Tusk Trader | WhereDoesAllMyMoneyGo.com

Eurozone elections. Fandiddlytastic.

Posted by Tusk Trader on May 10, 2012 | 0 comments

Voters rarely trust politicians. Neither do markets, and for good reason.

Politicians as a whole are not always the most predictable group. They can often be predictable in what they might say, but unpredictable in what gets actually accomplished.

Some answers to complex problems seem obvious to markets and yet not so obvious (or desired) to the political set. Two major elections occurred this past week, one in Greece and one in France. Both countries now have new leaders (Greece has a coalition of sorts) and they have both swung to the left of where they stood a week ago. It is not just the swinging that is causing the markets grief, but it is the uncertainty of the swing. Markets can price in bad news but uncertainty and potential chaos is what creates market turmoil.

France’s new leader, Hollande, says he will halt the austerity momentum in France and “grow” his way out of the problem. The markets heard his comments and have very little faith in his ability to follow through on his plan or any faith his plan will work. Hollande seems proud of how much he disagrees with other European leaders; a very unsettling point for the markets as the European Union attempts to cling to fiscal solvency. Greece has added a great deal of political uncertainty to it’s already heightened problem of running out of money in 5 weeks time. The new Greek leader, Tsipras, says he opposes the strict austerity imposed as a condition of the European handouts. Fairly elected leaders have a right to attempt to make changes, but I have yet to hear about his plan to pay the bills in 5 weeks when the well will run dry. The market is truly sitting at attention, straining in an attempt to figure out what this guy’s plan is.

Saying no to austerity is not a plan. With a fiscal ticking time bomb occurring in that country, saying no to austerity is nothing more than a political bumper sticker.

Politicians create market uncertainty for two reasons. Firstly, market participants spend their time trying to decipher if the politician in question will attempt to do what he or she has promised and secondly, will the politician be able to achieve what he or she has promised? Failure can happen both in the area of lack of intent and in lack of achievement. European leaders big (Lagarde) and small (Tsipras) need to work together to bring certainty back to the markets.

With the antics occurring this week, that seems unlikely.

Amateur technical analysis mistake

Posted by Tusk Trader on May 3, 2012 | 3 comments

Technical analysis is great tool to be aware of when trading or investing your own account. There are, however, right ways and wrong ways to use technical analysis. Here is a wrong way I continue to hear explained to me by the at home investor:

‘Hey, ABC has great support at $5.10. It used to trade around $8 but has been dropping a lot lately. I am looking for a good spot to buy. The chart is telling me there is support at $5.10, so I am putting my bid in there and seeing if I get filled in the next few days or weeks.”

Why is this wrong? Support and resistance points are not barriers that prevent a stock from trading through a price. The stronger the support or resistance point, the more volume or push it might need to get through, but it can still easily trade to the other side of the critical point you have located.

When a stock is getting close to a price you want to execute a trade at, see if the support or resistance actually does what you think it will before jumping in. There is no advantage to getting in at $5.10 when the stock blows through that support like butter and continues to fall down to $4. You should not be saying, ‘I want to be long at the support.” You should be saying, “ If the support holds, I want to get long.”

Some people I explain this concept to respond with, “But then I will have to pay up.” It is true; you could have to pay up from 5 cents to 25 cents (or more depending on the stock). A trader would rather pay up for a winner than get a “great price” on a loser.

Clowns to the left of me (real estate), Jokers to the right (bonds), here I am stuck in the middle with you (equities)

Posted by Tusk Trader on Apr 26, 2012 | 3 comments

Hello Reader, I would like to introduce you to the equity markets. Equity markets, this is Reader.

There has been a lot of chatter from some Canadian financial leaders about the high probability of a cooling housing market. Real estate has been a solid performer for many Canadian investors over the last 20 years, but with it’s outlook cooling, homes are likely to return to being just a roof over our heads and not the pension plan some Canadians have been banking on.

The bond market has had decades of overall favor in the falling interest rate environment. The bond market has not been just a place for investors to hide from a volatile stock market, but a place to thrive over the long term. This bond market success for many will soon be changing as well.

