Saturday, May 9, 2009

Interesting Quote

Robert Rhea, the great Dow theorist of the 1930’s wrote: “It is almost certain that a panic rebound will recover 40 percent or more of the preceding decline.” Mr. Rhea goes on to say “Whenever a panic decline occurs, the market thereafter seems to need a resting period during which it appraises the damage to its structure. Prices frequently back and fill for several months in such areas. The action somewhat resembles that of a pendulum which, oscillating slowly as it seeks equilibrium, gradually comes to rest. The direction taken after equilibrium is attained is generally significant.”

The Real Unemployment Rate Reaches 15.8%

The news media failed to report that the March data was revised downward to -699,000. This was an all-time record.

from John Mauldin:

First, there are actually two surveys done by the BLS. One is the household survey, where they call up a fixed number of homes each month and ask about the employment situation in the household and then take that data and extrapolate it for the economy as a whole. So, while the number of employed rose, the number of unemployed rose a lot faster, by 563,000 to 13.7 million. In addition, there are 2.1 million who are "marginally attached" to the workforce. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

According to the survey, headline unemployment rose 0.4% to 8.9%, the highest level since 1983. But if you count those who are working part-time but want full-time work, as well as the "marginally attached," the unemployment rate (called the U-6 rate) is an ugly 15.8%.

For whatever reason, the markets were happy that the headline number of the other BLS survey, the establishment survey of lost jobs, was "only" 539,000, down from a negatively revised 699,000 in March. At least, the thinking was, the numbers were not getting worse, though it is hard for me to be encouraged by half a million lost jobs. That may not be the worst of it, however, since 66,000 jobs were temporary workers hired for the 2010 census, and the BLS estimated that the birth-death ratio added 226,000 jobs as a result of new business creation. Really? This will mean that there will likely be a major revision downward at some future point. The number will likely be well over 600,000 in the final analysis.

Further, it is likely that we will see at least another 1.0-1.5 million lost jobs over the rest of the year, taking unemployment very close to 10%. As an aside, the Treasury used an unemployment rate of 9.5% in their stress test of the banks, which suggests the test was not all that stressful. And, showing further weakness, there were 66,000 fewer temporary jobs. If there was really a nascent recovery, you would see a rise in temporary workers.

Thursday, May 7, 2009

More Bad Bond Auction Action

from Bloomberg:
Treasury 30-year bonds fell the most in four months as investors demanded higher-than-forecast yields at today’s auction of $14 billion of the securities with the U.S. slated to sell a record amount of debt this year.

“This is a problem,” said Chris Ahrens, head interest- rate strategist at UBS AG in Stamford, Connecticut, one of 16 primary dealers required to bid in Treasury auctions. “The market required a fairly significant discount to buy the bonds.”

Stress Tests Signal More Government Intervention


The stress tests on the 19 biggest US banks pave the way for an ongoing interventionist approach to regulation, Ben Bernanke, chairman of the Federal Reserve, signalled on Thursday.

Hours before the publication of the results of the tests, which are expected to show that banks including Citigroup and Bank of America will need to raise equity, Mr Bernanke told the Chicago Fed that the “exercise has been comprehensive, rigorous, forward-looking, and highly collaborative… Undoubtedly, we can use many aspects of the exercise to improve our supervisory processes in the future.”

China Expresses Concerns About Fed's Bond-Buying on Value of It's Treasuries

from Marketwatch:
Chinese bank authorities warned the Federal Reserve's programs to pump more cash into the financial system by buying $300 billion in Treasurys risked jolting bond prices and devaluing the dollar.

The overnight comments from the world's biggest holder of U.S. government debt helped depress Treasury prices in trading Thursday, said one analyst.
In a monetary report dated Wednesday and posted on the People's Bank of China's Web site, the central bank said the quantitative easing policy pursued by the Fed may help keep bond yields at low levels in the short term.
But over a longer period, higher inflation expectations, interest rates and central bank measures to take extra liquidity out of the system could cause a sharp adjustment to bond prices, the report said.
The central bank also said plans by the Fed and other central banks to drive lending rates lower by buying their own government debts risks depreciating major currencies.

Commercial Loan Defaults Surge

from Bloomberg:
Commercial mortgage delinquencies in the U.S. climbed to the highest level in at least 11 years in April as scarce credit made it difficult for landlords to refinance loans, according to property research firm Trepp LLC.

The percentage of loans 30 days or more behind in payments rose to 2.45 percent, Trepp LLC said in a report. The delinquency rate was more than five times the year-ago number, Trepp said. The New York-based researcher’s records go back to 1998.

“It’s about as bad as it’s ever been,” said Thomas Fink, a Trepp senior vice president. “I don’t think we’re done yet. Where it’s going to top out, I don’t know, but we’re not done.”

Weak Treasury Auction Sends Stocks Lower Too!

Not often do we see this -- both treasuries and stocks selling off forcefully. Today's poor showing at the treasury auctions results in fresh fears!



Free Cars for Welfare Recipients

from the Boston Herald:

Gov. Deval Patrick’s free wheels for welfare recipients program is revving up despite the stalled economy, as the keys to donated cars loaded with state-funded insurance, repairs and even AAA membership are handed out to get them to work.

But the program - fueled by a funding boost despite the state’s fiscal crash - allows those who end up back on welfare to keep the cars anyway.

“It’s mind-boggling. You’ve got people out there saying, ‘I just lost my job. Hey, can I get a free car, too?’ ” said House Minority Leader Brad Jones (R-North Reading)...

The state pays for the car’s insurance, inspection, excise tax, title, registration, repairs and a AAA membership for one year at a total cost of roughly $6,000 per car...

But Kehoe admitted about 20 percent of those who received a car ended up back on welfare, and while they lose the insurance and other benefits, they don’t have to return the car.

“Given the state’s fiscal condition, paying for AAA and auto inspection costs is outrageous,” said Senate Minority Leader Richard Tisei (R-Wakefield). “There are so many families out there trying to deal with layoffs and pay cuts. You have to wonder what the state’s priorities are at this point.”

Interest Continues to Rise

After a week-long consolidation, treasuries have continued their sell-off, with interest rates rising to a new high. We are seeing the highest rates since December '08.

Sell in May and Go Away?

Note this graph from John Mauldin's newsletter. Apparently, there is some validity to the saying, "Sell in May, and go away". He mentions that this is particularly true during a secular bear market, which we are experiencing right now. He also mentions that the phenomenon has been even more amplified during the current bear market.

Eurodollar Futures: Now That's Some Trend

Every day I expect this trend to reverse, or consolidate, especially since it is based upon interest rates for Libor. However, it just keeps going and going.


LIBOR stands for "London Inter-Bank Offered Rate." It is based on rates that contributor banks in London offer each other for inter-bank deposits. From a bank's perspective, deposits are simply funds that are loaned to them. So in effect, a LIBOR is a rate at which a fellow London bank can borrow money from other banks. Rate calculations are complex as they incorporate variables such as time, maturity and currency rates. There are hundreds of LIBOR rates reported each month in numerous currencies.
Apparently, since LIBOR is a rate that banks charge to lend to each other, it is reflective of confidence in the financial markets. The Eurodollar is a futures derivative that mimics LIBOR. It continues to fall as long as confidence between banks is improving. It is also extremely liquid, with more than 1,000,000 of open interest.

I have begun to wonder, with the Eurodollar approaching a value of 100, if that price is equivalent to a zero percent interest rate for LIBOR. From the CME's website:
"Quoted in IMM Three-Month LIBOR index points or 100 minus the rate on an annual basis over a 360 day year (e.g., a rate of 2.5% shall be quoted as 97.50). 1 basis point = .01 = $25."
This suggests that with the Eurodollar priced today at 99.1300, the LIBOR rate would be .8700%, which is obviously less than 1%. Since the low rate is reflective of high confidence, it appears to represent the return of rising confidence in the financial markets, and particularly the lending between banks outside the United States. It closely mirrors both LIBOR and the Fed Funds rate, but is not set by the Fed.

Stress Test is a Sham

from James Quinn at

William Black is a former senior bank regulator. He is currently an associate professor of economics and law at the University of Missouri. Mr. Black held a variety of senior regulatory positions during the S&L crisis. He managed investigations with teams of examiners reporting to him, redesigned how exams were conducted, and trained examiners. He calls the stress tests conducted on the 19 biggest banks in the country a complete sham. In his own words:

  • "You can't conduct a meaningful stress test without reviewing (sampling) the underlying loan files and it seems likely that the purchasers of securitized instruments (not just mortgages) do not even have the loan file data. Moreover, loss ratios vary enormously depending on the issuer, so even a bank that originates (or has purchased a bank that originates) similar product cannot simply take its own loss rate and extrapolate it to the measure the risk on the value of securitized credit instruments.
  • "It is vastly more difficult to examine a bank that is engaged in accounting control fraud. You can't rely on the bank's books and records. It doesn't simply take more, far more [employees]. It takes examiners with experience, care, courage, and investigative instincts and abilities. Very few folks earning $60,000 are willing to get in the face of the CEO and CFO making $25 million annually and tell them that they are running a fraudulent bank and they are liars. FYI, this is one of the reasons why having "resident examiners" never works.
  • "Examiners certainly can't do the stress testing that Geithner describes or evaluate the reliability of a large bank's proprietary stress test. If they were serious about constructing reliable stress tests, which they aren't, you'd require their analytics to be made public. You'd have the industry fund independent investigations by rocket scientists chosen by a committee selected by the regulators of the soundness of the analytics. You'd also have the industry fund competitions to rip them apart (a bit like we hire legit hackers to test security by trying to defeat it) and show where they produce absurd results. The concept that there are 100 examiners with these skills, suddenly freed up from all other duties, assigned to CONDUCT stress tests is a lie."
We should also keep in mind that the "profits" recently reported by the big banks were concocted through one-time sales and FASB accounting gimmicks that allowed them to count bad loans as good ones. This doesn't inspire confidence except in an environment of fraud and irrational exuberance -- on steroids.

Wednesday, May 6, 2009

Gangster Government: The Rule of Law Is Dead In the United States

from Michael Barone at the Washington Examiner:

Last Friday, the day after Chrysler filed for bankruptcy, I drove past the company’s headquarters on Interstate 75 in Auburn Hills, Mich.

As I glanced at the pentagram logo I felt myself tearing up a little bit. Anyone who grew up in the Detroit area, as I did, can’t help but be sad to see a once great company fail.

But my sadness turned to anger later when I heard what bankruptcy lawyer Tom Lauria said on a WJR talk show that morning. “One of my clients,” Lauria told host Frank Beckmann, “was directly threatened by the White House and in essence compelled to withdraw its opposition to the deal under threat that the full force of the White House press corps would destroy its reputation if it continued to fight.”

Lauria represented one of the bondholder firms, Perella Weinberg, which initially rejected the Obama deal that would give the bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts.

This of course is a violation of one of the basic principles of bankruptcy law, which is that secured creditors — those who lended money only on the contractual promise that if the debt was unpaid they’d get specific property back — get paid off in full before unsecured creditors get anything. Perella Weinberg withdrew its objection to the settlement, but other bondholders did not, which triggered the bankruptcy filing.

After that came a denunciation of the objecting bondholders as “speculators” by Barack Obama in his news conference last Thursday. And then death threats to bondholders from parties unknown.

The White House denied that it strong-armed Perella Weinberg. The firm issued a statement saying it decided to accept the settlement, but it pointedly did not deny that it had been threatened by the White House. Which is to say, the threat worked.

The same goes for big banks that have received billions in government Troubled Asset Relief Program money. Many of them want to give back the money, but the government won’t let them. They also voted to accept the Chrysler settlement. Nice little bank ya got there, wouldn’t want anything to happen to it.

Left-wing bloggers have been saying that the White House’s denial of making threats should be taken at face value and that Lauria’s statement is not evidence to the contrary. But that’s ridiculous. Lauria is a reputable lawyer and a contributor to Democratic candidates. He has no motive to lie. The White House does.

Think carefully about what’s happening here. The White House, presumably car czar Steven Rattner and deputy Ron Bloom, is seeking to transfer the property of one group of people to another group that is politically favored. In the process, it is setting aside basic property rights in favor of rewarding the United Auto Workers for the support the union has given the Democratic Party. The only possible limit on the White House’s power is the bankruptcy judge, who might not go along.

