop from the April high, exceeding the 20 percent commonly defined as a bear market.



“When you see this much fear in the market, it’s probably the time to get a little more constructive and possibly look to putting money to work,” said Peter Sorrentino, who helps oversee $13.3 billion at Huntington Asset Advisors in Cincinnati. “The skew is too heavy. The paranoia premium has driven it up.”



Billionaire Warren Buffett said in a press conference on May 1 that his Berkshire Hathaway Inc. is ready to spend as much as $10 billion on an acquisition as the economy improves. Buffett, chief executive officer of the Omaha, Nebraska-based insurer and investment company made an “all-in wager” on the U.S. by paying $27 billion for Fort Worth, Texas-based railroad Burlington Northern Santa Fe Corp. in February.



Rally Signal



When bearish puts cost 50 percent more than bullish calls, the S&P 500 rallied 28 times during the next six months and declined 6 times, according to OptionMetrics data going back to 1996 compiled by Bloomberg. The biggest gain started in November 1997, when the index rose 18 percent and the premium increased to 54.1 percent, data show. The S&P 500 plunged 35 percent after the skew reached 50.2 percent in June 2008.



More than $1.9 trillion has been erased from American equities since April 23 on concern budget deficits in Greece, Portugal and Spain will spur bank losses and freeze lending. The S&P 500 slid 3.4 percent to a four-month low on June 4 following the jobs report and speculation that Hungary’s budget deficit may force a default.



A group of U.S. financial companies posted the third- biggest retreat during the selloff since April, falling 16 percent. Energy and commodity producers both lost 17 percent.



‘Tail Risk’



“The tail risk of a significant stock market correction is very high now, thus the option prices correctly reflect the cost of hedging against” a decline, Nouriel Roubini, the New York University professor who warned of a financial crisis in 2006, said in an e-mail on June 2. “Macro risks and financial risk are significantly rising.”



Rising options costs suggest money managers are suffering smaller losses than are reflected in benchmark indexes after Europe’s crisis sent the S&P 500 down 8.2 percent in May, the biggest monthly slump since February 2009, said Christopher Metli, a derivatives strategist at Morgan Stanley. Hedge funds fell 2.6 percent last month, according to the HFRX Global Hedge Fund Index. That was the largest drop since November 2008, two months after New York-based Lehman Brothers Holdings Inc. filed the biggest-ever bankruptcy.



“The market’s telling you that investors are still bullish, and they’re hanging onto their positions, but they’re protecting through options,” Metli said. “Investors are worried about sovereign contagion, and the growth slowdown transmitting globally.”



Bank of America



Traders are buying options on Bank of America amid the 1.9 percent rally in its stock this year. The second-biggest U.S. home lender behind San Francisco-based Wells Fargo & Co. said on June 2 that loan charge-offs may have peaked as demand improves. The company posted losses of about $9 billion in its mortgage unit since January 2008, Bloomberg data show.



The Oil Services ETF has plunged 31 percent since April 23. The security is made up of companies such as Vernier, Switzerland-based Transocean Ltd. and Halliburton Co. and Schlumberger Ltd. in Houston that declined after U.S. President Barrack Obama proposed extending a moratorium on deepwater drilling. New York-based Citigroup Inc. was the fund’s biggest holder with 3.55 million shares, or 19 percent of those outstanding, as of March 31, data compiled by Bloomberg show.



“It could be a buying opportunity,” said Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., which manages $685 billion. “Stocks are at good value. Earnings are growing fairly strongly. Economic fundamentals are still strong, especially for the U.S., making it possible that the risks are overblown.”



To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net.



Last Updated: June 7, 2010 16:49 EDT

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The Case For DOW 4500 WATCH IT Unfold! - Week 6

The share and dollar volume on selling is just huge, about half of what it was on Friday, but still very heavy.  This step doesn't feel done although the TRIN ending the day at 2.0 makes it easier to have a pop early tomorrow, but I doubt it will last.

Here is that monthly Russell 3000 chart with the big ol' Head and Shoulders pattern thirteen years, there is an additional H&S on the same chart daily from December also confrimed.  This still looks so nasty.  Be careful and don't overstay your welcome.

See Yesterday's Chart O' The Day for the UUP, chart...

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UUP, UUP, and AWAY...er... down we go?!?

UUP approaching levels we haven't seen since the unhinging of the markets since late 08 and early 09, yes the big down swings. 

