Thanks Ah, Krugman.

Well, found an article by a Nobel prize winner (he’s currently at the awards dinner actually) that goes directly against the grain of my previous post.

Oh, JT! What have you done!

The German Light

Amidst anticipation that the UK-backed plan for pan-European fiscal stimulation will fail, the German finance minister is actually taking a courageous stance to appeal for calmness and logic amidst the market chaos. It is really laudable, but the tough part is getting the majority (other European countries) to listen. Like he says, they are all acting under pressure to just do something to answer to their people. In his words: “We have a bidding war where everyone in politics believes they have to top up every spending program that has been put to discussion. I say we should be honest to our citizens. Policies can take some of the sharpness out of it, but no matter how much any government does, the recession we are in now is unavoidable. When I look at the chaotic and volatile debate right now, both in Germany and around the world, my impression and concern is that the daily barrage of proposals and political statements is making markets and consumers even more nervous.”

I think that is a fantastically frank account. He goes on to admit that he doesn’t have a panecea, but that he believes going down the “joint European approach” without knowing the exact effects is not a good idea. Its great to see that there is someone willing to not go with the herd and try to do something right, bearing in mind policy mistakes of the past. 

I suppose this is an endless cycle played out throughout the advent of democracy; where kings used to simply increase their tithe in times of need, democratically-elected governments risk being toppled by people power. Which may not be the most logical path to take sometimes.

What this means for plain ol’ me is that I now got to watch the GBP really carefully. If they do listen to Mr Steinbruck and not rush out a mega-billion recovery package, the pound may not drop as much as I think it would. And that’s going to affect the amount of money I can change and take over to the UK.

Bear Rallies: Not On Fundamentals Anymore

Essentially trying to ply trades based on market sentiments, in what would seem like a market ‘herd mentality’. True enough to the predictions and observations of some, there seems to exist a ‘Friday effect’ where the market tends to close sharply up at the end of Fridays. It may be due to buyers wanting to finally take up positions after a whole week of thumping lower and lower. And possibly sellers, thinking rationally, that the buying frenzy usually spills over to the following week before fizzling out, thus holding back their sales although in today’s example the sellers came out in force in the final 5 minutes to prevent a total uprush. But the result was still impressive nonetheless: a full 500 point gain in the final trading hour alone. Pretty significant considering its a pull up from a lowly 7500. Then again you can argue that 7500 is too low for the index to stay over a weekend, and I’d even tend to agree somewhat.

Regardless, I still feel there is still some room for upward movement before the Dow succumbs again to the rudderless uncertainty it has been facing all weak. If there was one thing to takeaway from this week’s market, it is that the market HATES uncertainty. And is willing to pay a premium (in terms of realizing losses) to get the hell out. Sounds like something we can make money out of.

Hopefully the stars will align with some good hope-inducing news over the weekend, so that the index will continue to get swept up in irrational exuberance at least for part of Monday, or even better, part of the upcoming week. I’ll be watching closely to finally wade in with some short positions. They should be great companions in an overall monster-bear market.

TBT Again

Sorry! Couldn’t resist checking on adorable TBT as I studied.

As we all know, TBT tracks the inverse of long-term bond prices. And the inverse of a bond’s price is its yield. So we can see TBT tracks TYX, the 30-year bond rate, step by step. So far, treasury prices have been going up and as far as I know, the 30-year yield is the lowest in at least 10 years, dipping below 4% today. And will be going further down if nothing dramatic happens.

The interesting thing is that, while yes, treasuries are the safe haven in deflationary environments, their percieved safety still lies in the US govt’s credit-worthiness. And as we all know the US govt has been, and will continue to be, issuing debt to pay for the bailouts and government credit swaps of this decade. 

A position in TBT can be used to play two ways: to, with some certainty, ride the bond price decreases as the world economy recovers in the medium term (and with it, demand for forms of investment other than treasuries), and also be used to benefit from any credit events/inflation fighting situations down the road where the Fed might find itself under. Overall an above-normal return from my understanding of the situation.

The dates to watch for this play would be the Fed announcements coming up on 16th Dec and 27th Jan where the prices will definitely jump. 

Would be great to hear your opinions on this. Good night!

[edit] an informative read on why you should consider playing the Treasury’s debt binge would be The Treasury Department is Choking on Debt, But You Don’t Have To from moneymorning.com. They recommend RYJUX though, which is a ‘normal’ inverse bond etf compared to the ‘ultrashort’ TBT.

Forced Halt

Forcing myself not to follow the market these two weeks. It’s both a great time to start my trading ‘career’ and a lousy time. Great because the volatile and weakening market offers many opportunities to uncover opportunities through hard research and practice. Lousy because this is the period where the grades of my last (hopefully) semester in college are determined. Exam time.

I just hope I don’t miss out too much action these two weeks although that’s really unlikely. I really really would like to catch a great bear rally! That would give me a chance to offload some of my AIG, and gain an entry point into the ridiculously expensive ultrashorts, EEV, FAZ and SRS. Should there be another capitulation on the scale of October I would actually go *a little* long on the $300 MKL, and of course keep my eye out for a good time to take up some TBT as I still believe strongly in the eventual long-term cheapening of Treasuries.

On a brighter note, I’m registering with a new brokerage, OptionsXpress, and transferring all my holdings over from DBS Vickers Online! OX offers a fantastic, responsive interface with HALF the trading fees. And the customer service is even better. I do not have much against DBSVO’s service, although there was an administrative lapse that denied me access to US equities even though I had submitted the W-8 form already. My first customer service experience with OX was very pleasant. Middle of busy trading day and I logged on to the ‘live chat’ function they have to ask some dumb questions about certain promotions they were having. And a person actually answered back really promptly, plus there was the option to recieve the transcript via email. All I can say is, throughout the entire website experience, you know and feel that they put their customers first. AND their share custody is insured by the US Govt, unlike for DBSVO where I *heard* that the holdings are uninsured against.. anything. Although it was a forum post where someone posted a reply from a DBSVO staff, there is still some credibility.

Will be back with a vengence on the first Monday of December. Appreciate your comments and hope to see you all soon!

All Hyped Up And Nowhere To Go

This Monday’s trading session was promising, given the volatility last weekend, the upcoming Nov options redemption deadline and of course the G-20 meeting.

But nothing. Tepid market.

Tried my hand with paper-trading some options. Understand that I’m new to it, need some time okay? Managed to get a reasonable price for EEV (Ultrashort Emerging Markets ETF) but missed my target for FAZ (Financial Bear 3X) by just a wee bit. Getting the hang of it, might make my belly-splash soon.

Bad thing about “flurry of activity near the end of the trading session” is that I have to stay up till 5am if I were to get some action. Would be a fun challenge any other time, but not this near my exams.

Tepid.

I’m Loving This

Add another, very obvious, sector to the list of sectors I’m interested in: financials. More to the point, I’m looking out for financials that have no business being beaten down but are beaten down excessively by virtue of their SIC classifier tag.

I must say, MVC Capital (NYSE:MVC, Current: $10.38) looks really really really interesting. Reasons include:

1. Replacement of entire board of directors in 2003, and incredible growth in earnings since then. Their turnaround of their own company is, to me, the strongest indicator of their capabilities in turning around other companies.
2. Experienced head investor with deep industry links ensures constant pipeline of opportunities
3. Strict internal controls to ensure regulatory compliance
4. Status as business development company ensures transparency in dealings
5. Current market conditions provide excellent investing opportunities for them
6. Provides access to micro-cap growth companies otherwise unaccessible by me (us)
7. And, most importantly, trading almost at its 52-week low and at price-to-book-value ratio of a measly 0.6

Possible downside of investment

1. There may be a ceiling to growth given the small investment team they currently have. I’m just not personally sure about the scalability of PE businesses, especially since they participate actively in the management of their invested companies.
2. Their current debt level may prohibit them from obtaining credit should the downturn stretch out. This may be balanced out by the cash they have on hand although I wasn’t able to find out how much.
3. I also may face reinvestment risk because MVC has policy of paying out dividends

That said, I’m looking forward to monitoring this counter and hopefully adding it to my little portfolio really soon. I’m loving this recession.

Update: On 6th Nov, management actually bought approx $240,000 worth of their own stock at around $12. Great vote of confidence. Lovin’ it.

Money Brought Me Back

Preamble

Really been some time. With facebook dominating my online life and my dearest girlfriend sustaining my offline life, the value of blogging dropped to almost zero. Of course, the insane semester with 6 modules and exchange application didn’t help. Nor did the emergence of an online competitor looking to upseat this blog’s remaining value proposition of being an online repository of photos of my future travels: deviantart.com.

Purpose

The purpose today would be for me to document my 5-year investment strategy. This so-called strategy is obviously still in progress: my first ever trade took place a mere 2 months back with a purchase of AIG (NYSE:AIG, Current: $2.10, Bought $2.70). The trade was done without proper due diligence, based on gut instinct and was more of a opportunistic lurch than anything else. More on my plans for AIG later. The purpose of this blog entry is simply this: it represents an investment of time (3am now, supposed to be in bed 2 hours ago.) that will hopefully yield an incredibly large amount of amusement in the future. 

I don’t know about other investors out there, but I believe a person’s investment portfolio represents his personality and views of the world. I shall now flesh out my current tendancies and my position picks will naturally follow.

