FEELINGS

The subject of Behavioural Finance is becoming extremely well known in finance and investing circles; however, there remains a common misconception as to the role feelings play in our investment decision making process. Superficially it appears that our feelings cause us to make irrational decisions in situations of uncertainty and therefore the best cure for our attack on our feelings bias’s is to cut them out completely. Until recent advancements in neuroscience this mistaken assumption would have been acceptable thinking; going forward far more comprehensive models will be required to outsmart our own smarts.

Allow me to take you on a journey of philosophical thinking before providing you with some scientific proof. Importantly these ideas and a lot of the words have been taken from an excellent book by neuroscientist Jonah Lehrer called, The Decisive Moment.

The question of how we make decisions has been puzzling philosophers throughout the ages. Plato was one of the 1^st to tackle the subject and used the now famous analogy of a charioteer being pulled by 2 horses. The charioteer being the rational brain and one horse representing good and the other bad combining to represent our feelings. Plato wrote of the bad horse, ‘He is of an ignoble breed. He has a short bull-neck, a pug nose, black skin, and bloodshot white eyes; companion to wild boasts and indecency, he is shaggy around the ears – deaf as a post – and just barely yields to horsewhip and goad combined’.  What Plato was putting across is that the human job as charioteer is to keep going forward by keeping both horses under control and in so doing he pioneered the thought of the mind being separated into 2 spheres; reason and emotion as became accepted by western culture.

René Descartes a leader of the Enlightenment era took a similar view and separated man into a soul representing the reasoning part of man, and a body full of ‘mechanical passions’. His objective was to advance man as an entity that could triumph reason over emotion, with the Cartersian faith forming the basis of modern philosophy. Francis Bacon and Auguste Comte took this rational approach to society further as did Thomas Jefferson with his hope for America been governed by reason alone. Immanuel Kant took it a step further with the imperative that morality was rationality. Freud to embraced Plato’s style of thinking by describing the mind as divided into a series of conflicting parts (id, ego) with the survival of modern society incumbent on man sacrificing the id (pleasure principle) for the sake of greater good.

Then with the increasingly scientific approach of mapping the cortex of the brain modern science became uncomfortable with a lot of the theory surrounding human thought. It lead to the belief that the mind behaved like a computer and therefore scientists such as Marvin Minsky (the pioneer of artificial intelligence) thought the programming of computers could replicate the human mind as one driven by rational thought. Cognitive psychologists followed this line of rational thinking taking it through to the field of our interest Behavioural Finance.

To summarize; the line of thinking Plato and his followers supported was a utopia whereby man could use his reasoning sphere of the mind to completely shut out the emotional side, which after all was the cause of all mistakes throughout the ages. As Lehrer in his book puts it, ‘the truth is far more interesting’. Science proves to us that in fact both sides are mutually dependent upon each other and without emotions reason wouldn’t exist at all. Talk about turning accepted philosophy on its head. In the story that follows Lehrer presents a case study where we learn how important emotions are in our decision making process.

In 1982, a patient named Elliot walked into the office of neurologist Antonio Damasio. A few months earlier, a small tumor had been cut out of Elliot’s cortex, near the frontal lobe of his brain. Before surgery Elliot had been a model father and husband and held an important management job. But the operation changed everything. Although Elliot’s IQ stayed the same he now exhibited one psychological flaw: he was incapable of making a decision. This made normal life impossible, routine tasks that would take minutes now took hours, with endless deliberation over irrelevant details. Damasio realized while in conversation with Elliot and later confirmed it with scientific brain testing that Elliot no longer had feelings.

At that time neuroscience believed human emotions were irrational and therefore not having feelings should make for better decisions. ‘The charioteer should have complete control’. What we now know is that a brain that cannot feel cannot make up its mind.

To bring some closure to this journey it is worth understanding how the emotional brain system works according to neuroscience. ‘The orbitofrontal cortex (OFC) is responsible for integrating visceral emotions into the decision-making process. It connects the feelings generated by the primitive brain – areas like the brain stem and the amygdala, which is in the limbic system – to the stream of conscious thought’. To say this in English the brain only feels comfortable making decisions when it experiences positive stimuli along with its rational calculations. The field of neuroscience is scientifically able to demonstrate how certain stimuli trigger emotions and their involvement in brain computation making the field of Behavioural Finance and Neuroscience mutually dependent on one another.


I would therefore like to suggest that in order to advance our ability to make decisions under uncertainty a two pronged approach is necessary, i.e. the study of our behavioural biases along with the influence neuroscience has to offer. To negate feelings just because we are scared of the biases they may represent is a one dimensional approach to the teachings of Behavioural Finance and is perhaps a misdirected objective - much like the philosophy taught by Plato and his followers.

NEW SOFTWARE

I am just trying out an interesting piece of new software

EWI and their 2000 HIGH

It still doesn't sit well the count that EWI have as their all time high in the Blue Chip Indices, i.e. 2000 the top with the 2003 bottom as wave A and 2007 as the wave B high, if this is the case one would then need to label the 2009 March low as wave C; I just don't get how they have labelled it only Primary wave 1 of C.

I need to check this again, but I have time as we are so overbought that we are due a proper correction. Also so far we have only had an ABC so perhaps there is a more complex correction at play.