This TRIN (above) is comical. Generally, a trin THAT ends that out of whack would be screaming big rally on Monday, but I tend to think not because of the last picture and the decisive nature of the sell off across everything (see below) the tale of the tape. 

BTW, you can subscribe to my Daily Aimed Market Analysis where you get this analysis and more, check it out on the newly added share site! Where is it?          Hint: Check the side menu bar!

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1933 and 2010 Concentration

What if we drilled down on the 1929-1933 $DJI Era what would we see?

Well the Gestalt view (looking at the whole) last 7 plus decades, probably not much, but when you look at the period of 1929-1933 you have to ask yourself does this relate to our current situation?

Are we at the beginning or the end?  Is 2010 = 1931 or is it = 1937?  My hunch is that this is more like 1931.

The market at that time was equivalent to a 37 story building (10ft=1 Story).  FYI, the tallest building at the at that time was 48 stories (The NY Mercantile). 

A fall of a 37 story building was just as deadly as it is today, except the buildings being built today are well in excess of 100 stories, one of the the tallest buildings being planned is in excess of 160 stories.  Yes you guessed it.... in Dubai! I guess the extra stories gives you more time to think about how you got to where you were and where you are going.   

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This Day and Week In History

This Week in History, Jun 6 - Jun 12

1. Jun 06, 1944 D-Day
2. Jun 07, 1913 First successful ascent of Mt. McKinley
3. Jun 08, 1968 King assassination suspect arrested
4. Jun 09, 1973 Secretariat wins Triple Crown
5. Jun 10, 1752 Franklin flies kite during thunderstorm
6. Jun 11, 1979 John Wayne dies
7. Jun 12, 1987 Reagan challenges Gorbachev.

Although the term D-Day is used routinely as military lingo for the day an operation or event will take place, for many it is also synonymous with June 6, 1944, the day the Allied powers crossed the English Channel and landed on the beaches of Normandy, France, beginning the liberation of Western Europe from Nazi control during World War II. Within three months, the northern part of France would be freed and the invasion force would be preparing to enter Germany, where they would meet up with Soviet forces moving in from the east.




With Hitler's armies in control of most of mainland Europe, the Allies knew that a successful invasion of the continent was central to winning the war. Hitler knew this too, and was expecting an assault on northwestern Europe in the spring of 1944. He hoped to repel the Allies from the coast with a strong counterattack that would delay future invasion attempts, giving him time to throw the majority of his forces into defeating the Soviet Union in the east. Once that was accomplished, he believed an all-out victory would soon be his.



On the morning of June 5, 1944, U.S. General Dwight D. Eisenhower, the supreme commander of Allied forces in Europe gave the go-ahead for Operation Overlord, the largest amphibious military operation in history. On his orders, 6,000 landing craft, ships and other vessels carrying 176,000 troops began to leave England for the trip to France. That night, 822 aircraft filled with parachutists headed for drop zones in Normandy. An additional 13,000 aircraft were mobilized to provide air cover and support for the invasion.



By dawn on June 6, 18,000 parachutists were already on the ground; the land invasions began at 6:30 a.m. The British and Canadians overcame light opposition to capture Gold, Juno and Sword beaches; so did the Americans at Utah. The task was much tougher at Omaha beach, however, where 2,000 troops were lost and it was only through the tenacity and quick-wittedness of troops on the ground that the objective was achieved. By day's end, 155,000 Allied troops--Americans, British and Canadians--had successfully stormed Normandy’s beaches.



For their part, the Germans suffered from confusion in the ranks and the absence of celebrated commander Field Marshal Erwin Rommel, who was away on leave. At first, Hitler, believing that the invasion was a feint designed to distract the Germans from a coming attack north of the Seine River, refused to release nearby divisions to join the counterattack and reinforcements had to be called from further afield, causing delays. He also hesitated in calling for armored divisions to help in the defense. In addition, the Germans were hampered by effective Allied air support, which took out many key bridges and forced the Germans to take long detours, as well as efficient Allied naval support, which helped protect advancing Allied troops.



Though it did not go off exactly as planned, as later claimed by British Field Marshal Bernard Montgomery--for example, the Allies were able to land only fractions of the supplies and vehicles they had intended in France--D-Day was a decided success. By the end of June, the Allies had 850,000 men and 150,000 vehicles in Normandy and were poised to continue their march across Europe.



