Jesse Livermore - The Boy Plunger

Jin - Market Sentiment

tohchinsheng@gmail.com (jin) — Thu, 05 Nov 2009 12:06:00 +0000

As a committee member of my school’s investment club, more often than not, I have to attend to investment talks by professionals. These talks range from real basics of the stock market to more in depth stock analysis. Frankly, such talks are rather dull. However, they have something in common, especially talks about fundamental and technical analysis. In the later part of their presentation, they will always conclude by highlighting that the most important thing about the stock market is the market sentiment.
I find this amusing. The professionals seem to contradict themselves with their presentations. So does that point mean that whatever analysis or factors were considered in front are useless? It is weird that professionals will speak so much about structured analysis even when they do know that market sentiment is the most important. Yet there is hardly any concrete approach or analysis made on market sentiment. To be fair, grasping the market sentiment is arguably the hardest thing to do in the stock market. This is probably why I admire Jesse Livermore the most.

Nonetheless, it is always important to try to understand market sentiment and I will attempt to make a bold yet plausible approach to understand today’s market. An important point to understand is that market sentiment doesn’t change everyday. It goes on for a long trend until one of two extreme moods kick it; “Crazy” and “panic”.

Stock Market Definition
Crazy: a period of time where everyone is frantically buying anything!
Panic: a period of time where everyone is selling like there is no bottom in sight!
Traditionally, fear and greed are terms associated to the stock market. But I feel that both emotions are represent a normal state of mind. It is alright to be fearful or greedy at times but things start to change when one gets crazy or panicky.

Moods
Most importantly, “crazy” and “panic” mark the end of a market sentiment trend. Surprisingly, when everyone is panicking, it is the best time for you to enter the market. These are the only two extremes that we will be working on. It reflects trading styles too. It is almost impossible to day trade. Good traders trade the whole trend and it doesn’t mean that they trade from the very bottom to the very top. They attempt to decipher the market sentiment and will capture the bulk of the sentiment trend. Other than that, they are just normal investors. When it is time to long a couple of positions and sleep at home, they jolly well do so.

Irrationality
It has always been my belief that the market is irrational. While it is probably true that the stock market leads the economy (I always hear that it leads the economy by 6 months), it can also be argued that currently, the stock market is in denial about the state of the economy or is hopeful. Eventually, understanding that the stock market is irrational, there is one important factor to consider in grasping the market sentiment – underlying or real economy status. My point is that it will be justified for a stock market to shoot up like a rocket provided the “reality” justifies it.
Understanding the economy is an art and I believe Kenny will bring you through the economy status in the following weeks.

De Ja Vu
It has been my stand that our economy is not really picking up. I am not going to throw any figures over here because there is always two side of the coin regarding figures.

On hindsight, it was easy to label “panic” with those green arrows. The first green arrow marked the bottom of 1929 crash, where there was this huge panic selling day. In my opinion, I really thought that the market had bottomed at the 2nd green arrow back then in November 2008. Nonetheless, the real bottom occurred in March 2009. Purple arrows signify a period of hope or denial. But do take note that hope or denial can turn into real hope. A really a thin line separates them.

1929 and 2008
I would like to draw parallels between 1929 and today price line. The difference is obvious. The process in 1929 was really fast. Transition from rapid selling to rapid buying happened in matter of months. The recent market meltdown was a long painful process. Even the “recovery” stage stretched through a period of time. Nonetheless, the similarity between both is interesting. The degree of the recovery period is more significant than that of 1987 (purple arrows). I will not discuss more about 1987. If you could do someone were to research further on the crash, it would be apparent that there wasn’t any strong economy weakness that underlies the crash. Reasons such as programmed trading have been cited to explain the crash (I tend to disagree). The recovery stage of 1987 is of greater significance. It was a slow and steady process and this is very important. A bull market is a dull market. Volatility is low, gains are low everyday. You don’t see 5% gains happening at all. But the crazy stage of bull market will give you that number.

Sentiment Today
It is about taking a stand. My stand is simple. The underlying economy is weak and the stock market is moving upwards normally because participants are hopeful. It takes a while before they realize that the underlying economy is weak. When will that crystallize? It comes down to how the market is moving. As of now, I don’t see any volatility yet. Gains are representative of that in a bull market. That being said, we probably have quite a bit more for on the upside in the market despite recent dips. But bear in mind that we are bound to head down and when more people are starting to buy, where gains are posting greater numbers each days, the crazy stage would have been reached.

An important sign for everyone to recognise about the stock market today is the trend of US dollars. A question that I will like to throw at you is, "Whether the stock market is moving up or down because of the facts and numbers that we are seeing or is it simply because the US dollar is moving up or down inversely with the stock market."

Kenny - Microsoft

ktay522@gmail.com (Kenny) — Sun, 18 Oct 2009 14:07:00 +0000

3 weeks have passed since I've posted and I'm glad to be writing again. October 22nd is just around the corner and that means Windows 7 is going to be available to the general public real soon. I'm pretty excited about this as well as the prospects of Microsoft. This post, similar to my previous one, will be somewhat anecdotal/common sensical. I did receive a bit of feedback about how my posts don't have raw numbers for facts but personally, I prefer to invest in my own common sense. Again, I'll talk a bit about investing philosophy and then focus on the reasons why I like Microsoft.

Top-down vs bottom-up. This is one strategy which I picked up from Jim Rogers (who apparently claimed that things aren't too bad in the US just last week). If you read both of his 'around-the-world' books, one thing you noticed was that he chooses his investments based on what he sees at ground level. He doesn't look at the country's GDP or the rate of unemployment (well perhaps he does but it isn't as important as his opinion from ground level). Instead, he looks at how corrupt the officials are or how hardworking its people are (it is hard to go wrong in life if you're a hard worker but that's another philosophical issue altogether). I will attempt to analyze Microsoft from the bottom-up perspective as well and I hope that this will give you new insight into this company.

So, what about Windows 7? It may not be released to the general public but this is where studying in a US top 15 college pays off (I won't be surprised if all other colleges have this benefit but w/e). Our computer science department is somehow able to distribute copies of Windows 7 to students (for free) and a couple of friends are running Windows 7 on their computers. One major breakthrough - boot time. Windows Vista had just terrible boot times and in this day and age, where everything happens instantly (or at least we hope they do), waiting 30 seconds to 1 minute to start up your computer is just simply annoying. I'll bet that the folks at Microsoft realised that and just cleaned up their code so that the boot sequence as well as their interface runs a lot more efficiently.

We know the product is good but not all good products succeed in this world. Now, we'll look at Windows 7 from a commercial perspective. First, we need to answer the question of what operating system large companies and educational institutions are running on their computers. Is it Windows Vista? I would say that is highly unlikely. Microsoft continued providing support to XP users even a few years after the release of Windows Vista. Did companies have the incentive to switch to Windows Vista then? Not really. Why spend more money when the current OS works just fine? What about now? Microsoft will only provide paid support to XP users and chances are they will not be releasing many more (security) updates for Windows XP. Now, there's some incentive to switch to Windows 7. The global company I worked at during Summer will probably switch and so will the many computers here at Northwestern University. So, we have a good product and a fairly positive environment. I believe Windows 7 will be a hit and we'll see it in Microsoft's 4Q results early 2010.

Another key area of interest for Microsoft is the search engine field. When Bing was first released, you may have heard that it was chipping away at google's market share. Within its first two weeks of release, Microsoft gained about 2% of the searches to get up to 11% of the searche engine traffic. Let's see where it is at right now. http://www.comscore.com/Press_Events/Press_releases/2009/9/comScore_Releases_August_2009_U.S._Search_Engine_Rankings says that Bing's and Yahoo's search engine traffic is at 9.3% and 20% respectively (Yes, Microsoft did close that deal with Yahoo). So, the Microsoft, Yahoo combination has less than half of the search engine traffic that Google has. Am I surprised? Not really. Look at Bing's and Yahoo's interface. Pretty buttons, some (useless) information on the right sidebar as well as the left sidebar. Google, on the other hand, has simple buttons with minimal junk data. The difference here is precious search time, analogous to the boot time in the case of Windows Vista.