Who knows, I am tired and now it is time to get some shut eye. This same problem doesn't exist thankfully in my markets, at least not the way I am counting from the 2007 high.

Paul Macrae Montgomery

I have only recently been reading some of his work, the man is a genius. I am not sure how his trading performance stacks up but the guy can sure write.

ANGRY

Today I felt angry with the markets as the whole process is actually quite ridiculous. In hindsight I should have expected more positiveness to come from the stimulus, even if it was just a band aid.

ANECDOTE

I am starting to pickup a lot of anecdotal nervousness from retail money. Questions like I think it is time to cash in. This rally is nuts is also what I am hearing.

MONTH END

I hate trading on month end it is a lottery and I don't like gambling.

STILL NO ANSWERS

Unfortunately we still cannot tell whether the top is definitively in. Month end today so there is always the chance for window dressing.

Still not Sure the Top is in

 reiterating my comments on the chart.

A CATALYST

Ran into someone today who proceeded to explain to me how the markets work.

He said along with many others one of the most annoying things to a reverse causality believer. He said to me that the market will only turn on the back of a catalyst. Something must trigger the reversal.

Markets simply reverse direction due to exhaustion of the underlying trend. The reason could be from a myriad of different sources the point is simply that more buyers or sellers dominate the previous trend.

I know I can do better in terms of explaining this but I simply had to place on record my disagreement that there has to be a catalyst. A catalyst is what so called experts assign to a reversal after the event, it is amazing that none of them seem to anticipate the catalyst in advance although one is able to make probabilistic forecasts on future direction.

MISTAKE

Last night I probably made a mistake buy closing out the 15 IYR 44 calls I had for Oct. I should have rather sold 46 calls or something like that as the market direction today is a 50:50 probability based on the wave count.

I suppose that is what happens when you wake up at 3am to trade after an exhausting day without fully rehearsing a game plan

TIM SENTIMENT INDEX

TIM Sentiment Index (TSI): Market sentiment among institutional brokers worldwide continued to fall
this week. The TSI Worldwide Index five day trailing average was in bearish territory at 47.58 on
September 24, 2009, down 5.14 points from the week before. Over 50 is bullish; 50 is neutral; under
50 is bearish. By region, UK sentiment fell a steep 9.07 points, to an even more bearish 41.61, while
North American sentiment was off 1.74 points, to a slightly bullish 51.05. Among the 10 sectors we
group trade ideas, seven were in bearish territory, three in bullish.
Long / Short Idea Trend: Total new long ideas (as a percentage of all new ideas sent this past week
to investment managers in real time through the Trade Idea Monitor) dropped 6.31 points to a
somewhat bullish 62.05%. September to date, the percentage of long ideas is 66.28%; year to date, it
is 60.15%. Idea volume was down 11.8% week over week.

DEFICIT IN US

When reading this article we all know what the end game is for the US dollar. In the short term I maintain my USD strength call in the face of deleveraging the debt mountain, but one has to say the end for the dollar will be far uglier than the current demise is portraying. For now a crumbling dollar has just not really registered on the US psyche, when the full impact of this eroding purchasing power is internalised the effects will be significant, at that stage I wager the death of the US empire.

Read this column out of Forbes by Bruce Bartlett, former Treasury Dept. economist -- "Whenever I write about the federal deficit, some nitwit always demands to know why we don't just cut spending," says Bruce Bartlett. "Here is the simple, if unsatisfying, answer. We can't. Nearly two-thirds of spending -- 62% is mandatory, entitlements and interest on the debt. The defense budget -- which will never be cut substantially, -- consumes more than half of what remains, leaving a total of $485 billion for everything else. Given a deficit of $459 billion last year, a balanced budget would require the elimination of virtually every single domestic program, including all social programs, education, highways, border patrols, air traffic control, and the FBI. The only alternative is to reduce mandatory spending on Medicare and Social Security -- and good luck with that. The elderly will fight anyone who tries to cut their benefits, even as they hypocritically demand fiscal responsibility. And seniors' political power will only get stronger, as baby boomers get old. Face it, if the US ever stops running a deficit, it won't be because Congress made massive cuts in federal spending. The votes aren't there, and never will be."

And how about this, also from Mr. Bartlett? "How Much Debt is Too Much? Projections show the national debt rising from $5.8 trillion last year to $14.3 trillion in 2019, and from 40.8% of GDP in 2008 to 67.8% in 2019. So at what point are the economic consequences so severe that radical action is required? According to the IMF Monetary Fund, the critical point is when a government borrows just to pay the interest on its debt. The Congressional Budget Office says we'll reach that point in 2019, when the US is forced to borrow $722 billion, same as it projects its net interest expense. Financial markets haven't priced in the possibility that Republicans would rather default on the debt than raise taxes. The fiscal situation going forward is even more precarious than it appears at first glance. Default on the debt is a real possibility."

TALEB ON BERNANKE AND GEITHNER

Sept. 28 (Bloomberg) -- Nassim Taleb, author of “The Black Swan,” questioned why Federal Reserve Chairman Ben S. Bernanke, and Treasury Secretary Tim Geithner kept their posts after failing to foresee the collapse in global credit markets.
Bernanke was appointed to a second term last month by President Barack Obama, while Geithner took his job after being the president of the New York Fed from November 2003 through January of this year. Current National Economic Council Director Lawrence Summers was treasury secretary between 1999 and 2001.
“Bernanke, Geithner and Summers didn’t see the crisis coming so why are they still there?” Taleb told a group of business people in Hong Kong. Bernanke is like “a pilot who didn’t see a hurricane,” he added.

