Monday, August 31, 2009

Turtle Portfolio Update - September 2009

(Click on the image to enlarge)

Put in regular $ 888 saving for September 2009.
China market got the world rattled today, Shanghai Composite Index dived by 6%+ which I considered serious. It has also answered my question that I posted yesterday fairly quick, the selling momentum is gathering.

Sunday, August 30, 2009

China's central bank targets at M2

Shanghai Composite Index dipped into bear market(20% from 3461) briefly two weeks back and fought its way back, only 17% down on last Friday closing. The players are cautious but still bullish citing the recent correction has brought the valuation a very reasonable level -- neither too expensive nor too cheap. Ahem, hello, is China market rules by the fundamentals? On the sentiment side, they think it is not the time to dump yet, still hanging to their shares.

I think liquidity is key to decode this market. This piece of news is very important: China's central banking is issuing verbal warning of the need to tighten the liquidity.

(Xinhua) The People's Bank of China (PBOC), the central bank, published its
Annual Report 2008 on August 25, emphasizing the stability of the moderate
increase in monetary credit and reaffirming the growth target of total annual
money supply, making M2 growth stand at about 17 percent.

Did you catch the significance of 17% ? Look at this chart.

I believe there is no need to waste time to debate whether Shanghai Composite Index will be able to avert a bear market again. M2 reversion to mean from 27% to 17% is giving us that strong hint. As bank lending is very tightly correlated, it will be very easy to figure out their lending rate will have to slow down, liquidity will have to be mopped out from stock and property markets.

Guys and gals, I'm not that Mr. Market that has emotion problem flipping with "bullish" and "bearish" moods. I believe while others are getting more and more greedy, I think I should be a little bit fearful. See below on American investors sentiment chart, there are only 20% of people are bearish while bullish percentage are rising very fast. Another 9% more bullishness will get to the market top in 2007.

Saturday, August 29, 2009


Taking a break without looking at stock market indices is one of toughest things for me. On and off, I still tried to peep on the TV screen to find out performance of DJIA, S&P, Shanghai Composite, Hang Seng, crude oil, gold, etc. Though ununcessfully to take a 100% break but on the overall I stayed away sucessfully from following stock market news whole of this week. Sorry for not able to share any views about stock markets.

Two random thoughts. One of the most important lessons is differentiating relationship betwen master and servant --we are the master and the market is the servant. I keep reminding myself that the markets are there to serve us and not the other way round. We are not the slave to the markets. If we are unable to switch off for a short period of time, it is highly probable that we will not be able to pull out from the market when it is topping(some day later).

It is also important, in my personal view, to really feel the money physically esspecially living in the electronic age. Sometimes we feel numb when the money stays in electronic form. Your trading account may inflated or deflated just like playing some kind of "computer" game -- it's just paper gains I sometimes cash it out from the bank and count the real money. Counting money is really satisfying, it's real and not some kind of fantasy game. Try it if you've never done it before.

Will need another one to two days before I can get back to speed posting my thoughts. Take care.

Friday, August 21, 2009

Winding down and relax

Thank God it's Friday. It's time to wind down and regain perspective. Decoding market sentiment is just like playing jigsaw puzzle. The bits and pieces will be given to us one at a time, hopefully we can put it together to get the big picture right.

When it come to a point that it is just to difficult to decode it, I will just take some money off the table and take a break. When China Composite market dipped into bear market by definition, two days ago then bounced back so strongly yesterday. The world of course cheered and assigned that as the reason of the US rebound.

I normally will lose money quickly when I put in money in a hurry after taking profit when I see a number of indicators are pointing to a correction. Sometimes, the market will frustrate me by rallying another 5-10% or so before a correction sets in, this is described as point of maximum frustration.

Let me borrow a chart from dshort posted by S Dali of Malaysia Finance. It's a great chart actually being a chart lover myself. Let's try to translate this into risk-reward. If the path of recovery is tracking oil crisis, S&P 500 has another 25% potential gains but if it is tracking dot com bubble, there is a potential 0% gain after it has gone up by 48%. In index terms, 75% up from 666 bottom will be around 1,165 or stay around 1,000 points sideway for 1 - 2 years?

In an evironment like this [after a huge gain], buy and hold of an index fund will likely to get frustrated. In my opinion, investing strategy should not based on momentum as we are tracking this terrain. We got to go back to basic -- picking undervalued stock laggards or business that can grow faster than GDP.

Thursday, August 20, 2009

The dollar’s destiny lies with Congress.

Found a nice piece and logical analysis by Warren Buffett. His Op-Ed appeared in the NYT.

IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.


Wednesday, August 19, 2009

Technically speaking

Click on the images to enlarge.

I picked three stocks to support hypothesis of liquidity is tightening i.e. unwinding of emerging markets.

Couple of things:
  • The common theme of the three charts is declining volume.
  • Stock price hit upper trend resistance (Axiata for an example).
  • To breakthrough .618 of Fibo statistically is very tough, odds are normally not too good with declining volume.
  • In Tanjong case, twice failure attempts to breakthrough $ 16. If they cannot go up, going the opposite direction is a logical move. May come back to rock solid $ 13 support(low risk trading range play)
  • Most are trying to paint nice fundamental justification for Genting but breaking down from the trend is not something we should take it likely.
  • If the US $ is truly strengthening, I can buy into explanation of unwinding of carry trade. Speculators/investors will have to liquidate something to cover losses.
  • China market correction is another piece of hint of liquidity tightening. Another 100 points down from Shanghai Composite Index 2800, China market will be in a bear market by a strict definition.

  • Gosh, why am I talking about technical analysis again?

Tuesday, August 18, 2009

Correction to my yesterday's post

invest said...
Hi Turtle "I don't think the bull run is NOT over but just want to take advantage of volatility to tweak my return a bit."Err...I think something is not right in that is either I don't think the bull run is over or I think the bull run is NOT over....I hope I understand you correctly....

Sorry readers especially most people are nervous now, thousand apologies. Just to clarify my yesterday's post: I don't think the bull run is over is the correct statement.

Monday, August 17, 2009

Turtle sold 200 shares of Tanjong Plc

Turtle wants to raise some cash to around 20%. It's a tough choice to sell something. My vote goes to Tanjong as it's one of the foreign investors favorite, reasonable bet that it can go lower. I can either tweak my return by buying back at lower price or pick up another cheaper stock later. I don't think the bull run is NOT over but just want to take advantage of volatility to tweak my return a bit.

Saturday, August 15, 2009

Starbuck stock market talk

John : Would you mind to keep an eye on my Notebook, I'm going to get you a drink, what can I get for you?

Joe : Caffè Mocha, please.

John : (back with a tray with two cups of nice Mocha and some muffins). Joe, here is your Caffè Mocha.

Joe : Thanks. John, what a beauty MacBook Air you got there.

John : Cool huh, cost me quite a bit but worth every Ringgit I paid for it.

Joe : Did you read my blog lately.

John : Sorry, I didn't, busy closing a M&A deal lately. I just got back from Shanghai preparing for due dilligence.

Joe : Is everything going on very smoothly?

John : Nope, let's talk something else, need a break. Let's talk about your favorite subject making money out of stock market.

Joe : Cross border investing is one of the hottest topics around. I got a bit of pressure in almost every cocktail party. Their impression on me was just a Lat's kampung boy, unsophicated.

John : U hum, sounds like you got peer pressure going on there. Me too. My bosses and clients talk about commodities, futures, buying the US stocks, goreng a bit of stocks in Hong Kong. Looking into Superfunds. They got burnt very badly last year. They managed to get back a big chunk of good money recently and got them going ga ga again.

Joe : Same boat-huh. Well I can pretend because I can read those stuffs over the Internet and start talking like an expert. Construct a hedge-fund like portfolio : 10% GLD(Gold ETF), 10% SLV(Silver ETF), 10% DBA(Agriculture Commodity Index), 10% DBC(Commodity Index ETF), 10% EEV(Short-Emerging market ETF), 10% FXI(China market ETF), 20% SSO(Proshares Ultra S&P500) and 20% Cash. I can scream like idiot Jim Cramer too!

John : Haa....haaa. Jim? O yea, I agree whole heartly -- he is an idiot. Your thoughts on portfolio construction looks pretty neat.

Joe : I'm seriously thinking of liquidating my Malaysian stocks and play like a global investor.

John : Must be a big sum there, RM 300 - 350 k ?

Joe : Not that much.

John : If not, why ? I thought the whole idea of it is to look sophicated, stay diversified, play with volatility because the markets are a lot more efficient and liquid than Malaysian market.

Joe : I was thinking to put in RM 200 k or about USD 55 k.

John : Wow!, sounds like you are almost going for zero weight on Malaysia?

Joe : Not exactly, basically I'm thinking of just leave RM 50 k(20%) to invest in Malaysian stocks only. I am getting very fed up with long term prospect of Malaysia, politicians, lack of domestic market size and I can go on and on.

John : What makes you think that the pasture is greener over there? We are going to play against the best of the best you know. I know that you got really pissed when you could not into the local university. Your father got to mortgage his house to send you to RMIT. You had 2 part time jobs while schooling, I can understand your frustrations.

Joe : I can invest a lot more efficiently because there are whole lots of information available with great analysis compared to Malaysian stock brokers. Just get on to SeekingAlpha, The Bloomberg, the WSJ, the Economist, etc. Plus I can tap into our bosses and clients' trade gossips.

John : You got to know that they got millions and just a drop in the ocean for them but us ? Yea, we got a nice semi-D, a beamer - a thirty something millionaire by definition - but our investable fund is just a peanut.

Joe : Come on, we are smart, I think we can outsmart those guys. We just got to work harder. We were on the Dean list OK?

John : Unfortunately, Joe, market don't care a damn how smart, how hard we work. The best fund managers can't beat S&P 500 most of the time. Each transaction is going to cost us RM 200. To keep transaction fees less than 1%, we got to commit RM 20,000 for every shot. If we obey our cut loss rule of 20%, when the value drop to RM 16,000, transaction cost going to up to 1.3% when you sell. Not to mention about the forex buy-sell spread. That's going to cut our return easily by 4-5%. Assuming we are that smart and lucky, a gross 23% annual compounding(Warren's record) will cut to 19%, can't we achieve the same return rate from Malaysia market?

Joe : You got a good point there. So open a cross border with our local boys are really not worth it huh? What about open a foreign saving account and trading account? That way at least we don't lose out in the forex. Our local broker is sucking our blood, they charge us at least USD 25 per trade, you can get around US 12-15 with US brokers. Even they allow us to open a USD saving account, we still need some serious money.

John : What about looking into some of the off-shore mutual funds?

Joe : Oooops, Judy asked me to pick her from Marie France now. May be we catch up about this topic later. Ciao!

John : Ciao!

Putting three Dr. Dooms together

Let me put all the three Dr. Dooms together this weekend: Bob Prechter, Marc Faber, Roubini.
Bob first - interesting take away, the US dollar hits a bottom because of extreme pessimism.

Marc Faber has a similar view that the US dollar hitting a bottom, he warns emerging markets will be vulnerable.

INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor said a period of weak equities and rising dollar is likely to follow the strong rally since March.

Speaking to CNBC on Wednesday, Faber said: "Between 2002 and 2007 we had a bull market in assets and stocks and a weak dollar while in 2008 the opposite was true. This year, we bottomed out on the S&P 500 index but the dollar was weak."

"I expect now for the next couple of months a period of a recovering dollar and weak assets," Faber said.

The dollar will strengthen not because the US economy is the best, but because it is the least cyclical. "A strong dollar means global liquidity tightening."

As liquidity tightens, growth will begin to disappoint, and 'emerging markets will become vulnerable, especially after being a favorite of momentum investors who may flee the trade,' said Faber

The worse the global economy, the more stocks could go up, Faber says, because the world’s central bankers have become nothing more than money printers.

Nonetheless, even with slower economic growth, 'markets may still go up given that there are a number of worldwide central bankers who are nothing more than money printers and continue to feel the need to intervene when prices go down, except for crude oil.'

“They’re dangerous to the health of the global economy,” Faber says

At the end of the three interviews, I think they are nervous but not extremely pessimistic on the short term but long term outlook remains unchanged. Correction is inevitable.

I have been trying to find some suitable words to express what is inside my head to describe the investing environment. The closest words come to my mind will be "Cyclical", 'Turbulent", a few years up follow by sharp downturn. That does not mean that we have to time the market all the time, it will be revealed in the form of valuation "cheapness". My strategy will be buying at that those cheap level and hanging on to the ride and sell it when it's reaches a level of madness. When I talk about people's bullishness or keeping an eye on liquidity, is not timing to buy but timing to exit. The only reason a person should get excited during rising price when almost fully invested is looking to sell. Hope this will add clarity and help my reader to understand my postings context better.

Thursday, August 13, 2009

Psst, I want to tell you an open secret

This is an open secret -- this rally is driven by liquidity. I know it too but what this fund manager said forced me to cover my mouth with two hands -- I'm shocked, I'm terrified. He said, screw the fundamental and enjoy the ride. What is even more shocking, they advise their clients not to look into fundamental. Hmmmmm....

Sandeep Bhardwaj, CEO of Tower Capital & Securities, in an interview with NDTV Profit’s Namrata Brar and Prashant Nair, speaks about the current market rally.

NDTV: Are you perplexed by the liquidity which is driving the markets higher? Earning season was good but the upward movement in markets is just too strong?

Bhardwaj: We are not perplexed as we are positioned on the long side. The reason why I am not perplexed is that we have seen how events unfolded 10 years ago in the Internet bubble and then in the US housing bubble. We are seeing a similar scenario pan out with liquidity being pumped from all directions. For the moment we have asked our clients not to look at fundamentals because there is nothing in the market that you can buy based on the fundamentals. We need to keep fundamentals aside and just play the liquidity game. I think the markets can go a lot higher from here and surprise many with this fast and furious move from here.

NDTV: Sandeep, how higher is the key question?

Bhardwaj: I think the first stop would be around 5,200-5,250 mark and the move up can’t be a straight line up as we may see some very sharp reactions which will lead people to believe that the move is down for good. But we need to keep copper as a lead indicator in mind. It is an indicator for periods like this. With copper being an industrial metal, people tend to believe that if copper prices are going up then everything is well. But we need to look underneath what is going on. Six months ago, Chinese premier expressed great concern about the US dollar and he came up with an idea of alternative currency. China tried to acquire Aussie-Anglo mining giant Rio Tinto and the Australian government blocked the deal. It also tried to acquire an oil company in US company and the US blocked it. However, in the last six months, Chinese consumption of copper has gone up with imports rising by 42 per cent. Whereas the global consumption of copper is down 3.5 per cent. This leads us to believe that China is actually going in for piling physical commodities as it is biggest alternative for dollar, as all these commodities are denominated in dollar. Taking a cue from copper, we have seen oil and aluminum rallying. So, what the market is telling us is that the bad news is good news and not so bad news is very good news.

NDTV: This is manipulation that we are talking about as there were reports that some miners may be buying their own copper to keep its prices at high. In this scenario, isn’t the risk of a complete reversal that you would want to study?

Bhardwaj: That is inevitable! But the question is when that happens. It will not happen sooner because we are in the process one of the biggest bubble formations. The last bubble formation of 2007, which went bust in 2008, was very small compared to present one. Just to give you an idea of the size of current bubble, at the moment we stand at about $5 and 50 cents of debt which creates $1 of US GDP. Thus the bubble formation is immense and it will have disastrous consequences but it is difficult to tell when.

NDTV: What is going to be your strategy in a market rally?

Bhardwaj: What we have seen is that money is chasing everything. So I wouldn’t advise being underweight. I would advise having a balanced portfolio be it defensives and metals. The names which investor is confident of holding should continue to hold that. Top 80-100 names in Indian market compared to liquidity in Indian market is becoming fairly finite. So if you are comfortable holding FMCG portfolio then please do continue holding that because valuations will not make sense anymore for commodities or any defensives.

Wednesday, August 12, 2009

Are we prepared for 85 millions bpd crude oil ?

Aug. 12 (Bloomberg) -- The International Energy Agency raised its global oil demand forecasts for this year and next, citing accelerating industrial activity in China, the world’s fastest-growing consumer of crude.

The world will need an average of 85.25 million barrels of oil a day next year, 70,000 barrels a day more than previously estimated, the adviser to 28 nations said in its monthly report today. Demand growth next year at 1.6 percent will be lower than earlier forecasts after the outlook for 2009 was also increased. The agency boosted predictions for supply from outside OPEC.

Let me ask that question again, with most people are highly skeptical of sustainable global recovery, do you think they are preparing for 85.25 million bpd oil a day ?

After all, with hig hue and cry, oil producers were able to push it 86-87 million in 2007, soon a little bit of news like Nigeria pipeline attack or some plants caugh fire, fear of terrorist threat will move crude oil price again?

Monday, August 10, 2009

A little bit warning by sugar!

Aug. 10 (Bloomberg) -- Damaged crops from India to Brazil mean the world won’t have enough sugar for a second straight year.

