Friday, August 17, 2007

adios

amid the "collapsing" of global market, it's time for a change.

not only in the sense of market turning into bearish mode, not only cutting losses, but personally, i will be moving to hong kong soon.

wish me luck, and god bless the market. haha

adios.

Friday, July 13, 2007

money money money

Too much of something is never good. I totally agree with that.

Despite the fact that "more money equals to more happiness" is very true to a certain extent, sadly to say this is not always the case.

look at the chart here. This is the M2 figure in Malaysia. M2 is one of the measurement used to quantify how much liquidity we have in the system. The chart below shows that the system is basically flushed with liquidity.

wow.

there are just so much foreign interests in our local market, both bond and equity. But is this the sole cause for the rallies in our local markets? Might be, it might not. But hey, is our market overvalued now?

guess it has been a old story that everyone been mentioning every now and then. One of my friend once told me that " not everything will follow the law of gravity. It doesn't mean what goes up must come down". Ya right. guess the difference is the timing / investment horizon.

for the time being, like what our friend Clovis said, just close your eye and enjoy the ride. But of course, all good things will come to an end. When the day comes, well. Hope that we don't get burnt that much.

Any lead?

For me, when there's a huge negative news flow through the market, it will cause a contagion effect and domino effects will kick in.

For clovis, 1) reversal of yen carry trade 2) The "collapse" of china and 3) deepening of US sub prime woes...

till then, happy investing. ;)

Monday, July 9, 2007


As at 6th July 2007, KLCI closed at 1,373.84, a mere 3.84 points more than my prediction of 1,370 beginning of the week. Not too bad isn't it?




How about let's do it for another week? make your guess for this friday closing KLCI ! I say 1,390.

Monday, July 2, 2007

chart your own graph - charting #1


Sometimes charting helps, sometimes it doesn't. Most of the time, i think we wish we could see the charts rather than just numbers. But where can we get free charting software with technical analysis besides expensive (but very useful) machines like bloomberg and reuters? here's it is. http://www.tradesignum.com/ (mainly for malaysian equity though...)

attached herewith a chart showing KLCI index as at 29 June 2007. gosh, what are those red and green bar? this is what we called the "Candle stick chart". Well, basically, the green bar depict an "up" day (i.e. closing price is higher than opening price) and red is the opposite. Go to google, type in candlestick chart and read up more interesting features of candlestick charting. Trust me, it's worth it.

From the chart above, it shows that KLCI was having 4 consecutive "down" (Red) days. Painful it is. But does the chart tell you any other stories?

The art of reading financial charts is called "Technical Analysis". There are millions of books out there teaching investors how to read the chart, so they can predict the future movement of the prices. Sounds strange, isn't it? i mean, isn't that sounds like "fortune telling"?

well, as a matter of fact, it is kinda similar. Put it this way, once my "Sifu" told me that reading the chart or charting is some form of natural born talent. The same chart can be presented to two different people, and they might see different things altogether. But of course, if you read more about technical charting, you will see that in general, the future movement of prices do follow certain trends...

but why so? well, that's because market is made up of People. You and Me. and where there are people, there's EMOTION. like it or not, when it comes to investing, investors tend to be a little bit....okok, very at times, emotional. Thus alot of tools have been developed for chartist or us to discover the general trend.

For instance, one of the common tool used is Bollinger Band. Bollinger band is represented by the shaded blue area surrounding the green & red candle sticks on the upper chart. Basically, the higher the volatility in the market, the bands get wider, and vice versa. If the band has contracted, it might signify a massive jump in volatility to follow suit. From the chart above, it seems like KLCI's band is contracting, but not quite there yet...

One of my favourite tool is called RSI. Relative strength index, or more commonly known as RSI, is shown at the chart right at the bottom. Basically, what it tells is that if the line is above 70, it means that it's "overbought", i.e., time to sell. If the line falls below 30, it's "oversold", what does that mean? Time to Buy it is! simple isn't it?

From the chart, it shows that the KLCI is currently at the neutral level, which is at 50. Pretty much, it does not telling much story. But once you see it moves, it might give you some indication of "to buy or to sell"

But these are not magical tools, they merely provide you with some direction, but not absolute definite-will-happen direction or prediction. Most investors claimed that they are chartists, but few got them right. Also, one thing we should bear in mind is that technical analysis will only works well if the underlying market is very liquid. I.e. the trading of the cross currencies such as USD-EUR and USD-JPY.

Nonetheless, it's fun to learn and put this techniques into application. will share more of my thoughts for days to come.

Let's play a game now, just drop me some comments and say where will the KLCI be on 6th July based on the chart shown? i say 1370. ;)

Thursday, June 14, 2007

Options 101



Vertical axis – payoff
Horizontal axis – share price

WHAT ON EARTH IS THAT?!
That ladies and gentlemen, is what we call a payoff diagram. Remember it well.
In case you’re wondering what Long, Short, Call and Put means….well…..(phew, this is gonna be a long day)

Here are some useful terminologies :
Long – to buy

Short – to sell

Call – a contract whereby the buyer has the option but not the obligation to purchase the underlying asset at the contracted price (exercise price) anytime before the expiry of the contract (American Option).

Put – a contract whereby the buyer has the option but not the obligation to sell the underlying asset at the contracted price anytime before the expiry of the contract.

