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The Mind of a Trader

I am thinking of putting my personal stories, along with advanced technicals, into my next book. The relevance is what comprises the mind of a money market trader. If you disagree, then I won't continue. Feedback, please, and here's a sample:

DADDY IN THE SLAMMER
Lenny Jordan <lennyjordan1@gmail.com>
May 13 (1 day ago)
   
Ok, I admit it. I spent one night in the slammer. I was on my motorcycle during college, and I crossed a traffic violation, a double yellow line,

It was after a few tacos and a few beers, and I wasn't feeling law obliging. There was an open road with no traffic, so I gunned it. It was up in Highwood, a mafia town, near my college, LFC.

The cop was waiting for me in the dark. Next thing you know there was a siren and flashing lights. I could have out run him, but I figured he had my licence plate.

I pulled over. He wanted fifty bucks. I said, 'I don't have it.'

He then 'escorted' me to the slammer, where I spent the night on a cold hard bed.

Next morning, my pals put fifty bucks to together to bail me out.

Two weeks later I showed up at Cook County Court where the judge told the cop off, and then gave me a twenty dollar ($20) refund.

All true!  Regards, LJ

Advice to a Finance Student

Here's my advice to a young finance student who contacted me from Nairobi, and who wants to learn how to trade the money markets:

Advice: trade the markets. Put capital at risk, no matter how small. Feel the profits and losses in your gut. Lose sleep. Analyse your trades. Don't risk more than 10% of your capital on any one trade. Live cheap. Work with a senior trader, even if he treats you like rubbish. Learn technical analysis. Stay away from the sharks, like the guy you just mentioned. They just want commissions. 

 And don't get married until you can afford divorce:) Regards, LJ

How to Make Money with Options

What follows is a direct quote from the London Evening Standard of Friday, 21 April 2017:

"Footballers' bus bombed in plot to profit from share price fall" by Ross Lydall

"Police today arrested a man alleged to have bombed the Borussia Dortmund soccer team's bus in apparent attempt to cash in on a resulting collapse in the German club's share price"...

"The 28-year old German-Russian man...'Sergei W'. ... was seized in the town of  Turbingen"...

"... a triple blast ... as the bus made its way  to the club's stadium"...

"German prosecutors today revealed the suspect had bought a large number of  'put options' ... in an attempt to secure a financial windfall."

[A similar tale is told in the movie Casino Royale.]

And if you want to know what is a put option, then I have a book for you: The Financial Times Guide to Options,  By Lenny Jordan.

Sweet dreams.

Fed to Harm US Exports; UK Chancellor's Unrealistic Budget Projections

Fed Set to Raise the Cost of US Exports
UK Gets Another Woefully Optimistic Budget Projection
Lenny Jordan Blog, 12Mar17

So NFP, or Non-Farm Payrolls, or the so-called ‘Employment Situation’ (talk about terminology – yuk!) was in the stratosphere - especially when you look at the components - and it was highly leveraged, to whit:

The headline of +235k exceeded an expected +200k. Ho hum.

In my short 30 years’ experience in trading off of economic stats, I would say that an over-the - estimate number is to be expected during the first phase of the recovery cycle.

And given a nation of appx 125mil full time workers the number/figure is, in itself only statistically significant to the extent that it correlates with other stats. [How’s that for terminology? ] So let’s look at last week’s stats, which were published in my humble column:

US Q4 GDP +1.9% [okay, right?]
US Durable Goods + 1.8% in Jan17 [Not bad]
US Consumer confidence: 114.8 [A whopper. Bear in mind that Dec was 113.3, which was a 15-yr high.]
Chicago PMI: 57.4 [well above the 50.0 mark for expansion]
S&P CCS HPI (whatever that means) housing index, + 5.6% [the feel good factor, compare the consumer confidence number above.

Now add NFP, and it’s clear that the US economy is strengthening.  So okay, Fed, let’s kill it off with pre-emptive rate hikes 

The older school economists, educated during the inflation era 1980’s will cry alarm about inflation. They’re past it. We’re in a new era, boys and girls. It’s called the era of nearby DEFLATION.

