LESSONS FROM THE TRADER WIZARD

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CONTENTS

Book information

Author information

Technical details

Contact information

Sample chapters

LESSONS FROM THE TRADER WIZARD

Electronic Press Kit

BOOK INFORMATION

New from trader/free market patriot Bill Cara, Lessons From the Trader Wizard demystifies the complex world of capital markets. One of the world’s top traders equips you with the experience-proven tools and insights learned over a lifetime that you need to trade at the top of your game. Learn to avoid common mistakes even the pros make and minimize risk with this clear, concise guide to trading success.

Learn the specialized tactics you need to compete with Wall Street. Bill shows you how to navigate with confidence through the dangerous world of trading the capital markets.

Whatever your level of trading experience, Lessons From the Trader Wizard shows you how to protect capital and maximize trading returns in any economic climate.

LESSONS FROM THE TRADER WIZARD

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AUTHOR INFORMATION

Known internationally as “The Trader Wizard”, Bill Cara is a highly regarded capital markets professional with over 35 years of managerial and entrepreneurial experience in the Canadian and Bahamas securities industries. He has earned Hon. BA (Bus.) and MBA degrees, plus CA and CMA professional accounting designations. He was co-founder and Responsible Person for the initial Canaccord Capital office in eastern Canada, and co-founder, system designer and Responsible Person for the start-up of Qtrade Investor, the electronic broker rated #1 by Canada’s Report On Business.

In the past year, more than 300,000 readers in 140 countries have visited his CaraCommunity.com blog for daily reports, market commentary and discussion. Named the Forbes magazine “Favorite Trading Blog”, his blog has received accolades from Barron’s, Business Week, and The Wall Street Journal.

Bill was called as an expert witness by the Canadian Securities Administrators at a forum on electronic trading brokerage and also by the Senate of Canada Banking Committee Task Force on the future of Canada’s financial services industry. The Government of Canada invited Bill to speak with Canada’s trade commissioner in three Asian countries. He has been a member of the Government of Ontario Task Force that reviewed the operations of the Canadian unlisted securities market, now operated by the Toronto Stock Exchange. He supported non-profit, non-governmental organizations committed to the United Nations Global Compact for Third World economic sustainability.

As founder, owner and President of Cara Trading Advisors Ltd., Bill exclusively manages client accounts dedicated to junior mines and exploration stocks. The company enjoys an international clientele.

Bill is Chairman and Executive Director of Greenfield Mining Capital Inc., a professional consulting services firm intended to serve the boards of directors, management, and investors of small metals and minerals exploration companies. Greenfield’s services may also be of interest to government agencies, funds, broker-dealers, investment advisors, and high net worth individuals.

LESSONS FROM THE TRADER WIZARD

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TECHNICAL DETAILS

- Price: £7.20

- Format: Kindle Edition

- File Size: 7942 KB

- Publisher: ADVFN Books

- Sold by:  Amazon Kindle Store

- Language English

- ISBN: 978-1-908756-05-3

LESSONS FROM THE TRADER WIZARD

Electronic Press Kit

CONTACT INFORMATION

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Contact us and ask for a review copy of Lessons From The Trader Wizard

LESSONS FROM THE TRADER WIZARD

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SAMPLE CHAPTERS

Part 1: What is the Market? What is Trader?

Part 2: Cara’s Approach to Trading Bonds, Bond Funds and Cash

Part 3: Trading Stocks (Also Called Equities)

Part 4: Specialties to Trade

LESSONS FROM THE TRADER WIZARD

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SAMPLE CHAPTER:

Part 1: WHAT IS THE MARKET? WHAT IS TRADING?

Markets are not free, they are driven by forces related to interest rates, economic activity, commodity and forex prices, and by vested interests. After the writing of the original “Lessons” in 2007, the parties I call vested interests or Interventionists have expanded somewhat.

The most powerful of these groups include central bankers and finance ministers, persons elected or appointed to government, plus well-organized networks with names like Council on Foreign Relations, Royal Institute of International Affairs, Trilateral Commission, Bilderberg Group, Club of Rome, Business Round Table, and United Nations and their friends in the media. Whoever they are, all seem to have an interest in globalization, which I now see as a control strategy, and in public-private partnerships, which to me are clearly tactics to invade the public purse.

Given that intervention is now rampant, the loser is the free capital market, which was founded as a simple price discovery mechanism between buyers and sellers who were interested in finding value “underlying” the securities being traded. Interventionists do not seek value. They are interested in the power to control prices, which effectively means the power to control the market.

Trading success comes to those who don’t focus on the parties operating in a backroom to manipulate prices (whomever they are), or the stories they publish to help them meet their objectives, just be thankful they do enough to create price volatility.

Rule number 1, 2, 10 and everything in between is, “We trade prices, not stories.”

Although some people will tell you it’s not true, prices do occur in trends and cycles. Regardless of why it happens, prices in the market are never random.

Have you ever heard of the Random Walk Theory? Perhaps you were taught that at school? Well, I have never met a successful veteran trader who suffers from credulity syndrome, believing in Random Walk! Randomness occurs in a vacuum but we don’t live or trade in a vacuum.

*All italicized text chapter openings in this book are taken from the author’s commentary in his blog: CaraCommunity.com.

1. Getting your head around capital markets and your place in them

During your trading journey, you will eventually come to see you are not investing in products or companies. You are trading prices, and your motivation is to increase your financial wealth and lower your risk. You will look at trading as a process, a journey that has a right road and a wrong one. Armed with a few skills, some experience and a bit of determination, you can make it on your own, and you should make every possible effort to do it on your own. It is, after all, your capital. — from Bill’s blog

What is the market?

As complex as it might seem, the market is merely a case of “people acting like people” — with all their fears, enthusiasms, prejudices, stupidity and wisdom. Together, we create prices.

We are the market.