While I am not able to prove this next fact completely, Bing's search algorithm seems to be no more superior than that of Google's. Jin will probably have a lot to say about that. A simple search on 'bing vs google' will give you numerous links to all sites comparing the two search engines. Another thing people must note here is the Matthew Effect, which essentially means that the strong get stronger and the weak get weaker. Even if Bing has a comparable search engine, it will be insufficient to take a larger part of Google's search engine share since Google has been the dominant force in search engine technology. Hence, Bing needs to come up with a far superior search algorithm to start chipping away at Google's lead. And at the moment, that is just not happening. That's why I'll be sticking with Google.

Thumbs up to Windows 7, thumbs down to Bing. Let's see how they do in this quarter.

Ashpal - Alternative Investments

noreply@blogger.com (AP) — Sat, 10 Oct 2009 21:31:00 +0000

To lay the foundation for my explorations and eminent advocacy of alternative investments, I would firstly like to address the situation of the US dollar. In my opinion, and as expressed by numerous people in a host of positions, we should see a decline in the US dollar. The questions to be addressed will be why and over what time scale will this occur.

On the international scale, the US dollar has been the world’s reserve currency of choice for much of the period after WW2. However, some significant changes have taken place that make the US dollar unsuitable to continue in this role.

A recent report on governmental spending showed that the US would need to “create” in access of 500 billion dollars annually. (That is effectively printing money) This is aside from the money it receives from American savings and from foreign purchases of treasuries. In basic macroeconomic theory, this is going to lead to inflation and a corresponding devaluation of the currency.

This view was recently echoed by a Chinese official, Cheng Siwei, at a conference in Lake Como, Italy. Criticizing the monetary policy in the US he said: “If they keep printing money to buy bonds it will lead to inflation … and after a year or two the dollar will fall hard.” Cheng went on to say that China was diversifying its roughly $700 billion of U.S. foreign-exchange reserves into gold.(http://www.cnbc.com/id/32739769)

Another important factor is that the US has a major trade deficit. Its net imports, even adjusted for the relatively high price of oil imports last year, far exceed its exports. This again puts downward pressure on the currency. The US trade deficit with China and Japan, its 2^nd and 3^rd largest trading partner, is over 300 billion dollars. As governments grow weary of buying US dollar denominated assets like treasuries to balance the flows, we are likely to see an added strain on the continued strength of the US dollar.

Hopefully, this is sufficient to convince any reader that with over 10 trillion in debt, and a record budget deficit for the current year, the US cannot repay its debtors anytime soon. There are two points to take away from the extract in particular. With a decline in the US dollar imminent, US dollar denominated commodities will likely increase in absolute value. Gold seems to be a pretty solid bet, especially if China is considering converting its vast US dollar holdings into physical gold reserves. (Now in excess of 1000 tons) The downward risk seems insignificant

However, before jumping into an investment in gold, especially as the price of gold has crossed the thousand-dollar mark, I think some cautious background analysis may offer greater insight into the topic. Firstly, a foray or rush into gold will not be in favor of the Chinese, as they would have to pay increasing amounts for their purchases of the metal. Therefore, although the downward pressure on gold might be limited, we might see a relative stagnation in the price of gold. Gold has no intrinsic value in terms of industrial use. Its value is entirely perceived. There are however, other commodities that have vast industrial uses and hence a base demand, that are also denominated in US dollars. For this reason, I believe that it will be useful to explore commodities such agriculture and metals, copper and lead in particular.

Copper has widespread uses in industry, ranging in nature from electronic to creating pipes for air-conditioning. The relative importance of copper is also highlighted in its listing under precious metals, right alongside gold and silver. Hence, if it has a standing as a precious metal and an underlying value from the burgeoning industries in places like China, I think it has better security and bullish prospects then gold.

Lead, again is linked to industrial demand, this time from the alternative energy sectors. The large hike in oil prices has jolted the demand an interest in nuclear power plants, with a record number of applications reaching the US authorities last year. Lead is a major component of the nuclear containment construction. Furthermore, Mr X brought to my attention the potential use of lead in fuel cells of the next generation trucks and possible cars. Looking good?

The inherent demand for agriculture is self-evident. With an ever-increasing number of people and food crops being affected by adverse weather, agriculture appears to be a solid bet.

However, as the naysayers of the Malthusian argument will rightly point out, the predicted disaster never materialized, largely due to improvements in farming. Therefore, I think there is great potential not in the crops themselves, but in companies that help to ensure that the price of agricultural produce stays low. (We can also continue to count on the European and Americans to subsidize our wheat instead of solving their fiscal problems)

A prime candidate for this category would be Monsanto. Thursday’s issue of the NY Times (8^th October) carried a full-page advertisement for the company that read: 9 Billion People to feed. Climate Change. Now What? Recognizing this problem, Monsanto has already started to address green initiatives to create advances, yet affordable seeds for farmers. Its foresight into this field has enabled it to become the market leader. Despite the recent anti-trust filing against the company for a possible abuse of its monopoly power (which itself reflects the importance of this company), the company looks in fantastic shape and is situated in an industry that is guaranteed to see a 50% increase in business, save World War 3.

Since flurries of people have been recommending gold, it might be pertinent to keep in mind that (paraphrasing deliberately) none of us are as dumb as all of us. There are other possibilities out there that may offer greater potential.

Goldman Sachs - The True Banking Culture

tohchinsheng@gmail.com (jin) — Mon, 28 Sep 2009 04:58:00 +0000

Goldman Sachs – Strong Fundamentals Continue Business Tenet

Goldman Sachs used to downplay or avoid consumer-oriented retail businesses like stock brokerage, credit cards and mutual funds. There are three main activities that it engages in – Investment banking (chasing M&A deals), trading and principal investments (market making and proprietary positions) and a segment it once avoided, asset management (offers investment products).

Nonetheless, like most of its peers, Goldman Sachs cannot escape a weak business environment and will be affected in some ways or another. But what really surprises me is the shrewdness mentality in Goldman Sachs money making activities as well as just how smart Goldman Sachs is.

Let me just introduce some facts and figures.

1. Aug. 5 (Bloomberg) -- Goldman Sachs Group Inc. made more than $100 million in trading revenue on a record 46 separate days during the second quarter, or 71 percent of the time, breaking the previous high of 34 days in the prior three months.

2. Goldman didn’t believe its own hype during the crisis. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman shorted them just before their value crashed. It was perfectly legal.

3. It took the $12 billion payment from the Fed for its AIG exposure even though it was protected on 100% of its position. It repaid Uncle Sam's $10 billion fast so it can offer its employees record compensation this year. It was a “thanks but no thanks TARP”.

What I have shown above is just some of the mind-blowing records that Goldman Sachs has made. While trading records are awesome, it makes one wonder how they ever achieve such astonishing results. Trading revenue was really amazing when I look at past figures for 2007 and 2006 – 31 billion and 25 billion respectively. There are two inferences that can be drawn from point 2 and 3. They are risk control and risk seeking respectively. I wonder how many other banks did the same thing as Goldman Sachs during the subprime crisis. As much as the implications of subprime and housing bubble are being discussed over and over again before it actually happens, not many banks out there have taken strong actions and considered the most adverse market conditions that may happen.

Though, Goldman Sachs does lose quite a significant amount of money in subprime mortgages, their ferocious short selling strategies minimize the loss. Are they the market leader for banks? I believe the numbers tell. JP Morgan may achieve the no.1 awards in many areas, but Goldman Sachs is a earnings machine.

Point 3 is really funny in my opinion. It sums up the brilliance of Goldman Sachs. Of course, they don’t take the $12 billion payment from the Fed and do nothing about it. I wonder how much more money do they actually make with this payment.

But all these can only happen and work if Goldman Sachs has the talent which is the durable competitive advantage of Goldman Sachs. If there is something for you to draw away from this articles – Goldman Sachs has a true banking culture.

