Nadal and FedererThe truly knowledgeable tennis fan who was fortunate to watch the Nadal-Federer match last week in Madrid should walk away from that match knowing who will win Roland Garros this year. It will not be Nadal. Market enthusiasts should take comfort in the Nadal-Federer market correlation which was invented by this writer.

Federer did not play that match with the intent on winning. He was using it as a set-up for the high probability that he and Nadal would play 3 Sundays later for the title in Paris. Federer easily could have won that match after blowing the first set and dumping the tiebreaker. I was at first aghast at Federer’s careless play, but as I continued to watch the match I realized that he was using the match as an experiment first, outcome second.

Federer was able to establish patterns of play that I had never seen out of him in all previous matches with Nadal. He has planted seeds of confidence in his mind, and seeds of concern in Nadal.

Sure enough, the US futures sank upon the open that Sunday evening, and the market dumped all of last week. It is hard to know what might transpire over the next 10 mkt sessions leading up to the final in 13 days, but I assure you that in the event there is a Federer-Nadal confrontation, it won’t even be close. Federer in straight sets, perhaps four, and the market will have made the low for a considerable time.



Justine Henin, one of the top five or six most complete tennis players of all time — male or female — decided to retire today while still ranked as the number one female player in the world. Though she has won only seven grand slam titles in her career, I believe her game had no weaknesses whatsoever, thus putting her in elite company with Steffi Graf, Pete Sampras, Martina Navratilova, Chris Evert and Roger Federer. Her retirement comes at a time when she still could have competed at the highest level in grand slams. How many she could have won is an unknown, but at least three or four in my opinion.

She was tired. It was as simple as that. There is much more in life than tennis according to her press conference today.

With respect to the market, I suspect we all will ultimately face the day when we decide to stop competing, and most of us will do it at different times and for different reasons - burnouts, setbacks, age, success, or death. As for me, I have quit the trade a few times for a few of these reasons, and also was almost out of the game for the last of these. But, I continue to trade on.

Henin chose the high road, one marked with tremendous success. I hope my end, and all of yours, will be similar.

Vince Fulco adds:

Speaking of "When to Quit," picked up Professor Randy Pausch's book "The Last Lecture" while on vacation last week. He was a computer science professor at Carnegie Mellon who surprised his class by giving a lecture on realizing one's childhood dreams. All those in attendance realized it would be his last public presentation due to his advancing and inoperable pancreatic cancer at age 47. While written in a breezy "Tuesdays with Morrie" style, his heart-wrenching and impactful life stories with a moral attached to each are poignant reminders of our finite time on this planet and the need to strip away the superfluous and focus acutely on one's chosen task at hand. Of course, while not forgetting the importance of cultivating strong families, relationships with work colleagues and friends.

The lecture is available online.

A great summer read written by a genuine straight arrow.

Nigel Davies responds:

There may be a difference between quitting and moving on. Quitting, at least in my book, means a total discontinuation of a particular activity with a huge loss on the time/money invested. 'Moving on' is different, you keep the accumulated 'wealth' (skills, lessons, experience, money) and subtly redirect it within the context of your life.

Perhaps we should always try to move on rather than quit, just change the balance rather than go in with major surgery. I think this applies to all walks of life; professions, sports, games and relationships. And it may be better for trading too, readjusting positions within shades of grey rather than opting for black or white.

This line of reasoning also makes me wonder if we should always look for things in life that will have ongoing value rather than face the expense of multiple 'quits'. This may be a useful guide in everything we do, and I only wish I'd thought of it earlier.



TallyOne thing is for certain regarding the collapse of BSC: restricted stock and options compensation, which likely went from an aggregate net worth of a several hundreds of millions of dollars to the ripe and round figure of zero. The decay of this wealth is what no one is talking about and what will have substantial ramifications over the medium-longer term.
On a much more important note: we have arrived at the point of the free market lifecycle where profiteering might still remain private, yet losses are now becoming socialized. Also scary are the recent changes made by our Treasury regarding the rules and limits of credit/mortgage market dealing by participants. "You can only profit so much." Or, "this is no longer a free market."

