Newbie's Guide to LBR

First things first...this is a member-prepared guide, not an official LBR Group post. It is simply one member's perspective on things he would of liked to have known on day one of his membership.

Ok...for starters...your number one priority should be to learn Linda's approach to the markets, not to simply wait for room calls, nor to focus on the chat in the Open Forum. You have multiple resources available to accomplish this (I'm assuming you've already installed the Chat tools from https://www.lbrgroup.com/index.asp?page=FuturesLive):

Linda's Presentations - https://www.lbrgroup.com/index.asp?page=WebinarFiles
Trade Setup Library - https://www.lbrgroup.com/index.asp?page=TradeSetupLibrary
FAQ on Terminology - http://www.lbrgroup.com/index.asp?page=FAQ
Linda's Articles - https://www.lbrgroup.com/index.asp?page=Articles
Class Transcripts - https://www.lbrgroup.com/index.asp?page=ClassTranscripts

The above list is how I would personally prioritize reviewing LBR's material. The prioritization is subjective of course, but the point is that you should get to it as quickly as possible to maximize the utility of your stay with LBR. There is a lot of other material on the LBR site, and you should at least glance at all of it, but this is a good starting point.

A couple of other resources worth mentioning include this blog, where you can search for examples of various setups, ideas, statistics, etc., posted by members. The blog is searchable by topic via the list on the right-hand side of the page. The other key resource for your learning is 'The Lounge', a room that is open to all members, and is usually inhabited after the close, and over the weekends. The Lounge is probably the single best spot to ask LBR-related questions to other team members in a relaxed and informal setting.

Also...some tips from fellow members that you should keep in mind...

• The room is filled with some very experienced traders, trading their own particular styles, some based on LBR principles...some not. Don't get caught up in the Open Forum...it's a great resource for learning from other people, but you must focus on learning Linda's approach (that is why you are here isn't it?), and developing you own style from that.

• Don't expect to join the room, sit back, and just take trades based on room calls...and somehow become a trader along the way. Room calls are a learning resource, and can result in some nice pocket change, but you need to do the work yourself to get anywhere. My observation is that it takes about a year to fully absorb the material.

• Focus on ONE pattern at a time. A common mistake many traders make when joining LBR, is to immediately try to trade every pattern they see. You are MUCH better off mastering one setup at a time, before moving on to the next one.

• I wouldn't recommend blowing your capital while climbing the learning curve. Use enough to keep you mentally engaged, or better yet, just use simulations if that works for you. At least until you have enough knowledge to keep yourself out of trouble.

• Remember to read the Opening Play at https://www.lbrgroup.com/index.asp?page=Members every day, before the start of the trading session.

I am sure that there is more to tell, but this is at least a solid departure point. Be sure to ask a lot of questions, as long as you are respectful of other members' time. Focus, study, and put the work into it and you will become a better trader!

One final reminder... it's the concepts that matter more than the setups (market structure, day type, momentum, etc.)!

Welcome Aboard!!

Oh Those 'Dumb Foreign Buyers of US Treasuries' ? Uh, no

Comments From Goldman Sachs Re Fed Policy

US Daily: The Ps and Qs of Unconventional Easing (Tilton)

7:58 PM  Wed Mar 18 2009

h    The Fed offered a kitchen sink of “unconventional easing” measures today including commitments to purchase up to $1.15 trillion of Treasury and agency securities.  We view this as a positive step towards easing financial conditions and supporting the eventual stabilization and recovery of the economy.

·        Last week, we estimated that it would “cost” the Fed $1 trillion to $1.6 trillion of balance sheet expansion to generate an unconventional easing in financial conditions equivalent to a 100bp cut in the funds rate.  Today’s announcement and consequent move in the GS Financial Conditions Index implies a “bang for the buck” of about $1 trillion per 100bp-equivalent easing, although it is too early to judge the full impact of the move.

·        As we noted last week, the key caveat of our balance-sheet-to-funds rate analysis was that it focused only on “P”—the price of credit—rather than “Q”—the quantity of credit.  That emphasis is appropriate for the measures the Fed offered today.  However, the Fed is also trying to increase the flow of lending directly, via the Term Asset-Backed Securities Lending Facility (TALF) program.  Officials are so optimistic about this approach that they have hinted via media reports at a second major expansion of the concept (to include legacy assets) before the first subscription period has even been completed. 

