Gold to Oil Ratio

Lately, this has become a relatively popular chart. Gold is usually priced in US$ per ounce, Light Crude Oil priced in US$ per barrel. The comparison is how many barrels of Oil can 1 ounce of Gold buy.

Firstly, some long term chart over the past 20 years ...



Key observations:

1. Gold is overbought when Gold/Oil ratio is around 22 or higher.
2. Gold is oversold when Gold/Oil ratio is below 10 say.
3. On average - over the past 20 years - the "mean" for Gold/Oil ratio is around 14-16 say.

A closer look over the past 3 years:

Key Observations:

1. When crude hit bottom (below $34) a fortnight ago, Gold/Oil ratio is locally highest, at 24, which suggests that either Gold is overbought, Oil oversold, or a combination of both. Or if Gold is priced normally, then, Oil is extremely oversold. Or if Oil is priced normally, then, Gold is extremely overbought. I lean towards Oil being oversold.

2. It is interesting, that during July this year, the Gold/Oil RSI was oversold, suggesting that either Crude Oil was overbought, or Gold oversold. As it turns out, July this year is when Crude Oil peaked at $147 per barrel.

3. It seems in Dec this year, the Gold/Oil RSI is now the reverse, i.e. overbought. Also appears to have coincided with the lowest Crude Oil price at below $34 on Dec 19.

Other Observations:

1. The Gold/Oil ratio is on a "bull run". As usual, a bull run can always run higher than 24. We now appear to have seen a "local peak" at 24 a fortnight ago. Is this "THE PEAK"?

2. Historically, when measured over years and decades, the Gold/Oil ratio has a tendency to revert to the mean. Personally, I have no doubt that it will revert, it's only a question of when.

3. In the last 6 months, the Gold/Oil ratio has gone very, very quickly from oversold, to overbought. This is the fastest move ever in the last 20 years.

Other Thoughts:

1. If you don't believe that you can time markets, then, around now might not seem to be a bad time to commence entry into Crude Oil if one has a long term horizon measured > 12 months. You won't be able to pick the bottom, but you should be able to scale in your entry over progressively lower prices. The practical problem is of course what vehicle, since crude oil futures are highly leveraged instruments, and you have the rollover / contango problem to overcome.

2. Index funds are interesting, but there are some detailed studies suggesting that the performance doesn't appear to match the actual Continuous futures charts.

3. Oil stock/s with huge oil reserves/inventories are possible prospects, but these require careful study of the stocks concerned. The general feel is that the stock prices have not yet factored in recent low crude oil price.

4. I will not personally consider Options on 1, 2, or 3, as they are more complex forms. And forget physically owning oil in barrels. *grin*

Light Crude Oil Breakeven prices: Personal Observations and thoughts

From my own personal observations, most of the fundamental arguments as to why "crude oil can never fall below $x" is based on the reasoning that in the long term, the price of crude oil should not fall below the long term production costs.

However, the long term production costs seems to be a complex and ever-changing figure for several reasons. My own observation has shown that the number varies depending on who publishes it, when they were published, in addition to varying by country, types of oil extraction methods, by company, etc. Intrinsically, it is probably a "living figure", meaning it changes over time, and is expected to continue to change over time.

Unfortunately, without a perfect filing system, it appears I have missed past figures. So, this article is an attempt to link to these figures, based on a limited search recently.

1. IMF Oct 2008 Report (World Economic and Financial Surveys - Regional Economic Outlook - Middle East and Central Asia, 60 pages - http://www.imf.org/external/pubs/ft/reo/2008/MCD/eng/mreo1008.pdf):



MCD stands for Middle East and Central Asia with an average of $58.

GCC stands for Gulf Cooperation Council, and has a lower average of $47.

Both figures are based on IMF staff estimates and projections, based on 2008 Fiscal Accounts for the countries concerned. As crude oil price fell below $40 at the time of writing, my expectation is that some of the more prudent countries are probably preparing to rewrite their Fiscal Budgets if crude oil price don't rise soon ...

2. Seeking Alpha 25 Dec 2007 article - http://seekingalpha.com/article/58322-oil-price-predictions-and-break-even-prices




Note the GCC average in July 2006 is $38, which is lower than IMF Oct 2008 figure of $47.

If one wants to be prudent, then, one should lean towards the $38 figure since it is common for analysts to jack up the figure when crude oil prices are high, and they were definitely high when IMF produced the report prior to Oct 2008. Whilst there may be valid reasons as to why the cost of extracting crude oil has risen since July 2006 (or approximately 2 years ago) - e.g. inflation - there are also valid reasons as to why the same cost will come down due to deflation. You should have your own figure.

Note also that Canadian Oil Stands cost is also not very high - only $33. It is true that these costs have since then increased to around $50, but it would not be surprising if going forward, they will attempt to lower the production costs down due to deflation. Again, you should have your own figure.

3. 21 Oct 2008 Wall Street Journal article - http://blogs.wsj.com/environmentalcapital/2008/10/21/

Venezuela 2008 Budget based on $35.
Nigeria 2009 Budget based on $39 (down from $62).
Iran next 2 budgets based on $55 to $60 (down from very high figure prior)
Angola plans for $65.
Russia $70 (previously need $95 to break even)
Iraq plans for $80 (but IMF previously said it needs $111 to break even)
Iraq Plan B for $60.

It is obvious these are not static numbers, but fluid and will keep changing depending on how the world changes. Some may have been forced by circumstances (e.g. must tighten belts during tough times), others may be due to choice (e.g. artifically over-inflate during good times, etc). What I take out from this is that the so called "break-even" price is NOT a static figure, but a dynamically changing figure, and it is very important to understand the timing and underlying motive of such announcements.

4. Merill Lynch projects crude oil price to drop to $25. This is widely reported in Bloomberg and else where (e.g. http://www.thewashingtonnote.com/archives/2008/12/the_oil_floor/).

Bottom Line

If you are a true fundamental investor who believes that you can never time the market successfully, then, I still stand by my previous thoughts that any price below $40 is a decent entry price for the long term (> 12-36 months).

But must be extremely careful and beware of the effects of contango on futures rollovers and possible similar impact on passive index funds.

Personally, I lean towards shorter term market timing.

Light Crude Oil: More thoughts on futures, rollover, contango, index funds

Just some notes to myself. If you don't understand this, just ignore it.

In the present environment in Nymex light crude oil, contango poses a real practical problem for the long term investor who chose to be exposed to Light Crude using futures (e.g. Nymex).

Take this Dec 19 as example, when current month futures price crashed to below $34 at expiry.

The "long term investors" who were long Jan 2009 contract on Dec 19 who left the rollover process to the last minute suffers huge losses in 2 ways.

First, on Dec 19, the sale price at closing just prior to expiry is terribly poor, as everyone else wanted to do the same thing and sell. Consequently, these "long term investors" got hit badly, when everyone else wanted out.

Second, on the same day, if this "long term investor" wants to roll-over into subsequent month contract, the price is much higher due to contango. For example, whilst Jan 2009 contract might sell at $33, Feb 2009 contract could only be bought at say $42.

In this sense, contango is a real practical problem if the "long term investor" didn't consider his rollover carefully, because he has suffered the price fall to $33, and by reentering at $42, since this price has now fallen to $35, he has suffered another price fall again, almost equivalent to $33 falling by another 16% or more.

In other words, an investor who doesn't pay careful attention to timing his rollover contract could suffer consistent deteriorating loss, simply due to contango and poor rollover, if light crude price doesn't rise after he rolls-over, but stays flat. For example, imagine that light crude stays flat at $35 for 6 months, but the market is in contango. So, every month, when he rolls-over at $42, he suffers $7 loss per month by month end because it dips to $35. After 6 months this way, he would definitely be wiped out. (in fact, for futures, just a single $7 loss in a month is often enough to wipe out some of the poorly capitalized, over-leveraged, over-bet players, let alone 6 consecutive months of $7 loss).

Interestingly, the current month contract also happens to be the most popular month contract.

The long only crude oil index funds which invests in such futures contracts could become risky in this sense, if their index mandate is to be invested in current month contracts, and if they mechanically rollover at each month end at expiry date. They would certainly fall into the category of "long" (as opposed to short) investor (since index fund, i.e. indefinitely long term) in crude oil by mandate, and some of these use a combination of cash and futures to maintain an equivalent net crude oil exposure. Those who does this will financially suffer from mechanical rollover at expiry date due to contango.

I believe we have actually seen this phenomena happening on Dec 19. Certain light crude oil long index fund price continues to fall from Dec 19 to Dec 26, even though futures current month contract appears higher (from $33 on Dec 19, to $37 on Dec 26).

Let's see whether similar effects will be observed next month.

For future reference.

Light Crude Oil - Is this a normal Contango Spread?

As at Dec 26, light crude oil futures market is said to be "in contango", meaning, the price of crude is higher in future months than spot month, with an upward sloping forward curve.

The opposite is known as "backwardation" (downward sloping forward curve), which I am guessing happened with a rather strong effect about 6 months ago, when current month crude oil peaked at around $147.

Now, being "in contango" does NOT automatically mean that current month price will necessarily rise. This is because, "rational pricing" suggests that there is a "cost of carry" to hold the commodity today for future delivery. Such costs include storage fees (including security and insurance), as well as interest foregone on monies tied up. So, it is quite normal for light crude futures contract to be in contango since it is a non-perishable commodity which can be stored for years if necessary (unlike perishable commodities like pork bellies, etc.).

However, the question in my mind right now is is the size of current spreads rationale?

For example, from the above table, Feb 2009, 2010, 2011 crude selling at $37.80, $52.96 and $60.30 respectively, giving a 12 month spread of $15 (2009-2010) and $7 (2010-2011). Is this a rationale spread? Why is $15 so much larger than $7? And is this sustainable and exploitable?

Perhaps not for an average Malaysian retailer like me. However, what about from the eyes of a professional arbitrageur / hedge fund manager? Since, if he can, then, prices may converge over time, as fear reduces and they start smelling opportunities. And if they can move prices, then, can I take advantage of this expected move?

The size of the spread seems large. For example, the $15 spread represents nearly 40% return on $37.80 Feb 2008 contract. In other words, an arbitrageur can buy Feb 2009 contract and sell Feb 2010 contract (with zero NET crude oil exposure), and receives 40% margin (=52.96 / 37.80 - 1) to cover the cost of carry. Whereas doing this for another year (2010 to 2011) only provides 14% margin (= 60.3/52.96 - 1). If we ass-u-me the normal annual cost of carry is 14% (a big ASS-U-ME), then, there is another 26% marginal difference (= 40% - 14%) in the nearer term. And if we think that risk-free interest rates will rise in 2 years time, then, this difference appears even more irrational.

However, the size of the spread (40% margin) has actually declined since a week ago. Recall Dec 19, 2008 when Nymex Jan 2009 contract expired with a closing price of below $34. The same price on Jan 2010 contract on Dec 19, 2008 is $55, with nearly $21 spread, and far larger than $15 spread observed today. However, Dec 19 was a once-off event in that it was a Nymex light crude expiry day, and obviously, someone who was long that day just simply didn't want to take delivery and was forced to sell, regardless of price, which created an excellent opportunity for the other side to arbitrage/profit. And probably no similar opportunity for an average retailer like me to profit from this expiry event.

Where am I going with this?

Well, just rambling ... I also came across this article quite by accident - http://oiltradersblog.blogspot.com/2008/12/contango-scares-uso-and-dbo-investors.html - and found myself wondering if I agree with the writer, in particular, the first paragraph statement that says "This little monster (contango) is scaring investors off simple passive funds". After thinking a little about it, my feeling is that this writer probably confuses cause with symptom, since if contango is a normal phenomena, then, the observed contango is merely a symptom or the result of prices falling more on the spot month, rather than the cause. So, the fall in prices of these passive funds are probably due to something else, rather than contango itself. Using contango to explain price falling is rather like saying "the price falls because it fell" or "the price falls because it did not rise", which is a rhetorical tautology - it is true, but is redundant, and does not really convey any useful information. However, the overall article, and certainly the blog is interesting and thought provoking, even if one may not necessarily agree with everything that's written there.

For future reference.

Merry Christmas, Happy New Year, and Some thoughts for 2009

As we approach the end of this year, it's this time of the year when we review and reflect how the current year has been, and our plans for the next year.

There is no doubt that 2008 has been quite possible, once-in-a-generation experience. I have never seen, in my adult life, how financial markets around the world has collapsed to the extent that it has. Dow Jones above 14k, and crashing to a low of 7.5k. Our KLCI shooting past 1,500, only to crash to 800 in the same year! Baltic Dry Index peak of over 11,000, now languishing at 800! Crude oil price running up to US$147 per barrel, only to come crashing down to below US$40, and still doesn't appear to have found bottom yet (at the time of writing). Commodities everywhere literally crashed. Financial institutions like AIG with AAA rating by various rating agencies, crashing down and losing 98%-99% shareholder value. Major institutions collapsing, gone bankrupt and blood literally everywhere. I am not sure - once this is over - that we will witness similar events to the same extent again in our own generation - these bubbles and busts that we've seen this year. Perhaps, it needs another generation to not learn the lessons of the past, so that mistakes this scale have a chance of being repeated ... call me pessimist, but based on history, we don't seem to learn the lessons of history e.g. after 2-3 generations ...

On the local political front, this year, we witnessed a most unexpected and a most amazing result this March, with BN losing an unexpected 5 states and Pakatan nearly coming into power. Sadly, things continue to deteriorate since then. Malaysia became an underweight country for foreign investors from the political uncertainty, and whilst things appear to have somewhat settled, many remain pessimistic that our country can be turned around from what appears to be heading towards the abyss. Our RM continue to deteriorate towards the end of this year, and foreign investors doesn't appear to be rushing into Malaysia to invest in our country again. Many is of the view that even when the global economy recovers, Malaysia will continue to lag and remain under-weight for some time, simply because our policies does not appear to be consistent, and investment friendly ... the Badawi administration likes to flip flop too much, and foreign investors simply hate flip flop behaviour to want to come in and invest in this country long term.

Personally for me, this year is definitely NOT a good year at all compared to prior years. I'm sure it would be the same for all of you with real trading accounts. If your trading account showed an even better result in 2008 vs 2007, then, you are an extremely rare individual, and I hope I have the chance to meet you in real life :-) Notwitstanding the absolute result, I most definitely feel that my trading has improved personally this year, than last year, but like all years, I still feel that I can continue to improve.

What are my thoughts for 2009? There are many, and predictions for 2009 always make one look stupid in hindsight, but it's an exercise worth doing every year simply because it forces one to look forward and learn ... So, at the risk of appearing stupid, the following are my own views:

1. US stock markets ... I am not expecting the same level of volatility in 2009, than what we've seen in 2008. Being an optimist, I think there's a 55% chance that we've seen "the bottom" in the Dow Jones. (It also means there is a 45% chance we might not, so, I'm not very confident here). I think we'll see 2009 being a consolidation year for US. There's no doubt that their problems are real, their economy will continue to register bad results everywhere, whether GDP growth, unemployment, prices, general economic activity, etc. but much of these were priced in when the Dow was 7.5k.

2. Baltic Dry Index ... I really cannot imagine the BDI staying below 1,000 for the entire 2009 year ... if it does, a lot more shipping companies are going to go bankrupt, and that itself will put some upwards pressure on shipping rates. So, I envisage the BDI to break above 1,000 in 2009, and perhaps heads towards 2,000 level sometime in 2009. It may not happen soon, but the odds of this happening is greater than 50/50 in my opinion.

3. Crude Oil price ... it is currently trading below US$40 at the time of writing, but I expect this to rebound in 2009. On a macro scale, inventories are at its highest today and there's fear it could stay that way for some time, and it probably would in the short term, but by the end of 2009, we should see significantly higher crude oil prices than US$40. Those with 12 months horizon will do well.

4. Global economic activity ... this is the key driver to asset prices everywhere, but China and India still needs to grow. Yes, there's a dampener, but I see these as short term effects. When things settle down as they appear now, I expect natural demand to reappear again, to stimulate the growth engine ... then, we'll see more manufacturing activities, more shipping trades, more lending by financial institutions, greater demand for energy sources and raw materials like crude oil, etc. which explains why I expect to see higher BDI and higher crude oil prices towards the end of 2009 ...

5. US Treasury ... worth mentioning that this is probably one of the last bubbles in financial markets that I'm aware of at the time of writing ... as you know, the Fed Funds rate has been brought down to 0%-0.25%, and bond prices has never been higher before in the US. The longer dated bonds are still yielding between 2%-3%, and I expect these to perhaps come down more in the first half of 2009. Expect to see the bubble bursting towards the 2nd half or the end of 2009 say, when US economic activities start to pick up again and perhaps inflation ... at the moment, it's still definitely deflation concerns.

6. USD/JPY ... this is prompted by Dali's writings on spotting market bottoms when risk aversion reduces. Over the next few years, I'm generally bearish on the USD for obvious reasons, but timing these are difficult. But when the USD starts to drop, we should see some of these funds moving to other countries such as Euro (traditionally, seen to be inverse to the USD) and AUD (being a resource rich country), not to mention other "riskier" countries. I expect to see the USD peaking in 2009, i.e. I think we may see lower average USD value in 2010 than in 2009 ...

7. Our local stock market will probably mirror US stock markets and perhaps lag a few months ... by that I mean it of course "tracks" it on a weekly basis, although with much lower volatility, but it needs at least a few months before foreign investors feel confident to return to Malaysia after global risk aversion reduces ... right now, we haven't yet seen that happening in a substantial way. So, consistent with my 1. above, I'm not expecting a rapid recovery to our local stock market in 2009 in a major way ... "ezi" mentions that 1,000 is a major resistance, and I tend to agree with him ... for this to happen, we need to see BDI rising to say 2,000 level, crude oil rising to above US$50-US$60, Fed Funds rate rise above present 0-0.25%, US$ falling, etc. etc. etc.

Anyway, it's been fun writing this article, and making all sorts of predictions about the future. But as usual, take EVERY predictions with a huge grain of salt. No one has a crystal ball that guarantees the future. And I certainly don't trade significantly based on my general and long term predictions like the above. Treat it as fun.

With that, I would like to take this opportunity to wish you and your family a Merry Christmas, and a Happy New Year for 2009!

And may 2009 be an EVEN BETTER year yet to you and your family!

Cheers!

Peak Oil and a call for Crude Oil CW in Bursa

I like this article because of the balance that it provides. Short, simple, for future reference - http://gas2.org/2008/12/15/iea-chief-economist-says-peak-oil-will-come-in-11-years/

The thing for me to take out of this is that "peak oil" is a concept where many people have many strong and yet different views about it, ranging from "it's going to happen in 10 years time" to "it might never happen because the world will find new sources of energy through improvements in technology" ...

Even the IEA (International Energy Agency) chief changed his mind, that peak oil might hit in 2030, and brought that down to 2020, which makes it much sooner.

Obviously, "peak oil" is a highly important and highly critical concept simply because our world is so energy dependent, and if the world fails to address our long term future energy needs, then, some says "human civilization as we know it today" could come to "an end".

I tend to agree with the author that it is too important to NOT plan for it.

Even if it's going to happen in 30 years time or 50 years time, the possibility that it could happen in 10 years time means it's too important to do nothing.

So, I strongly lean towards the idea of taking out an "insurance policy". And like all insurance policy, only a small % of assets needs to be committed, not the entire portfolio.

And when crude oil prices is so low and potentially volatile, it would only makes sense to trade a significant portion of it. Note that the recent Nymex crude oil price is not across the board, but only to the expiring January contract on Dec 19. The February contract did not behave in the same manner.

Unfortunately, there isn't a really decent crude oil counter in Bursa that provides direct exposure, nor is there sufficiently large volume and liquidity that a single or a small group of players does not control the prices on a regular basis ... In my chatbox, I have expressed strongly ideas for Bursa and brokers to consider creating products that are linked to crude oil prices, such as a relatively simple, straightforward, call warrant based on crude oil prices. When crude oil prices are in a "lowish range" like it is now, it should be a relatively straightforward matter for the professionals to hedge their exposures, and to write such Call Warrants and introduce these to Bursa. The call warrant can be so designed so that it could be in the money, even if Crude Oil falls to USD20, thereby, making it a very low odds of having a zero value at expiry. At current price of $35-$40, if it goes back to $50-$60, the instrument will have doubled one's money, and $50-$60 might not be an unreasonable target over the next year or 2. An expiry date of 9 to 12 months would be excellent. If the introduction of such call warrant can be timed when crude oil is around $35, then, I believe such Call Warrant will be HIGHLY popular, especially when crude oil price starts to run back to above $40. Many traders would flock back to Bursa just from this CW alone.

If you support the introduction of such call warrants, don't be shy to drop a note in the comments section.

Let's hear your views!

Another con-job ... chatting with Ethan

This morning, a long-time chatter and blogger who went MIA for most of this year came back to share a relatively simple "con-job-that-despite-its simplicity-almost-got-away" with us, further to my article on newbie. Apparently, the modus operandi is similar which involves instilling confidence amongst the chatbox readers, but completely different in approach in execution. Instead of recommending stock tips, his plan involves "managing funds" on behalf of others. Here's the gist of the actual exhange in my chatbox:

To keep it brief, I have removed some of the other chatters comments that are not strictly related to the conversation, and some minor typo corrections, as the conversation are many as usual ... Please note that the chatbox works from bottom-up, so, you'll have to start reading from the bottom.

_____________


19 Dec 08, 12:58 ethan: liar is here and there, and u should judge urself is it worth to earn a little more $$ by risking urself on losing 100%

19 Dec 08, 12:57 ethan: so be extra careful with ur money, especially in bad economy time.

19 Dec 08, 12:56 ethan: another example, remember madoff scandal? the owner also dunno what the fund is doing, so ends up ? really buy fund for fun only...thats bad...

19 Dec 08, 12:55 ethan: check it out urself ya wind as i am not lawyer.. hoho..but i read it somewhere at newspaper

19 Dec 08, 12:54 ethan: as the contract will void itself if it is for illegal stuff from legal point of view

19 Dec 08, 12:54 ethan: wind, as from what i know, if it is a private fund, which is illegal in malaysia, it seem contract doesnot make sense

19 Dec 08, 12:51 ethan: how can u trust somebody to take over ur fund as u are the one that will care it the most

19 Dec 08, 12:50 ethan: he may lost all previous client

19 Dec 08, 12:49 ethan: easy, he stil use his agent id to do biz, if we report to sc and futmc , he will be in deep ****..

19 Dec 08, 12:49 Windsurfer: ethan, how did u manage to make the con man give back the money ??

19 Dec 08, 12:48 ethan: seng, u are welcome to use it since it is good for everybody, but the figure is 4k, not 8k .:)

19 Dec 08, 12:46 Seng: Ethan, I assume you are okay for me to write something based on what you just said here?

19 Dec 08, 12:46 Seng: Yes, iv ... let me makan first and hopefully, the chatbox still have the history after lunch ... I'll see if I can do a copy and paste in another article if ethan has no objections ...

19 Dec 08, 12:45 ivtac: thanks for the warning ethan. hope more ppl read about it. perhaps seng, you can addedum to your posting below?

19 Dec 08, 12:44 Windsurfer: u guys treaten to report police ??

19 Dec 08, 12:44 Windsurfer: ethan, i mean how come the con man gave back the money to u all ..??

19 Dec 08, 12:44 ivtac: a lot of ppl just arent sceptical enough and accept a lot of what anonymous people say, at face value

19 Dec 08, 12:43 ethan: wind, i dont have to proof on the case, as what i say is purely for the benefit of everyone..

19 Dec 08, 12:43 Windsurfer: he scared of u all izzit ??

19 Dec 08, 12:43 Windsurfer: ethan, how come the guy gave back the money ar ??

19 Dec 08, 12:42 ivtac: when it comes to matters relating to markets/money...it pays to be sceptical. if its too good to be true, it usually is

19 Dec 08, 12:42 ethan: we learn from this case that no matter this net person pretend they are good, somehow they will show their face to con u sooner or later

19 Dec 08, 12:42 Seng: What more proof do you need in that situation (assuming the story is true of course).

19 Dec 08, 12:42 Seng: Wind, the poor girl is probably terrified to her wits when the conman didn't want to give back the $8k on her request.

19 Dec 08, 12:42 ivtac: good la at least get back your money. a lesson to be learn lor

19 Dec 08, 12:41 ivtac: but this sort, they will just go prowl another site and try another con

19 Dec 08, 12:41 ethan: and conman leave us forever...

19 Dec 08, 12:41 Windsurfer: now is how u prove he con ur friend ...

19 Dec 08, 12:41 ethan: yes...money is 100% get back

19 Dec 08, 12:41 Seng: But how did you get him to give back the money? Face to face meeting and give him an ultimatum?

19 Dec 08, 12:41 ivtac: so you did get back the money la

19 Dec 08, 12:40 Seng: At best, it's just a trace and a source of lead for further investigation ..

19 Dec 08, 12:40 ethan: so lastly we recover full sum and we ban him and less active in ethansoft ..as i feel sad..haha

19 Dec 08, 12:40 ivtac: of course, but that person would have to be an accomplice

19 Dec 08, 12:40 Seng: Yes ethan, good thinking.

19 Dec 08, 12:40 ethan: actually even i know we can use bank account to trace him, but guy, do u think can he use other people account to get that money

19 Dec 08, 12:40 Windsurfer: so wats ur plan now ??

19 Dec 08, 12:39 Seng: Err ... I think better to keep the name confidential ... I trust ethan has good intentions, but let's not mention it here in this cbox ...

19 Dec 08, 12:39 ethan: dunno where he live, but since we know his id and real name, he cant escape any more...

19 Dec 08, 12:39 ivtac: but as i have seen in many online con cases, its very hard to recover your money even if you make police report

19 Dec 08, 12:38 Windsurfer: where he live ??

19 Dec 08, 12:38 ethan: the way we ask him go out is we want to hand over the money to him

19 Dec 08, 12:38 Windsurfer: u know his name ??

19 Dec 08, 12:38 Seng: a licensed guy some more ... kakakaka

19 Dec 08, 12:38 ethan: that is his mutual fund agent id

19 Dec 08, 12:38 Windsurfer: yalor .. bank acc ..

19 Dec 08, 12:37 ethan: so me and another guy really met him another time, and tis time we get something really unique to indentify him

19 Dec 08, 12:37 Windsurfer: u know him name ??

19 Dec 08, 12:37 ivtac: ethan, bank account details

19 Dec 08, 12:37 Windsurfer: u met the guy no ??

19 Dec 08, 12:37 ethan: but even report police, we only got ip, then do u know how hard we can trace that guy

19 Dec 08, 12:37 Windsurfer: then how u plan to get back the money ??

19 Dec 08, 12:37 ivtac: ethan, its good idea on your part but just a reminder to you. this chatbox also many silent readers, your conman could be one as well

19 Dec 08, 12:36 ethan: since i have recorded all their pm and whatever ip in my server, report police is the last option

19 Dec 08, 12:36 Windsurfer: police report la ..

19 Dec 08, 12:35 ethan: the victim sms, call and do watever to get back the money but the conman just refuse to do so.

19 Dec 08, 12:35 Windsurfer: pls tell me u whack him ..

19 Dec 08, 12:35 ethan: since conman is stil active there, we talk with him as usual but just delay to transfer money , as we want to create honey pot and know more on him

19 Dec 08, 12:34 Windsurfer: whack him la ..

19 Dec 08, 12:34 ivtac: then did you all take any action to track the fella down? police report etc?

19 Dec 08, 12:34 ethan: and that time she know she is being con and ask conman to give back

19 Dec 08, 12:34 ethan: but later on she checkout with us that we have NOT transfer any single cents

19 Dec 08, 12:34 Windsurfer: siao !!

19 Dec 08, 12:33 ethan: then the joker ask her to transfer the money

19 Dec 08, 12:33 ethan: unfortunately , one of the member which didn't join the meet up thought we have transfer money to conman

19 Dec 08, 12:32 Windsurfer: then u all whack him ??

19 Dec 08, 12:32 ethan: and we actually on hold on the fund transfering and at the same time observe him more..

19 Dec 08, 12:32 ethan: after the discussion, that conman look suspicious to us

19 Dec 08, 12:31 ethan: we discuss and talk there..

19 Dec 08, 12:31 ethan: then some of the member show up and of course me too

19 Dec 08, 12:31 ethan: after that, we really have a real meetup at some place in kl area

19 Dec 08, 12:30 ethan: each people initially he want 8k

19 Dec 08, 12:30 ethan: then he invite to create a private fund and he will in charge of executing

19 Dec 08, 12:30 wen: ya, pro con man

19 Dec 08, 12:30 ethan: then he blah blah blah..and some of us interest as he talk like really pro

19 Dec 08, 12:29 mydreamgetrich: yaya... dun let other ppl effect ur investing decision.. if canot tahan just walk off

19 Dec 08, 12:29 Seng: Alamak ethan ... managing money for others is something I strongly advise against ...

19 Dec 08, 12:29 ethan: and he got special right to short from the broker..

19 Dec 08, 12:29 Windsurfer: ethan, y they bugger transfer money to the other bugger ??

19 Dec 08, 12:29 ethan: the case is like this..that guy initially claim he is good in TA trading

19 Dec 08, 12:28 ivtac: ethan you need to tell about the conman's modus operandi too...so that others are warned

19 Dec 08, 12:28 ethan: please be extra careful with net personalities...a lot of liar and cheater there ...so do ur investment and homework wisely

19 Dec 08, 12:28 ethan: the reason i need to recover the money as the member is the victim from my website and i am the site owner, so i really need to warn u all,,

19 Dec 08, 12:27 ivtac: what story did he use?

19 Dec 08, 12:27 ivtac: ethan what was his scheme?

19 Dec 08, 12:27 mydreamgetrich: y u give him ur money?

19 Dec 08, 12:27 ethan: and lucky another 8 -9 members didn't transfer the money to that guy

19 Dec 08, 12:27 ethan: mydreamgetrich, yes..it is a few k

19 Dec 08, 12:26 mydreamgetrich: recover ur money???

19 Dec 08, 12:26 ethan: and initially the conman gain our trust.. but lastly me and another member manage to recover the money by meeting with that conman

19 Dec 08, 12:25 ethan: that conman at my site actually con one of the member and the member transfer some money to him because member trust me

19 Dec 08, 12:24 ethan: as u know, i do setup a chatbox too last time at ethansoft.com, and i also found one conman using more or less the same tactic to manipulate and con other

19 Dec 08, 12:24 Seng: What happened this time?

19 Dec 08, 12:24 Seng: Oh?

19 Dec 08, 12:23 ethan: actually seng today i am here to actually warn and giving another real example on con man in the net

19 Dec 08, 12:23 ethan: just discover newbie naughty personality

19 Dec 08, 12:23 Seng: Hi ethan! Long time no see ... what brings you back here after such a long, long, long absence?

19 Dec 08, 12:22 ethan: long time didn't come here and chat already

19 Dec 08, 12:22 ethan: hi..seng and everyone..

_______________

As usual, don't blindly belief everything you read over the Net, including this article.

Always use your own discretion.

Many thanks to ethan for sharing!

Multiple Personalities in the Net

I believe many of you know NEVER to blindly trust what you read from the Internet.

In the case of my blog and chatbox, ESPECIALLY stock tips.

Unfortunately, in an area where money is involved (e.g. stock or other financial markets), there are simply too many unscrupulous sharks around.

The unscrupulous operates in a huge variety of highly imaginative styles.

One such area is the con artists. Whether actual or wannabe syndicates. The basic name of the game is blind confidence. Inspire confidence from a few successful trades (whether imaginative or real), have "others" proclaiming "full confidence in you", and then, one day, with the right stock, or at the right time, distribute. Blindly follow the tips, don't be surprised to lose it all.

It is for this reason that I don't advocate multiple nicks for the same person in my cbox. However, be warned that there ARE multiple nicks in my cbox, some of them lying dormant. With nearly 250 registered members in my cbox, and yet, less than 10% chat regularly, and when someone out of the blue comes out, be immediately suspicious.

Anyway, today, I had a surprise to discover that one of the regular chatters employed a multiple nick. The first warning was provided by "ivtac" several weeks ago that newbie and "StockGod" doesn't seem to be around at the same time, yet, from the content of what they wrote, StockGod idolizes newbie and was rude to fellow chatter Moolah.

Anyway, this is the exchange that triggered the alarm.

Unfortunately for newbie, the IP address for both Stock God and "newbie" are the same.

And unfortunately again for newbie, when queried, his story is full of holes and inconsistency. Here are some of the exchanges:

18 Dec 08, 15:51 newbie: terry, he does not know that my nic is newbie

18 Dec 08, 15:50 newbie: sorry i gtg. Bye !!!

18 Dec 08, 15:50 newbie: Seng, my office is fully wifi and i have about 60staffs so he may use the same IP add with me lah

18 Dec 08, 15:50 Windsurfer: newbie, i'm disappointed at u man ...

18 Dec 08, 15:49 terryshannon: u told him about this forum, but he doesn't know u r his boss

18 Dec 08, 15:47 newbie: he will dissect a company account before investing and will not take risk

18 Dec 08, 15:46 newbie: bcos he does not know i'm his boss but now i think he knew

18 Dec 08, 15:45 newbie: Seng, bcos my tips was given to me by some politician mah

18 Dec 08, 15:45 Windsurfer: newbie, this stockGOD is one of ur advisor ?? how come he talk to u as if he dont know u??

18 Dec 08, 15:45 terryshannon: "earned my respect",

18 Dec 08, 15:45 newbie: he is a very wise man full of wisdom in investment

18 Dec 08, 15:45 Seng: newbie, how come SG in 15:40 doesn't know where YOU get the tips from?

18 Dec 08, 15:44 terryshannon: hey, newbie ur advisor too bad lar, pretend himself know nothing

Some of the problems and inconsistencies are:

1. StockGod isn't a regular chatter. He rarely appeared at all. And yet, out of the blue when he appeared, there is no "Hi everyone"... instead he immediately called newbie a "boy" and "Newbie Boy" ... alarm bells ...

2. newbie claimed SG doesn't know who he is in real life. Yet Stock God never wrote recommending stocks in my chatbox as far as I can recall, and I'm always in my chatbox. So, how does newbie come to the conclusion that StockGod is conservative? I didn't even sense that StockGod is conservative, but behaved rudely to other chatters especially to Moolah.

3. newbie claimed to recommend SG to my chatbox, and yet SG has no clue who newbie is? When SG is supposed to be advising newbie on stocks that newbie fu-yoh here in my cbox?

Anyway, there are dozens of other inconsistencies if I want to pick it out, but it's more than enough evidence that this is serious enough prank.

Initially, I thought of just de-registering StockGod's nick, since it is more than obvious to me that StockGod and newbie are the same person.

Also, at the same time, I am ass-u-me-ing that newbie's call in the past has not created any harm, although as I write this now, I did remember at least once that I also lost some small money (because I bet small) following his PROTON call last year when he went on and on about how PROTON was cheap at $5, and his "inside info" tells him it's going to be ramped up. (I cut loss when it was obvious the move was wrong, but I don't know how many of the silent readers did that, and I also don't know how many bet big) ...

And many of the other chatters have also picked up the negative vibes from newbie's fu-yoh ...

This is a real shame, because I noted some improvement to newbie's behaviour since the last 1 week suspension.

Anyway, the issue is trust, so, after penning this, I have come to the conclusion that to try to preserve the integrity of my chatbox, I need to implement 2 things.

1. Ban newbie to set an example to others that these sort of behaviour are simply NOT acceptable in my cbox.

2. No stock calls - as a policy - are permitted. Discussions based on reasoning is of course welcomed, and if one needs to quote examples, then, it is acceptable, and reasonable expression of being vindicated when the stock price then goes right is acceptable, but UNREASONABLE fu-yoh and UNREASONABLE expressions will not be accepted nor tolerated.

I realize this may seem subjective and arbitrary, but then, membership in my chatbox is not a right, but a privilege. I expect reasonable standards of behaviour, but not when warnings are ignored.

Anyway, enough about this. The main purpose of this article are two-fold. First to remind readers, especially novice readers, that in the Internet, don't blindly believe what you read. Always apply common sense and critical and independent thinking.

Second, to let everyone know that such behaviour - as that displayed by newbie since last year, since his recent 1 week suspension, and especially his behaviour today - is not acceptable in my book. It is a real shame, because since last year, newbie has built up relationships with the regular chatters.

It's not so much that his behaviour today is especially dangerous to new investors or traders, but his duplicity, and the completely unacceptable behaviour of "StockGod" in my book. Even though Moolah was not insulted, I - as a chatbox owner - was insulted by the way "StockGod" talked to Moolah. Should any individual be allowed to insult others using a 2nd nick? Isn't the person behind both nicks responsible? Of course, I am also very dissappointed to have been fooled by newbie.

Hence, thinking about this as I write this article, I think it's only appropriate that I also ban newbie from the chatbox.

And I will not be surprised to hear more character attacks against me over the Net.

Alt-A Loans - Is this the Next Big Fear for 2009?

For future reference ... note the chart - http://seekingalpha.com/article/110919-alt-a-loans-spiraling-downward



Note that the size of the Alt-A Resets are about the same rough order of magnitude as the Sub-Primes, except they are deferred by nearly a couple of years, based on a cursory glance of the above chart.

With the Fed Funds Rate dropped to nearly zero now, will the Feds have enough Balance Sheet to even absorb half of these future Alt-A problems?

Citi targets KLCI to fall to 691

In general, I tend to more often than not distrust analyst predictions as they are generally biased and often made with vested interests. However, at the same time, I believe there are many useful things that one can learn by reading such analyst reports to see if their reasoning is consistent with yours, so that deviations can be investigated in greater detail to see if you need to alter your own reasoning, or to dismiss the analysts conclusions.

For future reference:

http://www.btimes.com.my/Current_News/BTIMES/articles/citi15/Article/index_html

http://www.btimes.com.my/Current_News/BTIMES/articles/20081215121640/Article/index_html

Interesting extracts:

"MALAYSIA'S stock market may continue to fall for at least another quarter as earnings shrink and a possible drop in domestic spending threatens economic growth"

"The domestic market typically recovers from a slowdown during or after the worst quarter of economic expansion"

"In three of the last four recessions, the bear market ended in or immediately after the worst quarter of GDP growth"

"Corporate earnings in Malaysia will drop 11 per cent in 2009"

"Companies in the utilities sector are expected to see a 23.7 per cent decline in EPS, banks (-8.3 per cent), telecoms (14.4 per cent), plantations (-20.6 per cent) and tobacco (-10.5 per cent)."

"biggest losers will be media companies, plantation owners and utilities"

"valued at 9.8 times reported earnings, the highest among Southeast Asia's benchmark stock indexes"

"new target for the index is 691"

"now using our benchmark the average Asia P/B of 1.2 times - implying a further decline to 691 points"

"Malaysia's slowest growth in gross domestic product might occur in the first quarter of 2009, with expansion of 2 per cent"

"stocks trading at trough P/Bs or have strong earnings visibility are on our top buys list - AMMB (2.28), BCHB (5.85), IGB Corp (1.18), KLCC Property (2.61), Tanjong plc (13) and IOI Corp (3.2). Our top sell ideas are Public Bank (8.3) and Maybank (5.1)"

Reference prices at close of 15 Dec in brackets.

Some rumblings on next FOMC Meeting Tuesday, 16 Dec 2008

Sometimes, it takes a while before "the obvious" becomes "obvious" and stares at you right in the face.

I don't know why I didn't see this earlier. Perhaps when one's mind is distracted, it is too easy to miss this reasoning.

I came across this article by Kathy Lien a couple of days ago - http://www.kathylien.com/site/federal-reserve/what-zero-yield-in-treasury-bills-signals-for-currencies. The interesting chart is this below:



Note that Fed fund futures are now pricing in a 98 percent chance that the Federal Reserve will cut interest rates by 75bp to 0.25 percent on December 16th:

98% chance! Fed rates cut to just 0.25%! And it seemed today, the same Fed Fund Futures are now pricing in 100% probability of a 75bp cut!

And then, there is the negative/zero yield on the 4 week US treasuries bills, and the 3 month US treasury bills which looks set to head to zero also soon ... Again, it should not be a surprise since markets are now "certain" that the Fed funds rate will be dropped by 75 bp. Fed funds rate drops, yields on US Treasury Bills and other instruments drop. Whilst it is tempting to short longer term US government bonds today since it's near historical high, the possibility of rates continue to drop next week could mean that what looks expensive today (the price of longer term bonds are inversely related to yields), can become even more expensive tomorrow.

And with interest rates at all durations look set to drop, it is no surprise that we could finally be seeing downward pressure on USD currency, quite possibly soon ... the USD has been on a fantastic bull run in the last 4 to 5 qmonths quite possibly "without wings" and recently, I've seen USD currency charts looking set to test 50 day Moving Averages and this is generally considered to be a critical signal. The immediate question is could next Tuesday's announcement be that catalyst that will confirm the start of the USD downfall? (obviously, it's never this obvious)

The impact on US stock markets is now "obvious" in hindsight. Lower rates, lower cost of doing business, generally regarded as a good thing for US stock markets. In fact, we've just seen S&P 500 rising well above 20% since the last bottom on 21 November 2008, technically, qualifying US markets to be in a bull run (due to the more than 20% gain in the index, just like a more than 20% fall in markets being declared to be a Bear market). Again, the general impression is that the real US and global economy is still in a rut, i.e. this bull market - like the USD - appears to be flying without wings too ... Again, the immediate question is - will next Tuesday's Fed announcement be the catalyst that would trigger profit taking, or even well before that? In other words, is what we are seeing an anticipation of 100% probability of a 75 bp rate cut, and when this becomes fact, will markets then correct itself like what it did with the most recent rate cut?

Global banks have been coordinating their rate cuts recently, and it seems a few countries have been actively cutting interest rates:

http://business.theglobeandmail.com/servlet/story/RTGAM.20081209.wrates1209/BNStory/Business - Bank of Canada Bank slashed its benchmark rate by three quarters of a percentage point to 1.5 per cent, a level not seen in Canada since 1958.

http://business.theglobeandmail.com/servlet/story/RTGAM.20081211.wswissrates1211/BNStory/Business/home - The Swiss National Bank slashed interest rates by half a percentage point on Thursday, the SNB cut its target band for the 3-month Swiss franc LIBOR for a fourth time within two months to 0.00-1.00 per cent.

http://business.theglobeandmail.com/servlet/story/RTGAM.20081211.wtaiwanrates1211/BNStory/Business - Taiwan cuts rates by most in 26 years

http://business.theglobeandmail.com/servlet/story/RTGAM.20081211.wkorearates1211/BNStory/Business - South Korea's central bank carried out its biggest interest rate cut ever Thursday, slashing borrowing costs by a full percentage point to a record low in a bid to stave off recession. The benchmark seven-day repurchase rate is now 3 per cent from 4 per cent.

And a nice picture showing various Central Bank key rates for this decade - all pointing south and in many instances, doesn't appear to have more room to go south further ...

So, bottom line - what does all this means to US stock markets and our own backyard KLCI? To me, definitely critical to monitor the US markets to see how it reacts to Fed's announcement this Tuesday. The past 2 Fed announcements was widely anticipated, and the beneficial effect on markets was getting shorter and shorter to the extent that the last announcement actually caused markets to fall on / just before the announcement day ... If markets continue to run after this Tuesday's announcement, other things equal, consider the possibility that we may be seeing another critical divergent signal that perhaps the bear market could be over ... However, if it doesn't, and if it tanks, then, we definitely need to see more divergent signals than what we are already seen so far from monitoring various stock markets around the world, VIX, bond spreads, commodity markets, shipping rates, copper prices, etc., before we can conclusively say the bull is truly around the corner ...

Some Value Investor Results for Perspective

Windsurfer shared this article with us this morning - do give it a good read. The focus is on the famed value investor - Bill Miller's - recent results, who were not spared at all by the current global crisis.

http://online.wsj.com/article/SB122886123425292617.html

The diagram that got my attention is this one:



Even the famed Legg Mason Value Trust lost 58% over the past 12 months, and many other Value Investors are not spared either ...

The moral of the story?

To me, "what looks cheap CAN GET CHEAPER during the Great Bear Run ..."

I'm sure there are plenty of other lessons that one can learn from that article. To me, on top of my mind, a few other quotes comes in such as ....

"Timing is EVERYTHING"

"Don't rest on your past laurels - do your homework properly AT ALL TIMES"

"Don't continue to hold on to your mistakes when it becomes clear that your original reasoning is proven wrong"

"Don't bet big on your mistakes, and this includes not blindly average down on your mistakes."

Do share.

Cheers.

Some rumblings on Gold prices

I'm not a Gold trader, I have never traded any Gold contracts in my entire life.

However, I do cast a glance from time to time at Gold prices as part of my personal monitoring of the global financial markets. I also noted that a few of the chatters in the chatbox have long positions on Gold, and was previously (and currently?) very bullish on Gold.

So, I was most interested to read this article on Gold in Seeking Alpha today. (want to see if I should jump on the Gold bandwagon or not). The title is "The Manipulation of Gold Prices". The link is here - http://seekingalpha.com/article/109210-the-manipulation-of-gold-prices?source=article_sb_popular

The article is rather lengthy, but what got my attention (and rang a loud alarm bell) is the most amazing claim by the author. In his own words ...

"... It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about half of the current increase in Fed credit is eventually neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of gold standard. In the nearer term, gold will rise to about $2,000 per ounce, as the Fed abandons a hopeless campaign to support COMEX short sellers, in favor of saving the other, more productive, functions of the various banks and insurers. ..."

Gold closed $752.2 per ounce last Friday, i.e. this author claims gold has the potential to rise 10 fold at the very least!!!

Anyway, I decided to take a look at the Gold charts to see if there is anything interesting there.

Here's a 3 year chart of Gold from stockcharts.com.



Some quick observations:

1. Price generally trending upwards (last 3 years), but with increasing volatility (this year). The latter is evidenced clearly from the daily price range which is clearly wider than in the past (and the widening MACD this year compared to prior years). The increasing volatility at the "tail's end" is not usually a good signal, as it signifies huge uncertainty.

2. Prices have fallen BELOW the 200 day Moving Average. In fact, prices dipped BELOW 50 day Moving Average as well. Unlike in November 2006 when the 50 day MA crossed below the 200 day MA only very briefly and then recovered, this time, the 50 day MA crossed below 200 day MA in September 2008, and does not appear to have the strength to cross over it again. The conventional TA interpretation is a bearish bias to Gold prices.

3. Since March 2008, the trend is bearish. You can see this from the lower highs in March 08, July 08, October 08. The most recent peak at end of November 08 is even lower. A series of lower highs is traditionally interpreted as having a bearish bias, not a bullish bias. The resistance level to watch is around $840 to $900.

4. There is also a series of lower lows in May, August, September, October 2008. Again, pointing to a bearish bias.

5. Bearish biased MACD - the black line just crossing below the red line.

6. The RSI reading is neutral at 44. Neither here nor there, and doesn't appear oversold yet.

In short, the technical view is that over the near term, the bias on Gold prices is bearish.

So, at this juncture, I would personally tend to ignore the author's claim of 10 fold increase in prices from today's levels. At the moment, it looks like a "grand dream". In fact, I just don't know how Gold can go to $2,000 in the near term. I don't have any gold trading positions (except for some family ornaments which are negligible holdings and definitely NOT for trading).

The other thing that's on my mind is the traditional view that Gold is often seen as a good storage of value during times of uncertainty. For example, I would say that this year is definitely a time of HUGE uncertainty. Everywhere I look, I see fear, whether this is in our local stockmarket, Asian stock markets, Global stock markets, commodities markets, the collapse of global shipping rates, the collapse of US interest rates and global interest rates following suit, etc. There's probably isn't a time of greater uncertainty globally like the one we are facing today in my adult life. (The last Asian Financial Crisis is not truly a global event, even though it was a huge uncertain period in Asia.) And yet, despite this huge global uncertainty, gold price DID NOT make a new high.

I don't know how to explain this.

Perhaps it's global gold price manipulation as the author suggested. Perhaps it's natural supply and demand, where miraculously, every time when there is pressure for demand to rise, supply miraculously appeared to reduce pressure on Gold price.

Anyway, my point is that technically, in the near term, Gold faces a bearish price bias.

Technically, support appears at around $650. I could be tempted to take a small position at $650 long, but more of a paper trade than an actual trade.

As someone who hasn't really monitored nor traded Gold before, I would be tempted to trust the charts a lot more than the so-called "fundamentals" of Gold written by one or a group of analyst. Superficially, it seems to me that in order to be a good gold analyst, one must truly understand a lot of factors such as history of gold price manipulation, the various Gold prices, products and markets such as spot and futures especially COMEX, the major gold reserves held by central banks around the world, and their policy and practices individually and collectively towards the release of such gold reserves (if any), the value differences towards gold in various parts of the world, the claim of manipulation involving CFTC (Commodity Futures Trading Commission) and various conspiracy theories, a good understanding of how margins actually work in various gold futures markets, the attitude of global insolvent banks towards gold in today's times of global crisis and how their attitude will change in future, the role (if any) of the Feds, US Treasury that could influence Gold prices, the relationship of the USD and Gold prices, the relationship between stock prices and Gold (if any), global Gold inventories, future technological usage of gold (?), in short, the entire topic of supply and demand of Gold that goes beyond superficial or general, widely available understanding, and how that ever changing demand/supply relationships influence Gold prices in the immediate, short, mid and long term.

In short, at this moment, I don't think I'm in that elite group of the world's Top 5% Gold analyst/players globally.

Maybe, I'll just stick to paper trades and general monitoring of Gold *grin*

Comments on Jason's Volatility System

Jason from the Angry Investor blog has proposed a semi-mechanical volatility system in both my chatbox and his blog here - http://theangryinvestor.blogspot.com/2008/12/blog-capsule-my-dow-jones-futures-for.html

I thought it would be a good idea to comment on his system here than in the chatbox, since it is more enduring than a chatbox comment, and as he correctly noted, there is practically zero / minimal risk of moral hazard for Malaysians to comment on a global and highly liquid trading platforms such as the Dow Jones Futures.

The first thing to note is that the mechanical volatility system proposed by jason is appealing in its simplicity. Every night, note the DJ closing value (say C). Then, enter both a Limit Buy and a Limit Sell order which is C-75 points and C+75 points. Then, go to sleep and pray. The next day, hopefully, both trades - Buy and Sell are executed because of the high Dow Jones volatility. That's basically what jason described in his blog.

However, jason appears uncertain, because subsequently, he altered the parameters from C+/- 75 to C+/-100. This begs several questions:

1. Is this the final amendment, or will there be future amendments?
2. If there are future parameter amendments, under what conditions would such amendments be made? Is jason able to describe such conditions that would trigger such amendments?
3. Is this a genuine mechanical system, or is this a semi-mechanical system, "semi" since in reality, the system parameters requires jason's own discretion as time passes? For example, jason has not described how he came about with the new +/-100 points change from +/- 75 points change. For example, will future changes be larger or smaller? What conditions would trigger such a review?

On the system itself, jason did not describe what would happen if only one of the trade was executed but not both. For example, suppose Buy at C-75 points was executed, and the market subsequently tanks. A few questions arises:

4. At what point would jason set the stop loss? C-175? C-200? No stop loss?
5. When would jason excute his stop loss, since he has gone to sleep after entering the limit orders? The next trading day?
6. If jason has an open (losing) order such as the one described here, will he continue to trade with a second contract (i.e. requires extra capital) or put everything on hold until the first contract is closed? If he opens a 2nd contract, is there a limit to the maximum number of open contract should he encounters a string of losses, and if so, what is that maximum limit? Furthermore, since he uses Futures with margin calls, where is that final limit?

Another comment I like to make is that when jason's proposal is back-tested over the past couple of months, it looks impressive because it works and it is so simple! Just a quick glance at the DJ charts in the past 2 months, and jason's system works. However, the critical question is will this continue to work in the future? And does it really work when back-tested further back in time?

For example, imagine we are at the close of 19 May, 2008.

On 19 May 2008, DJ closed 13,028.

According to jason's proposal, set a Buy Limit at 13,028 - 75 = 12,953, which would have been triggered the next day.

At the same time, the Sell Limit at 13,028 + 75 = 13,103 would NOT have been triggered, because the High on 20 May, 2008 is 13,026 only.

The question now is a critical one, because the hypothetical trade on 20 May 2008 is one example of a trade that has clearly gone wrong. Jason had expected both Buy and Sell to be executed, but it didn't. Instead, only one trade got executed. The question is would he then liquidate this trade the next day regardless of the size of the loss (or profit) on 21 May, 2008? Or will he just hold and "hope" that the DJ would climb back to 13,103 to close his position at a profit? Is there an equivalent mechanical rule for trades that have gone wrong? Or when trades go wrong, discretion is required?

This is a critical and extremely important question, because if he continues to "pray and hope", then, he is guaranteed to be killed one day (it's just a matter of time), because as it turns out, 13,103 is not reached again, even as of today nearly 7 months later. And let's not forget that he would be pretty much wiped out if he continues to buy and hold until today, as the DJ has fallen to around 8k, or even lower at the lows of 21 Nov 2008.

In other words, if he only keeps one contract open at all times, jason would be out of trade for nearly 7 months. Furthermore, he would not have participated in subsequent volatility gains which are extremely significant.

On the other hand, if he cuts loss, he must set his stop loss level extremely carefully because on other days when volatility is high, he would also be stopped out as well, even if the trades turn out to be profitable later in the day. There is no free lunch - damned if you're stopped, damned if you're not.

In other words, markets are too smart to give someone a free lunch for too long a time. It doesn't mean that markets cannot be beaten - it can, but the truth is, by only a very small % of players consistently like Buffett. Jason's initial guess that this might work for the rest of December month might turn out to be correct, however, it still requires Jason's discretion to decide whether such a system will work at the start, mid or end of 2009.

Another thing that jason has to watch out for - when trading mechanical system - is that there is No Holy Grail. There is no system that gives a 100% win rate. You simply will have a loss / a string of losses one day. That statement is pretty much a certainty and a fact over the long term.

The critical question is whether jason will have the discipline to continue or stop trading his system after he has a string of such losses, or whether he will be tempted to "fine-tune" and alter his system. His article indicates that he is tempted to "fine-tune", and he needs to be aware that "fine-tuning" will then turn his mechanical system into something else - a "discretionary" system - in other words, the success/otherwise of his "evolving" system then becomes dependent on his skill / otherwise in fine-tuning his system. Markets have shown that only a very small % of traders are successful in such an approach, but the majority will probably get it wrong. (In other words, his originally simply described system can be thrown out of the window when it evolves).

Another suggestion which I would like to give jason, since he strikes me as a hardworking young man, is to keep a daily record of his profit and loss from trading this system. Identify the starting capital now, rather than look back and then find the ideal capital size that would give the highest % return retrospectively (this is called "back-hand"). By identifying the capital NOW, he can then calculate the % returns appropriately at a future date.

A real trading portfolio is almost certain to give different results than paper trading. On paper, it is very simple to show good results. But in day to day real life trading, emotions, doubts, fear, greed, trading costs, slippage in execution, lack of discipline, lack of emotional control (widely documented in trading literature), unexpected sickness (e.g. grabber's recent dengue :-)), personal problems (e.g. divorce, etc.), holidays (e.g. Seng's Taiwan holiday), etc. etc. etc.comes into play and actual results is certain to be different from paper trades. I have yet to see actual trades turns out to be identical to paper trades, especially after the system have been traded for an extended period of time. Hence, I believe jason should test it with an actual portfolio since he can afford it. *grin*

Anyway, hopefully, this is enough food for thought. I would like to take this opportunity to thank jason for sharing his ideas with us, and his open and positive attitude in welcoming comments to his thought provoking article in my cbox and his blog.

Following Stock Calls

This evening, in an honest discussion with "dylan" who is a keen follower of "Samgoss" blog, Windsurfer chatted with us and shared his personal story and insights about following stock calls from Samgoss. The following are his exact words, and reproduced here with his permission. I have not edited any words (save for one minor spelling correction).

I am reproducing it here because I think it raises important and critical questions about following stock calls blindly, as well as very valuable lessons for any investors who has lost nearly everything, and does not learn how to fish for himself, and relies purely on others.

Windsurfer: i know Samgoss for long time ago ... actually it was through the OSK forum ... back then the website was stock188.com i think ... Samgoss appear in the forum preaching Fundametalist approach to picking stock ... i think i was in 2001 or 2002 ... back then the market was very slow ... i mean REALLY SLOW ....

Windsurfer: so back then i was just starting to invest (play) stock ... so alot of things dunno ... ask alot of stupid questions( i still do) ... so i started to follow Sam's pick ... because his reasoning was acceptable to me ... fundamental approach... looking PE ... things like that ... as he also made enemies in stock188 forum as well ... these are mostly TA people...

Windsurfer: I make some money from Sam's pick, some notible great calls was YTL-WB, IJM, PARKSON, JUSCO, LIONDIV( although this one i thin Tinglek made the call 1st) etc ... But i didn't really follow all his calls, and some of his calls didn't work out as well... Sam's appraoch is very simplistic, sometimes, even too simplistic ...

Windsurfer: I follow Sam's call blindly for sometime, some very good, some so so ... but i would say most is pretty good, but because i didn't follow all his pick, so i did not make the most money, but when i follow, the stock didn't perform quite as good. Maybe my luck not so good ... Anyway, the call to buy MIECO-WA was the most damaging .... i lost all of my gains for a few years and then some ...

Windsurfer: i was reduce to ZERO, after that, i realize i need to learn to invest by myself, i understand that learn to fish by myself. I believe that Samgoss is geniune, i believe that he has no intention or that he is manipulating anybody, most of his psycho fan follow him because his track record is very good ... but, when discover the investssmart blog, Dali's blog, and this chatbox, i find myself learning alot... especially from Dali ...

Comments

1. "when i follow, the stock didn't perform quite as good".

This is a very important issue that needs to be examined carefully.

Why didn't the stock perform as good as for the caller himself?

Is this because the follower didn't follow closely enough? Is it possible to ever follow closely enough? Is this because of inevitable time delay since prices can move up quicker than the blogger can blog or inform others? Or (heavens forbid) is this due to manipulative practices, i.e. you will never be able to get the same performance?

Very often, when stock calls are made, the price will usually have run up. This could be due to natural supply and demand, or price manipulation. The problem is for 99% of the followers, they will not be able to tell the difference. The risk is of course - are you buying off the caller's earlier buy? Then, you could end up taking the risk, with the caller having minimal risk. He doesn't need to sell all. Instead, he could buy a bigger amount first, and then distribute on the way up to his followers, thereby minimizing or zeroizing his own personal risk. And at the right time, he sells all.

Hence, I always believe that it is better to learn how to fish for oneself, than to follow stock calls. The benefit is that when you learn how to fish for yourself, then, you can be the first one to spot such bargains. Therefore, knowing the full reasoning is just as important, or more important than just knowing the stock call itself.

2. " i didn't follow all his pick".

This is a difficult issue. Normally, traders are encouraged to follow a constant and disciplined stock decision making process with a positive expectancy. And in this case, all stock experts will tell you to ALWAYS follow the signals generated with no exceptions. Why?

Because the positive expectancy is generated statistically, and have been proven from experience - e.g. it may even have been backtested against a large sample of stock trades before. Miss out some, and those trades which are missed out could turn out to be the really big moves that explains 80% of your potential returns or otherwise.

However, when it comes to blindly following stock calls, then, many additional problem arises.

For example, we cannot be certain that the stock caller always call when buy signal is generated. He might tell you 5 out of 10 times, and keep the other 5 to himself. This means that statistically, you may be at a disadvantage, because he may be keeping his best 5 trades to himself without necessarily having to disclose his best trades to you.

Another problem arises because we don't know the algorithm. What exactly is his decision making process? And for discretionary traders, the truth is sometimes, we can never know, because human decision making process which can be explained to others can never be 100%. We can explain some things, and others most things, but never everything, however much we try. In other words, for something as complex as trading stocks, we can never spoon-feed another. Like an infant learning to walk, eventually, the infant himself must force himself to learn how to walk. As parents, we can only assist and make the process perhaps a little bit easier.

Hence, again, I am a deep believer that it is better to learn how to fish for oneself.

3. MIECO-WA was the most damaging .... i lost all of my gains for a few years and then some

This is very important to understand. The nature of stock market is that all it takes is a single mistake, and it can actually wipe you out completely if you don't know what you are doing. Especially warrants.

Most people don't understand this. They think that if the past 5 calls works, and the next 10 calls work, and the 11th call doesn't work, they think they'll come out ahead.

But if the 11th call doesn't work, and if the guy is greedy and put 100% of his capital into that 11th stock, and if that turns out to be a warrant or a stock that goes to zero, then, all his past gains means nothing. Zero.

Buffett likes to say that when you take 25 x 24 x 23 x 22 x ... x 0, the end result is always ZERO. In other words, past gains means nothing if there is no prudent money management.

In the US, and overseas, this is a known manipulative tactic used by syndicates there. They know that statistically, greed in stock market is a relatively stronger force than prudence. So, they make sure the first few calls works in varying returns. And when most followers least expects it (usually, this coincides with the time when everyone is confident the next call will work, and there is huge volume), the next stock turns out to be the stock that the syndicates actually want to distribute.

Trying to prove beyond a doubt such syndicates in practice are almost impossible in real time. However, applying common sense is very easy. Hence, my position that I will never endorse nor promote another "stock call" service / blog unless I fully trust the service provider. The truth is - as you will have noticed from this blog - there is no such provider that I fully trust. Over the Net, it is important to never trust anyone, because you will never really know if the other person on the Net is genuine or not. Written words over the Net are cheap, if not free.

4. i was reduce to ZERO.

At this point, "dylan" asked Windsurfer this:

dylan: wind , yes miecowa is koyak.. but remember he asked us to swap to ijmwb @0.38 ? there we made kow kow to recover all yr losses ?

I don't know what transpired in the past. And it is probably worthwhile to explore this phenomena further specifically to better understand what actually transpired.

However, what I would say at this jucture is that it is actually quite common behaviour amongst investors/traders, that when one has built up substantial gains over a reasonable period of time (say months or years) by following others, only to see 100% of the gains lost, then, confidence in that person is completely destroyed.

Overseas syndicates knows this, and will make sure there is another trade that works ... "for you to swap to" .. in order to retain their clientele. The problem is that if you are a follower, then, psychologically, when ALL of your past gains is lost, you are devastated emotionally. You are usually in no position to be able to be objective about anything.

The next trade that works big (such as IJM-WB) is a known syndicate method of trying to retain their clientele for future followings, without having to start from scratch.

Again, I don't know if there are such syndicates here in Malaysia's stock market. And identifying them is usually very difficult for retailers. So, even if there is just 1 sign that I don't trust them, I don't follow them. Better be safe than sorry.

And it's always better to learn to fish for oneself. Initially, the results are less good, but after the first year, most learners should already aim to beat F.D. returns, and get at least market returns. And in a few years time, many of the dedicated ones will find that it's actually not too difficult to beat market indices. And by this stage, you should find your self with genuine financial independence, because you should then be able to fish for yourself, without having to rely on others. Isn't this a worthwhile goal?

Yes, it is not easy to learn how to fish for oneself. Initially, you will have to pay tuition fees to Mr Market. We all do. Even I and Samgoss did when we first started out, and even Windsurfer and Dali and everyone else did. Even Buffett did as well. No one can escape this "tuition fees".

Which is why, there are things in this world like investment groups, investment blogs, etc. for people to bounce ideas off each other for checks and balances. And hopefully, reduce some of the painful lessons.

Which is also why I decided to set up this chatbox 1.5 years ago so that honest discussions can be had without feeling fearful of discussing. The most important thing in discussing is one's own self-discovery process. Learning to trade/invest is much harder than it looks because one must be brutally honest with one's own strength and one's own weaknesses. Most of us are really unable to identify, confront, admit and accept our own weakness.

It is not to say that it is impossible to profit from syndicate activities, especially if there is a high win rate. For example, relatively straightforward strategies may be designed to come out ahead, but it requires constant discipline. And since you need constant discipline anyway, why not learn how to fish for yourself?

Some Concluding Remarks

Here, I want to raise the issue of trust. Trust and believe in the stock caller is important - in fact the single most crucial element - before one can follow another's stock call. To me, it should go well beyond "proven track record". Why? Because "proven track record" can always be manufactured, unless it is externally audited by a reputable external auditor (and even then, one still cannot escape the possibility of fraud such as Enron, Worldcom, etc.).

And how does one "trust" another? To me, trust comes from integrity, honesty, sense of fairness to oneself and to others, and develops over time. Trust must be earned, not given. And trusts comes from looking at the entire "package", not just focusing on one aspect (e.g. "so called proven track record") at the expense of ignoring others (e.g. arrogant behaviour, unfair comments, etc.).

When I was young a very long time ago, my mother always tell me to pay attention to the details, when judging a person. Don't just listen to what he says, but observe everything. If a person gossips about others to you, pay attention to that and ask yourself this simple question - what makes you think he didn't gossip about you behind your back?

Similarly, if a person does something that is unfair to another person, what makes you think that he is going to be fair to you? Can you really trust such a person?

And if I can't trust such a person, why should I allow such a person's stock calls and blog be endorsed and promoted in my own blog and chatbox?

Anyway, I am a deep believer that human beings are not all bad or all good all the time. Sometimes, when we are younger, we do things that we thought was right at the time, but years later, when we reflect, we realize how silly we were then, and wished we haven't done such things. I know, because I was young and was such a person once before. The smarter ones do change, but unfortunately, this usually takes an extremely long time. And things like trust must be earned over time.

Acknowledgement: I would like to take this opportunity to congratulate Wind for sharing his true story. If true, it is clear that Wind is indeed a courageous and responsible young man. Despite losing and being reduced to ZERO, he still does not blame Samgoss at all, and does not appear to have any malice or strong feelings against him. This is a mark of a responsible individual who takes full responsibility for his own actions. On that note, I salute him for his courage and keen observation.