Michigan politicians of both parties joined Obama in denouncing the holdout bondholders. They point to the sad plight of UAW retirees not getting full payment of the health care benefits the union negotiated with Chrysler. But the plight of the beneficiaries of the pension funds represented by the bondholders is sad too. Ordinarily you would expect these claims to be weighed and determined by the rule of law. But not apparently in this administration.

Obama’s attitude toward the rule of law is apparent in the words he used to describe what he is looking for in a nominee to replace Justice David Souter. He wants “someone who understands justice is not just about some abstract legal theory,” he said, but someone who has “empathy.” In other words, judges should decide cases so that the right people win, not according to the rule of law.

The Chrysler negotiations will not be the last occasion for this administration to engage in bailout favoritism and crony capitalism. There’s a May 31 deadline to come up with a settlement for General Motors. And there will be others. In the meantime, who is going to buy bonds from unionized companies if the government is going to take their money away and give it to the union? We have just seen an episode of Gangster Government. It is likely to be part of a continuing series.

This is symptomatic of socialist banana republics. Welcome to the Banana Republic of the United States.

Tuesday, May 5, 2009

Reader Comments on Handling Performance Pressures

from Dr. Brett--
I recently proposed that performance anxiety is the most common psychological problem faced by traders. In the comments section of that post and in private emails to me, readers have weighed in with their successful approaches to dealing with performance pressures. This post will summarize reader comments; tomorrow's posts will synthesize perspectives from reader emails and add a few views of my own.

Let's start with views from the comments section:

* Reader Charles talks about an approach that is common among proprietary traders I've worked with. When he hits a slump, he temporarily reduces his size, takes pressure off, and then raises his size once he gets back into the groove. I will do something somewhat similar: I will temporarily limit my trading to my highest probability setups and get a winning day or two under my belt during a slump period. The reason this strategy can work is that it takes an important element in stress--perceived control--and puts it squarely in the trader's hands. Often, performance anxiety occurs when we feel out of control of a situation. By creating an enhanced degree of control, we can regain our sense of mastery and minimize stress. The one caveat in this approach is that position sizing is crucial. If you risk too much of your portfolio on individual positions and then hit a losing patch, you could dig too deep a hole for yourself--particularly if you reduce your size in order to recover psychologically. Not betting the farm on any single idea is one great preventive measure for performance pressures.

* Trader David offers a fascinating analogy between trading and skeet shooting. He also provides a link to an Olympic shooting coach who helps his students with performance pressures. He suggests visualization techniques to occupy the conscious mind, enabling the subconscious (i.e., our automatized skills) to take over. Most performance anxiety occurs when a task that normally occurs automatically is disrupted by our conscious focus on the outcomes of that task. Any exercise that absorbs our awareness and directs our focus away from the performance itself will be helpful in that regard. As I will indicate in tomorrow's post, enhancing our state of concentration and directing that concentration toward the process of performing (not the outcome) can form the foundation for an effective self-hypnosis routine. David's approach is much more than simple positive self-talk: it is a redirection of attention and hence a redirection of regional cerebral blood flows.

* Dr. Bruce, who has offered so many fine comments on this blog, puts his training to good use and recommends the use of beta blockers in combating performance anxiety. I cannot agree more. When I ran the counseling program for medical students in Syracuse, I encountered performance anxiety problems all the time: test anxiety, public speaking stress, etc. My first line of assistance was the use of specific behavioral exercises that research has found to be effective in dealing with anxiety. (More on those tomorrow.) There were times, however, when even those exercises were not sufficient to gain self control. The beta blockers were very helpful in reducing physiological reactivity, reducing the secondary anxiety that I mentioned in the prior article. Instead of becoming anxious about their own anxiety, performers notice their reduced arousal and focus on that. Here's a nice summary of the use of beta blockers for professional musicians. Note that these are to be used as temporary measures before major performances and must be prescribed and supervised by a physician.

* Dr. Bruce also recommends relaxation and biofeedback. At present, a combination of these, along with directed behavioral exercises, is my favorite intervention for performance anxiety. Here you're training the body to remain calm--and training the mind to stay focused--under varying emotional conditions. Much of my post tomorrow will deal with this combination. As Dr. Bruce notes, the techniques work much like the beta blockers: by reducing autonomic arousal.

* Finally Dr. Bruce emphasizes the role of preparation in preventing performance anxieties from taking over. Making skills automatic is the best way to enable performances to flow. When I have a public speaking engagement, I will always prepare the opening of my talk most extensively. I'll also use overheads to cue me through the opening. I know that if performance pressures are going to be present, they'll get to me early in a talk. By being super prepared with the first portion of the presentation with plenty of cues, I get into the rhythm of the speech and the automatic skills take over. Similarly, I will intensively mentally rehearse the entry of a trade and what I'll do if it goes against me. This preparation takes the scariness out of a situation and, as noted before, enhances the sense of personal control. Please also take a look at Dr. Bruce's point about running wind sprints (increasing your physiological arousal) when you're anxious; it's an excellent point. By exercising vigorously when you're anxious, you override your body's nervousness with normal pumped-up arousal, which no longer plays into the secondary anxiety. Indeed, as the good doctor notes, you can actually use your awareness of your pumped-up state to aid your performance.

* Trader Dan mentions a technique that psychologists call cognitive reframing. Remember that performance anxiety occurs when we perceive a situation to be a threat. By reframing the situation, we take much of the threat out of it. His reframing is based on an analogy to the baseball player: The hitter can get on base less than half the time and still be an all-star player. It is not necessary to win on each trade to be a successful trader, and all successful traders have strings of losers simply as a function of chance. Making losing a normal, expectable part of the game--and making sure position sizes are reasonable in order to survive those losing streaks--is very helpful in taking the threat out of trading losses. My own approach, as readers know, is to view outcomes in two ways: trades that make me money and trades that teach me something about myself and/or the market. By embracing loss as a learning experience, I reduce the stress often associated with thoughts of losing.

* Reader AnaTrader, who has also graced this blog with many fine comments, offers several perspectives from her mentor. The essence of her mentor's approach is enhanced self-awareness: taking one's "emotional temperature" hourly to monitor stress levels and thought patterns associated with stress. AnaTrader passes along a key insight: the importance of staying focused in the present. It's when we become wrapped up in the past or future--worrying about past losses or possible future ones--that anxiety is most likely to appear. By using breathing techniques to stay grounded in the present and reduce physiological arousal, it is possible to regain a present-centered awareness. Citing Steidlmeyer, AnaTrader's mentor notes the value of immersing yourself in current market data as a way of staying focused on the present. Immersing oneself in meditation music and constructive self-talk, as AnaTrader notes, can also short-circuit the worry process that generally precedes performance pressures.

* Trader Jeff mentions returning to paper trading mode as a way of regaining one's rhythm. This is similar to the above-mentioned technique of reducing trading size, but now it takes money off the table altogether and just has the trader focus on the process of putting on trades and managing them. This approach is common in the area of sexual performance anxiety, where psychologists will help couples by telling them to *not* engage in intercourse and simply get comfortable with themselves and their partners in bed. By taking the performance pressure away from the sexual situation, couples can allow their natural feelings to take over. Similarly, the trader who goes back to paper trading temporarily can find his or her rhythm return relatively quickly, making it easy to return to putting money on the line. One caveat here is that you don't want to retreat to paper trading for too long a time; that could be an escape that would not enhance a trader's sense of master. As a temporary measure for getting away from money pressures and returning to sound trading practice, however, going into simulation mode can be very useful.

* KC Equity Trader makes a super-important point about making sure you can always survive losing trades. In my own position sizing, I always assume that I could have six consecutive losing trades. If my bets are so large that six consecutive losers would put me in an emotionally bad place (and a large P/L hole), then I know I'm trading too much size for my own risk tolerance. Because KC Equity Trader knows he's always going to survive to make another trade, no single loss is unduly threatening for him. KC's point about keeping things mechanical--carefully following planned entry and exit signals--also makes the trade automatic, reducing performance worries. By making losses planned and routine, the trader takes away their threat.

* Dinosaur Trader mentions how it's easy to become more focused on P/L when a new child enters the home and there are greater household expenses and perceived trading pressures. He also mentions reducing trading size as a way of reducing this pressure. Sound financial planning is also key: making sure that you always have cash reserves to handle unexpected expenses, loss of a spouse's income, etc. I'm a firm believer that one should not be trading one's household savings. There should be separate accounts: one for savings/investment that remains safe and secure and one for trading. If your trading account is also your savings and retirement capital, that is too much objective pressure for most traders. What that means in practice is that a portion of trading profits should always be devoted to rainy days, trading slumps, and future needs. It also means that new traders should have enough reserve capital not at risk (or secondary sources of income) to survive their learning curves. That having been said, I know many traders who have traded more cautiously (and smaller) immediately following a major life event (marriage, birth of a child, relationship break) until they're sure they have their equilibrium. The ounce of prevention in such cases is truly worth the pound of cure.

* Finally Trader M. mentions anxiety that comes from being unable to anticipate market trends. He engages in considerable market preparation to make such anticipations and feels pressure to incorporate new methods/information in order to not miss anything. The risk here is one of perfectionism: setting a standard of being able to predict trends that not even highly successful traders live up to. Many, many successful traders (trend followers, short-term traders) don't succeed by anticipating market trends. Rather, they identify shifts in trend as those are occurring or right after they've been confirmed. I know quite a few successful breakout traders who don't try to predict the breakout: they simply go with it once it's confirmed by volume and the participation of large traders. Trader M. perceptively notes that trading is like speed chess. In speed chess, however, you don't succeed by trying to predict your opponent's moves. Instead, you train yourself to respond to board configurations as they emerge. Moderating one's demands on oneself can be a powerful method for reducing performance pressure.

So there we have it! There are many more fine insights from commenters than you'll get in any high priced seminar or coaching session. Tomorrow, I'll summarize the equally astute insights of those who have emailed me with comments and then I'll post my own techniques for handling performance anxiety. Thanks to all who have participated in this exercise and shared their learning and experience!

I recently posted comments from readers regarding ways of handling performance anxiety. In this post, I'll summarize emailed ideas from readers and also add a few thoughts of my own. Because these readers opted to email me rather than comment publicly, I am not mentioning them by name to preserve their anonymity.

* Trader O recommends a book by Terry Orlick entitled In Pursuit of Excellence: How to Win in Sport and Life Through Mental Training. Orlick is a former Olympic athlete and coach and has worked with many Olympians on mental training. His methods include focused goal setting, visualization, relaxation, and methods to block out distraction. Recall that performance anxiety occurs when concerns about the outcomes of performances interfere with the actual act of performing. By learning how to direct awareness and achieve a state of focused concentration, a performer can become immersed in the act of performing. For instance, during my best trades I focus intensely on what various sectors are doing and how volume is behaving. My thoughts are on how the market is trading, not on whether my trade will make money. As Trader O and the book suggest, one can train oneself to sustain such focus as a positive habit pattern.

* Trader M observes that "The most effective technique I use for dealing with anxiety is to remember that anxiety is missing the letter ‘d’. There is no entry in any English dictionary entered as “andxiety”." His excellent point is that we tend to lapse into thought patterns where we see ourselves as either all good or all bad. Anxiety can be seen as a form of justice, pushing us toward a more balanced perspective. The word "and" itself adds a balancing element, reminding us that we are subject to both good and bad: winning and losing. This simple reminder--by turning "anxiety" into "andxiety"--helps a trader think and feel with "and". That's a balanced perspective that doesn't put pressure on the performer.

* Trader S recommends the book Emotional Intelligence and its description of methods to resolve problematic emotional patterns. He particularly mentions becoming aware of your own breathing, especially when it becomes short and shallow. By purposely elongating those breaths, he is able to slow himself down both mentally and physically. He has used the Journey to the Wild Divine biofeedback software to help him learn to control his body's arousal. Finally, after undergoing some traumatic losses, Trader S. has limited himself to trading one contract and losing only $100 per trade. This takes the possibility of large losses entirely off the table and enables him to regain confidence. In my next post, I will outline some of my own uses of biofeedback to deal with performance pressures. This can be a very useful tool for self control.

* Trader A mentions a technique from a book that helped him greatly when he started a new trading position with a firm. He kept a daily journal and wrote down the time of day whenever he experienced feelings of panic regarding his trading. He then wrote down the time of day when that anxiety subsided. Although it seemed as though the nervousness was lasting a long time, he could see that, in fact, it only lasted a few minutes at most. Each time he repeated the exercise, the duration of the anxiety period lessened. This is an excellent method, because it reinforces for the trader the sense of "This, too, shall pass." It is one easy way to deal with secondary anxiety: the fear of becoming anxious.

