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I’m going to spend a minute or three on my soapbox (I’m writing this on a Saturday morning after three cups of coffee on an empty stomach, and the kids are still asleep… you know I’ve gotta ramble), then describe a method which, if you’re up to it, can help you to take on little or no debt this Christmas season, yet still buy gifts for the people you love. My personal version of layaway, if you will.

What Happened to Layaway?

It’s been almost a year since Big Daddy Wal-Mart finally gave in and killed its layaway program. It was a necessary business move, as the traditional purpose of layaway- to allow folks to spread the pinch of buying expensive items or multiple gifts over a period of months- has vanished into the smoky abyss of personal debt, or to use the word we’ve all bought into due to its more huggable connotation, credit.

That abyss has opened up for the same reason that our economy has “grown” so extraordinarily since World War II, and that is that someone, somewhere has gradually convinced us all that it’s perfectly fine for individuals and governments alike to spend money they don’t have. Illegitimate Spawn of The New Deal, perhaps.

In addition, our enslavement to personal debt has evolved hand- in- hand with our inability to handle the concept of delayed gratification, a concept which was a part of life for our parents, but which our children can’t even comprehend (hang on, Dad, I’ve gotta switch lines on my cell phone and pause the iPod for a moment so I can take this other call). It’s an important concept which Scott Peck wrote very lucidly about in The Road Less Traveled, and if you’re into that stage of your personal journey, it’s a book I’d highly recommend.

Debt Is Bad, but “Credit” Is Good? Propaganda 101

Did you notice that happening? Me either. The specter of personal debt, which to our grandparents was anathema (especially after the Great Depression), to us is not only acceptable, it’s desirable. Heck, not that long ago there were still debtor’s prisons! How did we get from there to here?

As with all so-called “progressive” societal change, it took place over a number of decades and started with a brilliant manipulation of the language. George Orwell wasn’t right just in a symbolic sense; in many ways he was describing exactly what goes on every day.

We think in language. Much eastern philosophy is based on the forgotten fact that we are capable of so much thought beyond concepts which language can describe, but that’s another subject.

By manipulating the words we use (and think), we can be made to unconsciously take on a particular attitude or position about a subject, favorable or unfavorable, without even realizing it. We think it’s our personal opinion, when in fact it’s an opinion that has been given to us.

This is what used to be called propaganda, but in the greatest self-makeover in history it is now known by its more favorable moniker, marketing. Get people to think and speak in your terms, and they unknowingly adopt your opinions as their own. For instance, anything that ends in “-phobic” automatically connotes “bad,” or at least unreasonable, and the use of that suffix is very effective at changing people’s attitudes simply by getting them to use (and think in) those terms.

Imagine if we spent the next three decades universally referring to people who don’t eat meat as carniphobic instead of the we’re- so- enlightened- don’t- you- want- to- join term vegetarian. Geez, who on earth would want to be a carniphobe? And so the graduating class of 2045 would be 99.9% meat-eaters. (By the way, I just came up with this example off the top of my head, but Beef Association, take note and feel free to send me a check).

Are You Ready To Stop Your Addiction to Deficit Spending?

It takes years to break the habit. To get into a position to even have that option, frankly. But those years are well-spent, and once you’ve broken the bonds of enslavement to the consequences of your past impulses, you become much stronger in deciding whether to act on (or more importantly, to not act on) new impulses.

In fact, you finally learn the true feeling of “I want it, but can I afford to pay for it in present dollars (cash), and do I really want it that badly?” And that power is awesome.

To use the propagan…, er, marketing technique I described earlier, learn to think of yourself and others like you, who have reclaimed their financial power, not as “Debtophobic” or “Creditophobic” (which of course would be unreasonable, un-American even). Instead learn to think of yourself as a freedom-o-phile. Someone help me here, there’s got to be a catchier word. But you get the point. It’s a positive thing.

Refusing to add debt for Christmas is just one step, but it’s a very significant one. And you can still buy nice gifts without taking on debt, by paying for those gifts over time, in advance, just like layaway.

Here’s how:

Next time you’re going through the checkout at your major retailer of choice, buy one of these reloadable gift cards. Start out with 20 or 25 dollars. Then, each time you pass through the checkout line in the future, get out that card and have them add five or 10 dollars to it. That’s often less than the sales tax on your other purchases, and you’ll barely notice it. (And you are paying for these purchases, not charging them, right?).

If you start this scheme in the summer, or even at the end of September (!), by the time those big Christmas sales hit, you’ll be able to knock out gifts for the majority of people on your list, all prepaid and at sale prices, no less. No interest, no buyer’s remorse. You’ll be purchasing with full-powered current dollars, not future dollars which have been depreciated by a print-happy Federal Reserve and by the interest due The Master (aka the banking system).