Expiry – maturity of the contract

Exercise price – the contracted price that is agreed between the buyer and seller.

Underlying asset - It can be anything from, company shares, to commodities, and to even the weather!

American Options & European Options – most options are categorized into these 2 forms. Basically an American Option allows the option buyer to exercise his right anytime between the initiation of the contract to the expiry of the contract. On the other hand, European Options will only allow the option buyer to exercise his rights at the option contract expiry date.


So what exactly do I mean when I say, “I just did a transaction whereby I long an American call on 1000 Rolls Royce shares at an exercise price of 6 dollars expiring in August’07”?

Any takers?

Well, it means that I just bought the right to purchase 1000 Rolls Royce shares for the price of 6 dollars anytime from now till the expiry of the contract, which is in August 2007.

Here’s another Example:

“I just short an European call on 1000 Royal Bank of Scotland shares at an exercise price of 5 dollars expiring in September ‘07”

What does all this mumbo jumbo mean?
As a seller of a call option, I am now obligated to sell to the call option buyer, 1000 Royal Bank of Scotland shares at 5 dollars at the expiry date of the contract in September’07, IF he decides to exercise his rights (note – option is only exercisable on expiry because its an European option)

Now, I’m pretty sure all this is pretty confusing especially to those new to options. So I’ll leave it here for now and allow you lot to reflect on all these new terminologies.

In my next entry, I shall be explaining the payoff diagram.

And after that, we shall explore the trading strategy which I mentioned in my first entry.

(Coming up next – Options 102)

Wednesday, June 13, 2007

Lets Try Something Different

The last eight months has been phenomenal for the stock market. Just by investing in the local KLCI index, an average investor would have easily made a 50% capital gain return. Now that is impressive even by Warren Buffets’ standard, who averaged 23% return p.a. over his entire career.

So while the stock market basks in celebration in the longest economic boom the world has ever experienced, I shall present to you an alternative form of investment – Options. It would seem illogical for anyone at this current point of time, to be interested in this derivative form of investment, considering the Bull Run in the stock market. So why bother introducing it? The reason, plain and simple…..an extra bit of information never hurts anyone. (or was it the other way around?)

Contrary to the belief by many that Options are limited to institutional and sophisticated investors like hedge funds, Options are actually very much accessible even to an average individual. Theoretically, no amount of capital is required to start-off your options trading (save for the margin requirements).

Now, for benefit of those who haven’t got the slightest clue what I’m talking about thus far, and to those who have heard of options, but need a refresher course, I shall go through the basics options in the first part of my blog entry. And once that is out of way, I shall share with you a trading strategy that is utilized by many, that has the ‘potential’ of generating consistent return over a long period of time.

And to make things a little bit more interesting. I shall be using actual prices from the market to show you how this strategy is carried out. And you shall be the judge on the feasibility of this trading strategy.

(Coming up next – Options 101)

Tuesday, June 12, 2007

when it comes to creativity...

old blog of mine.

Blogging is nothing new, nor it is something extraordinary. Yet, the impact it is making to this world is fabulous.

That leads to the talk of "globalisation".

The world hasn't changed its size, yet what we observe is that the distance between you and me, has become shorter. No matter where you are, as long as there's phone line and internet access, we are not that far apart after all.

"globalisation" makes things easier, it also leads to the disruption of the natural law of economics. there used to be an era when things got expensive, demands will fall and thus price will fall. Yet, in today's context, this seems to be abit obsolete. The emergence of the oriental dragon and the south asian mammoth have created a world with new economic rules. What suppose to be going up continue to stay low, and what suppose to be coming down, continue to be up and rising. What has gone wrong?

This should be exciting because this is a brand new era that we're observing. 200 years down the road, our great great grand children will be referring to this era as the "globalizing era" or perhaps some other more fascinating terms. This is similar to the time when the europeans learnt about sailing and start doing world trades. Now, we're doing world manufacturing, world marketing and of course, a global trades.

so, what happen when it comes to creativity? In today's context, it's hard to survive if we still follow the traditional way in doing things. Why would you be writing articles for local newspaper by paying 30cents postage fees while you can choose to post a blog on line / write an article for online magazine for zero costs and with unlimited exposure? now even you and i can be a columnist on line, even you and i can do business with merely zero cost by starting a e-business. Therefore with abit of creativity, we can spot the next opportunity in this ever-changing world and make a fortune out of it.

we're observing the globalizing trend in the world that we're living in today, yet the fortunate thing is that it has just begun and might take a century or more to complete the progress. The utopia of globalization is when we're only using one currency in trading, where the oriental dragon is the only one manufacturing, the south asian mammoth is answering all your phone enquiries, the pisa leaning tower and eiffels are making the food for the world & etc etc. so before everything converges, there are opportunities for us to exploit this arbitrage. This mean that you can do something with lower price, and sell it to other continents at a higher price, thus, reap the margins and help globalizing.

when it comes to creativity, it is time for us to spot what our competitive edge is, and be able to fully utilise it, before the G-Day arrived.

Happy reading and will be back for more.

Monday, June 11, 2007

Change of Perception

Remembering not too long ago, the financial market was pricing in a possible "rate cut" by the U.S. Fed. Well, growth seems to be slowing down, inflation remain benign, housing sector woes were developing into a 'crisis' etc etc. Thus, equity and bond markets were both rallying and guess alot people out there have made some handsome profits for the last few months.
But is growth really slowing down? i am not too sure, neither does the global investing community, mainly because the "confirming numbers" are not out yet.
Nonetheless, the markets were "moving ahead of themselves" where we see huge foreign inflows flooding Asian markets, pricing in a rate cut anytime soon by the Fed. As a result, KLCI went up 23% year-to-date, while Malaysia's bond yields have dipped below its overnight rate. Crazy indeed.
The market trades on expectation. So the market priced in (i.e. BET) that the US growth was going to slow down, inflation will be kept low, housing market will go bust etc etc... However, after few months and nothing has materialised yet!
and out of a sudden, (not really that dramatic, but what da heck) US growth number published was rather resilient and employment data was still ok. Analysts out there were shouting for a possible spike up in the inflation numbers, and in turn, both market went into a technical correction last week. It is a "technical correction" because the markets were just correcting to the level that goes in line with the "revised expectation". A change of perception.
Due to the flushed liquidity in the system, coupled with the positive few good factors on global front, both bond and equity markets were positively correlated for the last few months. Both move up and down together, which is not what the financial text book has taught us.
The inversion of US yield curve (usually signify a recession) few months ago was deemed as "not telling the true story" as the "conundrum story" of excess global savings is the main culprit causing the inversion, but not the slowing economy.
Yet, at our own backyard, Malaysia's bond yield curve has been inverted for quite some time, and i believe that this time around, it is trying to tell us something...

Sunday, April 29, 2007

Ex Ante – Ex Post

Last Thursday was a public holiday in Malaysia. 26th of April 2007 marked the day of the installation of our latest Agung – the king of kings in Malaysia. Anyway, looking at an ex-ante basis, I guess everyone was glad that there was a holiday after such a long dreadful working month…

But then on an ex post basis, some investors might not feel the same…

“Basket, I can’t believe this. U.S. stock market has to hit all time high on that day, and you know what, regional markets were flying on Thursday as well! And where were we? MARKET CLOSED!” said a friend of mine when we resumed work on Friday.

“But you must admit that you did have a nice holiday celebrating the installation of our new King right?”

“Yeah, but I rather go into the market and make a few thousands bucks more…”

Well, it’s always easy when we do things on an ex post basis, i.e., we only look at it once it’s over. But on an ex ante basis, do you think you will be as gung ho as my friend?

That’s why people say Fund Manager should add more value in terms of judging the market correctly, consistently on an ex ante basis, performing better than the normal investors like you and me. But of course, sh*t happens. It’s always easy to say, ex post, that I should have, I could have buy or sell this and that.

Oh well.

The finance text books in town which touch on the subject of hedging always bring out an important point. Before a trade is being done, you are always concern about the potential downside risks of your investment, thus, you wish to hedge away your downside risk. However, in the end, it might be better off if you don’t hedge. On an ex post basis, it shows that hedging is a waste of time.

But is it so? By performing the pre trade hedge, although at a cost, it does remove all your worries and give you a certain outcome. A sense of security and comfort, and that’s most important of all.

Back to the market, if you pull out any chart, everyone will start sighing…. “ I should have bought in November, sell them off in February, then when the market corrected in end Feb, I should have more balls, going in to the market and grab as much as I could…I should have…”

Usually my response is, “so what are you going to do next?”

“I don’t know, what do you think?”
I think, based on an ex ante basis, I would suggest this:

I am still a firm believer of Come-May-Sell-All-Go-for-Summer-Holiday theory. Thus, will the market correct come May? I don’t know for sure. But I rather miss out the next rally than losing and cursing everyday!

The market is overvalued, if, and only if you believe comparing to historical level is useful. What goes up must come down. I guess that’s the law of nature…

Despite the talk of huge liquidity and the hunger for yield enhancement are dominating the market. But I do strongly believe that our market is quite vulnerable when there’s a change in risk appetite globally. We might not suffer as bad as Indonesia or Thailand, but who knows? Ask the more senior investors, they can tell you a few ringgit drops in a day in Maybank is not something impossible…

So, if you fear of regret, I suggest you should park some money in those stocks that you are familiar with, and if you have some buffer of profit, hold on to it until the correction comes, then you sell all.

But if your cost of entry is very near to its current price, I would suggest you to sell it now, and stay out of the market, until there are cheaper entry prices…

On an Ex Ante basis, what do you say?

Thursday, March 22, 2007

1st April 2007 - a better april fool for us

is it a sign that election is coming soon in Malaysia? who knows? but today...

Bank Negara (Central Bank of Malaysia) has announced further liberalisation of our foreign exchange administration. Previously, as an individual, we only can invest up to RM 100k abroad per annum...now, RM 1 million! bravo! but seems like it has nothing to do with me...

Limits for Corporation for overseas investment has increased to RM50million p.a. from RM10million p.a. before... good stuff, shall we expect to see more growth in earnings in coming years or more volatility in their earnings? well, in the end of day, it's fundamental that counts. Company with good management team will always outperform the rest...

Onshore funds like Unit Trust, Fund Management and Insurance companies can now invest up to 50% of their Net Asset Value (NAV) in foreign currency assets from 30% previously. This is good news for investors as you will expect fund houses and insurance company will continue to roll out more innovative product for us to invest in overseas, thus better diversification i would say.

there are more details to it, but bottom line is, we're on our way back to the open market that we used to be in before the Asian Crisis 1997. Most importantly, foreign investors will regain their confidence in our market again!

but then, there was an argument saying that it might not be such a good idea as investment flow might flow out faster that usual as previous "liquidity trap" in the market has loosened up abit... oh well... what ever it is, if you believe in economic theory, an economy with no government intervention or any form of capital control is the best form of market, as dead weight loss will be minimize, more efficient allocation of assets.... etc etc

This relaxation will officially be effective on....1st April 2007.

if you think this piece of news is not good enough. wait, we have more!

The government has announced several incentives to boost the property market, but most exciting of all, is this.

The Abolishment of nationwide REAL PROPERTY GAINS tax with effect from...1st April 2007!

what does this mean?

it means that if you have recently bought a house, you can straight away sell it off, with no property gain tax! (of course, provided you make a gain...) or, if you think this property can make money, but you have not enough capital, plus you don't want to stay there...you can borrow from bank, buy the property, and "flip" it within months, sell it at a gain, and hey ! no property gain tax!

by no mean, for foreigners and those who leaving the countries for good, this sounds like a good way to make more profit on the way out...

but would this induce to a mini-version of US Housing crisis? when there's too much flipping in the property market wouldn't it leads us to the same collapse that happened in Hong Kong's property market as well?

well, oh well, it's a good news, so at the mean time, we should embrace it happily. Who knows what lies in the future?

hopefully, this is a good April fool gift.

Thursday, March 15, 2007

Behavioural Finance - the answers...

In my previous entry, i've posted a question developed by Kahneman & Tversky. Here's the question again:-

#Choose 1 from (a) (b) and 1 from (c) (d) the following

(a) A sure chance of getting $2,400, or
(b) A 25% chance of getting $10,000 and a 75% chance of getting nothing.

(c) A sure chance of losing $7,500, or
(d) A 25% chance of losing nothing and a 75% chance of losing $10,000 #

Ok, generally, normal people, like you and me will choose (a) and (d). Why?

The efficient market theory assumes that all investors are Rational, i.e. we will always allocate our assets according to Expected Return and Risks. A rational investor will always go for the asset with the highest expected return, at a given level or risk, or invest in the asset with the lowest level of risk, at a given level of expected return. That's the theory.

In reality, we're no where near that. We are rather emotional. Ok, back to the question. Why choose (a) over (b)?

We will generally choose (a) because (a) gives you a 100% chance of receiving $2,400 bucks! A windfall! Whereas in (b), you have to gamble for it. So your mind has already been anchored that you can get $2,400 for sure, why gamble for it? But, in terms of finance, the way we generally look at it is through the calculation of Expected Return.

In (a), the expected return is $2,400.
In (b), the expected return is [0.25 x $10,000] + [0.75 x $0] = $2,500

Since (b) has the higher expected return comparing to (a), (b) should be chosen instead!

Ok, how about (c) and (d)?

Most people, including myself, Hate Losing. Let it be sports, card games, in relationship & investing, we dislike losing. Most people will choose (d) over (c), why?

Basically, (c) tells you, “You are a confirm loser. Pay me $7,500 now!” This is painful. (Both emotionally and financially)
So you say, “Hey, I am not a loser, I will choose (d) and I am not going down without fighting!”

Some academics say investors always believe too much in his/herself, i.e. Over-confidence. Oh well, we will eventually be humbled by the market…

Anyway, so you chose (d). Let’s do some calculation.

In (c), the expected return is -$7,500
In (d), the expected return is [0.25 x $0] + [0.75 x -$10,000] = -$7,500

Well, in this case, a rational investor should be indifferent between (c) and (d), but of course in reality, most of us hate losing and always over-confident that we might be lucky this time, (d) will be the favourite for sure.

So, if I combine all four of them together, which two is the best combination?

Let’s start with combination (a) & (d), the top picks by most people. The total expected return is

E(R) = [1 x $2,400] + [0.25 x $0] + [0.75 x -$10,000] = a loss of $5,100. Ouch!

According to Kahneman & Tversky, the optimal combination is (b) & (c) [or (d)]!

Here’s the expected return

E(R) = [0.25 x $10,000] + [0.75 x $0] + [-$7,500] = a loss of $5,000, effectively $100 better off than the (a) & (d) combination.

So what does this tell us?

Most people, like you and me, have mind-framing in our decision making process. We always differentiate the decision making process of “realizing gains” & “realizing loss”. In terms of gain, we always want the safest bet, unless, you have some buffer to gamble. Whereas, for loss, we prefer to gamble, and who knows, we might be lucky and can get away with lesser losses?

We rarely combine those two decisions together, although we should.

That’s the mentality of general investors ;)

Monday, March 12, 2007

Plankton Theory

read an interesting theory by Bill Gross, the bond king, who manages the world biggest bond fund at PIMCO, re-quoted by Paul McCulley at his Global Central Bank Focus dated March 2007. Bill Gross first wrote this Plankton Theory way back in August 1980.

"The plankton theory, like life itself, begins and ends in the ocean. Plankton, of course, are almost microscopic organisms that serve as food for higher life forms. Without plankton almost every fish and mammal in the sea could not survive, since most species depend upon other fish for their existence and plankton are the initial building blocks of the entire process ... ... In the case of real estate, the plankton would be the first time buyer (perhaps a young married couple) with a desire to own their own home but with very little capital to carry it off. When the time comes that they can't pull it off ... then the plankton would disappear and the rapid escalation in housing prices would ease as well. For, unless the current homeowner has someone to sell his house to, he'll be unable to afford the house, and the process would continue into the echelons of Beverly Hills and Shaker Heights. In the end, the entire market would wither on the investment vine and home prices would stop increasing at the same rapid rate. So to gauge the health of the housing market, look first at the plankton. Without their presence and financial vitality, the market's not going to repeat the experience of the past 10 years."

The meltdown in the US Sub-prime mortgage market has always been the talk in town and US housing woe has always been highlighted by financial gurus around the world as the key factor to cause the global financial crisis. Plankton theory, helps us to understand that a building won't be standing tall and remained stable if the foundation has weakened substantially. However, for us not in the US, it's pretty hard for us to see if the "planktons" are dying. However, we could look at some US economic data more closely in order for us to prepare for the "next worst thing".

If housing is the main "theme" last year, this year, US Unemployment figure will be an exciting one.

Perhaps it's time to watch out.

Word of wisdom:

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful" - Warren Buffet.

"Investing is simple, but not easy." - Warren Buffet.

Monday, February 26, 2007

Behavioural Finance!

Behavioral Finance has been one of the most famous topics for the last couple of years as it offers a whole new way in explaining the “market anomalies”. Basically what it does is to study how and why people will react in certain ways in the financial markets.

Heaps of researches have been conducted on behavioral finance over the last decades. Human’s emotions such as regrets, greed, fear, hope and etc has been the main drivers behind the numerous Bull Run and crashes. Buy low sell high, it’s always easier to be said than done, and it’s always way easier to say it in hindsight, or when you’re sideline.

But when you take up some position in the market, pretty much, you will be “disillusionised” by the market movement. When the price is creeping up, you’re hoping for more, or you might think, “Dude, I have enough, let’s sell it!” When the price is coming down, you might be thinking, “tomorrow it will go up, it’s just a paper loss, it’s not an actual loss! We’ll be fine…” and keep on praying. But according to the rule of thumb, shouldn’t you be selling when the price goes up, and keep buying when the price tumbles?

It’s Greed and Fear. You want more, but you’re afraid of losing. Losing is painful and research shows that people are very reluctant in realizing loss. But interestingly in this rising market, people are very reluctant in realizing gain as well, because the feeling of Regret, i.e. the price continues to soar after you sold is almost equally as painful as realizing loss. Well, it’s your call mate!

In an over-valued market like this (depending on how you value it), people always neglect the fundamentals. Well, in a perfect world, fundamentals should be the determinants that drive prices, but, in reality, it seems like anticipations play a bigger role!

The studies on anticipations, regrets, fear, greed, hope and etc led to the birth of behavioral finance. It’s just like doing a psychological test, the more you could understand how you think, then you should be able to understand what others think better, in turn, you should be able to read the market better!

Let’s do a simple test. This is a famous question by Kahneman & Tversky’s research

#
Choose 1 from (a) (b) and 1 from (c) (d) the following

(a) A sure chance of getting $2,400, or
(b) A 25% chance of getting $10,000 and a 75% chance of getting nothing.

(c) A sure chance of losing $7,500, or
(d) A 25% chance of losing nothing and a 75% chance of losing $10,000
#

What do you say?

Email me your answers to financialgeeks@gmail.com to find out more!

Friday, February 9, 2007

Interesting article from Bloomberg

This is an interesting article from Bloomberg, check it out!

If Hedge Funds Kept Cows, Your Milk Would Go Sour: Mark Gilbert
By Mark Gilbert


Feb. 9 (Bloomberg) -- A famous series of jokes attempts to define political systems. In communism, for example, you have two cows, your commune seizes them and charges you for milk. In a democracy, you have two cows, the cows outvote you 2-1 to ban all meat and dairy products, and you go bankrupt and starve to death.
Similar thinking can be applied to financial markets. Here, then, is the world of money recast in bovine terms.

Leveraged Buyouts
You have two cows. You come home from the fields one day to find Henry Kravis chatting to your spouse at the dining-room table. Two days later, you have no spouse, no farm, and no table. Two guys the size of sumo wrestlers have saddled up the cows and are riding them around the farmyard.

Currency Market
You have two cows. China has 1 trillion cows. Guess who sets the price of milk?

Bond Market
You have two cows. One is Brazilian, one is Australian. They yield 25 quarts of milk per day. That's half as much as three years ago, when you traded your less-lactiferous German and U.S. cows for them. You are thinking of swapping for a pair of Namibian cows. They only have three legs but, hey, they produce 26 quarts per day.

Derivatives
You have two cows. You repackage five of them into a Collateralized Lactating Obligation, pay for a AAA credit rating, slice the CLO into 10 pieces and sell it to investors, skimming the cream from the milk for yourself. Three of the cows fall ill, and the credit rating plummets. You get to keep the cream.