* Trader F recently went through a harrowing loss and dealt with it by shedding half his position and protecting his remaining capital. He notes that such a loss can spiral, taking a trader out of his discipline and interfering with subsequent opportunities. I believe his basic point is so important : we should always have loss limits in place that we can live with. This takes much of the pressure off of losing. I personally try to ensure that no single loss in a day's trade could prevent me from having a green week; no single losing week could prevent me from being up on the month. The key is to have control over one's losses, rather than letting them control you.

Once again, I thank readers for sharing their experiences and life lessons. One great advantage of a blog is that it can become a two-way vehicle for communication, in which we learn from each other's experiences. In the last post and this one, readers have written a virtual manual regarding how to overcome performance pressure. My next post in this series will offer a few perspectives of my own and attempt to contribute to that manual.

Favorite Techniques for Overcoming Performance Anxiety

from Dr. Brett-
A little while back I made the observation that performance anxiety is the most common psychological problem that I encounter among traders. It occurs in many forms--during slumps, at times when traders attempt to raise their size/risk, when life's financial needs add pressure to trading outcomes--but the common element is that a concern with the results of trading interferes with the process of trading itself.

I thought that both the comments of readers and their emailed suggestions offered very useful ideas regarding the handling of performance pressures in trading. In this post, I'll add two suggestions of my own.

* Self-hypnosis - This builds on the ideas from my first trading book, The Psychology of Trading. When a trader is responding to a trading situation with anxiety, I ask the trader to close his eyes, breathe deeply and slowly, fix his attention on a musical selection, and hold his hands in front of him with palms facing each other a couple feet apart. The music, taken from Philip Glass' early works, has a highly repetitive structure and serves as an object of focus. After an extended period of the slow, rhythmical breathing and focus on the music, I then suggest to the trader to imagine that there is a magnet between his hands, pulling them slowly and steadily together. As his hands are drawn closer and closer, I suggest, he will find himself feeling more and more relaxed, calm, and confident. The exercise is brought to a close when the palms finally touch. Altogether the exercise lasts at least 15 minutes.

The exercise becomes a self-hypnosis routine when traders give themselves suggestions during the time that the hands are moving together. For example, they might suggest to themselves (internally or even via a self-made audio tape) that, as their hands move together, they will feel increasingly accepting of a recent loss and able to put it behind them. The key is to enter a highly focused and relaxed state prior to the self-suggestions and to perform the exercise thoroughly and regularly on a daily basis. Over time, traders find it easier to enter the focused state of relaxation and invoke their own suggestions. Eventually it's possible to get back to that state (and activate the suggestions) by merely taking a couple of deep breaths and bringing one's hands together. This makes the technique very practical for real-time trading situations, when all you have time for is perhaps a few deep breaths and a simple gesture. Repetition is essential to such mastery.

* Reprogramming Anxiety Through Biofeedback - Regular readers know that I consider biofeedback to be a best practice in trading, with broad application to a variety of emotional situations that affect performance. Of late, I've been making use of heart rate variability feedback through the Freeze-Framer program, which offers a nice graphical interface to help users track their progress and visually determine whether or not they're in "the zone". In the first step of biofeedback training, I simply teach traders how to enter the zone, as above, by regulating their breathing and sustaining a tight cognitive focus. This, by itself, is a very useful skill that can serve as a preventive measure regarding performance stress.

Once the trader becomes adept at this, I then add a second component to the exercise: The trader must vividly visualize a mildly anxiety-producing trading situation while hooked up to the biofeedback and maintaining the calm focus. Once the trader can repeatedly visualize this low-anxiety situation and sustain "the zone" on the biofeedback readout, we then move to a second, higher-level anxiety scenario. Often it's helpful to vividly imagine variations of the same scenario in separate biofeedback sessions. Eventually we move to the most anxiety-producing situations, repeating them over and over in variations, until the trader can sustain the calm focus even in the worst case scenarios. The added benefit of this method is that it teaches traders what they need to do to get their minds and bodies under control. This awareness can then filter down to real time, when all the trader needs to do is focus attention and regulate breathing during stressful market periods. A variation of the biofeedback work that is quite effective involves practicing constructive self-talk while staying in the zone.

Notice that both of these methods involve shifting one's state--physically, cognitively, and emotionally--as a way of dealing with performance pressure. By enhancing our control over our states, we can place ourselves in modes of thinking and feeling that are incompatible with performance anxiety. My experience is that traders can learn this competency on their own or with only a minimum of coaching intervention. With steady practice, one develops a degree of self-mastery that carries over to other areas of life. I believe I'm much more able to deal with life's various stresses as a result of what I've learned from managing my trades--and my reactions to those trades!

Breaking Through Slumps

from Dr. Brett -
It's never easy going through a trading slump, but it's especially frustrating and difficult when markets are moving and you're missing out on so much seeming opportunity. I've received quite a few calls and emails from traders in slumps lately, and frustration is the common emotion: frustration that is channeled as self-blame. It's not just that the traders are losing money; they also hold themselves responsible for their losses--and they can't let it go.

Generally, what initiates a trading slump is not what sustains it. The initial cause is often a misreading of markets, an outsize losing trade, or a careless trading error. Those are things that happen to any trader who participates in markets long enough. Rarely, in and of themselves, do these initial mistakes and losses ruin overall profitability.

What does ruin profitability is compounding these unfortunate but expectable errors with subsequent bad trading. By "bad trading", I don't just mean trades that lose money. Rather, I'm referring to trading decisions that one would not have taken had those initial losses not occurred. The bad trading could entail ignoring an obvious signal to buy or sell. It could result in buying and selling in the absence of signals. It could result in a shift in position sizing or a large change in how manages the risk associated with each trade.

This transition from normal, expectable initial mistakes and losses to subsequent bad trading is what turns loss into slump: it is what sustains a slump. The trader cannot accept the initial loss or mistake, learn from it, and put it behind them. They cannot simply deal with it as one of those normal, expectable frustrations, like getting caught in traffic or like choosing the wrong restaurant. Instead, the initial losses and mistakes are personalized. They become threats, not so much to P/L, but to self-esteem. Suddenly, the trader convinces himself or herself that this is not acceptable: I must get my money back or I must stop trading altogether, because I have performed so poorly.

