Why forex traders tend to lose money...

Interest rates were fixed for a cup of coffee — and a $2.5 billion fine
By Steve Goldstein
Published: Apr 23, 2015

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Bloomberg

An illuminated sign for Deutsche Bank

The cost of fixing interest rates was a cup of coffee — and $2.5 billion.

That is one way to look at the record settlement paid by Deutsche Bank for fixing interest rates, to a combination of federal, state and British authorities. Combined with the roughly $1 billion it had already paid to European Union authorities, and Deutsche Bank has paid $3.5 billion for fixing rates.

Deutsche Bank DB, +0.59% , like other firms including UBS UBS, +2.07% , CitigroupC, +0.23% and J.P. Morgan Chase JPM, -0.22% , was fined over allegations it manipulated a key daily interest rate, called the London interbank offered rate, to benefit traders either internally or at other banks or fund managers.

According to the order from the New York State Department of Financial Services, the quid pro quo for manipulating rates wasn’t particularly steep. A message from Deutsche’s head of the London money market derivatives desk, from 2006, read: “Push for 60… or even 58 if u can… Coffee on me.”

Most of the time, the messages showed they were just favors, with the comments littered with references to “mate,” “dude,” “pal,” and uniquely, “old bean.”

There was a clear awareness of what was going on. Here’s what a vice president wrote in a message about the Tokyo interbank offered rate, or Tibor.

“It is not because all the tibors setters are corrupt/manipulators that deutsche bank has to be aswell… It is not because the japanese banks are manipulating the tibor fixing that DB has to do it as well… Tibor is a corrupt fixing and DB is part of it!”
Deutsche Bank says it has disciplined or dismissed the individuals involved and “significantly” strengthened its controls. The bank says it now has 200 employees dedicated to electronic discovery so that it can better collect and produce documents and audio.

Ahead of the Curve with Lance Gaitan

What Will the Fed Do?

Everyone that participates in the markets has an opinion about the Fed. An opinion about how their decision makers are doing, if it should be audited, or even whether the Fed itself should exist.

Of course, like Rodney said above, these opinions don’t really matter. What matters is what policy decisions the Fed will make, because it’s their decisions that drive interest rates, and rates affect stock and bond prices.

Stocks have performed exceptionally well since the financial crisis in 2009 because of Fed policy. We continue to see record highs in stocks as central banks around the world use similar tactics as our own Federal Reserve Bank.

Bond buying or quantitative easing (QE) ended in the U.S. last October and is now being used by Europe’s central bank. China’s central bank is intervening as their economy slows. And Japan’s central bank has been buying their own bonds for a couple decades.

But if market participants take central banks out of the equation, there seems to be little to cheer about.

At Dent Research, our editors have regular meetings to discuss market opinion, updated forecasts, and what risks we’re facing. Needless to say, no one in our most recent meeting had a cheery outlook for the economy, corporate earnings, or the market. Central banks are clearly the only thing driving this “bull” market.

That of course will be factored into their decision to raise rates this year. Will the Fed decide that economic data is too weak to raise rates? Will they slightly change the language in their policy statement?

Janet Yellen stated after the last meeting that rates may rise as soon as the June meeting. She also hedged her statement by saying that if economic data worsened, the hike could be delayed.

So far, market participants don’t believe a rate hike will happen anytime soon. Mixed economic data — including low wage growth, slowing GDP growth, and low inflation — will make it difficult for the Fed to justify a rate hike.

Will that stop them? Who knows. Maybe when they announce their policy decision tomorrow after today’s meeting they’ll give us some insight into the future.
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Lance Gaitan
Editor, Dent Digest Trader

The Fed Needs Your Help
By Rodney Johnson, Senior Editor, Economy & Markets

The Fed needs your help. This stately body of academics has worked for years to rejuvenate the U.S. economy, but to no avail.

You can’t say they’ve been lazy in their efforts. When their first quantitative easing (QE) program failed to create a bounce back in housing, they started up another one, QE2. When that failed they brought in QELite, followed by Operation Twist.

After all of those failures, the Fed kicked the numbering system to the curb and introduced QE-Eternity, which allowed them to print money and buy bonds for as long as they wanted. Still, the housing market, that engine of middle class employment, has remained in a funk.

But have no fear! Across the land we can hear what Ronald Reagan considered the scariest words in the English language: “I’m from the government, and I’m here to help!”

In late 2013, Congress directed the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, to increase the fees charged on mortgages. The idea was to better safeguard taxpayer dollars and to encourage private lending.

The agency’s new director, Melvin Watt, ignored this and left most rates the same. He actually lowered rates for the riskiest borrowers!

In the meantime, Fannie Mae and Freddie Mac have significantly lowered the size of the down payment required to qualify for a mortgage. It’s not the traditional 20%, or even 10%, but a mere 3%.

With real estate brokerage fees running at 6%, homebuyers are immediately underwater when they buy a home with 3% down. If they turned around and sold it for the same price, commissions would eat up twice their down payment! Brilliant! Isn’t this the sort of thing that got us into trouble last time?

But it doesn’t stop there. The Fed received another assist, this time from the private sector.

Credit rating firm Fair Isaac Company (FICO) recently announced the creation of an alternative credit scoring system. The point of the alternative approach is to give more consumers a high enough rating to qualify for credit.

Fair Isaac estimates that the new system will affect 15 million consumers, including those who rarely used debt in the past or who even have negative credit events on their history, like foreclosures. FICO expects a full one-third of these consumers to be rated at least 620, which is the minimum for many credit decisions.

Apparently the new approach is in response to lenders who have been looking for ways to increase the number of people that qualify for credit.

Something about this doesn’t seem quite right. Maybe it’s because under the old system of credit scoring we still went through the worst economic crisis since the Depression, and now the main credit rating company is looking for ways to increase the number of people that can take on debt.

But it doesn’t matter what we think. The Fed has determined that the way to solve America’s problems is to increase spending through credit. Lowering down payments and increasing the number of people who qualify for credit are two great examples of how the government and private companies are “just trying to help.”

What if these efforts do more harm than good? What if, instead of a fairy tale ending where all asset prices only march higher, some of the borrowers under these new programs default? What if reality invades and, just like last time, borrowers with low credit scores or those who put down very little when buying homes can’t make their payments?

With the U.S. economy stuck in low gear while Europe suffers inflation and China slows down, the chances of a downturn here at home loom larger every day. When the next recession happens, many of these newly minted (or recently reinvented) borrowers could fail.

That’s where you and I would enter the picture.

We might think lending 97% to home buyers is a bad idea and could lead to losses, but as we proved in 2008, the American taxpayer is the one left holding the bag when Fannie Mae and Freddie Mac make bad decisions.

As for private lenders, we backstopped them during the last recession as well, no matter how many questionable borrowers were approved for credit.

When the economy eventually turns south and stories of borrowers defaulting on loans once again fill the papers, there will be a knock on our door. Whether we want to or not, we’ll once again be forced to help.
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Rodney

Pay Close Attention to This Pattern in the Swiss Franc

BY CORY MITCHELL - CMT ON FRIDAY, APRIL 24, 2015


After bottoming at 0.9910 on March 12 (the same day a buy trade was signalled), June Swiss Franc futures (6S) moved higher. They are still well off the 1.1975 spike high from January, but there is potential the currency could begin moving closer to that level.

Since the March rally an inverse head and shoulders has formed. Pattern resistance is 1.0579. A break above that indicates the uptrend is continuing, targeting 1.0975.

http://www.futuresknowledge.com/medi...-shoulders.jpg
Figure 1. June Swiss France Futures - Daily Chart

The longer-term downtrend since the January high must also be considered. A failed breakout higher, or a move back below the ascending trendline on the right side of the pattern, is an indication the price could begin sliding lower again. Currently, that occurs if the price drops below 1.0340 (this level rises over time since the trendline is ascending). In that event, the target is 1.0.

When buying place a stop loss slightly behind a recent swing low, and when shorting place a stop loss slightly above a recent swing high. When waiting for a breakout, new swing lows or highs may form before the trade occurs; adjust your stop loss accordingly.

US Dollar at Key Trade Level
BY CORY MITCHELL - CMT ON TUESDAY, APRIL 28, 2015

Whether expecting a break lower, or a rally higher, US dollar index futures are trading right near support between 96.30 and 96.60. A break lower lends credibility to the argument the USD is in for a much deeper retracement, after running from 78.93 to a high of 100.785 in the last year.

March 18 marked the start of the current correction. On that day the price fell from just above 100 to just below 95. Since then the price has moved between 100.27 and 96.315, creating two smaller triangles within a larger one.

Figure 1. June US Dollar Index Futures (DX) - 8 Hour Chart
http://www.futuresknowledge.com/medi...x-april-28.jpg

The March 18 sell off was large enough to consider a short-term downtrend in effect. Those that are bearish will be watching for a break below the 96.315 low. Alternatively, if the price pushes higher off support, sellers will also be watching the 97.50 region. If the price consolidates there, and then breaks lower, the short-term descending trendline will have held, and short-position traders will be looking for a potential breakout lower (on the next attempt at support).
If the US dollar breaks through support (with conviction; be aware of false breakouts), the longer-term target is 92.50.