Trading in securities and contracts is not investing. All of us invest in assets like homes and cars and personal computers and, just like Warren Buffett and Bill Gates, some of us even buy companies. 99% of the rest of us in the market trade securities, which are the prices of stocks and bonds, options, futures, commodities and “Forex”, in what is called the capital market.

A security is a financial instrument that has real value evidenced by “underlying” equity or debt. A commodity or financial future includes all products and forward contracts linked to those products that trade on an exchange. These can be physical goods, foreign currencies, financial instruments and market indexes, trading either at spot (cash) or forward prices.

In the case of commodities and futures, there is no equity, debt, or physical value. Instead, there is time value. When you trade time contracts, you engage in a zero-sum activity, which simply means that no new wealth is generated. The impact of futures trading, of course, helps establish a cash or spot price that reflects the sum of knowledge of the “underlying” security, including projected price trends.

There is no principal value at the end of the contract. The expression “zero-sum” means that winners equal losers. Everybody pays transaction costs, including charges not fully disclosed in a net price.

While a capital market is one that involves only debt or equity securities, I refer to all matters relating to securities, currencies, futures and commodities as involving the capital markets. Let’s not get stuck on semantics.

In this book, I’m not here to tell you that trading in any type of security is best or that trading securities is better or worse than trading time-based contracts. Trading is about the process of finding a price that differs from the underlying value. I am here to tell you about the trading process and how you can become successful at it.

In the market, we trade prices and most traders never thought about it in those terms.

We all bring a different set of values, personalities and resources to the market. With a conservative leaning you will tend to see danger in markets. If you are an enterprising sort, you will often see the lack of creativity of traditionalists. If you are speculative, you will soon see that most traders are predictably inactive and wonder why.

In this book I give what I believe is sufficient information covering a wide enough range of topics in capital markets to help you become a successful trader. This information is based on my professional experience.

Precious little information on capital markets is qualified, independent and/or objective. You will soon find that you can trust the information here.

There are no absolutes in the market. Here, you will see the markets as I see them.

There are aspects of Wall Street that I don’t care for — I have been there and done that. Based on many years’ experience, there are people, tricks and concepts I don’t trust and neither should you.

The road ahead

If you follow my market-proven guidelines, use common sense, set realistic goals and exercise self-discipline, you will find that trading in the capital markets is a journey anybody can make with considerable success.

Is the road a difficult one? Well, sophisticated art and science are definitely involved, but nothing people with a secondary school education can’t handle.

There is much content here. However, if you decide to become a student of the market — which is to say you intend to remain open-minded, always learning, always trying to get better — you will in time acquire a life skill, a skill you can pass along to family and friends.

Ultimately, your success will appear to have come naturally, because the capital markets are nothing more than a personification of human nature. You just have to find the natural rhythm.

Is seeking financial success via trading your end goal? Without a destination you’ll never get there. You will probably measure your success in money terms. Never forget that money alone is never as important as peace of mind, which is merely another way of referring to happiness.

Along with monetary capital the market also contains what I call social capital, which I’ll also discuss in this book. Enjoy the journey!

I have a simple rule: whether you happen to be conservative, aggressive or speculative, the first rule to trading is: if any trade causes you or your family to worry, do not make it.

The market is chock-full of opportunity, but trading is mostly about avoiding aggravation and risk. If there is a single truth, that’s it.

There may be mystique to financial markets, but trading has always been a business of common sense, intuition, faith, courage, knowledge, patience, and luck. Trading is not rocket science, it is life itself. The capital market is just space we occupy for a moment. Attaining success should not be a mystery.

If you’re just starting out in a career in finance or making important life decisions about your financial affairs, it’s not going to be easy. Wall Street lays serious obstacles in your path. Trading is a long journey where everybody needs some help along the way.

Why take my lead?

I qualify as an expert in many aspects of the capital markets. I have managed major broker-dealers as well as smaller ones. I have built them from scratch — in fact, I did that a couple of times, one full-service and one electronic. I’ve also worked in research, retail sales, institutional sales and corporate finance.

I’ve worked onshore and offshore. The firms I’ve worked for include names you know and a few you won’t. I very much enjoyed my time as a professional money manager and a builder of automated decision systems.

I have served as an expert witness for securities commissions and governments, participated in a government task force to reorganize securities markets and appeared before Senate Banking Committee hearings. In the Far East I gave speeches side-by-side with Canada’s Trade Commissioner. For many years I have been publishing investment articles in magazines and the Internet and hosted a variety of seminars.

I worked hard to earn two professional accounting designations (CA and CMA) as well as an MBA. By working 24/7 and attending night school, I accomplished all three goals in just one year. I was even awarded the Wall Street Journal Student Achievement Medal.

Although I valued highly my upbringing and my formal education, I saw it as part of a process making me the independent person I wanted to be. I wanted to put myself out into the world as “me” and not somebody’s perception of me.

Holding the designations Chartered Accountant and Registered Industrial Accountant (now Certified Management Accountant) along with a B.A. (Hon. Bus.) and an M.B.A., my calling card looked like alphabet soup.

I stayed in that second career for eight years, built a business, did some writing (won a National Business Press Association Award) and eventually grew bored. In 4Q 1980, I decided I had the needed experience to venture into the securities industry, which I knew was dominated by my peer group who had been raised in a “silver spoon” environment. A year into my third career, despite a grueling “Bear market” and a crash in gold, I knew this was where I would spend the rest of my life. I decided I no longer wanted to be branded CA and CMA. While working at the firm of Dominion Securities Investment Management in Toronto, I made a change. I called the two professional accounting institutes that had bestowed their status on me and told them I was mailing back my papers. I then dropped all the fancy letters that followed my name.

