Goldman Sachs Research: Fundamentally Bad

Following my previous post titled inside Goldman Sachs, here is an interesting article taken from covel’s site. Note the interesting part at the end of the article.

Goldman Sachs Research: Fundamentally Bad

Here’s the bad news: Not all TurtleTrader readers receive Goldman Sach’s daily research. Now here’s the good news: The ones who don’t aren’t missing anything. TurtleTrader is not a client of Goldman’s nor do we endorse them in any way. We just happen to be on the mailing list. Okay. So now we’ve dispensed with the disclaimers.

Goldman daily research is extremely detailed. Projections abound. Discounted cash flow valuations, balance sheets and income statements overwhelm. It’s all there — the market performers, trading buy recommended lists, etc. as well as Goldman analysis. Tons of information right? Yes, indeed, but mostly useless.

For example, let’s take a look at PlanetRX, the online drugstore. Goldman has been promoting this baby as a great buy since shares sunk from the mid-teens to its most recent value of $2 a share. All of Goldman’s promotional analysis is based on its research minutia involving fundamental factors. None of the analysis is based on what the stock is actually doing, which is tanking. If the analysis was based on what the shares of PlanetRX were actually doing, any successful trader would know you would sell, not buy.

Why do large, respected brokerages go through the time and effort to produce such useless drivel by large salaried fat cat analysts? When you are a broker who earns monster fees and big commissions off pushing stocks and underwriting IPOs, you better make the package pretty don’t you think? How does this packaged information help someone who actually trades or invests? It doesn’t.

We would like to know how much of Goldman Sachs’ proprietary trading capital is actually invested as Goldman’s research suggests. It would be difficult, even for a Goldman Sachs investor, since the research never gives the reader solid advice regarding price levels at which to buy or sell. If the truth be told, we believe that Goldman’s trading capital is well positioned with hedge funds and trading firms worldwide that, as you might guess, trade trend following models.

Diversification

A nice simple article on diversification. Taken from IBFX’s website.

We all hear diversification is the best policy for an overall investment portfolio. This is also true amongst our currency focused investments as well. We must master the use of multiple trading strategies and multiple currency pairs to equalize our overall return. There are many traders that utilize trading strategies that when trading conditions are met are 80% accurate. However a full-time trader must utilize more than this single strategy as many times there are long periods of time when the trading conditions are not met which can last from a few days to several months. What good is a single strategy that can yield profits only half the year. Diversification is the answer. The key to making a living from your trading profits is to master several strategies that together yield consistent profits month after month.

Diversifying your investment is not the most popular of investment topics. In fact many people believe diversifying dilutes trading profits. But most investment professionals agree that while it does not guarantee against a loss, diversification is the most important component to helping you reach your long-term financial goals while minimizing your risk. But, remember that no matter how much diversification you do, it can never reduce risk down to zero.

What do you need to have a well diversified portfolio? There are 3 main aspects to ensure the best diversification:

Your portfolio should be spread among many different trading strategies.

Your trades should vary in risk and time held. Picking different trade opportunities with different potential rates of return will ensure that large gains offset losses of other trades. Keep in mind that this doesn’t mean blindly place trades all across the spectrum!

Your currency pairs should vary by region and crosses, minimizing unsystematic risk to small groups of countries.

Another question people always ask is how many currency pairs they should trade to reduce the risk of their portfolio. The portfolio theory for stocks tells us that after 10-12 diversified stocks you are very close to optimal diversification. However in the currency market this doesn’t mean buying 12 currency pairs will give you optimal diversification, instead you need to trade currencies of different regions and importance levels (i.e. majors, crosses and more exotic currencies).