Those that are bullish are viewing the current support area as a bargain. This is the lowest the US dollar has traded in a month, and the area has held up on prior tests within that month. If the price consolidates in this region (showing selling has slowed) and then moves above the high of that consolidation, expect a sharp rally. A similar situation developed on April 6.

Those that get long shouldn't be greedy. There is potential resistance near 97.50, followed by 99.50. If the price moves above the latter resistance area--breaking the large triangle to the upside--the correction is likely over, and the long-term up-trend is resuming.

Trading the Canadian Dollar Reversal
BY CORY MITCHELL - CMT ON FRIDAY, APRIL 17, 2015

June Canadian dollar have traded as high as 0.8563 in 2015 (first day of year), and as low at 0.7781. Most of that decline took place in January, and since the start of February has moved predominantly sideways. Between February and mid-April (prior to the recent upside breakout) there is also aninverse head and shoulders--a bottoming pattern.

On April 15 the price broke cleanly above resistance at 0.8076, closed above that mark, and continued to rally the following day. Given the change in direction, here are potential ways to trade it.

Figure 1. June Canadian Dollar Futures (6C) - Daily Chart

http://www.futuresknowledge.com/medi...95238095238096

Old resistance can become support. This is often toted as a "rule," but isn't; price doesn't respect old support/resistance as much as it does. Whether it is likely to or not depends on conditions.

The 0.8076 to 0.8049 region was tested multiple times over the last two-and-a-half months. The high number of tests creates "pain" at that level. Those who are in short positions will be happy to get out (buy) if the price pulls back to that region. For that reason, in this case, that old resistance could provide support. Traders not in yet can look to buy between 0.8085 and 0.8050. The target for the original breakout is 0.8360, which remains in play.

There is also a rising trendline moving off the 0.7781 low. That trendline should provide support between 0.80 and 0.7950 down the road. This is an alternative entry point (buy) if the price doesn't stall (ideally wait for the selling to slow before buying) and keeps dropping right through the 0.8085 to 0.8050 region. Stop losses can be tucked below 0.7950 (or 0.7888, the April 10 low) for now, and moved up as new swing lows form.

A drop below 0.7950 isn't an immediate signal to initiate new short trades, but it does warn the uptrend failed to follow through. At that point the trend is in question and it's likely best to step aside and let a trend take shape before trading again.

Euro Triggers Another Short Trade After Testing Descending Trendline
BY CORY MITCHELL - CMT ON MONDAY, MARCH 30, 2015

The Euro moved higher after putting in a March 13 low of 1.0473. Despite the rally, Euro futures (6E) remain in a strong downtrend. The latest sell signal occurred on March 27 when the price dropped below 1.0903, and is being confirmed by further selling today (March 30). For context, in May of 2014 Euro contracts were trading north of 1.39.

The relevant downward trendline in the Euro is one that connects the December and February rallies. Extending this potential resistance area out of the right, it intersects with the March rally. This alone isn't a reason to sell. There is other evidence though which indicates the price could start heading lower again.

Figure 1. Euro Futures - Daily Chart
http://www.futuresknowledge.com/medi...877&height=719

On March 18 there was a sharp rise due to an FOMC statement. Despite the strong move, there was little follow-through. On the days following the surge the Euro was barely able to move above the high established on that day. With the overall downtrend, trendline resistance and the price shifting back to the downside, the position of choice remains short. The signal comes sooner than previously expected; on March 6 it was indicated the next sell area could be in the 1.12 to 1.13 region. That area may still be useful in the future if the Euro moves higher instead of lower from the current 1.0832 level.

The current trade is a sell at 1.0903--a level touched multiple times over the last few sessions. A stop loss goes above the March 26 high of 1.1064. Initial target is 1.05, just above the 1.0473 low of the June contract. A more aggressive target is 1.03, near the low of the current trend channel.

The Kangaroo Economy
April 30, 2015 By George Yacik
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One of my favourite Abbott & Costello gags was when Bud cheated Lou out of a winning poker hand by claiming he had a rare "kangaroo straight," meaning he had a 2-4-6-8-10 run, all different suits, while gullible Lou "only" had two pair (watch it on YouTube).

On Wednesday we got another chapter in the "kangaroo economy." The Commerce Department reported that U.S. GDP grew only 0.2% at an annualized rate in the first quarter of the year. That was down from 2.2% in the previous quarter and well off the 5.0% and 4.6% paces, respectively, of the two quarters before that. But it was in line with the first quarter of 2014's drop of 2.1%.

As the Wall Street Journal pointed out, "The first-quarter figures repeat a common pattern in recent years: one or two strong readings followed by a big slowdown. Before this year, first-quarter GDP growth had averaged 0.6% since 2010 and 2.9% for all other quarters. That has worked out to moderate overall expansion but no sustained breakout for the economy."

But the feast-or-famine performance of the U.S. economy hasn't been limited to just first quarters. We've had a fairly consistent inconsistency in U.S. economic growth for the past five years. The downturns have often occurred in the first quarter, but we also had dips in the second quarters of 2012 and 2013 and the third quarter of 2011. Those don't correlate with "harsh winter weather."

The Q1 GDP report wasn't surprising, since it's been preceded by months of uninspiring reports on the U.S. economy, except for how much worse things were than everyone thought. Look at some of the comparisons to the fourth quarter of 2014, which wasn't so great itself:

1. In dollar terms, GDP rose a scant 0.1%, or $6.3 billion, in the first quarter to $17.7 trillion, compared to the 2.4%, or $104 billion, gain in the previous quarter.
2. Consumer spending growth slowed to a 1.9% pace, down from 4.4% in the fourth quarter. Personal outlays increased just $7.8 billion, compared to $127.3 billion in Q4.
3. Corporate fixed investment declined 2.5%, compared to growth of 4.5% previously. That was the worst performance since Q4 2009.
4. Nonresidential fixed investment dropped at a 3.4% rate, versus the 4.7% jump in Q4.
5. Business investment in nonresidential structures, including office buildings and factories, plunged more than 23%, the most in four years, compared to a nearly 6% increase in Q4.
6. Exports fell 7.2% after rising at a 4.5% rate in Q4, while imports rose a weak 1.8%, down from 10.4%.
7. Real final sales of domestic product – GDP less the change in private inventories – dropped 0.5%, compared to a 2.3% rise in the previous quarter.
8. Durable goods orders increased just over 1%, down from 6.2%. Nondurable goods fell 0.3% after rising 4.1%.

Coincidentally, the Federal Reserve's two-day monetary policy meeting ended in Washington just five and a half hours after the release of the GDP report. The announcement that followed stated the obvious, namely that "economic growth slowed during the winter months," although it said that was "in part reflecting transitory factors." Indeed, the Fed said that it expects "economic activity will expand at a moderate pace" going forward.

Also not surprisingly, it said it was leaving interest rates near zero as a result.

Is the Fed to blame for this up-and-down economic performance? To a large degree, yes.

To the extent that the Fed won't, finally and firmly, decide and announce to the world when it will raise interest rates and instead keep everyone guessing when it might, this spotty performance will continue.

As I've noted in an earlier column, businesses and households are holding back to some degree on making big investments, either building buildings or hiring new workers or buying new homes, because there's no compelling reason to do so. If you think interest rates are going to remain low for the foreseeable future and the U.S. economy is just going to blow hot and cold, what's the rush to do anything?

However, if you think rates are going to go up very soon and maybe keep going up, there's a strong motivation to act now. That would certainly juice home sales, retail spending, business investment and hiring, rather than having everybody, businesses and households alike, continue to hoard their money.
The Fed keeps saying that it can't justify raising rates until the decision can be supported by the economic numbers. I call it paralysis by analysis.
Visit back to read my next article!

George Yacik

Return dispersion, counterintuitive correlation
By Kathryn Kaminski, director, investment strategies, Campbell & Co
March 31st, 2015

2014 is the year that has been proclaimed the return of trend.

As divergence spread across financial markets, CTAs were poised to capture momentum’s rewards.

Despite this, the range in performance across CTAs was remarkable. Performance ranged from less than 0% to over 100%.

Because most large trend-following managers maintain a high correlation with each other, investors are left wondering why managers they perceived as similar could perform so drastically differently in such an important moment for the strategy.

This paper returns to the basic tenets of portfolio theory for equity portfolios to examine the origin of return dispersion and cross-manager correlation for CTAs.
Similar to how idiosyncratic risks in stocks are reduced by diversification in equity portfolios, the idiosyncratic differences in signal construction, parameter selection, and risk management are reduced by diversification in CTA portfolios.

A closer look at performance and return dispersion demonstrates that CTA strategies have more return dispersion on the upside.

Despite the high inter-manager correlation in the CTA space, during moments when there are opportunities in momentum, subtle differences in CTA strategy construction seem to matter.

This explains why correlation to momentum is easy to replicate while replicating performance in momentum remains somewhat more elusive. CTA diversification is best demonstrated on the upside.