Unemployment in the US - by John Mauldin

 

 

And What We Don't See

Those are the facts. Now it's time to look at what we don't see, and what you don't read or hear from the mainstream media.

We saw above that we are adding about 1.5 million workers to the workplace every year. That means over the next five years we are going to need 7.5 million jobs just to maintain that growth, or about 125,000 a month. That is on the low side of what economists normally estimate, which is around 150,000 per month. If we used the 150,000 estimate, it would mean we need 9 million jobs.

There are at least 1 million (and probably more like 2 million) discouraged workers who would take jobs if the economy got better. You can derive that number by going back to early 2007 and seeing the level of discouraged workers. That means, by the end of 2014 we are going to have 163 million people in the work force (see table above).

Today we have 139.6 million jobs, and that number is likely to slip at least another half million (last month the economy lost 216,000 jobs, with a very suspicious birth-death ratio accounting for a lot of job creation). So let's call it 139 million current jobs.

Let's assume that we would like to get back to a 5% unemployment rate. That would not be stellar, but it would certainly be better than where we are today. Five percent unemployment in late 2014 will mean 8.1 million unemployed. To get to 5% unemployment we will have to create 14 million jobs in the five years from 2010-2014. (163 million in labor pool minus 8 million unemployed is 155 million jobs. We now have 139 million jobs, so the difference is roughly 15 million.) Plus the equivalent of 3 million jobs that Rosenberg estimates, just to get back to an average work week. And maybe the extra 1.5 million a year I mentioned above.

But let's ignore those latter jobs and round it off to 15 million. Let's hope that by the beginning of next year we stop losing jobs. That means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month. As an AVERAGE!!!!!

Look at the table below. It is the number of jobs added or lost for the last ten years. Do you see a year that averaged 250,000? No.

If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.

Want to get back to 4%? Add another 25,000 jobs a month to 2006.

Let's jump forward to next September. We will need at least 1.5 million jobs to take into account growth in the population. Plus another half million jobs that we are likely to lose before we start to grow again. What is the likelihood of average job growth of 160,000 a month? Anyone want to take the "overs" bet?

Go back to 2003, the year after the end of the last recession. A few hundred thousand jobs were created. Why so slow? Because employers gave more time to those who were already employed and to part-time workers. Because of the near-certain loss of jobs for the next few months and the slow recovery, it is a very real possibility that unemployment will still be well over 10% a year from now.

Even with robust growth of 200,000 jobs a month thereafter for the next two years, unemployment will still be close to or over 9%. That would only be an additional 1.8 million jobs (making the most optimistic assumptions) over the new jobs needed for population growth.

 

US Position Payoff Profile

This diagram illustrates my current US portfolio looking towards month end duration.

 Here is the same diagram with all the underlying options making up the portfolio for the US.

STILL NOT 100% SURE

The Bear Growls

Having remained bearish since Mid May it feels like a lifetime. It has
also felt so right quite a few times along the journey to justify the
belief that bear market round 2 has begun.

The month started off with a bang and on day 1 we were up 4.5% and
then we gradually gave it back plus another 3.5% as yet another false
break down materialsed and we made new recovery highs.

Now the market is starting to present another bearish picture yet I am
currently not perfectly positioned for the bear story as there is
another game in play and that is risk management or damage control.

The message here is that in keeping with my policy of no regret it is
still important to build a framework to cater for the probability of
yet another bear fake.

I am comfortable with this overall strategy. What remains for me to
consider is how protective I become over P&L with month end on Wed
next week and Yom Kippur on Monday.

This will be partly decided in the next few hours.

Sent from my iPhone

China I believe continues to lead the way

US REIT downgrade to market perform.

Today BMO recommend taking some profits as they feel the market
reflects fair value.

I sense any profit taking will launch a landslide of selling.

The bearish case is starting to take shape.

Sent from my iPhone

AN OVERVIEW OF THE A-REIT MARKET

23 Sep. 09

This is a rough overview of the A-REIT (Australian) market over the last couple of years. I will essentially present it via charts and tables with a small commentary section.

VISUAL LANDSCAPE OF A-REIT MARKET

Chart 1:

In chart 1, you see a 5yr chart of A-REIT price action as reflected by the index on the left axis. I have superimposed the weekly volatility of the price action as measured on the right axis. You can clearly see the extreme in volatility at the March 09 low.

For sake of comparison to the Global REIT market I have created a relative chart 2, which compares the performance of A-REITs to Global REITs. The dotted black line is the mean of the relative ratio. What is clear is that the A-REITs have clearly underperformed in the last year stretching the ratio more than 2 std deviations away from the mean. Assuming reversion to the mean, Australia offers relative value.

Chart 2.

Using similar logic to the previous chart let us now look at the relative performance of A-REITs to the SA REITs as measured by the JSAPY index. Clearly Australia has underperformed the SA market to a slightly lesser extent than the Global Index.








Chart 3.

