Sunday, September 09, 2012


I am not an Interactive Brokers client, yet I got this in the mail over the weekend. My initial unfiltered reaction to this was WHAT THE .........? I like to listen to my gut reaction, then sit back and think about things rationally and reconcile the two viewpoints. Essentially what they are encouraging here is insane leverage for people to take on. Of course that type of thinking is what got us all into this economic mess we are in. It really falls upon an individual if they are dumb enough to take on the levels of leverage that can ruin them. Far be it for me to think a brokerage firm would take the morally higher ground EVER! What bothers me about this is where the actual collateral is coming from for the loans? From a sheer timing perspective, there has to be a float here somewhere and I am suspicious where that might be coming from. In this day and age where I think we all suspect customer funds are being used inappropriately at firms that have not as of yet been caught doing so, this raises an eyebrow to me. At the very least this is an example of a business going into things outside of their main expertise, and we have seen enough instances of ruin in those cases in all industries for this to be a red flag to me.

I have checked into this firm in the financial ratings, and they are rated well. There is no obvious cause for alarm there. As much as I hate them, I have contemplated opening an account there once I start spreading things out as more money comes in. This is going to make me look elsewhere first. I just don't like the feel of this even if there is nothing funny going on. I don't want my money in a place where it is encouraged to leverage to this degree. The one problem everyone needs to be aware of is that is one big account blows up, the FCM has to cover the loss. If they can't, the rest of the segregated holders collectively share it. This just does not feel right.

The debut of a breakthrough....

Here is a Soybean weekly chart, a market that many people seem to want to short except me. I have had several readers email me about this or ask me about it when we have been on the phone together. I have discussed at length my Synthetic version of the COT data in the blog, and it's short comings. There will never be the perfect indicator, but that will not stop me from trying to create it. Here I have the latest version of this, with some new tweaks, that is the best of anything I have done with this so far. It is not perfect yet, but there are a couple of basic rules for the signals that filter out most of the ones here that are wrong such as the one that is at hand right now. I will be covering this in my newsletter once it is launched.

You can see that in general, from a COT perspective, this is about as good a sell setup as there could be. We have the Small Specs heavily long, the Commercials with a big net short position. We also have the seasonal tendency which is not shown indicating down. The biggest red flag in all of that is the Small specs. It is impossible for rallies to exist and thrive based on them alone. They do not have the firepower to sustain moves. We do see the Large Specs with a big long position, that is what can drive price to a certain point. There are position limits there, so at some point they too run out of the ammo to keep things rolling. Timing that is never an easy proposition. I think long time COT experts, one in particular whose name I will not mention, have gotten stuck in being bearish in too many places for too long, with this type of pattern. Yes it should lead to a decline at some point, but that is where the art aspect of trading comes into things. If you don't trade and just are an analyst, being wrong for extended periods just does not have the same feedback to your views.

What we really need to wait for here is some type of a trend break. You might be able to be a hero and guess the top right, but the streets are littered with such attempts that have failed and written epitaphs in the process. For whatever it is worth, my main filter for the new indicator here is not confirming the sell yet.

I think with the election upon us, and the FED on full get Barry four more mode via inflating things, it is not likely we will see any major declines until afterward. It should not be this way, but it is. So it is with Gold also. That market will follow the Dow just like it has been doing. They are both being manipulated by the same people so of course they move together.

PFG Update

For those of you who are fellow victims, here is what I got from the Friday conference call hosted by the CCC.