Global demand will exceed output by as much as 5 million metric tons in the year through September 2010, leading to a record two-year shortfall, according to the International Sugar Organization in London. Parts of Brazil, the largest grower, are drenched by rainfall four times more than normal and too wet to harvest. India, the biggest consumer, had its driest June in 83 years and may double imports.

The number of options to buy sugar for delivery in March at 30 cents a pound, 44 percent higher than the Aug. 7 price in New York, has jumped more than 18-fold in four months. The rally is boosting expenses for food makers from Kellogg Co. to Kraft Foods Inc. and increasing profits for Cosan SA Industria eComercio, the largest cane processor.

“I haven’t seen sugar fundamentals being so severely unbalanced in my time,” said Adam Leetham, the Gurgaon, India- based director of Czarnikow Group who has been tracking the domestic industry since 1994. “It’s not just India. You see fundamental deficits in a number of large markets. It certainly looks like we will enter uncharted territory.”

This is a little warnings from soft commodities, sugar is giving us the preview.

  • People think sugar price will double from US $ 0.21/lbs to as high as US $ 0.40/lbs
  • Low stockpile is driving price through the roof. We have been warned many times, we're facing one of the lowest stocks in history.
  • A little bit out of luck -- weather is not on our side
  • Earlier credit squeeze is reducing crops -- farmers cannot get credits to buy fertilizers and etc.
  • Rising crude oil is selling us the story of bio-fuel again.

Saturday, August 8, 2009

It's Ah-Beng and Ah-Kiong Show again

Ah-Beng : Wow, S & P crossed 1,000 points this week, some guys tried to test the floor before pouring in more money-leh.

Ah-Kiong : How do you test the floor ?

Ah-Beng : Meaning whether got buyers out there or not-loh. To find out is quite simple, just sell and see whether sell orders can go through very easily or not-loh.

Ah-Kiong : O like that one-ar. Lai, give me some more analysis, what do you think of our Bursa Malaysia, can "porform" or not?

Ah-Beng : We are at a very interesting juncture, simply because facts have changed quite a bit at the external fronts.

Ah-Kiong : What do you mean ? You mean China-ar, Nasdaq-ar or US $ ?

Ah-Beng : Something like that-lah. The story line is changing forcing people re-write their scripts. Sooner or later, people are going to be convinced that the US recession is going to end. The next question is : what is the growth rate, the easy one is to rule out 3% growth. If it's not 3%, it will be between 0% - 2%, what are the implications? Will money flow back to the US or getting worse?

Ah-Kiong : I know-lah, you see in the short-term, people tend to over-react. They don't care whether it is going to 0%, 2% or 3%. Wa very respect Sifu Richard Russell, he said

What are we really doing? Are we dealing with the stock market or are we dealing with the background fundamentals? I’m looking at the Bloomberg site, and I read, “Birinyi says S&P may reach 1,050 in current rally.” Again, a question — Who do I listen to, the market or the “experts”? How does Birinyi know how high the S&P is fated to rise? Then on another Bloomberg spot I read, “S&P 500 tops 1,000 for the first time in nine months.” And what does that tell us about the future of the market? Unfortunately, not a damn thing. One thing I’ve learned after 50 years in this business is that a trend will continue in force until that trend ends — no further, no less. That’s a truism, but unfortunately, I don’t know anyone who can tell us how high a trend will carry or when a trend will end. If an “expert” wants a little publicity, he can make some damn fool statement that can’t be verified. If the statement is bullish and it proves to be wrong, well, nobody will complain. Wall Street’s business is distributing merchandise to the public, and every optimistic statement or bullish prediction helps. So the Street never complains when bullish predictions don’t pan out. At least the “expert” ventured a guess, and so what if he proves to be wrong as he usually will be? Nobody’s keeping tabs on him or her.

Ah-Beng : OK, Wa surrender, you really street smart.

Ah-Kiong : Don't be like that ma, tell me about China. Everyone seems to be screaming -- "bobble", "bobble" like Spa Jaguzhi

Ah-Beng : This is a tough one, do or don't do also mati one. If they maintain loose monetary policy, asset bubble is unavoidable especially free float is just too small because Chinese gomen hold a big chunk of the shares. If they tighten, then the "ecolomy" will slow down, people sure go to Tianamen again. But looking at this chart, I rather worry about Taiwan, Australia and etc than China(market capitalization to GDP which one of Warren Buffett's favorite tools).

Ah-Kiong : What if the world "ecolomy" really recovers ? Can they tighten ?

Ah-Beng : That's why I think the market will take some time to sort out, what is what-lar!