 

 

 

A-REIT STATISTICS

In this table you can get a feel for the hammering in market cap the sector has undergone.

	Free Float	Div	Total Real Estate
	Mkt Cap - AUD (million)	Yield	v Listed Real Estate
Mar-07	$121,451	5.36%	38.66%
Jun-07	$124,938	5.56%	38.66%
Mar-09	$40,847	13.84%	33.62%
May-09	$48,546	13.69%	32.71%
Aug-09	$72,928

• The average gearing level across the sector at the end of June 2009 was 31.4% compared to 43% at the end of 2008.
  
• JP Morgan anticipate a further A$8.1bn in write offs over the coming 12 months.
  
• Available liquidity is enough to cover the next 2 years of debt maturities.
  
• Bank lending is currently around a margin of 400bps.
  
• Current valuation cap rates on average 7.9%
  
• Development pipeline over the next 2 years has been slashed to rough A$5.1bn, 45% is applicable to Westfield.
  
• A value of A$12.4 billion traded in August 2009.
  
• Goldman Sachs today lowered their expected dividend yield on the sector for 2010 to 5.4% which is below the 10yr government bond yield of 5.8%.
  

Conclusion

The sector has clearly undergone a massive correction from its 2007 highs. Since March 2009 the sector has rallied some 72%. Clearly there remain valuation question marks; going forward dividend earnings are under pressure and the sector is expensive relative to the bond market. On the positive relative to the global REIT space and South Africa AREITs are cheap.

Global REIT Index

this too looks like it has done enough to begin the down draft.

LOOKING TOPPY

I am fighting myself from getting to excited that the wait is over. If the wait is over I dont have the ideal bearish portfolio, but then again it is more important that I stay in the game so I bought some near dated calls during the session. If this is it I will get my chance to add to the short side. BE VIGILANT as there are not going to be easy entry points on the short side if this is a 3rd wave.

Exhaustion

For some reason I am feeling extremely tired. Late nights early mornings will do it to you.

Hourly US REIT

Short Term Chart

A-REITS ARE EXPENSIVE RELATIVE TO BONDS

.

An Outsiders Wave Count

It was a great treat that I came across this chart from a wave counter that I really respect.

AUTUMN EQUINOX

For some reason, stocks, commodities and currencies have a curious
tendency to make major tops or bottoms on this day, as Paul Macrae
Montgomery points out in a special study edition of Universal Economics
newsletter entitled, "A Date Which Will in Infamy." While it is a bit of
hyperbole to equate Sept. 22 with FDR's characterization of the Dec. 7,
1941 attack on Pearl Harbor, the number of huge reversals that took
place on or about that date is stunning.

Montgomery recalls living through the October "massacres" of 1978 and
1979, the crash of 1987, the mini-crash of 1989, the 1997 Asian collapse
and the Long-Term Capital Markets plunges, which started to cascade
downward in late September. And while gold bullion topped in January
1980, gold stocks made their highs on Sept. 22 of that year, he adds.
That date also saw the peak in many oil stocks.

Why the apparent coincidence of these market upheavals beginning around
Sept. 22? Montgomery posits a possible link to the Autumnal Equinox,
which takes place Tuesday afternoon in the Northern Hemisphere. And he
also observes an increasing incidence of market reversals around the
time of Vernal Equinox in the Spring.

This year's Autumnal Equinox comes after a historic six-month rally in
stocks and a persistent, if much less dramatic, drop in the dollar, he
says. Traders should be alert for reversals in stocks, currencies and
gold for possible reversals, Montgomery advises. Long-term position
accounts shouldn't act without corroboration from other models, he adds.

Correlations are not causality, of course. Montgomery contends that the
typical explanations for market swings, such as the Lehman collapse or
Russia's debt crisis, are ex post facto. He asserts that certain cycles
tend to recur because of the human nervous system.

"At certain predictable times, subtle neurologic extremes are going to
occur, and these extremes are going to prompt behavior aimed at
ameliorating the attendant perturbation," he writes. Those reactions
supply the fundamental events, such as wars, political upheavals or
devaluations, that become the fundamental events to explain the market
swings, he concludes.

Whether you believe such alternative explanations for market actions is
beside the point. The notion of perfectly rational and efficient markets
has taken a huge, if not fatal, blow by the events of the past two
years. That so many wild things happen on this date is reason enough to
take note.

Ahoy there are ICEBERGS AHEAD

Most U.K. Commercial Property Loans Are in Default, CBRE Says
2009-09-22 12:32:26.35 GMT

By Chris Bourke and Simon Packard
Sept. 22 (Bloomberg) -- Most U.K. commercial property loans are now
in default after values slumped in the past two years, according to CB
Richard Ellis Group Inc., the world's largest real estate broker.
About 200 billion pounds ($327 billion) is needed to refinance
existing loans secured against 450 billion pounds of properties during
the next five to seven years, though only about half that amount is
available, the company estimates.
"Almost every senior, and every junior, loan is in technical
default," Robin Hubbard, a director of CBRE's real estate finance group,
said at a press conference today in London.
"There's limited financing available for new loans or refinancing other
people's loans."
Investors borrowed 360 billion pounds to buy stores, offices and
warehouses in Britain using about 90 billion pounds of their own cash,
according to Los Angeles-based CBRE. They now owe more than the
properties are worth after the global financial crisis ended the
market's five-year boom.
Average property values have fallen 44 percent since mid- 2007,
according to Investment Property Databank Ltd.
Banks are choosing to extend most of the 45 billion pounds of
commercial real estate loans due to mature this year, though only for
short periods, Hubbard said. This is only deferring the defaults, he
said.
The biggest challenge facing owners of U.K. commercial properties
is the leasing market, which "could be the straw that breaks the camel's
back," Hubbard said. The recession and rising unemployment are leading
to more vacancies and fewer tenants.
"Nobody's going to throw money in to get things back, unless it's
for new, nice, prime kit," Hubbard said. "There's only so much magic
dust you can sprinkle on the rubbish stuff."

