Harry Hindsight

Sell Sterling Wear Diamonds?

In April 2002 we published a report entitled "Sell Dollars Wear Diamonds." This piece was a detailed explanation of why we were selling Dollars against the Swiss Franc aggressively at 1.6500, now 1.2390, and why we disagreed with the majority of analysts who were then calling for the dollar to remain strong. The formula for working the direction of a currency pair is quite simple:

Trade Deficit/Surplus + Non Speculative Capital flow + Speculative Capital Flow = Direction
Taking the US dollar. We have a trade deficit of $42 billion a month so lets call that -$42. Yesterdays figures from the Federal reserve show foreign purchases of US bonds and agencies of $75 billion so we will put that in the non-spec capital as +$75. As ever the key is the speculative capital or "hot money" as we call it. This money looks to move form currency to currency in search of the greatest total return and is the biggest constituent of the Forex market; work out what the speculators are doing and you can generally work out where the currency is going. If speculative dollar selling is higher than the difference between the two, +$33 billion in this case, then the Greenback will fall.

A trade we put out for members yesterday afternoon is a good example of how important it is to follow the flow. Through our contacts we established that there was a large options related stop at 1.8980 and we placed a stop entry order accordingly, Cable was 1.9015 at the time. When this was triggered cable fell rapidly to 1.8840. This shows how important it is to follow the flow. Due to the way the currency options market works there are times when if the market rises then the options market makers have to buy and if it falls they have to sell. If the volatility price increases they have to do this in bigger amounts hence rapid movements.

Yesterday every Muppet imaginable was on CNBC calling for Cable at 2.00. It seems that all systems and momentum based hedge funds are similarly long. As members know we have been bullish of sterling for quite a while and have made good money from the "proud pound." Market's however are not one way and we know what pride comes before!

It was lovely to see Rolf Breuer, the head honcho at Deutsche Bank, extolling the virtues of Frankfurt on CNBC this morning, telling us how important it is to have such a nice working environment if one is to attract the best dealers. Methinks there's a funny smell here and it's not his aftershave! Having worked for the mighty German bank I think I am able to put this into perspective. Linking the words "German" and "best dealers" is an oxymoron and that is one of the reasons that Deutsche has it's main dealing floor in London. The main reason however is that Deutsche are unable to get their best, and I should add Anglo-Saxon, traders to work there as Frankfurt is such a hole. The Deutsche building is right next to the main park where all the cities drug dealers congregate and was one of the reasons that the whole Anglo-Saxon options team, that they poached from Citibank in 1995, threatened to resign en masse unless the whole desk was moved to London. The most successful dealers left in Frankfurt are the ones with syringes.

Harry

Muppet of the Month

Many thanks to dozens of you who have sent me information on Vince Stanzione but please no more. I have been inundated and it's not good for my health, as I keep falling off my chair from laughing so much. There was I thinking that Darren Winters was a renaissance man but he has nothing on our chum Vincent. A self-styled entrepreneur who apparently "began in hairdressing, and made his fortune in mobile-phones and financial services." Vince allegedly started his journey to becoming a "Master Trader" at the age of 16 as a "teaboy" on the Forex desk at Natwest, yet he strangely left at the age of 18 due to the equity crash of 1987. I was a Forex dealer then and that period was a boom time as we just kept selling dollars and wearing diamonds. Obviously he wasn't a very good teaboy!

Anyway he has obviously improved as he regularly turns a bet of £50 into £5000 and turned £24k into £720k over a 24 month period.He also keeps himself busy, running a plethora of different websites and sending out more mailshots than Readers Digest. He has even found the time to write a book, " How to stop existing and start living." as well as writing a monthly tip sheet called the "Market Monitor" and has even appeared on TV as a guest on "Esther." Add to this all the seminars that he does then the "Teaboy" deserves our admiration for finding the time to keep making shed loads of money trading.

So what has the "Teaboy" learned over the years to become the "best trader there is"? According to his own advertising literature he has "learned from the worlds best traders including Richard Dennis and Russell Sands (Turtles Trading Fame)." Many people have apparently tried to "imitate" his work but they are "nothing but poor copycats trying to make a quick buck selling systems that I threw out 5 years ago." OUCH!!!! Sorry I fell off the chair again. This is all jolly entertaining but I wonder what these "special techniques" are. Fortunately I do not have to wonder too much as I have one of his old seminar books that a member has kindly sent me.

