WhereDoesAllMyMoneyGo.com » Investing

JP Morgan’s $2 billion blunder re-ignites debate on regulation

Tusk Trader — Thu, 17 May 2012 03:59:16 +0000

This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

JP Morgan announced a massive trading loss last week and there are still many ripples being felt this week surrounding that announcement.

Since the start of the financial crisis, the head of JP Morgan, Jamie Dimon has been strutting around Wall Street and the other capital market areas with a swagger that appeared to grow by the quarter. Many hope this loss will bring him back down to earth a bit. He had engaged in a screaming match with the Head of the Bank of Canada, Mark Carney, a little while ago, and that appeared to not make a dent. It took a 2 billion dollar loss to do it, but he does seem slightly more humble.

What I think this massive loss shows is that the government and regulators can do little to prevent the big losses at financial institutions. This is because they can do little to prevent bank leaders from being stupid. You can’t legislate against being gigantically wrong. This loss did not even happen on a trading floor. In happened in a risk department. Rules like the Volcker Rule would do nothing to mitigate risk, these rules just move the risk elsewhere.

Trades like this happen all the time and never make any waves because they are either winning trades, or they are losses that are not big enough to make waves outside of the group of people in the bonus pool. A good rule or good regulation is when the act of the trade or investment is wrong. The profit or loss should not be a factor.

Regulators need to focus on making sure that the leverage a firm uses (whether in trading departments, commercial lending or investment areas) is never out of line for the size of the firm or the capital on hand. Regulators need to limit leverage, draw a line in the sand at the limit, and then let firms do what they will with the leverage allowed.

I believe firmly in capital market regulation, but not the kind the US seems hell bent on cooking up. These politicians seem to think they can stay one step ahead of the market and craft rules that will guide the market where they think it should go. They are wrong and they are creating rules the will just create loopholes somewhere else. I think it will play out in a similar way that interest on a mortgage in the US became tax deductible. The genius politicians thought it would increase home ownership. It seemed like a great idea at the time (and very politically popular). It took 20 years to discover it did not do as intended. All it did was discourage homeowners from paying off their mortgages.

When looking at regulations, one of the biggest red flags to look at is the length of the new proposed legislation. The longer, the more useless. The Frank Dodd act is over 800 pages long. To compare, the Federal Reserve Act (that created the Federal Reserve in the US) is only 31 pages long. It does not take 800 pages to say, “Don’t leverage yourself up to your eye balls” and “ If you can’t take the loss, don’t make the trade”

The next financial crisis cannot be prevented, but the losses can be mitigated. Regulators need to focus on systemic problems, not market ones. When rule makers make rules believing they are one step ahead, all it takes is a crisis to show them that they are 3 steps behind.

Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader

Eurozone elections. Fandiddlytastic.

Tusk Trader — Thu, 10 May 2012 12:30:25 +0000

This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

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.

Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader

Amateur technical analysis mistake

Tusk Trader — Thu, 03 May 2012 12:00:46 +0000

This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

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.

Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader

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

Tusk Trader — Thu, 26 Apr 2012 13:45:09 +0000

This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader

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.

Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader