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Monday, August 26, 2019

Trading on Customer Ignorance

In my 20 years as a broker and 13 as a fund manager I never traded on client ignorance. Its off limits in my view. As a matter of fact, I see a broker's role as one who educates clients, especially with an unfamiliar or complex strategy, and THEN THEY can trade it. Either way we don't take advantage of their lack of knowledge.

Last Friday's Wall Street Journal had a misleading story on a major broker with client losses over a "low risk" "income" strategy. These clients traded iron condors. Iron condors, in my view, are not extremely bad or extremely good. When markets are flat, you can sell and keep options premiums-an income strategy when markets don't move much. IC's are sometimes called (like all option selling strategies) "picking up pennies in front of a steam roller". Yes, when markets MOVE, option sellers get rolled over. 




But these clients didn't trade options at all. They actually invested in a fund created by the broker. This fund traded iron condors and was advertised as low risk income and took in billions of assets. Yep, interest rates are low and people want income. This fund charged huge 1.75% fees. Whatever else it did, it separated clients from their money.  

To put on an iron condor, you don't need a fund. You don't need to pay management fees. You need an options trading account AND you need to KNOW how to do it. It isn't hard but yes, you do need some education. Which takes us back to trading on ignorance. The best brokers focus on education, other brokers, not so much.

Because these people had no idea what the broker was doing and listened only to the sales pitch (income, low risk, neutral strategy, etc.) they trusted billions NEEDLESSLY to this fund. Needless for everyone except the broker. 

Its hard for a major pub like the WSJ to write a critical story about a major advertiser like a major broker so the focus of the story is the "complex investment strategy" and not the actions of the broker. In my view, the options markets are NOT to blame for these client losses.

Feel free to post comments.
Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.



Thursday, August 22, 2019

What's Going Down with Interest Rates?

Financial headlines are screaming about the "inverted yield curve". This is what it looks like:


Source: Federal Reserve Economic Data

The chart above shows the 10 year Treasury Note yield minus the 13-week Treasury Bill yield since 1962. All the blue peaks are periods when the 10 year rate was higher than the T-Bill rate. There are a handful of instances when the 10-year fell below the T-Bill including the last fifteen days as of this writing (Can you see it? It's a sliver on the far right bottom of this chart.)



Source: Federal Reserve Economic Data

According to today's data download from the Federal Reserve the "constant maturity Two-Year Treasury Note" has not been above the Ten-Year since 2007. 


Source: Federal Reserve Economic Data

What does this short rate "crossover" of the long rate really mean? In my view, it means nothing. It may coincide with stock market breaks but I don't see that they "cause" or forecast anything. Here are the Treasury rates with the S&P 500:


Source: Federal Reserve Economic Data and Yahoo Finance Data

The 1980 Volcker Crisis, the 2000 dot-com bust, the 2009 financial crisis all coincided with short-term rates rising above the long-term BUT they had NO lasting effect.

It may be that long-term investors have only been lucky for the last 200 years or so that US stock markets have been resilient and able to overcome wars, crises and even buffoons in government. Yes, we may be sorely tested today but the test of time is on the side of long term buyers.

Monday, August 12, 2019

Is Market Risk High?

Headlines are screaming the market has MORE risk than...this part is fuzzy... since the start of the bull market? the election? ever? Faced with the question do you believe your eyes or your theories, prudence may say the eyes have it!

Source: Yahoo Finance SPY historical data.

The above is a colorful and dense picture of the stock market, represented by the tradeable SPDR ETF price, AND its daily true range. True range is the day's high minus the low PLUS any gaps between trading days. This is a literal representation of how much and how fast the market can move over any one day. 

True range as a percentage of price is on blue left axis and the SPY ETF price on the orange right axis. To my eyes, volatility in the last year or so is little different, and maybe lower, than during the course of SPY's trade history. 

There are a number of days where the SPY range exceeded 6%, especially during the great recession, but recently the SPY has barely beat a 4% range!

Source: Yahoo Finance VIX historical data.


The much maligned VIX, a more complex measure of risk, on the long-term chart, above, reflects the same moderated levels of risk compared to past history.  Market risk, as my eyes see it, is little different and maybe lower than it has been for the last 20 years.

Feel free to post comments.
Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.


Friday, August 2, 2019

America's Tariff War on the World

As world trade erodes on rising tariffs and rising threats, commodity prices take their toll. The jury is out on whether raw materials decline is enough to offset final price increases due to tariffs. The toll on world trade, though, is not in question. Markets may finally succumb to the long term duration of the American tariff war on the world.

Vista Commodity Market Lab 20190802 pdf is available here!

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.