Thursday, October 26, 2006

Suck out

I'm not a big poker player, but I really enjoy the theories behind how the game is played. I think there are a lot of corollaries between a good trader and a good poker player. So let me make a poker analogy to the market action yesterday.

Yesterday I made the following statement: "...sentiment seems pretty bearish so a moderate sounding statement may bring a small rally." And that's exactly what happened. The statement sounded very much like the recent speeches we've seen from various Fed economists. Basically that inflation is too high right now, but a moderately cooling economy should allow the Fed to stay on hold for a while.

So why the rally if every one already knew this was the Fed's position? Because, in poker terms, the bond bears were all in. In poker, when players in front of you have made big bets, and the pot has gotten very large, sometimes the best strategy is to call the bet even if you think you have a less than 50% chance of winning the pot. For example, if the pot has $1,000 in it, and all you had to do was put $100 in to stay in the game, then as long as you have a better than 1/10 chance of winning, its a good bet.

That's what we had yesterday. The bond bears had bet heavily on a very hawkish Fed statement. Therefore, unless the statement was uber-hawkish, the market wasn't going to move much. On the other hand, since no one was betting on a moderate statement, that outcome resulted in a fair-sized rally.

Now, it isn't really my job to make short-term trades like that, so I can't say I made any money on my correct prognostication. But I think it reiterates the idea that you have to both analyze your economic opinion and what the market has priced in. Otherwise, you make lose money while being right all the way.

5 comments:

steve feiss said...

Tom, isn't that why it's called 'active management' and you are simply trying to earn your keep? Especially in times like these, when we have trading (not trending) markets, you have to be somewhat more careful in protecting your profits, locking in alpa whenever you can, no? after reading your post, I couldn't help but chime in to agree with you. Once again, positions have given us a good run up off the lows in Treasury complex, undoing some of recent tightening, priced in ... In fact, when I read your post today (especially the MBS part) couldn't help but mention (and ask) that I heard some of the bid early on was from international portfolios selling MBS and buying back some Tsies (as MBS are a good vehicle w/Fed on hold forever, in lower vol world?) ... have MBS widened to Tsies on the day? And is it true they are typically a better performing asset class in Q1? Maybe a good trade would be to sell MBS and work into TIPS ... they've started to work over last couple days. What do you think? ALSO, gotta ask if the time posted (4:45am) is correct? Thought I was the only one up at that hour of the day?

Tom G. said...

Steve:

Great comment. I think to make it in the investment management business, you've got to pick your spots. If you feel compelled to make a bet on every sector plus rates plus the curve every day, is the client really getting your best ideas?

I'm going to write a little bit more about MBS this morning.

BTW, I wrote the post at 7:45AM ET. Are you on the left coast?

steve feiss said...

nope, am in NJ (near Exit 8 for anyone reading that knows and loves the NJTurnpike) and when i went to respond it had the time of 4:45am ... perhaps it was technical difficulty on my side ... not the sharpest computer saavy guy in the bond biz ... and i hear you, re picking yer spots ... hopefully you are having a better-than-lehman index year ... (and were long duration in some way, shape or form going INTO weak GDP figures)

Firat said...

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Firat said...

şarkı dinle -cinsel sohbet-radyo dinle-
islami sohbet-sohbet-sohbet kanallari-
sohbet siteleri-sohbet odaları-cet-
çet-sohbet siteleri-cet-dj akman-
mirc indir-çet-sohpet-
çet-cet-sohpet-
antalya sohbet-mersin-sevda-
çet-cet-sohpet-
bedava sohbet-bursa sohbet-
çorum sohbet-denizli sohbet-gay sohbet-
lez sohbet-mersin sohbet-
avrupa sohbet-istanbul sohbet-
izmir sohbet-ankara sohbet-karadeniz sohbet-
mirc-mircler-mirc indir-
trabzon sohbet-adana sohbet-
hatay sohbet-antakya sohbet-
iskenderun sohbet-hatay-
hatay sohbet-hatay sohbet-
turk chat-mersin-gurbet sohbet-
sivas sohbet-yozgat sohbet-kayseri sohbet