One (my) solution is to let inflation run a while. Okay, hike 0.25% a few times but don’t have the outdated idea, Mrs. Yellen (and Mr Draghi), that you need to anticipate inflation. Your 80’s economic theories will only cause our economies to struggle. In other words,

We need inflation, so let it go. How far? Watch the US 10-Yr T-Notes. When they get to 4%, then think about putting on the brakes. Right now, they’re at 2.60%, which is only up from the pre-NFP level of 2.49%. So Mrs Yellen, if you want a real leading indicator, there it is.

And a pre-emptive raising of interest rates will only cause the dollar to rally, which will stymie US exports. Then the politicians will blame each other because exports are down.

[Haven’t we had enough of these market-unaware, over-educated bureaucrats?]

UK

Over here, in the UK, we had the usual Chancellor's over optimistic budget projections.  In this case, Mr Hammond rightly noted that in terms of productivity, ‘ We are 35% behind Germany and 18% behind the G7 average’.

However, the Office of Budget Responsibility (OBR),  which is the ally of the ruling party, and whose projections one may assume are relied upon by Mr H, projects that UK productivity will increase from an annual rate of + 1% to +1.8% by 2020 – almost double. Good luck, Mr H, with your deficit forecasts.

However, to his credit, Mr Hammond proposes lowering the corporate tax rate from 28% to 19% [Which is about where it was (20% if memory serves me correct) when I arrived during the Thatcher – Major era in 1993.]

As businessmen/women, haven't wee seen countless, unrealistic budget projections?

This coming week:

Tues, 14Mar17: US PPI, BoJ Economic Announcement
Wed, 15Mar17: UK Labour Market Report
Wed, 15Mar17: US Retail Sales, US CPI, FOMC Meeting Announcement
Thurs, 16Mar17: BoE Minutes and Announcement
Fri, 17Mar17: US Industrial Production, Consumer Sentiment
Fri, 17Mar17: Everywhere: St. Paddy's Day :)


See you next week, LJ

Bullish Numbers – Wow! – And the Looming Crisis of National Debt – (Oops).

lennyjordanmarketblog.blogspot.com
05Mar17
Bullish Numbers – Wow! – And the Looming Crisis of National Debt – (Oops).

The past week's good news. Totally bullish. Stats Courtesy  of CME, Bloomberg, tradingeconomics.com, +others

US Q4 GDP +1.9% [okay, right?]
US Durable Goods + 1.8% in Jan17 [Not bad]
US Consumer confidence: 114.8 [A whopper. Bear in mind that Dec was 113.3, which was a 15-yr high.]
Chicago PMI: 57.4 [well above the 50.0 mark for expansion]
S&P CCS HPI (whatever that means) housing index, + 5.6% [the feel good factor, compare the consumer confidence number above.]

CONCLUSION : We may be on a roll.

Now for the bad news. With stats like these, interest rates have only one way to go.

Let's start with the UK, with back of the envelope calculations.

Downside = Danger of 10-yr Gilts hitting 4%.

Servicing the UK debt of £1.5tril from current rate of appx 1.2% (current bid yield) to the historic mean of 4% = increase of  appx 3%.

 Now bear in mind that every child born in the UK during 2017 will be saddled with £2,000 to £3,000 of interest payments per year on the national debt , by some estimates. These are only back-of the-envelope calcs.

But if UK interest rates rise to the historic mean of 4%, then that almost trebles the interest payment on the national debt, which puts each UK kid in hock of appx £9,000.

If I’m wrong, then I want to be the first to know.

From Wikipedia:

“In 2012, the British population numbered around 64 million, and the debt therefore amounted to a little over £15,000 for each individual Briton, or around £33,000 per person in employment. Each household in Britain pays an average of around £2,000 per year in taxes to finance the interest.”

Maybe it’s not clear what Wikipedia is saying, so let’s make it clear: Out of a nation of 64mil there are only 30mil working taxpayers.  So we have one-half of the population supporting the other half.
In the words of Bob Dylan, “How does it feel?”

