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Today we witnessed the usual market reaction to FOMC decisions: randomly up and down. Completely unpredictable. As a trader you better stay away from doing anything on Fed days.

I have no idea why the market retreated the way it did once the news came out. Nobody exepected anything and we got just that. However, towards the end of the session I was willing to venture my twitter trade against the trend because of the fact that a) we’ve already seen a selloff over the past 8 days in the market and b) there really wasn’t that much to dislike about the Fed decision today. I expected a slight rebound towards the close and we did get one.

In other news, I just finished browsing through some of the Transformers 2 reviews. I hate Michael Bay movies with a passion, but I’m realistic enough to know that even though this one got truly devastating reviews it will once again make autobot-loads of cash at the box office.

You know, if we were really experiencing a new normal, maybe people would wake up, start turning on their brain and stop spending their money on shitty movies like Transformers 2. Or at least they’d consider waiting until they come out on DVD to save some dough. And maybe they would not buy the DVD, but just rent it.  However, so far I don’t see any signs of that. Do you?

Until that happens, you know the new normal is really the old normal.

As I tweeted this morning, the released economic data was just average enough to allow the market to do whatever it wanted. And today it obviously wanted to take a day off. Fine with me. Let’s just chill a little then, shall we? After all we haven’t done that in a while. Here’s a very smooth, totally work-safe song from Robert Miles; probably my favorite song by him.

Let’s see what the tide brings in tomorrow.

What a strange selloff today. The only explanation posted everywhere is the World Bank reducing their outlook for global growth. But seriously now? People, raise your hand: who sold because the World Bank opened their yap? Or did all you guys sell because you thought other people might sell and you wanted to get in front of them?

Be all that as it may, did anybody follow my live paper trade today on Twitter? The point was to demonstrate the use of scaling to slowly build a position at a favorable price. It did work to some degree and I think I was able to get the point across, but of course I’d have preferred a nice reversal at the end to end in the black.

Besides that, the put spread hedge that I recommended in early May is now turning out to be helpful after all. I’m also happy that my favoured utilities held up very well today and made it through the selloff almost unchanged.

Other than that, I don’t think anything noteworthy happened today. See ya ladies tomorrow. Let’s see if I can make it through the night here with all these constant storms..

Did you catch 20:20 last night? It was all about the effects of the credit crunch on the lives of ordinary Americans (and Icelanders at the end). The first segment was the story of a wealthy family who lost everything and the parents who had no choice but to keep them all together. By cutting back on a lot of stuff. For example, they actually had to cook at home.

No, this is actually not me making fun of them. More interesting is the key takeaway revealed at the end: the fact that they’re now happier people for having less. They called it the new normal. The new happier normal. Back to the roots so to speak (literally, at one point the Dad showed a beet to his son, who marveled at the foreign sight).

Here is my own personal takeaway: did you notice that whenever something big happens, people extrapolate the effects of that into all eternity? We already knew that they do it with assets time after time, creating bubble after bubble along the way. But they actually do the extrapolation with everything. Currently every economist runs with this “no more credit EVER, so what does this mean for our future?” theme. Nobody that I know of ever expects a return to the old normal.

But experience should teach us that nothing is stable. Bubbles eventually deflate despite everybody’s frenzy that created them in the first place. Life moves in cycles. We’ve just experienced a down. Next will come an up and before we know it we’ll once again have the story of the real gossip girls and real desperate housewifes on late night TV, living it up in all decadence, and inspiring the rest of us to follow suit.

And I guess then 20:20 will have another feature on it, on the new old normal. Giddy-up!

As I was browsing through some elitetrader posts, I noticed how some “traders” keep asking whether scaling in and out of positions is an inferior strategy.

I assume strongly that these people are not consistently profitable in their trading. To become a real trader, one that actually makes money regularly, I believe you have to have had a moment similar to Neo’s awakening at the end of “The Matrix”, the moment when he finally saw the illusion around him for what it was.

To become consistently profitable you have to fully internalize that your trading results are magically linked to your trading personality. The motto clearly is “Know thyself”. Know what position size you are comfortable with. And what time frame you want to trade (intraday, days, weeks, years). And what strategies and products you want to specialize in (stocks, futures, options, etc.)

Learning all of this takes a long time. But if you do not fully understand your own personality, you risk losing everything you ever made once the markets change and turn against you.  And they always, always will.

What does this mean for scaling? It means that you should not bother with trying to figure out what is mathematically or theoretically superior or inferior. It all depends on what works for you. If you feel better taking small profits along the way, then do it. To me it is impossible to answer whether this is mathematically inferior or not. Answering that would require perfect foresight, and if  you had that for even one day alone you could turn yourself into a millionaire overnight.

Just know that as soon as you start getting nervous about a position or your trading style, do something: scale back your size, or hedge it at least partially. The trick is to always stay in the zone.

Know thyself.

Cry me a river: on Seekingalpha you’ll currently find various posts on the evils of so called reverse convertible bonds. Felix Salmon, ever zealous and spear-heading the movement, wants to outright ban them. Yes, just like he wanted to wipe out stockholders of all them insolvent banks a few months ago (and don’t forget, the bondholders too).

Well, now he has discovered a new evil product that had the audacity to lose their investors money last year: “Reverse convertibles” (say it out loud like Satan would). Good old Felix. Either he doesn’t know his finance 101, or he just wants to feign outrage for publicity’s sake, as he usually does.

What is he upset about? A bundle of things. Let me address his major points.

1. They are called bonds, but have equity-like downside. That is misleading.

Well, you know, individual corporate bonds also have equity-like downside when the issuer goes bankrupt. And as we discovered over the last few years, even houses have equity-like downside. Should we ban houses too?

2. They are sold to clueless investors, even though they have such downside.

Investors always pretend to be clueless when their investments go sour. And then they start crying, run to Mommy and try to get their money back by suing and complaining. They do it with houses by just walking away, they do it with stocks (”oh, our financial advisor never disclosed that equities can lose 50 % in one year”), and now they do it with reverse convertibles.

3. They have excessive fees

So do a lot of products, including mortgages, appraisals, refinancings, etc. Let’s ban all of them.

4. They are much too complicated for retail investors (similar to 2)

That is true, but you know, finance is complicated. That’s what you pay your financial  advisor for: that he preselects an investment suitable for you, based on your individual risk profile. Does this mean that he should be omniscient and be able to avoid everything that could potentially lose money? I wish. If that was possible I’d outsource all my own investments to a guy who can do that.

Listen Felix: if these investments were sold as something else than what they are, then you should go after the prospectus or the FA. Banning the product is just short-breathed populism, something that you unfortunately exhibit in many of your posts (which always, always go WITH the crowd, never against it).

What do you want? Treat the consumer like an idiot? Then you should ban a TON of stuff, not just reverse convertibles. Maybe you should even ban children then: just too complicated, risky and work intensive for the average consumer: “Who knew these little guys would be so much work? Nobody told me! And the costs? Food, clothes, toys…Sheesh”

And who is going to ban all these products? The government that you hate on in most of your posts? I guess. Is there anything left that you actually like, dude? Does anybody ever do anything RIGHT according to you?

Fact is: reverse convertibles are an interesting product, but they do have their up- and downsides, just like everything in life. It goes without saying that their risks should be adequately disclosed. But banning them? That’s just stupid. Before you call for a ban, why don’t you check how they do as a group over the long run, instead of just looking at a not-so-random sample of 1 client who lost money last year? How ridiculous.