Investors pullout in Malaysia election aftermath

This is perhaps an important piece of news for investors in Malaysia stocks. Today, the Kuala Lumpur Composite Index (KLCE) fell as much as 10% to 1166.32, suspending the trading for an hour. As reported in reuter news, stocks linked to the federal government such as Sime Darby, the market's biggest blue chip, fell by 9.6%.

Warren Buffett, currently the richest man in the world now, has this famous quote, "Be fearful when others are greedy and greedy when others are fearful." Now, when the stocks are beaten down like that, is it a good, buying opportunity? If you had closed your position before this and are using the buy-and-hold approach, then it makes sense to buy. But then, you never know if the market might go down some more. So it is probably better to buy a bit as it moves lower to average out your purchase price. And perhaps use some technical analysis to determine a good market entry. Which stock should you pick? (Also, I think it is important to monitor the US market indices as well. IMHO, I think the world market is not decoupled from the US market.)

Nevertheless, we are just beginning to see the effects of the election results. The market is reacting this way because it is uncertain of the political stability in Malaysia. How long is this going to last? Maybe as soon as the media starts to trumpet good news. After all, as noted by Garfield Drew, "Stocks are never sold for what they are worth, but what people think they are worth." Hey, maybe some smart aleck can start using the internet platform or blogging power to trigger a positive sentiment, eh?

Just joking. No, it's not funny. Oh well, maybe, like the investors, we'll just have to wait and see.

Related links (as with anything on internet, read with discretion):
http://bursa88.blogspot.com/
http://www.squidoo.com/klse-online
http://www.klse.com.my/website/bm/
http://tradingbursamalaysia.blogspot.com/
http://www.chartnexus.com/
http://quote.yahoo.com/q/ta?s=%5EKLSE
http://www.tradesignum.com/PublicChart.aspx?symbol=KLCI

Disclaimer: The above is not a recommendation to buy or sell, all suggestions mentioned are purely for academic study purposes for our trend trader club members only, and the author may have personal interest and position in some of the examples mentioned. Any losses incurred if you were to trade base on the study examples above is solely your own responsibility. Do consult your dealer before taking any action.

Are we in recession?

I have been doing some reading about technical analysis and browsing the net for information. We hear the word recession everywhere. Some people think it is not yet recession whereas others believe it is already here.

What is defined as recession?

According to Investopedia,

"A significant decline in activity spread across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP).

Recession is a normal (albeit unpleasant) part of the business cycle. A recession generally lasts from six to 18 months.

Interest rates usually fall in recessionary times to stimulate the economy by offering cheap rates at which to borrow money."

How has the interest rate changed over time? We can look at the following chart.

There was a stock market meltdown in Asia on January 22, followed by an emergency rate cut of 75 basis points, bringing the interest rate to 3.5%. A week later on the scheduled Fed meeting on January 30, another 50 basis points were cut bringing the interest rate level to 3.0%. Additional data can be found here.

One of the books that I am currently reading (chapter 5, Technical Analysis Explained by Martin Pring) explains how interest rates affect the stock market . The four basic reasons given are:

Fluctuations in the price charged for credit have a major influence on the level of economic activity and therefore an indirect influence on corporate profits.

Because interest charges affect the bottom line, changes in the level of rates have a direct influence on corporate profits and therefore the price investors are willing to pay for equities.

Movements in interest rates alter the relationships between competing financial assets, of which the bond/equity market relationship is the most important.

A substantial number of stocks are purchased on borrowed money (known as margin debt). Changes in the cost of carrying that debt (that is, the interest rate) influence the desire or ability of investors and speculators to maintain these margined positions. Because changes in interest rates usually lead stock prices, it is important to be able to identify primary trend reversals in the debt market.

Can we forecast a slowdown in economy or recession is coming by looking at numbers related to the interest rate data? It seem we can by observing the trend in the yield curve. First, let's see how yield is explained in investopedia.

"The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.

This seemingly simple term, without a qualifier, can be rather confusing to investors.

For example, there are two stock dividend yields. If you buy a stock for $30 (cost basis) and its current price and annual dividend is $33 and $1, respectively, the "cost yield" will be 3.3% ($1/$30) and the "current yield" will be 3% ($1/$33).

Bonds have four yields: coupon (the bond interest rate fixed at issuance), current (the bond interest rate as a percentage of the current price of the bond), and yield to maturity (an estimate of what an investor will receive if the bond is held to its maturity date). Non-taxable municipal bonds will have a tax-equivalent (TE) yield determined by the investor's tax bracket.

Mutual fund yields are an annual percentage measure of income (dividends and interest) earned by the fund's portfolio, net of the fund's expenses. In addition, the "SEC yield" is an indicator of the percentage yield on a fund based on a 30-day period."

From investopedia again, the yield curve is explained as follows:

"The shape of the yield curve is closely scrutinized because it helps to give an idea of future interest rate change and economic activity. There are three main types of yield curve shapes: normal, inverted and flat (or humped).

A normal yield curve (pictured here) is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time

An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession.
A flat (or humped) yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of an economic transition. The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short- and long-term rates."

"Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in 2000 just before the U.S. equity markets collapsed. An inverse yield curve predicts lower interest rates in the future as longer-term bonds are being demanded, sending the yields down."

There is a very good website with wonderful charting tools for market analysis. In the following figure, the left graph shows the yield curve whereas the right graph shows the S&P500 curve. I have picked years 2000 and 2006 (red, vertical lines on right graph) to see the corresponding yield curves on the left graph. As mentioned previously, we can see that the yield curve is partially inverted in 2000 - the year where the S&P500 curve starts to decline. Similarly, the yield curve is also partially inverted in 2006. Correspondingly, there was a steep decline in S&P500 in mid-2006. However, the market started going up again until early January 2008 where it started going down.



You can go to the stockchart website and use the dynamic yield curve to study its relationship with the S&P500.

Although there is no official word from the government yet, we are most probably in recession already. What do you think? Are we in recession already?

(P.S. aiyo, someone beat me to posting this subject first in seeking alpha blog;)

Don't believe everything you read

Remember the following quotation, especially the second part if you are trading stocks.

"If you don't read the newspaper, you are uninformed. If you do read the newspaper, you are misinformed."

- Author unknown, commonly attributed to Mark Twain or Thomas Jefferson

When I was a young boy, a cousin challenged me to define the concept of gambling. To me then, gambling involves betting your money to luck, like poker, horses etc. So she forced me to think about other forms of transactions involving money, like playing arcade games. Hey, that's not fair!

There's a story I recently learned where a pastor was asked if trading stocks is gambling. He answered that gambling is when you do so without proper information. What do you think? One thing for sure, when it comes to gambling 50-50, you are on the losing end. Don't agree?

Let's say, you start with $100 for a stock. The stock falls 20% and you get back $80. Next, the stock rises 20%. You get back $96. The stock falls 20% again and you get $76.80. Up 20% and you get $92.16. Continue for 7 more sessions like this, you finish with $75. Therefore, if your average number of gains and losses is the same, and given that the magnitude of gain and loss is the same, you are doomed to lose in the end. What do you think?

Anyway, take note of these charts.

How long does it take you to say the word "recession"?

How deep is the bear cut?

At times like these, it is advisable to keep your cash. Don't jump in and out because of media reports. Cash is king. Sob sob, I wish I had more. Just wait for DJ and Nasdaq composite to fall to 10000 and 2000 levels. Meanwhile, just have a cup of susu kacang and enjoy the following videos. I need to too.

Ushering the Chinese New Year

As the lunar new year is approaching, I thought I ought to get my act together as well. Kenny Sia's new year resolution is to slim down for his Malaysian Dreamgirl. Although my comment is number 100++, I am the number one to suggest badminton as a good way to reduce weight. See if I can hit top 10 next time. I have no problem with my weight, thanks to good genes, good eating and exercise habits;) I haven't formally made any resolutions. Gotta find a time to do it.

However, as you can see, I have decorated my blog to look nicer. I am still on the learning curve but I am quite happy with myself. 'Sedikit-dikit lama-lama jadi bukit', as the Malay saying goes.

The boar(pig) was pretty well-behaved last year, I think. Not the early part of this year though. It felt more like the year of the bear....for equities market, that is. Sometimes you can even spot the alligator.

Last week was a frenzy as capitulation took place. Who would not panic when you look at charts like this? Okay, it is still year of the boar.

A check on the weather report shows that the temperature now is 53^oF (which is about 12^oC) here in San Diego.

In Chicago, it is 27^oF (or -2.7^oC).

Sometimes I just miss the warm climate in Malaysia. When it is cold like this, you really don't feel like going out, don't feel like taking a shower. You take a longer time to warm up for badminton and your shots are usually awful.

Consider myself very lucky if I look at the winter storm now raging in China. It is the worst in 50 years and is blamed for at least 63 deaths, including at least 25 when a bus plunged off a slippery mountain road. Something for us to think about the effects of global warming and the consequences of our actions and inactions.

It is very hard to imagine what these folks have to go through. I already cannot 'tahan' (stand) the bus waiting platform outside the Johor Bahru immigration custom. I remember seeing a pregnant lady trying to get on the bus with another small child. Since it was extremely crowded, she had to pass her child over the people heads to some other person already at the entrance door. It is amazing to see that things like this still exist.

This year will be the year of the rat. It is said to symbolize wealth and prosperity. It is the first of the 12-year cycle of animals which appear in the Chinese zodiac related to the Chinese calendar. Rat is associated with aggression, wealth, charm, and order, yet also associated with death, war, the occult, pestilence, and atrocities.

Well, let's hope that the new year will bring good fortune and happiness to all of us.

Money, money, money....

If you are interested to learn more about investing or trading in the stock market, I recommend a Bill Cara's blog. Currently, following his suggestion, I am reading Martin Pring's book entitled "Technical Analysis Explained". It is a thick book but I think it is worth getting one considering it is an investment. I cannot give a rating yet since I have only started on it. ;>

Anyway, while reading the comments in his commentary and community chat today, I came across an interesting video on "Money as a Debt". The running time is 47 minutes, so maybe you can order susu kacang to drink, sit comfortably and enjoy the show. Incidentally, this video comes from this website called socialistworld.net. And I found some interesting articles on current affairs related to Malaysia as well. You can read the article here. Seems like you cannot protest to the government about price rise.

Money, money, money....no money, cannot afford to buy things. Have you wondered how money is created? Not on the trees. Maybe wikipedia can tell you though the accuracy of the article is challenged by certain quarters.

How important is money to you? Money pays for your education and other bills. Yet money cannot buy happiness. You can read all the stories of wealthy people such as celebrities, dignitaries etc. who, despite their great wealth, still lead messed-up lives. Money attracts bad people like flies. When you have too much money, you become distrustful of people around you, even the closest ones like your family members. You always feel insecure and worried that people will take your money away or worse, take you away. Too little money also brings you a host of problems. Cannot pay for this and that. Not many friends maybe. Get sick but cannot pay medical bills. Always worried about no money.

Then again, I think it is easier to live with little money than too much money. If cannot afford to buy and pay, then buy less, and use less. Not many friends but the few friends that you have will be your best friends. You can trust their sincerity and will enjoy their warmth of friendship. Since you got no money, you tend to work harder and maybe move your butt around more. So maybe your health is better because of all the 'exercise' to your body. You tend not to eat 'expensive' food which may not be so healthy. The part about worrying about money - that is a mindset one has to correct. Remember the parable about the lilies and the birds in my earlier post?

So, I think stay in the middle path is better - not too rich and not too poor. What does ABBA say about money?

Be patient, don't gamble!

"The best way to think about investments is to be in a room with no one else and just think...if that doesn't work, nothing else will." - Warren Buffett

In my previous post, I mentioned about a stock that went from $13 to $130 in less than a year. In fact, if you look at the company fundamentals, it is very solid. The CEO himself has a huge share in the company. Since that last post, the share price has plummeted from $90 to a low of $48 before recovering at $53 today. In fact, if you have been following the stock market situation, you will be shocked to see so much selling going on now. It doesn't matter if the company is reporting great earnings like Apple today - everyone is just selling. Immediately after last night's market meltdown in Asia (you can follow the live news at cnbc), the fed rate was cut by 75 basis points (overnight) and that appeared to have lifted the stocks up a bit this morning. Nevertheless, if you haven't closed your long positions, chances are you are making some losses. In this economic turmoil, I think it is best to stay defensive - meaning, don't buy into rallies, rather - sell to take back some of your cash. Actually, the Baltic Drys Index (of which the company I mentioned is a component) was down a couple of weeks ago before this insane selling began. By the way, this index is perhaps a better economic indicator than stocks and bonds indices because it is totally devoid of speculation. Googling for the baltic returned me this blog (the post seems outdated though).

Even Google's stocks got beaten badly today. I think there is going to be a temporary relief from the surprise cut, as you can see in Asia stocks today. But after that, what else? There are very good financial blogs you can visit for information or discussion on the stock market such as Bill Cara, Wallaston Investments and others you can find on their blogrolls or posts.

In Bill's blog, he mentioned a passage from the bible taken from the Book of Ecclesiastes, Chapter 3.

There is a time

1 To every thing there is a season, and a time to every purpose under the heaven:
2 A time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted;
3 A time to kill, and a time to heal; a time to break down, and a time to build up;
4 A time to weep, and a time to laugh; a time to mourn, and a time to dance;
5 A time to cast away stones, and a time to gather stones together; a time to embrace, and a time to refrain from embracing;
6 A time to get, and a time to lose; a time to keep, and a time to cast away;
7 A time to rend, and a time to sew; a time to keep silence, and a time to speak;
8 A time to love, and a time to hate; a time of war, and a time of peace.

Similarly, there is a time for the market to go high and low. Although this post is unlike my previous posts where I mostly talked about self-introspection and so on, I hope I can urge you to act wisely with your investments. Don't panic (like I did, hahahaha), don't be too greedy, be patient, don't gamble. Good luck!


Disclaimer: This is a personal web site, and statements on this site reflect the opinions of its author only. This site is intended for informational purposes only, and may include facts and speculation about companies and markets as part of that process. None of the information on this site is guaranteed to be correct, and anything written here should be considered subject to independent verification. Any investment actions taken by you as a result of information written here are your responsibility.