For Related News and Information:
For more U.K. real estate news: TNI UKECO REL <GO> CMBS loan reports:
LRP <GO> Real estate resources: RE <GO> Top Bloomberg News bond stories:
TOPH <GO> Top Bloomberg News real estate stories: TOPR <GO> Stories on
banking: NI BNK <GO>

--Editors: Anne Pollak, Ross Larsen

To contact the reporter on this story:
Chris Bourke in London at +44-20-7073-3808 or cbourke4@bloomberg.net.

To contact the editor responsible for this story:
Alan Mirabella at 1-212-617-4149 or amirabella@bloomberg.net.

Volatility is Going Cheap

The market is back to the old days, "bullish" with low volatility. This promises to end in tears.

I think wae v up just started

 

Relative Trade

I am holding myself back from entering the relative trades I like to enter at momentum extremes.
Ideally I would prefer being long Australia relative to short the US but for now I remain steadfast short across the board.

All The Same Markets

Check out the correlations of these property indices relative to the S&P500, it is also worth noting the Beta of the US REITs to the broad equity market.

Where Does China Fit in

Is this index the leading indicator to the next leg down in world markets?

Check the DAX

I was busy looking at the DAX and couldnt get over how similar this final wave C of wave 2 is identical to the IYR chart in the US.

A longer term perspective

Close but still not there yet

US REITs still need one more rally

Short term REIT wave count

StockCharts.com: Favorite Chart (IYR)

http://stockcharts.com/c-sc/sc?s=IYR

THOUGHT THIS DESCRIPTION OF MARKET INTERNAL MOOD WAS INTERESTING

Moreover, there may be a shorter time rhythm to the Dow’s moves since last November, with a low-to-low-to-high directional change occurring every 68 trading days (± 2 days). If this rhythm remains intact, the next reversal window is now through next Tuesday; September 18 (± 2 days). Interestingly, this time span encompasses September 22, the Autumnal Equinox, which expert analyst Paul Macrae Montgomery has for years identified as a period whereby neurological extremes emerge as well as the resulting actions needed to “ameliorate” such anxieties (crudely put, “stuff” tends to occur around this time period in nature and in humans, from earthquakes to interest rates).

StockCharts.com: Favorite Chart (IYR)

Playing it safe we still need a small iv pullback and then a wave v high, then crash boom splash.

Mike

 

VERY BULLISH REITs

NOT SURE WHAT THIS CHART TELLS other than it is reflecting positive sentiment.

 

CLASSIC ELLIOTT WAVE COUNT FORMATION

COHEN & STEERS KNOW MORE THAN THE CENTRAL GOVERNMENT

These guys have called an end to the recession, whilst the world Central Banks are reluctant to make such bold claims, lets see.

 

Real estate bear market has run its course, says Cohen & Steers

Fri, 04 Sep 2009, 11:53

       

The two-year bear market in real estate stocks has run its course and fundamental recovery is already underway in key markets in Asia, to be followed by the US next year and Europe in 2011, according to analysts from investment firm Cohen & Steers.

Cohen & Steers' co-chairman Robert Steers and global portfolio manager Scott Crowe were speaking at the European Public Real Estate Association annual conference being held near Brussels.

Steers said: 'In recent months we have seen significant and rapid change in the global real estate securities markets as the monetary and fiscal stimuli provided by governments has helped to bring an end to the recession. The recapitalisation of listed real estate companies is also progressing well, and together these factors will initiate a new positive return cycle for stocks.'

In a research paper the firm said the real estate total return cycle is likely to unfold in three phases, starting with the completion of the equity recapitalisation that is underway to deleverage companies from their debt burdens. This has already realised nearly USD40bn in capital raisings around the world since December 2008 through secondary issuance, rights offerings and corporate bond offerings. 

The second phase, preceding the final fundamental recovery in markets, will be characterised by significant acquisition opportunities in the US, Spain, Germany and France, and to a lesser extent in Asia.

Crowe said: 'In the longer term we believe real estate values will settle at higher levels than are generally expected by the market, as we do not see capitalisation rates (yields) spiking as high as many people anticipate. Net asset values for many real estate stocks are rising, driven by better-than-expected cash flows and improving cap rates. Furthermore, companies are starting once again to acquire assets, which should also contribute to value creation.'

The Cohen & Steers report concluded that the traditional four pillars of attributes drawing investors to listed real estate investment trusts, including competitive total returns, attractive current income, moderate volatility and low correlations with other asset classes, are beginning to reassert themselves.