Ah-Kiong : Peng-yu, don't try to make grandmother statement OK!

Ah-Beng : Bottom line, I think people will take some money off the tables -- rich valuation emerging markets should find it difficult to continue to charge ahead(another 10% consider very good) but laggards(Malaysia for example) will have some rooms to move up. Laggards developed markets should continue to catch up in the next few months.

Ah-Kiong : "Tiok um tiok"(Correct or not), don't bluff me lar, I am a trader you know. KLCI will have a tough time to overcome the monster 1,200 resistance. This is really a very "suui"(unlucky) number you.

Ah-Beng : That's my view, any how I am a stock picker, it don't really bother me that much.

Ah-Kiong : Nope, when the whole market players take too much chicken legs, they are not steady, profit taking can turn into bloody ugly scene you know!? Stock picker also will "lau sai"(diarrhea)

Ah-Beng : Amoi ! siu loi(Kira). Good luck my friend, really nice talking to you unfortunately going no where.

A note from producer: Since China-man English or Phua-Chu-Kang English is embarrassing our Malaysian government(The producer is confident or very sure that the standard will go up with us going back to Bahasa for Math and Science), with deep regret, the producer will stop production of Ah-Beng and Ah-Kiong show. (Psst, is there a gun pointing at your head now?)

Friday, August 7, 2009

Can value investors short stocks?

I was not sure whether I shocked anyone yesterday by saying short sell Treasuries which not a prudent investor will or should do. It is very uncharacteristic of me preaching about conservative investment but suggesting aggressive approach. My purpose was simple - inspire what is the highest level skills of a value investor can possess(I am still not there yet but hoping to be there!). Perhaps this story about Sir John Templeton short the dot com bubble will make my points clear.

At first glance, there was nothing unusual about his desire. Most 88-year olds don’t own too many stocks. And, at the time John decided to sell, in January 2000, stocks were obviously expensive and therefore risky for conservative investors.

Selling a few stocks was only prudent. But it wasn’t prudence that motivated John. It was profit.

John believed he could make as much money on the way down as other, more foolish investors had made on the way up. Of course, unlike the bullish speculators, if John was right, he’d walk away with his gains in cash instead of watching them disappear on an electronic quote screen.

It’s one thing to have an idea about where the market ought to be heading. It’s another thing altogether to bet an entire $180 million fortune on your hypothesis. But, that’s exactly what John did, beginning in January 2000. John sold short 84 different Nasdaq stocks, putting an even amount of his fortune against each position - roughly $2.2 million on each stock.

He told his brokers: “This is the only time in my 88 years I’ve seen technology stocks go to 100 times earnings; or, when there were no earnings, 20 times sales. It is insane, and I am going to take advantage of the temporary insanity.”

By “shorting” these stocks, John borrowed shares of stock from brokers who held large inventories of shares on behalf of their clients. These shares were then sold in the market. The money from each sale was put into John’s margin account. John was now on the hook for the shares that he’d borrowed and sold. If the shares rose in price, he’d lose money - perhaps all of his money - because he’d have to buy the stock back at a higher price to repay the brokers from whom he’d originally borrowed the stock. On the other hand, if the shares fell in price...John would never have to repay the full value of his loans, earning him a profit.

He told his brokers to sell short every new technology IPO that came to the market in 2000 - every single one. He told them to establish his position 11 days before the stock’s IPO lock-up expired, which was typically six months after the IPO took place. In this way, John was selling just before all the company’s insiders were allowed to dump their shares.

In about half of these positions, the stocks fell 95% or more before he “covered” his short position, repaying only about 5% of the value he’d borrowed. In other stocks, he covered when share prices retreated to more reasonable multiples of earnings (30 times earnings). On average, he made over $1 million per position, increasing his fortune by 50% in just a few months.


Thursday, August 6, 2009

Long Gold, Short Treasuries

To short something now will easily get killed. You need to be extremely brave too. The only asset class that I dare to short now will be long dated treasury ( 20 or 30 yr). Central bankers from the US, UK or even China have been struggling to auction their debts because investors demand higher yield to compensate for potential inflation and over-supply to fund deficits. With the US government signaled to issue Treasury Inflation Protected Securities, you know they are going to engineer higher inflation.
Aug. 5 (Bloomberg) -- Treasuries declined for a third day after the U.S. announced it will sell a record $75 billion of notes and bonds at next week’s auctions and Goldman Sachs Group Inc. boosted its forecast for U.S. economic growth.

Thirty-year bond yields touched their highest levels in a week as the government signaled it’s considering the introduction of 30-year Treasury Inflation Protected Securities and ending 20-year TIPS as it finances unprecedented budget deficits. Goldman Sachs, one of the 18 primary dealers that trade with the Federal Reserve, said GDP will grow at an annual rate of 3 percent in the second half of 2009, an increase over its previous forecast of 1 percent growth.

It is also about time go long on gold and also other hard-asset.

Tuesday, August 4, 2009

Love Potion # 9

I took my troubles down to Madame Rue
You know that gypsy with the gold-capped tooth
She’s got a pad down on 34th and Vine
Sellin’ little bottles of – Love Potion #9

– Love Potion #9, Circa 1959

I’ve never known any gold-capped tooth money managers, but without squinting very hard there is undoubtedly a strong resemblance between all of us “managers” and the infamous Madame Rue selling Potion #9. Instead of love, though, we sell “hope,” but very few are able to seal the deal with performance anywhere close to compensating for the generous fees we command. Hope has a legitimate price, of course, even if its promises are never fulfilled. It is the reason we put a five spot into the collection plate on Sunday mornings and why we risk a 25-dollar chip at the blackjack table. In the former case we usually rationalize it as “insurance,” and with the latter as “entertainment.” Whatever – I’ve already alienated all of you with strong faith in the hereafter or the ones who actually believe they’re going to win on their next trip to Las Vegas.

But my point is that those who sell investment “potions” must wrap their product with an extra large ribbon because history is not on their side. Common sense would dictate that the industry as a whole cannot outperform the market because they are the market, and long-term statistics revealing negative alpha for the class of active managers confirms it. Yet, what a price investors are willing to pay! A recent Barron’s article pointed out that stock funds extract an average 99 basis points or virtually 1% a year in fees from an investor’s portfolio.

Bond managers are more benevolent (or less pretentious) at 75 basis points, and many money market funds manage to subsist at a miserly 38. Still, those 38 basis points are as deceptive as the pea that disappears beneath the shell of a street-side con game. Since money market funds barely earn 38 basis points these days, much of the return winds up in the hands of investment managers. A mighty expensive potion indeed. While some index and ETF proponents avoid this extreme absurdity with lower fees, roughly 90% of the $1.5 trillion in 401(k) and other defined contribution assets in mutual funds are in actively managed offerings with expenses close to 1%. Paying for those potions during an era of asset appreciation with double-digit returns may have been tolerable, but if investment returns gravitate close to 6% as envisaged in PIMCO’s “new normal,” then 15% of your income will be extracted based on the beguiling promise of Madame Rue. The solution, of course, is to compare long-term performance with fees and approach 34th & Vine with informed confidence, as opposed to Pollyannaish hope that you’ll get your money’s worth. Down the hatch and good luck!

Bill Gross's August investment outlook

While I am not entirely agree to what he said for the short term on his outlook(click on the link) but it could come to pass a few years later. It is not his investment outlook that I want to comment but I like the way he blasted his peers.

Nicely said Bill.

To fund managers, please pay attention to what your Dean said, ignore at your own peril. I already fired most of my fund managers a long time ago.

Monday, August 3, 2009

My take on the real reasons of rally

What are the real reasons behind the recent rally ?
  1. The Fed successfully unfreeze the frozen credit market ?
  2. The US stimulus program begins to filter through the economy ?
  3. The worst is over for the US housing ?
  4. The US recession is ending ?
  5. Corporate earnings are improving ?
  6. China stimulus are working ?
  7. Massive liquidity in China ?
  8. Decoupling theory again ?
  9. The return of animal spirit ?
  10. People are fed up with 1 - 2% return ?
I believe most of the answers to the questions probably will be YES but may take on the biggest contributors will be reason # 9 and reason # 10. To save you the pain I will not write a 700 pages report to justify my reasonings.

People are very angry with 1 - 2% return when central bankers around the world keep the interest rates very low. The fund managers will be fired if they garner millions dollar of fees for making 1-2% return. So they have to put cash to work. Worst still, many of them have been missing a 40% rally, they have been praying for 666 to return but the market hardly corrected with double digits, only one 9% plus pull back so far. They are(again) praying that S & P will pull back sharply when they are approaching 1,000 points, if the pull back is again very shallow, herds will chase only one direction - UP !

The cash/market capitalization in 2008/early 2009(110%) surpassed 1982 (100%). When the market started to rally in 1982 till we have 1987 crashed, cash pile(cash/market cap %) dropped to 65%. Back to present, from the highest cash pile of 110% dropping to 80% recently, is still way too high. The institutional investors will continue to deploy cash while retail investors are still scratching their heads - to buy or not to buy. (Click on the two charts below to visualize my narratives)

Sunday, August 2, 2009

Kopitiam Stock Market Talk

Ah Beng: Peng-yu, long time no see-lar. Wa belanja chiak Kopi. How's business? 

Ah-Kiong : Business like that lah! Hallo, Kopi-O noh-auw(2 cups). Ah Beng, got stock tips or not, wa really beh-tahan with FD of 2.75%. My broker call me, he said now is the good time to enter leh! Resort can buy-ah? I am really a long term investor, Tejari can buy-ah? Crude oil very solid leh, KNM can buy-ah? Rumania sure cannot lose money one. Handal, the shoe maker can buy-ah?

Ah Beng: Peng-yu, Handal is a crane maker lah, what lah you. 

Ah-Kiong: Don't care lah, the most important is got volume, I gasak all the top ten volume, 200 lots when the market open then I lari when they move 1 sen, RM 2 k profit one day, chiak beh liow. I just make RM 20 k you know in the last 1-2 months. If continue like that ah, I am thinking to be a full time trader you know. I think I can be easily the top trader in Kuala Kedah.

Ah Beng: Wah, so good one ah. I have been reading blogs, taking LCCI accounting and may be study ABE after I pass my LCCI. 

Ah Kiong: What lar you, so old fashion one. If you follow Warren Buffet, lu kee(go) holand faster-lar! Look at me, after I finis my Civil Engineering, working for 5 year salary only got RM 3 k plus. After deduct everything, mana eh-cukup makan? To make money ah, you must take risk. If you don't take risk, how to be rich?

Ah Beng: They say trading can be very rich but I think I still prefer to put my money in FD lah. I think the fundamental is not so steady lah. Look at this chart that I researched recently.

My personal view, the US market rally is not sustainable. When they realize that the stock price is running way ahead of earnings, unwinding of their positions will trigger risk aversion, then all the emerging markets will kena-lah.

Ah-Kiong: Wah Ah Beng, not bad leh, I think you can apply to be analyst. Making 5 figures. I heard they all drive BMW, even their boss also have to give them face leh. When they say buy, the market will move and when they say sell, the market sure go down one. Very powerful leh.

Ah Beng: Don't laugh at me lah. Wa ada sikit sikit knowledge but could be dangerous. To be honest I think the market really not bad-leh. I watch on the Bloomberg, I heard the US recession already ended. I read somewhere but not sure where, the stock market rally very fierce or strongest 3 months before it ended, you know or not, may be US recession already ended in April or May 2009.

Ah-Kiong: You really not bad leh, I don't have time for all this. All these analysts 9 times prediction, 11 times wrong one may be 2 times correct-lah. Unfortunately I think you wasted too much time lar.

Ah Beng: Peng yu, how can you say like that. Or may be you are right. One of the very bearish guys David Rosenberg, the ex-analyst of Merill Lynch  said this very reluctantly
[T]here is no doubt that after the sharpest downturn in housing, production and employment since the 1930s, that the laws of gravity themselves prevent the economy from any further deterioration. Nothing is going to zero, and there is always the chance that housing sales edge back up towards their demographic levels, auto sales recover to their replacement demand levels (plus GM getting back into the leasing game), and inventories get rebuilt in line with spending levels. The government has its hands in 40% of the economy and when public sector officials can influence how banks can value their assets, how mortgage servicers should be doing their business, who shall fail in the financial industry and who shall not; and when we have a central bank that is not just the lender but the market of last resort, even for RVs, and a government willing to run up its deficit to levels that would have made FDR blush, then perhaps we can end up seeing a recovery occur sooner than we had thought.
I really respect lu, you have very good feeling for the market, no need to read so much but can be so successful.

Ah Kiong: Yah lo!, To be honest-ah, tell me how much money you make out of stock market? Me not bad, may be you should follow me to sit in the broker office. I like to do that so that I can exchange my ideas with other traders. Some of them already have 20 years trading experience you know. These guys are good.

Ah Beng: Tommorw is Monday, I see you there - lau tee fang(old place)!