Olam Bonds plus Warrants Offer - To take or not to take for Retail Investors?

I was on annual leave travelling Europe for the last couple of weeks and was too busy since being back earlier this week to make any decent postings. Oh my, how much has the stock market rallied in my absence and how Olam made tremendous amount of headlines during the Nov-Dec period.

Being a  retail shareholder of Olam (vested), I received the thick bond and warrant offer booklet outlining all the details of this terribly complicated offering. 

1. 5 year bonds +
2. 3 year European warrants and then 2 years of American style warrants +
3. USD denominated exchange rate risk (USD down, bond coupon and maturity payment when converted to SGD down // USD down, warrants cost down, capital gain increase)
4. Trade-ability of bonds and warrants only in 1,000 units boardlot on SGX which makes odd lots difficult to dispose of.
5. (And in addition) Newspaper reports of people suggesting that the offer is really good and hence likelihood that the offer might be fully subscribed leaving little odd lot conversion possible.

Anyway, that's the simple qualitative analysis. 

Below is another simple quantitative analysis that I have came up with to aid my decision making process

Assumptions to calculations are

1. Based on purchasing 1932 bonds + 1,000 warrants (162:313)
2. Hold bonds to maturity (5 years lock-up)
3. Sell warrants immediately after 3 years lock-up
4. USD/SGD stays at 1.2273 level throughout 5 years
5. Calculations include ~S$28 brokerage fee to sell exercised warrants
6. Calculations factor in dilution factor in Olam share prices right after this offering assuming that ALL warrants are exercised and the company adjusts the warrant strike price accordingly in future dilution exercises to maintain the same spread.
7. Total annualised returns = (1 + Gain from 5 year bond coupons + US$0.05 bond discount after maturity + Gain from Warrants sale)^(1/5years) - 1

I think that to be putting in ~S$2,300 (for 1932 bonds) and taking the risk for 5 years, the minimum annualised returns that I expect from this investment be at least 6%. This is based on my own risk and target investment profile. In order to achieve this, the table simply tells me that I would require Olam stock price to appreciate by at least 30% in 3 years. So now, if you believe such is possible, then this subscription does make some appetizing sense.

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I also repeated the same analysis above to find out the sensitivity of USD/SGD exchange to this investment gain. The additional assumption is fixing analysis based on 

1. 20% gain in Olam share price (changing to 50% gain on Olam share price does not make the exchange rate sensitivity any greater)

As shown, the obvious fact is that exchange rate does little to impact total annualised returns. For the nitpickers, the weaker the USD, the better the gain becomes. And for analysis sake, the USD has been on a downward slide against SGD in the last 5 years due to weaker economic fundamentals and huge monetary stimulus (devaluation). However, in end 2013 the Fed has suggested an easing of the monetary stimulus with growth recovery in sight so expect some support at near current USD/SGD levels for the next 2-3 years.

In a nutshell, this offering ties Olam to the shareholders of the company for the long-term (at least for retail investors who may find it difficult to unlock value of bonds/warrants in the bond/warrants market). If you believe in the stock fundamentals that there is nothing wrong with being overaggressive in capital investment of late, that the company will return to positive cashflows in 2013-2014 after investments start to realise potential, that Olam has the liquidity in place to ride out any more storms, that the commodities market will make a timely rebound to push its stock prices up, then I would say this investment makes sense.

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Weekly Update - of Stimulus and Steel

The market has turned pretty optimistic since ECB's bond buying initiative was announced last Thursday. In response, China also issued a stimulus packaged that was unveiled over the APEC meetings over the weekend that aimed to restart its national rail projects that were in limbo ever since last July due to the Wenzhou rail incident. 

Now, the flooding of money into this global malaise does seem to require some sort of concerted shake given the lengthy 'depression-like' conditions that the world has endured since 2008. Similar to the response in 2008, a flood of money from major superpowers would definitely give the economy a good boost in the short run in order to allow it to prop up and get moving on its own again. Cynics against the stimulus idea must surely take lessons from the 2008 crash that such a organised effort may will be required this time around. We must not forget that all talk but no action on the fundamental restructuring required for our global and local economies to get moving again is going to be a protracted process, cynically, may not even occur in time to come.

Then, surely, Mr Bernanke and his aides, after declaring and hinting that a stimulus package is not far-fetched in their latest Fed meeting minutes, will be putting together their pieces for a follow up to the week's actions. No wonder the market has been responding optimistically, rallying day to day. It is coming, after way too long.

