Michael Ridpath - Free To Trade

'You are right that nearly everyone thinks that the number will be 5 per cent and that the market should sell off. So what should I do about it?' Hamilton asked.

'Well if we had any treasuries left, we could sell them,' I said. 'But since we sold what we had a month ago, I suppose we can just sit and watch.'

'Wrong,' Hamilton said. 'Or at least you can sit and watch.'

The green television screen in front of us showed where the market was trading at that instant. A dense array of little green numbers winked as bonds were bought and sold, and prices changed. The key treasury bond we were looking at was the thirty-year bond otherwise known as the 'long bond'. Its current price was 99.16, meaning 99 and sixteen thirty-seconds, or 99 and a half.

With one minute to go until the release of the figure, the green numbers stopped winking. Nothing was trading. Everyone was waiting.

The minute seemed to last for ever. All over the world, in London, New York, Frankfurt, Paris, Bahrain, even Tokyo, hundreds of men and women were sitting hunched in front of their screens, waiting. The bond futures pit on the floor of the Board of Trade futures exchange in Chicago would be silent, waiting.

A muffled beep came from our Reuters and Telerate screens. A second later a little green message flashed up, 'US July unemployment rate falls to 5.0 per cent versus 5.2 per cent in June.'

Two seconds after that the number 99.16 by the long bond flashed to be replaced by 99.08, meaning 99 and eight thirty-seconds, or 99 and a quarter. I was right. It was a bad number and the market was falling.

Two more seconds, and our phone board was dotted with flashing lights. The salesmen did not know what Hamilton was thinking but they knew he was thinking something.

Hamilton picked one up. I was listening on the other line. It was David Barratt.

'I just wanted to let you know our views on…' he began.

'Offer me twenty million long bonds,' Hamilton cut in.

'But our economist thinks…'

'I'm glad you have an economist who thinks. Now get me that offer!'

David shut up, and went off the line. He was back five seconds later. 'We would offer them at 99.04. Watch out, Hamilton, this market is crashing off!'

'I'll buy twenty at 99.04. Bye.'

The green number by the long bond on our screen was flashing constantly. It now read 99.00. I didn't know what on earth Hamilton was doing but I knew he knew exactly what he was doing.

Hamilton picked up the next line. It was Cash. 'Offer me thirty million long bonds.'

Cash didn't argue. Someone wanted to buy thirty million bonds in a falling market, that was fine with him. 'Our offer is 99.00.'

'Fine, I'll take them,' Hamilton said. He put down the phone and stared at the winking screen intently. So did I.

The price kept flashing, but it was no longer plunging straight down. It was wobbling between 99.00 and 99.02. Hamilton and I sat motionless in front of the screen. Every time the number 99.00 flashed, I found myself holding my breath, expecting to see 98.30 follow it. We could lose a lot of money on a fifty-million-dollar position. But the 99.00 level held. Suddenly it flashed up at 99.04, then 99.08. Within seconds the price had moved up to 99.20.

I exhaled. Hamilton had done it again. We had managed to buy fifty million long bonds at what appeared to be the lowest prices for months. And it looked like the market was going back up. I studied Hamilton closely. He was still staring at the screen. His expression was unchanged. He wasn't smiling, but I thought I could detect a slight relaxation of his hunched shoulders.

The price flashed up to 100.00.

'Shouldn't we sell now?' I asked.

Hamilton slowly shook his head. 'You don't know what is happening here, do you?' he said.

'No, I don't,' I said. 'Tell me.'

He leaned back on his chair and turned to me. 'You have to be one step ahead of what the market is thinking,' he said. 'Market prices move when people change their minds. The market will go down if people suddenly decide that they would rather not buy or hold bonds, they would rather sell them. This often happens when there is a new piece of information. That's why the market often moves when an economic figure is released. Are you with me?'

'Yes,' I said.

'Now, over the last couple of months a lot of people have been changing their minds, deciding to sell. As each piece of bad news has come out, more and more people have sold, driving prices ever lower. The situation has got so bad that by this week everyone expected more bad news and a further fall in the market.

'When the bad news came out, it was just what people had expected. Sure, the dealers moved their prices down, but all the sellers had sold long before. Like we did a month ago. There were no sellers left.'

'OK, that explains why the market didn't go down for more than a minute or so, but why is it going up?' I asked.

'Well, when a market is falling, natural buyers tend to delay their purchases until they think all the bad news is out of the way,' Hamilton said. 'And there are people like me who are tempted to buy bonds at low prices.' Hamilton talked slowly and deliberately, and I hung on every word, trying to extract the maximum amount of knowledge I could from what he had to say.

'But what about the economic fundamentals? What about the threat of inflation if the US has full employment?' I asked.

'That fear has been in the market for at least a month. Prices have been discounting that for weeks.'

I thought about what Hamilton had said. It did make some kind of sense. 'So one of the reasons the market went up was because everyone was so pessimistic?'

'Precisely,' Hamilton said.

'One last thing I don't understand,' I said. 'If all that was the case, why did the market wait until the release of the figure before moving up?'

'Before taking the decision to buy, investors wanted to wait until the last major uncertainty was out of the way. Once they saw that the unemployment figure, although bad, was no worse than expected, they had no reason to put off their decisions. They bought.'

I had a lot to learn in this business, I thought. I knew you needed a cool, calculating mind to be a good trader. But Hamilton was more than just an expert at analysing numbers or economics. He analysed human nature, weighing up the exact balance between fear and greed amongst the thousands of individuals who collectively make up 'the market'. And he was very good at it.

'I think we can leave this market to its own devices now,' Hamilton said. 'You wanted to see me about something.'

I told Hamilton everything that Debbie and I had found out about Tremont Capital. I told him it looked to me as though we would never see our $20 million again.

In all the time I had worked with Hamilton I had never seen him shaken. He was shocked now. He had lost control, a rare feeling for Hamilton.

'How could that happen? Didn't we check the documentation?'

I shook my head slowly.

'Why didn't I get Debbie to check the documentation?' he muttered, biting his bottom lip. 'That bastard Callaghan! He must have known about it all the time!'

'I heard Cash sold you the bonds?'

'He certainly did. At the time those bonds were yielding 1½ per cent more than US government's. Not bad for bonds with a triple-A guarantee. They were the cheapest bonds around at the time.'

'And you think he knew that the guarantee was worthless?'

'He must have done,' said Hamilton bitterly. 'If the library at Bloomfield Weiss knows nothing about the bonds, you can bet no one else there does. He must have set this thing up himself. I do my best never to rely on that man. I can't imagine how I let him get away with it.'

'Couldn't Cash have been passing on the bond prospectus in good faith? Perhaps someone in his corporate finance department is behind this? Claire mentioned a chap named Dick Waigel.'