Jim Sogi replies:

Decay of wealth? In fact over the past five years net wealth has gone up approx 48%. This despite the drop in the real estate market which constitutes a much smaller share of net wealth than equities. Also consider that the bulk of spending and wealth is concentrated in the top quintiles where income and wealth have gone up at an even faster pace. So the press and meme about decay of wealth is a red herring designed to part you with your money and transfer it to the top.



FedererOne must experiment on the chess board to unlock its mysteries.

Playing in web-based public forums, it seems as though traditional, run-of-the-mill openings are engrained as routine for almost every player one faces. Of course, the lower rated players (1000s-1200s) often put themselves into precarious positions early in the game, but when watching the higher rated combatants, they generally open the game with standard patterns of play that usually result in traditional exchanges. Black knight for white bishop, queen for queen, and so forth.

Adapting my knowledge of the tennis court, I have recently chosen to combat the higher rated foes I face with uncustomary openings, such as the f-pawn, while playing black. I view such a move as being very similar to a floating, chippy slice backhand crosscourt landing near the service line.

I do not compare myself to the brilliance of Roger Federer on the tennis court, but he uses the tactic often, as do I on the chess board. It generally neutralizes the point at play immediately. Take a look at his use of this shot: Even the strongest of his foes, Djokovic or Nadal, have trouble immeditely taking advantage of the point. They have to move up in the court, either rolling their reply back crosscourt, or up the line. But they have left their right side of the court open to his backhand, or his fierce forehand reply crosscourt into the corner. As they have moved up in their left side of the court, they have to scramble backwards as they have left the deep right portion of their court exposed. Typical Federer response: a winner on his first or following shot.

I am, generally speaking, a contrarian trader. Sure, quiet openings on the chess board can be compared to quiet openings in the market, and vice versa. Experimenting in the market with real money can become a costly exercise, just as experimenting on the chess board can lead to numerous losses. But the point here is that one must never rule out the value of doing something that very few are doing.



DuncanIn addition to the birthday of my better half tomorrow, another important date comes next week. No, not PPI or GDP. Rather, Feb 27th will mark the one year anniversary of Vol. I remember it well. We met after four down days and a nice down open, I throwing all caution to the wind. Then came the worst day since 2001, down some 58 S&P — and still no worse day since then, despite some perilous moves. Vol has never really looked back since then. The trigger that day was not subprime, credit, bank losses, the Fed, or housing. Merely a big down open in China after some huge gains. And what a year it has been for Vol. After nearly a 60% increase on that day alone, it went on to triple over the summer and fall, and now settle around double where it was a year ago. I would like to raise a toast to our good friend or fierce enemy, Vol. What a year it has been. Can't wait to see where we will be a year from now!

Wil Kenney remarks:

I for one know my brow sweats a little more as Vol increases, and from time to time that can be frightening.

James Bitumen replies:

There is nothing wrong with Vol, nor is it to be feared. It is what it is. There is nothing wrong with a rising market, nor is there anything wrong with a declining market. Change outside of a rather longstanding pattern is only that, change.

The market is no different today than what it was a year or two ago. It's simply removing levels of leverage one level at a time — we are at the exactly same spot. There are more levels to be removed. The key to trading the market is identifying where and when these levels will be removed from the system.

We are in the process of a credit bubble unwind. An institution owns an asset — no debt. Global rates at historic lows following the late-90s equity bubble deflation, 9/11, recession. They borrow against the asset at very low rates (just like the housing nightmare we are seeing not just in the US, but UK, Spain, etc.), and toss the free money into various asset classes all over the place — emerging market equities, Google, hedgefunds. What is considered equity to the asset manager is simply borrowed money. Borrowed money on top of borrowed money. The problem: economic growth never before has been so tied to asset price growth (housing primarily — ~30% of US workforce is tied to real estate). This is why the Fed has been so fiercely content to hit the ease button: They need to pump in liquidity in order to support asset prices, which they hope will protect bank balance sheets that have ballooned.