As correlations with other assets start to diverge, volatility comes down and yields fall towards historical levels, the advantages of investing in listed real estate, and particularly Reits, will return, the company said.

 

HOW TO TRADE WELL

The Components of Trading Well

by
Van K. Tharp, Ph.D.

This article is an excerpt from Part 1 Working on Yourself: The Critical Component That Makes It All Work, from the book, Super Trader: Make Consistent Profits in Good and Bad Markets

I’m a neuro-linguistic programming (NLP) modeler and a coach for traders. As an NLP modeler, I encounter a number of people who excel in something, determine what they do in common, and then determine what beliefs, mental strategies, and mental states are required to perform each task. Once I have this information, I can teach those tasks to others and expect to get similar results. My job as a coach is to find talented people and make sure they learn and follow the fundamentals.

I remember doing a workshop with the Market Wizards Ed Seykota and Tom Basso around 1990. All three of us agreed that trading consists of three parts: personal psychology, money management (which I subsequently renamed position sizing (TM) in my book Trade Your Way ...), and system development. We also agreed that trading psychology contributes about 60% to success and position sizing contributes another 30%, which leaves about 10% for system development. Furthermore, most traders ignore the first two areas and don’t really have a trading system. That’s why 90% of them fail.

Over the years I’ve done extensive modeling in all three areas, and I now disagree slightly with our conclusions in 1990. First, I would argue that trading psychology accounts for 100% of success. Why? This conclusion is based on two findings. First, people generally are programmed to do everything the wrong way. They have internal biases that seem to lead them to do the exact opposite of what is required for success. For example, if you are the most important factor in your trading, you should spend the most time working on yourself, but the majority of people totally ignore the “you” factor in their success. Read over the checklists in this part that deal with good trading. If you’ve worked extensively in all the areas listed, you are probably very successful and are certainly a rarity.

Second, every task I model requires that I find the beliefs, mental states, and mental strategies that are involved. All three ingredients are purely psychological, and so it’s hard not to conclude that everything is psychological.

I now think that there are five components to trading well:

1. The trading process. The things you need to do on a day-to-day basis to be a good trader.

2. The wealth process. Exploring your relationship with money and why you do or do not have enough to trade with. For example, most people believe that they win the money game by having the most toys and that they can have it all right now if their monthly payments are low enough. This means that they save zero dollars and are over their heads in debt. If this is you, it also means that you don’t have enough money to trade.

3. Developing and maintaining a business plan to guide your trading. Trading is as much a business as is any other area. The entry requirements are much easier because all you have to do is deposit money in an account, sign a few forms, and start trading. However, the entry requirements for successful trading require that you master all the areas listed here. That requires a lot of commitment, which most people do not have. Instead, they want trading to be easy, fast, and very profitable.

4. Developing a system. People often consider their system to be the magic secret for picking the right stocks or commodities. In reality, entry into the market is one of the least important aspects of good trading. The keys to a moneymaking system are elements such as determining your objectives and the way you exit a position.

5. Position sizing to meet your objectives. We’ve discovered through our simulation games that 100 people at the end of a set of 50 trades will have 100 different equities. (They all get the same 100 trade results). This extreme variability of performance can be attributed to only two factors: how much they risked on each trade (i.e., position sizing) and the personal psychology that determined their position sizing decision.

Based on the five components of trading well, rate yourself by asking the following questions:

How well have I mastered the discipline of trading well each day? Do I do a daily self-analysis or a daily mental rehearsal to begin each day? If not, why not? (I will give you a lot of ideas about how to improve in this area throughout the Super Trader book).

Do I really have enough money for trading to make sense? If you do not, you probably need to work on yourself and the wealth process.

Do I have a working business plan to guide my trading? If you don’t, you are not alone. We estimate that only about 5% of traders have a written business plan. Then again, perhaps you’ve heard that only about 5% to 10% of all traders are really successful. Super Trader will guide you toward developing this kind of working document.

Do I have a set of objectives thoroughly written out to guide my trading? Most people don’t. How can you develop a system to meet your objectives without having objectives?

How much attention have I paid to the “how much” factor: position sizing? Do I have a plan for position sizing my system to meet my objectives? It is through position sizing that you either meet or fail to meet your objectives.

How much time do I spend working on myself? You have to overcome your psychological issues and develop the discipline necessary to carry out the processes described above, which are necessary for success.

Most of the items described here could be the topic for an entire book. However, my intention was to give you an overview of what is required for successful trading, and my job as a coach is to find talented people and coach them on following the fundamentals I’ve described them here.

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com. 

 

MYOPIC LOSS AVERSION

As a slight departure from my usual month end newsletter I write this on a gorgeous day at a café overlooking Bondi Beach with 4 trading days left of the month, and not at the beginning of the new month as usual. This letter is addressed primarily to myself as a source of intellectual reinforcement, but I believe we can all take something from its message.

 

As a discretionary fund manager there are many times when ones market calls do not go exactly according to plan and it is during these times that we need to dig deep into our resolve, to question the basis of our research and our overall methodology and ultimately deliver on our stated objectives. Whilst the current market has moved with more persistence than I anticipated, it has by no means behaved in a manner at conflict with my overall market views. In fact what has developed over the last 6 weeks I believe is a fantastic gift for a sentiment extreme trader such as myself. The most reputable sentiment indicators are currently registering extremes above their 2007 highs with bears in extremely short supply. This combined with momentum indicators stretched to severely overbought levels paints a superb picture for an aggressive market reversal.