The heroism and bravery displayed by troops from the Allied countries on D-Day has served as inspiration for several films, most famously The Longest Day (1962) and Saving Private Ryan (1998). It was also depicted in the HBO mini-series Band of Brothers (2001).

GBUS

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FDR takes United States off gold standard - June 5th 1933

On June 5, 1933, the United States went off the gold standard, a monetary system in which currency is backed by gold, when Congress enacted a joint resolution nullifying the right of creditors to demand payment in gold. The United States had been on a gold standard since 1879, except for an embargo on gold exports during World War I, but bank failures during the Great Depression of the 1930s frightened the public into hoarding gold, making the policy untenable.




Soon after taking office in March 1933, Roosevelt declared a nationwide bank moratorium in order to prevent a run on the banks by consumers lacking confidence in the economy. He also forbade banks to pay out gold or to export it. According to Keynesian economic theory, one of the best ways to fight off an economic downturn is to inflate the money supply. And increasing the amount of gold held by the Federal Reserve would in turn increase its power to inflate the money supply. Facing similar pressures, Britain had dropped the gold standard in 1931, and Roosevelt had taken note.



On April 5, 1933, Roosevelt ordered all gold coins and gold certificates in denominations of more than $100 turned in for other money. It required all persons to deliver all gold coin, gold bullion and gold certificates owned by them to the Federal Reserve by May 1 for the set price of $20.67 per ounce. By May 10, the government had taken in $300 million of gold coin and $470 million of gold certificates. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the gold on the Federal Reserve's balance sheets by 69 percent. This increase in assets allowed the Federal Reserve to further inflate the money supply.



The government held the $35 per ounce price until August 15, 1971, when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus completely abandoning the gold standard. In 1974, President Gerald Ford signed legislation that permitted Americans again to own gold bullion.

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The Case For DOW 4500 WATCH IT Unfold! - Week 5 - $SPX - ALL RED

Wow is all I can say...  I got a baaaaaaaaaaaaadd feeling about this...

Oh and here is the PC Ration and volumes as of 2:19:46 PM EST, this just saying go short.  BTW, this is courtesy of TOS Platform.  It rocks!

Here is the closing picture for today 5 stocks in the S&P 500 finished up!  The PC Ratio below tells the story as does the $ and trade volume.  I can't imagine any investor wanting to be playing in this, I have to think even big investors are also getting leery.  Today I think I heard some necks snapping and backs breaking as any hedge funds that might have had a chance to live after May no just got their throats stomped. 

I can't believe Larry Fink and Barton Biggs came out bullish!  They aren't looking too smart right now.  Here is the above to snap shots again, after market close.  YUCK!

PC/Ratio of .28 on advancing stocks... WOW!  Over 1.601 on declining stocks. This just screams short on Monday too!

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The Case for DOW 4500 WATCH IT Unfold! - Week 5 - A Little Dipper

I  just wanted to bring this to your attention.  A nice head and shoulders on the daily $SPX, $DJI and $RUA looks like it is close to completing the right shoulder.  This pattern has been in development since December 2009, clearly this pattern should give anyone special heed if you are considering buying into these bargains. 

This H&S pattern is encapsulated witihn the 20 year pattern I have been writing about extensively. 

If you subscribed to my Aimed Daily Market Forecast or Aimed Bi-Monthly Market Forecast you would have known about the potentiality of it 24 hours ago.  Check out the William Tell TradeCraft store for details, just click the June 1 bi-monhtly report image.

Todays action looks to have made this right shoulder a done deal, definately bad news for Monday-Next week, unless something extraordinarily positive happens...

It's possible this could still head up, but it actually double topped, so I 'd say it's a goner.  Especially since the the DOW dropped 150 at the open.  Maybe a success story out of the Gulf will stem the bleeding, but even that may not be enough good news.

The $RUA is sans Fibonacci lines...  Each chart looks the same there is no escaping this Large Cap, Small Cap, Micro Cap, it just doesn't matter.

The little dipper.

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Fink Says U.S. Stocks to Rise - Someone better tell the insiders then...

Out of all the DOW 30 only have 2 show positive above zero line insider trading buying JNJ and VZ, every other stock is in the major selling mode or a few at the the flat no sell no buy, but this period follows a heavy period of selling which took place over the last few months.  Maybe Fink is a contrarian or his precious Aladdin system is seeing something the rest of the market isn't.