Idiosyncratic systematic: portfolio theory revisited

Behavioural psychologists, sociologists, ecologists, and evolutionary biologists all understand the diversification heuristic and our natural interest in variety.
Why do we diversify? – To increase our chances of survival as spreading risk allows us to reduce risks.

Turning to portfolio theory, there are both idiosyncratic (diversifiable, those we are not paid for taking) and systematic risks (undiversifiable, those we receive a risk premium for taking).

Individual stocks can be quite volatile, but as more stocks are added to a portfolio, idiosyncratic risk can be reduced via diversification.

The risk which remains is systematic risk. For equities, systematic risk is derived from a common equity “market” factor.

http://www.ctaintelligence.com/wp-co...g1-300x227.png

This classic relationship is plotted in Figure 1. Due to an exposure to a common equity factor, a diversified basket of stocks should provide a risk premium (i.e. the “equity risk premium”) over time.

If a long-only investment in equities provides a risk premium, how is this premium realized and how difficult is it to capture? Is there substantial variation (return dispersion)? Consider an equity universe of 1000 liquid US stocks.

Figure 2 plots return dispersion against the average return from 1980-2014. Over this time period, there tends to be larger variation in individual stock returns during times when the overall market is either going up or down strongly.

Would diversification have been beneficial during the extreme market scenarios?

http://www.ctaintelligence.com/wp-co...bellFig2_3.png

Following the same approach as in Figure 2, the 1000 stock universe can be partitioned into 100 unique portfolios each with 10 stocks.

Figure 3 plots return dispersion for 10-stock portfolios against the average portfolio return. When compared with Figure 2, return dispersion decreases substantially from around 25% to 8%.

However, despite the overall decrease in idiosyncratic risk, larger return dispersion still remains for both large positive and negative market movements.
CTAs primarily seek to capture a momentum premium.

Just as with equities, the same questions are also relevant.

How is the momentum premium realized over time? Is there substantial variation in how it is captured?

The earlier analogy with individual stocks can be extended to CTA portfolios.

One individual trend-following strategy based on one signal is conceptually similar to one stock.

The strategy roughly captures momentum, but it contains substantial idiosyncratic effects due to individual parameter choices.

Similar to building portfolios of stocks, CTA portfolios are collections of strategies, largely capturing time-varying momentum.

To examine how these returns are captured over time, return dispersion (or cross-sectional variation in performance across CTA portfolios) can be compared with the average performance. Using monthly returns from managers in the Newedge Trend Index, Figure 4 plots return dispersion (cross-sectional standard deviation) versus the average return from 2000-2014.

CTA portfolios capture returns with substantial variation and this variation is more pronounced during periods when momentum strategies are performing strongly.
Put more simply, key moments for CTA performance are also moments when the range in performance across managers varies the most.

Drawing once again from the stock analogy, CTAs can be viewed as being exposed to a common “momentum” factor.

During extreme returns for this factor (especially on the upside), different managers will have different exposures to this factor.

1. Put in another light, when CTAs perform their best they tend to be the most different from one another.

http://www.ctaintelligence.com/wp-co...mpbellFig4.png

Counterintuitive correlation

Correlation is an important measure for understanding portfolio diversification, but it doesn’t always tell the entire story.

High inter-strategy correlations in the CTA space are often interpreted as all CTAs being the same.
In theory, just as a long-only equity portfolio is a basket of individual stocks, a CTA portfolio is a basket of strategies applied across futures markets to capture momentum premiums.

The average correlation across CTA managers is akin to comparing baskets of stocks with other baskets of stocks.

Correlation between baskets of stocks increases with the number of stocks in a basket.

The same conclusions are also true for CTAs.

For any basket of CTA strategies (or a CTA portfolio), as more strategies are introduced into a portfolio, the level of diversification and the amount of cross-portfolio correlation should be expected to increase.

The relationship between managers can be examined in two ways. The first way is to measure rolling average pair-wise correlation.

This approach examines the relationships between portfolios over a certain time horizon.
Second, the level of return dispersion across managers can be used to estimate implied correlation for each individual month (or the implied point in time estimate of relationships between portfolios).

2. When return dispersion is high (low), this would imply that managers are less (more) similar to one another.

Using the managers in the Newedge Trend Index, Figure 5 plots cross-portfolio correlation (rolling twelve month average pairwise correlation) and implied correlation (point estimates and twelve month smoothed point estimates).

3. The managers in this set are large and highly diversified, and they tend to focus on trend-following strategies.

For this set of managers, average pair-wise correlation fluctuates around 70% and is time-varying. This measure can indicate a relatively high degree of similarity between CTAs (consistent with 10 or 20 stock portfolios).

Implied correlation tells a markedly different story. The smoothed version of implied correlation is roughly similar to average pairwise correlation, but point estimates for implied correlation demonstrate periods of severe correlation breakdown between CTAs.

This observation suggests that most of the time these managers are similar but during certain moments appear to be drastically different.

In a world focused on month to month performance, the actual investor experience may be better represented by the red line (monthly implied correlation) as opposed to black or grey lines (rolling pairwise correlation and smoothed implied correlation).

Figure 6 plots the conditional performance for seven CTA managers during extreme correlation breakdowns (negative implied correlation) and in normal times (positive implied correlation).

Subtle differences in CTA strategy construction have the largest impact during extreme correlation breakdowns.

http://www.ctaintelligence.com/wp-co...bellFig5_6.png

Portfolio implications

Through the efficient use of index products, most equity investors can select portfolios roughly the same size as the S&P500. A 500 stock portfolio has cross correlation with other 500 stock portfolios greater than 99%. Even a 100 stock portfolio has cross correlation with other 100 stock portfolios at roughly 95%.

If CTA managers have an average cross-manager correlation of 70% under some simple assumptions, roughly 7-8 CTA managers would be required to create a portfolio with the same level of diversification as an equity index.

4. There are currently 10 managers in the Newedge Trend index.

The 70% cross correlation between managers in the CTA space is often interpreted as a high level of similarity between managers. This correlation measure may cause investors to under-diversify, something which will be more noticeable during months with large positive returns.

When performance is very high, return dispersion tends to be high for CTAs. This implies a breakdown in correlation between managers.

5. Intuitively this suggests that under normal scenarios with moderate opportunities for CTAs, subtle differences in system construction, parameter selection, and risk management seem to be less important.

A closer look at implied correlation (as seen in Figure 5) demonstrates that when there are opportunities for momentum strategies, the subtle differences between systems seem to become important.

This leads naturally to two follow-up questions: Which managers perform the best during these periods? And is this predictable?

Considering the same universe of CTAs, Figure 7 plots the risk adjusted performance of these seven CTAs during the periods where CTA correlation seems to break down.

6. Despite being similar in aggregate pairwise correlation, performance across these highly correlated CTAs is markedly dissimilar during these moments.

This figure demonstrates why understanding CTA correlation may be somewhat counterintuitive. High pair-wise correlations may underestimate the importance of diversification in CTA portfolios, leaving portfolios undiversified in critical moments for performance.

http://www.ctaintelligence.com/wp-co...mpbellFig7.png

There are two main conclusions of this study.

First, consistent with results for stock portfolios, diversification has clear benefits in the CTA space. Better diversification improves the capture of return premiums for CTA strategies.

Second, cross-manager correlation in the CTA space may be high, but this correlation seems to be weaker when there are opportunities for momentum.


This suggests that CTA diversification may be best demonstrated on the upside.

1 Greyserman, Kaminski, Lo, and Yan (2013) derive a style framework for comparing trend following CTAs including a baseline strategy, market size factor, equity bias factor, and trading speed factor.

2 To estimate implied correlation, all portfolios must be assumed to have the same Sharpe ratio.

3 The implied correlation estimates are implied by the cross-sectional standard deviation across managers in the Newedge Trend Index. For this Figure, 7 Large CTAs were used due to data availability.

4 For a portfolio with N assets with stable correlation (ρ), the portfolio correlation (ρ_P) for an equal volatility weighted portfolio is ρ_P=ρN/(ρ(N-1)+1). For the average large CTA is ρ=0.7, to get a portfolio with a cross correlation of 0.95, N must be roughly 7-8 CTAs.

5 Similar to equity portfolios, differences in manager performance could be explained by different beta exposures to momentum and other factors.

6 7 CTAs are used due to their return series spanning the entire time horizon.

References

Greyserman, A., and K., Kaminski, Trend Following with Managed Futures: The Search for Crisis Alpha, Wiley Trading, New York 2014.

Greyserman, A, Kaminski, K, Lo, A, and L, Yan, ”Style Analysis in Systematic Trend Following,” Working Paper, 2013.

Barclays takes extra $1.2 billion hit for potential forex settlements
LONDON | BY STEVE SLATER AND MATT SCUFFHAM
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(Reuters) - Barclays (BARC.L) set aside another 800 million pounds ($1.2 billion) on Wednesday to cover potential settlements for alleged foreign exchange manipulation, hitting profits and reflecting its struggle to put past problems behind it.

