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Friday, April 14, 2017


“How do we get there from here?”

Markets are closed today [except for FX which is never closed] for Good Friday, a perfect time for perspective, reflection, and a look ahead. In the final analysis, that apple shown above with the carved, golden Dollar sign is the perfect metaphor for what got me in this business all those years ago, and while at times I wonder if the bearded lady at the circus still needs that full-time groomer, I never, evahh, have seriously questioned my decision to make trading my life-long professional pursuit. First, though, some perspective [especially for those under about 35] that will help fill in some of the gaps for Newbies to the trading biz, those who need to “escape to success”, and/or those trying desperately to find meaning in today’s markets and wondering how to navigate them successfully.

You have to go all the way back to the 1960’s, a few years before my time to be sure, but nonetheless an important decade in the “financial investing” history timeline; it was during this decade the mutual fund industry was born. Wall Street embraced it like a kid to candy for one big reason; MASSIVE FEES! Even today, under all the “goobly gook” of the prospectus [which by the way “prospectus” is a Latin word derived from “screw you”], and the SEC 13b, figuring out the fees investors pay is no simple task as Wall Street is very adept at hiding 2 things; 1) risk, and 2) fees you actually pay.

Even until the late 1970’s, Wall Street’s attitude towards what we today call “traders” was one of disdain & more often than not open contempt. The “blue blood country club Republicans” [at the time most often associated with Pols like Nelson Rockefeller] wanted nothing to do with the “trader cowboys” from the CBOT [Chicago Board of Trade] & CME [Chicago Mercantile Exchange] who were considered rogue alcoholic commodity traders that spit on each other, muscled each other around in a trading pit, and got in fist fights when necessary … “how utterly pedestrian”!

In 1974, when I graduated from biz school, and still thought like a “brainwashed B School Grad”, indoctrinated in the latest & best Biz thought around [hahaha], I went and asked one of my investments professors right before I graduated whether or not he thought buying an IMM [International Monetary Member] membership on the CME for $10,000 was a good idea [they had just recently started currency futures trading]; his response, “oh God no, don’t waste your life”!

“Right … good call Doofus … 6 years later it costs $500,000”!

An important event took place in the late 1970’s, one that was to “shake up” Wall Street and what few knew of at the time, start the evolution of changing perceptions, first the financial trading arena and then the public at large a few years later. In the mid to late 1970’s, the CBOT started the “modern era” of financial trading with interest rate futures contracts; the most popular at the time was the 30 year Treasury bond contract. When it first started, many people on Wall Street either laughed it off, or paid no attention to it; “after all, who needs to hedge interest rate exposure and/or who needs to speculate on interest rate movements, when interest rates don’t move”? And then a funny thing happened …

The bluest blue chip of them all, mighty IBM, was coming to market with a long term debt issuance [first time ever I think], one of the largest ever seen up to that time; the lead underwriter was the bluest of the blue investment banks of the time Solomon Brothers [founded in 1910 by 3 brothers Arthur, Herbert, & Percy Solomon]. Everybody and their brother in the brokerage community wanted a piece of this “money pie”; selling this debt to “Ma & Pa” and various institutions would be the easiest money they would ever make.

However, a funny thing happened on the way to the bank; when it finally came to market it bombed! And it wasn’t because of anything IBM related, it was due to the fact long term interest rates unexpectedly shifted higher, thus resulting in a lower price for the bonds. When the dust settled, a lot of brokerage houses lost money and took somewhat of a “sting” from the issuance; however, unbeknownst to the other Wall Street houses, Solomon Brothers trading arm, known as “Plaza” had sold 30 year T-bond futures contracts before the issuance as a hedge against interest rate risk; they came out smelling like roses and nobody else did!

Well, when the word got out of what Plaza had done, you can imagine the growth of hedging & trading in interest rate futures right up to the present day; and with it came a new “perception” of what these “cowboys” in Chicago were capable of doing with a bit of inspiration and imagination.

That leads up to the early 1980’s; April 1982 in fact with the introduction of SP500 futures at the CME. Even with the success of interest rate futures, most Wall Street execs & firms had a very “distasteful” view towards traders, and truth be told nobody had any idea whether or not trading the SP500 would be successful; some thought it would trade like “oat spreads”, while others thought maybe if things broke the exchange’s way it could be a milder form of pork bellies.

And just as a side note; at the time the CME was launching the SP500 with the blessing of Standard & Poors [who, give them credit, saw the potential for this and had the vision to make it happen], the CBOT was desperately trying to convince the Dow Jones “blue bloods” up in the Northeast at the country clubs in Connecticut to give them permission to use the “DJ 30” trademark, which they emphatically would not do. Why? Because they didn’t like the “commodity atmosphere” of the Chicago exchanges compared to the refined, distinguished, sophisticated environs of Wall Street, and they didn’t want their name & reputation to be “sullied” by being associated with anything in Chicago. And of course, the rest is history as it took years for the Dow Jones snobs to finally realize they made a mistake and eventually relented.

It has always made sense to me, that if you were in any way, shape, or form an active investor, that you would want to use the indices as a proxy for trading rather than individual stocks; 1) way cheaper than the commissions on retail stock transactions, 2) the ability to be long as easily as being short, with no need for the “uptick rule”, and 3) no nasty surprises from earnings or the fact the CEO ran off with the secretary, and the stock is 50% lower at the open and is today’s disaster “dujour”. The advantages of trading the indices so far outweigh the disadvantages versus individual stocks I could fill a book up with all the reasons.