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On a side note, steel play has clearly been dominant again with Midas, a steel producer with strong business foothold in China's rail industry. Its share price has already risen some 16% over the last 5 trading days on the back of very strong volumes. OCBC research has Midas at a TP of $0.435, which was just revised. Maybank just upgraded Midas to Buy with a TP of 0.48. Also, I had written a blog post over the weekend on my own analysis of Midas, with a TP of 0.45.

Steel play heating up? - Midas

Midas is a steel company that comes to direct consideration for more upside given the current resumption of rail development by the Chinese govt. It is a recovering stock that has seen a vast inprovement in its fortunes in the later half of thia year with impact expected in its 2013 FY earnings. It has sealed several successful contract wins over the 2nd half of the year as opposed to a very poor first half of 2012. In fact, a small table below has been compiled regarding its contract wins in 2012. There has been increased optimism too that it will be able to secure more rail contracts given the recovering China rail industry after the recent rail incident.

Midas contracts history for 2012 so far:

• 1 March Midas' JV Company Nanjing SR Puzhen Rail Transport Secures RMB526.9 Million Metro Contract
• 12 May Midas Secures Two Metro Contracts Worth RMB62.2 Million
• 2 July  Midas' JV Company Nanjing SR Puzhen Rail Transport Secures RMB860 Million Metro Contract
• 11 July Midas Secures New Contract Orders Worth RMB139.3 Million
• 14 Aug  Midas' JV Company Nanjing SR Puzhen Rail Transport Wins Two Metro Contracts Worth RMB1.4 Billion
• 3 Sept Midas' JV Company Nanjing SR Puzhen Rail Transport & Consortium Partners Secure RMB588 Million Intercity Rail Project
• 5 Sept Midas Strengthens Its Foothold In China's Power Industry With RMB123.4 Million New Contracts

Fundamental Outlook - Buy. It is clear that the Chinese government are indeed ramping up rail development once again after a hiatus from the Wenzhou railway incident 1 year ago. Let's not forget that it is in the interest of the Chinese government to link up cities and continue the economic boom, although possibly at a slightly lower pace from before. Nonetheless, resuming of the rail development business is definitely going to be a boon for Midas. 

On top of that, Midas is clearly diversifying in light of their recent troubles to restructure their business to also incorporate power. Their first contract of 2012 in the power industry has been secured in 5 Sept, a few days ago, to positive market acceptance. 

Finally, OCBC research also has a coverage on Midas with a buy call and a FV estimate of $0.41.

Technical Outlook - Buy. Chart is looking good with a breakout on 7 Sept on the back of news of 2 contracts being secured in the week. Not overly expensive either. TP ~$0.44.

• MACD - Has just turned upwards again and is in positive territory. Divergence also just turned positive when MACD crossed its signal line.
• RSI (25d) - Bounced off the 50% level and has some room to maneuver before the 70% levels.
• Bollinger Bands - Prices have just broken through the upper bollinger band to signify further upwards momentum.
• Breakout - A large white candlestick appeared on 7 Sept on the back of a breakout through the $0.38 major resistance. Expect this level to form good support for further challenging of the $0.44 levels for Midas.
• Volume - A huge surge in volume occured on 7 Sept accompanying the major white candlestick. 

Time to be Bullish on Property Counters?

It is of no coincidence that the Straits Times rightly mentioned about 'Property Stocks Outperform(ing)' in the Saturday's (29 June) papers; this is something that I had been highlighting since end May and even more strongly in the last 2 weeks. 

• "Focus on the supply & demand + momentum" - Strong real estate supply and demand 25 June
• "Weekly stock call - Ho Bee Properties" - 19 June
• "Weekly stock picks - CapitaMalls Asia and Ezion Holdings" - 11 June
• "Weekly stock picks - Yangzijiang and Capitaland" - 28 May

Again, acutely pointed by the article is that the FTSE property index is up 20% YTD. I have also plotted all key indices in a plot below that clearly illustrates the outperformance of the property stocks index as well as highlight some other outstanding and (possibly) undervalued sectors. 

If we go deeper into the reasons for this strong showing by the property sector, it is also not difficult to derive its strong fundamentals and technicals (supply and demand).