Barclays said it had now set aside 2.05 billion pounds ($3.2 billion) to cover any settlement, but offered only limited clues on how soon a deal might come.
U.S. and British authorities are investigating the allegations. Barclays pulled out of a settlement between some authorities and six rival banks in November because it had not reached a deal with New York's regulator.

"That (extra provision) reflects the further discussions we've been having with a number of regulators and agencies around the world across multiple jurisdictions," Finance Director Tushar Morzaria told reporters.

Barclays wanted to settle the allegations with as many agencies as possible in one go and Morzaria said the bank did not regret pulling out of the earlier settlement.

New York's banking regulator has said it could reach a deal with Barclays next month if it excluded a probe of the possible rigging of rates through computer programs. It could take several more months if that trading is included.

Barclays could settle next month with a host of regulators, and leave any settlement with New York's regulator on computer trading until a later date.

Barclays also set aside another 150 million pounds for compensating customer mis-sold insurance products in Britain, which has now cost Barclays 5.4 billion pounds and all British banks more than 26 billion.

RELATED COVERAGE

​› Barclays says FX charge reflects further talks with regulators

Britain's four biggest banks have paid out 42 billion pounds in charges related to misconduct in the past five years, and face paying out another 19 billion pounds over the next two years, Standard & Poor's said this week.

PROVISION DRAGS

Under Chief Executive Antony Jenkins, Barclays has abandoned its ambition of being a Wall Street powerhouse, shrinking its investment bank in favor of a return to its retail roots. He is cutting 19,000 jobs and shedding unwanted assets and businesses to cut costs and improve returns and its capital strength.

However, the cost of settling past misconduct issues continues to dog Barclays' attempt to turn itself around.

The bank reported a statutory pretax profit of 1.3 billion pounds, down 26 percent from a year ago.

Its underlying pretax profit, stripping out the provision and other one-off items, was 1.8 billion pounds, up 9 percent from a year ago and just above the average forecast from analysts polled by the company.

Barclays shares dipped 0.6 percent by 1010 GMT (6.10 a.m. ET), as analysts said the results showed progress being made by the bank, but the forex provision was higher than expected.

"The increased FX provision, unaccompanied by further news-flow, is rather troubling," said Mike Trippitt, analyst at Numis Securities.

Return on equity, a key measure of profitability, was 10.9 percent for the core business, as earnings from personal and corporate banking rose 14 percent and underlying costs fell 7 percent.

The investment bank's profits rose 37 percent on the year to 675 million pounds, as revenues rose 2 percent to 2.2 billion pounds, in line with analysts' expectations and echoing a strong performance by its U.S. rivals.

"The investment bank had a good Q1, representing a performance which is more indicative of the potential of the franchise following the repositioning undertaken last year," Jenkins said.

U.S. Startups Receive Fewest Number of First Financings since 3Q 2009
Published: Apr 30, 2015 6:00

PitchBook Data, Inc. releases 2Q 2015 U.S. Venture Industry Report

SEATTLE, Apr 30, 2015 (BUSINESS WIRE) -- Venture capital financing rounds in the U.S. dropped 24 percent between 3Q 2014 and 1Q 2015, falling from 1,651 investments to 1,262 last quarter—the largest consecutive decline since the financial crisis and the fewest number of rounds since 4Q 2010.

While this represents the first significant decline in VC activity in the last four years, the amount of capital invested remains stable. This supports the notion that VCs are becoming increasingly selective and are investing more capital across fewer rounds. The increased time and money being poured into late-stage companies and the dwindling number of first financings of startups is driving this trend. In 1Q 2015, first financings were the lowest since 3Q 2009, totaling 278 first financings in 1Q 2015—a 62 percent decrease from 1Q 2012.

“It appears rising valuations are starting to take their toll on the market, at least at the earliest stages,” says Alex Lykken, Senior Editor at PitchBook Data, Inc. “Raising early stage funding has always been a challenge, but the market is noticeably starting to thin in some areas, which could have a large impact on the industry in the near term and beyond.”

Overview of VC Financings

Most of the first quarter’s decline in activity was in the earliest stages (Seed through Series B), as investors have become more selective in what they finance and at what valuation. This trend is reflected by the continuous drop in first financings from a peak of 736 in 1Q 2012 to just 278 starter rounds in 1Q 2015—the fewest number since before the financial crisis. Early-stage, follow-on rounds fell for the third quarter in a row, dropping 26 percent from 2Q 2014. On the other hand, Late stage financings got off to a strong start, accounting for nearly 60 percent of total capital invested in 1Q 2015, with $8.34B invested across 352 deals.

Overview of VC Exits

After 2014’s momentous year of 926 exits for venture-backed companies, it appears 2015 is off to a slow start. During the first quarter, capital exited reached a combined $6.12B through 186 exits, the lowest number since 4Q 2011. Exits through IPO, a hot exit channel in 2014, dropped to 13 IPOS, a 68 percent decrease from the same quarter last year. This may indicate that mature late-stage companies will continue to stay private as long as capital remains available—particularly after valuations of companies like New Relic, Box and Hortonworks took a blow once they hit the public market.

All data and analysis included in PitchBook’s industry reports is powered by the PitchBook Platform, which tracks the flow of capital across the M&A, PE and VC landscapes, along with the companies, funds, firms, investors and executives involved. PitchBook also offers daily newsletters and consistent analysis on the private financial markets through the PitchBook Blog.

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May 4th 2015

Dear Fellow Stargazers,

Happy Full Moon!

It’s election week here in the UK and, as you might expect, I have been pouring over the charts for the UK itself, the present Prime minister, David Cameron, together with the charts of his political opponents.

A key chart in this study is that for close of polls: 10pm local time. This chart is fascinating as Saturn is exactly on the Ascendant. I couldn’t help but smile when a client (not a UK resident), on hearing this announced ‘Well, no good will come of this then!’ He may be right.

That’s not the only special feature of this chart however: Uranus is exactly conjunct a degree known as the ‘Part of Fortune’: suggesting a surprising outcome. Given the Capricorn Moon and that strong Saturn it may be that the populace in total makes a definitive statement for the conservatives – but entirely possible that this is not reflected in the number of seats gained by that party.
Let’s note that though Mercury is not retrograde for the election itself, it hovers around a key degree of the close of polls chart. It may be that the final outcome isn’t known until closer to the solstice on June 20th which suggests the ‘hung’ parliament journalists expect.

Charts for UK markets on Friday May 8th don’t suggest to me any marked fall – perhaps even the opposite. The next date for volatility – and this is likely to be global – is May 14th when Mars draws attention to the positions of Uranus and Pluto whilst simultaneously opposing Saturn. This is not a happy planetary picture suggesting a few days of negative pressure.

There is general agreement that the next British Prime Minister can only be either David Cameron or Ed Milliband. Their respective charts ought to give clear indications. I can well understand how an esteemed colleague has come to the conclusion that Mr Milliband will move into Downing Street. His chart shows many clear indications for upheaval and change of direction. However, with Saturn moving across his Neptune all summer, I fear he may be in for a period of disappointment and disillusionment. Even if he were to take up residence, I wonder if his tenure would last.

David Cameron’s chart is quite different and though the election outcome may not be as he hopes, I doubt he will be wholly disappointed with the result. Indeed, though it could take some weeks to arrive at a final working arrangement, it seems to me that he will stay in post.

There are two key dates to monitor: June 1st and June 19th. As political deals are done, markets could be unsteady in the 24 hours leading into these.
Worst case? If there is another election, then that could happen when Saturn returns to Thursday’s position in October.

There are various charts in use for the UK but one which has worked well is that for January 1st 1801 – a chart I call UK PLC. Since 2010 this chart has been pummelled by transits from both Uranus and Pluto which always suggested dramatic change. A break-up of the Union as defined by this chart is still likely with the actual deed being done most probably in 2017.

Whatever, it would seem that we need a new chart and that with this comes a new political landscape.

And what of sterling? I expect major moves in this currency (particularly in relation to the US dollar) after Jupiter and then the lunar node move into Virgo (respectively late July and September) and will be studying this closely in a forex webinar to be offered at the end of July (see below).

If you have heard me speak at all in the last couple of years, then you will know that I am of the opinion that new currencies will appear in the next few years. Bitcoin, chinacoin, feathercoin etc began the trend. I am now looking at those which are either backed by gold or which contain a little of that commodity. I will look at the chart of one of these in the currency webinar in July. Please do let me know if you hear of any others you think I ought to follow.

Mercury, in Gemini, is retrograde from May 19th.

There are some who feel that these regular retrograde periods coincide with telecommunication and travel disruption. This is not always the case BUT, this time, and given the degree areas involved, it may be that air travellers in particular area affected.


As explained in previous letters, I don’t think it coincidental that earthquakes so often coincide with tense planetary alignments. It may be that pressure on the earth’s crust around 14th-15th May plays a part and that travel disruption is caused by volcanic activity - as with the Icelandic incident some years ago.

Recently I met with Mathew Verdouw of Market Analyst and discussed with him the difficulties of organising a teaching schedule. Traders prefer Sunday classes, but finding blocks of these when I can guarantee my availability proved difficult. The cosmos allowed an idea to land during our conversation and having considered this carefully, I think it is the way forward. I will make full use of Market Analysts superb astro-programming during these classes.