Hedge Funds
You have two cows. A guy in an open-necked shirt drives up in his Bentley and offers to take care of them for you in return for a year's supply of steak and 50 percent of their milk. They won't be allowed to leave his compound for two years.
Six months later, you have half a cow, producing sour milk. ``You have to be willing to lose rump today to get rib-eye tomorrow,'' the hedge-fund guy mumbles through a mouthful of sirloin and champagne.

Economics
Assume two cows.

Carbon-Emissions Trading
You have two cows. They produce 1.2 tons of methane gas per day. After a hefty donation to the re-election campaign of your local representative, the government gives you enough emission permits for six cows. You sell three permits, buy another cow, and apply for a European Commission grant to build a methane-gas power station.

Microsoft Corp.
You have one old, tired cow. A recent heart transplant may have come too late to save the beast.
Google Inc.
You have no cows. You slap advertisements on everyone else's cows. The milk floods in. You use the proceeds to reinvent the cow.

Apple Inc.
Nobody wants your cows. You design the cutest little milk bottle. Now, everybody wants your cows.

Goldman Sachs Group Inc.
You have 26,467 cows. They are strapped into the milking machines 24/7. Some of them have more hay than they could ever hope to eat. Others aspire to one day having more hay than they could ever hope to eat. The cows with the most hay end up with big government jobs.

Pension-Fund Management
You have two cows. How boring is that? You pay a month's supply of milk to a consultant, who advises you to sell one cow and buy two aardvarks instead. The aardvarks die. The consultant charges you four months of your (now reduced) milk supply and advises you to sell half of your remaining cow and buy a wombat. The wombat dies. The consultant charges eight months of milk for a copy of his new report, ``Two-Cow Strategies for Alleviating the Impending Pensions Crisis.''

Russian Energy
You have two cows. Comrade, those cows are an environmental hazard. We suggest you hand one of them over to us.

Credit-Default Swaps
You have two cows. You buy insurance against them dying, and tuck the contracts into the middle of that tottering pile of documentation on your desk. One dark night, Henry Kravis sneaks off with your cows. By the time you track down the paperwork, your now worthless contracts have expired.

Interest-Rate Swaps
You have two cows. You pledge one of them to me as collateral in a swap for some of my pigs. I pledge the cow to my neighbor as collateral in a swap for some of his sheep. He pledges the cow to his cousin as collateral in a swap for some of his cousin's goats. Better pray the livestock market doesn't crash and we have to try and round up that cow.

Commodities
You have lots of stocks and bonds, but no cows. Are you crazy? Cows are the hot new market. Here, buy this exchange- traded cow futures contract. It can't lose. It gained 40 percent in the past six months.

Gold
You have two cows. You wear a cap you made out of tin foil so that the tiny black helicopters can't read your thoughts. You spend your days blogging about how the government's decision to abandon the cattle standard in 1933 was part of a global conspiracy by the world's central banks to destroy the value of your herd.

(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this article: &cls;Mark Gilbert&cle; in London at magilbert@bloomberg.net

Monday, February 5, 2007

Tough Time to Play

Finally, the day has come.

Isn't it amazing that KLCI finally broke through 1,200 pts ? do you still remember when was the last time the KLCI last stood at a point above 1,200 pts?

yup, it's about 10 years ago, it was the beginning of 1997, before Princess Diana had the accident, before Hong Kong was returned to China, and of course, before "the speculators" or Soros hit us so bad and subsequently brought us to the Asian Financial Crisis. Bravo. 10 years.

Still remembering that pre-97 are times when mum and dad investors would quit their daily jobs and spent most of their time hanging out in the brokerage house. Any stock, literally, any stock you buy, you can make money. Of course, what follow aftermath was a brutal, cruel, blood-splashing stock market crash where the plunge in the KLCI index was faster than the speed estimated by the Law of Gravity.

2007, what do we see? another amazing bull run we have. well, technically, it's no longer a "any stock you buy, you can make money" era, but hey, if you stick to the big caps, timber, palm oil, construction and Visit Malaysia Year theme's stocks, you have already made heaps!

Once upon a time, Mr. Puzzled asked a Guru. "Guru, when it's the good time to get out of a stock market before it crashes?"

The Guru said "You know the time has come... when everyone you know is talking about buying shares..."

Well, to me, i think it's a pretty good rule of thumb. But then, come to think of it, how do you know that those Tom, Dick and Harry who will rush in for the last bull run is not You, Me and You?

okok, cut the crap. Basically, most of the market participants are quite bearish about the current stage of the market. Has it peaked? when will it peak? Who knows? but i guess everyone is thinking about the same thing. For most, it's time to make as much as you can before the correction comes...(of course, only if you're a believer of what goes up, must come down...), for some, well, i rather put my cash in the FD, and not worrying about the market too much...

Anyhow, foreign money still coming in like no nobody business, market still going up up and up. What's next? Man, gotta admit that this, is a tough time to play!

So what shall we do? watch out for 2 things

1) US Fed Fund Rate Hike
2) Japanese Yen Appreciation and/or Japanese Central Bank's decision to hike rate...

When these happen... life is gonna be tough, again.

Sunday, January 14, 2007

Strong Ringgit vs Visit Malaysia Year '07

If you do track foreign exchange (forex) closely, you should realise that Ringgit (RM) has performed strongly against most foreign currencies, including the US dollar, Japanese Yen, Indonesia Rupiah and Thai Baht.

In other words, our local currency now has more buying power when we go abroad.

So, perhaps it's time for us to travel overseas? hm...before that...

2007 marks the 50th anniversary for Malaysia, and hence, our government has launched a year long celebration called "Visit Malaysia Year". We also have our version of London eye in KL called "Eye on Malaysia". It's a lovely observation wheel situated on Lake Titiwangsa, overseeing the beautiful skyline of KL City.

Visit Malaysia Year 2007 is one of the major theme this year that should give KLCI a nice boost. When it comes to an increase in tourism, the first thing that pops up in an investment mind should be "which sector will benefit the most?"

Yup, you're right. Consumerism and Retail, Hotel, Transportation related etc etc...

hey,that's quite a number of sectors! Ok, let's filter down. Which's KL most famous landmark?

KLCC TwinTower! yeah, i know. But how do i make money out of this? If you believe in this theme, and you wanna "get a piece of" KLCC, perhaps KLCC Property would worth a look since they own KLCC.

Since it's a tourism year, some would say that the industry which will have the most positive impact would be the airport and airline. Hm...that's true. For most international travelers, their first gateway to Malaysia will be the airport. Let it be KLIA International Airport or LCC (low cost carrier terminal), both of them are owned by Malaysia Airport Holding Berhad (MAHB). Tak lain tak bukan, of course, in terms of airline, MAS and AirAsia should pop up relatively fast enough in our mind. If not, then they have done a lousy job in terms of advertising! Key note here: which one pop up first?

Airasia, one of my all time favourite company, is currently giving away 1 million free tickets and finally they are planning to fly over the 4-hour radius region!

MAS, as a measure of survival and being competitive, has follow suit and rolled out some low fares strategies as well. Good news for us travelers!

so, is it time for holiday?

if you have been wanting to go overseas for holiday, perhaps this is the time since our Ringgit is strong and tickets are relatively cheaper.

if you want to go holiday sometime later, but wanna make a gain out of this appreciating RM, great, perhaps you could purchase some foreign currencies now and hold on to it till the day you go abroad, but of course, please bear in mind that you won't be making any interests on the foreign currencies that you're holding in hand or under your pillow. :)

Another way to make full gain of this is to open some sort of foreign fixed deposit account with banks, which will convert your RM to forex, place them in foreign banks' FD, and upon maturity, you can reinvest in other foreign FD or covert them back to RM. But to do this, you should be hoping that RM will not appreciate any further!

if you want to make more, and for instance, if your son / daughter is studying in overseas, perhaps you could send more money over, deposit them into the foreign banks FD and gain some yield pickup from currency gain and higher deposit rate! ( I know most savvy mom dad investors have been doing this since ages ago...)

if you don't have any foreign exposure or not going anywhere abroad for holidays... well, perhaps VMY '07 investment theme should keep you occupy for awhile. :)

Good Luck investing!

p.s. Disclaimer: this article does not constitute a buy or sell advice. You should do more analysis before putting your money in!

Tuesday, January 9, 2007

Investment 101 - benchmark

Let’s talk about investment.

Rule #1 of investing, you must know your own benchmark.

i.e. when you get your return on investment (ROI), you must be able to see, whether has it been a profitable investment, or otherwise.

For instance, in Malaysia,
- The inflation rate is about 3% a year, whereas
- 12-months fixed deposits (FD) give you about 3.70% per annum.
-Unit trust A, with 100% equities exposure gives you 8% return a year.
- Direct investment in stock B listed on KLCI 15% p.a. (tell me if you can find one!)
- 1 banana is selling for RM1. (c’mon, tell me you do have some sense of humour!)

Ok, so what does all these numbers and facts mean?

Let’s start with a simple scenario. You’re 25 years old. Work your arse off for 2 years and manage to save up RM 5,000. What an achievement.
But you know for sure RM5k savings won’t bring you anywhere. So you have decided to take a bold move and ready for some investment.

Naturally, and traditionally, most of our “investments” are in Banks’ FD. Correct?
If, and only if, you keep your savings underneath your pillow, so what have you actually “lose”?

CASE 1:
Beginning of 2007 you have RM5k, in terms of purchasing power, you can afford to buy 5,000 bananas. Wow. Ok, then you decide to put 5k underneath your pillow.

After 1 year, you dig out your RM5k notes, go to Giant or Tesco and want to reward yourself with 5k bananas, only to find out that due to inflation, 1 banana now costs you RM 1.03.

So in terms of purchasing power, your RM 5k no longer can buy you 5k bananas, but only RM 5k / RM 1.03 = 4,854 bananas, 146 bananas less than one year before!

So in the end, you still have your money in hand, but, it has lost its value. Thanks to the erosion caused by Inflation!

CASE 2:
Same scenario as before, but you use the RM5k at the beginning of 2007 to buy RM5k worth of bananas, i.e. you have 5,000 bananas in store. Assume that you can store it in superb condition for a year (ignoring storage costs……); at the end of the year, you sell all the bananas at market price of RM 1.03. End of 2007, you have RM 5,000 * RM 1.03 = RM 5,150.
Oh wait, have I made 150 bucks for trading bananas? Not bad eh! But wait a minute, something is not right here.

Actual return on investment = RM 150 / RM 5000 = 3% = inflation rate p.a.!

So you thought you made some, but in the end, you only manage to hedge your savings!