1. If you buy the fact that the STI is rebounding pretty strongly, with large cap counters beginning to re-challenge its first half of the year highs, there is a strong premise to do so with the property counters as traditionally, they are the leaders of any bull rally/rebound/correction. 
2. Past week of property news have focused on the resilient residential prices, rebounding commercial and industrial rental yields. To put it simply, despite all the cooling measures, demand for property is still very very high from the spare liquidity in the hands of Singaporeans. Some may argue that the commercial sector still faces a tough time ahead while prime residential is still reeling from the recent stamp duty imposed on foreign buyers, they are really just smaller issues in the bigger sphere of this property sector. Here are some of the published articles between 25 June to 30 June on the property market 
1. (iOCBC Research) SG Residential Sector: Upgrade to Overweight - Mass-market prices to stay buoyant
2. (ST) Bigger homes making a comeback after shoebox craze
3. (ST) Healthy demand for good class bungalows here
4. (ST) Private resale home prices inch up again in May
5. (PropertyGuru) Suburban condo prices resilient: NUS study
6. (ST) Industrial sites draw new players
3. Cooling measures are meant to prevent a bubble from occuring and not to cause a huge deterioration in prices (a hard landing). The finance ministry will not allow that to happen either. More importantly, the absence of a property bubble gives further insurance to everyone albeit slower capital yields that the market has incidentally overdiscounted.
4. Over the last 12 months, the overall new and resale property prices are still higher by almost 5%. Source: PropertyGuru

Fundamentally, the sector is strong with key counters having huge diversification across segments (residential, commercial and industrial). They are also big players around the regions with strong balance sheets and cash kitties. Technically, proposition of property counters doing well has been well and truly validated by the stock market over the last 2-3 weeks and there is little sign that they will be headed for a crash as many predicted after the last cooling measures. 

Focus on the Demand & Supply + Momentum

I have been tuned to the podcasts (via iTunes) provided by JP Morgan Asset Management department where they have frequent updates of speakers who share the core and fundamental principles that the investment bank employs to trade this rocky market. The one most important strategy that stands out has to be emphasis on price momentum and high demand for the asset. 

Fundamental analysis works theoretically but it does not matter if the market works, ironically here, inefficiently and not price that extra value that you see. But with a fundamental thesis, stock market demand & supply as well as price action not only will provide vindication but also ascertains a valid period of entry. This is what I find extremely telling and acute to my own investment strategies. Sometimes what I feel works fundamentally is not replicated by the market no matter how long I wait and I get fed up with it after awhile. Whereas there are some high in demand stocks that always end up moving up (high beta) with the overall market when times are good. 

Convinced or not, there is clearly one important sector that stands out to me over the year start rally and the recent 2-week-premature rally - Property. 

The SGX MyGateway portal has rightly caught up on this trends of activity for the first half of the year and translated it into a nice writeup that you should be able to access via SGX MyGateway pretty soon (the email update for this came 25 June 2012 and my guess is it should be up on the website in a few more days). Meanwhile, check out the article below.

Source: SGX MyGateway

Property is still Singapore's favourite hobby isn't it? Still, they are people thronging to grab these counters at supposedly discounted values especially counters like Capitaland and Keppeland that have done tremendously well YTD. This is where I will put my money obviously where the market fundamentals (overlooking the cooling measures which are supposed to do good than harm to property market) and demand aligns. Clearly, the returns will not lag the market when it rebounds. 

Pro-Bailout Groups Give Hope to the EU and Markets

As of 3am Singapore time, exit polls have shown that pro-bailout groups of the New Democracy and Pasok political groups will be able to form a majority coalition ruling government, sending waves of stabilisation, possibly, ahead of further renegotiation of talks.

There are several possible scenarios by tomorrow morning with the Japanese market first to open. Note that the Japanese finance ministry had adopted a wait-and-see policy before tweaking fiscal or monetary policy to further tackle the global slowdown emanating from Europe.

1. Pro-bailout parties win and agree to form the majority
2. Pro-bailout parties win but fail to agree on forming a coalition party.
3. Similar to the above, failure to form a majority.
4. Syriza gains control and Greece reneges on their obligations over the last 2 bailouts.

The first 2 are looking most possible at current time and whatever the case, the short term impact would most likely be to send markets around the world on another bull day. Bull week/rally ahead, it is still questionable given the need for real structural improvements that are really needed as a catalyst for another strong market rally. Let's not forget that Spain has yet to report their audited liquidity required. Several other nations such as Italy are also not out of the woods yet. They are merely obscured in news dedicated to Spain and Greece lately.

Nonetheless once the haze over the political situation in Greece lessens up over the next few days, there will definitely be a clearer market picture and confidence. With central banks showing readiness to act decisively this time to avoid a repeat of any financial crisis, the world is definitely in a much better situation to react. And as it really seems, it is not that bad after all.