This huge volume of insider selling doesn't really give a lot of support to Fink's thinking.  His idea that companies are cash rich, well this is still a reflection of the looming threat of a credit crisis materializing at any point.  If we were close to normal companies would be buying their stock back, or buying new businesses, but it's not really happening.

BlackRock’s Fink Says U.S. Stocks to Rise as Companies Thrive


By Anthony Effinger and Sree Vidya Bhaktavatsalam



June 2 (Bloomberg) -- BlackRock Inc.’s Laurence D. Fink, who leads the world’s biggest asset-management firm, said the stock market is poised to rally because U.S. companies have built cash reserves and manufacturers are returning to health.

“We’re ready to really rock and roll as a country,” Fink said today in a meeting at the Oregon Investment Council, which manages retirement accounts for public employees and invests in BlackRock’s funds. The meeting was held in Tigard, Oregon.



Second-quarter profits at U.S. companies will be stronger than analysts expect, said Fink, chief executive officer of New York-based BlackRock, which manages $3.36 trillion in investments.

Fink was even more bullish on the U.S. a few weeks ago, before Europe’s credit crisis, he said.



“We’re very bearish on Europe,” he said to the group of two dozen employees and board members at the council.



For Related News and Information: Top fund-related news: TFUND

Last Updated: June 2, 2010 16:02 EDT

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Remembering the 20 Year Anniversity of October 19th, 1987

Robert Prechter, Elliot Wave International Reprise of the 20 year anniversary of October, 19th, 1987.




Fun lookback!  I guess.

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Is There Survivorship Bias in Index Performance? Seeking Alpha Edited

Before you accuse me of being doddy or repeating myself, let me just say this is a second post of a recent post which was published by Seeking Alpha.   The Seeking Alpha edited version is available below or you can follow the jump to the article on their site.  The latter of which has some rich commentary from other participants on Seeking Alpha.  Thanks for reading!

Is There Survivorship Bias in Index Performance?


In the performance analysis of hedge funds, survivability bias -- the logical error of concentrating on funds that "survived" some process and ignoring those that didn't -- can skew the performance results significantly for an investor or hedge fund of funds interested investing in hedge funds with similar strategies.




For instance, many weak funds are closed and merged into other funds to hide poor performance, i.e. GLG Partners (GLG) being bought by MAN, or Amaranth closing its doors for good, can augment a historical view and spin a positive bias on the results of the "Survivors." If you were to exclude GLG and Amaranth (granted, they were dissimilar strategies) in your measure of return performance in a given basket of hedge funds starting by including only those funds existing as of today in a five-year look back, you would be susceptible to creating a positive skew in your performance return numbers. More often than not, even sophisticated investors seeking the best performing hedge funds or mutual funds will inadvertently be relying on fund or peer performance data that is positively skewed mainly because it doesn't include the return performance of weaker or dead funds.



When hedge funds and mutual funds develop marketing materials for their funds they will often include a benchmark (S&P 500, MSCI Hedge Fund) and their return performance as compared to their peers (funds with a similar strategy). They will often utilize a universe of funds that exclude dead or merged funds, as this puts their returns in a better light. This can result in a discrepancy of up to 1.6% of additional return performance (Alpha).



Essentially, you will have a fund that has an 11% return with the bias, instead of a 9.4% return as calculated without the bias. When you are discussing amounts greater than $1MM this 1.6% is substantial. Since this bias can occur in many situations it is not inconceivable that this can also occur in indices, etf's or any defined basket of funds that trades or that can be invested in. It is also likely that positive survivorship bias has pushed indices like the DOW 30, S&P 500, NASDAQ 100 and Russell 1000 to an un-natural positive skew over time.



Survivability bias in effect plays into a lot of how we perceive the world and it can make a very real impact, positive or negative. Let's look at a couple of different examples.



Bullet holes: A brain teaser - During World War II the English sent daily bombing raids into Germany. Many planes never returned; those that did were often riddled with bullet holes from anti-air machine guns and German fighters. Wanting to improve the odds of getting a crew home alive, English engineers studied the locations of the bullet holes. Where the planes were hit most, they reasoned, is where they should attach heavy armor plating. Sure enough, a pattern emerged: Bullets clustered on the wings, tail, and rear gunner's station. Few bullets were found in the main cockpit or fuel tanks. The logical conclusion is that they should add armor plating to the spots that get hit most often by bullets. But that's wrong. Planes with bullets in the cockpit or fuel tanks didn't make it home; the bullet holes in returning planes were "found" in places that were by definition relatively benign. The real data is in the planes that were shot down, not the ones that survived.