The plan is to offer monthly classes with set topics. The first will focus on gold trading and will take place on Sunday July 19th. The next, on Sunday August 23rd, will focus on Forex. I will continue to hold these classes on Sundays closest to the Sun changing sign each month (roughly 21st of each month). Full details will be available on the website.

The next webinar in the Equinox-Solstice series will be on Sunday June 21st. In this webinar I will look closely at Dow Jones and FTSE indices for the next six months together with very long trends leading into 2020. You can find out more about enrolment and costs by registering interest via the website.

For now,

Yours from the stars

Christeen

What You Don't Know Will Hurt You


PEOPLE used to think the Earth was flat. What would've happened if Christopher Columbus came along a couple hundred years earlier? Maybe someone like the Wright Brothers would've come along 100 years sooner. Perhaps someone would've discovered computers in 1900. Who knows where we'd be right now.

But in the early 70's a book called "A Random Walk Down Wall Street" came out that basically told a whole generation of traders and investors the Earth was flat. That book probably did more financial harm to more people than any book ever written in the history of Wall Street. I thought about this the other day because I don't even think one can calculate the amount of money lost because people have sold bottoms and bought tops or because they had decent profits and wouldn't sell near the top. Seriously, its a recurring theme among new clients in my trading program. I'm not putting anyone down. Obviously people only find out about this program when they find out about it. I just wish more people would find out how to identify key market turning points BEFORE they get crushed.

I think the reason that book was written was partially with the intention of Wall Street getting your money and making sure you are invested at all times. But the other part is because THEY can't time markets, they are arrogant enough to believe nobody else can either.

We've been putting together an entirely different and unique methodology very few people in the entire world know about. The deeper I get into this the more I find out how slick and tricky the market really is. When it comes to stocks, I've uncovered 2 unique time clocks, one for the trading clock and other for real time which includes time the market is closed. I thought that was it. But recently I uncovered yet another clock, click your email browser to see image.

http://staticapp.icpsc.com/icp/loadi...e411/image/png

The market will go along with one particular clock with a certain value for each bar and then it can change to another value and then to make matters even more complex, when time expires on the 2 clocks at the same time, you can get an important turn, its really slick and like a bucking bronco hard to pin down. But we are breaking through.

What we've done in the above chart is show a retest of an important resistance peak in the BKX. That's the banking sector which we are covering in greater detail in tomorrow night's Short Term Update. What you should take from this chart is an intraday retest of a resistance peak and the retest expires or stalls at 161dg. Why is that significant to you? I believe one of the biggest problems traders have is they can't identify the end of bounces or pullbacks properly. They end up either shorting or going long because they were close, but they end up getting stopped out and worse, the move goes without them. How do you like being right about a move yet see all the profits go without you while you are stuck with a loss?

http://www.lucaswaveinternational.com/shortTerm.php

That used to happen to me and no doubt, its devastating. What I've been showing you here recently are vibrational bars on the types of numbers most everyone in this group is familiar with like golden spiral, key Fibonacci numbers as well as key geometric points create important vibrations. These vibrational bars at certain points of time create what amounts to invisible support or resistance lines. Here's another example.

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Here's AAPL where we have an important sequence in time, lets say 720dg which is a very important geometric number (2*360) which created a gap down and a line of resistance. Its my contention its the 720dg aspect THAT CREATED THE GAP DOWN. So go further in this sequence and you see after the rally leg off the bottom a pullback hits that line perfectly and makes a bounce attempt. Then at 1800dg it gaps down in the exact same place!

Why does this happen? Those of you who know a little chaos theory and quantum physics have heard the term strange attractor. Its my contention these vibrational bars are creating invisible lines on the chart that attract then repel (or repel then attract) the price action.

Can you begin to appreciate why the Random Walk people couldn't time markets? But just because they couldn't should it stand in the way of you learning to do it. The only person stopping you is you.

Here's another example, this time on the NQ:

http://staticapp.icpsc.com/icp/loadi...d801/image/png

This pullback off the low in the NQ starts to breakout at 261dg off the low. Not all bars are created equal and if you can wrap your brain around the idea that in quantum physics a strange attractor will attract or repel the action once something starts breaking out at something important like a 161 or 261 bar you'll realize what is going on and your timing will be much better.

Look at the 2nd breakout. That one is a tight congestion which causes traders to lose chunks of money getting stopped out. But it starts to life as a very key point in the chart at 314 (pi) and 315dg. That leads to a very nice leg up.

Here's the point. If you are keep track of these bars you can like the Great Gretzky anticipate what can happen. He was the best player on the ice because while everyone else chased the puck, he anticipated where the puck was going. Here, you wait for key vibrational bars before you act and then size up the action. It will take a little while to get the hang of it but if you don't know what to look for you most certainly will never get there.


Briefly, the market is in a transitional phase. The Transports are just hanging on.

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Look how many times the Transports have retested the bottom of the range. You don't need to know market timing here. Just apply some common sense. Why does it continue to hug the bottom of the range? If a market doesn't behave properly its usually trying to tell you something. We already know it topped back in November so a huge divergence is close to being confirmed. Inside Transports we have rails doing worse than air freight. Why? Well, UPS and Fedex come to my house all the time yet I've never seen Union Pacific show up at my door. You laugh but we are woefully a consumer driven economy and the transport stocks that cater to consumers are still doing better.

But today the DJTA started slipping and has no more margin for error.

If we lose the Transports, we will lose this market, the market is not done yet but its getting close. Even if this leg survives, we've had questionable behavior every week for at least the last 6 weeks. This is what happens in a topping process. Just yesterday the stock CEVA beat by a penny but got taken to the woodshed and got crushed which is reminiscent of the period in the summer of 2000 when all stocks which were less than priced to perfection all got taken to the woodshed. That's what happens in the sequence before the bear.

Most were totally unprepared.

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By DEB RIECHMANN3 hours ago

Associated Press

Senate OKs Bill Giving Congress Weigh-In on Iran

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WASHINGTON (AP) — The Senate muscled its way into President Barack Obama's talks to curb Iran's nuclear program, overwhelmingly backing legislation Thursday that would let Congress review and possibly reject any final deal with Tehran.
Related Stories

1. Supporters of Senate Iran bill swatting away amendments Associated Press
2. Senate rejects bid to toughen Iran nuclear review bill Reuters
3. Senate sets test vote on Iran sanctions bill Associated Press
4. Senate rejects tying terrorism support to Iran sanctions relief Reuters
5. US Senate OKs bill giving Congress review of Iran nuke deal Associated Press

The vote was 98-1 for the bipartisan bill that would give Congress a say on what could be a historic accord that the United States and five other nations are trying to finalize with Iran. Under the agreement, Iran would roll back its nuclear program in exchange for relief from crippling economy penalties.

The lone "no" vote came from freshman Sen. Tom Cotton, R-Ark., who wants the administration to submit any agreement to the Senate as a treaty. Under the Constitution, that would require approval of two-thirds of the Senate.

The House is expected to vote next week on the measure.

House Speaker John Boehner, R-Ohio, said in a statement moments after the vote that the "goal is to stop a bad agreement that could pave the way to a nuclear-armed Iran, set off a regional nuclear arms race, and strengthen and legitimize the government of Iran."

White House spokesman Eric Shultz said Obama would sign the bill in its current form. But the spokesman added that Obama has made it clear that if amendments are added by the House "that would endanger a deal coming together that prevented Iran from obtaining a nuclear weapon, that we'd oppose it."

Even if Congress rejects his final nuclear deal with Tehran, however, Obama could use his executive pen to offer a hefty portion of sanctions relief on his own.

He could take unilateral actions that — when coupled with European and U.N. sanctions relief — would allow a deal to be implemented.

The U.S. and other nations negotiating with Tehran have long suspected that Iran's nuclear program is secretly aimed at atomic weapons capability. Tehran insists the program is entirely devoted to civilian purposes.
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FILE - In this April 14, 2015 file photo, Senate Foreign Relations Committee Chairman Sen. Bob Corke …

The talks resume next week in Vienna, with a target date of June 30 for a final agreement.

Senate Majority Leader Mitch McConnell, R-Ky., said the bill "offers the best chance for our constituents through the Congress they elect to weigh in on the White House negotiations with Iran."

Added Sen. Bob Corker, R-Tenn., chairman of the Foreign Relations Committee: "No bill. No review."

The legislation would bar Obama from waiving congressional sanctions for at least 30 days while lawmakers examine any final deal. The bill would stipulate that if senators disapprove of the deal, Obama would lose his current power to waive certain economic penalties Congress has imposed on Iran.

The bill would require Congress to pass a resolution of disapproval to reject the deal, an action that Obama almost certainly would veto. Congress then would have to muster votes from two-thirds of each chamber to override the veto.

In the House, about 150 Democrats — enough to sustain a veto — wrote the president to express their strong support for the nuclear negotiations with Iran.
"We urge you to stay the course," the letter said. "We must allow our negotiating team the space and time necessary to build on the progress made in the political framework and turn it into a long-term, verifiable agreement."

