Monthly Archives: May 2007

The Pledge and trading


“Detective Jerry Black

has made a promise he can’t break,

to catch a killer

he can’t find.”

This is a fascinating film. After watching it, I thought of those traders who set daily/weekly monetary targets … surely this is a dangerous business.


Street views – China crashes but will it burn?

Below are a selection of views on the 6.5% decline in China that occurred overnight following a surprise hike in stamp duty by the authorities. From the currency trader’s perspective I note the relatively limited spill-over to the international equity markets and the currency markets, so far. This contrasts with February, when the Chinese market dipped by a smaller magnitude and the whole world shuddered as risk appetite took a temporary nosedive.


(click on the image to see it clearly)

Goldman Sachs – China: Portfolio Strategy (May 30):

Near-term pressure is inevitable The A-share market boasts the highest turnover velocity globally and higher transaction costs could, at the margin, suppress speculation. Small caps driven by excessive speculation and richly-valued brokerage firms could get hurt. Any contagion effect on H-shares should be short-lived, however, and could lead to buying opportunities.

Without a proper adjustment of interest rates and exchange rates, we do not think raising stamp duty is an effective tool over a longer-term horizon. As such, we reiterate our view that the government should further raise interest rates, particularly when inflation risk is skewed to the upside given the recent rise in meat prices, to normalize negative real interest rates to positive territory.

JP Morgan – China: Economics (May 30):

JPMorgan always has this kind of non-market consensus view on how the government would come out measures to keep the A-shares in check without killing the economy by massive macro tightening as argued by the rest of the street. If you noticed ever since the Rmb band has been widened, Rmb has been on an accelerated path of appreciation. Together with further QDII expansion and less macro tightening on the economy, we believe these developments are actually positive for H-shares and the MSCI China world.
Note that even a 20% correction in the A-Shares should have very limited impact on the real economy. Total float market cap is only about Rmb6 trillion compared to the total savings of Rmb36 trillion, and a portion of the float in the retails hands as they only got into the market recently.

In 2001-2005 when the A-shares market suffered a long bear market when the A-shares index dropped from 2300 to sub 1000 level, the real economy kept growing at around 10% rate for the years, and H-shares and MSCI China experienced one of the best bull market. There should be little correlation on A and H…and this time at most we believe there will be a decent correction in the A-shares, not a bear market.

Morgan Stanley – Economics (May 30)

This tax change should be taken seriously, as the message it delivers is very strong, although a 0.2% difference in duty is minimal for investors.

Implications: The A-share market reacted aggressively to this because: 1) It breaks the perception that the government will leave asset prices to the market, and will not interfere by using administrative measures; 2) 0.3% is among the highest stamp duties in the world – it only targets the stock market bubble, and does not serve any fiscal revenue purpose; 3) it leaves the market with a lot of room to imagine “what’s next”; 4) the financial hit on speculators will be real, as the whole market is changing hands in less than a month versus more than a year back in 2005.

What’s Next? I think it depends on the market’s movements. If the market rebounds quickly and ignores the message, more austerities, such as the introduction of capital gain tax and stock shorting/index futures are possible to contain the quickly inflating asset bubble.

And some interesting charts from Nomura Quantitative Research:


(click on the image to see it clearly) (Gain Capital) fined by NFA

The National Futures Association has slapped the hands of (Gain Capital) with a $100,000 penalty. Part of the charge is for ‘using deficient promotional material and failing to uphold high standards of commercial honor and just and equitable principles of trade …’. Specifically, if you look at page 3, section 12 of the official complaint, you see the NFA takes issue with the following statements:



Statements made by several of the firm’s sales solicitor were even more reckless, including:

‘… you have nothing to lose and everything to gain’, ‘just by taking the automated trading signals generated by FXSignal4 over the past 12 months you would have seen a staggering 637.8% return on your money’, and ‘for everyone trading with the program with only $10,000 in their account by the end of the year they generated $63,780 in total profits!’.

Companies, like people, respond to incentives, and I think a fine of this magnitude would be well outweighed by the additional sales and commissions from bringing fresh blood (new customers) through the door using such unscrupulous tactics. Also, while it’s encouraging to see such efforts to protect the public, retail fx brokers have been making these kinds of statements for as long as I can remember. I expect they will continue with such underhanded manipulations.

Week 29 trading results

Weekly change in equity: +0.4%. It may be raining outside but my trading is still going through a dry patch (for another trading blogger going through a similar experience, see Tyro’s blog). Still, it’s comforting to show a small profit for the week.

Road map score: 9/10. These strong road map scores haven’t correlated well with my profits, I feel this part of the game is crucial for good defensive play.

All in all, I continue to bide my time.

Greenspanian flimflammery


“Ooh yeah, I still got it, baby”

Alan Greenspan continues to flex his muscles in the marketplace. One perspective is that it’s somewhat irresponsible for Greenspan to go around making the types of comments he has been making, but from the other perspective he deserves to be allowed to do what he knows best – the moral issue considerably gets stickier if the firms he represents are front-running his comments, which I expect is the case. Also, Greenspan knows his credibility will fade over time, so why not make hay while the sunshines? I see a self-reinforcing mechanism at work here: if the market reacts strongly following his comments, then they will pay greater attention to him next time he speaks. However, if the market manages to shrug off his words then this makes each subsequent speech that much less important.

Liverpool lose 2-1


Following on from the post below, Liverpool ended up losing to Milan 2-1. The match was a joy to watch. Liverpool’s performance was valiant and courageous, but as Liverpool captain Steven Gerard said after the game:

“In the build-up to the game we said it would be decided on small details and a bit of luck and Milan got that.”

Trading can also be about small details and bit of luck, and even though we may perceive a trading edge, we still need an element of luck to keep me from a truly disastrous but low probability outcome (throwing heads many times over with a coin toss is unlikely but it’s possible).

Returning to the football match, in my opinion we witnessed a case of the better team losing on the day. Milan capitalised on the few chances they had, and the history books will remember them as the victors, but they were quite sluggish relative to Liverpool, who, while not playing the perfect game, did very little wrong. Such outcomes are possible in games like football and trading, but as Liverpool manager Rafael Benitez said in the post-match commentary ‘at the end of the day you need to score’.

Football and trading

The Champion’s League final (Liverpool vs Milan) is about to kick-off in a few minutes and in the run-up to the game the media focus has been squarely on the strikers, the chaps whose job it is to score the goals. The defenders, however, have an equally crucial role in the game, as it is up to them to prevent the opposition from scoring. Their’s is a burdensome role, and the glory will never be as great as the upfront players, but they are a vital component of the team.

Likewise, in trading, we focus on our winners and on making the profitable trade. This is what people want to know: how much profit have you made? However, it must be remembered that our defensive plays and strategies are just as important as those trades that bring in the lucre. It is the defensive approach that protects our capital when the going gets rough – just because the safety play appears dull, don’t let that detract from it’s importance.