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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (5235)	12/9/2001 12:12:41 AM
From: macavity	Respond to of 33421

No relation here. Henry I would say that you are the exception that proves the rule. People have become a lot wiser, but the problem is basically a human one rather than a knowledge, or technological one. The better managers query and question everything and want a firm understanding of everything - I agree. The thing is to realise that these learning curves for new markets exist. Any idea of being super-profitable in a nascent market is false unless you have a completely matched book. Even then you have only just replaced market risk, with credit risk. All these markets behaved the same way as they were being developed. Interest rate swaps and options. Long term currency derivatives. Long term equity derivatives. Exotic currency/equity derivatives. and soon Long-term energy derivatives. If you cannot trade out of these markets then your basic premise about 'Mark-to-Market' goes out the window, you had better start behaving like a re-insurer rather than a 'trading' bank. This is fair enough - provided people acknowledge it. By saying you mark-to-market assumes you can get out of your position at that price. This is never true in these markets. Good managers take provisions and reserve on these occasions. With Enron they represented 25-35% of the market in a lot of their asset classes. The concept of them closing down their books has to include massive costs and therefore reserves. As with all these things, they probably have the same 'plays' as Dynergy, JPM, UBS etc.. I am not familiar with the energy markets, but 98 showed what happens when the entire street is playing the same game. Then it was short credit (short treasurys long lesser quality). Do not get me wrong, people make money in these markets. They simply never make as much as they think or hope. Everyone forgets the basic premise of efficient markets - liquidity in a bid to show profitability. "Unrealized P&L from Trading Positions" - basically means what money we think we have made from stuff that we have not traded, or cannot trade, out of. When this P&L is from (long-term) derivatives in new and fandangled markets then an astute observer should be highly skeptical. When this factor accounts for over 60% of your p&l reported, and basically accounts for your entire profit's growth rate (as with Enron) then someone is playing with smoke and mirrors. Making more and more money without getting anymore cash. -macavity!