Zach G. - Freshman Equities Trader

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A Major Step
Posted by Zachary G. - Freshman Equities Trader on Jul 8th, 2010 5:44pm

In just over a week our new website will be launched. Up to this point I have seen bits and pieces of our new format but remain anxious to see the pieces of the puzzle come together. Every day I witness several of my coworkers working endlessly to prepare the website and ask myself “what exactly are they working on?” Given the tireless effort I have seen from the media team, I expect the new site to be nothing short of extraordinary. Not only do I look forward to seeing the end product, I believe that the new site will be the binding force between the media and hedge fund aspects of our business allowing us to realize the full scope of the company’s vision. From the first day I entered the office I was told that this firm is not merely a trading shop but a revolutionary concept that combined traditional market strategies with a multimedia, interactive experience. While we have managed to strike a balance between these two seemingly separate halves, the website become the source of sustainable equilibrium. Finally, once we begin to aggressively market our website I expect our membership to grow exponentially. The notion of having hundreds and potentially thousands of listeners on our call is truly awe inspiring. I look forward to the exciting journey that lies ahead.

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Hedging the Trade
Posted by Zachary G. - Freshman Equities Trader on Jul 7th, 2010 7:50pm

Around 3:00 this afternoon, Dean suggested that the traders review their executions throughout the day to provide content during an otherwise slow period in the market. When I volunteered to go first, I saw Klein’s eyes light up; the Lumberjack Hour had come early this week. As I began to explain my trades, he posed the same question as last week: “did you think to hedge out any of your positions?” I told him I hadn’t and was unable to provide an acceptable reason as to why. When I informed Klein that I held a long position in Boeing, he suggested I double the position and hedge it with SPYs. After running this idea by Mark, I decided to enter the trade. Since I believed that BA was a name that showed relative strength compared to the market, we should make money on the trade during a rally because Boeing should rally harder than the overall market. Furthermore, if the market sells off, we will be protected to the downside with the short position. The trade ended up working very well and we realized a positive net P&L. After today’s success, I plan to put this type of trade into my arsenal and become more adept at maximizing its profitability.

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Why Today?
Posted by Zachary G. - Freshman Equities Trader on Jul 6th, 2010 5:57pm

With earnings season still looming two weeks away it seemed unusual to find that the futures had gapped up 6 handles from fair value in pre-market trading without any major fundamental news. When the market began to grind higher upon the open, the move became even more suspect. I asked Klein a simple question, “Why today?” He explained that the reason was two-fold. First, with last week’s major economic numbers out of the way, investors are more willing to dip a toe into the equities pool. Furthermore, last week’s sell off made stocks appear even cheaper than before and many investors decided to take advantage of the apparent value. Mark chimed in and mentioned that he disagrees with the valuation mindset and believes that cheap stocks can always get even cheaper.

Around 10:30, the market began to reverse and began what would be a 21 handle slide to put in a low of 1014.25. Once again, the shorts were able to win the day and the morning’s rally turned out to be another opportunity for the bears to sink their claws into. It appears as though this trade has worked consistently for the shorts for the past two months and the market will continue to be battered in the absence of a positive fundamental catalyst; hopefully a strong earnings season will provide just that. Until Alcoa kicks off the festivities, I expect to see a choppy market with buyers who are feeling sanguine about Q2 results and sellers who will continue to short rallies until the trade no longer works.

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Asset Allocators and Several Sellers
Posted by Zachary G. - Freshman Equities Trader on Jun 30th, 2010 6:37pm

Today was another disheartening day in the market with the S&P 500 closing down over 1%. Not surprisingly, the much anticipated ADP employment numbers missed estimates and immediately sent the market down 4 handles. It seemed as if the number had been forgotten by 9:50 as the market rallied to new highs and entered what appeared to be an upward grind. At 11:30, I watched intently to see if the market could put in a higher high and continue to move higher. Marc and I discussed this time period before; he said that he has seen a recurring pattern many times throughout his career. He told me that if the market attempts to make a higher push around 11:30 and is unable to do so it is more likely than not that the remainder of the day will be a disappointment. Needless to say, this pattern once again proved itself today.