 

So let me once again re-look at the stated objectives of the Freestyle REIT Hedge Fund. The objective is to achieve a 30% annual return with a Sharpe Ratio of 1 displaying an asymmetrical return distribution over a full trade cycle of 9 - 12 months. Having a clear objective and sticking to its goals is the key to achieving success, even more so in the face of adversity. Our strategy is very clear in that we look to make outsized returns when market calls are correct and keep losses to a minimum in the event of us being wrong. We have described at length in previous letters that markets behave according to their own time line and hence we accept returns to be asymmetrical as the market doesn't respect a hedge fund managers calendar performance needs. Having reaffirmed the funds objectives and feeling calm about the current portfolio composition it will be good to analyze the financial industries short term bias which places so much pressure on short term performance, consequently at the expense of longer term performance (talk about shooting ones self in the foot).

 

The bias I am referring to is Myopic Loss Aversion; ("MLA") ( Benartzi and Thaler 1995) where too greater emphasis is placed on short term (myopic) performance causing investors to underweight risk and as a consequence underperform. In order to understand where the theory of MLA originated we need to take a few steps back and look at a problem Mehra and Prescott identified in 1985 called The Equity Premium Puzzle which questioned the quantum of the equity premium for stocks over bonds as should be explained using the classical economic paradigm. According to their analysis of +- 100 years of market data the equity risk premium which is the equity return less the risk free rate should have been a lot lower than evidenced by the data, thus implying a far greater need for compensation for taking on market risk than a symmetrical model would suggest.

 

The answer to this puzzle came by way of MLA an adaptation of the seminal work Prospect Theory (Tversky and Kahneman 1979), whereby Benartzi and Thaler used two of its key principles, namely Loss Aversion and Mental Accounting to clarify the problem. These two theories are huge pilllars of the Behavioural Finance landscape and will need far deeper analysis, which we will hopefully get to in future letters but for now it is sufficient to say that Loss Aversion is the thesis that one feels the pain of financial loss a lot more than the joy associated with financial gain. Mental Accounting describes the way we evaluate outcomes to our decision making process, in the case of MLA it refers to the way we frame financial performance in a very narrow time frame.

 

With this basic framework in place let us look at the case in point. The Freestyle Fund believes it takes between 9 - 12 months for it to achieve its stated objective of 30% per annum. Theory tells me and the acid in the pit of my stomach validates the theory that the more frequently I look at performance the greater the likelihood of feeling discomfort, hence the greater the probability of avoiding risk in the portfolio the very source of the funds performance. It is therefore imperative that I put aside the industries need for neatly boxed monthly returns in an effort to stay true to the funds objectives and in so doing by lengthening the funds performance evaluation in line with its objectives we will be able to at this most crucial point in the trade cycle embrace the appropriate amount of risk in order for the fund to achieve its performance goals.  

 

By focusing on the funds last 3 months of small losses and ignoring the superb performance over 15 months it is very easy to become negative and too risk averse at a time when  our market research is pointing to the highest probability of outsized gains for those few mavericks committed to a market reversal. In conclusion, Bavlatskyy and Pogrebna (2006) found experimental evidence supporting a process of tilting the very behaviour responsible for MLA and in so doing neutralizing its damaging effects. I believe the validation of the funds stated objectives and the emotional acceptance of the funds performance time line is great step towards avoiding the bias of Myopic Loss Aversion afflicting fund managers and investors.       

 

BEING A CONTRARIAN IS TOUGH

By Vadim Pokhlebkin Tue, 25 Aug 2009 15:45:00 ET

Raise your hand if you agree with this famous quote from Baron Rothschild, an 18^th century British banker and a member of one of the world's richest families:

 

"The time to buy is when there's blood in the streets." 

 

Good advice, no argument there. OK -- now, how about this adage:

 

"Buy low, sell high."

 

Again, you'd be hard-pressed to find an investor who disagrees. Then why in the world do so few investors actually follow these rules?

 

In October 2007, when the DJIA topped 14,000 -- how many sold their shares? And when stocks scraped the bottom below 6,500 in early March of this year -- how many called their broker and yelled, "Buy, buy, buy!"?

 

It's no stretch to say that in each case, only a small minority of investors acted. The rest waited. At the 2007 top, paralyzed by greed, they waited for "the Dow at 40,000." At the March lows, they waited paralyzed by fear and hope. In both cases, the eternal cycle of greed and fear did what it always does: It transferred money from weak hands to the strong ones.

 

Harsh? Yes. But that's just how the market works. Despite a common misconception, it's not a place where everyone gets rich quick.

 

I will go one step further and suggest that even those gutsy investors who bought at the March lows are hesitating to sell now that the DJIA is almost 50% higher -- thus fulfilling only one part of the "buy low, sell high" adage.

 

Why is it so? The Elliott Wave Principle explains it best: investors herd. Human beings perceive safety in numbers -- and it's very, very hard to break away from the crowd, whether at market tops or bottoms. Being a contrarian is not for the faint-hearted.