Can you imagine a professional athlete--say, a football quarterback--who throws an interception and then becomes so self-blaming or so fearful of repeating the error that he abandons the game plan that he rehearsed with coaches and players? That is the trader who turns mistakes into slumps.

Of course, once the initial error is compounded, now the motivation for self blame is doubled: the slump becomes self-reinforcing. The more money is lost and the more the trader makes bad decisions, the more he or she alters those "game plans".

The answer to this problem is to embrace your fallibility. You *will* throw interceptions at times. On occasion, you'll lose, and, on occasion, you'll make mistakes that cost you victory. That happens to professional athletes, chess players, performing artists trying out for positions, and business leaders. What makes you a professional is not perfection--making no mistakes, taking no losses--but the ability to accept setbacks, learn from them, and move on.

It sounds paradoxical, but mistakes and losses won't turn into slumps once you embrace those setbacks as opportunities to learn: to learn about markets, to learn about yourself. Every mistake is there to teach you something; you're either losing because you've missed something in the market, or because you did not execute an idea properly. Either failing is there to teach you something, to provide you with an opportunity to grow. We overcome losses by accepting and transforming them; it's when we fight them that they turn into frustrations and then slumps.

For more information related to slumps and positive trading performance, I've selected several past blog posts below for additional reading.


Why Traders Lose Their Discipline

Characteristics of Successful Traders

Improving Your Well-Being

Overcoming Performance Anxiety

Assessing My Coping Style

from Dr. Brett--
How do you handle adversity in the markets? My recent post suggested that the effectiveness of your coping methods is important both in moderating the flight or fight effects of stress, but also in helping us retain access to our implicit knowledge of market patterns. Here is a short self-assessment that I've put together to help you identify your coping styles.

Imagine the following situation: You are in a trade and it is gradually moving in your favor. You have a mental stop set and a target price. A program trade hits the market and your position blows through your stop, putting you further in the red that you wanted to be. Rate each of the following reactions to the situation on a 1-5 scale, with 1 indicating that you're not at all likely to respond that way; 3 indicating that you sometimes respond that way; and 5 indicating that you usually or almost always respond that way:

1) I vent my feelings out loud and take immediate action to rectify the situation.

2) I step back from the situation mentally and make sure I'm calm and collected.

3) I tell myself it's not a big deal and that I can get the money back in a later trade.

4) After the trade, I seek support from other traders and from people I'm close to.

5) I hold myself responsible for what happened and take the blame.

6) After the trade, I try to not dwell on what happened and turn my attention elsewhere.

7) I go into problem solving mode and figure out how I can manage the position.

8) After the trade, I review what happened and try to figure out what good might come from the trading experience.

If, like many traders, you respond to this kind of situation in more than one way, write down which response you're most likely to have first, which second, etc.

Think back to a trade situation that you did *not* respond to effectively. Go back to the list and identify which response came first, which came second, etc.


Let's take a look at the results. The eight responses represent the coping strategies assessed by the Ways of Coping Scale developed by Folkman and Lazarus:

1) Confrontive Coping - Responding immediately to challenging situations with action.

2) Distancing - Gaining emotional distance from a situation.

3) Self Controlling - Making efforts to keep oneself in control in the situation.

4) Seeking Support - Looking to others for emotional support in the situation.

5) Taking Responsibility - Putting the responsibility for the situation on oneself.

6) Escape/Avoidance - Making efforts to get away from the situation.

7) Planful Problem Solving - Making plans to deal with the situation.

8) Positive Reappraisal - Trying to look at the situation in a positive light.

Remember, none of these coping methods are all good or all bad. All can have their place and all can be overused and misused. The key question is: How do *your* coping efforts work for you?

One easy way to determine that is to examine what I call your "conditional trading outcomes". Take a look at your trading results immediately after you have a meaningful losing trade, a meaningful losing day, or a losing week. Take a look at how well you trade after a position has gone against you. Do you trade better after a drawdown or worse?

How about after you have a few winning trades, days, or weeks in a row? Do you trade better or worse? Breaking down your performance as a function of recent performance will tell you a great deal about how effective you are in coping with risk and reward.

The other excellent indicator of whether your coping is working for you is your emotional experience during trading. If you find that anxiety, overconfidence, frustration, and stress are pushing you into poor decisions, you know that you're not coping well with the uncertainties of markets.

Finally, it is helpful to identify the sequences of coping behaviors that you utilize when you're making good decisions and the sequences when you're trading poorly. Knowing how your individual coping responses come together to form coping strategies can help you cultivate your coping strengths. How to develop those strengths will be the topic for the last post in this series.


Overview of Coping and Trading

Coping and Appraisal

Trading, Coping, and Intuition

Coping Effectively With Trading Stress

from Dr. Brett--
I recently read a book that claimed that the best traders trade completely clear headed, free of emotion. What rubbish. The best traders I've known have been highly competitive individuals who take significant risk and seek significant reward. They are no less emotional than boxers in a ring or basketball players at tournament time.

What enables these traders to perform at high levels is that they are able to prevent the normal stresses of work from becoming distress. Another way of saying this is that they employ effective techniques for coping with the daily stresses of managing money in uncertain and volatile markets.

Here is the post I linked yesterday via Twitter; it will enable you to assess your coping style.

Many times, we employ coping methods that have worked for us at one time in life or in other situations, but do not work in trading situations. We go back and back to the same ineffective coping behaviors, not because we're self-destructive, but because we have overlearned those behaviors through past experience.

Here are a few examples of such good coping gone wrong:

* A person who has learned to confront problems head on cannot back away from markets when trading poorly;

* A person who withdraws in situations of conflict to keep the peace finds themselves unable to stay in good but uncertain trades;

* A person who deals with problems by taking responsibility for them becomes self-blaming and punitive during periods of normal drawdown;

* A person who has learned to put a painful past behind them fails to focus on trading problems and never adequately addresses them.

In all these cases, coping actions that have been effective do not work for the trader.

This is where the solution-focused approach can be quite useful. In the solution mode, we focus on examples of times when we *have* coped effectively and figure out what we did that worked. Once you can identify a positive pattern--a way of dealing with challenging market situations that works for you--the task is then to rehearse it to the point at which it becomes second nature.