This is a literal example of "survivor bias" — drawing conclusions only from data that is available or convenient and thus systematically biasing your results. Another great example of survivorship bias can also be found in business advice books. Here are some specific examples of survivor bias in business advice:



So far I've ("a smart bear") been asking rhetorically whether survivor bias might be severely skewing business advice. Steven Levitt (of Freakonomics fame) investigated this question directly.



He (Mr. Levitt) was reading Good to Great by Jim Collins, a book that analyzed eleven companies that were mediocre, but then transformed themselves into stock market sensations. A conclusion was that the common trait was a "culture of discipline." This book has sold many millions of copies, so it's a good example of popular writing on business advice. One of the eleven "great" companies was Fannie Mae (FNM), and Steven Levitt was reading this book just as Fannie was collapsing in financial disaster. Hmm, he thought, I wonder how those other "great" companies are doing. Turns out, had you invested in those eleven companies in 2001 (when the book came out), your portfolio would have underperformed the S&P 500! (Fannie Mae wasn't even the only case of total disaster — also extolled was the now-bankrupt Circuit City.) Why didn't these companies continue to succeed?



It turns out Jim started by combing through 1435 companies looking for good candidates for the book, and picked eleven. With such a large sample size he was bound to find companies that fit his criteria, however, that didn't mean that they were great due to his hypothesis. On top of that, Jim doesn't bother asking whether any of the 1424 other companies also displayed a "culture of discipline." Maybe that's something that many public companies have regardless of performance. Is this book an aberration? Nope, Steven investigated another business book from the 1980s — In Search of Excellence — and found the same effect.



Given the previously mentioned scenarios for survivability bias we can extend this to the process of selecting and or deselecting stocks that are listed in the major indices, e.g. DOW 30, S&P 500 and the Russell 1000. Specifically, in the process of rebalancing the indices it is the tendency for failed companies to be excluded from indices because they 1. No longer exist, 2. Their market capitalization has fallen or 3. Their industry is in decline (which likely caused the first two reasons); this is considered Type 1, survivor bias. Inherent in this type of bias is the error you make in just counting the survivors.



Another type of survivability bias, is associated with companies which are successful enough to be included, but because they have not met the criteria for inclusion until recently, their five-year look backs tend to include uncharacteristically high rates of return.



This is described as, "the error of inclusion prior to qualification" or Type 2 survivor bias. This can introduce abnormally high return data if you were to include a company which today was added to the index vs. a company than has been "qualified" and in the index for some time. I imagine ETF's as a group have a propensity for huge performance survivorship bias, but this is just a hunch, not something I am interested in determining, but you might.



Does this mean that indices like the S&P 500, The DOW 30 and the Russell 1000 are inherently flawed?



Frankly I don't know and it is difficult to determine. I am not advocating that the indices are flawed… well, OK they are flawed, but it's more a shortcoming than a handicap. Moreover the issue becomes how the underlying components of these indexes are viewed by people whose job it is to deconstruct the indices for a living. Think about this, a company gets dropped from an index. While a large amount of care is taken that the weighting of the indices isn't impacted negatively, a smaller amount of care is taken that a stock might perform too positively at the point of inclusion, but what of the next few years? With inclusion of the new next generation up and comer company, it is likely that it has been viewed as a leading contemporary of the future economy.



This suggests in essence an inherent upward bias in the indices. It's like changing out tired horses on the pony express for fresh legs. In December 2001, Enron was replaced in the S&P 500 with NVIDIA (NVDA which brought the S&P to include approximately 77 NASDAQ weighted stocks. NVIDIA a 21st century stock replacing a 20th Century also ran, shenanigans notwithstanding. As an offset to the previous example TYCO was also replaced, by Northeast Utilities (NU). So while there is a bias in the indices, it's not something to be running from. The propensity of the index though given the selection and de-selection process suggests that it is positively biased.



What are the possible ways that survivorship biases affect the indices?



Money managers, fund managers, investors and even Traders struggle with this issue of survivability bias because it can cause a real discrepancy between a thoroughly back tested trading model and the real life market. In mutual funds many well regarded fund managers believe that survivorship bias can also overstate a mutual fund's performance returns by more than 1.6%. A trader struggles with it when the universe of stocks they selected by measures of liquidity and market capitalization changes over time. This assumes that their universe stays static and the indices of course do not. The problem with indices relative to a static universe of stocks a trader is likely to select for their portfolio is outlined here in a white paper by Tick Data:



Universes where membership is based upon capitalization, such as the Russell and S&P indices, reward (include) companies whose stock prices have been outperforming, i.e. rising in relative ranking based on capitalization, and punish (remove) companies whose stock prices have fallen such that their market capitalization no longer qualifies for inclusion in the index.



For example, the 1050th company in market cap experiences relative outperformance versus existing members of the index and its market cap increases in rank to 990th. That stock then becomes a member of the index on the next index rebalancing date. In the meantime, an underperforming company that was a member of the index is crowded out as its market cap now falls below the 1000th largest. The outperforming stock is in and the underperforming stock is out. A trader that defines his/her universe on the day following such a theoretical event will test his/her trading strategy only on the outperforming company and will never see the impact of the underperforming stock on the strategy's results. This is survivorship bias.



However, it gets worse. Real-time practice begins to disconnect from simulation almost immediately. The next stock that rises up the ranks of capitalization to merit inclusion in the index will not be added to the universe. Again, I am assuming the universe, once defined, remains static. The underperforming company that was just crowded out of the index is not removed from the universe. As a result, in real time the trader is not trading the outperforming company, is trading the underperforming company, and both are in direct opposition to what was done in simulation.



Moreover, how can survivorship bias impact index performance?



Well consider this scenario which Tick Data provides in their white paper, which I borrow heavily from to make my point. Enron, Worldcom Global Crossing, and endless dot com blowups maintained substantial influence in the Russell 1000 during Tick Data five year test period, 1998 - 12/31/2003. However by virtue of defining the universe (RUS1000) as of 12/31/2003, these companies, and their negative downside performance had been excluded. As time and distance from these points of failure increased so did the positive skew in the Index data from which many traders made their assertions and recommendations for investment decisions.



This is inherently problematic on two levels. On one level it creates a false level of optimism when looking at the Russell 1000 Index as the companies included in the index on or by 2003 excludes a significant number of major deadbeats, and in the same vein the companies that were replacements to the dead beats most likely exhibited extraordinary growth in a short time period, Type 2 bias e.g. Carmax which was added to the index in December 2002 and since they had a relatively short existence their 5 year historical analysis include returns of 477% in 2001 and 66% in 2000 this gets added to the mix and causes people deconstructing the indices to their basic components to drastically overstate an indexes relative performance.



This further compounds the optimism as you now have a company included in the data and the five year look back feeds the current optimism about the future value of the index. This is why you can have some people convinced that stocks are undervalued and other(s) are convinced stocks are way overvalued. Leaving investors thoroughly confused and scratching their heads wondering whether to stay or go.



The second level is a bit more sinister as, when the "deconstructionists" forgo inclusion of the dead beats in their five-year look backs, they gloss over the amount of risk you take on, ignoring the very real possibility that a future bunch of drop outs like an Enron, Global Crossing etc. etc. can be modeled in your risk profile or their risk analysis. The end result is that it can't, and this creates a problem in modeling and assessing future risk appropriately, because you have sheltered your model from Enron/Lehman (LEHMQ.PK)/Bear risk. This is over simplified, but can provide a good context with which to put the 2003-2007 rally into context, led by Apple (AAPL), Google (GOOG), eBay (EBAY) and a stalwart of other 21st century companies. All of a sudden stocks got really undervalued because the dead beats were gone and new thoroughbreds were added. It's akin to having a market that resembles a narcissists' selective historical view of their own performance attributes.



So what does this mean right here and now?



Well much like the survivorship bias was likely skewed positively from 2003-2007, we have ascribed that notion to the 2009 rally, especially since December 2009 – March 2010 many bad performances fell off the horizon. What this means is that the "deconstructionists" and their chief prognosticators are likely to start getting bullish when the Bear Stearns, Lehman's etc. etc. are just specks in the rearview mirror, and the inclusion of a new batch of upstarts creates an open road off into the horizon. However, we need to learn more about the planes that were shot down, before we can move forward otherwise we will unnecessarily risk very possible repeat of 2008-9. Be a survivor.

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