Nobody brands me. I am what I am. Some people refer to me as eccentric; I call it independent. Other than my immediate family, I owe nobody. No mortgage debt, no credit card debt, no car loan — no financial obligation of any kind. I am beholden to no one, including those two accounting institutes that were demanding I pay “professional fees” for the rest of my life.

Actually, I do have a debt — to society for giving me my independence.

Within five and a half years of joining the securities industry, I founded and built out the penthouse floor of the Toronto Stock Exchange Tower for Canada’s largest full-service independent broker- dealer. I built their Eastern Canada operations from scratch. Twenty-five years later, I’m called the Trader Wizard and I presently run Cara Trading Advisors (Bahamas) Ltd.

Along with giving back to others where I can, I take from life only what I believe is fair and honest. Despite the criticism, I continue to speak out on behalf of the interests of owners and managers of capital against an industry and groups of Interventionists all too willing to exploit them.

Let the journey begin!

Stop listening and talking; start reading and thinking, then doing

Every person has a responsibility to look after their own affairs and not rely on others — in particular Wall Street or any form of government — to work in their interest. That’s not to say a person ought to do their own trading, as it isn’t practical in many cases. People may need to put their capital under the management of a professional. If that must be the case, it is still a decision that requires knowledge, planning, execution, and subsequent oversight.

A trader is the owner or manager of capital. That is a buy-side role. Job number one is to stop listening to the sell-side or to people who may mislead you. Job number two is to read, discuss and think. Then act. Traders are actors, not part of the audience.

From direct experience, I believe that deceit in financial institutions is commonplace and could easily be discovered by legitimate independent audit. I believe the deceit that exists on the sell- side is not often discovered, unless the wrongdoers are literally caught doing wrong, because they are all part of the financial services network I call “Humungous Bank and Broker” (“HB&B”).

Call it “HB&B”, the Club, the Firm, the Sell-side — but don’t call it a place that works for you ahead of its own interests. In the eyes of “HB&B”, you are either their customer or their employee. To those (not me) who refer to the market as a casino, they are the owner-operator and the gaming commission combined. You play by their rules or you don’t play. That’s a fact.

It’s also my belief that the governments of the United States and Western Europe and every important financial agency of government are controlled by “HB&B” and the opaque networks that control these banks either directly or indirectly.

“HB&B” and the government are in the business of credit and I contend they own every person who has a debt. People in debt are not independent and they know it. Burdened by debt, people are clearly disadvantaged, and as traders often taken advantage of as in the case of “MF Global” at the end of October 2011. Complain loudly enough and there may be token examinations by one or more government committees or agencies. Occasionally, fines are levied on “HB&B” criminals to keep up appearances, but none of them apparently are going to be convicted of a crime, nor do they even have to admit to it. They pay fines amounting to a luxury tax, which they immediately pass through to the customers or shareholders.

Having risen to the penthouse in the “HB&B” structure, I think I’ve earned the right to say that the “HB&B” controls our markets and runs them in its own interests and those of its controllers. It really is a closed society. The rest of us have been treated unfairly. That has always weighed heavily on me, and I have always spoken out for social equity. Although they are not well organized, the Occupy Movement that started in 2011 is doing the same.

During my time as an insider with “HB&B”, I experienced human nature at its worst: 99% pure greed and gluttony. I discovered it’s not very different from what was portrayed in the movies Wall Street and Boiler Room. Self-interest rules. However, I’m not at all sour today because my time in the “HB&B” was an education. It helped me to see the market as a place of fear, greed and ignorance, which I can exploit. It took me a long time to realize that with knowledge and skill, I could become an independent Trader Wizard.

I have always spoken out about “HB&B” (including at the highest level of government and in public forums), opining that Joe Public would be best served if governments forced the financial services industry to eliminate their conflicts of interest and to act in a completely transparent manner.

Take, for instance, a broker-dealer. If brokers were separate from dealers, you wouldn’t be giving your order to an organization that shows your order to their principal trading desk, which then trades in their interest and against your order.

If you think this sell-side, government-dominated market is not fundamentally sick, then ask yourself a couple of questions: Has “HB&B” ever shown you their principal trading orders? These firms control the US Federal Reserve Bank. Has the “Fed” ever shown you its principal trading orders or who, in fact, are the people or organizations that pressure “The Fed” to make the decisions they do?

These companies demand to know your wealth and your trading instructions so they can trade against you. It’s a flat-out conflict of interest. Only now are the majority of you understanding this.

Their “we-are-fair-and-transparent” charade will continue until the capital markets implode in a “financial armageddon”, collapsing under the weight of debt and misguided credit. My friend Michael Panzner has published a book (2007) by that title. I hope you read it.

Too busy cutting down trees, people fail to see what’s happening to the forest. Panzner, however, is one of the few people I know who can deal with day-to-day Wall Street action as a topflight institutional salesperson and yet possess a big-picture perspective — a picture he painted in Financial Armageddon that has already come to life and one that should terrify us.

Since I wrote the original Lessons, we have seen the bankruptcies of some of the largest financial companies in the world, and a failure of many once solid countries to pay their debts on time, plus personal bankruptcy and homelessness of millions of Americans and Europeans as unemployment soared. I forewarned of these events in the blog, once opining when US national unemployment was about 5% that it would soon go to almost 9%, failing to see at the time the rate would far exceed 10%.

Must this multi-trillion-dollar house of cards that we call the capital market collapse? If so, can society still protect itself ? Time, Panzner says, is running out.

I am more concerned about what happens before the financial system ultimately collapses. Until the financial services industry and government restructure to a point where the owners of capital have equal opportunities for wealth enhancement, there will be a continuous transfer of wealth from the middle class to the “HB&B” and the governments and their controllers.

Our job as traders is to build and retain wealth, not to give it to others.