As I emphasize in the chapter of the new book devoted to this topic, traders frequently run into problems when they fail to enact their best coping strategies. Tracking how you deal with challenges when you are at your most effective enables you to create a mental model of that coping that you can call upon during periods of high stress. We cannot avoid the stresses of trading, but those do not have to generate distress and biased decisions.

Monday, May 4, 2009

Energies Rebound in Sync With Stocks

Natural gas continues to show significant strength today, along with crude oil and gasoline. The natural gas daily chart is shown below.

Grains Collapse in Profit-Taking, Improved Weather Forecasts

Soybeans and wheat have also collapsed on better weather forecasts. At this moment, even soybeans just crossed into negative territory for the day, giving up the $11 handle. Corn is hovering around the $4 handle.

More Mammoth Failures -- Why the Stock Rally Will End

from Martin Weiss at

Just in the past few days, the United States has moved dramatically closer to the final fork in the road that I set forth in my online video of April 7th:

Either a prolonged, agonizing depression that dooms our country to decades of stagnation, decline, and poverty … or a painful-but-shorter depression that paves the way for a wholesome, sustainable recovery.

Either a government that pursues the dogma of “too-big-to-fail” to the bitter end, rewarding wild risk-takers and punishing taxpayers … or a government that pro-actively guides the natural process of failure, rewarding those who save for the future and can reinvest in America.

I’ll tell you which way we’re headed - and how it will impact your investments - in a moment. But first, an update on what we’re doing about it:

Yesterday, we printed out your petitions appealing for the better scenario; and tomorrow, I will deliver them to Capitol Hill.

I had hoped readers would sign at least 10,000 petitions; instead, they signed 53,547. I had hoped we’d get a good number from the most populous states; instead, we got large participation from all 50. I had expected only U.S. residents would join; instead, citizens residing overseas joined from 45 different countries around the world.

The most urgent and pressing issue …

What to Do With Failed Corporate Giants, Monoliths, and Mammoths

The great dilemma today is not just companies that have already filed for Chapter 11 like Chrysler … but also those that would be in bankruptcy today had it not been for taxpayer bailouts - Fannie Mae (FNM: 0.782 +0.032 +4.27%), Freddie Mac (FRE: 0.783 +0.023 +3.03%), Merrill Lynch (SFA: 7.22 +0.24 +3.44%), General Motors (GM: 1.859 +0.049 +2.71%), Citigroup (C: 3.13 +0.16 +5.39%), AIG (AIG: 1.41 +0.03 +2.17%), and others.

The great debate is not merely what to do with big companies that have already hit the skids … but also how to deal with those that could meet a similar fate in the not-too-distant future - Ford (F: 5.83 +0.14 +2.46%), JPMorgan Chase (JPM: 34.01 +1.52 +4.68%), Wells Fargo (WFC: 21.67 +2.06 +10.50%), Goldman Sachs (GS: 129.86 +2.78 +2.19%), SunTrust (STI: 15.39 +1.58 +11.44%), Fifth Third Bank (FITB: 4.29 +0.44 +11.43%), and many more.

And the greatest challenge of all will not be strictly about the failure of giant corporations. It will also be about the next big shoe to fall - the failure of the U.S. government to fund its bailout follies without severe consequences.

Where do we stand? I see two phases in the evolution of this crisis:

Current Phase: Prolonged Agony

Right now, we have nearly all the pain of failure but little hope of resolution. And nowhere is this “worst-of-both-worlds” outcome clearer than in the Chrysler failure …

First, despite the infusion of another $4.5 billion in taxpayer money to finance Chrysler in bankruptcy, its Chapter 11 filing last week is wrecking havoc on the auto industry anyhow:

  • We have a supposedly “temporary” - but TOTAL - shutdown of Chrysler production, pushing U.S. auto-parts suppliers to the edge of bankruptcy and disrupting the flow of parts to General Motors and even Ford.
  • We see Chrysler auto dealers going broke in large numbers.
  • And we see a new phase in the collapse of auto financing, as lenders recoil in horror.

Second, despite massive commitments of taxpayer funds to back up the warranties on millions of Chrysler and GM automobiles, consumer confidence in the ailing auto industry has plunged, helping to drive all auto sales even deeper into the gutter.

Every major auto maker, whether failing or not, has reported dramatic sales declines from year-earlier levels: Not just Chrysler, which got whacked with a massive 48 percent loss in sales … but also General Motors, down 33 percent … Toyota, down 42 percent … and even Ford, supposedly better off, suffering a 32 percent hit to sales.

Third, despite hopes and assurances that the Chrysler bankruptcy will be “quick and easy,” we can already see signs of an imminent barrage of creditor lawsuits and claims hitting the courts. Their demands: Liquidate the company! Sell off the assets! Distribute the cash based on the contractual pecking order that gives first dibs to secured creditors!

In sum, we have BOTH a huge burden to taxpayers AND widespread pain for all those who rely on the auto industry for their livelihood!

In the final reckoning, the bailouts have bought nothing more than prolonged agony.

Next Phase: Tougher Love

The true pessimists of our time are those who assume the current pattern will simply continue indefinitely.

These pessimists include former U.S. Treasury Secretary Paulson, who literally dropped to his knees last September to beg Congress for $700 billion to save the nation from a Wall Street meltdown.

They include Treasury Secretary Geithner, who’s so terrified of bank failures that he’s zealously pursuing the crazy goal of guaranteeing ALL bank credit.

They include Federal Reserve Chairman Ben Bernanke, who’s so plagued by Depression-era nightmares that he’s been willing to abandon the Fed’s history, destroy the Fed’s balance sheet, and sell the nation’s monetary soul to the devil of unbridled money printing.

Plus, among them are all the Wall Street pundits and cheerleaders chanting for more.

In contrast, I am an optimist in this sense: I am very confident their days are numbered and our nation will soon step up to the tougher task of truly putting this crisis behind us.

My optimism is not derived from wishful thinking or armchair philosophizing. It’s steeped in practical, hard-nosed realities:

Hard-nosed reality #1
The market is not dead!