Durable Competitive Advantage – Banking Culture

Goldman is also known for its insularity. Roy C. Smith, a professor of finance at the Stern School of Business at New York University and a former Goldman executive, noted that relatively few employees defect to rivals. Basically, it is hard to convince an employee that switching job to another rival firm is not a step down. It really takes a lot to retain talent, especially in the banking industry. The business can’t work without talents. You don’t have smart bankers to chase M&A deals, no whizz kid out there to conjure rocket science financial models to program trade, and certainly no talented support staffs that are willing to take a back seat and run the whole show.

Risk management is something that GS is actually famous for.

The risk control officers are treated as equal in authority to the risk takers. There is now a comprehensive effort to bolster what GS calls the "federation"--the empowering of the firm's support staff, those less glamorous individuals once called back-office types. That description is banned under the new culture. Recruitment, training and compensation are conceived to create a band of brothers and sisters honored for their contribution as much as some whiz kid trader or M&A banker. I believe most companies do claim that they do treat their operations department equally. But I can only see it at Goldman Sachs. I see it in the annual reports. In fact, they emphasize about their risk management culture. Operations department is under-recognized in many places even in my school club. But it is only at Goldman Sachs, where things are different. I really wish to go in there and see how the culture is like. What a fat wish!

Moving Forward

One should never dwell in past heroics. While it is great to make an impact in the past, it is important to keep it sustainable. I stumble upon the market share history from the annual report and I find it interesting.

1. During the Asian crisis at the end of the last decade, we made several significant investments in consumer and real estate assets.

2. After the dislocation that followed Long Term Capital Management’s problems in 1998, we increased our fixed income market share.

3. Following the telecom and technology bubble, we built up our private equity and mezzanine investments.

4. After the failure of Enron when capital was scarce in the power sector, we invested in power plants, resulting in recurring trading revenues as well as gains from restructuring power contracts.

5. In each instance, Goldman Sachs was able to identify opportunities during times of market dislocation. In this same vein, we have proven our ability to adapt our own structure, time and again, to meet rapidly shifting market conditions.

Nonetheless, this really exemplifies the talents at Goldman Sachs and how Goldman Sachs has always been able to position itself after a crisis while its peers struggle to restructure. Though this shows a lot about Goldman Sachs, I have to scrutinize more to look into the future of Goldman Sachs. I see it in one of their fastest growing businesses – proprietary asset management. As mentioned earlier, it was a segment that they once avoided. But right now, they see the future of it.

In my opinion, I do not believe in the recovery story. I can’t see how the U.S or the world economy is going to pick up just yet. This certainly has some implications on the investment banking segment for Goldman Sachs. M&A activities may be sluggish. Trading activities can still be strong given a possible period of volatility in the future (more about this in later posts). The next earnings driver will then be its asset management. This is also where I see the talented analyst of Goldman Sachs coming into play. I feel this is the reason why they are going into this consumer related business. They will be able to make full use of their formidable reputation.

To sum it up, Goldman Sachs is not just a bank. It is a bank with a true banking culture. I really wonder how long is Warren Buffett and Jon Paulson going to hold their Goldman Sachs shares.

Jin

Greetings: Jin

tohchinsheng@gmail.com (jin) — Mon, 28 Sep 2009 04:35:00 +0000

Greetings to all the readers out there, I’m Jin, the former sole writer for “thenewboyplunger.blogspot.com”. Just a formal introduction of myself, I’m a Nanyang Technological University undergraduate majoring in Accountancy and Banking and Finance. I’m also the vice president for research and education in my school’s Investment Interactive Club (IIC). More can be read under my profile at the contributors column.

Mr. X - Ford

tohchinsheng@gmail.com (jin) — Sat, 19 Sep 2009 16:13:00 +0000

I like Ford. Or more specifically, I like the long term prospects of Ford. Cash for clunkers has been a huge plus for them in the past few months but it really doesn't mean anything in terms of the big picture. FYI, cash for clunkers is a program where people trade in their old gas guzzling machines for up to $4000 for a new environmentally friendly vehicle. It was a program put together by the US government to help the US auto industry and to reduce emissions.

However, again, I must emphasize that it not the reason why you should be buying into Ford. What I like most about it is the weakness of its competitors. GM and Chrysler are still in the process of restructuring their businesses and still making huge losses (or barely breaking even, depending on when you read this entry). Consumers are more likely to purchase Ford vehicles rather than GM or Chrysler ones. I can think of a couple of reasons off the top of my head. 1. Consumers have little faith in GM/Chrysler. Why buy a car from a poorly managed company? 2. Potential lack of after sales service. GM/Chrysler may have to shut down a few branches (or they may have done so already) to reduce costs. 3. The loser effect. People may be seen as losers buying cars from a company that has been barely resuscitated by the government.

Well, now the skeptic in your brain should be thinking. What about the recession/slow rebound? Doesn't that hurt Ford as well? Of course it does. Here is where you need to weigh the effects of the previous economic downturn. Will the decrease in demand for cars in general be offset by the increase in demand for Ford cars due to its weaker competitors? Chances are the former is greater than the latter at the moment. Nonetheless, eventually both the economy and Ford's competitors will recover but the latter's recovery will be significantly longer since trust, once shattered, takes a lot of time to be built up again. So, in the long run, the increase in demand for Ford cars will offset the decrease in demand for cars in general. Or in other words, Ford will have a larger portion of the relatively smaller pie.

Another fantastic question that the other contributors on this blog asked was what about the Japanese and Korean car manufacturers? I agree that they are fundamentally stronger than Ford. But how close of a substitute are these manufacturers? They may make cars but they do not make American cars. That is the key term here: 'American Cars'. Americans have strong national pride and are likely to buy American. Take a look at this article: http://voices.washingtonpost.com/economy-watch/2009/09/ford_august_sales_surge_212.html?hpid=topnews. Ford sales increased by 17% but Toyota had a significantly lesser increase at 10%. The Prius is superior to what Ford has to offer in green cars yet this superiority was not shown in the raw numbers. I believe that the 'buying American' effect is in play here.

This concludes my first investment idea. I would encourage all of you to read this entry in the same manner as how a skeptic would. Question the logic behind what I have to say and leave comments. I will attempt to come up with a counter argument. Or you could just make more sense than I do.

Greetings: Mr. X

tohchinsheng@gmail.com (jin) — Fri, 18 Sep 2009 16:44:00 +0000

Since this is the first entry of the group blog, I’ll do some introductions here (you can look under the profile section if anyone wants to stalk us further). Followers of the previously solo-blog might even know me as Mr X. A bit about myself, I’m a Northwestern University undergraduate majoring in Electrical Engineering, Economics and possibly, Computer Engineering. I will be participating in the Kellogg Certificate Program for Undergraduates for Financial Economics, which supposedly is a highly selective program, in the next academic year.

So I guess the number one question is 'Why should you take what I have to say seriously?'. After all, I'm just another undergraduate. Well, I'll respond to that by saying that you should read this blog, assimilate the information and come up with your own analysis. It is exactly what I do when I'm writing these blog posts anyway. I read the news on google, analyze it independently and talk about what my instinct is telling me in this blog. One thing to note about my approach to reading the news is that I don't restrict myself to finance news and that I read the news with skepticism. Take the facts, the raw numbers but ditch the analysis. These experts can think of the most rational of reasons and persuade you to believe it. Their reasoning is undoubtedly believable but is it correct? No one can really tell. So, my approach to investing is to trust yourself rather than the analysts and experts out there. What makes sense to you?

Restructuring

tohchinsheng@gmail.com (jin) — Sat, 29 Aug 2009 20:09:00 +0000

Greetings to all, thenewboyplunger.blogspot.com is currently going through some restructuring. A new team consisting of students from Northwestern University, Cornell University and Nanyang Technological University will be formed to run the blog instead of just a writer previously. This is an attempt to bring in diverse perspectives on various investment related issues. So, do stay with this blog and keep a look out for the new change as well as more insightful and professional posts.

We hope to see you all soon. =)

I Will Be Back 2

tohchinsheng@gmail.com (jin) — Wed, 15 Apr 2009 15:46:00 +0000

I will be back after my college exams in 1 week's time. Really sorry about this.

Thanks Thanks

Jin

Why I'm Buying Gold at $1000

tohchinsheng@gmail.com (jin) — Thu, 19 Feb 2009 03:37:00 +0000

To sum up everything into one line, "The Time is here."