Weekly Stock Picks - CapitaMalls Asia and Ezion Holdings

CapitaMalls Asia is a particular counter that caught my attention over the last 2-3 weeks. It is also one of the stronger counters that have outperformed the STI by almost 20 basis points and turned in around a 23% YTD gain. Pretty impressive counter that has a solid balance sheet of increasing assets/long term investments over the last 4 years. High stockpile of cash that was recently (in 2011) used to acquire more investments which is pretty shrewd given the low valuations during that period. Stockpile of cash still remains pretty high at $930m as of 31 Mar 2011. Earnings, though, have been hit recently due to the sluggishly economy that has finally found its way eating a still solid track record of equity investments. Expect more decrease to come in this bulk contributing segment that is also pulled down by lowered operating income (though almost negligble compared to equities investment income).

Outlook - Short Term Rebound observed. Stars are aligning to put this stock on a upward trajectory. Nonetheless, pay attention to possible downside risks of price lowering to 1.3-1.35 (lower bollinger bands of both daily and weekly charts as well as major support horizontal at ~$1.35). Risk reward favourable and a good long opportunity is suggested. 

• MACD - Is trending upwards for last 2 trading weeks with suggestion of clearing the negative levels in the coming week.
• RSI (25d) - Is also steadily trending upwards to cross the 50% level.
• Bollinger Bands - Bollinger bands are narrowed with some possible big price movements to come.
• 20d MA - the 20d MA has clearly stabilised in the downward direction and there is some good suggestion of a local minimum. Another suggestion that upward momentum is building and this is a good opportunity to enter with low risk of selling pressure.
• 200d MA - Prices are now supported by 200d MA prevailing at support levels of $1.35. Very clear support.
• Volume - Buyer participation for the last 4 weeks has been dwindling but this has been stemming/flooring the prices at ~$1.35 levels.

Ezion Holdings is a counter that I have been seeking to own but prices have been sky rocketing since end 2011. There has been strong analyst coverage on this company and many are very bullish about its prospects with some brokerages even placing a TP $1.4 on it. Well, it is not too unexpected given that the company has been growing its income steadily since the downturn of post financial crisis in 2010. Cash reserves are being built up with some difficulty in the last year with this economic malaise. Nonetheless, the company has shown good vision in growing its business, securing more deals and income margin quite convincingly over the last 4 years. 

Outlook - Track for uptrend. The 20d MA is still showing a downtrend but other leading indicators are turning in favour of a rebound. In this jittery market, it is still better to wait for real confirmation of upward momentum to reflect in the 20d MA before deciding on the long position.

• MACD - Is trending upwards for last 2 trading weeks. Still far from the 0 level and momentum is still in the negative territory. 
• RSI (25d) - Is also steadily trending upwards to the 50% level.
• Bollinger Bands - Bollinger bands are narrowing.
• 20d MA - 20d MA is still downtrended with some suggestion of a minimum point to come but not totally indicative yet. Prices are suspended above the 20d MA precariously. More strength validation still required.
• 200d MA - Prices are seen bouncing off the 200d MA on Tuesday last week. Pretty much indicative of a strong stock in this market. 
• Horizontal Price line (red line in weekly chart) - Price is trading near the red line which is almost an average price of the stock since 2010. An almost well-valued stock right now. Considering also that earnings have been increasing, it is even more sufficient to say that the stock is slightly undervalued now. 

Never Let Emotions Overtake Judgement - A take on STI

It is so tempting to make a call that the market sentiments are getting better isn't it? But before you start declaring so, the market turns downwards the next day again. Day and day, you wait to make the call that indeed things are getting better. Has the day arrived when you can claim victory?

The answer is obviously no. The market has almost given up gains obtained on Monday and Tuesday in the last 2 trading days. We know very well that Greece elections is scheduled on 16 June; Spain has been a huge drag on the EU under the shadows of Greece while Italy has seemingly gained some better foothold of its debts; China has been slowing down albeit insufficiently to warrant a timely stimulus that has been on the mouth of many lately. Nothing has changed today as it has 4 weeks again hasn't it?

The STI chart speaks almost the same language as the Dow weekly chart as I have posted a few days earlier. 

• MACD - charging downwards with little inclination that it will be changing direction anytime soon. In fact, MACD has just started going below 0 and there is much more room possibly for downward movement.
• RSI (25w) - has still been hovering around below 50% levels
• Bollinger bands - latest weekly price is still resting nicely on the lower bollinger bands that suggest a possibility of a short term rebound as discussed in the Dow chart 4 days earlier. Prices are also well supported by a major support line.

Technically, there is good evidence pointing to a short term rebound in prices but an overall continuation of the drag in investors sentiment in weeks to come. The problem here has not been the confusion of technical indicators but the internal emotions that drive our judgement. The facts are present to tell us not to trade unless we can make a quick bet and get out of the market. Then we succumb to greed and stick a while longer.

Will we ever learn?

Are we out of the doldrums yet?

After a 3 months hiatus from the equities market thanks to a timely break to the West, I am back finally to a interesting market situation today. The Great Singapore Sale some call it. Exactly how much of a bargain are we getting from the market today and is this so cheap that we are going to ignore market momentum and news pouring out of Europe?

I prefer to base the analysis with the US Dow Jones chart where there is most liquidity and consequentially the one that gains the most benefit from bank withdrawals happening right now in Europe and ECB liquidity injections.

So what is the Dow chart telling us right now?

1. Strong US - Evidently, the bull market is still clearly intact and the US has been on a recovery since the crisis in 2008. The plus here is in the market's strong belief as well as healthy statistical evidence that the US is going to be a key player to lead the world out of this crisis. 
2. No, not out of the woods yet - Contrary to popular belief right now that stocks are at a cheap especially those of commodities that were badly hit this month and ending last, the momentum of this correct is still heavily downside biased. There is nothing to suggest that the Dow has reached really horrendous RSI or MACD levels that a cheap equities market is for the taking. Furthermore, prices are still uncomfortably above the 100w MA and sitting on the 55w MA precariously. 
3. Volatility has increased but it is still LOW - Again, if you ever heard good traders speak - Anton Kreil is one of them - low market volatility is a boring and poor period to trade. To make good gains with bets (let's face it, however we argue, any stock market trade is but a bet after all) is to trade when volatility surges. In this case, note how the bollinger bands have been squeezing together.

Market Outlook

Despite the bad news still earmarked on most indicators, take light of the small white candlestick that has appeared on the lower bollinger band of last week's market action. Perhaps there might be a short bull rebound to reclaim ~13000 but it really depends on the US job market news to be announced this week. Nonetheless, any small news from Europe and supply of oil is going to further impact the market and drive it downwards further. 

The easiest way today is still downwards; take heed.

Trading Strategy in an Inflated Market

Let's admit it that the market has gone too far. Valuations (P) have outstripped earnings (E) far too quickly and for the market to move further ahead, it needs to seek a breather. Well, basically either the P decreases, or the E has to increase to match a 'worthy' evaluation.

The first quarter of 2012 was basically brought about by a couple of changes.
1. Greece unlocking itself from the debt abyss; hopefully.
2. Improving US economic health
3. China seemingly avoiding a hard landing
If it is not clear enough, 2 out of 3 of the main factors contributing to the market's rise has been based on speculations and psychological perception of the future. Only the improving US economic health is real and based on truth.

We know the market is forward looking so there is some sort of an element that this is what we all expect. But there comes a time when evaluations are too high than what we should expect. And we have seen it in recent times. But on the other hand, there will be ones with evaluations too low that we miss in this euphoria chasing the rallying stocks. One huge example is the knowledge we all have that the big cap stocks tend to move first followed by the mid and small cap ones in a bull market. This is no special ingredient. As the big cap fulfills its valuation, people feel they are pricier and re-look at the mid and small cap ones that have yet been fully valuated.

Today, everything seems inflated.
So what can we do?
Look and relook.

One tendency that I find myself often doing is being fixated at a certain set of stocks that have participated in the rally. Even though their prices have ran far away from their 55d, 100d and even 200d averages, it is still tempting to buy. That is now, to me, trying to pick the peak. It will never happen and when it does, all it takes is a couple of days to return to square one or even much below.

So instead of trying to go heavy on these stocks that have already moved, my aim now is to look at stocks that have yet moved. Of course, this is not easy as a hard search is necessary but with some stock filters, doing so should not be too difficult.
Focus on a select few and monitor them for a couple of days or weeks if necessary and enter only when a huge move is possible. Things to look out for include a large white candlestick together with a larger than average volume that signifies a possible interest from the broad market. This bodes well with their low valuations that are lower than their moving averages whichever you decide to use.

Nonetheless, there are downside risks to this play since an unattractive stock may remain unattractive for long periods or even experience a whipsaw that leads us buying into the stock and getting ripped. These risks are real but they can be mitigated by some simple checks on analyst reports and annual reports gauging the fundamental performance of the company. Once satisfied, this method is definitely much more relevant and less risky in the inflated market of today.

Surprising Correlation Between STI and Dow Jones Avg

Today, I finally got time to sit down and have a good look at STI and Dow Jones data. As I was fiddling with the data, I decided to take a look at its correlation. After all, we often chat up with each other excitedly in the morning if Dow went crazily up or slid frantically down the previous day, making exclamations and predictions about the current day's STI. So it would be indeed enlightening to find out how exactly is such a prediction based on Dow Jones performance.

Analysis 1 set-up 
Using the data from Yahoo Finance, I first weed out the different holidays to match the dates. This was quite tedious given the messy nature of the data available. What to do, it is still free and much better than nothing. And it seems pretty consistent and error free, at least. The date range for the data is from 24/1/2008 to 26/3/2012. I decided to chop off some data at the start of 2008 because there was quite a few missing dates in the Dow Jones data set. Well, 4 years of data should be good and clear enough for a correlation relationship, if any.

Then, I took only the closing day prices for comparison. Note that this is not the change of the day, and just purely the closing day prices.

Here are the results

1. Correlation between STI closing day price with previous day Dow closing day price (ie. the relationship between Dow's price last night and STI's price today)

r = 0.864

2. Correlation between STI closing day price with same day Dow closing day price (ie. the relationship between Dow's price tonight and STI's price today)

r = 0.866

From a statistical point of view, this correlation of around 0.86-0.87 is close to 1 and that suggests a positive relationship. To me however, even if r = 0.86, it does not make a very smart way to trade as it is not entirely close to 1 either. There must be something more to this correlation than this weakly positive value. I was not satisfied so I decided to take another approach to look at this 'correlation'.

Analysis 2 set-up 

Using another approach, I considered only the direction of move and not the magnitude. So it would be easier to sieve out the nuances of noise and volatility in the respective markets and identify if there was any directional correlation. 

Here is what I found

1. Average number of days where a loss or gain in Dow the night before will be matched with a similar direction of move in STI.

Average number of days = 0.617

2. Average number of days where a loss or gain in STI in the current day will be matched with a similar direction of move in Dow at night.

Average number of days = 0.304

Surprisingly, the correlation between Dow and STI is at best weak. Even though the simple linear regression analysis puts the figure at around 0.86 based on closing day prices of both indices, the impact is clearly even lesser when put to perspective in the direction of move of both indices compared. In fact, for every 10 days Dow increased/decreased, there would be 4 diverging days on the STI. That is really some news for short-term traders looking at strategies to employ. Definitely after looking at this, previous day's Dow prices is an inaccurate prediction of the direction of move STI will make in the current day! The opposite is worse. To use STI to predict Dow's price. Of course, this is not too unexpected given the economic impact Singapore exerts on the US - hardly. 

The Little Known Chicago Fed National Activity Index

Have been pretty busy lately but as I was listening to a podcast on Morningstar.com where a Chicago Bank economist was interviewed over his views on the current economic situation in the US, I got pretty interested in a particular piece of content. Yes, the topics discussed were employment, consumption and housing sales. Pretty much as expected. And we know that the employment statistics in the US has been rebounding quite steadily. Although it is still far from pre-2008 levels, the figures are still pointing to a much better economic picture.

However, the more interesting part of the conversation that really caught my attention was the introduction of this Chicago Fed National Activity Index - CFNAI as a pretty good indicator of economic health. Well, for a start, I have little idea and cannot keep track of the enormous number of indices and figures that typically pour out from the US. Basically, there's some sort of a data due every day. Kind of. And so, as he was introducing this index, he mentioned that it is a combination of many economic indicators and my eyes lit up. It was also not only a Chicago-based focus but national.

A closer look online, I found that the CFNAI is a weighted average of 85 indicators of national economic activity. And it touches on data related to product and income, employment, unemployment, personal consumption, housing, sales and inventories. Wonderful! This would allow a much simpler analysis job whenever I need to know something more about the economic health of the US - the biggest economy of the world.

For those of you who are wondering what is this indicator all about, you can check it out at http://www.chicagofed.org. The latest report is available at http://www.chicagofed.org/digital_assets/publications/cfnai/2012/cfnai_march2012.pdf
And from that report, here's how the economic health of the US has been lately. The zero line represents an economy that is growing at its historical average. A positive value indicates above-average growth that is essentially what we want to see. Evidently, it does not seem anywhere correlated with current and previous year's stock prices but it still does give a good representation of the economic health we see in US. And this is definitely backed up with all the data that we know. So at least for most of us, we can gather this information as a good supplement to our trading activities so that while we are employing any sort of methods and taking positions, we are fundamentally aware of the state of the largest economy in the world.

Healthy Trading.