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FILE - In this March 11, 2015 file photo, Sen. Tom Cotton, R-Ark.

The bill took a roller coaster ride to passage.

Obama first threatened to veto it. Then he said he would sign it if the measure was free of amendments the White House believed would make continued negotiations with Tehran virtually impossible.

It survived a blow from Israeli Prime Minister Benjamin Netanyahu, who stood before Congress in March and warned the U.S. that an emerging nuclear agreement would pave Iran's path to atomic weapons.

"It is a very bad deal. We are better off without it," he said in a speech arranged by Republicans. His address aggravated strained relations with Obama and gambled with the long-standing bipartisan congressional support for Israel.

A few days later, Cotton and 46 of his GOP colleagues wrote a letter warning Iranian leaders that any deal with Obama could expire when he leaves office in January 2017.

Senate Democratic leader Harry Reid of Nevada accused the GOP of trying to undermine the commander in chief while empowering the ayatollahs who lead Iran.

In April, the Senate Foreign Relations Committee passed a compromise bill on a 19-0 vote. Obama withdrew his veto threat.

But Republicans were not done trying to change the bill, drawing up more than 60 amendments.

One, from Cotton, would have made any deal contingent on Iran's halting its support of terrorist activities that threaten Americans. Cotton used an unusual Senate procedural move to get his amendment heard.

McConnell did not want to see the bill end in tatters, so he acted to end the amendment process and have votes on the legislation.

"We should have insisted on amendments to put real teeth in this bill," said Republican Sen. Ted Cruz of Texas, who is running for president. "Ultimately, I voted yes on final passage because it may delay, slightly, President Obama's ability to lift the Iran sanctions and it ensures we will have a congressional debate on the merits of the Iran deal."

Another 2016 candidate, Sen. Sen. Marco Rubio, R-Fla., said the bill puts Congress in a better position than having no say.

"At a minimum, at least it creates a process whereby the American people through their representatives can debate an issue of extraordinary importance," Rubio said.

The Science of Investing

The most successful societies entrust scientifically trained workers with the most specialised tasks, such as performing brain surgery, designing airplanes and setting market-wide interest rates. Yet many individuals regularly entrust their fortunes to the investing equivalents of witch doctors and astrologers. Or they take matters into their own hands for no good reason other than a vague belief that they can do it if they put their minds to it. Unlike good scientists, they're not sceptical enough of themselves or others.

Brains and education are no panacea. My father is a tenured professor of electrical engineering at one of South Korea's top research universities. When he designs a microchip, he draws on his years of education, consults industry journals and relies heavily on the work of other engineers. When he speculates in small-cap technology stocks, his efforts are far more casual and sometimes include asking me which ones I like – I always profess ignorance. Despite admittedly subpar performance over 20-something years of investing, he refuses to give up control. It's as if the logical, sceptical part of his brain shuts down and a more animal, overconfident part of his brain takes over in all matters investing.

Would I, armed with nothing more than the efforts of a few spare hours each week, go into the chip design business to compete with the likes of Intel and ARM? Of course not.

There is a science to investment
Though you may not know them by their technical names, chances are you're familiar with the fruits of modern portfolio theory, the connection between risk and return, the theory of interest and the efficient market hypothesis. Parts of financial theory are so integral to the practice of investing that most investors have forgotten they originated in academia. Nevertheless, some domains are more amenable to scientific expertise than others.

The sweetest fruits of biomedicine originate from trained scientists; the best investment results don't always originate from finance PhDs. In fact, some of the greatest investors are derisive of "scientific" approaches to investing. Warren Buffett warned: "Beware of geeks bearing formulas".

Why don't finance professors dominate investing?
The foremost reason is certainly emotion, which can consume even the finest minds. Famed logician Kurt Gödel was terrified of being poisoned and ate only food prepared by his wife, Adele. When she was hospitalised for six months, he starved himself to death.

Even very smart investors can kill their retirement plans when they're in thrall to their animal brains. Investing requires unusual discipline that, by definition, most people lack. Moreover, this quality, in my experience, seems unrelated to brainpower.

Second, finance and economic researchers often don't have powerful enough tools to divine as much meaning from the available data as they'd like. That doesn't stop them trying, though, and they often end up making astrologers look good by comparison.
Not helping matters is how their work can have profound economic, social and political implications, tempting researchers into the morass of politics, where their impartiality often withers and dies.

Third, most of the information in the markets is not quantifiable with the tools at our disposal. By restricting themselves to hard numbers, scientific investors sometimes miss what qualitative investors see clear as day.

Franco Modigliani, of the Modigliani-Miller theorem, was puzzled that so many firms paid dividends. Investors have known since the days of Ben Graham that dividends impose discipline on corporate managers, keeping them from doing too many stupid things.

Soft qualities such as culture and incentives matter, even if you can't easily assign numbers to them or model them in a closed-form solution.

There are good reasons to be sceptical of the things that come out of finance researchers' mouths but it's a big mistake to completely dismiss them. I'd go as far as to say evidence-driven investing is the best approach for most investors because it's based on an efficient learning strategy.

Experience is a flawed teacher
Many investors pick a terrible learning strategy: personal experience. Experience is unreliable; coloured by emotions and the zeitgeist, it captures a period that's short by the standards of history. Investors traumatised by the Great Depression learned that stocks were dangerous and should be avoided; investors who rode the bull markets of the 1980s and 1990s learned that stocks were unstoppable engines of wealth. Both learned the hard way that personal experience is a flawed teacher. A better strategy is to learn from history so you don't repeat the mistakes of past generations.

Scientific investing, at its best, is about engaging the data honestly, with the intention of learning something new, hopefully something discordant with previously held beliefs. Science as it's currently practised has plenty of flaws but it's still the most reliable method of acquiring the truth that I know of.

What are the fruits of science as it pertains to investing? There's a lot of nonsense but also a great deal of sense: Factors are important and most investors should focus on investing in them.

Source: Samuel Lee, Morningstar

It's Not What You Earn But What You Save

It’s easy to think that a large salary or windfall is necessary to accumulate substantial savings. However, many people who earn large salaries reach retirement with little to show for all the income they have earned over the years.

People on average incomes can and do save very successfully to make their money work harder. Indeed, it is often people on average incomes who have learnt the discipline to save. Over time, those savings can become a sizeable amount.

To get your savings working harder for you, you could:
• Take a hard look at your bills, to see how you have been spending your money and where you can cut down!
• Identify your medium to longer term personal financial goals.
• Make a realistic but firm budget to help you work out your savings capacity.
• Determine an amount that you could set aside each month for your future benefit.

It is harder to save during some stages of life than others, such as when you have debts like a mortgage to pay, but as a guide, you should aim to save 10% of your net income. For example, on a salary of $30,000 pa, saving 10% of your after-tax income is just $227.00 per month. Earning 7% pa*, your monthly $227.00 will grow to $15,350 after five years and $34,860 after 10 years.

For many, the key to effective saving is to pay yourself first. Have a portion of your salary paid into a separate account, or have the money direct-debited from your account into a separate savings account or a managed fund. If you don’t see it, you won’t miss it as much.
Source: IOOF

Charting Troublesome Waters
By Chris Cimorelli, Managing Editor, Economy & Markets

I recently had a conversation with a financial analyst who doesn’t think U.S. stocks are that overvalued.

I didn’t argue with him. I spend so much time talking to Harry & co. that I like hearing another human being’s take on the markets. We’re all looking for the truth, so I appreciate anyone’s rationale.

His argument was essentially this: “It’s all about supply and demand. When stocks aren’t a good deal, investors move to bonds. When bonds stink, they move to stocks. Money follows wherever the best deals are.”

Only, things are never that simple.

Harry argues that stocks tend to do better when interest rates are falling, not rising… this raging bull market we’ve had since 1983 attests to that. Hence, rising Treasury bond rates typically are not good for stocks. Earnings are decelerating while bonds yields are rising… that’s not a good thing.

Besides, to assume that investors will continue to allocate their funds such that both the bond and stock markets remain propped up is a little short sighted, in my opinion. It suggests the same amount of cash chasing the same amount of assets overtime, which is ludicrous. And it also begs the question: What, then, was the point of QE?

Rodney has a book called Irrational Economics. Our annual economic and investment summit follows the same name. And while I’m mentioning it, we’ll be in Vancouver for our next summit in October… have you reserved your seat?

The markets don’t make sense, and you can’t operate on absolutist logic to find the truth (i.e. profits) within them. The markets reflect human psychology, and humans are deeply complex, neurotic, contradictory creatures.

Then there’s this: With quantitative easing propping up the stock market, and interest rates fluctuating due to investor perceptions (i.e. and nothing to do with central banks themselves), it’s difficult to take the markets seriously.

John gave the markets a dose of his acerbic wit on Thursday when he suggested they’ve “jumped the shark,” comparing them to an awful, horrible episode of Happy Days that signaled the show had run out of steam.

He discussed how a particular website that serves as a venue for adultery is seeking to raise $200 million for marketing and international expansion. It reminded him of a bad April Fool’s joke The Motley Fool ran in 1999 when they promoted the initial public offering of a business selling meringue pies over the Internet.

