Trouble in Paradise

Kenneth Lay, Andrew Fastow, and Jeffrey Skilling of Enron are preeminent poster boys for corporate greed, but by no means are trio unique. In back alley game of “Fleece Shareholder”, skilled competitors are abundant. Dennis Kozlowski, Tyco's ex-chairman and chief executive, showed some real creativity. Late last year Morgan Stanley, always promoting an image of steady, conservative, trustworthy values, agreed to pay $50 million to settle federal charges that investors were never informed about compensation company received for selling certain mutual funds. So much for protecting little guy. Before that SEC settled with Putnam Investments, fifth largest mutual fund company, which allegedly had allowed a select group of portfolio managers and clients to flip mutual fund shares to profit from prices gone flat.

A proposal that would force SEC to give shareholders a greater voice in selecting board members was defeated in October 2004. Commissioner Harvey J. Goldschmid, an advocate of proposal, said “The commission’s inaction at this point has made it a safer world for a small minority of lazy, inefficient, grossly overpaid and wrongheaded CEOs.” The ugly truth does not stop there by any means. Even venerable Fannie Mae is accused of fleecing investors. The Wall Street Journal reports that Justice Department opened a formal investigation in October 2004, following reports that mortgage company may have manipulated its books to meet earnings targets. This is after Fannie tried to hinder an official investigation by refusing to provide relevant information. Oddly, Enron scandal ultimately revealed Fannie’s alleged deception, when energy company’s collapse forced Fannie Mae to replace Arthur Anderson with a new auditor.

When Good News is Bad

And that is good news. The bad news is very bad indeed. As an individual investor, you might begin to suspect game is rigged against you after hearing recent spate of charges and revelations. But real problem lies not with illegal activity of a few high-profile rogue directors, acting beyond rather generous and forgiving rules of SEC. Instead, frightening truth is that you have much more to fear from what is done legally, with impunity, with official blessing of regulators. I am a scientist by training, not a professional investor, but I have a substantial portion of my net worth floating about Wall Street in various stocks and mutual funds, mostly in self-directed retirement accounts. I want to protect those assets, so I naturally set out to learn more about stocks, bonds, futures, and commodities. Like any self-respecting scientist, I starting digging and methodically researching rules, regulations and practices of Wall Street to get an objective picture how my money was handled once I made a transaction. Early on I concluded that best way to make money was to take control of trading decisions myself, so that I could identify opportunities for greatest returns without looking through artificial filter of a broker with his own agenda.

I also found that institutional investors managing billion dollar transactions or individuals working with grandma’s “blue chip” stock all share something in common, regardless of method of trading or size of portfolio. All depend on fundamentally flawed notion that future is predictable. As a result, all are doomed to fail over time: any attempt to predict future is utterly hopeless, and no amount of fancy arithmetic will change that immutable fact of nature.

The futility of trying to foresee future, however, has not stopped traders from creating ever more sophisticated methods that rely on predicting market movement. This tragic flaw, this inability to recognize that future will never be predictable, is often masked by confusing terminology and complicated math to create a comforting image of some higher knowledge. But no matter how clever system or elaborate math, future simply can not be foretold.

Oddly, while traders of stocks, bonds and commodities suffer equally from delusion that future is knowable, pernicious effect of this myth is seen with greatest clarity in futures trading. The world of trading futures, therefore, will be example explored in detail to expose depth and extent of big lie. The lesson from futures trading, however, applies universally to all sectors.

Futures Trading

Traders fall into two distinct camps when it comes to analyzing market: fundamental traders and technical traders.

Fundamental Traders

Fundamental analysis is a study of principals of supply and demand and production and consumption patterns of commodities, and how these relate to future market behavior. The goal is to sift through fundamental economic data to identify discrepancies between inherent value of a commodity and current market price of that commodity. A fundamental trader seeks to profit by buying or selling during this period of discrepancy before market catches up to reflect correct information.

Technical Traders

Traders in second major camp rely on technical analysis, which is a study of price behavior over time. Technical trading attempts to foresee future, an impossibility. But hope seems to spring eternal, and so technical traders have developed an arsenal of tools to predict market direction.

The big gun in technical analysis is bar chart, which is a graph that represents market price changes over time. Using bar chart, traders evaluate historic price behavior, seeking to identify any indicators that will predict market movement in immediate future.

The various patterns of peaks and valleys create “chart formations” that analysts use to predict prices. Eighteen basic signals and chart formations establish basis for technical analysis: trend lines, rounded bottoms, consolidations, tops, bottoms, support, resistance, retracements, reversals, head and shoulders, continuation formations, triangles, coils, boxes, flags, pennants, diamonds, and moving averages. The only signals missing are tea leaves, scattered bones and eyes of newt.

A few of these chart formations, explained clearly by Russel Wasendorf in All About Futures, are discussed below as a means of illustrating how traders use analytical signals to determine when and why to enter and exit market.

The Trend Line

Watching big amount of “low-carb”, diet-friendly versions of foods that appear on market, one would say that South Beach Diet has not affected only people who want to get slim and healthy. Companies involved in food industry have also been feeling South Beach Diet effects: some of products in great demand have brought profit while sales for high-carbs, diet unfriendly ones have drastically fallen. The owners of many businesses have taken measures to adapt their range of products to needs of market, offering low-carb versions of their products.