·        To gauge the possible “bang for the buck” of the Fed’s attempt to boost the “Q” of credit via TALF, we estimate the potential impact on auto loan volumes—and ultimately on sales and GDP.   As a best-case scenario, we consider the possibility that issuance of auto-related ABS returns to the average rate over the 2006-2008 period.  If all of the incremental issuance translated into new lending, and new lending translated one-for-one into domestically manufactured vehicle sales, this would boost GDP by roughly 0.5% at a balance sheet cost of less than $100 billion.  This implies that the TALF approach could be an order of magnitude more efficient (from a balance sheet standpoint) than the approach of buying assets to lower credit spreads.  However, unlike with asset purchases, the ability to scale the TALF is constrained by banks’ willingness to lend and the ultimate end demand for borrowing.

 

The Fed offered a kitchen sink of “unconventional easing” measures today: a stronger commitment to a zero funds rate, an expansion of agency debt purchases by $100 billion and of agency mortgage backed-securities purchases by up to $750 billion, and a commitment to buy up to $300 billion of Treasury securities.   Although we thought the Federal Open Market Committee would ultimately take these actions, doing them all at once and in large size sends a clear message that the Fed recognizes the downside risks to economic activity and is determined to mitigate them as much as possible. We view this as a positive step towards easing financial conditions and supporting the eventual stabilization and recovery of the economy.

Last week, we estimated that it would “cost” the Fed $1 trillion to $1.6 trillion of balance sheet expansion to generate an unconventional easing in financial conditions equivalent to a 100bp cut in the funds rate (see “Unconventional Easing—Not Much Bang for the Buck So Far,” US Daily, March 10).  Today’s action by the FOMC gives us another data point for our analysis.  Given the size and broad market implications of the announcement, we can simply look at the total move in the GS Financial Conditions Index (GSFCI) and convert it to a funds-rate equivalent (for more on the GSFCI, see our “Understanding US Economic Statistics” publication, pp. 15-17). 

On the day, the GSFCI eased 41 basis points, equivalent to 117 basis points of Fed easing (given the 35% weight of the short-term reference rate in the GSFCI).  With a total “cost” of $1.15 trillion in asset purchases, this implies a cost of just under $1 trillion per 100 basis points of conventional Fed easing—at the low end of our previously estimated cost range of $1 trillion-$1.6 trillion, and hence at the high end in terms of “bang for the buck.”  (The true cost might be smaller, and hence effectiveness greater, if asset markets partly anticipated the move today, although our sense from media reports and conversations with clients is that most market participants did not expect a major announcement; any “consensus” for balance sheet expansion would have been in the low hundreds of billions at most.) Of course, it’s a bit early to definitively judge the impact of the Fed’s action, as the purchases under this program have not yet begun. 

As we noted at the time, the key caveat of our balance-sheet-to-funds rate analysis was that it focused only on “P”—the price of credit—rather than “Q”—the quantity of credit.  That emphasis is appropriate for the measures the Fed offered today, since they do not directly generate new lending but simply provide an incremental source of demand for debt securities. 

However, the Fed also is trying to ease balance sheet constraints and increase “Q”—the flow of lending—directly, via the Term Asset-Backed Securities Lending Facility (TALF) program.  Broadly speaking, this is an effort to restart the securitization process by providing low-cost, non-recourse funding to investors who purchase asset-backed securities (ABS) that meet the Fed’s requirements. Officials are so optimistic about this “private capital, public leverage” approach that they have hinted via media reports at a second major expansion of the concept (to include legacy assets) before the first subscription period has even been completed. 

To gauge the possible “bang for the buck” of the Fed’s attempt to boost the “Q” of credit via TALF, we estimate the potential impact on auto loan volumes—and ultimately on sales and GDP.   As a best-case scenario, we consider securitization of auto-related ABS returning to the $73bn annual rate it averaged over the 2006-2008 period, from essentially zero in recent months.  If this additional issuance translated dollar-for-dollar into new lending—an aggressive assumption, especially since issuers could begin by securitizing loans made in the last 18 months—and all of that represented incremental spending on domestically manufactured vehicles, the boost to GDP would also be $73bn, or 0.5%.  (Keeping ABS issuance at that level would continue to support the level of GDP, but would not provide any further growth.)  Of course, this incremental easing of credit conditions would not show up directly in the GSFCI, again because it measures financial conditions in price rather than quantity terms.