Here’s a case in point: At the peak of the equity prices in 2000, the sell-side was advising 97.5% Strong Buy, Buy or Hold positions in stocks. When the market started to look shaky, Wall Street circulated a story of mythic proportions hoping independent traders would take their eyes off the ball. The sell-side was telling us “public day traders” had caused a bubble in the market. “Blame day traders for the catastrophe that was unfolding,” Wall Street said.

It wasn’t true. All day traders — including the thousands of day traders working on the “HB&B”’s principal trading desks — hold open positions for hours, minutes or sometimes a second or two.

Central bankers and commercial bankers had feared that when 1999 ended, computers would crash, throwing the banking system into worldwide chaos. To avoid a liquidity crisis, excessive money printing took place around the world.

Money printing is done by credit expansion, which happens when banks lend money that has been extended to them by central banks that do it by expanding their own balance sheets. If done too quickly, the process creates an imbalance between global debt and equity. What results, then, is an inflated asset price, often called a bubble because the price will burst at some point.

Independent commentators and analysts who warned of a looming collapse of market prices were ridiculed. This happened in the late-1990s, and the Price-to-Earnings ratio of the “S&P 500” index zoomed from a long-term average of about 15 to about 45. The many critics, for example, who decried buying General Electric (GE) at 50 times earnings (its normalized “PE ratio” is in the 13-to-19 range) immediately encountered unjustified personal attacks on their character and judgment.

It’s not enough for the financial services industry to admit they failed us. They knew precisely what they were doing when they sold you their top-rated GE at up to 60 and later bought it back from you under 25 when valuations returned to long-term norms. The extent of the over-bought market in 1999 and resultant 2000-02 crash would never have happened but for a steady stream of characters from Wall Street “advising” the public how good a deal was GE with a 50 PE.

The 1999-2000 bubble, which was attributed to insane valuations placed on Internet companies, and the 2006-2007 bubble, which was real estate related, were nothing more than opportunities for “HB&B” to transfer trillions of dollars of wealth from the general public to a relatively few market insiders, many of whom earned multimillion-dollar bonuses for their efforts. This self- serving conduct was despicable and ought to be the basis of huge class action lawsuits or else the process of “fleecing the lambs” will happen repeatedly.

We are told that “HB&B” is in place to serve us, but I know better. I know that if you are well down the pecking order (which starts with “HB&B” executives and then travels down through their families, friends, biggest clients, church and charities and so on) and you listen to these “HB&Bs”, you’ll be sorry.

Here’s how the public was sucked in:

The sell-siders are storytellers. In 1999 and 2000, even the Madison Avenue storytellers — the advertising kids — got into the game. Right up to the market crash in mid-year 2000, they were producing television commercials for online discount brokers with stories of truck drivers using their stock market winnings to buy tropical islands. The public was sucked right into a bubble and paid a substantial cost.

All seems fine on Wall Street until a “Bull market” ends. Then harsh reality sets in for the buy-side.

Oh yes, there are investigations. When Wall Street helped its biggest clients participate in a front- running scam against mutual funds owned by “Mom & Pop”, the SEC regulator called this crooked practice “market timing”! Do you believe that?

Market timing exists for a legitimate reason. There are always pullbacks in equity markets because, ultimately, market price and real value must match up. Effective market timing is crucial to your success.

Whether the “Bear market” landing is short and hard, like it was in 1987, or lengthy but no less painful, like 2000-02, or the one in 2008-2009, the buy-side customer always pays. Does “HB&B” care? Their principal traders need the volatility of cycles to make a profit and know they will soon recover from the low volume challenges of Bear cycles. They anticipate that you will soon get entranced by their latest stories and forget the past.

The sell-side wants to start afresh with the next “Bull market” in hopes of showing a baseline performance from “Bear market” lows. This trickery makes them appear smart and competent. Interestingly, they are neither. The public soon forgets the passing of a “Bear market”, something Wall Street and shareholder-owned corporations count on.

There is one person who should be responsible for your assets — you. If you hand over the

management responsibility to “HB&B”, you are putting yourself into an institution in many ways.

The Trader Wizard and my friends at BillCara.com will try helping you down the path to independence — to a realistic understanding of the market — and teach you what is required to become a successful trader. That process is complete once you understand who you are and why and how you’re intending to go forward in search of financial freedom.

The market is about average people like you and me on a lifelong journey. Every journey needs a map, a plan and a starting point. Decisions have to be made and I am here to show you the way.

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Part 2: CARA’S APPROACH TO TRADING BONDS, BOND FUNDS AND CASH

I began this part of the original book as follows:

The economic problems the Administration does not want to address are widespread. Higher energy, food and mortgage costs will break the budget of many Americans this time around. We are in a transitioning phase where bonds will become more attractive than stocks for a while. After stocks start to fall, “The Fed” will drop the interest rates and bonds will start to rally. However, the momentum of falling stock prices will linger, and that is the time it will pay to be out of stocks and into bonds. — from Bill’s blog

Eighteen months later, the most popular US Treasury Bond for traders, the 20-year TLT, had soared +49% while the S&P 500 benchmark equity index had plunged -41%. I refer to these results as ‘proof of concept’.

1. What is a bond?

You can’t become a successful trader of stocks until you understand a little about the bond market. Because bond yields and interest rates work in combination, together they drive stock prices.

When you buy a bond, you are lending your money to a corporation or government. In return, you receive a certificate or contract that states the issuer will pay you interest at a specified rate — usually twice a year — until the principal debt is repaid, sometime in the future; perhaps 10, 20 or 30 years hence.

When most people buy a bond or “debenture”, they do so for income or security. Somebody else’s obligation or debt is the buyer’s asset — just like a stock except the owner of a bond doesn’t hold any equity in the business. The asset is limited entirely to the debt, which underscores the importance of the contract.

To many of you, a bond is a secure, mostly stagnant holding that provides a fixed annual income and can be redeemed at maturity for the same amount of dollars used to buy it. There are risks with all kinds of bonds as well as opportunities to attain capital gains or to increase total returns from income plus appreciation.