Keep the card, and start the five dollar gig in January next time. Get cards from two or three major retailers. By the time the next Christmas rolls around, you can give more nice gifts to more people than you ever imagined (you don’t have to cut so many off the list due to lack of funds, you can do it just because you don’t like ‘em!), and guess what… you can get to a point where you even have money left over!

It’s very liberating. The politicians don’t want you to do it. The retailers don’t want you to do it. The Federal Reserve doesn’t want you to do it. And the banks sure as hell don’t want you to do it.

Think about it- are those the people you want to please? Be a true anarchist. Pay your debts. Take personal responsibility. Take your power back, and just watch ‘em all squirm!

…your years of hard work finally paid off, you discovered your Holy Grail of a trading system, and your trading became so consistently successful that, with the compounding effect, your future income was virtually unlimited?

..you won the Powerball?

…everything you ever thought you wanted was suddenly available?

What would you really do?

***

This is a post title I’ve had collecting dust for years (unfortunately, every time I say “What Would You Do” I keep hearing that crazy song from Team America in my head). I guess it’s about time I tried to get this stuff onto paper, or pixels.

No sooner have I attempted to put pen to paper, however, than the post starts turning into a novel, as have so many ideas I leave on the back burner for too long. So the article itself will be separate, much longer, and may require that you ingest a good stimulant if you want to read all the way through it.

This post is more of an introduction.

The idea and the urge to write the article (novel) were brought back to the forefront of my ever-fading attention over the past week or so by a few things: one was a post by Bass Ackward Trader over at Move the Markets called Simple Question, which reminded me of the Schadenfreude phenomenon.

Another was a great email I got from a reader in Germany, suggesting I host a StrategyDesk Backtesting Contest, where I answered that I doubted anyone who had developed a really, really successful strategy would be eager to share the details publicly, although as you know, many of us exchange ideas regularly via email with each other. And as I wrote that note, I remembered the post I needed to compose.

Finally, a recent comment by Brett reminded me that I still owe everyone the results of that big backtesting study I did back in the Spring and Summer, which permanently changed the way I trade. With those changes, and the potential positive effects they might bring, I had to revisit the motives behind my trading once again, which- you guessed it- brings us back to that darned novel.

Where will I be going with the article? Here’s a teaser: I was at a good friend’s house for supper a year or two ago. This friend and his wife have the uncanny knack of inviting me to supper out of nowhere, just at a time when I need it most (the company, that is, although the food is excellent as well).

There were only a few of us there (as usual), and the subject of winning the lottery somehow came up. One guest hesitated, and when my friend’s wife asked him, “You would want to win the lottery, wouldn’t you?”, his reply was “Not Right Now.”

Silence. “Why not??”

Because I don’t think I’d like the person I’d become if I had that much money right now.

I’ve never forgotten that conversation, and that statement which struck me so deeply, and I wonder where that guy came up with it sometimes when I see him looking back at me from the mirror.

The following photo is of UAW President Ron Gettelfinger and is by Rebecca Cook of Reuters:

Yes, bravo. We all need health care (on whose nickel is another post). But apparently our “grammer” is acceptable as-is.

Perhaps the negotiations should have included a demand that GM fund an education account for its (or would that be it’s, Mr. Gettelfinger?) employees and their (or is it there) families. Geez.

Last night I was at the Homecoming Football Game to take pictures of the best High School band around, and more specifically, the best, brightest and prettiest flute player in that band. And that’s a completely objective observation- it’s just a coincidence that I’m her father

I was using my new Mondo Lens I got back in the summer, and that thing rocks. I caught this picture of two of the first Faithful Friday Football Fans to show up on the visitors’ side– about 80 yards from me:

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Alan Greenspan made an appearance on The Daily Show to plug his new book, but instead of the shallow, softball exchange he may have been expecting, Jon Stewart knocked him back on his heels with one of the most insightful interviews I’ve ever heard.

They covered the myth of the Free Market, the Gold Standard, the Fed’s role in controlling the quantity of fiat money, inflation, irrational exuberance… all in the span of about 5 minutes and all in a comedic context.

The coup de gras is when Greenspan admits that even with all the complex mathematical models, neither he nor anyone else is any better at forecasting now than they were 50 years ago!

Pure Brilliance. This interview should be mandatory viewing for any student of FOMC operations and monetary history, and I think libertarians and many Ron Paul supporters will particularly enjoy it.