This example, vastly oversimplified though it is, makes two points clear.  First, unconventional easing that actually generates a higher volume of lending—i.e. the “Q” approach to credit easing that the TALF is pursuing—has the potential to have much higher “bang for the buck.”  A 0.5% boost to GDP from $73bn of balance sheet expansion (actually a bit less, since the investor has a small equity stake) would imply nearly a 7% boost to GDP from $1 trillion in balance sheet expansion—an order of magnitude higher than our FCI calculations for “P” approaches suggest.  Second, however, the extent to which the Fed can employ the “Q” approach is quite constrained: there is only so much end demand, and banks are only willing to lend so much even at a very low cost of funds.  Conversations with several market participants suggest that the actual impact of the TALF on auto ABS issuance is likely to be significantly smaller than our “best case” scenario above.  Also, auto loans are probably the area where incremental lending translates most clearly to spending, since most vehicles are bought on credit.  So while the TALF approach is potentially highly efficient, it remains to be seen how scalable it will be. 

 

Andrew Tilton

 

Summary of Goldman Sachs Economic Research (Hatzius & McKelvey)

1.  Real GDP is falling rapidly, but we expect it to 

stabilize by about mid-2009.   The main reason for

the stabilization is the recently enacted fiscal stimulus,

which should help many households continue to boost

saving without cutting real spending much further.

We think this stimulus will add about 3 percentage

points to the annualized change in real GDP (relative

to a baseline of continued contraction) during the

middle two quarters of 2009. We also expect

residential investment to level out after a long slide

that has cut this industry’s output by more than half.

2. However, the timing of the bottom in real GDP is 

highly uncertain, and recovery, when it does begin, 

will be anemic. Persistently high levels of claims for

unemployment insurance (both initial filings and

ongoing payments) underscore the strength of the

negative multiplier dynamic, which could short-circuit

any upturn in consumer spending; the other downside

risk is that we may underestimate the degree to which

consumers will cut back spending to achieve saving

objectives. As for recovery, the private-sector forces

that have usually driven strong cyclical rebounds—

vigorous housing recovery, consumer spending on

durable goods, rapid rehiring, and the inventory

cycle—all face significant challenges in the current

environment. Without them, the economy will have

difficulty sustaining growth, especially since we think

the fiscal stimulus now in place will fade out during

2010.

3. As a result, the unemployment rate should reach 

10% by year-end 2010. We expect the same type of

“jobless recovery” pattern as occurred in the past two

business cycles, when companies held off hiring fulltime

workers until increases in demand were well

established. This behavior undercuts recovery, greatly

lengthening the lag between troughs in real GDP and

peaks in unemployment.

4. Deflation is a much bigger threat than inflation, 

at least  for the next  few  years. Although sharply

expansionary fiscal and monetary policies have caused

many market participants to worry about inflation,

these concerns miss the point that the policies have

been undertaken to combat a large and growing gap

between actual and potential output. Under any

reasonable economic scenario, the output gap will

peak at an extremely large level—8% to 10% of GDP

or more—and thus require years of above-trend

growth to eliminate. Given this prospect, we expect

year-to-year inflation in the core index of consumer

prices—now about 1½%—to cross through zero by

late 2010 if not before.

5. Monetary tightening is highly unlikely before the 

end  of  2010.   Given our inflation outlook, we think

most members of the Federal Open Market Committee

will look for three conditions before raising the federal

funds rate from its current 0-25 basis point range: (a)

job market stability, defined as confidence that the

unemployment rate has peaked or will do so shortly,

(b) housing market stability, defined as a reduction in

unoccupied units large enough to reduce the pace of

decline in home prices, and (c) financial market

stability, defined as “you know it when you see it.”

6.  The yield curve remains steep. Although we do

not think inflation worries will prove justified, they

will undoubtedly persist in financial markets and even

be reinforced whenever commodity prices jump in

response to global recovery or expectations of it. This

plus an extraordinarily heavy volume of Treasury

issuance is apt to keep the yield curve steep even as

Fed officials keep short-term rates extremely low.

My wave count

Goldman Sachs Note

Market Profile View of Z-Day

Feel free to comment with any corrections. Newbie perspective here.

Cleon


Cleon - this is my take on yesterday's action:
(similar to yours, but from a slightly different perspective)



SRS

Tick To Minutes Histogram EL Code

if (BarType = 0) then begin { tick bars } 

end;

if date = date[1] then begin 

value1 = (TimeToMinutes(time)-TimeToMinutes(time[1])); 

if value1<=15 then plot1(value1,"tick time"); 

if value1>15 then plot2(15,"15"); 

plot3(5,"5");

end; 

{to not distort the chart, any reading higher than 15 mins gets set to 15-minutes -- so really slow markets will be slightly overstated 'down' to 15 minutes}

Bear Market Year, Still Plenty of Low to High Days

I made a cheat sheet for the some of the 'standard' MP setups that are out there.

Cleon

Thinking About VIX in relationship to return (close to close daily return) and high to low range

Meaning of this chart:

As a general rule, once the market does its 'range' -- the odds are that price will recover by the close to something significantly less than which VIX implies.   But beware, this is a frequency distribution -- meaning that while you have odds of recovering back towards the previous days close, when it does not -- you could have a large move relative to what VIX implies (fat tail risk).  Notice the more symmetrical shape (though still skewed) of the relationship of Range and VIX Implied Vol vs the fat-tailed  'close to close return'  relationship with VIX Implied Return.

Goldman Sachs Now Expects Q1 GDP of -7%

US Daily: Sharper Near-Term Correction Leads to 10% Unemployment by Year-end 2010 (McKelvey)
5:58 PM Mon Mar 2 2009

We have marked down our forecast for US economic activity in the first half of 2009; we now expect real GDP to fall at annual rates of 7% this quarter and 3% next quarter (versus declines of 4½% and 1% previously).
· The good news is that the bulk of this change is in business investment, which typically lags other sectors of the economy. Meanwhile, the steepest decline in consumer spending appears to be behind us. However, since this is already built into our forecast for remaining quarters, no further adjustments to our GDP outlook appear warranted at this time.
· As a result of the additional near-term weakness, we have boosted our expected path of the unemployment rate, to 9½% by year-end 2009 and 10% by year-end 2010; both figures are ½ point above the previous forecast. We have also marked down our estimates for the year-to-year change in consumer prices, to 1% by year-end 2009 (from 1.2% previously) and zero by year-end 2010 (from 0.5% previously).

As we noted in last Friday’s US Economics Analyst, the risks to our expectations for near-term US economic activity swung sharply to the downside last week as a result of four developments: (1) a larger-than-expected downward revision to last quarter’s setback, featuring markdowns to several components of domestic demand including a big one (0.8 percentage points) to the annualized decline in real consumer spending; (2) fresh signs of weakness in industrial activity, notably in orders for and shipments of nondefense capital goods; (3) further evidence of a sharp correction in housing activity; and (4) ongoing deterioration in the labor market, implying that the negative multiplier remains in full force. However, with several key reports due for release this morning, we held off making revisions until today.

Although these reports rendered a split verdict, downward revisions are still warranted to our expectations for US economic activity in the first and second quarters. Specifically, we now think real GDP will fall at a 7% annual rate this quarter and at a 3% annual rate next quarter. These figures compare to -4½% and -1% in our previous forecast. Quarterly details of this and other adjustments, also described in this note, are shown in the exhibit at the end of this comment.

As large as these changes are, they could have been worse if not for the mixed nature of this morning’s data. The saving grace was the 0.4% increase in real consumer spending reported for January. Although this could disappear on revision, it is the second gain in three months. The uptick in November, while only about half as large as first reported, remains reasonably sizable at 0.3% (3.6% at an annual rate). More significantly from a forward-looking perspective, consumers will begin to see some benefits from the recently enacted fiscal package, which should help ease the tight budget constraints imposed by the labor market deterioration. In addition, the tightening in credit standards during the second half of 2008, which probably played a significant role in the contraction in consumer spending, has since eased.