GatorToday is one of those tremendous days in the market that reminds me of the Battle of Ramree Island that took place in Burma between January and February of 1945.

I have not seen a first half of month decline in the market this severe for many years. Vic and Laurel have frequently discussed symmetry and V-shaped recoveries, and I'd add that I have never seen an earnings season beginning with a decline that has not been met with a sharp recovery.

The above picture shows what the shorts, like the fighters at Ramree Island, are going to face very soon.

Caroline Valetkevitch notices:

NEW YORK (January 23, 2007. Reuters) - The Dow and the S&P 500 rose late on Wednesday, rebounding from earlier losses of more than 2 percent each, as investors bought back shares they had bet against and the banking sector gained. "It looks like it's short-covering and also all financials are really, really running right now," said Todd Clark, managing director of stock trading at Nollenberger Capital Partners in San Francisco.



With the market up a few percent this year, and daily ranges often running 2% or more, it becomes more important to have some sense, some base of operations regarding what these ranges imply. To start with, one would make the obvious point that the ranges are designed by the invisible evil hand, the bad market mistress et al. to relieve you of good positions. Since many of the market hands are addicts however, the mistress has had to go deeper and deeper into the bag of tricks to get you out. She's given us 23 days of up 40 or more since 1996 , none since October 15 2002, and then 2 this year. On the other side, she's given us 19 down 40 big points or more since 1996, none from 9 17 2001 through year end 2007. And then given us 5 in 2007 to date. At least we're making it harder for her to do her work. And when she does relieve you, it hurts.

Other base of operations stuff to follow such as Nasdaq up very big while S&P up just a little. The fantastic moves from 330 to close just when you're complacent. The big range early in the day just to be recapitulated on a Lobagola basis the rest of the day. And most of all, the look like the end of the world on a Thursday, with the leak of an announcement saving the day before the actual move on Friday. Then of course the fantastic run of big down opens totaling 30 points that follows the one big up 30 the preceding day et al. And of course the fake moves before the big announcements often tripping the stops. Oh, the stops. How the market seems to know exactly where they are, even when the screen is opaque supposedly, and worse yet, when only you know the stop. And the beautiful moves in Vix that always seem to precede the next days moves on a reverse basis. Oh what a beautiful and complex thing it has become. Things like that have to be put in the manuscript of all good market players. I 'll try to quantify some of the meals for a lifetime in similar things provided they are not overly meal for a dayish.

John Floyd adds:

Adding to the complexity of this: the shifting correlations between asset classes, and the economies that are, in part, the drivers of these assets. For an example today (Dec 21) one can look at the moves in gold, the G10 FX carry index (Bloomberg ticker for one is fxcarrsp index) or some of its components by default (yen, nzd, and aud), bond yields, oil, and Emerging Market currencies to name a few.

From an economic standpoint one only has to look at many of the components of growth and see the recent correlations and drivers. Whether it be the influences of housing on growth on the U.S. and U.K. or the export oriented growth of Germany and Japan that now is fading and lacks strong domestic demand to pick up the slack. One can look at what is priced in to interest rate markets in terms of central bank expectations over the next year and see that roughly 80-140 bps of easing is priced for the US, Canada, and UK, not much change for Switz, Europe, and NZ, and small tightening for Japan, Aust, Sweden, and Norway.

Investigating how to best capture the leads and lags here on both a day to day and more medium term basis seems like a potentially profitable exercise. The day to day volatility has increased and the short term ranges often exceed multi period point to point moves by large amounts. Look at the Sept 09 Eurodollar as an example where it has circulated roughly between 96.40 and 96.00 about 5 times in the past 11 days as an example. 

James Bitumen adds:

The big boys who are up on the year are not participating in these markets, unless there is free money up on the table — that they surely take.

Flows are being dictated by two types of market participants:

1. The smaller guys who typically trade all the time and are regular market participants. Through leverage, they still possess a considerable amount of firepower.

2. Managers who run sizable books who are clinging on to flat, or only slightly positive, returns on the year. Even moves of 50-60bps might determine their annualized outcome just a week away. They do not want to play, but they are forced to play in order to achieve a neutral outcome in 2007 for their clients, or maybe catch a year end move that could provide some grotesque form of consolation.