Thus, it’s important that bond traders understand the agreement.

The type and quality of the debt is a prime concern to the trader. A bond is secured debt, whereas a “debenture” is unsecured debt. A bond may also have other features, like convertibility to stock.

The bond agreement will contain a security clause, while in the case of a “debenture” there is no such security. Hence, bonds are typically more secure than debentures, but not always. A bond issued by Consolidated Moose Pasture is not as secure as a “debenture” from McDonald’s. As many traders discovered to their chagrin in 2011 and through to the present (June 2012), however, even the sovereign bonds of major economic powers like Italy and Spain are not secure.

Clearly, the financial strength of the corporation or government is a significant factor in determining the quality of the debt.

A straight bond is usually priced relative to the current cost of money, which is reflected by the interest rate, which for the most part is set by central banks. Capital gain opportunities result from changes in central bank policy and in the interest rate market.

How interest is calculated and paid

Interest on bonds is calculated on a daily “basis” and added to the sales price (but does not include the day of delivery). For US Government issues other than “Treasury Bills”, the base is the exact number of days in a 365-day year. With other bonds, it’s a 360-day year or 12 30-day months.

To figure out the “yield” superiority of 360-day bonds (versus 365-day bonds), divide the interest rate by 360 to get the daily return, then multiply the result by 365. With a 12% interest rate, the daily rate works out to 0.333%, so the annualized rate for 365 days would be 12.16%.

How bonds are rated

Prices for high-grade bonds — rated A or better — reflect money-market conditions and interest rates almost exclusively.

The lower the rating, the more the bond prices are more closely attuned to business conditions generally, and to any changes in the quality of the issuer.

Medium-grade Baa or BBB bonds are the lowest category that qualifies for commercial bank portfolios.

Any rating of Ba or BB or lower is speculative and traders should not buy these bonds without analyzing current financial statements and considering the industry prospects. Of course, if you want to speculate, corporate Ba or BB-rated bonds were paying over 8% and B-rated junk bonds 10% or more in 3Q07 at the time of the original book, and that’s close to the market today (June 2012).

Differences in bonds

Quality

Unless you are day trading interest rates, you ought to be buying bonds for safety. Stick to high- quality issuers and forget the small amount of extra interest ($5 to $10 per year per bond) that can possibly be obtained with the debt of a company that has a dubious credit rating.

Most corporate and municipal (but not Federal Government) bonds are rated by statistical services in nine categories from gilt-edged to extremely speculative. These ratings represent carefully calculated estimates of the degree of protection for both principal and interest, based on past performance, current financial strength and future prospects.

Collateral

This is the property that stands behind each bond. Secured bonds may be:

- First-mortgage bonds backed by the company’s real estate, plants, heavy trucks and so on, or equipment trust certificates such as the ones secured by railroad locomotives, freight cars, etc.

- Bonds guaranteed, according to principal and interest, by another corporation or by the government or a government corporation or agency. Examples of the former are foreign bonds offered for sale abroad by foreign subsidiaries or affiliates of US corporations and guaranteed by the parent company.

Unsecured bonds (debentures) are backed only by the general credit standing of the issuing company. The trader should translate this credit into the company’s ability to pay annual interest and amortization plus the principal sum when due. The projection should consider recent historic ratios and trends, and should apply to the total debt. In practice, for most bonds, the ability of the corporation to pay is much more important than theoretical security, because legal obstacles to traders collecting a bond’s security due to insolvency are formidable and time-consuming and often require litigation, which is the last thing you need in your life.

If an industrial bond is unrated, a rule of thumb for determining investment-grade is that interest charges should be covered over a period of five years at the following rate:

Serial and “sinking fund” bonds

Serial bonds are issues redeemed at various dates over a period of years. This enables a buyer of a new bond to select the exact maturity desired: say, in 10 years when a son or daughter is due to start college. Usually, all the debt comes due at once but a “sinking fund” feature means extra safety.

Bearer or registered bonds

Historically, most bonds were issued in bearer form with interest coupons attached. Interest was paid, usually twice a year, by presentation of the detachable coupons to the paying agent. This is the origin of the phrase “clipping coupons”.

In today’s world of forgeries and scams, do not deal in bearer bonds and only buy unrated bonds from a topflight broker-dealer who is a known bond trader.

Exchange-traded bonds

Bonds, like stocks, even trade on the “New York Stock Exchange” (NYSE), which operates the largest centralized bond market of any US exchange or other self-regulatory organization. A list of current bonds traded on the NYSE is available at: http://nysedata.com/bondsymbols.

The NYSE offers a broad selection of over 2,000 corporate (including convertibles), agency and government bonds and even foreign bonds. Most bond volume at the NYSE is in straight domestic corporate debt, with some 15% in “convertible bonds”.

In my opinion, the NYSE website is outstanding in many respects. For trading bonds, you’ll find all the information you need at: http://nyse.com.

NYSE-listed bonds trade through the exchange’s Automated Bond System (ABS), a terminal-based system for trading corporate, agency and government bonds. The ABS system maintains and displays prices and matches price orders on a price and time priority basis.

ABS reports real-time quotes and trades to market data vendors. Closing bond prices are available in the financial sections of major newspapers, as well as on-line.

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SAMPLE CHAPTER:

Part 3: TRADING STOCKS (ALSO CALLED EQUITIES)

To succeed at trading stocks, you need an investment plan complete with a range of trading strategies and tactics. I truly believe you need to learn very little about many things. A Jack or Jill of all trades if you will. Judging risk and sizing up opportunities for successful traders is based on macroeconomics, corporate fundamentals, corporate and peer group quantitative data studies and technical trend and cycle data studies. All of them.