The other factor on my mind today was asset allocation. At the end of every month, many asset managers are required to shift out of securities such as cash and bonds and put that money to work in the equities market. I was particularly attentive when the clock struck 1:00, 2:00, and 3:00 as these are common times for buy programs to be switched on. Unfortunately, as the market began to sell off late in the day, it became apparent that the bid of asset allocators was potentially overshadowed by redemptions, continued liquidations, fear, and those who could no longer bear the pain. With great uncertainty looming in the markets it remains unclear when real buying will resume. Hopefully Friday’s jobs report and the House vote on financial reform will ameliorate some of this uncertainty in the short term until earnings season commences in two weeks; I expect it to be a long two weeks.

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Taught to Learn
Posted by Zachary G. - Freshman Equities Trader on Jun 28th, 2010 8:14pm

In the pre-revolutionary era, foreign imperial powers were hungry for control of land and trade routes in North America. In particular, both the French and British governments sought to control the strategic location where the Allegheny and Monongahela rivers converged, providing a passage to the Ohio territory. The French claimed the land as their own given that it fell within the drainage basin of the Mississippi river; however the British felt that this claim infringed upon the existing British land stakes in the area. To defend their land, the British commenced construction of Fort Prince George until a much larger French battalion arrived at the site, forcing the troops to surrender. The French proceeded to raze Fort Prince George and construct Fort Duquesne in honor of Marquis Duquesne, the governor-general of New France. When the French and Indian War erupted into a global conflict, the strategic confluence of the Allegheny and Monongahela became a focal point for the British army. The Brits launched several failed attempts to take Fort Duquesne but were unable to overcome the French garrison. On November 26th, 1758 the French set fire to the Fort and retreated into the cover of darkness. When the British discovered the smoldering remains the next day, they resolved to construct a much larger fort on the site. British General John Forbes decided to name the new structure Fort Pitt in honor of Prime Minister William Pitt and dubbed the surrounding area Pittsburgh.

In four years of formal college education, I never encountered this particular history lesson. While knowledge of Pittsburgh’s etymology probably won’t help me impress my friends and certainly won’t score any dates, the fact that I was unable to identify the city’s original moniker begs the question, did my college fail to properly educate me? Over my college career, my core curriculum combined business and humanities requirements with various electives. The business courses began with Business 1, an introductory course that gave students a general picture of what the industry entails and the various players who are involved. Over the years, the courses became more specialized to include topics such as investments, corporate finance, and financial institutions. Next, my humanities requirements helped hone my reading and writing skills, increased my mathematical acumen, and helped me understand why “Rocks for Jocks” was such a popular choice for fulfilling a science requirement. Finally, the remaining time slots were awarded to a spectrum of elective topics including philosophy, poetry, history, political science, and theatre. These classes allowed me to expand the scope of my knowledge and utilize parts of my brain that accounting classes failed to stimulate.

Although these classes provided a wonderful breath of information, why did the original name of Pittsburgh elude me this afternoon? The answer lies in the process. Instead of attempting to cram a universe of knowledge into a four year span, colleges and universities strive to prepare their students for the inevitable problems and challenges they will meet throughout their professional careers. This goal is realized not by what is taught, but by how it is taught. The most effective professors know how to challenge their students to not simply memorize facts but to understand the whirling gears of logic driving those facts. This allows the student to develop a skill essential for any career, the capacity for critical thought. Furthermore, these skillful educators know to reserve the highest ranks for those that put forth the greatest effort. By doing so, students learn that mediocrity never begets glory. Finally, the effective college experience prepares students to continue the educational process after graduation. While the history of Pittsburgh was never uttered in the Lehigh classroom, neither were the words support or resistance. Most colleges realize that education does not stop at the edge of campus but is a lifelong process.

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Are you Experienced?
Posted by Zachary G. - Freshman Equities Trader on Jun 25th, 2010 8:45am

Yesterday, Mark Moskowitz was able to predict the reaction to the Jobless Claims number just before the number was released. This prognostication was not based on any sort of lengthy macroeconomic analysis or knowledge of employment picture yet it turned out to be remarkable accurate. His prediction was no parlor trick, nor was it a lucky guess. Mark recognized a pattern in the market action leading up to the number and his gut immediately alerted his brain that the reaction would be positive. This ability is a product of one of Mark’s most valuable assets, experience.

