Mid Week Pit Stop #21

1 Year ago...

I remember it was April, when the markets kept making new highs every week. I was like looking at everything and telling my frens that the markets are going crazy and it shouldn't be like this. China was like up 170% for a year or so, STI was up 25% in a year. There is only one thought in my mind at that point of time - STOCK MARKET WILL CRASH...


Well, when subprime comes in july, I begin to study the impact of housing on the US economy. Also, this is also about the time when my investment begins to form. Mr. X, the mail man (missing in cornell), one more guy (haven't thought of a nickname for him) came together with the same mentality - stock market will crash.

We understand the housing implication; the intangible side of credit, something that cannot be built overnight since its a matter of trust. The markets pick up real fast after Aug, and we decide to short the market heavily when STI was around 3600. The rest is history.

My point of telling this story is that sometimes, its quite fruitful to do things in a group especially when you are doing it with a bunch of people who think the same way as you. Of course, we met lots of trouble - getting caught in a crazy last burst of fire from the bulls, getting killed by time decay on our warrants, lots of emotional ride here and there. But it was a good learning experience. We understand what's going on, just that we don't know how to make full use of it.

Coming to present, we met again on monday night and were looking at the Dow closing at 500 points down (yes, we were still watching cnbc at 4am). Even though, we were late for a year and didn't have a position in the market as team (I have on my own of course), we knew that we came together as a team for a good reason and the initiative was very right in the first place.

So I urge you to learn from your friends, maybe you can form a team as well to assist in your learning. We can form a new team as well if you wish to learn together with me. I don't mind. The whole purpose of this blog is to educate people and provide a new learning platform anyway.

Looking at the market now...

Again, yesterday night was not panic selling as well. There is more to come. But be prepared, the bottom is coming soon. Well, I don't know how low HSI will go but I'm pretty happy to sit on my put warrants anyway.

I have lowered my target for China to about 1700. I can't really picture anything for HSI and STI. Dow target still stands at 9750. Remember, we want to pull out only we see panic selling.


Gold is doing good as well. Buy some gold for long term purposes.



The stock market continues, and investors continue, to want to believe that what they’ve seen in the past over the last 20 years is what they’re going to see in the future. They refuse to face the truth.

Anonymous

Here We Go Again

Actually, I don't really like my army days but "here we go again" sounds catchy and it is very applicable to what we are going to see and what we ought to do.

Well, it's the same story. Short anything you see, in particular financials. Short the dollar. I have covered my Lehman on friday. Not much of a difference between $3 and $1. Learning from what happened to Bear Sterns, Freddie and Fannie, get out when you can. But Tuesday is Fed's rate day. We should see Fed doing nothing with the interest rate or even a small cut of 25 basis point.

PAUPER-DOllAR


Pretty much expected, dollar is beginning to revert back to its bearish mood. This is a daily chart. You can actually see a shooting start at index level of 80.5 (I know I mention 80 but give me some allowance please). Again, if you go back to the fundamentals of dollar, why would anyone want the dollar. We are probably going to see some sharp correction in dollar soon. I have a short term target at index level of 75. Do me a favour, throw away your dollar.

GLITTERING GOLD

1.If you still remember, I mention about shorting gold all the way to $700 when it failed to hold at $850. Honestly speaking, I lost faith in that view when gold shot back to $800. Nonetheless, even though there is a possibility that gold might still fall despite of dollar fall. Possible but unlikely.

2. No.1 is just something that I wish to remind you of.

3. Regardless of anything, my super long term view in gold remains the same. If you actually look back all the way to the 1980 where we are crazy inflation and an oil spike, gold went into a crazy bull market - almost vertical. Of course, I advocate a great deflationary period in front of us, I still like gold and believe that it will behave the same way during the great inflation of the 80s.

My Position

1. Some gold if my money allows me to actually

2. Lots of HSI put warrants (super long term ones, I can't stand the time decay thing). I might pull out when HSI reaches 18000 actually. Really have to see how the general environment goes. It is very difficult for me to give a fix target.

3. Short and Hold basically. Anything in sight. Index, financials (like AIG, Merril Lynch), some china stocks (well for those from singapore, I reckon Cosco going all the way down to $1)

Last But Not Least...

HERE WE GO AGAIN, SAME OLD SHIT AGAIN...

Latest Update

In my opinion, Dow losing 500 points on monday is not panic selling. So please don't cover your shorts or go in and buy some things thinking that it's "cheap". We still have more to go!!! Here we go again... ...

Remember I believe Dow can go below 10000. So, HSI, STI and Shanghai targets must all be adjusted as well.

“The market today is dominated by much younger people who have not experienced a bear market.”

George Soros

Mid Week Pit Stop #20

The Bottom That We Are All Looking For

Alright, this post is for everyone. New learners, old time professionals, children of all ages whatever...

I really think that we have a bottom. But some signs have to be met.

1. Bankruptcy!!! Well I learn this from Jim Rogers. I was watching a video of his and he was telling people about airlines. He was bullish on airlines when oil was $140. Honestly speaking, my eye brows were raised. But he mentioned that bankruptcies mark the end of a bottom and many airlines were bankrupt already. I probably mention this before but I need to emphasize this again because it is very applicable now. Fannie and Freddie are sort of considered gone. Lehman will probably be next from the way things are going (but it will be like Bear Sterns case). Maybe more financials will go as well, like MF global or something.

2. Panic Selling. Even though I think we will see a bottom soon, but this bottom will be accompanied by a period of panic selling. Real crazy selling, maybe 1000 points off DOW in a week? Something of that magnitude. Like what I have mentioned before, I wish to see HSI at 17000, STI at 2400, Dow at 9750, Shanghai at 2000 or even below 2000.

3. Catalyst is the key that marks the end of a bottom. I have mentioned about the emergency rate cut before by the Fed that marks a mini-bottom. We have a 2% interest rate now and I will not be surprised if they bring it to 1% to save the market. =)

4. Few scenarios that I picture. Might not be true but just to give you some guide on what might happen.

a. not much news -> no rate cut -> market sell off -> emergency rate cut (not sure about this, but it did happen in 2002)

b. crazy bankruptcy news like lehman and more -> panic sell off -> emergency rate cut/ normal rate cut on 15 sept to 1%

c. nothing happens -> things resume as normal (no panic selling and we are at a bottom already) -> I'm very WRONG.


It isn't as important to buy as cheap as possible as it is to buy at the right time.

Jesse Livermore

The Market Is Really Bad

Recently, I have met some people that are interested in stocks and are telling me that the market is really bad right now. Some of them asked me what am I holding right now and I replied, "Put Warrants." Somehow, most of them were surprised. It makes me think about the mentality of those people and a theory that Mr. X (well, Mr. X wasn't surprised with my holdings) tells me about - Anchoring.

Well, we have to think through a few questions before we move on.

1. How bad is considered bad? Bear turf? 20% from 14k peak? China at 2200 from a peak of 6000 last year?

2. Can a bad situation get worse? If so, can market go even lower? Can China go below 2000?

3. This question is quite interesting. Is it really a bad situation that is being justified in the first place? Could what we are seeing right now be the truth in the first place and the last 2 year bull run wasn't really justified?

People are used to anchor their judgement on certain significant point or events. The reason why they say that the market is really bad now because they anchor on the peak level that we have seen in the past. HSI 30k, STI 3800, Dow 14k... All these levels are close to mind blowing and paint a very rosy picture about the future. When one look at the indices right now (HSI 20k, STI 2500, Dow 11k), the first impression that one forms is a very bad market. Something is wrong here isn't it?

The next comment that usually follows a very bad market by those people that speak to me is, "I think the prices are very cheap right now." Oh man, what is really considered cheap? Again, most people anchor their judgement on prices that could be too high in the first place isn't it. Most people fail to consider the 2nd question because they are illusioned by the crazy bull market in the last 5 years and the amazing century that stock market has been through. Because of this very reason, most people don't really question a bull market and there seems to be a social stigma with bear market. It seems logical to most people for the market to go up in the long run that's why they are going to "invest". But the fact is, there is 2/3 of the time that the market doesn't go up.

On a side note, success of Warren Buffett could be the undoing of most young investors right now but I shall not be too explicit. I am still a fan of Warren Buffett. =)

Alright, time to see how bad the market can get...

The Dollar

The dollar index stands at 79 last week and is very close to the 80 resistance that I see in the dollar. If we actually look beyond next week, we have Fed meeting the week after. I remember seeing a headline on Cramer calling for rate cut again. Don't really like to do this as it gets pretty self-fulfilling, but could it be possible that Fed will call for a cut as the strengthening of dollar recently has given them some leeway to do so? Everything falls in place to some extent.

Dollar Reaching Resistance soon -> Fed Cuts Rates -> Dollar Loses Steam and Falls

We could also add something to the equation.

Oil price reaching legendary $100 -> Dollar reaching resistance soon -> Fed Cuts Rates -> Dollar Loses Steam and Falls -> oil price bounces above $100 -> commodities rally

Can't really see the light at the end of the tunnel yet, I'm still on the short side which I believe is the right side. =)

Financials, Where Are You? I Can't Hear You

Alright, we are actually going to hear from the treasury about the fate of Fannie and Freddie. Again, there is not much news about the rest. You have lots of speculation and rumours about Lehman and that's it. Nothing Else.

Stocks Challenge

Few stocks challenge games are coming up next week. You have OCBC, Poems and Citibank. So try them out. Macquarie hotshot just ended and sadly, I didn't win the big prize. Asking too much of myself lol.