 

Still, some manage to do it. Baron Rothschild bought when everyone sold. Sir John Templeton (look up his investment philosophy if you don't know it) sold tech stocks in 2000, and as early as 2004 warned (along with Elliott Wave International's president Robert Prechter) of the real estate bubble, also saying it was "a dangerous time to own stocks."

 

How do these investors do it? Well, some simply have both the uncommon intuition for extremes in crowd psychology and the guts to act while others wait. Others, like Bob Prechter, have a method -- a contrarian method like Elliott wave analysis.

 

The DJIA is up BIG from its March lows. Do you know how much longer the rally may last? Will you know when to sell? Our Financial Forecast Service can give you forecasts on multiple time frames right now. Try some contrarian thinking for a change. (Risk-free, as always.)

Tags

 

Classic Contrarian Signal

Investor optimism about the global economy has soared to its highest level in nearly six years, with portfolio managers putting their cash back into equity markets, according to the Merrill Lynch Survey of Fund Managers for August.

A net 75 per cent of survey respondents believe the world economy will strengthen in the coming 12 months, the highest reading since November 2003 and up from 63 per cent in July. Confidence about corporate health is at its highest since January 2004. A net 70 per cent of the panel respondents expect global corporate profits to rise in the coming year, up from 51 per cent last month.

August's survey shows that investors are matching their sentiment with action, by putting cash to work. Average cash balances have fallen to 3.5 per cent from 4.7 per cent in July, their lowest level since July 2007. Equity allocations have risen sharply month-over-month with a net 34 per cent of respondents overweight the asset class, up from a net seven per cent in July. Merrill Lynch's risk and liquidity indicator, a measure of risk appetite, has risen to 41, the highest in two years.

'Strong optimism in August represents a big turnaround from the apocalyptic bearishness of March. And yet with four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains,' says Michael Hartnett, chief global equities strategist at Banc of America Securities-Merrill Lynch Research. 'The equity rally has been narrowly led by China and tech stocks. We have yet to see investors fully embrace cyclical regions such as Japan or Europe, or Western bank stocks.'

Global emerging markets, led by China, and technology stocks are the strongest engines behind the early recovery. Investors would rather be overweight emerging markets than any other region, and by some distance. A net 33 per cent of the panel prefers to overweight emerging markets while investor consensus is to remain underweight the US, the eurozone, the U.K. and Japan.

Technology remains the number one sector, with 28 per cent of the global panel overweight the industry. Industrials and materials lag with global fund managers holding 11 per cent and 12 per cent overweight positions respectively.

Further behind are banks. Global fund managers remain concerned about the sector, holding a ten per cent underweight position. In contrast, investors within emerging markets are positive about banks with a net 17 per cent of fund managers in the regional survey overweight bank stocks.

Some of these sectoral and regional imbalances are starting to erode, however. Global fund managers have scaled back their underweight positions in bank stocks from 20 per cent in July. Industrials and materials have recovered from underweight positions one month ago. Emerging markets are less popular than in July when 48 per cent of the panel most wanted to overweight the region. And Europe is a lot less unpopular. In July, a net 30 per cent of respondents wanted to underweight the eurozone. That figure has dropped to just two per cent in August.

Within Europe, fund managers appear as excited about the outlook as their global colleagues. A net 66 per cent of respondents to the regional survey expect the European economy to improve in the coming year, up from a net 34 per cent in July.

The net percentage expecting earnings per share to rise nearly trebled, reaching 62 compared with a net 23 per cent a month ago. Investors in the region took an overweight position in basic resources, a cyclical sector, and radically scaled back their overweight position in pharmaceuticals, a defensive sector.

In contrast to global respondents, those in Europe have failed to inject new money.

'European growth optimism has finally caught up with other regions, but fund managers have yet to fully act on this and cash levels have actually increased and overall sector conviction is near record lows,' says Patrik Schöwitz, European equity strategist at Banc of America Securities-Merrill Lynch Research.

CURRENT SENTIMENT

O baby it is hard to be a contrarian.

 

Hedged.biz reports: Most Western Central Bankers, and virtually all private sector economists have now declared the recession over. Probably around three months late, but better than their forecasting record going into said recession.

Consensus growth for China in 2010 is now 9% plus. Most stocks in our universe are at or above pre-Lehman’s levels. A lot of respected (?) commentators are talking ‘V’shaped recoveries on the back of a rebound in inventories. Property markets appear to be stabilising in the West and moving sharply up to near record levels in parts of the East.

 

INVENTORY

A lot has been said on this topic, and I frankly never took much note of it.

 

If I understand it as the economy slowed down and consumers stopped spending like they did in the past, inventory built up and production dropped off to cater for the lower demand. As production numbers dropped as evidenced by weaker GDP numbers the consumption that was taking place drew inventories down to a level that required replenishing.

 

So we have now witnessed a topping up of inventories to cater for consumption even though it is still muted, but this inventory build up has caused production to increase and will therefore be reflected in the current GDP numbers as an increase.

 

If my summary of how inventory works on a simplistic level, then surely we are completing cycle 1, to draw inference that this is the bottom surely needs further evidence whether demand is likely to pick up significantly, or will we go through another cycle of weak demand, increased inventory build up and lower production and lower GDP.

 

Am I missing something or are we ignoring the cyclical / secular debate.