Mid Week Pit Stop #28

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

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

"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)

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

Mid Week Pit Stop #26

Mistakes

Let's take a look at some of the mistakes I have made so far. Well, ignore some of the achievements of course.

1. Gold

Remember that I emphasize on deflation all along. The mailman actually thinks the same way as me but he sees that holding cash is a much safer bet than buying gold. In a way, I actually think that people will see gold as money and safe haven during times of "potential" deflation. Of course, I am wrong. Every commodities go down together. But fortunately, I never buy any gold. =)

I will probably see gold going down to as low as $700.

2. Oil

Well, same thing for oil. I didn't expect oil to plunge down so much after all it has an inelastic demand in some sense isn't it? Now, we all know that during times of deflation, everything falls. Cash is king and I should have listened to mailman. He is actually happily sitting on US dollars after converting all his Singapore dollars. Amazing econ man.

I will probably see oil going down to as low as $50.

3. Trading

I have always asked myself if I should have gone for more volatile warrants or done some intraday trades. There have been days where its like Dow was up 5%, and hsi opened just slightly above flat and I could have pulled out of the warrants and bought at the end of the day. There are also days where it is quite obvious that a rally will come. Of course, "obivous" is a very subjective word. There are also days where I will lose out badly because hsi just totally goes against the trend of Dow. One up, one down. If I have gone for more volatile warrants, those that expires less than a month. I would have made 1000% seriously.

On hindsight, it is easy to say such things isn't it?

ONE GOOD POINT...

Alright, there should be something worth learning to attribute to some of my gains. I believe it's the emotional control. I really like the way I see the market those days. I was relax. Too relax to some extent, that Mr. X reminded me to be careful at times.

But I told him, "It is different this time round."


"the only way you get a real education in the market
is to invest cash, track your trade, and study your mistakes…"

Jesse Livermore

Very true indeed =)