This will be the first time I'm buying a future contract. I am going to all-in gold with all the profits I made through shorting the HSI last july. Readers of my blog will know that I do not believe in diversification. It is crap in my opinion. As I always emphasize, put all your eggs into one basket and watch your basket.

De-coupling from Oil, Dollar....

Strangely enough, gold has somewhat decoupled from everything. Other than the fact that when the market is down, gold price rises, it simply ignores the movement in oil and US dollar. I feel that this is a sign - a sign of gold bull market. It is a sign of all bull markets. Ignore everything and sky rocket. It will of cos end in a bubble like manner but before it ends, there is so much money to be made.

But... Is it a bubble forming?

Some may argue that this is a bubble forming. As always, I face lots of funny opposition when I give some crazy thoughts about the market. But it is only at 7-8mth high.

Lets reflect on some bubbles we see before.

1. China Market - more than 100% for two yrs. PE at 90. Bubble? Yes

2. Dot Com - similar to china market

3. Housing bubble - subprime

4. Possible bond bubble - lowest yields last seen 40 yrs back.

You make the call. =)

Gold At $1000

Magic number 1000. We have seen that happening for oil before. Gold has to close above $1000. The close on friday was not at $1000. But believe me, it will be there soon. Real soon. It may even be next week for all we know.

Conclusion: I have talked about the reasons about gold before. I believe that you should be opened to many assets as well. I'm buying gold at $1000, are you?

Polar Bear

tohchinsheng@gmail.com (jin) — Thu, 05 Feb 2009 04:13:00 +0000

I feel that this is not a bear market.

This is a polar bear market!!!

Polar bears are carnivorous unlike a normal bears which are omnivorous. Polar bears are also the largest land predators. I find this pretty funny. What I'm trying to do here is to emphasize that this is not a normal bear market. It is a polar bear market where your environment is going to be like winter, where the polar bear will be hunting for you. Apparently, all the seals are gone now. LOL to put it in financial terms, it will be one of the worst bear market that really destroys bulk of the wealth in the world.

Again, I see no value in stocks. The economy is horrible. There is a reason why the top 5 hedge fund managers shorted the whole fiasco that we are facing. They understand the economy and there is a reason why Warren Buffett is buying into Swiss francs. Come on, I have emphasized this over and over again. Buffett years will take a very long time to come.

But jokes aside, I was looking at some stuffs and remembering how the market was going. I feel that it is very bad. Descending triangle at a very deadly level of 8000 is not a very good omen in my opinion. All the rallies have been killed lately and we should all know why.

The lost decade for the world. Sounds apt for current situation? Welcome to the new polar bear market.

Forest Fire

tohchinsheng@gmail.com (jin) — Wed, 28 Jan 2009 13:53:00 +0000

What should the smart people do regarding the financial system?

This is a burning question that everyone has in their minds. Is bailout good? Jim Rogers and Austrians alike will say no. I will throw you the word unknowledge. Majority of the people (I guess) will say that if we don't bail them out, we will suffer badly (whatever).

So I was talking to this teacher today and I explained to him about my forest fire analogy. He was mentioning to me that actually people do try to stop forest fires. They will burn down a ring of trees that is further away from the main fire. This isolate the inner burning trees and also prevent them from spreading to the good trees outside. Perfect sense!

I thought that this was pretty awesome. Two things that we can draw here.

1. Identify the end of the bulk of dry leaves.

2. Burn them first.

But by doing this, you need to hit yourself at the back of your head and say: you can't stop the fire that is burning now. This has always been my line of thought. But I guess it is easy to say but difficult to believe in.

Identifying the end of the whole bulk mess is also another difficult task. I mean, what are the good banks/financial institutions left? I really don't know. Hopefully someone can enlighten me. Maybe Lazard Frères & Co will rise to the top of the industry again.

Burning down a ring of weaker trees is also another tricky question. How to burn banks? I suppose you have to let some go bankrupt.

But ultimately, to fight against a super huge fire, you have to use fire. I know this sounds freaking fuzzy, but it's pretty cool isn't it? Common sense tells you to use water but during a super huge fire, where do you find the huge supply of water?

Desperate times call for desperate measures. Use fire against fire. I like it.

Mysterious Gold

tohchinsheng@gmail.com (jin) — Thu, 22 Jan 2009 08:17:00 +0000

I really like this bunch of people. Do check out here to know about them. I will provide a short write up about them though.

Basically, there is this group of people who went into research on gold deposits all over the world. They ask lots of questions about gold to authorities but are constantly rejected all the time with fuzzy answers.

So the story of the mysterious gold goes like this.

1. Central banks are holding lots of gold.

2. You don't earn money holding gold. So you loan them out.

3. You loan at 1% interest to banks called bullion banks.

4. They borrow these gold and sell them to get cash and buy bonds that gives them 5% interest rates against their 1% loan payable (accounting!!)

5. Yup, these gold are what we wear on the street.

6. But they have to manage their risk properly against gold price so they have to hedge by buying some gold futures.

7. Well, step no.6 is an ideal scenario. Humans being humans, like to try funny stuffs. We see them all the time.

8. Basically, there are many more reasons. But I only find one that is particularly interesting. The authorities are not very transparent about gold lending activities. They don't reveal the figures.

9. From this, there is a possible double counting error. Banks will count that they are still owning the gold. The market people will count the amount of gold they have when in actual fact, these gold are the mysterious gold that are supposed to stay in the vaults. Get what I mean?

10. However, so what if this is true? It could be my next life time because the truth is out. This is very important. It is exactly this situation that make me think for quite some time and I think I can see the picture now. My inspiration comes from Bank of England. Sterling pound is dead. But does that mean that US dollar will be good? If not, then what will be good?

I think the world currencies will be in a mess. No one will like any currency in my honest opinion. Everyone will look back at gold and this is when the shortage will be realised by the whole world because demand is going to drive the truth out and it will be an upward spiral.

Hope this doesn't sound like any self fulfilling prophecies. I just feel that such stuffs make sense to me.

Oil 101

tohchinsheng@gmail.com (jin) — Sun, 18 Jan 2009 17:11:00 +0000

I didn't have much time to write a lengthy one. But I think talking about oil is pretty important today. I remember my friend asking me to buy oil right now because he thinks that oil is cheap. I feel that there is a lot more into what's going on in the market and the oil story is pretty complicated.

My logic for oil is pretty simple. I always advocate on understanding the general environment (environmental analysis... whatever).

In my opinion, if no one likes oil, oil will not go up. No matter what's the fundamentals are like now. Of course, in the long run, people will begin to realise its fundamentals that's why most people like to buy and hold as long as they get the big picture right. In addition, people are ignoring the supply side in my opinion. Oil looks freaking cheap (not to me though)!!! But let's not anchored our mind on $140 a year ago. There are few things to look out for.

1. A good huge selling of oil. It will be great if oil hits $20.

2. The next time it crosses $50, it is time to buy oil. I have no doubt for this. Just that it might take some time before it crosses $50.

3. To some extent, I feel that Treasury bubble has to burst first before oil will come into play. Of course, don't forget that I'm a very faithful gold bug.

Speaking of gold, I shall talk about gold lending activites during mid week post.

A Mind Of Its Own

tohchinsheng@gmail.com (jin) — Tue, 13 Jan 2009 15:21:00 +0000

These few days I have been talking to some professors regarding some macro economics of today and in particular about commodities market. As usual when I talk about commodities market, I will mention Jim Rogers stand and seek the professor opinion. I hold a high opinion for this professor though.

Professor R said, "I'm not trying to be arrogant, but in my opinion, Jim Rogers is at most beginner level in the economics scholarly realm."

I like this statement a lot. At least he has a stand and is willing to stand against a professional in the finance industry or at least on wall street. The reply for me is way too easy. I could have just said, "Well, he is a billionaire?" But I didn't. I began to think about it and I totally agree with this statement. It might just be true that Jim Rogers is a newbie at economics (scholarly level).

I think through a lot and I reflect back on what I have learnt about this market. Stock market is not just any market where you trade stuffs. It has a mind of its own. Ben Graham calls it Mr. Market. I call it Mr. WTH (just kidding). In a way, how often have we seen the fact that the market is diverging away from its fundamentals for no reason. I got burnt badly trying to short a market that is simply shooting the roof back then in september even when all economic data fall within my expectation.

Dot com had a mind of its own. Housing had a mind of its own. All economists will tell you that it should not happen. Greenspan did it, Ben Bernanke did it. They are all great economists in the world but they can't explain certain things in the market. In addition, Noble prize winners failed with LTCM because the market stays irrational way longer than they can stay solvent.

I am not saying that we should throw away our economics knowledge. I want to emphasize to you that you have to always remember economics is economics and stock market is stock market. They are two different things that we are talking here and they don't go hand in hand usually.

Because

You will always see things like "News are freaking bad, Market goes up 2 percent."

Word Of The Week

tohchinsheng@gmail.com (jin) — Thu, 08 Jan 2009 14:50:00 +0000

Just a really simple and short post. I met this professor today and he told me about a word which his professor coined it in the past. It is "unknowledge"

Knowledge - what we know about the past, today and possibly future.

Uncertainty - what we don't know that will happen in the future

Unknowledge - unknowledge is not knowing what is happening now

So actually, unknowledge is worse than uncertainty! Holy!!!

I find this very interesting. In a way, one can say that we live in an unknowledge financial world. We don't really know what is happening now and everybody is acting that they know what is happening. Economists don't really know what is going on but they have to make some stuffs out because their rice bowls depend on what they say. I can't seem to find a quote about this but it is very true.

Even more interestingly, I went to see another professor and to my horror, he gives the exact statement that I find amusing.

He said, "I believe that economists have learnt greatly from the past and will know what they are doing right now." So, I question him that what happens if we stay stuck for 10 years and he exclaimed, "What 10 years! At worse it will be 2010, some economists even say that we can recover in june."

I really wish to throw the word unknowledge into his face.

The Market Never Changes

tohchinsheng@gmail.com (jin) — Sun, 04 Jan 2009 14:03:00 +0000

I will start by replying that comment first. It is really nice of you to reflect back on what you have said. Hopefully, I can give you a good reply. Btw, I'm from IIC, are you from IIC also?

Interestingly, you said that "If all things go right, I forsee another steep fall before the upwards wave begins."

Well, you didn't really justify why another steep fall. But yes, I definitely agree that commodities have to go up. In a way, I like what Jim Rogers said about commodities.

1. If the recovery was to take place and the economy turns better. Commodities will first come out of the hole much earlier than stocks. For example, if Toyota's business is picking up, it will first be reflected in platinum prices because they will have to buy more platinum first in order to produce cars. By the way, platinum is used for catalytic converters in cars. Platinum prices will shoot first before Toyota prices shoot because it takes time for the cars to be produced, it takes time for the salemen to sell their cars. It takes far less shorter time to buy platinum.

2. Actually, I think demand concern is overblown. In a way, it could just be an excuse for a correction. In the market, sometimes fundamentals are just distorted. Even though the facts may be there about demand and supply for commodities, prices may just stay low for a period of time for no reason. I feel that supply side issues are totally ignored (I don't know why, maybe people are short sighted). Again, no one is going to open new mines. No one is lending farmers to buy more fertilizers and plant more agriculture. I remember reading somewhere that if oil prices stay this low, some producers cannot meet their margins. By my minimal knowledge, supply for such cannot be increased fast enough to meet demand when the demand picks up. Hopefully I'm correct about this.

3. To sum up, I just don't understand why will people want to buy stocks with no fundamentals at all. Commodities have their fundamentals. Stocks? So, I feel that people should re-think their "value investing" to some extent because in any case, if the economy is to pick up, commodities will be shooting up first rather than stocks.

Hope to hear from you soon. =D

The Same Old Market

Well this is the best I can find. A 30 year chart on Treasury bonds yield. Actually it seems to me that we have a crazy bond bull market as well that stretches back to late 1981. The highest point (highest yield) was in late 1981 and yields corrected in some ways before bond prices continue its crazy bull run. Exactly the same as stocks, and we have a very fast leg down this time round. Remember I talk about acceleration phase in price behavior. Somehow it is de ja vu isn't it. We see that in the stock market and now we are going to see that in the bond market. But how far more do we need to see in this leg down before it finally corrects, I'm not sure about it. I'm a lousy trader. I bought put warrants when HSI was 22000, not at its all time 31000 high. So I think it is alright for the market to show us the pressure before we do anything.

Again it reminds of a fact that the market never changes because the people that participate it ever change. Life's like that.

I Invest Like Warren Buffett

tohchinsheng@gmail.com (jin) — Sat, 27 Dec 2008 16:52:00 +0000

Many people including myself are fans of Warren Buffett. Well, he is the greatest investor of our time and that's a fact despite what's happening lately. Alright, I shall go straight to the point.

"Losing" His Midas Touch

Let's talk a little about criticisms on Buffett lately. To put it in simply, he is losing money. He bought some derivatives which showed him quite a bit of paper losses. He bought Goldman Sachs which isn't doing that well either. He is holding tons of shares that are beaten to some cool values. So many people, like those during the tech boom days, are coming out to criticise him. They are condemning his buy and hold and tons of stuffs.

The criticisms are pretty obvious and I totally disagree with what they say. I see Buffett differently. This is a man who lives in a simple middle class house, drives a simple car and contributes back to the society. In other words, he doesn't care about money. Of course he will probably feel pissed that he loses money through investing. What I mean is that money is merely stakes in his eyes. Somehow, he never loses these stakes (I wish so too...).

But what's happening today is something different. Imagine this on morning papers: "Buffett is selling most of his holdings". What will happen? What I see is a great person who is trying to emulate J.P Morgan during the 1907 Bank crisis. Remember that Buffet is the one who criticizes derivatives, dot coms, persistent trade deficit. He knows what's going on. There is also a reason why he is speaking out so often these days, telling people that he is buying certain stocks and giving his opinions about the future of the economy. He hardly said anything in the past. This is so unlike him. There is definitely a reason why he is doing certain stuffs these days.

"Investing" Like Warren Buffett

But I feel that there is a dangerous trend among investors today especially those young ones. I actually talk to quite a number of people and this is what I feel. Maybe I'm a little extreme but this is just me. Most people normally claim that they are affected by Warren Buffett. They "see" values in stocks. They are optimistic for the long run and many more stuffs that are related to three words - buy and hold. In fact, they have simplified "Buffettology" in these three simple words.

Quote Einstein: "Everything should be made as simple as possible, but not simpler".

There is so much more into a real true Buffettology and yet most people who claim to know what value investing is, simply anchor their mind on buy and hold. I'm not trying to discredit buy and hold. When it is time to buy and hold, you simply do so. When it is time to go on the short side or do some trading, then you ought to forgo buy and hold. Buffett is so brilliant because he can see the great bull run in the 1980s. He can probably see the future of the great nation USA. The nickname Oracle of Omaha is so true.

Looking more in depth, there is a reason why Bershire has been holding lots of cash for quite a period of time. I don't know. Maybe I'm so wrong. Maybe by printing more money can really solve this whole pile of mess which is created by a whole lot of money in the first place. It happened during the Great Depression. It happened with Japan. It is happening now. It seems very obvious to me though I'm just a normal investor from a normal local university in a tiny island on the whole map.

We enjoy the process far more than the proceeds.

Warren Buffett

The Last Bubble

tohchinsheng@gmail.com (jin) — Sun, 21 Dec 2008 14:55:00 +0000

U.S Treasury

Background Information
You need to know one thing. Yields on all the treasuries are at historic lows, very close to 30 years low. Yields for 3 month treasuries are negative. It means that you will lose money by putting money into it. It sounds very funny. But it is the way it is right now. From another perspective, U.S govt is getting money from you for nothing.

Deflation
The only reason I can think of to explain current situation is deflation. Supposed during deflationary times, people want to hoard cash. They will want to put into treasuries. Bonds will be more valuable even when yields are at record lows.