A shift in investing and asset mixes is slowly underway. Rates are rising soon and the housing market is more than due for a pause. I think it is time that investors focus on getting reacquainted with the equity markets. This re-acquaintance process is not about finding the next big stock that will run up in a week or about putting all of your retirement savings in the stock market and praying it only goes up.

It is about actually learning about how the markets function, why they exist and what the moving parts are. The equity markets are not about 50% returns and huge risk. Many people trade their at-home investing account without basic capital market knowledge. Being able to trade should not be confused with a properly managed equity portfolio.

Another pitfall I hear of are investors who fill themselves to the brim with mutual funds for equity exposure because they don’t want to deal with learning more about the stock market. It can be a very costly decision long term and one I consider very risky overall. Being uninformed about an investment is always very risky.

It truly isn’t hard to learn more about the equity markets and learning more does not have anything to do with trading stocks from home. The more you know, the more investing options you will have to choose from and the more educated your decisions will become. Knowledge starts with the basics and that is where the reader seeking knowledge should begin. Whether you have been interested about the equity markets and have just not gotten around to learning more, or if you have avoided the equity markets like the plague out of fear, just start. Start tomorrow.

Or if you need to, start on May 1^st. Finish your taxes first.

Why are companies pleased to announce crappy earnings?

Posted by Tusk Trader on Apr 18, 2012 | 0 comments

I am very pleased to announce my blog for this week.

As earnings continue to be announced this week, I am reminded of a funny small item that makes me laugh during this common quarterly routine. I always have a little chuckle when reading the first paragraph of earnings reports. Every company starts off with the same line, “We at ABC corp, are pleased to announce our 1st quarter results”. It always brings a smile to my face the fact that every company is pleased announce their earnings.

The report can go on to say that the firm is almost bankrupt and has no chance for a future or that pigs will fly before they can meet their debt obligations; it matters not. Every firm is pleased to announce regardless of what they are announcing. Being pleased to announce a wonderful takeover offer makes it appropriate to use ‘pleased to announce’. When the news is grim or negatively revealing, it is still used. The firm could be reporting deep internal struggles that make RIM look like a walk in the park. It never seems to matter as everyone is apparently pleased (except the shareholders they are reporting to). When the earnings are bad, just once I want the report to start off with, “Terribly sorry. We have finished the calculations and we see that we suck. Here is the math behind the fact we suck.”

They can still finish it off with a plan to do better next quarter. I am all for being pleased to announce positive future plans. But when the quarter sucks, start off with something more creative.
Many of these firms should be embarrassed, upset or at least hesitant. Alas, that is never the case, they are always pleased. Maybe some people are just pleased the quarter is over?

Investors took Instagram from $500 million to $1 billion in one week

Posted by Tusk Trader on Apr 11, 2012 | 0 comments

We might have seen the trade of the month this week or even the trade of the year.

The markets have been a buzz these last few days about the 1 billion dollar takeover of Instagram by Facebook. Facebook has paid $1 billion to acquire the high growth photo sharing app. Other than the shear magnitude paid for a company with no revenue, what has really captivated traders is the small group that actually doubled their money in that transaction in a very short time frame. Less than a week before the takeover, Instagram had just closed on their series B financing and that valuation was at $500 million. The investors involved were Sequoia, Thrive Capital, Greylock and Benchmark (as reported by AllThingsD’s Liz Gannes). Within a matter of days, these venture groups turned an investment into a trade most traders would be drooling over and bragging about for years. This group doubled a very large investment in a very short period of time with little risk. Most venture capital firms are about the investment, longer-term strategies, guidance and loads of risk management. The Instagram deal ended up bringing these venture firms loads of cash and some Facebook stock.

Like many traders, these investors could say they knew the offer was coming and that was why they got in when they did. There could even be some truth to that. A popular company with a large bank account does attract much more aggressive takeover bids and can prompt quick moves by potential acquirers. Something tells me however, that they had little idea that the valuation would end up that high or that it would happen so quickly. Either way, good for them, well done and they deserve a pat on the back. It’s a bumpy month in the markets and it’s nice to see someone making money and knowing that the gains will be likely pumped back into more start-ups to foster more growth in the industry

Bay Street fisticuffs over the penny?