Inside Goldman Sachs

Start with the physical surroundings of the firm. There’s nothing that shouts either “Goldman Sachs” or “money.” The drab brown headquarters at 85 Broad Street famously bears no sign. Inside, you’re struck not by elegance, and certainly not by opulence, but rather by the shabby state of affairs–the faded, torn carpets, the grungy cubicles, the utterly ordinary offices. Treasurer Elizabeth Beshel, who was a junior analyst back in 1990, points out that a giant ink stain she left on her old cubicle is still there. (The firm is building a new headquarters in downtown Manhattan.) Nor will you spot a lot of flashy investment bankers. Jon Winkelried, who is the co-head of Goldman’s massive fixed-income, currency, and commodities division, sports a shirt with a torn sleeve and missing buttons.

for a complete article go here.

Allied Irish Bank

On February 6, 2002, Allied Irish Banks – Ireland’s second-biggest bank – revealed that it was investigating an apparent currency fraud at its Baltimore-based subsidiary, Allfirst, perpetrated by a trader named John Rusnak. It soon became clear that the scale and nature of the losses would make the AIB/Allfirst story one of the biggest ‘rogue trader’ scandals since Nick Leeson brought down Barings bank in 1995.

The AIB board of directors quickly commissioned an independent report into what had gone wrong. Written by Eugene Ludwig, a former US Comptroller of the Currency, the report concluded that Rusnak had systematically falsified bank records and documents, and been able to circumvent the “weak control environment” at Allfirst’s treasury.

Ludwig was given a limited period to carry out enquiries, and his report begins with the caveat: “We have emphasised from the outset that we believed that 30 days was inadequate to render a comprehensive report.” The investigators also had no opportunity to speak with Rusnak and the report does not necessarily reflect Rusnak’s understanding of events. But the report’s central finding was that AIB’s rogue trader had allegedly accrued losses by writing non-existent options and booking the fictitious premiums from them as revenue.

This, the report said, was in turn motivated by Rusnak’s need to recoup money he had lost on a misplaced proprietary trading strategy sometime in 1997. He later compounded the situation by selling a number of real deep-in-the-money options to counterparties for high premiums, racking up huge unrecorded liabilities for the bank. Estimates of the total losses to AIB/Allfirst from the debacle now stand at around $691 million.

While the bank’s solvency was not threatened in the immediate aftermath of the losses’ discovery – the bank was able to absorb the losses by a one-time charge on earnings – the loss was large enough to wipe out 60 per cent of AIB’s 2001 earnings and significantly deplete its capital. No senior AIB official was forced to resign over the affair, but the scandal badly dented the bank’s reputation and those of some senior executives. Many commentators predict that ultimately, the debacle may result in a takeover of the weakened bank by another institution.

The case also led many observers to wonder why, seven years after the collapse of Barings, the risk management lessons of the case were apparently having to be learnt all over again – in particular, the need for robust supervision of trading activity by back-office staff and risk managers, and for parent firms to be intimately aware of what is taking place at overseas units.
Meanwhile, Rusnak – by all accounts an unexceptional individual, living quietly with his family in the suburbs of Baltimore – has joined the likes of Barings’ Nick Leeson and Daiwa’s Toshihide Iguchi in the pantheon of rogue traders. And bank risk managers, who had begun to think of errant traders as a phenomenon of the past, are having to face up to the fact that a new generation of rogues may still be able to evade risk controls, including such industry standards as value-at-risk.

More readings on:
- Lessons Learned
- The Story
- The Aftermath
- Timeline
- Web Resources
Please go to this link.

Research on Squircle

I’ve found an interesting idea for a new approach on trading. It involves a mathematical formula for a family of shapes called “squircle”.
This family of shapes was given the name SQUIRCLE by Peter Panholzer. They are shapes that are intermediate between squares and circles.
To simulate the squircle please go to this page. According to that page, a squircle is described by the equation:
|X|^N + |Y|^N = Radius^N.
Peter Panholzer is a currency manager. He has been trading for more than 30 years. He trades mechanically.

This new idea will be built into an EA soon after our software engineers complete his current task on building systems for several clients. Yes, we accept programming jobs from people who wish to build their system into an automated one. For more info on this service, please contact us at info[at]risenberg[dot]com.