 And LJ asks what are your chances of success while you struggle to pay for the non-working half?
 And what does this mean when (not ‘if’) 10-yr Gilts rates increase from the current 1.2% to the historic mean of 4%?

You don’t want to know, but I’ll tell you anyway. The LJ back-of the envelope calculation purports that the UK debt per person will TREBLE.  Then every working taxpayer will be in hock to appx £100,000.

No wonder that  UK trained doctors are fleeing the country.

US Bad News:

Let’s use the same method in order to figure out the consequences for the US.

Likewise, the States are in debt to the tune of appx $20tril, which according to columnist Mike Patton, works out to be appx $150,000 per head.  So every kid born in the US this year has $150k hanging over his head. Tell me I’m wrong.

But if ten-yr Treasuries go to the Historic mean of 4%, then does that mean that everyone in the US will be in hock to the tune of $300,000?

Tell me I’m wrong.


NEXT WEEK

All eyes on Friday’s NFP. Look for confirmation of this past week’s bullish stats.

Inflation vs Deflation, with Stats

26Feb17 blog
Inflation vs Deflation

Once upon a time, back in Chicago, I was a boy.  I was sitting with grandfather at the kitchen table. This was during the sixties. I was reading the front page of the newspaper while he was eyes down on the paper’s stock tables.  He had owned and managed a successful freight hauling business through the Great Depression.

I read that several economic authorities were concerned about inflation.  I asked grandfather, “Grandpa, what about inflation?”

Grandfather did not look up from his stock tables, but he cracked a rare smile. Out of the corner of his mouth he said, “You should see Deflation.”

Commodities inflation vs wage deflation.

The central banks are breathing a sigh of relief that all their inflationary tactics, such as QE (printing money), bond buying, and negative interest rates, have rescued us from the downward spiral of deflation.

Does that mean that we have turned the corner into inflation? Hardly.

The recent UK and EU inflation indicators have been driven by the price of oil. Thank you, Saudis, for cutting supply.

On the other hand, the CB’s are concerned that full employment will drive up wage inflation.

Bunk. In a globalised economy there are millions of people chasing jobs, and therefore driving down wages.  For the time being there is no such thing as full employment. Here is an example of economists’ 70’s-80’s thinking.

So the CB’s are concerned about inflation. I agree, but I say don’t do what the CB of Japan did during the nineties, by raising rates at the first sign of inflation. They put their economy into deflation and it still hasn't recovered. Their CB's were oldies, educated in the 70’s-80’s, when interest rates were 14%.

Inflation ain’t gonna happen any time soon, boys and girls.


Inflation Stats and Indicators

This past week, headline, pan-European inflation hit  1.76% Dangerous? No way. Core inflation, ex oil and food, was unch’d at 0.9 %. Relax, EU CB.

However, one telling sign of potential inflation is the price of Comex May Copper, which has risen from  appx 2.23 during Oct16 to appx 2.75 during Feb17. Keep an eye on it.

And Oil may be $50 per barrel, but it’s not $100. Get real.

Another source of inflation is the price of stocks. The P/E of the S&P 500 is now appx 25. Would you buy 25%? What is the cost of investing in stocks? Does anyone remember how to calculate the yield on dividends?

(Idea: create a futures contract based on the P/E level of the S&P 500.)

Raising interest rates may be a solution to control inflation, but it is also a cause of inflation because it raises the cost of borrowing.

Solution for the CBankers, Conclusion

The immediate solution for the CB's - in this era of transition - is for the CBs' to hike rates in order to lag inflation, and not try to anticipate inflation. Get it? These CBankers are stuck in the 70’s-80’s.

Next week

Mon, 27Feb17: US Durables
Tues, 28Feb:  US GDP,  Consumer Confidence, and a new one: S&P annualised index of home values. Was 5.3%.
Wed, 01Mar17: US Car Sales and Beige Book
Fri, 03Mar17: NFP postponed until 10Mar17