It is also pretty much a deflation scenario that we are probably facing right now. But here's the catch. What if it is a deflation now/inflation later scenario?Rates will go up or dollar will fall drastically. Whatever the case, it will force people to sell a whole lot of treasuries and that is going to drive inflation up into the stratosphere.

As Weird as it sounds...
Stock market picks up. Investors start to sell their treasuries with low yields. They go back into stocks. Yes, treasuries will still fall but at least it is a sign that the economy is picking up and money is going back into investment of goods. Ideally speaking, this sounds logical. So maybe it is a bubble that is worth having after all.

Greenspan/Bernanke put
I mention about Greenspan put previously. I think Bernanke has inherited his legacy. In a way, men believe that they can control things. In fact, men want to control things. But sometimes, you simply can't control them. Both are creating bubbles that they cannot control at all. For the current trouble with treasuries, with yields at record lows, Bernanke is making a crazy promise to held interest rates at such low level for a long period of time.

The implication is that should things pick up, Fed will be pressured to raise interest rates again. This will kill all the bond holders at today's low rate.

When the treasury market collapses…
It makes sense for a dollar collapse as well because there is going to be this huge supply of dollars lying around. Stocks will crash as well (again!?). I suppose this is the implication of a dollar collapse. But actually, stocks may bottom with this crash.

A straightforward thing is people will buy a true safe asset - Gold. It may be a new tentative money system while people are trying to sort things out.

Something about Great Depression

I wiki-ed recovery of Great Depression. It is a freaking short paragraph. But something interesting about it. It is said that some economists attribute the recovery to the devaluation of dollar against gold.

Maybe, Bernanke wants the dollar to collapse. This sounds very fuzzy. But supposed Bernanke realises that the current situation is so bad that to flush the whole system out, you have to flood it with more money. Let the dollar collapses and restarts. Maybe they are hoarding lots of gold. I don't know. Lots of conspiracy theories over there.

Nonetheless...
we can profit from this. It is the only four letter word that glitters. Starts with a G, ends with OLD. By the way, there is an incident that happened recently. It is called backwardation of gold. I still don't quite get it fully. But a permanent backwardation reflects a situation where no one will want to sell gold. Very interesting piece of stuff. Hope to share with you soon.

Are You Getting It?

tohchinsheng@gmail.com (jin) — Wed, 17 Dec 2008 08:37:00 +0000

I have been asking myself this question about whether I'm getting it. I mean whether I have grasped what's going on with the market so far. To some extent, I just want to affirm my stand again and be fully assured before I make my next move. I think that in stock market, you should take some rest once in a while. Even Jesse Livermore goes for some fishing after some trades and toally ignores the market.

Reflections

Let's reflect on what have happened so far and looked at things from a different point of view. We shall first look at stocks.

1. 2004-2007 Jul

First of all, we have some crazy bull runs from 1980s. It was stopped momentarily during 2001 dot come bubble. Afterwards, it was continued by some nice bull market. Things are looking great. China markets post gains that are simply mind blowing. Everyday, the market is making new historic high.

2. 2007 Jul to Aug

Just when things get too rosy, Bear sterns showed some signs of distress. Two hedge funds were closed. More companies are revealing the sub prime problem. Market corrected 10% for the US markets and 20% for the Asia markets. For example, STI bottomed at 2800.

3. 2007 Aug to Nov

I feel that there is a learning point here. I believe that in the market, there are always signs to look out for. They are very subtle signs which are very important in understanding the environment (remember environmental analysis...). In matter of months, the market shot straight up. You could simply take a ruler and draw a straight line upwards. It will be the graph for most markets. For example, STI shot to 3800. 30% of gains in matter of months.

According to my fuzzy logic, the end of a bull market is always marked by this acceleration period.

Alright, not a very nice picture over here but hopefully it's understandable. Normally in a bull market, gains are steady and small. But at the end of the bull market, there will be this last burst of fire. The last spur that the market will make and everyone will go crazy buying the market. It is very obvious to most that it will not go on. But this is the stock market.

4. 2007 Nov till today

Actually if you apply this theory right, it is the same for the bottoming process. Remember I mention that only when everyone thinks that there is no bottom and begins to sell, then it is a bottom. In a way, I'm also looking for this acceleration stage for the bottom. The day came in the form of a limit sell down for futures. It is not a very strong signal for a pure bottom of course but nonetheless, it is good enough to show a respite in the market.

Commodities

I guess everyone is quite familiar with this short timeline for stocks. The main point that I want to highlight in this post is about commodities.

1. Jan 2007 to Jul 2008

Basically, commodities were scorching hot. Oil went from $50 to $140. Gold reached $1000. These were history. I need to bring in something here - King Dollar. USD went the opposite way of course.

I will like to make some assumptions here actually. This dollar, oil, gold and most commodities are related. Of course they are! But looking more in depth, I will like to assume that a lot of people in particular hedge funds are buying oil and shorting dollar. Keep this in mind. It sounds really simple but I feel that there is some truth into this.

2. Jul 2008 till today

Oil tanked. Dollar rallied. Why? Again, in matter of months, oil dropped from $140 to $45. A bubble in oil initially? Maybe. But looking from another angle, remember that many people are buying oil and shorting dollar. Supposed they are being leveraged and are holding lots of other stuffs that never do well, in particular, stocks.

Because of the losses in other areas, they begin to unwind and sell off some of their positions. So they are selling their oil and covering the dollar. This leads to a massive chain effect. Oil dropped slightly and dollar rallied. This actually forces others to sell more oil and cover more dollar. I'm assuming that lots of money are tied down to these two positions.

So in the end, there is this huge unwinding of commodities and dollar trade that we are seeing right now and we have dollar strengthening and oil at $45.

The catch is this.

Question No.1: When you look at the dollar, is the strength of the dollar justified?
Question No.2: When you look at commodities, is the selling justified?

Answering question No.1 is simple. When you have someone that keeps printing the paper money and a country that is hugely in debt, you will have the most useless piece of paper in the future.

Question No.2 is tricky. True enough, demand will fall due to recession blah blah blah. But have anyone considered about supply side issues. Farms will close down, no one will open new mines, no one to lend money to prop up productions. All these events take time to surface. Demand is straight forward and simple and this is why most people ignore the supply side issue.

In conclusion, I believe that the commodities are grossly oversold. Of course they can go lower. The strength in gold recently reflects what I am preaching thus far. There is certainly some truth in the demand for gold. But the commodities are still quite shaky at the moment. Time is needed for money to go back in because supply issues will surface in the future and supply may fall much more than demand when you look at stuffs like agriculture. This is probably why Jim Rogers said that stocks and commodities prices are inversely related (though it is not reflected today), I believe in the long run when stocks turn down somemore, commodities will rally and that's where the money will be in because there is some truth in the commodities rally.

The Last Bubble

The treasury market is pretty funny at the moment. Yields for the 90 days notes are negative.

This is the two year chart for the 30 year Treasury bonds. Logically speaking, I don't understand why will people want to lend money to the US government. There are of course experts who state that the potential deflation disaster is spurring people into safe haven like bonds to preserve their money. I don't like the word "preserve".

Why will you want to hold an asset that is grossly overpriced (90 days notes yields are negative)? On top of that, you are getting dollars back that will likely to plunge badly in the future. By my own common sense, price of the notes will not go up that much to offset the fall in dollar because yields for some ntoes are way to little. Who in the right mind will buy them?

I believe that all the money are going into the treasuries at the moment and this thing has to unwind. It takes time to unwind. When it does, I think the last bubble in the financial market will be burst and commodities on a whole will rally.

I will study more about the last bubble and make a detailed one on during the weekends.

The Big Picture II

tohchinsheng@gmail.com (jin) — Mon, 08 Dec 2008 08:15:00 +0000

It is about time to consolidate some thoughts and look at what's happening. I will probably enter the market again pretty soon. This time round, I shall not throw in any economic jargons. It is just plain straightforward common sense investing.