For many years, I watched expert mathematicians, expert economists and expert accountants blow up their capital simply because they thought their specialized expertise was all they needed to succeed in the capital markets. In fact, you don’t need to be an expert at any one thing, but you need a good working knowledge of many.

There are four basic knowledge elements that all traders must master before they can gain confidence to trade successfully. Start investigating a corporation whose stock you are interested in from the top down by looking at:

- The macroeconomic and government regulatory environment that a corporation has to manage. Do this to assess the environment picture and operating conditions for business corporations.

- The corporation itself and how it deals with its employees, suppliers and customers.

- Industry peers and past-performance metrics compared with the results of (1) and (2).

- The stock price to see where it’s been, where it’s likely to go (according to mathematical studies called Time Series Analysis), and how that theory compares with a sense of the underlying enterprise value and the share prices of a company’s peer group, industry, sector and broad market.

1. Macroeconomics: Where public and private sectors meet

The first Friday of every month, the capital markets (stocks and bonds) are put through their biggest spin cycle of the month. It’s called US Jobs Report Friday. Like “CPI”, the number is almost meaningless because it is a wild estimate and will almost certainly be revised. What the Jobs data does, however, is to add grist to the sell-side mill. Just a lot more yada yada by smooth talking noggins, trying to convince Joe Public they are “experts” and you ought to be following their advice… I learned the patter too. I mean, if you want to survive in the securities industry in any capacity from chief investment strategist to mail runner, there are a few things you must be prepared to utter when your lips start moving. The US Jobs Report data is at the top of the list. “CPI” is another. Why? Because all people have a vested interest in their jobs and in the cost of getting to the end of the month, hoping not to be a dollar short. — from Bill’s blog

Understanding economics, the Fed and the market

If a trader has a basic understanding of the subject, macro-economic data can be used to interpret and forecast trading conditions and make better-informed decisions. Business owners and executives do this and traders have to realize their business is managing the wealth under their control. Clearly, that is a business like any other.

The Internet offers traders free access to potentially valuable economic data. Where we go wrong is to overlook the data and focus on the “talking heads” who interpret the data in the broadcast media. These are well-educated, intelligent analysts and reporters, but they are either biased or paid to say what they say. Traders need better information.

When a US Government agency, like the Bureau of Labor Statistics (BLS) publishes data such as the Consumer Price Index number, the talking heads and Wall Street read the number like it is a sports report coming to you hot off the wire.

Economic data is made to seem as important as pulling a face card from the casino’s blackjack dealer. The audience is advised to buy or sell because this number (an estimate in itself ) is up or down a tenth of a percentage point from consensus expectation.

Now, isn’t that an absolutely ludicrous approach to wealth management?

The fact is that economic data is just that — data. It is only an indicator of underlying conditions. Besides, the “CPI” data is materially incorrect and misleading. The US Bureau of Labor Statistics calculator states that the cost of living has increased by 7.56622 times in 50 years (June 1961-June 2012). That means $1,000 on all items of consumer expenditure in 2Q1962 would cost $7,656.93 today. Wrong.

Consider your typical consumer expenditure list today and compare them to what they would have cost in mid-1962. Here’s a list of comparables:

- housing, property taxes, insurance

- auto costs, maintenance, insurance and repair bills

- mass transit

- hotel rooms

- food and beverages

- newspapers and magazines

- dental and hospital/medical care

- school tuition and books

A house bought 50 years ago for $16,000 is now selling at 25 times or more that cost. The soft drink I bought in my youth at the local service station vending machine now costs 15 times as much. The mass transit ticket I use has increased 20 times in price. Entire books have been published just on the issue of the flawed “CPI”. (Source: http://data.bls.gov)

Economic data points do not strictly control stock prices. Conditions may set the framework, but players decide on the game. Economic data, like other data you receive, is carefully spun to you by vested interests. If those people want markets to go up, data, like the “CPI”, is used to paint a positive picture. If they want it to go down, the same data is used to paint a negative picture.

In 2007, when I wrote the original Lessons book, the US Federal Reserve Bank leadership had a Fed rate of 4.75%. I asked if “The Fed” had set a rate of 3.75% or 5.75%, would there have been any difference? I remarked that after a series of moves, there would still be a stable stock market, but that traders would then be worrying about if, and when, the next Fed rate would be set at 4.00% or 6.00%. Today “The Fed” funds rate is near zero and traders are worrying about the implications of a move to higher levels.

Still, economic analysis is a truly important adjunct to securities analysis for serious traders. It is the change in the data that is important and how each change affects thinking, which has an impact on market prices. Back in November 2007, for instance, traders were hoping “The Fed” would cut “The Fed” rate to 4.25% from 4.75, which had fallen from 5.25% in just a couple months, but I remarked at the time, “if that were to happen the reason would be problematic. Traders would initially think that the rate cut would be a positive factor, and would rally equity prices; then they would think about the underlying reasons for the rate cut and would start selling stocks unless there were a series of rate cuts. All through this period, the spin artists for the various sides would be pushing the public to move from one extreme to the other.”

By focusing on a few key economic statistics, any trader should be able to acquire a reasonably full understanding of the real-world conditions in which corporations and professional traders operate. This is essential to drawing a link to future operations and financial strength of a company and its future share price.

Rather than thinking that any one data series is more important than others, consider the many interrelationships between underlying economic conditions and securities prices, and the fact that financial markets are dynamic. They constantly evolve due in part to changes in these economic conditions.

One caveat to new students of the market is that US data are only part of the economic picture. Traders, like corporate business managers, must increasingly deal with a global economy. Push and pull forces on stock prices — economic factors like interest rates, commodity and currency prices and so on — operate today in the international arena. Every Fed action or public speech must be put into the context of trying to stabilize interest rates and the US dollar in a global context. In any discussion of economics, start from the premise that “those with the money set the rules”. Banks — and the most important bank, the US Federal Reserve Bank — are a good place to begin one’s analysis. Commercial bank lending facilitates personal and business spending, and excessive spending generates “inflation”. Since “The Fed” controls bank lending in the US, it thereby controls the pressures that would increase or diminish inflation in the United States.