Measuring Market Noise

Properly measuring market noise, could be the way to determine which kind of trading system is suitable for a particular market.
Here is an article token from an interview with top traders section of the traderslog website.

Kaufman Uses Multiple Trading Methods, Cites Market ‘Noise’
By Jim Wyckoff, JimWyckoff.com

Many traders attempt to find the single-most “robust” trading strategy possible by looking for one set of rules which works for all markets. Such systems don’t take into account the fact that markets can change quickly and dramatically due to a news event, according to Perry Kaufman.

“There are times when a market is volatile, or moves unusually, and you need to take different strategies to trading,” said Kaufman, a market strategist, author and director of research for the consulting firm Kaufman, Diamond & Yeong, based in Wells River, Vt. He was speaking at the Technical Analysis Group (TAG XVIII) traders conference, held here late last week and sponsored by Dow Jones Telerate.

“Price shocks”–a government economic report or other major news event–can quickly turn a quiet, sideways market into a volatile and highly discretional one, he said. A trading system that works in a sideways market will likely not work well in a volatile one.

Kaufman focused on what he terms “market noise,” which is the unpredictable movement of a market. He said more active markets have more market noise, and are therefore harder to trade.

The formula for measuring “market noise” is as follows, according to Kaufman: Change in price divided by the sum of each price movement over a period of time.

More market noise means it takes longer for a trader to identify a trend in a market, said Kaufman. He said the S&P 500 futures are very “noisy,” and therefore need a longer time for a trend to develop. Conversely, Eurodollars have less noise, so traders can jump on a price trend in a shorter period of time.

Very long timeframes make market noise less significant, said Kaufman. For short-term trading, noise is more important than the trend, he said.

“Short-term (price movement) is mostly noise and long-term is mostly trend,” said Kaufman.

“If a market has high noise, you should not trade with a trend-following system,” he said.

Kaufman ranked the world’s markets by their “noise” factor–keeping in mind his proposition that less noisy markets are easier to trade.

Brazil has the least market noise because it’s an emerging marketplace, said Kaufman. There’s less participation in emerging markets. Thus, “you can trade trend-following systems and faster moving averages” in those markets, he said. Indonesia, Turkey, Malaysia and South Africa are among the other less noisy world markets, he said.

The U.S. markets are the noisiest, most active markets, and hardest to trade, said Kaufman. France, Japan, Germany and U.K. markets are close behind.

For more information on Jim Wyckoff’s comprehensive daily e-mail market update, weekly top trading opportunities, and bi-weekly chart update, click here: Jim Wyckoff on the Markets

Chicago Mercantile Exchange to offer Cash Forex Trading

The Chicago Mercantile Exchange and Reuters have announced that they will be offering a new electronic platform for trading the global cash forex market in a 50/50 join venture. The platform, called FXMarketSpace is set to launch in the Q1 2007.

While the forex market is the largest and most liquid financial market in the world, it has never yet been centralized on a physical location or an exchange – FXMarketSpace will create the first centrally cleared, global forex market. Trading will be offered through the CME Globex electronic trading platform – offering an anonymous central limit order book. The CME will provide their trade matching and clearing technology, while Reuters will provide the global distribution through the Reuters desktop. Currently over 100,000 forex professionals use Reuters FX products.

The backbone of the forex market is made up of a global network of dealers – largely the major commercial banks of the world, who communicate through networks and by telephone. The Interbank Market describes the marketplace that exists between the largest banks, who trade with eachother directly, via interbank brokers or through electronic brokering systems such as Electronic Brokering Services (EBS) or Reuters Dealing 3000 Spot Matching. The rates can be seen by all banks – however each bank must have an established credit relationship with another in order to trade the rates being offered. Currently, other participants in the forex market – such as online forex market makers must trade through commercial banks.

token from http://www.traderslog.com/fxmarketspace.htm