Glittering Gold Again

Finally it is back. Gold in times of possible crazy deflationary period. I don't know. Remember one of the older post where I actually say Gold might fall to 700. I can't explain or even convince myself why gold will fall to 700 when interest rates keep falling and dollar keeps falling. It is super illogical to me. In the end, dollar simply skies through the roof and blows my mind away. I certainly did not consider such a scenario because it didn't make sense to me. But again, in the stock market, anything happens.

I was reading somewhere about bond yields can't stay at this low level forever. However, this makes sense to me. Who in the right mind will want to hold US treasuries? So demand for treasuries have to go. In a way, you can short some bonds but it is so out of my field. I'm actually reading about Charles D., the legendary bond trader. Hopefully I can learn a thing or two about the bond market.

So putting bonds aside, I just think that the only avenue that people will want to park their money in is gold. Holding cash just doesn't make sense. I really don't know if the dollar will just collapse one day. If you seriously like dollar, I can't stop you. So unless you can propose to me another currency, I believe that gold is one of the best asset class in the future and even now.

Gold simply has this mysterious lure. I am lured by it. I know Indians love them. I just can't see how the demand for gold will go down. It will stay flat at most.

Stocks

I like China Stocks. Alright maybe I shall change this blog to a Jim Rogers fan blog. LOL

On a whole, I don't really like stocks for the long run as mentioned before. But certainly there is more to the upside and I support buying any index. I like HSI.

I am keen on buying DJI 9500 DBeCW090323.

Again I have always emphasized on this before. When things go up, everything goes up together. It is just that which one goes up more. I really can't pin point any stocks to you. I just feel that buying the index makes a lot of sense. To some extent, I can highlight some stocks like consumer staples, Walmart, and this is all I know. I still don't like any banks. AIG was back on spotlight with some stupid speculation losses.

Buy some index stocks or bluechips. But again I don't like any stocks for the long run. I think stocks will go down badly and stay sideways.

Commodities

I'm a fan of Jim Rogers. What can I say? Actually gold is also a commodity but I want to highlight it separately.

You can buy them now or wait a bit first. Most of us don't have the staying power like Jim Rogers. The margin will probably eat us all up easily. Again, buy some agriculture.

Conclusion - The Big Picture

I am a bear. I don't like any stocks. Bailouts don't really solve the problem isn't it. What will happen down the road in a few more years? When the banks are still stuck? Who is going to bail the Fed out? It is pretty funny isn't it? I really don't know how people can be slightly optimistic about the future. We are really going to see crazy valuations down the road. Dow at 5000? STI 1000? HSI below 10000? Do look out for weekend post. I will try to consolidate everything that has happened so far in an interesting manner.

The future of money is commodities and in particular, argiculture. You ought to own some.

Mid Week Pit Stop #28

tohchinsheng@gmail.com (jin) — Sat, 06 Dec 2008 15:44:00 +0000

Men Never Learn From History

Last week, I stated that some people believe that the great men alive out there will draw lessons from history and apply appropriate measures. I will like to reiterate that human nature never changes. In a way I'm still quite pissed with the idea that men will "learn" from history. So let me give somemore concrete reasons. This is actually very important for investing in stocks and I will also explain why as well.

1. Greenspan Put

This is actually a famous phrase in wall street. It just means that no matter what goes wrong, the fed will rescue you by creating enough free money.

i. Crash of Oct 1987
Fed cuts interest rates three times in six weeks.

ii. Asian financial crisis, LTCM fiasco, Russian Default
Fed cuts interest rates three times in seven weeks

iii. 2001, worsened by 9/11 attacks
Fed cuts interest rates three times in seven weeks again, and later on bringing the interest rates down to 1%

iv. Only one chairman presided over a longer period of negative interest rates than Greenspan did. He was Arthur Burns. It took Paul Volcker (cool, Obama is smart enough to hire him) a nasty recession and decade of interest rates to repair the damage. By negative interest rates, I meant inflation adjusted short term rates, which simply means, money is free.

v. 2007 Housing bubble. The rest is history.

So...
If you were to ask any statistician, they would tell you that such bubbles and market crashes happen only once in many many years. We have tons of them in this century. Linking back to the forest fire analogy, putting out the forest fire immediately by flooding more leaves on it sounds awesome and effective.

But one must realise that the bubble gets bigger each time. With interest rate this low for many months to go, it will only lengthen the problem and we will have the great inflation of the 70s back again. Whether you are burnt to death or frozen to death, you are still dead. But I believe we might get both. In a way, my quote on Greenspan Put is to highlight the fact that lowering interest rates will resolve the problem only for now. During those big bubbles, it seems to be the best policy because the economy continues its growth afterwards. But it does not solve the root cause of the problem and it only leads to another bigger problem.

2. Smart people aren't that smart after all

Well, LTCM fiasco was caused by a group of smart people including two Nobel prize winners. Smart enough? They nearly brought the financial system down with them. They over leverage themselves, underestimate risks back then. Sounds familiar? All these are common sights in today's problem. Does men learn from history?

3. No one listens to real smart people (I'm not refering to myself =D)

Felix Rohatyn. I doubt many people know about him. You can read The Last Tycoons to know more about Lazard Frères & Co. He is the only man that criticizes on junk bonds in the 80s and no one listens to him.

Warren Buffett. No one listens to his shareholders meeting and the term that he coined - financial weapon of mass destruction.

Top 5 Hedge Fund managers (Soros, Paulson etc). Actually, they hardly speak.

Toh Chin Sheng. No one listens to me. Alright just kidding.

Conclusion: You have to learn from history. Based on history, commodities will go up. I like argiculture for the long time like what Jim Rogers said. I totally agree with him. Good times, bad times, you still have to eat. I dislike stocks for the super long run. Of course there will be bear market rallies but again, you can try to eat like chicken and shit like elephant.

Word of The Day
Seigniorage
Refers to the persistent overvaluation of a reserve currency

Eat Like Chicken Shit Like Elephant

tohchinsheng@gmail.com (jin) — Mon, 03 Nov 2008 01:15:00 +0000

Alright, finally I get a computer to work with. Exams are finally over but my computer is spoilt. I haven't been following the markets lately though but hopefully I can write something that make sense

Eat Like Chicken Shit Like Elephant

I was preaching for a bottom these days. Well, I just think that things take time to unwind and its time for a respite. Btw, do you understand the meaning of the title? =) I like this quote.

1. Technical Analysis

If we look at things from the technical point of view, Hindenburg Omen is over. From what I know, Hindenburg omen lasts until somewhere in between November.

2. Fundamental Analysis (hmm....)

The economy is horrible, period. But then again, stock market is just a funny area where even though things are bad, there will still be ups and downs in the market. But again, I just think that events will slowly unwind... maybe...

3. Environmental Analysis (cool)

I still can't forget the limit sell down day for DOW futures. I just think that it actually signals an end to current situation. Even though there was a day where it broke 8000 afterwards, I still feel that the crowd is more on the buy side now.

4. What Have I done?

I suppose lady luck smiles at those who are prepared. Alright, maybe I'm simply lucky. The mailman decided not to go for any call options in the end. In the end, I will be in for a crazy ride if I had bought any calls. Call me lucky.

5. Some Random Thoughts

i. Eat Some Chickens now?

Even though it's a very volatile period now and its very good for traders. But I think that most people will just be in for some small portion of chicken meat. I still think that big money will only be made in big swings not intra day and day trading.

ii. Shit Some Elephants

In one sentence, I just think that for day trading, you will be shiting lots of elephants while hunting for the chickens. Fair enough?

6. Let's Be Straightforward

I was reading some article about the current situation. Someone actually quotes some expert writing and says that we will not enter into another depression of the 20s. I was furious when I saw the 1st reason.

He quoted, "Experts have learnt from the mistakes of the past and will not repeat them again!"

I quote myself, "What kind of rubbish is this!"

Stock market never changes. Bubbles come and go. Crowds get mad and go into buying frenzy all the time even though things alway repeat itself and it is apparent that a bubble is waiting to be burst. Has anything changed in the stock market? NO. The reason is simply because human nature never changes. Complacency, greed, ignorance blah blah blah.

He quoted more reasons afterwards but I can't be bothered with the rest after reading the first one (I assume its the most important one).