Why Did I Trade When I Said to Be Wary?

I have been learning in the last 5 years of my trading journey and I have often made mistakes - plenty, in fact in the early stages. But having said that, though the frequencies of bad trades are less often now, they have not been completely eradicated. I am still not satisfied with myself. I am not satisfied with my greed and ability to give in to my will.

2 weeks earlier, I posted a key post suggesting a pull back/volatility/consolidation phase in this bull run of 2 months. I said further to stop putting in trades and to ease out on open positions. I did. But I only obeyed the latter despite my strong convictions seeing the very obvious negative MACD divergence on the Dow Jones chart and subsequently a gap down on the STI. Since then, neither the STI nor Dow Jones have recovered to its February highs. 

I saw it coming, I did my homework but guess what. I caved into temptations when the STI tried to stage a swift pull up on the small fall. It was really tempting to bet in the bull direction and say "Hey, perhaps yesterday or my analysis was an aberration" Or like my other post mentioned, "Looks like it can go on further".  Then, in all honesty, that really took over me and I plunged into commodities - arguably the worst buys of the 2nd half of the February month. 

Why did I enter? Greed and impulsive trades without checking technicals nor fundamentals of the sector (commodities). When I look back, I really should not have entered given the pull back was evident on commodities lately (ex crude oil companies which are typically more so classified as oil & gas).

What next? Thankfully to closing quite a lot of my key opened positions, I booked my profits that have almost reached my objectives of this year and that helped a lot in my risk management. Glencore just announced an improvement in their profits for this quarter and I am cautiously optimistic on the cyclical nature of commodities being able to bring me breakeven in 2-3 months. I am also thankful for trading stocks of strong business groundings that should be able to withstand any future shocks while the commodities market starts to pick up again.

Til then, the outlook and momentum still seems slightly downcast together with the STI's.

Forget March, Remember April?

March has typically been a quiet month for equities trading as mentioned in the Straits Times on 27th Feb. We also know that the March we are heralding is a month of uncertainty after 2 months of strong uptrend. The market is struggling with an effort to make a decision and is swinging up and down every other minute. Yes, this is the March that may unfold - testing, volatile and unproven.

But yet, it is not going to be the most defining month.

The IMF has deferred several key initiatives aimed to bolster the firepower provided by the European Central Bank and European Union members for Greece. And has remained coy about providing concrete agreements to support the work of the EU. Reason is obvious - Greece can agree to the austerity measures and policy reforms but does it have the strengths and support from other members of the EU to pull through? Are their lawmakers serious about making this happen and can and will withstand the backlash from their citizens? Plugging one gaping hole still leaves water leaking from others and a real concerted effort is necessary to ensure the survival and return-to-growth of the EU on a whole. Prospects are looking feasible now with a certain degree of solidarity amongst key EU members but it must hold.

The bickering and negotiations will continue. It must. And until April when the IMF and G-20 meets again will we get a truer picture to where this may lead us.

G-20 2012 Mexico Statement

Euro Zone Bank Stress Test

Given the volatility of the market over the last 2-3 days, I am deciding to sit on the sidelines and watch what unfolds before deciding what to do with my money. Breaking away from technically analysing stocks/markets, I thought it will be a refreshing and useful addon to share a bank stress test calculator prepared by Reuters. Full Link Here.
By sliding those bars, you can see how much debt haircut the Euro zone PIIGS have to do in order help to avert a national/regional disaster. Plenty of food for thought and realising the implications of this debt crisis. One hole is leaking while we fix the other.

It is huge and it is still not over. Much more to do still.

Source: Reuters

Euro's Plunge is Recovering.

So is the world and its economic sentiments.

Chart obtained from Euro/SGD Rates on Yahoo Finance.

First, the news of payroll, employment and other economic data coming out of US have been positive and suggesting recovery. It has been suggested that the US will grow slightly in this year and lead Europe out of its recession.

Second, the Greek issue has been slowly resolved and expect Greece to have a second bailout by the end of this week after all the hard work from members of the EU.

Thirdly, the Euro has been gradually strengthening over the month. Looking at the chart above, it seems like a double bottom has played out and the Euro is on a recovery against the Sing dollar as has been the case against the greenback too. This is ideal as well as it shows the appetite and the confidence slowly building back into the Euro after the crash last December after reports of a suggested Greek default being on the cards.