Thus, we take the better-than-expected data on consumer spending as a promising sign that the worst declines are over in this sector—we now think real spending will be roughly flat this quarter and start edging up next quarter, a bit earlier than before. In this regard, it is noteworthy that the saving rate rose to 5.0% in January from an upward-revised 3.9% level in December. Although this jump reflected two nonrecurring special adjustments to disposable income in January, both of them (a large cost-of-living increase in social security benefits and an even larger reduction in estimated personal income tax liabilities) represent genuine, if one-off, increases in after-tax income. Moreover, in coming months they will be replaced by additional boosts from the fiscal package, as already noted. For households who are determined to raise their saving rates quickly, these boosts will help them reach their goals with less parsimony than would otherwise have been required.

On the negative side of the data ledger, the latest report on construction outlays was much worse than expected, both in terms of the change reported for January (-3.3% versus our lower-than-average -2.0% call) and because of large revisions to November and December (2.3 and 1.0 percentage points, respectively). Although these data largely get ignored by market participants because they usually come out alongside the ISM report, they are quite important for pegging the trend in the construction components of real GDP. Given the depth and widespread nature of these declines across (residential, business, and government) subsectors of the construction industry, they overrode the positive implications of the better-than-expected consumer spending figures. (The ISM report, while also better than expected, implied an ongoing significant decline in US manufacturing and in any event does not figure directly into the GDP “bean count.”)

On balance, the pattern of recent data surprises and their impact on our economic outlook is encouraging in the sense that our forecast adjustments are concentrated in sectors that tend to lag economic activity. Thus, we have marked down estimates for real business fixed investment and real inventory investment, taking on board the unexpected weakness in capital goods orders and shipments as well as today’s construction data. Meanwhile, we have brought forward by one quarter the expected stabilization and subsequent slow improvement in real consumer spending (into the current and next quarters, respectively). The exception is housing, which appears to be even a larger drag in the current quarter than we had anticipated. However, given the low levels to which starts have fallen, we continue to think that homebuilding will stabilize later this year.

Unfortunately, our GDP revisions have negative implications for both unemployment and inflation. Specifically, we have boosted the profile for the unemployment rate to 9½% as of the end of 2009 and 10% as of the end of 2010. Both figures are ½ percentage point higher than before. (For the technically minded readers, our cumulative revision to GDP is about 1 percentage point as of the second quarter, which by Okun’s Law should be associated with an unemployment that is about ½ point higher). On the inflation front, we now expect the core CPI to rise only 1% over the four quarters of 2009 and to be flat, on balance, over the four quarters of 2010; these figures are ¼ and ½ percentage point lower than we previously thought.

With one critical caveat, the silver lining in these clouds is that unemployment and inflation are generally also lagging components of economic activity. (Unemployment leads at business cycle peaks but lags at cycle troughs.) The caveat is that the forecast revision underscores the likelihood that the US economy will endure a bout of at least mild deflation in consumer prices, if not in 2010 then in the period immediately beyond that. This is fundamentally different than the “technical” deflation we expect this year in the headline indexes, which is driven by a sharp and (so far) unsustained drop in energy prices. In principle, deflation can be self-reinforcing if price expectations are backward-looking. In this situation, consumers put off discretionary spending in anticipation of increases in real purchasing power and higher real interest rates—inevitable in markets where nominal rates are already zero—deter borrowing. However, if expectations are sufficiently forward-looking, then economic policies that are highly expansionary should head off such behavior, especially if the economy is showing signs of recovery.

Ed McKelvey

Exhibit 1: Key Numbers in the US Economic Outlook

10-Year Notes: recent HoD and LoD times (7am - 3pm CT)

Chart 1: Frequency distribution of High of Day (HoD) and Low of Day (LoD) in each 30-min bar


Chart 2: Frequency distribution of HoD and LoD in each 30-min bar on High Made First days


Chart 3: Frequency distribution of HoD and LoD in each 30-min bar on Low Made First days


The letters are the standard Market Profile characters for each 30-minute bar
i.e.
y = 7:00 - 7:30am CT
z = 7:30 – 8:00am CT
A = 8:00 – 8:30am CT
B = 8:30 – 9:00am CT
etc.