You can (and should) view the entire video at the Comedy Central Daily Show website. Here’s a sample of some of the exchanges:

That was the episode which was supposed to end the series after seven seasons, and IMHO, should have. But due to the protests they had to come back with another season and wrap things up all nice and pretty.

(For you youngsters, Magnum P.I. is one of the few series officially declared to NEVER have jumped the shark.)

My problem has been that I can’t seem to find the text of the speech Higgins gives to an unconscious Magnum near the end of “Limbo,” about whether he’s Robin Masters.

Guess I’ll be buying the DVD set when it comes out in October, just to satisfy my curiosity.

With experience, skill and a bit of luck, it’s often possible to make a quick, profitable trade in the minutes after an FOMC announcement by “fading” the first reaction spike.

The Fed announces its Target Funds Rate decision at 2:15 EST on the last day of the meeting, normally a Tuesday for one-day meetings and Wednesday for two-day meetings. Immediately after the announcement, the market typically goes into wild oscillations, the amplitude of which depends on recent volatility, whether the announcement is a “surprise” compared to expectations, and most of all, how many people are watching and waiting to jump in.

Caution #1: This trade is not for the inexperienced, the undisciplined or the faint of heart. I’d only recommend it to experienced traders who have the self-control to take a small loss instantly, not giving in to “hope” for even 5 seconds if the trade goes against you, because if this trade goes against you, you may be on the wrong side of the Big Swing, and holding on can do massive damage in a matter of minutes. It’s best to watch a few Fed announcement days and paper-trade for practice first, noting the (many) ways in which you can get caught pointing in the wrong direction.

Caution #2: This pattern works out about 60+% of the time, in my experience. I consider those great odds since the anticipated gain is multiples of the maximum loss (initial stop!). However, the times it doesn’t work, if you drop your plan and start trying to “second-guess” entry points, you’re just trading on emotion, and you WILL lose money. If the trade sets up, I take it. Otherwise, I do not trade Fed days except occasionally right at the close.

The Setup: Wait for the First Swing to Falter

(Note- there’s an example chart at the bottom of this post)

The “fade trade” takes advantage of the fact that individuals often react to the first movement after the news, afraid of being left out of a big run. The “smart” money usually lets this swing go for a few minutes (typically until about 2:20 or 2:25), then takes it violently in the other direction, often doubling or tripling the range of the first swing.

The Trade: Spike, Doodle, Reverse!

Here’s how I enter the Fed Fade Trade:

• I ignore the market altogether until at least 2:10 EST. Sometimes I don’t even look until around 2:19 to 2:20, so that I don’t get caught up in the excitement when the announcement hits.

• A short time-frame chart is required to see the swings clearly. My personal preference is 3-minute bars. 5-minute bars work pretty well, too. 1-minute bars usually cause me to enter or exit too soon.

• Important! I let the post-2:15 swing go whichever direction it likes, however far it likes. It may spike up on “bad” news or down on “good” news. I do not try to predict the direction by the news.

• At about 2:20, I start watching for one or two narrow-range sideways bars near the extreme of the spike. These bars often appear between 2:19 and 2:29.

• Once a narrow bar has formed, I take the break of its range in the opposite direction of the spike as an entry signal, with the extreme of the spike as a hard stop. No exceptions, no wait- and- see, no hoping.

  For example, if we get a downward spike from 2:15 to 2:20, then a sideways “noodle,” I’ll get long (opposite the spike) on the break of the “noodle” bar’s top, with a stop at the spike’s low.

• At this point, if the price reverses back through the extreme of the spike and hits the initial stop (and this can be 10 seconds after the trade is placed), the trade is exited, no ifs, ands or buts.

The Exit

Ok, so what if I catch the falling knife and find myself up “6R” in 14 minutes? This is where stop-management strategies come in, and I’d recommend a very aggressive trailing stop. This is a quick trade, the trend is NOT your friend; spank it and get out.

I watch for reversals particularly at 1) the level where the first spike started at 2:15 EST and 2) when the current thrust has reached 2x the range of the first spike. If we make it through those, I’ll trail the stop up using Fibonacci levels or my variation on the PSAR. If the spike I’m riding is simply HUGE and I’m up “8-10R” or more (happens only once every few years), I’ll jump out at the first sign of any reversal, whether I’ve caught the extreme or not.

What It Looks Like: A Long FFT Off A 2:15 Down Spike

I’ve watched this phenomenon for many years, and traded it quite a few times. I have not captured intraday charts on Fed days, however, so here is a hand-drawn example for your viewing pleasure:

The Fed meeting coming up this Tuesday should be a doosey. We may see some extreme post-announcement action. Should be fun.

Let me know what you think- comments always welcomed.