I myself recall the voice of a big-wig executive plugging another of these adulterous dating services on NPR recently, saying they’re just filling an economic vacuum.

I had to turn off the radio.

While useless services claim to stimulate the economy, other, more worthwhile services get trampled on.

Rodney recounted on Thursday the rise and fall of a brilliant innovation serving both borrowers and investors: Lending Club.

The peer-to-peer (P2P) loan agency directly connected potential borrowers with investors seeking to issue loans at a profit. It lowered interest rates for borrowers, and simultaneously raised profits for investors. What a great idea…

… Until corporate institutions came into the picture, recognizing just how profitable a service like this is. Now, big banks, hedge funds, and other major players are scooping up the highest value loans, leaving next-to-nothing for the little guys this platform was originally meant to serve.

It doesn’t paint a pretty picture for our economy.

But as Rodney suggested, this is no moralistic battle of good versus evil. And it’s not exactly Lending Club’s responsibility to weed out the larger players so Mr. Sanders at the electric company can have a go of things. Everyone is in the same place today, searching for streams of income in a low-yield world.

Adam brought up a good point this week when he said you have to go fishing through the right sectors to find the ones that bring the most gains. That’s the whole point behind his Cycle 9 Alert, which is why that service brings readers consistent returns despite economic conditions.

Ben Benoy is also maneuvering through the markets with careful precision as his leading market indicator flashes warning signs, playing both long and short positions for his BioTech Intel Trader readers where he sees fit.

And of course, Lance has his eyes on the bond market as yields on 10- and 30-year Treasurys have made startling climbs over the past couple weeks, and he’ll report the most strategic moves through Dent Digest Trader.

Enjoy your weekend,
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Chris Cimorelli

Dead presidents are looking unusually lifeless this morning. The dollar is grinding away at three-month lows relative to the euro as the week draws to a close, weakened by a series of data releases that failed to convince investors that the economy is ready to rebound. The yield premium attached to US ten-year Treasuries relative to their German counterparts has shrunk to less than 155 basis points, reflecting the convergence in expectations between the world’s two largest economic blocs that has occurred over the past two weeks.

West Texas tea is tasting slightly less caffeinated, trading under the $60 mark as producers continue to pour almost two million barrels a day in excess supply into a moribund market. Rig counts have fallen sharply in the United States, pointing to a more balanced market over the coming six months, but global production has continued to rise, generating fears that a supply glut could emerge and kill a fledgling price rebound. Brent is changing hands around the $67 level as simmering geopolitical tensions continue to influence dynamics in the Middle East and Europe.

The Canadian dollar is down more than a cent as we go to pixels, falling over the trading cycle as lower oil prices remove a vital supporting pillar under the currency’s recent outperformance. As believers in the idea that a “fracklog” or backlog of unfracked oil wells will limit upside for oil prices into the autumn months, we suspect that the loonie is unlikely to take flight again until after the American economy stages a complete recovery. While the Bank of Canada’s outlook should stay generally positive, the country’s non-energy trade performance remains appalling, meaning that gale-force headwinds will continue to restrain growth through the summer months.

Heading into next week’s relatively bare data calendar, it is quite possible that we experience reversals in a number of the currencies that have recently rebounded. Technical support levels were breached in the euro, sterling and Canadian dollar during the last five trading cycles, and a number of major option barriers were struck, wiping out some large short positions. If the squeeze is over, exchange rates could retrace into the trends that dominated only two short weeks ago.

Of note are purchasing manager index numbers due to land in Europe and the United States next Thursday and Friday respectively, and North American inflation data scheduled for Friday. Any sign of a pickup in American numbers could smash the prevailing economic consensus and tilt the scales toward a September rate hike once more. As the author Jarod Kintz once put it – “economist should be spelled echonomist, because they all repeat each other”.
Have a great long weekend!

Cambridge Global Payments

Karl Schamotta, Director, FX Risk and Strategy

What the (Yen) is going on?
May 27, 2015 by The Alts Team.

We know, we know the digital ink is barely dry from our take on the bond market, then were turning our attention to currency markets but hey, you cant really have one without the other. After all, what do you think all that currency market movement is about the difference in what can be earned in each currency (via interest rates) relative to one another. To get right into it the currency markets have been a little crazy as of late. Like crazy crazy. The USD had one of its biggest trends higher in 2014, and vice versa with the Euro. And while that trend was happening, the Swiss Franc (without warning depegged) itself from Euro. All of that calmed down a bit with the USD selling off about 7% from its March highs, but now we have the Japanese Yen calling for some attention.

Seems our old friend Yen Futures are reaching 20 year lows

Either way, this isnt something you see every day, or more technically every 5000 days. The Yen has been getting smoked over the past week or so, dropping -3.81% in just the last nine trading days (Past performance is not necessarily indicative of future results). If this was crude, we probably wouldnt be talking about it, but an almost 4% move in a national currency is sort of a big deal. Not to mention the -37.85% move since the beginning of 2012.

Who cares, besides Japanese investors how about the retired police officer or state college professor. Because the falling Yen is likely a part of nearly all of the worlds largest pensions and endowments, with their heavy use of Alternative Investments using hedge funds, managed futures, and Global Macro strategies.

First up, systematic trend following types who are all about this trade (see long the US Dollar and loving it), even if we dont understand the socio-economic impact of the BOJ removing the artificial demand for the Yen or postulate on the wisdom of purposely blowing up your currency to try and stimulate economic expansion. All these types of strategies care about is a persistent trend in one direction say one caused by a governmental policy which results in a weakened currency.

And next up the hedge funds who use the so called carry trade. Heres the FT on how that works in the Yen:

Here is how the yen carry trade, a favorite currency for the trade, basically works now:

1. Hedge funds and other very big traders borrow the yen at very, very low interest rates now approaching zero.
2. The yen are converted to dollars, which are invested in U.S. Treasuries at a much higher yield than the interest cost for the borrowed yen. That creates a positive carry because of the differential in interest rates.
3. The buying drives up U.S. bond prices. The traders accrue big profits, when done with high leverage, assuming the yen value doesnt rise.
4. Additional profits are made when a) The dollar rises vs. the yen as the BOJ intends, b) U.S. Treasuries rise in price (as is happening)
5. Triple Profits: A leverage 100:1 means that a 1% rise in the value of the dollar vs. yen doubles the value of the equity investment. An additional profit is made if the U.S. T-bonds rise in price as they have done. Further profits are made from the positive carry, i.e. when the yield on the T-bonds is greater than the interest cost on the yen. Thats a triple profit.
6. So far, so good. And thats what is happening now. Some of the profits are probably reinvested in the stock market for diversification.

And what about firms doing both. We covered a while back how managed futures strategies had a devil of a dilemma on whether to add the carry trade to their strategies perhaps hurting their crisis period performance profile, but helping the rest of the time.

One interesting side note is that the Nikkei 225 Index has been rallying opposite the move in the Yens value. Last week, the stock index tracking the Japanese stock market, the Nikkei 225, finally (we repeat) finally surpassed its 26 year old high water mark in terms of market capitalization, via Reuters:

The total market capitalization of the TSEs first section rose to 591.30 trillion yen ($4.9 trillion), surpassing the previous peak of 590.09 trillion yen hit in December 1989, when share prices hit record peaks at the height of the Japanese asset bubble.

Heres the thing; even though the price of the index remains well below its all-time high the value of those increased value shares (priced in Yen) may be roughly the same given the decline in the value of the Yen versus the US Dollar. So while the Nikkei 225 may be up 39.8% over the past 12 months if we look at it priced in something which is a store of value say Gold you see a much different picture:

Now, those who trade Yen futures and Nikkei futures via the Chicago Mercantile exchange dont have this problem, however, with both contracts settled in US dollars (there is a Yen based Nikkei contract, also, if youre wondering), meaning Managed futures folks dont quite have the same problem with the ability to ride any trends that happen, and get out. Although the contracts will have their own performance profile which will represent being priced in US Dollars.

The Top 6 Reasons Oil Prices are Heading Lower
By STEVE AUSTIN for OIL-PRICE.NET, 2015/05/07



Many buyers and their agents may have been caught out by long-term futures contracts that commit them to high prices despite the falling spot price. Thus, they will talk up the market to try to square their books and find a pool of gullible outsiders upon whom they can dump their over-priced stock. However, readers at oil-price.net should know by now that the simple rules of supply and demand mean that the crude oil price will continue to hang around or below the $60 mark for some time to come. Here are the top 6 reasons that savvy speculators should continue to short crude oil.

1. Iran Returns

Despite heavy fines by the US authorities against anyone trading in any way with Iran, that country has still managed to continue oil production over the past few years. Sanctions against Iran have existed in various forms since the eighties when religious fundamentalists overthrew the West-friendly Shah of Iran and committed a series of terrorist attacks against Western nationals. However, sanctions ramped up to the point of shutting Iran out of the oil markets in January 2012, when the US insisted that Iran cancel its program of tests of nuclear weapons.