Posted by Tusk Trader on Apr 6, 2012 | 2 comments

According to the new Federal Budget, the death of the penny is upon us. The penny has a completely different history and future in the trading world.

It was not that long ago (but before I began my capital markets career) that a new trading system thrust the legendary penny on to a bunch of traders who wanted nothing to do with it. Trading currently happens in pennies and fractions of a penny on some very inexpensive stocks. You can buy ABC at $25.34, right down to the penny. Trading actually used to occur in fractions of a dollar. Back then, when the spread was as close as it could be, it was more than a penny a part. About 6.25 pennies apart actually. Each $1 was divided up in to 16parts and the stocks would trade in 16^th’s. Previous to 1/16^thspreads, trading happened with a minimum of a 1/8th spread. A dollar was divided up into only 8 parts and the spread was 12.5 cents. Trading the spread alone was exceedingly profitable.

This fractional system changed in 1996 when the TSX embraced the penny and went from trading with fractions to trading with decimals. This change introduced the now common practice of being able to “penny” the guy in front of you in the trading book. That is when you bid a penny higher or offer a penny lower than the best bid or offer in the book. To “penny’ is also referred to as ‘chiseling’. When there was an actual trading floor and this was done in person, it was rarely done twice. This move could prompt anything from a dirty look and dirty language to an elbow or even a punch.

Since trading occurs in firm offices all on computers now, only rarely does a trader in the same room, working for the same firm penny an actual colleague (yes, there are traders that are that rude/stupid), and thanks to HR, even rarer does this action result in the old school trading floor threat or action of physical violence.

Many older traders still hate the decimal system and trading in pennies. Most traders hate being ‘pennied’ and that type of behavior, but even with demise of the actual penny, I do not see the penny leaving the financial community. It is here to stay. Sorry old boys.

Not all Market News Moves Markets

Posted by Tusk Trader on Mar 29, 2012 | 2 comments

[Editor's note: Yesterday's post on visualizing diversification was removed and will instead appear in The Globe & Mail on Friday. I'll link to it when it has been published there.]

This week’s business news websites and papers are jam-packed in Ontario as both the provincial and the federal budgets are being presented to the public. This type of business news is very important. It tells businesses that reside in (or conduct business in) the area what changes might be made to any tax structure or about the plans for any stimulative events the government might be initiating. The news is critical to businesses for planning efforts and long term forecasting, but it is not always market moving. For news to be market moving, it must change a set of assumptions in a distinctive way that market participants currently have for the business and economic environment. This does not mean that budgets do not move markets. They have many times in the past and will continue to sometimes have that affect. However, just because a budget is released, does not mean you will see a market move from it or gain a trading idea.

The same is true for sector specific news and stock specific news. Just because there is news on a stock does not mean it will move the stock. Even if the stock does start to react to a piece of news, it does not always translate into a solid trading idea or good trading environment that you can make money from. A lot of at home investors I speak to mistake a piece of news on a stock for a trading idea. It is often not the case. It doesn’t mean the news is not important, it just means that it does not create a tradable idea. Keeping on top of a lot of general business news is very important as is staying current on the news of any stocks that you trade. Many good trading opportunities come from having a solid understanding of the issues a company is facing and being in the position to react quickly when actual market moving news is reported. A tradable opportunity arises when news comes out that changes (or opens the possibility of changing) the trajectory of the company. The news has to either promote buying or selling by shareholders to create a trading opportunity from that news piece.

Simply hearing a bad news story about a company should not trigger your sell finger to spring to action. You don’t want to be the only one selling. The negative news story must change the outlook or the current position of the firm.

This week, definitely review the budgets tabled, stay on top of as much sector and stock specific news as is relevant to you, just don’t do it with your hand constantly on the keyboard. When it comes to the markets, the more you know, the better. Just do not think you are seeing trading or market moving news, when you are really just seeing really important news.