Even the most elaborate of government bailouts are not immune to powerful market forces. That’s why Fannie Mae and Freddie Mac shares plunged to zero. That’s why Bank of America and Citigroup shares have lost over four-fifths of their peak value (even after the recent rallies). And that’s why Chrysler finally wound up in bankruptcy court last week, despite repeated government promises to the contrary.

“Isn’t the government fighting to intervene massively in the market?” you ask.

Yes, of course. But fighting is one thing; winning is another. The undeniable fact is that the markets are not dead. They’re still alive, kicking, and massively powerful. Despite delusional bureaucrats who may think otherwise, it’s the marketplace - and not their mad-science experiments - that’s ultimately driving the course of history.

Hard-nosed reality #2
Easy to promise, hard to deliver!

Anyone in power can step up to a podium, make speeches, and say they’re going to spend or lend trillions of dollars. But even if directives are written and laws are passed, what’s promised on paper is not the same as what actually happens in practice.

Right now, for example, the total tally of the government’s bailout operations and commitments is $14.7 trillion. But among that, only $2.5 trillion has actually been spent or lent so far. Meanwhile, in 2008 alone, U.S. households lost $12.8 trillion according to Fed data, or over FIVE times the bailouts thus far.

Hard-nosed reality #3
No free lunch!

Anyone who thinks all the funding for the bailouts is going to simply appear out of thin air must also believe in the tooth fairy. The facts:

  • Congress cannot raise taxes without sinking the economy even faster.
  • The Treasury can’t borrow the money without driving interest rates through the roof for everyone.
  • And the Federal Reserve can’t print the money without destroying global confidence in the U.S. dollar and credit markets, gutting the economy even more.

Each of these - singly or in combination - will sabotage the same bailouts they’re seeking to finance. Each, even if pursued initially, will soon backfire.

Hard-nosed reality #4
The truth always comes out!

Last week, I told you about Six Egregious Lies perpetrated by Washington and Wall Street.

But I also showed you how the truth has already begun to pour forth - via leaked confidential memos, such as AIG’s confessions of a likely insurance industry collapse, and dire official forecasts like the IMF’s latest prediction of a massive global decline.

Hard-nosed reality #5
Not everyone is stupid!

There is a fast-growing, informed minority - skeptical investors and independent citizens - now rising in rebellion against federal bailouts.

That’s why our petition drive against senseless bailouts has been such a resounding success!

That’s why, two months ago, Thomas M. Hoenig, President of the Kansas City Federal Reserve, defied his own chairman … declaring that the “too-big-to-fail” doctrine has failed … recommending regulatory tough love for any failed bank, no matter how big. (See his paper “Too Big Has Failed.”)

That’s why, one week ago, FDIC Chairman Sheila Bair demonstrated equal defiance against her fellow regulators, stating, point blank:

“The notion of ‘too big to fail’ … is a 25-year-old idea that ought to be tossed into the dustbin …

“[It has] eroded market discipline for those who invest and lend to very large institutions. And this intervention, in turn, has given rise to public cynicism about the system and anger directed at the government and financial market participants. …

“Everybody should have the freedom to fail in a market economy. Without that freedom, capitalism doesn’t work. … Ultimately, this would benefit those better managed institutions and make the financial system and the economy stronger and more resilient.”

Finding it hard to believe that one of our nation’s top regulators is openly attacking the shaky thesis underlying most of the government’s bailout operations? Then read her speech for yourself.

This doesn’t mean we agree with everything these voices stand for. But it does go to show how the days of unlimited bailouts are numbered … and the epic fork in the road is now rapidly approaching.

The Consequences for Investors

This is bad news for investors who are again taking risks - and good news for all Americans willing to make the sacrifices needed to get this crisis over with as soon as possible.

It means that:

  • The supposedly “too-big-to-fail” banks like Citigroup or corporations like General Motors WILL ultimately be allowed to fail after all; their shareholders, wiped out; their creditors, suffering massive losses.
  • In the stock market, the seven-week rally we’ve seen will end; the financial stocks will give up all their gains and the broad averages will plunge to new lows.
  • Credit markets will freeze up once more, the government’s stimulus package will be overwhelmed, and any pause in the economic decline will be over.

But it also means that any temporary revival of inflation will soon die … the dollar will ultimately remain viable … and we can still look forward to a real recovery in the future.

That’s why I’m optimistic and why I’m delivering over 53,500 petitions to Washington tomorrow.

Fanning the Fires of Inflation

Commodities are skyrocketing across the board. Even the price of natural gas, one of the most abundant commodities, has confirmed a buy signal from last Friday by moving higher today.

China Has "Cancelled the U.S. Credit Card", As Interest Rates Rise

from AFP--
China, wary of the troubled US economy, has already "canceled America's credit card" by cutting down purchases of debt, a US congressman said Thursday.

China has the world's largest foreign reserves, believed to be mostly in dollars, along with around 800 billion dollars in US Treasury bonds, more than any other country.

But Treasury Department data shows that investors in China have sharply curtailed their purchases of bonds in January and February.

Representative Mark Kirk, a member of the House Appropriations Committee and co-chair of a group of lawmakers promoting relations with Beijing, said China had "very legitimate" concerns about its investments.

"It would appear, quietly and with deference and politeness, that China has canceled America's credit card," Kirk told the Committee of 100, a Chinese-American group.

"I'm not sure too many people on Capitol Hill realize that this is now happening," he said...

Kirk said he was the first member of Congress to tour the Bureau of Public Debt, which trades bonds, and was alarmed at how much debt was being bought by the US Federal Reserve due to absence of foreign investors.

Sunday, May 3, 2009

Where Is Your Head When Trading?

from Dr. Brett-
Where is your head during the market day?

Are you looking through the rear-view mirror, criticizing your last trade?

Are you looking at your profit/loss for the day and filtering trades through that?

Are you distracted by people or the phone?

Are you thinking about yourself and how well or poorly you've been doing?

Are you locked in an opinion of what the market "should" be doing instead of observing what it *is* doing?

Are you wanting to get your money back after a loss or hold onto it after a gain?

Are you focusing more on yourself or on what markets are doing?

Many times, our head just isn't in the game. We can't be focused on performance outcomes and immersed in our performance at the same time.

When you ask yourself questions such as the ones above, you are thinking about your thinking: you become your own observer. Asking the right questions: That is the start of all self-coaching. With repetition, we internalize the coaching role and take control over our learning curves.