Portfolio

1. There’s a streak of juvenile rebellion in me. This led me to make a, on hindsight, bet (as opposed to investment) that AIG will prove ALL its naysayers wrong. It was of course rather juvenile. Thus from my current position on AIG of around 30%, I will be seeking to pare my exposure down to around 10% should any opportunities present itself in the form of bear market rallies (eg. ’surprise’ from the G20 conference, Obama’s policy moves etc.) in the coming months.

2. I believe within the five-year horizon, the massive spending/bailouts/reflationary measures will have a larger-than-life impact on world, and especially US, interest rates as Fed + central banks seek to clamp down on inflation during the global market recovery phase. Looking at the Fed interest rate at 1.00% now, and 30-year yields hovering around 3-4%, I am very pessimistic about Treasury bonds. Thus I intend to purchase a 10% exposure to ProShares UltraShort Lehman 20+Year Treasury (AMEX:TBT, Current: $60.72), which is essentially an inverse bond ETF. What happens is, should interest rates really rise in the future, bond prices will go down and the price of this share will go double-up as its an ULTRAshort (It seeks to replicate approximately twice the bond price fluctuations, in the opposite direction). I intend to hold it until the Fed rate hits a certain target (8%? not sure, gota research on this), then sell it and immediately invest in cheap bonds to balance up my equity-heavy portfolio.

3. I am deeply sold on Buffett’s idea to invest in companies with moats ie. competitive advantages that are not easily replicable. By Fool recommendation, I came across Copart Inc (NASDAQ:CPRT, Current: $27.93, Bought: $28.49). A mid-cap company with an innovative idea: to move the traditional car-salvage business model online, and do online auctions to fetch better prices. It’s moat comes from its web interface and the fact that it has acquired several junkyards in US and UK, which competitors can’t duplicate easily as junkyards are limited by zoning limits. After doing very sketchy research I quickly bought some up near the end of Friday’s session (Friday is the correction day after a 550-point Dow zoom on Thurs) as it was trading within 3% of its 52-day low. Looking at it now, I need to do ALOT of research on the competitive landscape and whether the moat is as good as it sounds. Should everything still look good, I will maintain a 20% overall exposure to this stock with promising growth potential.

4. Personally, I am long China and should the opportunity present itself I would want some exposure to the property sector simply because since there is SO MUCH land, a developer with capable management and sound business strategy would literally be staring at endless growth. Xinyuan Real Estate (NYSE:XIN, Current: $2.38) looks really attractive, trading at a large discount to book value. Things I like about it are the management’s focus on second-tier cities like Hangzhou (which makes alot of sense to me), clear target market, and their asset-light strategy. Contract, develop, move on. Should further research not turn up even better China stocks, I will aim for a 10% share in my portfolio for this stock.

5. The last company looks almost unreal. Looking at how the management is running the business and their sources of income (dual income from underwriting policies and investment portfolio), you really would think you’re staring at Berkshire when it was still growing (not that its not growing now still). I would just like to say Markel Corp (NYSE:MKL, Current: $312.25) looks downright amazing to me. Reading the management’s letter for FY2007 made me check out the career prospects in the company! Their single-minded focus on creating shareholder value, emphasis on employee development, clear tangible metric for success (growth in book value), alignment of incentives to prevent agency problems (employees are EXPECTED to buy company stock. They don’t believe in options!), constant evaluation of business niches and flexibility in restructuring business lines to weed out underperforming ones, capable investment team to manage it’s float (cash generated from insurance premiums that are used to invest to earn returns).. my gosh. I really can go on and on. I’ll be putting my money where my mouth is: 50% of my portfolio will be dedicated to this amazing company.

Prospects

So that’s essentially my entire portfolio. Should the TBT-flip trick work, I will be looking at a roughly 10%-90% division in terms of bonds vs equity. And NONE of the companies offer dividends, they all retain full earnings. So this is essentially growth-to-the-max for me. Given my very limited investing knowledge, I still feel that such a strategy is suitable as for the upcoming 5 years I do not foresee any capital outflow requirements, my income does not need any dividend supplement, and my appetite for risk is rather high. Just look at how I loaded up toxic AIG.

The currency risk on this portfolio is also very high. I’ll be over-loaded with USD exposure. However, given broad  analysts’ bullish outlook on USD to date, I can suffer less tension on this point at least in the short-term. But definitely I need to figure out a way to mitigate this factor.

As my portfolio grows (hopefully), I would want to use the gains to diversify further and seek to include my other views as well: I’m watching a basket of Alternative Energy and BRIC ETFs, and eyeing sectors like entertainment and customer discretionary that will be battered down by recession.

Politeness

Thanks for reading!