At the beginning of April 2015 Iran signed an agreement to end its nuclear program and let in international inspectors to prove its commitment. Confirmation of Iran's compliance will remove the biting sanctions of 2012 and bring Iranian oil to international markets. Despite being stymied by US and EU sanctions, Iran is still able to produce 2.7 million barrels per day, of which 1 million is exported. The un-exported 1.7 million barrels meet domestic demand, but a large proportion is sent to storage.
The world currently has excess crude oil production of roughly 2 million barrels per day, so a cash-strapped, and slightly embittered Iran could have immediate impact on crude oil prices by putting its estimate 35 million barrels of stored oil on the market the day sanctions are lifted.

The impact of Iran's return to the market greatly depends on how quickly they can ramp up production. Bijan Namdar Zangeneh, Iran's oil minister, claims that the country could easily increase production by 1 million bpd within months of the lifting of sanctions. That worrying figure would increase the world's excess production by 50 per cent, which some analysts claim would push crude oil prices down to $20 per barrel. However, other analysts are skeptical.

Iran's production levels were at 4 million barrels per day in 2011 before the latest round of sanctions hit. Iran's isolation and denial of technology and investment capital means its oil industry has become badly under-invested. Their ability to get back up to former production levels could also be blocked by OPEC, of which Iran is a member. Nevertheless, Iran's return will prevent the world's excess supply from being reduced and so prices will fall.

2. Fracking is Not Going Away

Many believe that the 2014 fall in oil prices was specifically engineered by Saudi Arabia to knock out US oil production through fracking. Industry analysts estimated that heavy start up costs and financing requirements placed the break-even point of a fracking rig at around a $70 per barrel price of crude oil. Many saw the slump in the price of crude down to $60 and then to the $50 mark as a significant factor.

Sure enough, the rig count in the USA plummeted from 1,608 in October 2014 to 747 in April 2015. Seemingly, the lower oil price had squeezed out US oil production in the higher-cost fracking sector. However, the advancement of technology and the agility of fracking producers resulted in higher output from fewer rigs. In October 2014, the USA produced just under 9 million barrels per day. In April 2015, that output had increased to just under 9.5 million barrels per day.

Chinese oil production through fracking has risen to the same extent as USA production, with companies in both countries adopting and improving the same technology. In a world with an excess production of 2 million barrels per day, America's increased production means that oil prices are not about to rise. China's increases compound that situation.

3. OPEC is Idle

Previous oil price falls have been keenly countered by OPEC, the cartel of oil producing nations, centered mainly on Middle Eastern producers. Whenever oil prices fall, OPEC cuts quotas to its members, limiting their production and causing the price to rise through reduced output.
Saudi Arabia is by far the biggest producer in the OPEC club and the opinion of its oil minister, pretty much rules the actions of OPEC. If OPEC members decide to cut their production, but Saudi Arabia refuses to play ball, the resolution to cut would have no impact on oil prices, and thus be a worthless exercise.
Fracking started to provide the USA with a means of achieving energy independence. The country has already become a net exporter of gas, and similar performance in oil production would remove the USA's dependence on the Middle East for its oil supplies. Saudi Arabia's dominance of American oil supply enables them to entice the USA to deploy its military in the Persian Gulf at the direction of Saudi foreign policy. The Saudis want to return to the days of US dependence on Arabian oil and so refuse to cut their production in the face of falling prices.
Despite the apparent failure of the Saudi production tactic, OPEC shows no signs of changing its policy. The Saudis seem to be determined to continue forcing the price of crude down to squeeze out US production, but as fracking gets cheaper, output will continue to expand and the price of crude oil will continue to fall.

4. Russia Produces More

Political analyst point out that oil prices fell dramatically around the time that Russia invaded the Ukraine and the EU dithered over imposing the sanctions that the USA demanded. Although Europe did eventually go along with the policy of punishing Russia through trade restrictions, their reluctance to really hit hard has undermined US strategy.

Eyeing the success of an embargo on oil sales in bringing Iran to the negotiating table, the US administration, the theory goes, decided to depress the price of oil in order to bankrupt Russia and force it to cancel plans to take over the Ukraine. The Russian economy is overwhelmingly dependent on oil and gas exports, because it has little successful industry and is unable to match the West in the development of technology.

Saudi Arabia also has a cause to complain about Vladimir Putin's behavior. The Saudis loathe Bashar Assad, the President of Syria and want to see him overthrown. American and European governments seemed willing to play along with this policy until the Russians threw their support behind Assad and European determination folded. Without any significant allies to share the burden, the USA cancelled their planned invasion of Syria. The infuriated Saudis decided to take matters into their own hands and collapsed the price of oil with the intention of punishing Russia, not US frackers.

Vladimir Putin and his administration have complained loudly and frequently that the oil price fall was deliberately aimed at attacking the Russian economy. However, the steadfast determination of unrealistic quotas haunts the Russian mentality as an overhang of the Communist era. Putin needs money to continue his glorious and domestically popular policy of reassembling the Russian Empire. The Russians refuse to bend to market forces and so have made up the shortfall in their budget caused by falling oil prices by pumping out more oil. The Russian need for income means they are unlikely to make a tactical cut in oil output. Increased production adds to the downward pressure on crude oil prices.

5. ISIL's Days are Numbered

The Islamic State of Iraq and the Levant are said to be causing havoc with oil production in the Middle East. ISIL, originally called "the Islamic State of Iraq and Syria," first came to the world's attention when they threatened takeover of northern Iraq and Syria in the autumn of 2014 – just after the USA declared they would not intervene in Syria to overthrow its president.

Oil analysts talk up the oil price by warnings over ISIL's actions. However, the revolutionaries only managed to grab a small portion of Iraq's oil wells and actually increased production of their new assets in order to fund their cause. The ISIL bogeyman delayed the fall in oil prices by about a month and the havoc they have wrought across the Middle East has since failed to block that overproduction of 2 million bpd.

ISIL's greatest success in wrecking an oil producing country came in Libya, where they apply different tactics to the oil industry. Rather than profiting from Libya's oil wells, ISIL has been destroying them, thus knocking out a major oil producing nation. Simultaneous increases in production in the USA, China and Russia, however, mean that the loss of Libyan output has had no impact on the glut of crude oil in the world. The panic pricing in the oil markets that the group's initial appearance caused has withered away.

Europe's willingness to turn a blind eye to ISIL's activities in Libya came to an abrupt end in mid-April. Deciding to knock out oil production, rather than profit from it, ISIL turned to Libya's other money maker – people smuggling. The short distance between the Libyan coastline and the Italian island of Lampedusa makes the former slave trading ports of Libya ideal routes for illegal immigrants to sneak into the EU. Unfortunately, the greed and carelessness of the smugglers has resulted in overloaded ships sinking in the middle of the Mediterranean.

The death toll through drowning of ISIL's passengers has reached headline-grabbing levels and Europe's major military powers have resolved to put an end to the organization's activities. Although the smuggling gangs are the proposed targets of European airstrikes, the difficulty of identifying those activists means that Europe will have to restore a legitimate government to Libya in order to stop human trafficking.

It is significant that the proposed European strategy is to join Egyptian military efforts. The Egyptians have been routinely bombing ISIL in Libya since February. ISIL is easier to attack than other terrorist groups. With a standing army, rather than a terrorist cell structure, such as that of Al Qaeda, ISIL is more visible, and so can be engaged by a traditional military response. Its system of local governors and administrators require offices and infrastructure that are fixed and easy to bomb. The imminent defeat of ISIL in Libya means the oil industry there will be able to rebuild, the world's oil production excess will increase and crude oil prices will fall further.

6. No Demand

The excess supply in the oil market could easily be mopped up by increased demand. However, there is no great leap in growth expected in the world for the next couple of years. Energy efficiency and investment in renewable energy, such as solar, has permanently reduced demand for oil in most of the developed world.
Both the Federal Reserve and the People's Bank of China have announced they are ending their loose monetary policies. This free money pumped around the world inflated the prices of property, stocks, bonds and commodities. Part of the reason the oil price rose through 2013 and early 2014 was simply that the excessive amount of dollars in circulation had to be invested in something. Now that money has to be paid back, the asset price inflation of the past two years will be reversed.
The BRIC economies have failed to continue their stratospheric growth into 2015. In fact, some developing nations, like Brazil, are now in recession, with tumbling currencies cutting their populations' spending power. World trade is falling and demand for oil will fall with it. With few prospects of increased demand for oil, the chance of its price rising is zero.

Conclusion

The major oil producers have done nothing to cut production since October 2014, and they are unlikely to consider cutting output any time soon. The USA, Russia and Saudi Arabia each have different reasons to continue high output, but all three are just stockpiling oil because they cannot find enough immediate buyers. Add on the inevitable return of Iran and Libya and the prospects of the 2 million bpd excess production in the world reducing can be seen to be impossible.
Monetary tightening will reduce world growth and remove asset price inflation. Lower growth, coupled with lower need for oil through efficiency and environmentalism, means demand for oil is not going to exceed supply for a long time to come. The oil price is not going to rise any time soon.