7. What's my Outlook?

I am waiting for the mailman to be back in Singapore. I'm still more inclined towards the call side for a while, though I'm a crazy bear about many years down the road.

Thanks to those who will come back regularly to check this blog. Hopefully I can get a new computer soon and write better and interesting posts.

Cya

Eat Like Chicken Shit Like Elephant

Jin

Mid Week Pit Stop # 27

tohchinsheng@gmail.com (jin) — Wed, 29 Oct 2008 03:51:00 +0000

"It is not what you know, but whether you know yourself"

This has been my line for the stock market lately.

I believe that in the stock market, it is not what tools, knowledge or information that you have or know but rather it is about whether you know yourself; your own emotions. The biggest enemy that one faces in the stock market is usually himself, no one else.

My Final Thoughts...

Just a recap on my previous post, I got this feeling that friday might just be a bottom and for the first time I was comptemplating whether to clear all my put warrants.

On Monday, I was prepared for a huge gain in HSI. Of course, I can't do anything since sgx was closed due to deepavali. But surprisingly, HSI dropped 10%. The US markets didn't do as badly as the asia markets.

Tuesday, I was still undecided. It is not because HSI was up 14% on tuesday, but because I was still unsure about what happened on friday. At night, for the first time, I was thinking really hard about whether to sell or not. For the US markets, consumer confidence was horrible. Home prices were horrible as well. But Dow closed up 10%.

Wednesday morning, I begin to reflect on what I have done so far and I realise something. Why am I thinking so much over it? I reflect on the two particular days where HSI rallied 20% in total because of bailout plans. I was calm and relax and totally ignored what the market did because I knew that the selling is not over yet. For four days, I have been overwhelmed by my emotions bit by bit and I know this time, something is wrong. Intuition at work? Maybe, but friday limit sell down was the key for everything.

I sold all my put warrants in the morning. Of course, HSI closes flat at the end of the day.

Today as I'm writing now, HSI is up 10%.

Lesson To Learn

I was so close. I was so close to making the mistake that I have been making 1 year ago. I was so close to losing a huge chunk of my profits. Of course, I lost some of the paper profits. I could have sold everything on tuesday morning but I didn't.

I needed to see a panic selling to confirm a bottom and I did see one but a part of me chose to ignore it initially. I almost fell into some sort of self fulfilling prophecy and it could have killed me today. In the end, my worries on friday limit sell down was proven right.

I think we have a bottom here. It is not a real bottom in the long run of course, but it will be a bottom as of now and we have some upside to catch

What To Buy?

1. Buy some commodities. Buy some oil. I believe that the selling of all commodities is due to the deleveraging of hedge fund rather than real fundamentals.

2. Stocks wise, buy anything. I mean everything should rally, anything should go up. Buy some oil related or commodities related companies like Noble or Keppel corp.

3. For simplicity, just buy the index. I like HSI for its volatility. I think we have the upside of HSI at 17000. I can see dow picking up to 10000. I don't even think that tonight GDP numbers will affect anything. I'm going to buy some HSI call warrants. But I'm waiting for the green light from the mailman. Even after HSI is up for 10% today, I don't think that it is too late to go into it. You can still catch a 3000 point to the upside.

What To Sell?

1. There is only one thing. Sell all your lousy stocks into this rally. Of course, I'm not telling you to sell today but make full use of this rally.

One More Thing...

I will like emphasize on this. Know yourself. Understand your emotions. It is not easy. Even after one full year, I'm still susceptible to it. I firmly believe that once you know yourself, once you know how to handle your emotions, you will be there.

"It is not what you know, but whether you know yourself" - Jin

I Think I Think I Think (still thinking)

tohchinsheng@gmail.com (jin) — Sat, 25 Oct 2008 15:05:00 +0000

I really think a lot.

I have been thinking for one whole day on whether friday was a bottom.

Some Thoughts So Far

1. It was a panic. Well, futures were traded to limit down.

2. But there was no huge sell down that really clear all the selling pressure.

3. To some extent, I could view it as the selling pressure is not strong enough to push prices lower anymore.

4. For the first time in many months, I am considering selling my put warrants. I mean it. But monday is closed so I can't do anything.

5. HSI is probably going to shoot on monday. But again, there is nothing I can do about it.

In conclusion, I will make my decision on monday night anyway. Nothing much I can do. Fed's meeting on wednesday, GDP numbers on thursday.

I will want to talk about something else this week - Derivatives. I will try to do it in a structured manner, something that one of my college tutors commented about. Hopefully, you can learn in a much better way.

Derivatives

Let's begin with some definitions.

Derivatives: They are loosely defined as papers that derive their value from other underlying financial instruments. So a derivative on oil will derive its value from the real oil price. Usually, you only have to put up a small margin to own a piece of paper that has a notional value of say 10 times your margin. Simply put, to "virtually" own 100 barrels of oil that are worth 1 million dollars, you only have to put up 100k to your broker (10% of the value) for example.

What forms do they come in?

They are mainly your futures, options, warrants, swaps and forwards. Well, usually people use futures and options more often than the rest.

What are the common uses?

Well, money making instruments? By right, they are meant to reduce risk. For eg, someone is holding huge amount in stocks. He is quite afraid of a potential selldown but he doesn't want to sell away his holdings (don't answer me why). So, he buys some derivatives, put options to be exact, such that he will reduce some of his losses if the market turns sour. They usually call this hedging.

But, by left...

They have been used for speculation purposes mainly. Speculation is the key word over here.

So... why is it so dangerous?

I have mentioned OTC derivatives before in the possible demise of USA part I. So do refer back again.

More Insight Please...

This is something that I have thought of. Something really fuzzy and yet, I think it really explains why it is so dangerous.

From a normal person point of view, when he faces derivatives, the first thing on his mind is the gains. Believe me, the potential for gains totally out-weighs the risk that everyone knows.

The reason for this is pretty simple. Most people tend to believe that they will be on the right side more often than on the wrong side. They will picture how much money they are going to make with it rather than how much money they will lose and so on.

Furthermore, we all want to make money. Greed is "good". Imagine this, I buy a stock, thinking that it will go up. It does go up 10% in the end. But if I buy a derivative on the stock. If the stock goes up 10%, I earn more than 50% (for e.g.). The mentality is this - for the very same position, I earn more using derivatives (I know about the losses but...). In fact this is exactly what I feel when I first come in contact with derivatives. I go for more volatile ones such as short maturity dates, out of money warrants. I lost quite a fair bit =).

To sum things up, it is human nature as work. We, as humans, are overwhelmed by greed.

Even More Insights - Bank's Perspective

Using this analogy, we can try to think from the standpoint of a bank. Well, banks are supposed to manage risk properly. They handle lots of money. Think of it this way...

1. The world economy has been good.

2. Stock market has been on a crazy bull run since 1980 for 20 years.

3. There is too much money everywhere because money is no longer pegged to gold anymore and there is a printing machine.

As a bank, during rosy times, where everyone is earning money and competing how much money you earn, derivatives become a money making tool more than hedging tool to them. A bank will worry more about how much money they make rather than how much money they might lose. They anchor too much on their past successes and are getting complacent. Because of the competitiveness among the banks, the only way to better one another is through derivatives. Banks are not only hedging their positions but they are also making these derivatives bulk of their holdings as well. Banks become greedy to some extent. Not only do they purchase normal derivatives, they go into more unique, creative derivatives to complicate things.

The Financial System

The whole system has turned into a gambling den. Everyone is betting heavily using these derivatives. Everyone has turned to a speculator because of past successes and greed. The idea of doing the exact same thing that yield two different results where the latter is much better, covers the underlying risk that comes along with the latter decision. Again, people ignore the other side of the coin. They feel that one side is much heavier than the other.

Today, we are faced with a global financial system meltdown because of greed and complacency. Yet, these people are not learning their lesson. They plead to others to save them.

Hopefully, this is a much better explanation for derivatives. The previous is good as well, just that it covers another part of it and its pretty dry.

I will make my decision on monday and probably put an update here.

P.S: sgdividends, my msn is xeron_knight@hotmail.com. Feel free to add me =) Thanks