I view every day I sit on this desk as a learning experience. The more hours I spend in front of the screen, the more adept I will become at recognizing patterns and identifying trends. In order to maximize my time on the desk, I try to constantly ask questions of the principals to take full advantage of their years of experience. Furthermore, taking notes allows me to retain the lessons I have learned and reap their full benefit. It is very rewarding to come into work every day knowing that I will leave at night with a new piece of knowledge.

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The Last Days of Lehman
Posted by Zachary G. - Freshman Equities Trader on Jun 23rd, 2010 12:55pm

Sitting on the dirt-stained porch of 427 Fillmore, we casually smoked the afternoon’s first cigarette, waiting for our friend to return from class. A familiar figure sauntered around the corner, newspaper in hand. His pace seemed unusually frenzied and his eyes were lit with intrigue. “Dude, it actually happened, Lehman’s gone…f*@king Lehman!” The words seemed to hang in the air. The failure of a stalwart institution like Lehman Brothers or Bear Stearns seemed impossible. As we watched the markets plunge in the weeks that followed we could only ask ourselves “What type of world were we graduating into?” While we knew that the shrapnel was flying on Wall St., most of us were unsure as to exactly why the big bank ultimately failed.

Last week, CNBC ran a special entitled The Last Days of Lehman that depicted the major players and events surrounding the bankruptcy proceedings. While the acting left much to be desired and the messages were thinly veiled, the film succeeded in allowing the viewer to understand why the bank went belly-up. First, the film provided multiple perspectives by depicting scenes within the company, at the Federal Reserve, and on the street. By doing so, the viewer formed a broad picture of the multiple forces that were in play. Next, the film stuck to the facts but portrayed them in a way that allowed the viewer to understand how certain decisions were reached. For example, film shows a meeting between John Thain of Merrill Lynch and Ken Lewis of Bank of America in which Lewis coaxes Thain to sell his business. While the public was fully aware of the acquisition, few were privy to the backroom dealing that took place to reach an agreement. This unique glimpse into high powered finance was intriguing and enlightening. Finally, the film focused heavily on the character flaws of Dick Fuld that helped contribute to Lehman’s demise. Fuld’s personality was riddled with hubris; he believed that his company’s reputation precluded them from failure. His unwavering faith in the merits of Lehman blinded him to the company’s massive shortcomings. Rather than bury his pride and sell the company, he chose to press his luck and soldier forward. He failed to realize that there were forces at play greater than himself and ignored the facts at hand. On this desk, we have always said that acting on emotion always leads to the wrong decision. As history has shown us, hubris is the most treacherous of all emotions.

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Behind Closed Doors
Posted by Zachary G. - Freshman Equities Trader on Jun 21st, 2010 9:07am

What image comes to mind when the words “hedge fund” are uttered? Some people may paint a picture of a piggy bank for the fabulously wealthy; a place where the rich become richer. Others might construct the image of shady dealmakers transferring billions of dollars to offshore accounts from the comfort of their luxury yachts. Finally, some individuals will say a hedge fund is nothing more than a pool of assets with greater investor restrictions but fewer investment restrictions than a mutual fund. While these descriptions undoubtedly evoke discrete images, they all share the common theme of exclusivity and privacy.

Before I came to The Frommer Group, my knowledge of the hedge fund world was limited but not entirely deficient. My mental image of a hedge fund fell somewhere between that of the turbocharged piggy bank and the standard textbook definition. In college, I had come across various articles in the Wall St. Journal describing the enormous salaries of hedge fund managers and the immense returns their funds were able to generate. These fanciful stories led me to believe that these funds stood boldly at the pinnacle of the Wall Street community, scoffing at the restrictions and scrutiny of public institutions. This attitude persisted when my yoga instructor told me that a hedge fund had opened its doors on the top floor of the building. The first thing I told him was “That sounds cool, but I’m sure it’s a bunch a market veterans up there. Why would they be interested in someone fresh out of college?”

