Martin Kronicle

The Fed cut Fed Funds and the Discount Rate by 50 bps each. Most pundits did not think they would cut both, nor did they think they would cut either one as much as they did. The market took this news as being a catalyst to put money to work, Buying Long and Covering Shorts. The indices had big moves today too. It seems that the investment community felt safe, or safe enough, to trade after some very low volume days. But is it safe?

I don’t know a lot about the woes of credit markets these days, other than the fact that I know lenders like a steep Yield Curve, and the Fed is doing everything it can to steepen it. There is such a lack of transparency (integrity) in the marketplace.

My sense is that investors want to trust, but at the same time they don’t want to wake up to an ABN Amro, Sentinel, Countrywide, or Northern Rock – and this is just a partial list. How does anyone know there isn’t another well-known name out there that won’t be the next shoe to drop? You don’t and it’s impossible to predict. I know. I was in business with Refco.

This is a type of dicey negative proposition – that there are no further sub-prime woes. As William Eckhardt said in Schwager’s The New Market Wizards, “Any negative proposition is very difficult to confirm because you’re trying to prove that something doesn’t exist. For example, consider the negative proposition that there are no chocolate cakes orbiting Jupiter. That may be true, but it’s very hard to prove.”

My sense is that cutting rates now to help the lenders is a lot like caring for your teeth between Dentist visits: you can’t start flossing 2 days before your next visit. The damage may have already been done – and the drilling may be inevitable.

From the film Marathon Man (1976) with Laurence Olivier (Christian Szell) and Dustin Hoffman (Thomas “Babe” Levy).

Christian Szell: Is it safe?

Babe: You’re talking to me?

Christian Szell: Is it safe?

Babe: Is what safe?

Christian Szell: Is it safe?

Babe: I don’t know what you mean. I can’t tell you something’s safe or not, unless I know specifically what you’re talking about.

Christian Szell: Is it safe?

Babe: Tell me what the “it” refers to.

Christian Szell: Is it safe?

Babe: Yes, it’s safe, it’s very safe, it’s so safe you wouldn’t believe it.

Christian Szell: Is it safe?

Babe: No. It’s not safe, it’s… very dangerous, be careful.

Yankee greats Manager Billy Martin (left) and Captain Thurman Munson.

The Boston Red Sox/New York Yankee rivalry is one of the most storied in all of worldwide professional sports. Both teams seem to play their best when they play one another regardless of whether they are playing in the Bronx or at Fenway. And although I would not wear pinstripes to Fenway, it’s generally safe to watch…

I have watched Cricket matches between India and Pakistan, widely considered the greatest rivalry in all of sports. Even greater than cricket between England and Australia. After matches, you can count on riots, arrests, tear-gas, and hospitalization. Their fans take it to another level. Pakistan has won 72 times of the 136 general test matches. Interestingly, Pakistan can’t win in the “post-season.” In 4 World Cup appearances, India has blanked Pakistan 4 out of 4 times. Got Rings?

It’s often said that you can throw team records out the window when rivals meet. I believe that is generally true, but one has to differentiate between the regular season and the post season. Players “rise to the level.” This year, Boston has been in first place since the season began – at one time by a margin of some 14 games in the early part of the season. Those were dark days. New York pitching was…wait, we didn’t have any pitching to speak about so I’ll move on.

The Yanks played the Red Sox this weekend and took 2 of 3 games. They won the first game 8-7, overcoming a 5-run deficit in the 8th inning. Tonight, Jeter hit a 3-run shot OVER the Green Monster to break a 1-1 tie and the Yankees held on to win 4-2. Boston killed us 10-1 in Game 2, pitching, or lack thereof was the deciding factor. We don’t get consistency from our starters. The Yanks swept Boston in the Bronx a few weeks ago, taking 3 of 3 games.

They still lead the Yankees by 4.5 games in the AL East. The Yankees will make the playoffs worst case with a Wild Card berth. We’ll meet Boston in AL Championship Series and go on to win the World Series. We are in store for some great baseball.

I don’t hate the Red Sox despite the rivalry. Without the Red Sox, I don’t think that I’d enjoy being a Yankee fan as much. Many of my relatives are from New England and are Boston fans – and we brawled. Growing up, watching baseball at my house in the Fall was like living in Belfast (Béal Feirste) during The Troubles. Nowadays, someone doesn’t always have to die. But then again, there’s nothing like a good wake.

So if the Bronx gets lit up this Fall, it’s likely because New York GM Brian Cashman doesn’t make A-Rod a player/owner of the Yankees once he exercises an Opt-Out Clause in his contract as he is expected to do. Don’t blame Boston if the Bronx is Burning.

I read a VERY interesting article on Reuters this morning about emotions and investment returns.
The opening salvo stated, “…hot-headed stock investors make better decisions, a study in the Academy of Management Journal showed.” (My guess is “hot-headed” is a poor choice of words.)

It seems that the original study suggested that stock investors who had strong feelings and listened to their feelings, did better. Acting out as a “hot-head” is probably not the best ethos or manner of behavior, unless of course, the trader likes to feel what he feels when he’s “hot headed.”

I have not read the entire study, but I’m working on getting a copy of it to review for a trade publication.

Myeong-Gu Seo of the University of Maryland and Dr. Lisa Feldman Barrett of Boston College, the authors of the study found that “the greater the average intensity of an individual’s feelings, the higher their investment returns.”

IMHO, I don’t think that means flying off the handle as the anonymous Reuters author suggested. A trader can feel his feelings of anger, but not lose control. When I think of one becoming or acting “hot-headed,” it does not conjure an image of someone who is in control.

This may be evidential in why some traders follow computerized trading models that derive entries, exits, and position sizes, so that the trader can still feel their feelings, but not sabotage their trading by doing so.

Remembering Pavarotti upon news of his death.

If you have ever heard the aria Nessun Dorma, chances are it was the late Luciano Pavarotti singing it – it was his staple song. I was very fortunate to have seen maestro live during the summer of 1993 in The Great Lawn of Central Park.

Having gotten there at 3 pm for a 7 pm start, I was up by the stage. Like when you’re around other great talents, you can feel their presence. Central Park is a very special place. And it was more so that evening. Luciano sang to the back of the park and he didn’t need the mic. My friends and I were speechless after the concert.

Here is that classic performance of Nessun Dorma from the Great Lawn in Central Park.

Students of Introductory Economics classes are taught that when supply equals demand there is equilibrium. When securities trade each day, each transaction is at equilibrium. If traders believe that a security’s price reflects all that is known about the security, plus the uncertainty factor, risk is therefore “repriced” each and every trade, not just in times of duress.

Something is Rotten in the state of Denmark

Television Reporters and market pundits on television seem have recently been gravitating towards this expression – “repricing risk,” which itself suffers massive ED (it is too soft). It is inadequate in explaining what has happened to Portfolio Managers’ risk models. Using such “soft” language shys away from holding Traders and PM’s accountable and responsible for their risk management or lack thereof. It’s like talking about a sniffy nose, instead of the fever. Humans program computer models, therefore the humans are responsible. VaR models do not take into account things that managers don’t consider.

Something Wicked This Way Comes

The phrase “repricing risk” foreshadows how VaR models themselves are at risk. Use them at your own discretion, but know that when you hear “repricing risk,” you may be hearing a foreshadowing that something else is at risk: your career. You can’t fire the computer.