Headwinds lie ahead of course but for those of us trading, I believe there are money making opportunities that are surfacing today. The confidence and conviction to trade given these sensible news and real data being presented are telling. But as the nag goes, do take note of your time horizon of trade and do not anticipate too long a trade. Given we are not totally out of the malaise climate yet, do not take too high a risk. High risk high returns. High risk high losses. Trade, profit and enjoy yourself. Stay sustainable this week.

Weekly Market Review and Perspectives

Week 7 of 2012.

1. STI Performance Review

This week, the STI raced to recapture the 3000 mark. Convincing? Not quite yet. We only saw a short breakout on Wednesday before a fall back below 3000 levels occured with a pretty big dark candlestick. On Friday, STI had closed 3000. 

From both TA and FA point of view, this coming week is crucial. 

First, for proponents of TA, STI's failure to breakout from 3000 is not helping many to make a decision in this seemingly overbought market. Talk to anyone and people will say that they are treading cautiously now since everything 'seems too high'. Too high is relative, at least to me - so it suggests nothing. But translate this to overall market action, it is significant as we want retail and institutional investors to come in and continue the buying pressure. So, this coming week will finally throw more light on the value investors are putting on the STI and if it can breakout successfully, the next target I am putting is 3206, using the height of difference between the low in Dec and breakout in Feb (past 2920). 

Not thinking too far, the uptrend is strongly intact on a weekly chart (I do support a breakout but at least in the next next week since STI should be taking a break this coming week) and the latest week candlestick is still suggesting strong buying pressure with sustainable volumes. RSI and MACD are trending upwards with the MACD crossing 0 for the first time since August. Another bullish indication. MACD histogram is all green for the past few weeks and this suggests momentum is still firmly with the bulls. 

Second, Greece is still on the cards for everyone. So long as its default potential is not put to bed, this market will not ease on cautiousness. We saw how a little indecision in providing the full aid to Greece on Wednesday night caused a market turmoil on Thursday so anything may happen.

2. STI Performance vs other Key Indices

Below are 2 graphs with difference starting dates (used in the computation of the % relative gain/loss). I have chosen 1 Oct and 1 Dec as reference points due to their local lows.

It is interesting to note that the Hang Seng index is a clear outperformer compared to the rest in the basket. Its rise has been nicely sloped and has on every single day after 1 Oct and 1 Dec (except 12-13Dec) reference points outperformed the STI index. This meant that if you went long on HSI and STI on 1 Oct and reviewed your portfolio any day after til date, you would have a better result with the HSI.

However, if we delved into the rise of the STI since 1 Dec, it was not a bad performer. Assuming we went long on the STI on 1 Dec and looked at it today, only doing so with the HSI and Nikkei(slightly) would yield a better result. 

3. Key Sector Performances of the STI

Looking at the performance chart of the key sector indices referenced on 1 Dec, it is clear that the maritime index has been way better than the STI. It is almost a 24% increase in the profits that would have been obtained by longing the STI on 1 Dec and reviewing it today! The next outperforming index is the Oil&Gas sector that has also traditionally been pretty strong given Singapore's fundamentals in this area. Not surprising that these 2 sectors have been leading the charge on the recovery and although the performance of the maritime sector has been way stellar, one contributing factor was the tremendous loss it suffered in late 2011. 

So comes the question of which area to look at? Well of course, this ultimately boils down to your preference, risk appetite, portfolio optimisation and objectives. There are clear outperformers in this market. Will they last the trend? Of course one day they will too become expensive and people will begin avoiding them, seeking for more undervalued ones. Then comes the next question of which undervalued one? As it seems, the real estate index is still recovering from its losses in late last year due to stamp duty legislation. This is one area to look at given key blue chips like Capitaland and Keppeland are solid in balance sheet while reits provide good dividend yield.

Food for Thought

The STI has rebounded by almost 10% since the start of the year, a bull run that was probably overdue. As we savour the current period of market boom, it might be worthwhile to direct your attention to the STI monthly statistics on turnover of the market. 

The graph below shows value/share of each of the key sectors over a period of 3 months. 

Are these what the market is trying to tell us about price reflecting the performance, market psychology, fundamentals of each sector? Utilities has been increasing steadily in value/share transacted over the last three month. Undervalued but up and coming proposition? As expected, consumer services, financials and oil and gas are sectors with high valuations. Could this graph yield us more insights to changes in the stock market to come?

Healthy Market Exposure

Thailand, Indonesia and Hong Kong seem to be worth alternatives to investing in Singapore equities and I am terrible bullish about Asia growth fueling inflow of investments.

India, on the other hand, took a huge correction in 2011 but look at the slope of its recovery towards the end of 2011 and start of 2012. Tremendous! Undervalued region that is now up and coming.