1) It appears some co-conspirators have been identified through the investigation. They were tight lipped about who they are, perhaps due to legalities. If I had to guess based on the way it was discussed, I would say it is other officers of the company. This seems sort of obvious, we all knew he did not act alone. The problem with that is I doubt but do not know, that any of them have any significant assets to litigate for. It would have been nice if some big dog where on the board, but there are no such people involved in this that I know of. If we are fortunate enough for it to be someone at the NFA that would be a home run, but I doubt it. It would also be great if it were US Bank, but we really don't know the money trail, so there is no way of knowing who else might be able to be drawn into this.
2) There is a meeting on Monday where the assets are being discussed and perhaps the pecking order of who stands where in line is going to be established. If you live in Chicago you can go down to the court room on the day in the court docket which I think is 9/12, and be heard. Go to www.pfgchapter7.com to get the details.
3) PFG's real assets are $270 Million against liabilities of in excess of $500 Million. The  $270 I believe is there book value, so the fetching price will likely be much much less than that number. In theory, seg holders should be first in line to get that money, but in this day and age the judge could give it all to a dog for all we know. Nothing is ever guaranteed in a court room. What if any money comes to us through the sale of these assets, will likely take a year or more. Certainly the office building could take a very long time to sell, and that is valued I believe at $24 Million. I think it will sell for under $5 Million in the end.
4) The first distribution is 30% for those who traded on US Exchanges (4d) and 40% for those who traded on foreign exchanges (30.7). Forex people get nothing and are not likely to ever see a penny if the law is followed correctly. Again the award to a dog factor is always lurking.
5) They are holding back about $58 Million due to suspicions of some of the accounting being phony. This is about another 15%. That will likely be distributed at a future date, bringing the total to 45% assuming the same ratios are applied when it is returned. There is no date set for that.
6) There has been some friction between the CCC and the trustee, but it seems to be abating some
7) The class action suits are going to be consolidated into one reasonably soon. The NFA is named as a defendant but the burden of proof there is bad faith ( basically someone had to have deliberately done something wrong ) which is very tough to prove. There certainly is an argument for that based on the email to them in 2011, but again the dog factor... I doubt in the end that anyone in a regulatory position will even lose their job, much less be part of a larger award back to us.
8) The prospects for longer term recovery are not very good unless the banks are guilty of something. The trustee stated directly on one of his released statements, that the long term prospects for recovery are not very good. ( paraphrased )
9) The industry as a whole is not supporting the insurance option. This strikes me as particularly troubling. Why wouldn't they want this? I can think of many reasons, none of which are any good. It is my contention that many firms are using client money illegally on some level, so that would be one possible reason why reform would be resisted. The argument of the cost is bullshit, they are just going to charge extra fees to cover it, so it really tells me they think they will not be able to mess around the way they are now, and as a result make less money on the trades they do with client money.

Net net, here is where I think we are. We are looking at probably getting between 50 and 60% of our money back in the end after several years, with probably getting about 45% within the next few months. After that we will have to wait for years of litigation and keep in mind the trustee is charging $650 and hour, so he will get millions of our dollars just by running the clock here. He will wind up with most of what they get from asset sales most likely.

Website update

I have been working hard all weekend on this and I don't know when I will be done. I want this to be as professional as I can make it, have good explanations of things etc.. However at the same time I don't want it to be too verbose and an autobiography. I will give an update when it is ready to go and I sure hope it is this week. I have re-written it several times and I am still not happy with it.

This week I expect rallies to continue for the most part, dips are most likely buys in most places in spite of COT sell setups. It is the time of the year when declines usually happen, but the FED seems intent on stopping that from happening. We know that betting against them is a tough proposition.

Good Trading


Enrico said...

And what about all that deleveraging which they we speaking about five years ago when the financial crises started?


this is nice. And thanks again to IB new activities.

TraderJ said...

Keep going Chris. True fighters become even stronger after obstacles. After receiving the remaining fund from PFG, you still can trade it back to original values within a few years. So no worries, more important is the brain/knowledge. It is still there!

TraderJ said...

Keep going Chris. True fighters become even stronger after obstacles. After receiving the remaining fund from PFG, you still can trade it back to original values within a few years. So no worries, more important is the brain/knowledge. It is still there!

Chris Johnston said...

Yep Trader J that is the plan, I should be able to do just that.

Enrico, the IB thing is bizarre to me

Anonymous said...

Another problem with the Interactive Broker solicitation is the fine print says that your collateral can be sold if you do not meet minimum equity-to-loan requirements but fail to state what that ratio is and whether or not it could be violated intraday vs. end of day.
Keep up the great work.
Don in Virginia

Chris Johnston said...

Don, this whole thing with them is just very strange and does not feel right to me for some reason, just gut.

Chris Johnston said...

Don, this whole thing with them is just very strange and does not feel right to me for some reason, just gut.