Stock market indexes may run up or down in tandem with the economic cycle, or they may run counter to it. Both have a cycle. Stock prices are linked to the economic cycle, and the economic cycle is linked to conditions set by or permitted by “The Fed”. Fed policy determines the actions of commercial banks, which happens to be the most important source of lending and, therefore, spending.

Bank lending is a key ingredient in the economic cycle — it drives the cyclic expansion of demand. Lending can’t grow beyond the limits set by commercial bank reserves, so when “The Fed” wants to give the economy a boost it will encourage banks to lend more by increasing reserves at those banks. To do this, “The Fed” simply buys securities on the open market or directly from the commercial banks. The sellers (who are independent of the commercial banks) deposit some of the proceeds of the sale into their banks. Thus, the banking system reserves grow from both sources.

Increased commercial bank reserves directly increase the money supply — given that banks can find borrowers (and they always do). Banks create money through loans by crediting the deposit/ checking accounts of their borrowers when they make those loans.

Money is a commodity. All commodities have a market price and the interest rate you pay to borrow is the price of money. Its price fluctuates according to the laws of supply and demand, depending on its use. The use of money is what this discussion is all about.

If money is used to build armaments for warfare, that’s probably inflationary. During wartime, wealth is destroyed. Historically, periods of war (over hundreds of years, affecting all markets) have been the only serious periods of inflation for otherwise stable economies. During peacetime, the economic cycle is typically disinflationary. This is the best time to invest in stocks and bonds — particularly those that are low interest rate beneficiaries, such as the banks and mortgage companies, REITs, and companies that “hold” several bonds and high debt as liabilities, like regulated telephone companies, other utilities and insurance companies.

During periods of economic expansion, which occur when the business cycle is disinflationary or inflationary, the demand for money increases and interest rates rise because consumers and businesses often need to finance increased spending.

Spending is financed by savings, by sales of assets, or, most importantly, by borrowing from banks. Every few years the price of things, including money, gets too high to finance spending from bank borrowings or diminished savings levels, so personal and business spending cannot keep up with the supply of available goods and services. Then, inventories build, business investment slows and the economy goes into a recession.

Recession and “disinflation” are quite different. Recession is bad. Low inflation and periods of “disinflation” are good.

As a recessive economy recovers, savings start to rebuild, financial assets accumulate and debts are paid down. Cash becomes plentiful again. Interest rates fall as the supply of funds exceeds demand for funds at current rates. This was the economic picture leading up to 3Q98, for instance.

With cash available to lend because of higher reserves, and with a low enough interest rate to attract borrowers, bank lending increases. This leads to higher spending, which leads to increased total demand and economic expansion. Internationally, the US economy took the lead in 1998 (it doesn’t always) and by late 1999, there were signs that other major industrialized nations were beginning to follow.

Excessive bank lending then leads to inflation when the higher demand for goods and services reaches a level exceeding supply. At that point, “The Fed” — all other considerations aside — steps in to reverse the cycle.

That process began in the US in 1999, and “The Fed” raised its rates to commercial banks several times until a recession ensued.

If “The Fed” abandons their responsibility to keep inflation in check, the trade-weighted US dollar falls in price, and the cost of imported goods — to a nation that is a heavy net importer like the US — rises, causing inflation to spiral higher.

Because the US is a debtor nation, “The Fed” often has to perform a balancing act between interest rates and the foreign exchange rate and their combined impact on US jobs.

If US interest rates rise too much, the dollar becomes too strong, causing businesses to stop spending on capital programs locally and start importing more from foreign vendors. Jobs are lost. If rates fall too quickly, the dollar weakens, causing imports to become needlessly expensive and inflation returns.

By 2003, additional spending by both business and consumers was needed to boost the US economy, so to ramp up jobs and avoid the potential for “deflation”, interest rates were forced down by “The Fed” to 1%. As we subsequently learned, that rate was well below a reasonable point and had been the intention of “The Fed” to help their precious banks generate earnings and restore capital. As a consequence, the price of the US dollar collapsed. Following the financial system failures in 2008, “The Fed” rate was dropped to near zero, where it remains today to the discomfort of even some of “The Fed” governors who worry that it is yet another subsidy for large banks and a tool for redistributing wealth from savers to debtors.

A long-term balance between the supply and demand for money is needed and “The Fed” has for many years played a controversial role in moving too far in one direction or the other. Its critics wonder why the banks can borrow from “The Fed” at rates of 0.25% or lower and use that money, not to make loans to corporations and individuals, where cheap money is required to grow the economy, but to invest in Treasury bonds that yield 3%, strictly for the benefit of the shareholders of these banks.

For political reasons (as in pressure from the White House and Congress) the job is not an easy one. Sometimes when the economy is running hot on all cylinders, like kids in the schoolyard preferring an extended recess, there are many traders and politicians as well who never want “The Fed” to tighten the money supply and borrowing conditions. Then when the economy has cooled out, the same people want “The Fed” to be aggressive with accommodative policies.

Many schools of economic thought exist today, from the Keynesian/monetarist/demand-siders to the Kudlow-Laffer/supply-siders. All believe different factors in this equation (the business and economic cyclic process) have varying degrees of importance. The basic equation for the cycle remains the same.

The world is as rife with economic statistics as with sports stats listed in our daily news. Some are more important than others. Consumer and business spending aggregates are important economic numbers and must be routinely monitored by traders who use the big picture, top-down analytical approach.

The most important consumer spending statistics are auto sales, consumer credit and new permits/housing starts. For business spending, the most important data are capital expenditures and inventories.