We enjoy the process far more than the proceeds.
Warren Buffett

Mid Week Pit Stop #19

P.S: I wish to apologise for the low quality of my recent post again for the 2nd time since I began writting 4 months ago. I totally ignore what I have preach thus far about the general environment in the stock market. Well, most will have notice about the oil positive during last weekend post by me based solely on an oil chart. In a rush to produce the post, I fail to reflect back on what I see on the dollar (run up to level 80 as a pullback) and reflect on the general environment of the market where the correction for commodities was underway and good news like gustav is generally ignored. I'm really sorry to the readers out there and I hope to produce better articles in the future.

Environment Analysis

I actually coin this term. Don't really know that if it is really considered as a field of study as compared to Technical Analysis and Fundamental Analysis, the two schools of investing that most people fall into. Of course most people will claim that they are both, I don't know why. Somehow, there is a social stigma among the young adults on sticking to just one school. For me, I proud to say that I follow environment analysis.

What is environment analysis?

Actually it's a lot on macro aspects of the market.

The no.1 rule is of course to determine whether it is a positive environment or a negative environment. As simple as it sounds, it requires some thinking, only some =).

To do this, you need to understand some characteristic of the market.
1. In a positive market, the indices will usually go up steadily.

2. There will be no crazy huge gain day usually.

3. Bad news are ignored.

4. Corrections are triggered by weird news that don't make sense. For eg, "Fed Is Not Cutting Rates This Time". To some extent, you can actually "feel" that the market is bound to correct and it is just using something as an excuse.

5. The opposite applies for a negative market.

6. Oh man, this is very simple, can I make some money now? =D

Picture paints a thousand words

Well, to see things in a clearer manner, you need to look at some charts. Wait a min, isn't charts technical analysis?

Honestly speaking, technical analysis is a lot more on indicators that are designed by "smart" people. But there are tons of indicators out there which all claim to work just as well. Hmm... ...

Nonetheless, charts tell you a lot, and I don't consider it technical analysis. This is the DJI chart for your info. To understand the environment, you need to realise how crazy the market has been going. One look at the chart, you can see two distinct gradient lines.

Conclusion: Link back to point no.1, you actually see a take off in the market which is good for all bulls out there but a possible indication of the final stage of a bull market. I mean, it is logical to think it the same way as "last burst of fire". Along the take off stage, bad news were ignored. Well, sub prime fiasco was introduced during July 2007 but after 1 month, the market continued its rampant bullish mode.

Why Environment Analysis?

I have emphasized this many times and I think I should emphasize it again. In a bull market, all stocks go up (at least most of the blue chips or sound companies), in a bear market, all stocks fall. There is only one side to the market and that is the right side. It is not the long or short side. Bear this in mind, and tell this to people around you as well.

Maybe, you need some great fundamental analysis skills to pick out really amazing performers but if you could understand the Shanghai market environment, you are looking at an index that shot up 300% in two years. Do you really need to study a lot of fundamentals of companies? Good companies like Goldman Sachs, RIMM can't tank the market selling pressure as well. But they have real solid fundamentals. I'm not trying to deny fundamental analysis strengths and if you disagree with me, read the previous paragraph again. =)

Honestly speaking, technical analysis is... you know...

Alright, if the indicators really work so well, everyone will be rich. =)

Is that all?

Actually, you need to have some economics knowledge. Don't really need very in-depth one. To some extent, it's also common sense. Take sub-prime for example.

1. You need to know that consumption is the main driver of the US economy.

2. You need to know that housing drives consumption in US economy. Don't really have to know why, it is common knowledge. Just accept the fact.

3. You need to know that sub-prime deals with credit and credit is an intangible stuff. It means that you can't build credit overnight. It is like trust, you can't place your trust again on someone who has broken it. It takes time for you to trust and believe in him again isn't it. Sometimes, it takes forever.

4. So, after know the above 3, you can come to the conclusion with the death of consumerism in mind and the downturn in US economy. Of course there are more underlying issues and more economics at work but let's just take things simple.

5. Lastly, you need to realise that it takes time for reality to catch up with the illusion especially when they have diverged from one another for quite some time. Even though you know the economy is going to be very bad, be patient, it takes time for things to unfold. I have made this mistake before, I hope you don't follow my footpath.

So...

To sum things up, if you sort of apply to current situation, we are still in a crazy bear market isn't it. No matter what price level is oil heading to, it is largely viewed as an negative news. We haven't really reached some panic selling stage. It makes sense for a bear market to end with some bankruptcies. I feel that the bottom is coming (dow 9750, sti 2400), I think some real panic selling and bankruptcies will follow soon. Lehman and The two F words? lol possibly?

I hope to fine tune this theory more. This is the prototype, but the general idea is still there.