Well it starts off with the incisive strategy of spending less than you earn. Yes readers your £2000 plus journey into the complex world of the financial markets starts with an exhortation to cut down on satellite TV and mobile telephone bills. After all " a little change can make a great difference." Personally a little less padding and a lot less b*****x Vince would make a great difference! Half way through the course book we come to one of the alleged trading system; The Turtle Techniques.

According to Vince the turtle system is:

1. " A long term trend trading system."
2. " A money management system. Using stop losses of 5% to 9% of your money."

Oh dear. Oh deary deary me. "Imitation!" " Copycats trying to make a quick buck." The words stones and glass houses are ringing in my head. Vincent if you are going to try to copy the techniques from www.originalturtles.org then please try and get it right! I could go on at great length into the Turtle system: About using the 20 day breakout of the highest high or the lowest low on the exponential moving averages (something the Teaboy doesn't even cover). I could go into the unit progression method incorporating the Average True Range which is a key part of the Turtle technique (again you don't seem to cover this). I could even bore everyone by going trying to explain the concept of "curve fit" that Turtles use making this system quite unsuitable for amateurs but I won't bother.

The core money management rule of Turtle Trading is never risking more than 2% of your capital on one trade. Not 5% to 9% as you write and certainly not as you say later in the course book: " Say you start with £2500, never let one bet lose more than £500." That is risking 20% you total Muppet!

The inconsistencies in the "Teaboys" course book and advertising literature are astounding. He wants to teach people how to make "£400 per day making small trades that can make £500 plus in less than 30 minutes." How? Turtle trading is a long term trend following system. His course book offers no more than a basic look at the different financial markets and technical indicators. All of this can be found on the internet for free. His teachings on risk management however are not basic. They are completely and utterly suicidal. To be suggesting to amateurs that they should be risking anywhere between 5% and 20% per trade is elevating incompetence to a level not yet seen by Equitable Life.

In conclusion I would like to leave you with a quote from the "Teaboy" himself:

"You can have everything in the world you want, but there is a catch, you have to be willing to do everything and anything it takes."

I wonder just how far Mr Stanzione is prepared to go to get what he wants!

Anyway congratulations "Teaboy" you are our Muppet of the Month and thanks for the entertainment.

Harry

P.S The Turtle Techniques have been published in their entirety, free of charge, at www.originalturtles.org in order to stop the "charlatans and scam artists" who have been mis-selling the system.

Euro Splits

However sceptical one is over the eurozone it has to be admitted that it makes for good fun as well as nice forex movements. The weekend G7 in Florida produced the usual platitudes from politicians, claiming that all parties were in agreement and had a wonderful relationship. Yet as soon as everyone got home to the wife the weekends musings were quickly dismissed as a pina colada fuelled holiday fling. Everyone has got back to business as usual. The Us claim they want a strong dollar, which is true, just not as strong as it is now. Germany wants a weaker euro and lower interest rates whilst the French don't really care as long as they can keep their politicians out of jail for fiddling the books.The Japanese want to keep buying dollars and lending the US money so that they can buy Japanese goods whilst the UK are quite happily chuckling from the sidelines. Today the Austrians and the Swedes, at their own G 102 Group of less significant countries meeting, decided to punish Germany for not being allowed to sit at the big boys table by saying that they are quite happy with the Euro where it is.

Oh what a tangled web we weave when we try and let politicians manage macor-economic policy. There lies the problem with the single currency. You remove the power of the market to punish the mistakes of politicians via freely floating exchange rates, and then the only way to correct those mistakes is by those same politicians, who messed it up in the first place, making the correct fiscal decisions. Surely even the most pro-european would have to agree that the demise of the "suicide pact" has proved that this is a triumph of optimism over experience.

A report from the Morgan Stanley bond desk has highlighted these problems and suggests that we are witnessing what could be the start of the dismantling of the single currency. MS believe that speculators will target the government bonds of some of the less stable eurozone countries resulting in those countries ditching the euro. Should this occur our belief that the "proud pound" will strengthen against the euro ought to be realised as speculators will look for blue chip plays on the periphery of the euro zone such as Norway and good old Blighty.