The effects on the capital markets of changes in data related to retail sales, employment and personal income are difficult to analyze. This data is sometimes helpful when analyzing individual stock groups, such as specialty retailers, recreation and leisure stocks, and the like.

All this data is reported on by a free service called Econoday, which is available through the NASDAQ website.

The world is strewn with economists, statistics, economic analysis and reports. I frankly don’t see the value of most of it and I certainly don’t believe much of what I hear and read. I need to frame my trading analysis and opinions in my sense of the economy, so I constantly seek meaningful information in this area.

LESSONS FROM THE TRADER WIZARD

Electronic Press Kit

SAMPLE CHAPTER:

Part 4: SPECIALTIES TO TRADE

Yes, trading gives us hope in the same way that the struggling people in other lands managed to take control, doing it one stop at a time to build a mountain. Working together, we can do it. In a virtual world, you and I and our brothers and sisters do not have to lock arms and raise our rifles to get ahead. We must, however, connect intellectually. We must share the same dreams, and we must plan, organize, implement and control our actions the same way that others have planned, organized, implemented and controlled us in order to get theirs. So the question is, are you going to adapt to the changes that are being forced upon us, or are you and I going to work together to bring about the change that benefits us? I think I know what you want. It’s now up to us to put it together. — from Bill’s blog

1. About trading options

What we can do before Financial Armageddon inevitably strikes is to watch prices. We can continue to buy them when they are low and sell them when they are high based on relative historical performance and trading patterns. We can stick to trading the shares of quality corporations and buying risk-adjusted high-performance fixed income securities if that is our need. — from Bill’s blog

Options on stocks are time-based contracts, each with an expiry date.

In buying or selling an option, you are buying or selling time. As you learn throughout this book, there is no concept more important in capital markets than time.

Rather than try to educate you directly, I’ll point you to the best source of information, which is the Options Institute Online Learning Center of the Chicago Board Options Exchange (http://cboe.com/LearnCenter). Another excellent source of options education plus tools is at Yahoo Finance (http://biz.yahoo.com/opt).

As a time-based trading instrument, options on stock are “rights” to buy or sell a specified number of shares (100 per contract) of a specified stock at a specified price (the striking price) before a specified date (the expiration date). You may have to read that sentence a few times.

By definition, options are diminishing assets and pay no dividends. The closer the expiration date, the less time there is for their value to rise or fall, which limits the trading or speculation interest in them.

While it’s not altogether simple, the act of buying an option alone without it being part of a larger plan is speculative trading, and selling an option is conservative trading.

The most popular and widely used option is a “call”, which is the right to buy the underlying stock on certain specified terms. A “put” is opposite to the “call” as it is the right to sell the stock, also with the terms attached.

For sophisticated traders, there are seemingly complex combinations such as spreads, “strips”, “straps” and straddles. All this, however, you can learn with several hours study.

The cost of an option is called “the “premium””. It varies with:

- the duration of the contract

- the type of stock

- the general activity of the stock market

- the corporation’s status and prospects

By looking at the options data for a stock, you can see that premiums run as high perhaps as 15% of the value of the “underlying” stock.

For an example, let’s turn the clock back to November 200X, where for about $270, the trader could control 100 shares of Dow 30 stock “ABC” (the name’s not important) selling at 74.53 ($7,453) for about 45 days. Once the price of ABC stock moves close to the exercise price of the option at 75, both stock and option will usually move together, often in small fractions of a point. Thus, the $270 investment can be just as profitable in absolute dollars as the $7,453 investment (not counting any dividends ABC might declare in the next 45 days).

What is most interesting about the options market is that a single trade involves both prudent trading and speculation together. When options are used to protect positions or to acquire stock as part of a trading strategy, the other side of the trades in these puts and calls are speculations. One side of the trade is trading in the traditional sense and the other is probably speculating.

Be careful when speculating with calls. As the broad market tends to move up say 80 or 85% of the time (over say 20 to 40 years), you have to be careful buying puts as well.

However, selling (writing) calls on stocks you own can be a conservative strategy.

With experience, and the support of a knowledgeable broker and a good market, I believe a call- writing trader should obtain total returns at an annualized rate of 18—20%, which would be 13—15% from option premiums and 3—5% from dividends (as long as the stock is owned and used as collateral rather than cash, but, even with cash for margin you are going to earn interest on your credit balance).

Mystique

There has always been a mystique about options. I suppose it’s because options trading represents a “zero-sum game” where there is one winner and one loser and no other value created except for the employment of intermediaries.

In my opinion, for 20—25 years after exchange trading of options was organized in 1974, no part of the securities markets has changed more. In the beginning, the number of options was limited, the volume was small and price changes were closely related to those of the related stocks. In time, that became less so.

Today, there are options on everything from stocks to indexes, commodities and futures as well as esoteric things I don’t even want to get into. Annual volume of equity options is into many billions of contracts representing probably trillions of shares of stock in the aggregate.

It is a mature and sophisticated market today, but options prices occasionally move inexplicably with little relation to the price movement in the “underlying” securities. So, be careful.

Still, I believe that every trader should use options as part of an overall trading strategy. With careful management, options can boost income or bring short-term gains. Buying and selling techniques can also be structured for tax benefits.

Trying to figure out options premiums

When a stock trades at its exercise price, the options “premium” percentage, as part of the “underlying” stock price, will vary simply depending on the volatility of the stock price. This is the table I use to explain the options “premium” percentage differences of low, average and high- volatility stocks:

- Dividends and “rights”
As long as you own the stock, you continue to receive the dividends. That’s why calls for stocks with high yields sell at lower premiums than those of companies with small dividend payouts. A stock dividend or stock split automatically increases the number of shares covered by the option in an exact proportion. If a right is involved, its value will be set by the first sale of rights on the day the stock sells “ex rights”.

- Commissions
These depend on your broker-dealer.

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