Trader’s Narrative

I use Interactive Brokers as my primary broker because of their price and offering but also because they consistently improve and add new features. They put the Japanese companies to shame when it comes to kaizen.

Usually they follow the requests made by their clients - I’ve been with them long enough to remember a time they grudgingly gave in to demands for trailing stop losses because Thomas Peterffy believed they weren’t good for the health of markets (I am not kidding!!). But they also innovate and surprise their fans with new features.

They recently announced a raft of new features, products and markets. If you are a serious trader and looking for a broker, check them out.

Here are the recent additions:

New Products & Markets

• US Treasury Bonds and Notes
• Vanguard No-load Mutual Funds
• Mexican stocks, futures, and options
• Spanish stocks

The first two are huge news because as far as I can remember, we’ve been pestering IB for it. The even better news is that fixed income will be expanded soon to include T-Bills and that other mutual fund families will be added as well. IB was at one time proud that they stuck to just derivatives and equity markets. Finally, they are branching out to other financial products.

The expansion to Mexico and Spain are also welcomed. Especially since I have familiarity and interest in the Spanish equity market. IB has offered Spanish derivatives for some time but now the lineup is complete.

IB Block Desk
The biggest news is this! Interactive Brokers is opening up their institution block desk to retail customers. Now if your orders are big enough (100+ contracts), you can call them up and get a tighter spread or more liquidity than electronic markets. The desk also offers you access to the Spoos (the S&P 500 open outcry market or pit), OEX, NDX (and their options).

Answering calls will be experienced, knowledgeable traders who can tackle anything you throw at them, including complex derivative trades. But this is a very surprising development since Interactive Brokers has adamantly refused to do anything but push deeper into electronic markets through sophisticated trade matching computer algorithms.

IB Risk Navigator
This is a relatively new built in quantitative tool that will monitor and manage your risk exposure across countries, markets, currencies and securities. Think of it as your very own risk manager. IB has added a few extra capabilities to it but unless you trade a gamut of securities spanning markets or dabble in options heavily, then you probably don’t need it. In case you’re interested, IB is offering two Webinars to explain it in more detail: March 26th and April 23rd.

Trader Work Station
The TWS is the trading platform from IB and most people fall into two camps: they either love its simplicity or hate its clunky look (and Java-ness). In any case, IB isn’t going to chuck it any time soon so if you’re thinking of opening an account with IB this may be the only deal breaker. You can always use their web based interface but it has very limited functionality compared to the TWS. IB has finally tried to mollify its critics by adding skinning, so you can customize the look of the TWS.

I can’t help but think that a lot of these uncharacteristic new features and markets are a result of Interactive Brokers becoming a public entity last year.

If you’re shopping for a broker, click to see last year’s best broker ratings from Barron’s.

The bond market and the stock market are intimately intertwined. But how exactly they influence each other is often complex. The dynamic nature of their relationship makes it even more difficult to read the market’s tea leaves. As soon as you think you’ve figured them out, the interplay among them changes and the game starts all over again.

I’ve already described one way that I link the two together: the monthly rate of change for bonds. This is a useful indicator that has not only provided guide posts for market bottoms but also times when the market has climbed into thin air territory and is about to be humbled.

Here’s another, similar method:

As the chart above shows, this is the annual rate of change for the 10 year US Treasury Bonds. Since it is based a longer time frame, it reaches extreme levels much less frequently than the monthly rate of change.

Right now, the annual rate of change for 10 year bonds is very close to reaching the historic level that has marked a top for bonds (and a bottom for yields).

Interestingly enough, each of those times was also a good time to not only sell (or sell short bonds) but also to be long stocks:

Just a few months ago everyone was wringing their hands over the Chinese stock market (myself included).

With Greenspan chiming in to join the chorus of “bubble” talk, everyone was expecting it to implode at any minute. So what happened?

Nothing.

In fact, the Chinese market is going strong (see graph below). This is remarkable considering that it has done so when almost all the global markets have corrected along with the US recently.

That’ll teach me for not using Greenspan as what he is: the world’s rarest contrarian indicator. From his poo-pooing of ARMs (adjustible rate mortgages), which are now coming home to roost, to his prediction about natural gas, to his casualness about this generations greatest financial bubble, and going back to his econometric predictions even before he was in the Fed, Greenspan has a knack for taking the wrong side of a trade. He rarely makes statements on the market, but when he does, it pays to go the other way.

Bubble or no bubble, technically speaking China looks like one hell of a resilient market.

Calling China’s Bluff
The economic war of words between China and the US hit a new shrill high note with China explicitely warning that it will use its $1.3 trillion dollar reserve to cause a crash in the US dollar if it is pushed around in trade talks. From the Telegraph in the UK:

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing’s foreign reserves should be used as a “bargaining chip” in talks with the US.

“Of course, China doesn’t want any undesirable phenomenon in the global financial order,” he added.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

“China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

Of course if we play this forward like a chess move, it is clear that China is in reality threatening to shoot itself in the face with both barrells. The dominoes would fall like this:

1. China sells dollar reserve
2. US dollar crashes through 80 support area
3. US interest rates shoot through the roof (bond/yield inverse relationship)
4. the wounded US housing market gets a stake through the heart
5. stock market crashes as yields shoot up
6. liquidity dries up causing a cascade
7. US economy nose dives into a deep recession
8. US recession reverberates throughout global economy
9. US imports of Chinese goods are drastically reduced
10. Europe and Asia fall into a recession (perhaps milder)
11. Chinese economy sputters
12. Chinese factories shut down causing unemployment to rise
13. rioting and unrest increases exponentially in China
14. the fan is soiled with #2 in China

Why would the Chinese put in motion the scenario which would in the end see them lose those cushy Communist Party jobs? They are not that stupid. Here’s hoping that the US politicians aren’t either.

Anyway, here’s the chart showing the Chinese and US markets: