Blog Capsule 6: Bought PROTON @ $2

Ok. This is definitely a stock that EVERYONE hates. Everyone must have their own (long) list of why they hate this stock. I'll quickly list a few here, and you can add some more in the comments section:

CONS of PROTON

1. Generally lousy product quality. PROTON is so well known for its problems, to say its product quality is "below average" is being nice to PROTON.

2. Generally perceived (rightly or wrongly) below average management quality who are paid too much for doing too little.

3. Long record of being subsidized by the government in so many ways for so much and so long that it is still unsuccessful for such a long, long, long time.

4. Absolutely no reward to long term shareholders. Especially those that bought in the mid 90s when the stock price was well above $16 - $18 and the stock now trades at $2.

5. Everyone hates PROTON. Period.

So, why did I buy?

Here's a few reasons:

1. Stock price fell below $2 recently. The last time the stock price fell below $2 was in 1998. See chart below. This is the Asian Financial Crisis price.




2. Stock price of $2 is fundamentally cheap from Net Cash perspective. At $2, the stock is capitalized at RM$1.1 Billion. In other words, if you have RM$1.1 Billion, and if the stock price remains at $2, then, you could buy up the entire company. And what do you get in return?

Well, from a Balance Sheet perspective, based on the latest quarterly report at 30 June 2008, PROTON Cash alone is $1.4 Billion. Long term borrowings = $0.13 Billion. Short term borrowings = $0.11 Billion. Net Cash = $1.4B - $0.13B - $0.11B = $1.16Billion, which is bigger than the market capitalization of $1.1 Billion.

In other words, you get the rest of the coy fixed assets booked at $3.8 Billion for free effectively, since the Current Assets of $3.5 Billion is already greater than its total Liabilities of $1.9 Billion.

I'm being extremely lazy with my calculations here, but if you are diligent, then, you will find that the coy at $2 is dirt cheap from a fundamental perspective.

3. PROTON latest NA at 30/6/08 is $9.98 per share. So, buying at $2 is equivalent to buying at 20% of its Net Assets (= Total Assets - Total Liabilities). By traditional measures, it looks dirt cheap, but see cautionary statements below.

4. Q2/08 earnings reported at $52 M. Not large, but an improvement over same period last year which is a loss. Roughly speaking, annualizing this suggests possible earnings of say $200M per year, i.e. at $2, PROTON appears to be trading at a P/E of 5.5, which is not demanding at all. In fact, as long as PROTON does not make a loss, buying at $2 should have a limited downside for a long-term investor.

5. It is well known that TDM is a long time supporter of PROTON. At the moment, his son Mukhriz looks set to take the top job in UMNO Youth. It is obvious his chedet blog is extremely popular, with over 9 million hits in such a short period. The Malaysian Insider carries this article on TDM - http://www.themalaysianinsider.com.my/index.php/malaysia/11423-mahathir-is-back-with-a-vengeance. Personally, I am not a TDM supporter, and would never vote for him. However, at $2 PROTON, Mr Market is asking me to take a gamble with him to make money off PROTON. This is a pure speculative play, that should BN retains power and with greater Mahathir's involvement, we could see PROTON one day being in the forefront again.

6. At $2, the price appears to be capitulating, although volume is not large .... As chatter dorraidd says ... think also about those who are selling at $2. In other words, if this is capitulation, the people who are selling at $2 must have lost a lot of money. If you are anti-PROTON, buying it off the long time PROTON supporters at rock bottom price is not a bad way to get back at them, although bear in mind that they can get back at you by totally destroying this company too ... *grin*

7. EPF and Khazanah owns it at much higher prices than $2 or $4.

More cautionary statements

1. The market is still long term bearish say over the next 6-12 months, despite the current bear market rally at the time of writing. What appears cheap right now can get cheaper eventually. I will not be surprised if PROTON trades below $2 after this bear market rally is over. So, treat this Blog Capsule as an alert to cheaper prices ahead, but if I am wrong, then, I won't mind owning this at $2.

2. The car maker sector is still long term bearish, and worldwide, have taken great hits. Everywhere you look, the world leaders like GM and Toyota are taking huge beating to their share price. PROTON will also be hit as well. The future outlook for this sector is very bleak indeed.

3. Malaysia is politically unstable. Who knows what PROTON will become if there is a change in government policy to no longer subsidize the national car. It is clear PROTON would be need to be liquidated if by then, it is clear that it would be losing money. In other words, despite the Net Cash, we could see PROTON losing money and bleeding, and eventually, the coy would be liquidated. So, Net Cash today that is bigger than market cap, could turn out to be a Bankrupt coy in future in the worst case scenario.

My Strategy

1. In Graham terms, this is buying an average quality business at bargain like prices. The "cigar butt" approach to investing. So, since Graham diversifies across 100 of such stocks, don't bet the entire house and farm on PROTON.

2. Pure speculative Buy. I believe bear markets will eventually recover one day.

3. Don't invest more than say 3% to 5% Capital into this stock. I can bear losing these 3%-5% Capital.

4. This is the first out of say 5 possible buys. I spent less than 1% Capital at $2, and am waiting for lower prices.

5. I expect to make 100%+ return over the next 3 years, say by 31/12/2011. I need PROTON to get to $4 to make a 100% return. In return, I seriously doubt I will see PROTON trading at $1, with 50% loss over the next 3 years. But I could be wrong, since we are dealing with the future, and I don't have a crystal ball.

Disclaimer: I now own PROTON. I am still a trader at heart, although at very low prices, I shift towards being an investor since the latter is easier. If the prices rise too high, I will sell and trade, so, don't bid this stock price up.

Blog Capsule 5: Bought ICAP @ $1.22-$1.23

Not the best price.

ICAP actually closed lower at $1.20, after touching a low $1.18 intra-day. :-(

Nevertheless, was extremely relieved this morning, since just saw US markets closed hugely positive , with the Dow posting +10.88% overnight gain, S&P500 posting +10.8% overnight gain and Nasdaq posting +9.53% overnight gain. I had expected US markets to be green this morning, but never expected it this strong. *phew*

Why yesterday, why ICAP?

To be honest, good luck probably played a bigger part than I would have liked to admit.

Most of you will know that I will be away for nearly 2 weeks on a holiday starting this weekend.

I am especially sensitive on this absence because as I have stated this before in the chatbox, even though I was not yet buying for investing since my outlook was still long-term bearish (e.g. see here - http://fusioninvestor.blogspot.com/2008/10/huaan-some-rumblings.html), one of the risks in staying in cash for too long is that when the markets rise, history has taught us that they tend to rise very fast. Worse, sometimes, we don't catch the upswing timely enough. Such points was also repeated by "V" in this article here - http://fusioninvestor.blogspot.com/2008/10/dont-dig-bigger-hole-2.html.

So, even though I have stayed largely in cash (except the small intra-day trades recently and also the occasional contra and short term-trades), I've also been thinking about positioning my stocks since the KLCI have broken below 850 and nearly touching 800 yesterday. Make no mistake, the markets have become deeply oversold when it fell more than 30% in less than 3 months. Another technical reason to consider buying around the 800 level is that I have been advising the chatbox my technical expectation that the market will test 800 (and not 850) last week, when the KLCI was trading near 900 last week and others were predicting 850 to be breached. The strong recovery intra-day yesterday after hitting a low of 801 prompted me to take position, and also prompted me to take profits in one other stock (TENAGA).

Furthermore, there is the saying "Sell in May, buy back in November", and we are now near the start of November. In a sense, the timing of my holidays is poor because it coincides with this November period where stock markets traditionally rise. Even though I personally attach less weight to this saying, at the back of my mind, the idea stuck. So, it's a matter of buying something during this timely period, certainly before the end of this week.

So, amongst the stocks that I thought might be good ideas to hold during this 2-3 week period would be ICAP. Actually, the attraction of ICAP is that it is "managed", as opposed to buying a stock like TENAGA (where it is not managed). Also, blogger "turtle" recently indicated in his blog that he purchased ICAP at $1.49 recently. Fellow blogger bullbear of course is a staunch supporter of ICAP, when the price fell from its peak of $2.81, down to $1.7x before his sabatical last couple of months. Fellow blogger Moolah is of course instrumental in alerting me the inconsistent behaviour of ICAP fund manager earlier this year. Of course, ICAP is a stock that I have invested before, as well as a stock that is followed by the chatbox from time to time. To me, ICAP is a stock to buy when the price becomes compellingly low. The only problem is when to buy, because what appears cheap almost always become cheaper during bear markets, if not next week, then, next month or next few months.

Ok, but why ICAP?

The "cheapness" struck me quite strongly yesterday. According to its latest weekly NAV report, on 23 Oct, ICAP NAV was $1.54. At the time when I saw the price, it had touched a low of $1.18, and $1.22 and $1.23 were available for sale.

I did some quick maths in my head. On 23 Oct, the KLCI closed 891.3. At the time when I bought it, the KLCI has recovered off its low of 801, and was around 820-825 iirc. A quick estimate suggests that I don't expect its latest NAV to drop below $1.42 since 23 Oct, by simple pro-ratio.

So, $1.22-$1.23 is equivalent to nearly 14%-15% discount from NAV. Historically, ICAP trades at a premium, and occasionally at a discount (say 3%), although I have never seen such a large discount before. Hence, it was very tempting strategically, and the only issue is always a tactical one, i.e. when to buy.

At the time, I felt this seems enough safety margin (even though what is cheap can get cheaper), hence, I took everything that Mr Market had to offer at $1.22 and $1.23 then, and left it there since this is a long-term investment.

This morning, I took a closer look, and realized that ICAP have approximately $57 million in cash as at 31/8/08, which translates to approximately 41 sen. So, its NAV of $1.54 on 23/10/08 comprised of say $0.41 cash and $1.13 equities. I expect this equity portion to fall since 23/10/08, and not the entire NAV. A revised estimate suggest that the NAV could well be higher than $1.42, say $1.46. A prudent estimate of the revised NAV may be say $1.40 to $1.45 say. In other words, the discount should still be around 15% say, when I bought at $1.22-$1.23.

I should sound a cautionary statement that buying on a discount is not necessarily always wise. Why? Simply because the discount can dissappear eventually if markets keep heading lower. However, if one manage to buy at close to the bottom and at a discount, then, this is ideal, because if the bottom is indeed reached and if it does bounce back up, then, this discount is a wonderful buffer and price to buy. So, whilst I'm generally to buy stocks at discounted prices (than at a premium), I would very much prefer to buy when the price has reached bottom, and is on its way up.

So, has the price reached bottom yet? No one knows for sure. Technically, it is still a long-term bear from the charts, although charts only shows the past clearly and the future is still uncertain. Fundamentally, the outlook is still bearish, even though in bear markets, we will have bear market rallies which can sometimes be quite strong and fast on the upside during these volatile periods - fortunes change hands very quickly too. My buy at $1.22-$1.23 is not the entire long term strategic position, but just say 1/5th of what I intended to accumulate by the time this bear market is over, which may well last until mid to end of next year (I could be wrong here very easily). So, think of this as just the first out of a few possible long term instalments, although I reserve the right to trade without informing anyone until after-the-fact.

Should long term investors buy now?

Again, traders should always follow their own timing rules, but what about investors? Well, at 800, the KLCI appears "cheap", although, as I have mentioned here and elsewhere many times, what we mustn't forget at the back of our minds is that what appears fundamentally cheap can always become cheaper later if/when markets eventually become more depressed.

So, since long term investors generally don't try to time the markets, a program of slowly accumulating at successively low prices would make sense. As I indicated above, I have spent 1/5th of what I intend to accumulate yesterday on ICAP. It is a bit bigger than what I would have liked for a long term investment, so, I may take some profits later if Mr Market is too bullish for my liking.

Has this changed my views of Mr Tan the fund manager?

No. I still think his track record and past results as a fund manager is still good, even in this current bear market. For example, when he started ICAP at end 2005, KLCI was above 900 and despite the market now being at least a good 10% below today, the NAV has grown from $1 to $1.4x. In other words, even though market is say 10% below, the NAV has grown at least 40%, suggesting an outperformance of at least 50% during the last 3 years. This would certainly beat - as a rough guess - 90%-99% of professionally managed monies in my humble opinion, so, there is no doubt in my mind that Mr Tan Teng Boo certainly has a superior investment track record. His integrity on the other hand remains the same to me, whether I own ICAP or not. As always, it is critical to always apply one's own independent and critical mind and not blindly believing in what anyone says, otherwise, you just simply expose yourself to possible manipulation by others.

Disclaimer: At the time of writing this, I now own ICAP. Do be aware that I can dispose ICAP at any time in future, without telling you so.

Breaking Problem Cycles in Trading

With the stock market being as "bear" as they are right now, I thought some might enjoy or at least find it useful reading Brett Steenbarger's articles on trading psychology, especially this particular one here and the links below that article - http://traderfeed.blogspot.com/2008/10/when-good-trading-leads-to-bad-trading.html.

My own personal observations (including personal experience) in both trading and outside trading have convinced me without a doubt that problems tend to recur than not recur. I have no doubt that everyone - no matter how good a trader they are - will have their own problems recurring from time to time. The only difference between each of us is the type of problems we face and how frequently we face them. I believe trading is a lot like taichi, badminton or other specialized skills - there is no such thing as a perfect taichi practitioner, a perfect badminton player or a perfect trader. Everyone can always improve.

Novice often associate a trading problem with a loss. To a seasoned trader, a loss is not necessarily a problem. There are good losses to have (e.g. a stop loss well set and executed and part of the systems edge), and there are bad "unnecessary losses" to have (e.g. instead of executing the stop, the trader "averages down", and compounds the mistake, making the final loss much larger many times over than initially planned). Consistently and successfully executing the first category is not necessarily a problem (although this requires a proper review to make sure that the overall trading system is still okay to make sure it is a genuine non-problem), whereas the latter is almost always a problem.

Anyway, enjoy reading the linked articles. And best wishes as always.

Day-trading vs Holding Overnight

Something interesting based on US statistics on the S&P 500. A bit dated, but useful to think about in local context:

http://marketsci.wordpress.com/2008/07/21/the-markets-are-nocturnal-daytime-vs-overnight-performance/

The main conclusion from this study is that "Markets are Nocturnal". In simple terms, this means that most of market returns are from holding overnight, as opposed to day-trading. In fact, just holding overnight alone accounts for MORE than total returns for S&P500 from 1994 to 2008 period, suggesting that intra-day trading is a "losing activity" where S&P500 is concerned.

Over that period, the S&P500 was in a generally rising market.

I have a strong suspicion that the corrollary is also true in a generally declining market, such as the bear market we are witnessing now. My own close observation has shown me without a doubt that holding overnight this year would have been very, very costly.

In summary, in strong bear markets that we've seen since the start of the year, unless you are an accomplished day-trader or contra-trader, better to just step aside and hold 100% cash. That way, you won't lose money from holding overnight, and you won't lose money trading intra-day.

And conversely, when the bear finally turns into bull one day, be prepared to be flexible in changing the trading style from intra-day to long-term investor.

Sector Snap: Shares of drillers slide with crude

For future reference - http://biz.yahoo.com/ap/081024/drillers_sector_snap.html?.v=1. Expect similar trends with local O&G stocks.

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Sector Snap: Shares of drillers slide with crude
Friday October 24, 4:39 pm ET

Shares of oil drillers slide as crude prices tumble and broader markets fall on economic woes

NEW YORK (AP) -- Shares of oil drilling and exploration companies plunged Friday as the price of crude tumbled and the broader markets slid on concern about the global economy.

Light, sweet crude for December delivery fell $3.69, or 5.4 percent, to $64.15 on the New York Mercantile Exchange. The price has slid in recent weeks from an all-time high of $147.27 reached on July 11.

And natural gas for January delivery fell 13.9 cents, or 2 percent, to $6.747 per 1,000 cubic feet on the Nymex. Prices for the cooking gas had been above $10 per 1,000 cubic feet last summer.
When energy prices are high, oil and natural gas exploration becomes more lucrative. However as prices fall, generally so does the incentive to explore new areas, and with it potential new sources of revenue for the sector.

Shares of Diamond Offshore Drilling 1.15, or 1.6 percent, to $72.58; shares of Noble Corp. fell $1.84, or 6.6 percent, to $25.90; and shares of Ensco International Inc. fell $2.24, or 6.5 percent, to $32.34.

All three posted increases in their third-quarter net income earlier this week.

"Although uncertain commodity prices will lead to volatility in the daily stock prices, the long term outlook on all three companies remains very solid," Pritchard Capital Partners analyst Brian Uhlmer said in a note to clients.

Elsewhere in the sector, shares of Schlumberger Ltd. fell $4.52, or 8.7 percent, to $47.52; shares of Cameron International Corp. fell $1.63, or 7.1 percent, to $21.29; and shares of National Oilwell Varco Inc. lost $1.28, or 4.8 percent, to $25.50.

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Some stock charts for your reference:

Diamond Offshore Drilling (DO) - http://finance.yahoo.com/echarts?s=DO#chart1:symbol=do;range=1y;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Noble Corp (NE) - http://finance.yahoo.com/echarts?s=NE#chart1:symbol=ne;range=1y;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Ensco International Inc. (ESV) - http://finance.yahoo.com/echarts?s=ESV#chart1:symbol=esv;range=1y;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Schlumberger Limited (SLB) - http://finance.yahoo.com/echarts?s=SLB#chart1:symbol=slb;range=1y;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Cameron International Corporation (CAM) - http://finance.yahoo.com/echarts?s=CAM#chart1:symbol=cam;range=1y;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

National Oilwell Varco, Incorporated (NOV) - http://finance.yahoo.com/echarts?s=NOV#chart1:symbol=nov;range=1y;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Half Truths and Lies

What is the difference between "half-truths" and "lies"?

Is half-truth not a lie?

For example, imagine this hypothetical scenario. You're away at work, and leave your wife alone at home with the kids. You came home, have a chat with your best friend neighbour (let's call him John), who hinted to you that rumour is your wife has been cheating when you are away with a neighbour. Your attention immediately turns to Mike, who is single and likes to flirt around with your wife before. You thanked John for the heads up, and later, at the right time, when the kids are asleep, you asked your wife this direct question - "Dear, have you been seeing Mike lately?", and your wife immediately said "No, why do you ask?". And because you have an honest relationship with your wife, you confided in her - "Well, I just heard a rumour from John that apparently said that you have been sleeping behind my back". And your wife looked at you in the eye, and in the most honest answer you've ever heard ... she said "Darling, I swear to God that I have never slept with Mike in my entire life, and I have no intention of sleeping with Mike ever despite his handsomeness and his past flirts". She further added ... "Darling, you can trust me on this.".

Would you feel reassured with this response, when she looked at you in the eye?

What if the reality is such that yes, she did not flirt with Mike, but actually, she's been sleeping with John, your best friend?!!!

She never lied!

She told a half-truth.

She didn't sleep with Mike at all.

But she simply didn't tell you that she's been sleeping with John!

Read the attachments here, and tell me whether Syed Hamid and The Star is telling the truth, the whole truth and nothing but the truth. Or whether the Government and the mass media are experts in telling half truths?

And more importantly, can a country prosper with its citizens, if the Government is only concerned with telling half-truths?

1. http://mt.m2day.org/2008/content/view/14176/84/ - "How Much Longer can the Government Lie to the Malaysian Public"

2. http://thestar.com.my/news/story.asp?file=/2008/5/27/nation/21368814&sec=nation - May 27 Star article consistent with May 26 Bernama article referred to in 1. above.

3. http://thestar.com.my/news/story.asp?file=/2008/7/14/nation/20080714124856&sec=nation - July 7 Star article referred to in 1. above.

4. http://thestar.com.my/news/story.asp?file=/2008/10/22/nation/20081022191045&sec=nation & http://thestar.com.my/news/story.asp?file=/2008/10/23/parliament/2354544&sec=parliament - - Syed Hamid's response claiming that he did not lie.

Don't dig a bigger hole! (2)

Further to my first article on the above topic (http://fusioninvestor.blogspot.com/2008/10/dont-dig-bigger-hole.html), I have received several email comments and replies, but there is one email reply which stood out in its length, with thought-provoking contents, and may be interesting to retail investors, that I would like to share with you (after receiving the author's permission last night).

Please feel free to leave comments at the end of this article, or the chatbox, although, leaving a comment at this article would allow the original author to check the comments later.

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Seng,

I came across your blog accidentally and noticed one interesting topic, “Don’t dig a bigger hole!” I do agree with some points but not to others. Let me share some of my past experience, since I have went thru 1 bull market (1992-93), 1 bear market (1997-98) and recently bull run (2006-08). The question of digging bigger hole or not is all depend on which counters one buying or plan to buy. Record shows that at least 25% of company listed on bursa disappear after 10 to 15 years. Counters like Taiping, Tongka, Omega, Yaohan … and many others which famous at one time all disappear from Bursa today. So those own these kind of co. if not cut loss, had been making very severe loss.

However, if one choose a solid co. and have some sort of monopoly and can be sure that it will continue with it’s business for next 10 years, then the current weak sentiment would be a good time to buy. I will choose TNB as one of counter for this discussion. The reason why I choose TNB is because I have full history record, beside it meet above condition and also my friend was ex TNB staff who bought with Pink Form (IPO).

I was a Dealer during 1992 bull run market. Market was so hot until KLSE reach 1200 – 1300+ in one year time. TNB surged from $6.50 (IPO $4.50) to highest record of $20.00. Then suddenly one day it drop to $15.50 and I advice my friend to sell, but he refused as market rumours it may rise to $25 again. One week later, TNB closed at $10.00. (if one sold at $14 or $15 will consider good deal) My friend sold his TNB at $8, three months later after market drop significantly. However one year later, TNB trade between $7.00 to $10+ and this seem that the decision to sell at $8 was not good deal.

There was one client (Mr L), who started to buy TNB at $9.00 (only small portion). When TNB drop to $8.00, he bought some more. When it drop to $7.00 he bought again but with more lots than before. That time I don’t understand the pattern of this buying method, but later noticed he actually use Cost Average Down method. On 1994 to 1995, people seem to forget about 1993. TNB up to $12+ again and Mr L disposed all TNB after holding for 1 and half years. The question here, is Mr L buy at $9, $8 & $7 consider digging hole?

Now we look at 1997, it all started with currency crisis. On one day morning, rumours came from Thailand and spread over to all Asia countries. During that time, we noticed a group of fund managers start to create panic environment in the country by keep on selling and caused KLSE comp index drop 40 to 50 points in 2 days. We as dealer know what’s happening and their intention. One week later, market started to feel the panic and fall ever more. Add to the worse, Ringgit kept on falling against USD. Some of our clients were so panic, worry and start to dump shares at any price available. One of my clients called and ask if value of share can fall to Zero?

TNB started to fall from some where around $10+. Some clients start to collect at $8, some at $7. One month later, the closing price was $6.50. Then Mr L started his buying order at $6.50 with minimum lots. Some clients who started to buy at $8 or $7 start to give selling order. Still recall, I was told by them that they want to cut loss, as the market not moving in their favour. This was a very funny situation, you know, as a dealer, we saw someone buying and someone selling the same counter. Of course, I can not tell them Mr L started to buy, don’t sell. After all, we want more business to earn commission.

The following few months, Mr L continued place “buy till done order” at $5.50, $4.50, $4, $3.50. The last order I received was Aug 1998, where he put buy order at $2.50 and it was done with $200K, the most compared to previous order. On 1 Sep, 1998, ex PM Mahathir announced several action and economy stipulated package, including peg Ringgit at 3.80 / USD and arrested Anwar. Market suddenly reversed and surged 100+ points. TNB also surged from $4.50 to $5.60. The following day, it closed at $6.40. Very few clients who cut loss earlier bought it again at $2.50 or even $4.00. Also, they have no chance to buy back as the market turn was so unexpected and fast. Question here, is Mr L digging hole? Or if he did not do that, he had no chance to buy at $2.50 as none of us know when was bottom reached.

I am not sure what’s the trigger point for Mr L to buy at $6.50, in fact, I did check with him, but he say it’s just 6 sense. But base on the previous price, seem he actually started to buy when price fall below 50% or more, with Cost Averaging Down. On 2001/02, Mr L, started to disposed TNB with price range $10 to $12 after holding for 3 years plus.

Actually, among all clients who actually making money was less than 10%. Most of them are traders, especially day trade. We like those traders but don’t like Mr L, after all, Dealer want to earn commission as well. But Mr L seem to be in the top list and he do it in very relax way.

All the above happened 10 years ago and Mr L had agreed for me to disclose the above matter to others. However, don’t ask me if Mr L start his buy order today, as this is private and confidential. (Last week we noticed Warren Buffet made announcement say he started to buy America stock, I am not sure what the intention. If you announced to public that you intend to buy something, would you still get it cheap?)

The current market situation is more or less similar to 1997’s financial crisis except it trigger by US. The different I can see is More Internet Trading compare to 1997 and our Interest Rate did not surge to 11%. Also, now Composit Index Counters allow Short Selling and the change of political climate, which I think may give certain impact to overall market.

In the extremely bearish market condition, one should buy low and later (2 years or more) sell with handsome profit. If one would to follow Mr L, he must choose the right company. But we may not know when’s the bottom, that the difficult part, even TA is also hard to tell. The 1997 bear, we saw KLSE closed at lowest of 200+ points. Or one can wait till TNB fall to $2.50, but we don't know if this can happen or not.
Just share my thought.

Cheers!
V

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My quick comment:

My guess is that Mr L is probably not the typical chatbox "chatter" who chats here everyday, glued to the screen the entire day, and plays intra-day / contra.

For such a person where trading is not a full-time job, the risk of being out of the market when the stock market recovers is greater. The Asian Financial Crisis recovery was relatively fast, and if you hesitated too long, you run the risk of missing the upside move. Also retailer psychology is such that when the current price is higher than the previous low price, majority will hesitate. That hesitation is normally costly.

However, as a TA practitioner and student of past charts, there are always early warning signals for example, when one looks at the daily candles. You won't catch "the bottom", but you should still be able to catch say 40%-80% of the uprise depending on your skill and level of monitoring. This assumes an above average trader psychology too.

Mr L's approach is an investing approach with little monitoring. It is unclear if all his stock investments is in just 1 stock (TNB), or is diversified. It is unclear what proportion stocks are to his entire net worth. I seriously doubt someone like him would have put his entire net worth into just 1 stock, nor would I consider the latter a prudent practice. It is important to note that when you bet on just 1 stock, the choice of stock is super-critical, unless you don't mind losing money over a prolonged period. And the psychology of that investor, having first bought at say $6, only to see it drop steadily to $5.5, $5, $4.5, ... and finally down to $2.5 ... and still not panic ... - do NOT under-estimate what sort of mental toughness is required to see this happening on a daily basis, especially when we see our $1 million investment shrunk to just less than $0.5 million for example, or $10 million shrunk to just $5 million ... etc. These sort of mental toughness probably does not exist in abundance, although those who has made it to millionaire status and beyond would most likely have undergone similar test(s) to their mental toughness previously.

The author's letter contains many interesting snippets such as "Record shows that at least 25% of company listed on bursa disappear after 10 to 15 years. ", and "Actually, among all clients who actually making money was less than 10%. Most of them are traders, especially day trade. ". Personally, I haven't done the statistical studies myself on Bursa, so, treat these as "anecdotal" for the moment.

There are other parts of the article that is worth commenting, but as time is short, and trading is about to commence, perhaps we can discuss later.

Again, I would like to take this opportunity to thank the author for sharing.

HUAAN: Some rumblings

Firstly, this is NOT an automatic BUY call for HUAAN.

The background is that today, we were chatting about steel stocks in my chatbox, someone mentioned HIAPTEK (a steel stock), I took a quick look at the Balance Sheet and noticed that it has significant borrowings that is larger than its inventory, I am then reminded of HUAAN and wondered if this could be something to watch out for LATER when the market has found "the bottom". Just to be clear, I am still long term bearish on the KLSE, so, let me talk first about my own bearish outlook on the KLCI.

Bearish KLCI Outlook

From the above chart, the important things to note are:
* KLCI is still making new lows as late as this morning (888.28).
* Obvious trend is DOWN since the peak at the start of this year.
* Both 20 day EMA and 200 day EMA are still pointing DOWNWARDS as of today.
* Today's price is well below both EMAs, which is BEARISH.
* Generally speaking, we have yet to see THE BOTTOM, even if this week turns out to be "a bottom".
* The odds are still against long-term investors "buying and holding", and they are better served to wait until they have clearly seen THE bottom.

So, why am I writing about HUAAN?

In two words - Preparation and Discussion.

The attractive part is that the share price has clearly taken a huge whack, since listing in March 2007. Take a look at HUAAN's price chart below.

HUAAN Price Chart

* WEEKLY chart since HUAAN's listing in March 2007.

* Opening price on listing day at $1.48 in Mar 2007.

* Found peak price 5 weeks later at $1.79.

* Since then, fallen steadily to close to $0.26 as of today (also new closing low). This is a huge fall, since 26 sen is only 17.5% of Opening Price of $1.48, and only 14.5% of Peak Price of $1.79. However, be careful about picking up stocks like this where the price just made a new low, since it is easy to cut one's fingers whilst trying to catch a falling knife, even if there appears to be a deceleration in the price fall.

* It is clearly OVERSOLD by any oscillators. For example, the weekly RSI shown above is oversold. It is important to note that oversold does NOT mean BUY, as evidenced by past oversold readings when the stock price continues to fall 4 times in the past in Aug 2007 (quick rebound), Nov 2007 (quick rebound), Jan-Mar 2008 (continued price fall), and June-July 2008 (continued price fall).

The key question is has it found bottom yet?

The prudent answer is "we still don't know". Superficially, support is seen at 25.5 sen, but if global markets makes a new low, it is obvious to me that this 25.5 sen is not going to hold. The odds are when a stock price makes a new low, expect more new lows to be made, until we've seen reversal signals, such as a new higher low subsequently.

So, even though price starts to look interesting, the bargain hunter might still want to wait a little bit longer.

Balance Sheet

This is the original reason as I recalled:

* No debts. No short term borrowings. No long term borrowings. Net cash position on 30 June 2008 of $76 Million, although the dividend paid on 13 Aug 2008 will have reduced this cash amount today by approximately $25 Million, leaving a Net Cash Position of say $51 Million, ignoring new cash flows since 30 June 2008.

* Current Assets of $275 Million compares favorably against Market Capitalization at 26 sen of $292 Million. If we adjust Current Assets down by $25 Million, this leaves $292 - ($275 - $25) = $46 Million, to own (Fixed Assets - Goodwill - Total Liabilities) = $571 - $107 - $44 = $420 Million. In other words, at 26 sen, HUAAN is fundamentally cheap by traditional Net Tangible Asset valuation.

* I personally don't like NTA because it can be overstated sometimes. For example, in the current global recession environment, and in the current soft global steel prices since mid this year, inventories are unlikely to be worth the stated values. For conservatism, better to mark these down by 50%. Similarly, receivables are unlikely to be worth the stated values - in times like these, even though we don't know exactly who HUAAN clients are, we should mark these down by 50% for conservatism. Only cash is worth its stated value. Goodwill is worth nothing in the event of liquidation. Total liabilities worth full value. So, what would be a realistic worth of HUAAN in the event of liquidation? My quick calculations showed that Revised Fixed Assets = $464M, Revised Current Assets = $150M, Total Net Tangible Assets = $464 + $150 - $44 = $570M, or say 51 sen per share.

* At 26 sen, from a valuation perspective, HUAAN appears cheap. At this price, it is *almost* giving away its entire fixed assets for very little amount. The concern of course is that what appears cheap can get cheaper in a declining stock market. In serious bear markets, I have seen stocks selling at cheaper than its Operating Capital.

Income Statement

* Net Earnings is around 6.5 sen in the last 6 months, roughly evenly distributed between Q1 and Q2.

* The major concern is of course huge increase in Revenue (Q2/08 vs Q2/07), and yet, Net Earnings only increase by a tiny %. The margin erosion is indeed serious.

* The earnings outlook is equally serious. As the coy has stated, "the metallurgical coke industry is largely dependent on the direction and growth prospects of the steel industry as
metallurgical coke is one of the critical raw material for the manufacturing of steel in China.". Since the steel industry is soft, we can expect serious deterioration to the metallurgical coke industry. The question is how serious?

* Q2/07 margins was 15.7%, it has deteriorated to 8.5% in Q2/08. Given the huge fall in global commodity prices, huge fall in Baltic Dry Index, huge fall everywhere, it is difficult to make a prediction on how low margins can get. The truth is I don't know if half of 8.5% is adequate or inadequate. I did remember that HUAAN - when compared to its competitors in China - is not exactly an "average coy", but more like a "below average" company, from Moolah's blog. How would a "below average" coy perform - from an earnings perspective - in a prolonged global recession?

* In 2007 Annual Report, the coy mentioned its expansion plans - "In mid 2007, we have also commenced the construction of our additional metallurgical coke ovens to increase our annual production capacity from 1.2 million tonnes to 1.8 million tonnes. The construction of the said new metallurgical coke ovens have been completed and are expected to be fully commissioned in June 2008." So, it seems we can expect greater output, but the question of course is what will be the profitability of these expanded businesses? Whilst the Directors are optimistic (in latest quarterly report) on continued profitability for the rest of this year, this doesn't speak anything at all for the next year.

* There is a high degree of uncertainty in calculating P/E, but some people like to take current price (26 sen) and divide that with an annualized earnings of 13 sen (6.5 sen for H1/08 x 2) , giving a superficially low P/E of 2 times. One is tempted to think that even if H2/08 earnings is nil, the P/E for 2008 is still 4 times. The question is - is this meaningful? For example, if Q3/08 earnings are zero, do we seriously think that HUAAN Price will not take another hit downwards? Yes, there are some cushion because it is trading below its realistic liquidation price, but in a credit crunch environment, will potential buyers be able to finance this acquisition, if liquidation occurs?

* It begs the question - has the huge price fall "priced in" zero earnings for H2/08, and half of 2008 earnings in 2009?

* HUAAN is in a Net Cash position. It has no borrowings. Probably, in a prolonged global financial crisis where credit is hard to find, it will probably survive better than its leveraged competitors, if it doesn't expand beyond where it is already, or do something else silly that consumes precious cash/capital. It is comforting to see no new capital commitment planned from the latest quarterly report, and the past capital spending just a tiny fraction of prior year. However, it needs to watch its inventories tightly, it needs to chase its clients for its receivables to make sure that they finally receive cash, because in this sort of environment, cash is King. But from above, it is concerning that both inventories and receivables have increased, suggesting that HUAAN management doesn't appear to be on top of this problem, as least judging by the past. One would want to watch closely these figures in the next Quarterly Report that is due next month. If there is further deterioration in these numbers, then, the price is unlikely to rally.

Major Shareholders

To date, there are no selling reported to Bursa this year by the major shareholders. Top 5 shareholders responsible for over 60% shares outstanding. The history of the listing is somewhat puzzling, since this is over 1.5 years ago, and at the time, China stockmarket was red hot. I will forever remained puzzled as to why the owners did not list the company in China where it would have obtained not only easy credit but also command huge share valuations in the red hot Chinese stockmarket then. I guess this will forever remain a mystery to me. Still, as time passes, I suppose it loses some significance over time, as long as the major shareholders don't sell, and to date, it is becoming less discomforting that no selling is announced so far. My guess is that since the stock price has taken a huge beating (fallen more than 80%-85%) of listing price and peak price, the major shareholders are unlikely to sell now at 26 sen. (But if they did, this would then become an extremely bad sign indeed). But what is equally glaring is that the major shareholders have not been adding their stake despite the low "bargain discount" price. Perhaps this may be one of the the catalyst needed to send the share price up again, when major shareholders buys more. What is interesting though is that we haven't seen the company using up its cash holding to buy back its shares, which to me is a good thing. However, if it did buy back its own shares, then, I would view it as generally bad, because in the current global credit crunch, cash is King until the global credit/business environment recovers.

Conclusion

So, what can we make out of this?

I have deliberately pointed out the pros and the cons.

I think my own conclusion so far is still unchanged.

If you are an investor who buys and hold, then, it doesn't seem like it's clear yet that we've found THE BOTTOM, and even if we've seen "a bottom", the Buy and Hold investor is unlikely to sell at a local peak, and it would be terrible if the price then dived to make another new bottom which is lower than 26 sen. So, Buy and Hold investors are advised to still stay aside and just monitor.

And of course, if one is a trader, then, you don't need me to tell you when to enter, when to exit, and when to cut your losses.

Anyway, this is my honest view so far on HUAAN. If you would like to add anything, please do not hesitate to drop me a comment here in this article.

And if you are considering other steel stocks, do give consideration to its balance sheet too, besides its future earnings prospects. My feeling is that in times like this, as the global economy deteriorates, a strong positive cash flow and a strong balance sheet will increasingly find a premium relative to the highly geared competitors with negative cash flow. Relative to its steel peers, Huaan balance sheet with its net cash and nil debt position appears to be above average, if not one of the best amongst the steel companies listed in Bursa. But steel future prospects at the present moment doesn't appear exciting yet.

In short: Investors - KIV. Traders - do your own thing, don't wait for me to call.

ValueCap Sdn Bhd

This is one of the topics discussed in my chatbox this morning. It is also reported in various media here:

- http://www.bernama.com/bernama/v5/newsbusiness.php?id=365800 "Government Provides RM5 Billion In Additional Funds To Invest In Undervalued Stocks"

- http://www.nst.com.my/Current_News/NST/Monday/NewsBreak/20081020175413/Article/index_html "Valuecap would invest in undervalued stocks and protect investments in government-owned companies."

- http://www.bernama.com/bernama/v5/newsbusiness.php?id=365989 "Deputy Prime Minister/Finance Minister, Datuk Seri Najib Tun Razak announced that the government would provide RM5 billion in additional funds to double the size of Valuecap Sdn Bhd to RM10 billion to invest in undervalued stocks and protect investments in government-owned companies."

- http://afp.google.com/article/ALeqM5iInNgQ7ggUVplcGM109ox6W-S8Uw "Najib said the government will double the size of its state-run investment company Valuecap Sdn. Bhd, which was formed in 2003 to invest in under-valued, but fundamentally strong shares, by pumping in an additional 5 billion ringgit "

- http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_1808c204-cb73c03a-687ea900-8feee09d "20-10-2008:- Govt to pump extra RM5b into Valuecap "

Superficially, this news announced by our new Finance Minister seemed to have provided the market with some support this morning. Together with the spillover from regional recovery (e.g. Hong Kong +5.28%, Singapore +3.23%), and as can be seen from the KLCI intra-day chart below, the KLCI found a low of 888.28 just after 10 AM, before clawing back more than 21 points to close at 909.51. (+0.47%). Actually despite ValueCap, this is another "under-performance" of the KLCI relative to regional, although the comeback from the intra-day low is a slight improvement at +2.4%.





Someone asked if this is a good news. Obviously, something is better than nothing. However, we must note that the additional $5 Billion pledged is only a tiny 1% of KLCI market capitalization of nearly $500 Billion, i.e. in the longer term, probably little impact by itself, in terms of stopping the longer term bear. Note that ValueCap is one of Khazanah's portfolio (http://www.khazanah.com.my/portfolio.htm).

USD 596,004,000,000,000

Or US 600 Trillion Dollars.

That's the estimated size of the Derivatives Market globally by the Bank of International Settlements as at Dec 2007.



The growth from Dec 2006 (just one year prior) is staggering - from USD 415 Trillion to USD 596 Trillion, or a growth of USD 181 Trillion, or 44% growth in just 12 month period.

I wouldn't dare to predict what the updated figure would be at at June 2008, in view of the huge momentum growth, notwitstanding recent events and bankruptcies. I would *hope* the world learnt quickly how dangerous these instruments is, but they don't seem to have learnt in 2007 despite the huge warning signs posted all over the place then.

According to this author here ... "However You Look At It, This Is an Accident Waiting To Happen" - http://seekingalpha.com/article/99674-coming-soon-the-600-trillion-derivatives-emergency-meeting?source=article_sb_emailed

Just the tiniest % change to this Huge number is still a huge number in itself, that the recent bailout packages proposed in the US and Europe that runs into Hundreds of Billions still appear inadequate.

And by the way, in the entire history of US stock markets which stretches to well over 100 years, with all the doom and gloom during the Great Depression, 2 World Wars, the Cuban Missile Crisis, the Great Oil Crisis in the 70s, Asian Financial Crisis, the Great Tech Bust, 911, etc. etc. etc. - my simple question is - has the world seen such a large derivative market before in its entire history? USD 600 Trillion or more?

Will 2008 goes down into history books as the Great Credit/Derivative Crisis?

If the world has never seen such a crisis on such a massive scale before, how much damage can such an implosion do? Is there a limit, where is that limit and how certain are we that that is the limit?

Many financial institutions have gone down, even the largest that were previously thought to be "too big to fail" have also gone down. The question is have the system purged out all the toxins, or are there still institutions holding much of this toxic waste that is still "hidden inside the closet"? USD600 Trillion is not something one can hide easily.

Markets have taken a huge plunge this month, and volatility has never been higher. Perhaps there is some consolation that markets have "priced in" these problems, but with such a huge amount of sensitivity and uncertainty, how does one go about "reasonably pricing in" such uncertainties?

Fundamental Valuation: How Low Could We Go?

Came across this excellent article by Brett Steenbarger with the above titled here - http://seekingalpha.com/article/100533-fundamental-valuation-how-low-could-we-go?source=headline1

To me, the key chart is here:



Brett focussed on the S&P500. My own observations from Ned Davis Research chart above are:

* The estimated Book Value for S&P500 is around 615.

* S&P500 closed 940.55 last Friday.

* In the last 31 years, the S&P traded at an average of 2.4 times book value.

* In the last 31 years, the S&P traded at a low of below 1 times book value, and traded at a high of around 5 times book value.

* Based on the above chart, if one wants to buy at the lowest over the last 31 years, then, a definition of "cheap" is set at half the normal figure, i.e. 50% x 2.4 = 1.2 times book value.

* This suggests that "cheap" may be 1.2 x 615 = 738, or a further 22% downside, despite the new S&P low.

* Or if you think this is one hell of a financial crisis, and it could be worse, then, maybe even the Book Value itself could be possible (615), or 35% downside.

* At the moment, the S&P is trading at around 1.52 times Book Value. Whilst this is lower than the 31 year historical average of 2.4 times, it is still not regarded as absolutely cheap, which is around 1.2 times. There is still quite possibly, another 20% more downside to go.

* There is no rule nor law that says that the stockmarket must conform to this "31 year old pattern". Nothing is certain in stock markets.

* One thing certain is that you have been hearing pundits saying the "bottom is near". I don't know, but if we take the last 31 year old history into account, you could still suffer considerably if you just "Buy and Hold". Why buy for example at 950, only to see it fall to say 800 (or 750 or 700 or ... ) after 2 (or 3 or 4 or ...) months, and then takes say another 4 months (or 6 or 8 or ...) to rise back to 950, only to make nothing during that 6 (or 8 or 10 or ...) months? The key concept is why try to catch a falling knife, when doing so could hurt you and subject you to unnecessary anguish over a prolonged and uncertain period if you "buy and hold"?

* One thing we cannot discount is the possibility (and more like probability) that our KLCI will broadly track the US markets.

* In recent months, our KLCI has "outperformed" US markets, in that KLCI has not fallen as much as the US. However, if you believe in "reversion to the mean", this could actually be bad news, because what happens if the KLCI starts to "outperform" US markets as markets revert to the mean? Meaning, what if we start to see even faster downside for KLCI, as KLCI "catches up" with the US downside?

* Again, whilst nothing is conclusive.

* Markets are full of vested interests, there will be pundits taking positions or calling for positions at every level of the S&P from now down all the way to the lowest possible estimates. With reasons why the past will not repeat itself because certain events in the past are once-off, inflation adjustment, growth, past wealth creation, etc, etc. etc.

* If you have thought through all the issues, great for you! However, what is clear in my observation is that many pundits don't consider the possibility that somehow, the ugly (we've long past the "bad") could turn even uglier. There are no guarantees and certainties in stock markets. There is no rule that says that there is a minimum floor to the stock market. The only certainty in stock market is uncertainty will forever rule the stock market.

* But what I do believe is that success in stock markets depends on how we manage our risk in times of uncertainties. It's all about risk management.

Do give Brett's article a good read and an independent critical thinking.

Some rumblings on financial rumours

Rumours are a fact of life. It occurs daily, it happens everywhere, and it can never be eliminated. Some think that because it is a fact of life, we should condone and not speak against rumours. I couldn't disagree more.

Rumours is often claimed to be spread by idle people with plenty of spare time and nothing better to do. Whilst true in some cases (think idle chats), spreading rumours is also a specialized skillset. Used skillfully, it can give you an unfair advantage over others. And precisely because of this, it should be condemned.

There are many types of rumours. Not all rumours are equal. Some are light-hearted, with no serious implications. At the other extreme, lives and/or millions and billions of $$$ are at stake. Only a fool would think that all rumours would have equal impact.

Financial rumours are no different. They've been around since financial markets first existed. They occur daily. They occur everywhere. And they have unequal impact.

Financial rumours usually travel fast. Faster than regulators and Bursa can disseminate true information. Faster than investigators can investigate the truthfulness of the rumour. Faster than reporters can report on the truth. The UMA enquiry and formal company responses are usually regarded as a joke by those in the know. The time delay is often long enough to cause the full damage, to reap the full gains and to allow the perperators more than enough time to escape scott-free. Regulators and laws seems 10 steps behind. Syndicates thrives and prosper since time immemorial, because of this time lag and time discrepancy. Persistent unscrupulous management and/or major shareholders tacit participation are widespread symptom that regulations and enforcements have been inadequate. The extent moves in cycles over time, reducing when there is a strong reminder, and increases when most people forgets, and then decreases when it gets re-discovered and many are doing it, and so forth.

Rumour grows as it goes. The best rumours are the ones that started off as believable. Sometimes, as it gets passed on, the story gets better by design or accident. When share prices are depressed and accumulated, it may start out as one out of dozens of possible management actions. Someone comes out and says it is one of the "top" options considered. Eventually, usually by the time it gets to the masses and reported in the newspapers, it is said to have been approved or a fait accompli by management. At this juncture, the share price accelerates to its peak, because a General Offer for a specific high price is already on the table (according to sources). Usually, at this stage, the late-comers and the lambs find themselves facing the slaughter house, as the initial parties have already made their $$$ money and are already long gone.

My own personal observation of Moolah's blog is that it contains some of these examples, and by far, the most exhaustive in the Net. To long-time readers of Moolah's blog and to those who are sensitized through years and decades of experience, they can smell a potential rumour 10 miles away. And take positive steps to either avoid becoming a victim, minimize potential damage or better still, to profit from it, if it's from the other side.

As a Bursa investor and trader, you can never rely on the regulator to stop rumours from happening. Self preservation and self responsibility comes first. Besides the fact that regulators are always 2 steps behind, you must also consider the possibility of vested interest everywhere.

When markets are quiet, financial rumours are apparently "welcomed" by market participants, because - the argument goes - it adds "life" to an otherwise lifeless market. But when markets are highly volatile (like now) and close to tip-over point (like now), certain financial rumours should be condemned harshly when they are blatantly irresponsible. In times of heightened uncertainty (just see the record level VIX for example), truth is critical and certain unsubstantiated rumours should be harshly condemned.

Sensitized investors and traders can usually tell the difference between rumours and facts. The good ones know the impact on prices, which is not necessarily straightforward. They know that the same type of rumour, leaked at different times, can lead to different impact. They aim to profit from the rumour.

But experienced syndicates know that as sensitised traders joined the game, their share of the cake get smaller. Eventually, they need to find ways to shake off these free-loaders, or their own share gets smaller.

In a market that only allows longs and disallow shorts, financial rumours which are designed to push a stock price up despite having no fundamentals, will have minimal downside for the perperators. The only risk is the "bigger swinging dxxx" who called the smaller syndicate's bluff.

When it comes to giving others unfair advantage over others, my own personal position on this is similar to my own personal position on vice activities such as robbery and theft.

I realize that there are segments in the society who thinks that the loser "deserves" it. They were not "wise enough" to tell the difference between a cleverly constructed rumour and the truth. They were too "innocent" and "too greedy" to believe in such false rumours. These "weak" groups deserved to lose to the manipulators. To win the big money, you must have the "killer instinct". "Sentimentality to those trampled" is a sign of "weakness".

To those of sound moral character, this begs the question - does this mean that it is fair game to manipulate everyone? Consider this analogy - is it fair to lure a fair maiden to a lion's den through manipulation or false promise, only to rape her and dumped her, and justify that she deserves to be raped because she couldn't tell the difference between the rumour and the truth that enticed her to enter the lion's den in the first place? Isn't there a difference between attracting someone into some arrangement based on the truth, versus a false promise or a rumour?

So, you would think such activities should be condemned isn't it?

And yet, even this is apparently not clear cut - according to some. For example, the most often cited reason to stay silent is because you don't have the full evidence. But is this prudent?

Going back to the fair maiden example, it's like saying even if you suspected the handsome guy with the false promise is a fake, you are still not allowed to raise the alert to the fair maiden until you have 100% solid evidence, i.e. after the deed is done. What kind of logic is this?

It should be obvious to all, that a "suspected" rumour which are designed to lead to a certain price action through unfair practices should be alerted quickly and loudly, even if it may seem as condemnation by others who are not so sensitized. Why? Because the consequences of not sounding the alert can be large. The nature of the stock market itself, the lure of easy money, combined with natural greed of investors, tend to lead to excessive speculations, which naturally lends support and success to such vice activities. When the potential consequences are large, the warnings can never be loud enough.

And there is the human and religious angle to this as well. If one is truly a religious person, how does one reconcile such activities with what the religion teaches and one's religious beliefs? Namely, the one that says that if we see a wrong being committed, we should try to physically stop it, and if we can't, we should voice out our disapproval, and if we can't, then, in our hearts, we should at least condemn it in the harshest terms? What kind of people need the extra money so badly, that they are willing to sell their soul to the devil? Is this the kind of people our society should worship?

Blog Capsule 3 Update : This Week's KLCI High

Blog Capsule 3 has ended. Background here - http://fusioninvestor.blogspot.com/2008/10/blog-capsule-3-this-weeks-klci-high.html

The KLCI high of this week is 972.92, registered on Tuesday, Oct 14, 2008.

Noone predicted this figure to the nearest integer. The 2 nearest predictions are:
- win = 967 (Difference = 5.92)
- pk = 980 (Difference = 7.08)

Since "win" has the nearest prediction, I officially declare him the winner!

So, for next week, let's all address "win" as "xifu" in the chatbox. *grin*

Incidentally, fellow blogger "nexttrade" also blogged on the KLCI high for this week here - http://nexttrade.blogspot.com/2008/10/market-outlook-as-at-october-13-2008.html. He mentioned this on Tuesday, Oct 14: "In the current rebound, the KLCI will face resistance at the psychological 1000 level and at the 1030 level (posted by the immediate downtrend line). " So, not only did "win" out-predict everyone in this chatbox, he also outpredict Alex from nexttrade!

So, please join me in congratulating chatter "win" for his well deserved "win" for Blog Capsule 3!

(and don't forget to pester him for some "sure win" tips next week! *just joking*)

Blog Capsule 4 - Is Seadrill Selling Sapcres or Not?

Since the start of this week, "newbie" made several unsubstantiated comments that Seadrill has been disposing SAPCRES. If my memory serves me right (I could be wrong), I vaguely recalled he first made the comment first on Monday. Certainly, as of yesterday, he repeated them more than once here. His latest was last night, at 11:14 PM.

Note newbie's 23:14 which said "since Sep 30" (which is over 15 days ago) and note "disposing SAPCRES "every day".

Is this true?

Checking Bursa announcement today (lunch time, Wednesday, 15 October), Bursa has not yet made any such announcement, despite well over 2 weeks.

Personally, I doubt this news very, very much for the following reasons:

1. Seadrill has been accumulating SAPCRES since last year. They've gone from zero to 23.4%. The 20% level is a key level, suggesting strategic buying. They would need to have very, very strong reasons to backtrack, as their accumulation price is clearly higher than today's level.

2. They have been consistent net buyer. As far as I am aware, they have never sold Seadrill before. Their latest purchase is on Friday, 19th September, which they reported on Monday, 22nd September. Note their generally prompt report and their practice of never selling.

3. Newbie claimed that Seadrill has been selling "every day" "since Sep 30, which is a Thursday. IF so (and I seriously doubt it), then, this would makes it well over 2 weeks already, and Bursa has yet to report on it. So, the longer Bursa don't announce, the greater the signs of "untruth" here.

Anyway, this morning, I noticed a couple of chatters - Windsurfer and Moolah - has already queried newbie, and I also left a comment for newbie at 8:48 AM. Others like "ezi" also started querying where newbie got this source, since it is not reported in Bursa.

newbie finally joined the chatbox at around 11 AM, not his usual behaviour.

After my query, newbie said "Seadrill has sold or has been selling thru CLAS broking firm no. 35" at 11:03 AM.

When queried by cycle, he said he doesn't know how much Seadrill have sold at 11:07 AM.

At 11:11 AM, he asked me "Seng, wat if Sea drill sold just a tiny percentage of their holdings must they announce?" (Note the "what if")

At 11:15 AM, newbie claimed that his remisier knows this.

At 11:16 AM, newbie claimed his remisier told him this and repeated "Seadrill selling thru CLAS".

***************

Anyway, the purpose of this blog capsule is to see whether newbie is telling the truth or just spreading a false rumour at a critical and sensitive time.

Price wise, SAPCRES found bottom on Monday AM, I suspect many in my chatbox started buying when the price was around or below 92 sen on Monday PM. I suspect many held it overnight Monday night, started selling on Tuesday, but continued to hold overnight on Tuesday night also. On Tuesday night, US markets profit take, and Bursa KLCI was down 16 points at today's lunch time.

So, the timing of newbie's rumour has the potential to cause a major fall to SAPCRES price, because of the sensitivity of the news - Seadrill is the MAJOR reason that makes SAPCRES a bullish case, and the absence of Seadrill means the stock price has the potential to fall.

Also, the timing of newbie's rumour is "good" (i.e. good if you want SAPCRES price to fall), because it creates additional uncertainty, when overall recent uncertainty was already at its highest.

There is no doubt in my mind what newbie wanted to do with his rumour since Monday. All experienced traders and knowledgeable investors also knows exactly what newbie was trying to do.

I am naturally dissappointed with newbie's behaviour. But at the same time, nothing is certain in stock markets, and newbie could actually be doing us a favor, if it was the truth. But the manner in which he spreads rumours and the manner in which he does this more than once - speaks very loudly in itself also.

Anyway, this is a blog capsule. Let's see whether newbie (or as he claimed, his remisier) has been telling the truth. The truth shall come out later anyway, one way or another.

Don't dig a bigger hole!

Today, in my chatbox, a chatter has the courage to share with us his investing losses. He considers himself more an investor than a trader - apparently, he still hold stocks bought a decade ago. At the height of the bull run, his account showed a total net profit, but to date, he estimates that his account is losing approximately 60% with some stocks losing 90%.

His experience is probably not unique. The recent "crash" has taken away a lot of the retirees savings, especially in the US. Investors who invested in Bear Stearns and Lehman have lost their retirement savings, and even those who invested wholly in AIG - the company that until recently had AAA rating and couldn't be more secure - has lost nearly their entire retirement savings. For these retirees who had looked forward to a wealthy retirement, their retirement dreams have been destroyed totally. It is a tragedy for these people, as it would mean that their lives - going forward from here - would need to change in a drastic manner, including the need to continue working past retirement age to find continued income, the need to cut down on monthly spending, forgo the little luxuries left and have monies to spend only on the necessities. Sadly, a forced and complete change in lifestyle.

The reason I point this out is because if you think you have it bad, there are thousands and millions out there who have it worse. Psychologically, I can only imagine that the worst cases must be devastating. The chatter shared with us his loss of confidence, which I suspect is only the tip of the iceberg. I'm sure many have seen similar situations with friends, ex-colleagues, families who temporarily lost a job and the means to support their family. There is a psychological impact that is not easy to shake off, because the effects is felt on a daily basis.

However, there is hope. I do know that people who lost jobs gained hope when they took action, and was given a job interview! You see a tremendous change there. Similarly, I believe that those who lost money in the stock market can also feel a deep psychological change if they start to have wins again in their trades. The account might not go back to zero immediately, but the hope is there after a string of wins.

And I believe that's basically the objective for someone who has lost money from this round. The first thing I believe is to commit to yourself that you will stop digging a bigger hole! The last thing you want to do is to dig an even bigger hole that makes it "more impossible" for you to get out of.

If you find yourself in this situation (having a net negative account despite years of investing and feeling depressed), I think there are a few critical steps that you need to take to get out of this situation and this feeling of depression.

1. Know your situation first. A jobless person knows exactly the problem, because he doesn't have a job and doesn't have a regular income. Likewise, if you are investing and have a job, the first thing is to make sure that your job is secure, because a regular income provide some peace of mind. The last thing you want to do is to lose that job income as well, then, psychologically, it becomes even more damaging. (related to this is to also be opportunistics to ways to improve yourself financially in a responsible manner)

2. Know the exact problem. As hard as it seems, I suspect most people who had losses will find it difficult to know exactly how much they've lost. I know, because during 1998, I had similar experience, and I simply didn't want to look at stocks for months. But I believe that the last thing you want to do is to not know your problem. So, my advice would be to take a deep breath, total up the market value of your stocks, compare that with the purchase price, and work out the exact $ loss and exact % loss. For example:

- If you had allocated $500,000 to invest in stocks (all numbers here are purely hypothetical).
- Cash balance is $25
- Market value of stocks is $189,321
- Then, current portfolio is $25 + $189,321 = $189,346.
- Your loss = 500,000 - 189,346 = $310,654,or 62.1% loss.

You know this exact number. Your goal is to not make this worse if you can (see below).

3. Self-acceptance. As hard as this may sound, you need to accept that your paper loss of $310,654 or 62.1% loss is a real loss. This number may be a different number tomorrow, but the fact that you are depressed at this juncture is probably enough to indicate that you have been holding on to the loss for some time, and longer than you expect. You should do a thorough analysis of the stocks you own.

If you are honest, the reason you are in this predicament is simply because you didn't invest or trade with a stop loss. Yes, Warren Buffett said that you should be willing to see an unrealized loss of up to 50%, but he was silent on what happens if it becomes 60% or 70%. More likely, you are in this problem because you paid too much for a business that is probably only average or below average quality. Since your stocks aren't exactly Buffett-like stocks, so, you shouldn't blindly copy Buffett's 50% unrealized loss rule. You should have taken action earlier and quicker.

So, bottom line is odds are high, that you are probably holding to an average or poor quality stocks. If you don't know how to identify this, then, get many 2nd opinions because this is critical. Basically, you need to be prepared for your worst case scenario if the stock price falls further.

4. Commit and resolve to yourself that you don't want the problem to get significantly worse than where you already are.

The root cause of the problem is most likely owning a set of average quality stocks. The problem with this is that the downside is not necessarily limited. If the stock market gets worse than the recent low, your stocks may create new lows and new losses. This is an uncertainty that is not easy to evaluate for the untrained investor/trader.

But what is within your control is your maximum loss. At this point, it is 62.1%. What is your tolerance level? Can you "tahan" 65% loss? $325k loss? Or 70% loss? $350k loss? Try visualizing this as detailed as you can to see if you can try to pre-determine this.

5. Know the maths. Realize that a 50% portfolio loss requires 100% return to break even. So:
- 60% loss requires 150% return to break even.
- 65% loss requires 186% return to break even.
- 70% loss requires 233% return to break even.

Know that there is huge difference between getting 150% future returns vs 233% future returns. In short, your strategy should be to minimize your loss, preserve your capital, so that you have bigger bullets to fight another day.

6. At the time of writing (lunch time, Tuesday, Oct 14), there is a general market rebound after the crash, but I don't know how long this will last exactly. If in doubt, consider the possibility of selling some of the stocks during strength, even if you sell only 10% or 20% or a larger number. Every sale at strength helps provide some comfort in that the maximum loss gets smaller and smaller, but it also reduce the probability of breaking even again in the immediate term.

7. Selling is an art, and I doubt I can cover this nor do I consider my sell method foolproof. But the general idea - if you are an avid stock price watcher - is to sell only when you think a downtrend is imminent and that you are confident to buy back at a lower price. But implementing this is much harder than it sounds.

8. During these times, you will be tempted with "quick rich" schemes. In fact, someone in your situation is probably ripe for the unscrupulous to promise you a quick way to get back your money, and steal all of it away! Don't! Don't be tempted with "get rich quick schemes"!

The truth is - in my experiene - there isn't any reliable quick methods to get it back. The lucky ones are very few. Most who tried loses it all.

The general rule of thumb is that since stock market rises slower than it takes to crash, if it takes you 1 year to get into this hole, give yourself at least 2 to 3 times longer to get it back. In other words, the only way to get it back is the slow and steady way.

I do realize that some recommends futures or options to try to get it back. I don't! If you can't make money using stocks, chances are good that you will blow it all away using leverage products.

Remember: Whatever you do, don't dig a bigger hole than the hole you are already in. And never forget the maths! And be patient. If it takes you 1 year to get into this mess, give yourself 3 years to get it back. Sadly, it will take this long, but the critical thing is to be patient. Don't average down, don't buy more, until you are sure the odds of the price going up is higher. And don't be greedy or afraid that the price will run away from you. That will only cloud your thinking.

Good luck.

Blog Capsule 3: This week's KLCI High

In a light hearted mood this afternoon, someone suggested we take a small bet predicting KLCI high for this week.

The winner gets to be called xifu for a week the next week.

As the nature of the bets are playful, do not take these predictions seriously.

For example, I am speculating that Moolah's prediction is deliberately highest, to prove the point that his call does not have an impact on the market. Similarly, my prediction of 984 was simply because mydreamgetrich thought I would call 948, and I simply reversed the 2 figure to 984.

So, don't take these predictions seriously!

Anyway, for blog capsule purposes only.

The predictions are:
- Ocean = 955
- sleeppy = 958
- ckkuan = 962
- WM = 965
- win = 967
- pk = 980
- elton = 981.15
- Seng = 984
- mydreamgetrich = 990
- naruto = 1001,
- Moolah = 1025 (!)

The Dangers of Catching a Falling Knife

Much has been written about the dangers of trying to catch a falling knife. Suffice to say that keep doing this long enough, and you'll end up cutting your own hands eventually. It's rarely a question of if, but when.

In short, trying to catch a falling knife should not be a regular activity, but an occasional activity, when the odds favor the knife catcher.

And it should not be done with margins, but with small amounts set aside for speculation (say 5% capital), as opposed to serious trading or serious investing when one may then swing to another % to be close to fully invested.

Better still, avoid trying to catch a falling knife altogether if you can. There are far better times to do so.

***********

Today, I was shocked to learn that at least one of the regular chatters in my chatbox appears to have had his hands cut quite severely. What surprised me is why he was so quick to go on a margin at this juncture.

Yes, the KLCI has dropped hugely this year. We've gone from a peak of 1524.69 in January 2008, to a low of 926.22 today (lunch time). That's nearly 40% fall from peak. But does this necessarily mean that prices have to stop falling after falling by 40% from peak? If not, why go on margins at this jucture?

Importance of Cash & Asset Allocation

In a falling stock market, it should be obvious that the most important thing is asset allocation. In a falling market our target should be 100% cash, 0% stocks. This allocation is far more important than market timing.

I also appreciate that human nature is such that when we see a lower price, we think it's cheap and we get greedy. But the problem is "Is it the right time to be greedy?". In stocks should one be greedy in a downtrend or in an uptrend? Do you know the difference between a bull market and a bear market from a quick glance at the charts?

If you can tell the difference from looking at weekly or daily charts, then, why go with over 100% allocation in stocks when the market is still bearish?

Do we simply not believe that what is cheap can get cheaper?

Allow me to show you 4 charts to illustrate this.

Chart 1 - 5 year period ending 29 August 1997



Up to August 1997, the KLCI appears to still be on an uptrend over the past 5 years. However, the uptrend line got broken in August 1997, as shown on the chart above. Furthermore, an earlier sell signal was generated twice before that, when the index first crossed below the 200 day MA, followed by the 50 day MA crossing below the 200 day MA. The fall below the uptrend line was the last call to sell.

Yet, the Index has gone from a high of 1332, down to a low of 777.46, or approximately 42% fall.

My question is at 777, is it time to go on a margin and be 100% in stocks?

Let's see what happens if you did this the following month.

Chart 2 - YTD to 29 September 1997



This chart zooms into 1997 YTD. You can see that in September, the market found a new low of 675, before doing a W shape and closed the month as a monthly "doji" suggesting indecision. The 2nd leg of the W shape is higher than the first leg, which is normally regarded as positive, although one would need confirmation from other indicators too.

There are a few issues here. The first is the greedy investor who went 100% last month at say 780. What's happened to him when the KLCI found a new low at 675? Did he have enough cash to buy more at lower prices? No. What was his frame of mind when KLCI went to 675? Probably nervous at the very least, if not a nervous wreck. What was his frame of mind when the KLCI went to 814? Relieved at the very least, but probably still feel a big greedy. Will he sell? My suspicion is that if he's already 100% invested in August 1997, then, he probably wouldn't sell in September 1997.

Chart 3 - YTD to 31 October 1997



KLCI opened 808, touched a high of 845, hit a low of 646, closed at 665.

Remember the investor who went 100% at 780? He's now 115 points down, or nearly 15% negative. What do you think is his daily frame of mind?

Ok. The right side of the chart shows possible "bottom" and possible "support" at around 646.

The question is with 15% negative return, should he "average down" again?

Chart 4 - YTD to 30 November 1997



In November 1997, KLCI opened 672, touched a high of 750, hit a low of 512, closed at 545.

At 545, the loss is a whopping 235 points, or 30% loss!!! What will be his frame of mind?

At the end of Nov 1997, it looks like there is a possible bottom. Is it time to "average down"?

Actually, the Asian Financial Crisis period is a terrible period for investors and greedy traders. The CI ultimately found a low in September 1998 (or 10 months after Chart 4), at 261.33.

It is obvious that what appears low can get lower from these 4 charts.

It is also obvious that if one trades without stop loss, not only will your fingers be cut, but also you could suffer serious, serious loss of wealth, and be in debt, if you play with margins.

There is a time for serious money, and there is a time for pocket money, and there is a time to stay cash.

Never ever forget what kind of time it is at every single day of trading.

In fact, trying to trade every day, or trying to "average down" every day is futile and self-defeating.

My goal in writing this article is to hopefully get you to think about the uncertainty of markets, and the difficulty in predicting bottoms. It's a waste of time and effort trying to predict bottoms. Much better to control your trade, and to cut if your stop loss is triggered.

As for the investors in you who never sells, my only advise is don't be so quick to average down.

Even those of you who are on a 50/50 stock/cash allocations.

It is better to give up bottom, and only go into stocks when it finally bottomed and then goes on an uptrend.

Update: Apologies for the typo errors earlier. This was typed in a very rush manner. Hopefully, the title of the dates are now corrected, and are now consistent with the dates shown on the charts.

Dow & Past US Recessions

If a picture speaks a thousand words, do 14 pictures speak 14,000 words? *grin* For future reference:

The Next Meltdown: Credit-Card Debt

Not a new topic, not a new issue, but a nice chart, and an interesting article for future reference:

Full article here - http://www.businessweek.com/magazine/content/08_42/b4104024799703.htm

Some interesting extracts:

* "The next horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic."

* "That's bad news for players like JPMorgan Chase (JPM) and Bank of America (BAC) that have largely sidestepped—and even benefited from—the mortgage mess but have major credit-card operations."

* "We still haven't hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better." What's more, the U.S. Treasury Dept.'s $700 billion mortgage bailout won't be a lifeline for credit-card issuers. "

* "But some banks and credit-card companies may be exacerbating their problems. To boost profits and get ahead of coming regulation, they're hiking interest rates. But that's making it harder for consumers to keep up."

* "Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009. "

* "Those losses, in turn, will wend their way through the $365 billion market for securities backed by credit-card debt. As with mortgages, banks bundle groups of so-called credit-card receivables, essentially consumers' outstanding balances, and sell them to big investors such as hedge funds and pension funds. "

* "Big issuers offload roughly 70% of their credit-card debt. But it's getting harder for banks to find buyers for that debt. "

* "Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That's because most credit-card debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property. "

* "Making matters worse, the subprime threat is also greater in credit-card land. Risky borrowers with low credit scores account for roughly 30% of outstanding credit-card debt, compared with 11% of mortgage debt."

* "Credit-card losses are already taking a bite out of lenders' balance sheets. Bank of America, the nation's second-largest issuer behind JPMorgan, revealed on Oct. 6 that roughly $3 billion of its $184 billion credit-card portfolio has soured, a 50% increase from a year ago."

* "Likewise, American Express (AXP), which caters to wealthier borrowers, upped its provisions for credit-card losses from $810 million to $1.5 billion in the latest quarter, a sign that even upscale consumers are having trouble. "

* "The industry's practices during the lending boom are coming back to haunt many credit-card lenders now. Cate Colombo, a former call center staffer at MBNA, the big issuer bought by Bank of America in 2005, says her job was to develop a rapport with credit-card customers and advise them to use more of their available credit."

* "Now regulators and politicians are trying to curb some of the industry's abusive practices by limiting interest rate hikes, abolishing certain fees, and cracking down on questionable billing practices. Under rules proposed by the Federal Reserve, a borrower would have a 21-day grace period before being hit with a late fee, instead of the few days offered by some firms now. A similar plan working its way through Congress would allow banks to increase rates only on consumers' future purchases—not existing balances. And under both proposals, credit-card companies would have to allocate account holders' payments equally to balances with different interest rates. Currently, firms first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt."

* "The Senate isn't expected to vote on the matter until early next year. "

* "Even consumers like Michael Polemeni, who miss only a single payment, can find themselves in the crosshairs of credit-card companies. ... Polemeni generally made more than the minimum payment each month, carrying a $2,000-or-so balance. But in July he missed a payment, and Providian, owned by Washington Mutual, jacked up his rate from 9% to 30%."

* "Not everyone will be able to pay down their debts like Polemeni. And that could make for a vicious cycle: As credit-card companies raise rates, more consumers fall behind on their payments, which then hurts the issuers. Says Innovest's Larkin: "We are going to see the banks massively hit." "

* "Consumers in Latin America, South America, and Eastern Europe are filling their wallets with credit cards. The number of cardholders in Brazil and Mexico has more than doubled in the past three years. But rapidly rising credit-card debt can wreak havoc on emerging-market economies, according to Oxford Analytica. Take South Korea. Consumers there went overboard on credit in 2003 and defaulted on a large percentage of those loans—which seriously crimped the country's growth."