Many thanks to the readers who have been sending me information on Winters clone Vince Stanzione. In fact I don't think clone is fair as he seems to be getting away with charging even more than "Doji Daz" with £2500 per person for his group seminars. I'm surprised he needs to charge so much as according to him he makes a fortune from trading. I'm curious. I seem to remember a chap with a very similar name who made his money from selling mobile phones and who, when having an account at a firm that rhymes with Cantors (oops), hardly ever traded and when he did regularly lost money. Could this really be the same person? Surely not, but I think I am going to have to take a closer look at this chap and I think I'm going to enjoy it.

Inspector Harry

A Mad World

With the G7 starting today in Florida volatility has increased in the Forex markets. All the short term funds that were selling $/Yen at 105.35 with a target of 102 are now buying their greenbacks above 106.50. All the main banks have stop losses all the way up to 107.20 so hopefully we can see a nice impulsive move higher which we can then sell in to.

Non-farm payrolls will provide a catalyst for the equity market but with the S&P right in the middle of the 1020 to 1042 you can pay your money and take your choice. The SOXX seems to be indicating that a move lower in equities is the play buy a look at the daily and weekly charts shows a classic uptrend channel with the support coming in at 478/480. A break and close below this level is an important indicator and one we will be watching closely.

I hope something interesting happens today as, having just received a tax bill I need cheering up. When one adds this to the fact that the Handbrake insists on watching that programme " I wish I was a celebrity...." then one can understand my general antipathy towards life in good old blighty at the moment. Such programmes make me wonder whether we have the politicians we deserve and that it's time to do a Jonny Rotten and walk out.

One story that did make me laugh though was that the government intends to teach school kids financial acumen. Is it just me who finds this ironic from an administration who after having their wicked way with "Prudence" chucked her for a shop-a-holic "It" girl intent on melting daddy's platinum credit card. Perhaps the government should get previous Muppet of the Year award winner David Thomas to come up with the curriculum. We are still waiting for the FSA to rap the knuckles of Brewin Dolphin after their Head of Corporate Finance admitted to the Treasury Select committee admitted that he didn't realise that increasing borrowing increased risk.

In the syllabus for the IMC exams for running a fund, which makes war and Peace look like a short story guess how much of the course explores such exotic topics such as stop losses and the effects of leverage on a portfolio? Zip..... Nada.......... Niente.......... Not a sausage. You get a 70 odd pages each on regulation, accountancy and tax but god forbid that any hedge or mutual fund trader should have the slightest clue on basic trading fundamentals such as buy low and sell high even if like Brewins you have £14.2 billion under management. You may think I am being churlish but many of the UK life assurance companies who were forced to the FTSE 100 below 4000 will similarly be forced to buy on a break of 4750. Let's be honest my goldfish Squishy knows more about trading than these guys and he's a lot cheaper to feed.

Harry

P.S Squishy says: "Sell British Airways wear diamonds."
He better be right or his name will change to Sushi.

What Now?

With much of the US corporate earnings figures now out of the way this will be an important week. Add to this rate announcements out of the UK and Europe and we have the makings of some nice movements. the only problem is, as ever, working out which way the market will move. Though we remain very sceptical about stock market valuations we are however mindful of the fact that the market is irrational and it is the flow of money, rather than a subjective view of valuations, that will decide the direction of the worlds stock markets.

Flows into equity funds in January have been strong and thus far fit in with our view that the US market will remain buoyant ahead of the US election. The Bush administration, post September 11, showed how adept it was, with the help of their chums in big business, in propping up the equity market. This trend has carried on with last weeks passing of a bill that will limit companies pensions liabilities, saving companies $80 billion over the next two years.

An interesting potential indicator will be the dollar. I say potential advisedly. In 2002 trading equities was easy. If the dollar went down equities followed and vice versa. This correlation broke down last year but there are signs that it might be trying to re-assert itself. The last four weeks have seen a rise of foreign buyers of US Treasuries and this figure on a trailing four week average is now equal to the monthly US Trade deficit. This balance will mean that the Dollars continued fall is far less certain than many commentators would have us believe, and will allow traders such as us some interesting short term opportunities.

One piece of news to keep an eye on is this Avian flu. The weekend allegedly saw the first human to human transfer of the disease in Vietnam and though this is not a major problem yet it could become one and requires monitoring.

Harry