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Book Reviews

"This is a great book for novice and experienced traders. Soaking up its wisdom distilled from experience and introspection will help you become more successful. And that's true even if it doesn't make you a penny." --Aaron Brown, AQR

What the heck is it with all the traders trying to be Karl Popper? Just shut up and trade already.

The last thing we need in trading are a bunch of self-appointed Philosopher wanna-be’s doling out pronouncements. I never trust a guy who uses the word “epistemology” in the same paragraph twice. Consider yourself warned…

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Over at The Big Picture the other day, Barry put up a cool video on the history of the wah-wah pedal entitled Cry Baby: The Pedal That Rocks The World.

Here are a few candid shots of my very own wah-wah pedal. It’s the Vox Clyde McCoy which is featured in the video. Love me, love my Clyde McCoy…

Click the pictures to enlarge.

Notice the red Fasel inductor… (bottom picture).

vox clyde mccoy

vox clyde mccoy bottom

red fasel inductor

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I bet if the Board of Directors tied long-term CEO compensation to how effectively the C-suite hedged basis risk, it would become a focus overnight. They certainly put enough effort into making sure they hit their quarterly earnings number…

In order to better afford hedging operations, when there is employee attrition, the firm might consider not replacing the employee and using their salary for hedger margin. This will likely result in a handful of fewer jobs, but I think it’s in the best interest in the overall firm. Don’t risk the entire operation by not hedging.

If the operation is large enough, an employer can look to see where computer hardware or software can create efficiencies, or reassign some tasks. Everyone will eventually benefit by having a firm that can be more competitive in the marketplace.

If you remember Peak Oil, Southwest Airlines did not have to pass along higher fuel costs nor add fuel surcharges thanks to its hedging operations. [Note to hedgers: call a recruiter and hire the best energy traders you can. The life you save may be your own.]

From the WSJ:

“Volatile oil prices have forced many businesses to walk a fine line between passing along costs to customers and finding other ways to mitigate fuel’s impact on earnings,” began the article Firms in Mitigation Mode as Oil Prices Jack Up Costs.

This is especially true where there are price wars for beverages such as beer and soda distributors. The article also mentions car dealerships.

From an academic and historical standpoint, commodity futures markets exist for the hedgers. Although there is no such thing as a “perfect hedge,” all the rules are skewed to benefit hedgers over investors. Kudos to the CEOs named in the article who hedged their risk. They are forward thinkers.

I find it hard to believe that the smaller players cannot utilize options to hedge and keep the cost of the insurance finite. I’m not saying that it doesn’t take a little planning, but with options you can define your potential losses before you pay for the insurance. Some of the insurance costs can be passed on to the end user.

“Deutsche Lufthansa AG says fuel is the largest cost on the company’s balance sheet, and it expects to spend €6.8 billion ($9.6 billion) on fuel in 2011, topping last year’s €5.2 billion, says spokesman Martin Riecken. The company is hedging about 74% if its fuel exposure for 2011, says Mr. Riecken, in line with what it has hedged in previous years.

Norwegian Cruise Line, meanwhile, has 60% of its fuel hedged for 2011, a move that CEO Kevin Sheehan says will make the rise of oil prices manageable for the cruise operator.

In 2008, Norwegian had a very small percentage of its fuel hedged, and had to levy fuel surcharges on its passengers. The company began hedging more aggressively after that experience, and isn’t currently considering fuel surcharges, says Mr. Sheehan.”

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When you interview your potential clients, ask these 5 questions or you might be in for more than you delineated in your Client Agreement. You get to interview and screen your potential clients as much as they will be screening you. Don’t sign up anyone who can “fog a mirror.” You’re not as desperate as you might think for the assets, and there must be a good fit between you and the client emotionally.

1) Have you ever had to sue a manager or take them to arbitration? What happened?

There is a class of investor that sees you coming from a mile away. Make sure that you stay away from them. It goes without saying that you must have your own business and documents in order. The major Broker/Dealers and FCM’s keep a list of such clients and they’ve been know to NOT open accounts for them when they recognize the SSN or Tax ID number.

2) How long have you been with your Investment Advisor? What do you like best about that relationship? What could be better about it?

If they are promiscuous with their advisory relationships, what makes you think it will be different this time because you are in the equation? It won’t be. Don’t sign up this time-waster. You can’t build a solid asset base off this jackass nor a reliable revenue stream. Leave the drama of the hair-trigger hiring and firing for another manager.

3) How soon are you going to need the funds that you are considering investing with me and my program?

If they want to buy real estate during the “next leg down” in a major city, don’t sign them up. They’ll need the money in the middle of a drawdown and you’ll never hear the end of it. I recommend that you make sure they can leave the money with your for 5 years minimum.

4) What percent of your overall investment pie does this money represent?

If this is more than 5% of their liquid net worth, be wary…it might be fast money…and that type of money leaves as fast as it comes in. You don’t want to build a book of guys who want 400% annual rate of return. They feel that this is readily attainable and moreover that they should not have to withstand more than a 10% drawdown to get it. Follow your rules, not the gambling habits of some moron who has no clue about how to run money responsibly.

5) When would you like to schedule your monthly update call with me — beginning of the following month or at the very end of the current month?

You don’t want to have clients that have an emotional need to speak with you daily. They are neurotic, spend the day watching financial TV, and don’t realize that calling you is a major distraction and actually harms your performance. Cut them loose or don’t sign them up in the first place.

Speaking with you every morning is not going to make your systematic not discretionary rules work better. Ask them to find a way to satisfy their needs without calling you.

Just because there is a high-net worth person, who has sizable liquidity, who likes you, and who wants to give commodity trading/managed futures a try, does not make them necessarily a good candidate for you to work with.

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