When I first started managing money from the trading floor, which I was the first ever to do, my goals for trading the SP500 for accounts in my commodity pools [remember, this is the pre-internet, pre-electronic, pre-offshore, pre PAMM trading era and all that is available is to form these kinds of pools] was 1) offer managed stock trading, somewhat along the lines of a mutual fund but with a much shorter time frame [daily], 2) offer people leverage that to this day is still unavailable to stock traders as a whole, and 3) offer much better returns than whatever you were going to realize by simply owning mutual funds for the “long run”. And while I thought I had all the angles covered, I made one very huge miscalculation.

That miscalculation were my costs to setup, run, and maintain the funds in the pre-internet era; and to give you an idea of the kind of money I’m talking about, at my highest point of AUM [Assets Under Management] I had about $15 million, and for the year I made about 186% for clients and my incentive fee was 20%; I lost money for the year cuz my costs ate up all of the incentive fee!

Ok, let’s fast forward to the near present of last year; I still, at this point can’t find a brokerage house, that accepts U.S. clients, that will host a PAMM and allow me to trade the stock indices without 1) very wide and disadvantageous spreads, 2) very high round turn commissions, and 3) slippage that makes your eyes water. Granted, the problems from my side of the equation as a money manager have been solved by the development and implementation of the PAMM software to offshore brokerage houses, but for clients it’s nowhere near acceptable to me.

A couple of years ago, Assets FX brought on stock indices through the LP Finsa, and had an acceptable spread and commission structure; that lasted for all of 2 weeks when their feeds crashed and disappeared for good. Then Traders Way offered stock indices, but the only index that made any sense to trade was the DAX30 [Germany], and so my PAMM there traded that for a few months or so until their LP doubled the spread, increased the commission, and started giving worse slippage on fills; “adios Traders Way”! Ok, back to Assets FX, where they got some new LP’s that promised a lot, then delivered nada. On I went to LMFX, which promised more and delivered less than Assets FX. Anybody here see a pattern among brokerage houses?

During all this time, of course, brokerage houses outside the U.S. are dropping U.S. clients at a rate that would make a race car driver dizzy; simply put, they don’t want them cuz the U.S. Government is a pain in the donkey. And at the end of 2016 I’m really beginning to wonder if I can ever trade the U.S. indices again without having to go the futures route; and futures is the last thing I want to do. Why? Cuz no matter where you go, brokerage houses can’t [by regulators] split futures contracts to clients inside a pool of money; for example, I have 5 clients with $X in a pool. If I trade a 6 lot, everybody gets 1, but who gets the 6th one; you can’t split it. So, in order to get around this, you would have to form your own hedge fund, and to get that up & going costs upwards of $50,000 at a minimum. With offshore brokerage houses creating CFD’s, the PAMM software only concerns itself with splitting the P/L.

Which brings me to the present time, and now we have Turnkey, which offers the very best money management PAMM for clients with the lowest costs we are likely to ever get; a 2 index point Dow30 spread [usually most of the time] and a meaningless $2 per $100,000 notional base round turn commission. For a PAMM, this is as good as it gets.

But why the indices; why not stay with Yen, gold, or some of the FX crosses? Easy for a number of reasons; 1) they are not as reliable markets for trend, 2) while as liquid or even more, they have far more violent spikes occurring on an almost daily basis, 3) their trading is more dispersed over the 24/5 week in all hours, and 4) our risks to capital are many times a level of magnitude greater with smaller volumes.

It is almost impossible to run any semblance of a “mutual fund” where I can obtain a rate of return that gets you to “escape to success” while trading USDJPY, gold, or any of the FX crosses. For approximately 5 weeks I was trading very small volumes relative to capital and was getting 1) unfavorable to outrageous slippage on market fills, 2) a few stop orders that got run, and 3) spreads that were quoted one way prior to taking a position, and then widened after I got into a position; add it all up and we were the chumps at the poker table.

My goals for the Turnkey PAMM today are the same as when I was on the floor, only now I have an even better cost structure in the stock indices for clients. In essence, my PAMM is a Dow30 mutual fund, where you can gain exposure to the most widely known blue chip stocks, and where my returns will beat the living snot out of the averages over time.

So basically, what I will tell all of you now is what I told people when I was on the floor; 1) I am no “trader cowboy” looking to take “shots” with your money, trying to double it in a week; that’s for fools and idiots, 2) whatever it is you hope to gain by “investing” in stocks on your own or through passive investment vehicles like index funds over time, I will shred to pieces the returns from those and make you cry, and 3) managing risk properly is the key to “escaping to success”.

Now, I don’t make promises about returns; they are whatever they are, and market volatility has a lot to do with our results. Having said that, though, the advantages of the PAMM over and above index funds or other type of stock investing programs are huge; bottom line is that your returns in the PAMM over time will be higher.

I’m not trying to compete with JP Morgan, Vampire Squid, or anybody else; I know what kind of size I can do comfortably in the indices markets, and I know what kind of returns will most likely be generated over time; at present, I’m not anywhere near my limit in terms of AUM, which leaves plenty of time for many of you to plan and become participants; the cost of entry is lower than just about anywhere, and transparency in the PAMM is 100% [it couldn’t be possible to be any greater than it is].

Granted, these last 6 weeks or so have not seen the kinds of results I expected to see from other markets; it isn’t the fault of the stock indices, which is where I should have been all along. Sure, I got smacked in the mouth a few times via the dealer gamers in gold; lesson learned, and truth be told, that market more than likely won’t ever see my face again. It simply isn’t the same market that was on the floor for decades.

Once we get into next week, markets return to normal; that should see continued volatility in the stock indices. All in all, my first priority is to make back our gold losses … after that, I’ll expand volume and start to “position scale” on a more consistent basis. Onwards & upwards.

PAMM/MAM spreadsheet directly below.


Ohhhh yes, beach today baby… I’m outta here … until Monday mi amigos!

Have a great Easter weekend everybody!


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