CASE 3:
So instead of buying bananas, you put your money into FD. Smart move.
After one year, you have RM 5,000 plus 3.70% interests = RM 5,185. Not bad.
You withdraw all the money from the bank and go get yourself some banana.

At the end of year banana price of RM 1.03, you can buy RM 5,185 / RM 1.03 = 5,034 bananas! Crikey! 180 more than case 1, 34 more than case 2!

That’s investment!

You want more bananas?

CASE 4 & 5:
Just lump the two investments together, basically they will tell the same story.

Instead of putting in the FD, you have decided to buy Unit Trust A or direct investment into stock B.

Maybe it’s pure luck or maybe you’re inspired by financial geeks, you get 8% return back from investment A and / or 15% back from investment B. Bravo!

So how much have I made? You asked yourself. Let’s get back to the real finance and stop playing so much with bananas.

You should know by now that inflation will eat into the amount of bananas that you can buy at the end of year. Good.

So now you have made 8% (15% for B). But which benchmark do you compare against?

Both the investments have beaten inflation rate of 3% like how Bruce Lee smashes financial_cicak. If you lose me here, it means that you can buy yourself a lot more bananas.

But is that your real benchmark? You should be smart enough to put your savings in FD.

Instead of putting your money with the bank which gives you 3.70%, now you’re investing in unit trusts or share.

So by not investing in FD has become an opportunity cost for you! Is it really worth it?

Absolutely. Investment A gives you an extra 5% return while investing in stock market gives you a handsome 12% return!

Thus your actual benchmark is … your next best investment opportunity! In this case, FD.

But hey, are we missing out something here? I am afraid so.

Rule #2 of investing – Risks vs Return

The above example has one major flaw. It has totally ignored one of the most important elements in terms of investing. RISK!

Basically the illustration here assume that all the investments, either in bananas, hide underneath pillow, FD, A or B have similar risks. Is this the case?

No no… so how do we measure risks?

More to come in my next entry. It’s time for me to enjoy my bananas…

Sunday, January 7, 2007

Are we done yet?

Omedeto! Welcome to financial geeks!
I'm financial foorensu.

Before we start, what's foorensu?

It’s actually フレンズ, japanese for the word Friends. Yeah, i know, the actual romanji should read fu-re-n-zu, but what da heck, just gotta give it a slight twist to make it ... more me!

'nuff about the nick. Ok. Let’s see what we have here. Today is 5th of January 2007. In financial terms, today is the 3rd trading day of the year.

As at 5pm, Malaysia KLCI stands at 1,120pts, continue to up 2 points after the strong bull run 2 days ago. not too bad as this is a healthy consolidation.

The investors' sentiments are very positive due to the recent Bull Run. Even the Christmas and New Year eve parties are more happening in KL than before. KLCI was below 900pts back in May 2006, but then it surged past 980, 1000, 1050, 1080, and now, broke through 1100. Omedeto!!!

But hey, wait a minute. Isn't there a saying sounds like this?

"what goes up, must comes down"

If you asked any fundamentalist like the great Warren Buffet or even Sir Isaac Newton who has discovered the law of gravity will agree with the abovementioned statement. What goes up can't go up forever. Similarly, what goes down can't go down forever.

Therefore the million dollar question is this, "Are we done yet???"

Today on Bloomberg TV, Bear Sterns Chief Strategist believes that 2007 will be a bull year for US equity. Similarly, Bill Gross from Pimco also predicted that US Fed Fund Rate will be cut to 4.25% by year end from its current level of 5.25%. (note: rate cut? what the heck? well, we can explore this in more details in my next entry perhaps).

This news is very positive for the stock market. The rationale is that US economy growth is expected to slow, and thus, an easing monetary policy is expected to be in place in order to stimulate the slowing economy.

The key word here is Expectation.

finance #101: Prices Fluctuates based on Expectation.

simple illustration:-

Expectation of slowing economy ---> central bank is expected to cut rates ---> more friendly business environment ---> better earnings ---> increase in firms' values ---> increase in share price.

Thus, one of the key risks going forward that will halt the bull run will be this:

The US growth does not slow as fast as expected.

If this materialises, what will happen?

Expectation of rate cut --- doesn't materialise, as there are no foundation for them to do so.
Expectation of better earnings --- might not materialise.
Share prices? --- fall back to its fair value.

So back to the question of "are we done yet?" The answer is no, not yet. Personally I believe that we could ride on this bull run for awhile more due to the January effect before something happen that turn the investors' sentiment from positive to negative. In Malaysia, we're abit luckier because the 9MP and Mergers talk will continue to keep our market supported for awhile.

Two set of numbers would provide us some clues if we do track it closely.

1) The volume traded on KLCI. Make sure that it is not on a declining trend. If it does, well, first sign of the tapering of investors' confidence.

2) US Growth number - i.e. the GDP (Gross Domestic Product). The magnitude of change would be the key focus.

Till then, will be back for more!

What’s your thought?

Friday, January 5, 2007

Welcome!

ladies & gentlemen, welcome to the financial geeks' blog.

we're a bunch of financial geeks and we would like to share our thoughts with you.

do bear with us for a while cause for a start, we would only cover malaysia market, which is the market that we're most familiar with.

so do drop by once in a while, or everyday if you like, for some investing tips and financial updates!

cya

Financial Geeks