Once I began working for the fund, some of my assumptions were confirmed; however, the veil of mystery began to dissipate. The principals at the Frommer Group were indeed highly seasoned professionals and the office space did convey an air of luxury, but I soon discovered that there was no secret to the firm’s investment strategy or modus operandi. In fact, many of the fundamental concepts I learned in college permeated the firm’s daily decision making process. I was also surprised at the principal’s willingness to share their knowledge with the students and bring us into the fray. With each passing day, I realized the only secret to the success of a hedge fund is hard work and dedication.

At Hedge Fund Live, our unique business model will redefine public perception of the hedge fund community through increased transparency. By sharing the daily experiences on the trading floor with our external member community, we provide a window into a world that was once sealed off from the general public. Furthermore, we allow our members to become part of the collective experience through interactive capabilities and educational seminars. Someday, our iteration of the hedge fund concept will become ingrained into public perception and will become the norm rather than the outlier.

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Relative Strength/Relative Weakness
Posted by Zachary G. - Freshman Equities Trader on Jun 18th, 2010 5:33pm

Today during the Lumberjack Hour, Klein and I discussed a trade that was made in US Steel. Upon review of the chart his first question was “So you were short, right?” I admitted that I had decided to take the opposite end of the trade and got long with support from S3 and a 50 SMA. The stock bounced 20 cents from where I purchased it, came into resistance and then sold off, triggering my stop. Not only had I failed to control my risk/reward by moving my stop out when the trade was in my favor, I had chosen to get long a stock that was relatively weak compared to the market. In order to dissect this trade, Klein began to dissect the fundamental forces at work that were driving the stock price this morning. Since the market was essentially range bound all day, the only major buying pressure would have come from index arbitrageurs and individuals who believed in the fundamental picture of the steel industry. As the stock began to sell off, many of these buyers may have stepped away as selling pressure intensified. As Mark and I look to trade around positions within the book, relative strength will always be at the forefront of our decisions. This becomes particularly important given our plan to hold trades for longer periods of time rather than looking to scalp nickels and dimes. Next week, I will intensify my focus on relative strength while trying to understand the underlying forces that may be generating this strength or weakness.

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Elementary my dear Watson
Posted by Zachary G. - Freshman Equities Trader on Jun 18th, 2010 8:29am

“A famous red-coiffed clown, or just any incompetent fool.” While any Bozo should have little trouble determining the proper answer to Synonyms for $400, it seems impossible for a computer to decipher the intent of this question. When this phrase is typed into Google the top result is an article written in 2009 about Barney Frank’s disgust over excessive AIG bonuses; Humans 1, Computers 0. Recently, IBM launched its new supercomputer “Watson,” a machine capable of producing actual answers rather than search results to questions posed in plain-speak language. To test its capabilities, Watson was pitted against several Jeopardy champions to determine how the CPU would far against the human brain. On the day of the competition, Watson won four out of six games, besting a total of eight competitors.

Unlike existing search engines and other question answering devices which run a master algorithm, Watson executes hundreds of different algorithms simultaneously. These algos dissect the question using different strategies and aggregate their results into a database. Then, a separate set of algorithms interprets this data and chooses the result that has the greatest statistical likelihood to be the correct answer to each question. For example, when a user asks Watson a plain-language question such as “What was Larry Kroger’s Delta Tau Chi name in the film Animal House?” Watson would come up with a plethora of different responses based on its different algorithms. If a majority of those algos produced the response “Pinto” then Watson would report that as the correct answer.

Clearly, the capabilities of such a technology extend far beyond the quiz show arena. Perhaps Watson’s greatest strength lies in its ability to decipher complex phrasing and colloquialisms. This allows the computer to essentially communicate with humans by deciphering the nuances and intended meanings that permeate the English Language. With this technology IBM could surpass the search engine by creating the first true answer engine. This would give IBM a strategic advantage over companies like Google and Microsoft by providing a service that has never been offered before. Users could type in questions such as “Where should I eat tonight in New York if I am looking for the best cheap Italian food?” and Watson would be able to point the user in the proper direction. Watson’s extensive knowledge coupled with its ability to communicate with humans holds untold possibilities and represents a new step the synergistic evolution between humans and machines.

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