New record number for sale on eBay, now 244. The significance of the Ferrari Indicator this time around is in the distribution, as several are of the more recent models.



Several months ago, Victor wrote a beautiful post on The Salesman. "When you call a man a salesman, you flatter him," I think a quote from the piece read. It stuck in my mind, as did, "Nothing in the world happens without a sale being made." It was a piece that would flatter anyone associated with the art of sales. I took great comfort in it at the time, as I had recently returned to a sellside platform on Wall Street, mainly because I felt that the opportunities on the sellside, and the less rigid structure, offered a much greater reward in comparison to the rewards offered to a manager of market risk who is forced to operate under buyside confines best defined as ignorant, inept, and hypocritical.

But sales, as an art, is dying, at least in the industry we refer to as Wall Street. Yes, there are "research sales" people who still get all excited when a firm analyst comes out with a new recommendation. They make the call into the portfolio manager's office or analyst. "John, how are you? So nice to take my call. Listen, I have some really important things to discuss, but we will get to the dress your date was wearing the other night at the gala in a second… No, John, this isn't Mike from Buckingham. No, this isn't Mike from Weisel either. This is Mike, the guy with the Salsa moves from Pru… Now you got it, listen, about Ann Taylor, we love it today." Everyone is saying the same thing with the same routine. Institutional sales people still get goose bumps when calling a customer to schedule a meeting with the CEO of that new growth stock, but at the end of the day, they are just appointment makers. And the hundreds of firms making hundreds of appointments is disastrous.

What is even more scary is what happened earlier in my day. I had a conversation with my friend Tom, who recently made the switch from the still-in-existence telemarketing department of his firm to the institutional sales side. He only knows telemarketing of the retail kind, and he is not going to change his approach whatsoever. He has no research, just his own ideas. I am not so inclined to believe that such an approach is going to bring Tom a windfall in commissions from all of these hot hedge funds, but all sales efforts need enthusiasm and encouragement if they are ever going to get anywhere.

Here's a transcript of our Instant Message dialogue. I love Tom like a brother and I had to play along with him so that he would be excited and not lose enthusiasm to go out and write some tickets.

Tom: I am telling you, it isn't so often I get an idea like this one. You ready for it?
Me:  Go
Tom: NOC. You love it already, don't you?
Me:  I don't really know anything about it to be honest. What do you have?
Tom: Think of the geopolitical mess going on around the world. It is a nightmare
     to say the least. First, 9/11 -- the US and world starts to militarize. Then
     Iraq, Korea, you with me?
Me:  Yeah, I guess so.
Tom: Militarization is only going to continue -- everyone is going to continue to
     build arsenal and these NOC guys can't go wrong.
Me:  I suppose that could be the case, but I am on the other side. A Democratic
     landslide in the elections is a risk. And, that combined with a world that
     will politically and culturally start gravitating back to the left is going
     to be major inflection point in the business cycles of anything defense.
     Buy the cheap long-dated puts -- your risk is clearly defined.
Tom: Great thought, but you have to admit, defense is not a partisan issue, and
     you can't tell me America, as a nation, wants to be less safe.
Me:  So missile buying continues or escalates. Good luck with that. Anything else?
Tom: It is, no pun intended, defensive in a lousy market. Ha Ha Ha. Isn't that great?
     Gotta love the chart, decent forecast. This is a fast trade with a tight stop.
     Why don't you give me an order to buy 50k and let me trade it for you?
Me:  No thanks, but good luck with it. Appreciate it. But keep me up. I am too
     wrapped up taking all of the time off from my screens for these meetings.
Tom: Time off is time lost from making money. In fact, you are going to lose money
     by not having it on. Do want to lose money?

I am not going draw any brilliant conclusions here, but these examples are evidence that the salesmanship of today cannot beanything like of what is used to be, and this might be presenting all sorts of problems for Wall Street. This in no way is a prognostication of an unfortunate market direction, but it is representative of the times.


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