Palm Oil

In case anyone is figuring out why plantation stocks are going up, it’s because the price of CP has hit a 2 year high. Off the back of that, investors are positioning for earnings upgrades. Check it out here.

Trading: Unloading some more

Today I lightened up to 78%-22% cash equity ratio because I think that a turnaround is imminent. Yesterday the Dow gapped up after the Fed news, but ended up closing down, which is a classic distribution pattern (i.e. when sharks offload to lambs at inflated prices). Today, last minute buying drove the KLCI up at the last minute, which represents a positive divergence, and my cue to sell off even more.

Trading: Quick Valuation Method (JOBS)

Here’s a quick method of how to quickly evaluate whether a company is good or not, using JOBS as an example.
Now the two criteria I and many other traders use is consistency and growth. So here are the few items I would look at, gleaned from JOB’s P&L:

		Profit and Loss	2005-12-31	2004-12-31	2004-06-30
		Turnover	54,996	34,932	16,171

Net Proft

16,371

2,414

4,039

Okay, next we look at the balance sheet to check that there are no timebombs in the form of huge debts or liabilities.

BALANCE SHEET

2005-12-31

2004-12-31

2004-06-30

NET CURRENT ASSETS

27,135

24,839

18,627

Now if a company cannot show growing numbers like this for the last 2 to 3 years, I would kick it off my watch list as there are too many good companies out there to bet for me to be scraping the barrel for lousy ones. Okay so at this point, I will do a second level check, which involves trying to figure out what management is doing. After all, profits can be fudged and so can balance sheets. My second check involves looking at cashflow.

Gents, cashflow is one of the harder figures in a balance sheet for a company to fudge, because it is literally looking at what money the company has and what it is doing with it. Following money is what criminal investigators, asset tracers and smart investors do.

So for JOBS I can see this:

Cash Flow		2005-12-31	2004-12-31	2004-06-30
Operating Activities		16,572	3,628	4,564
Investing Activities		-11,396	12,739	-1,130
Financial Activities		-3,099	7,951	9,018

Cash c/f

26,558

24,401

18,008

From these few figures alone, I can see that this company is cash rich and growing its bank balance. This is important at this particular point in time because companies which are unable to generate as much cash as their competitors will have a problem when times get rough. It is also earning a lot from its core business (operating activities) and reinvesting most of what it earns (classified under Investing Activities). I am not worried about its financial activities which are quite low in relation to their net profits and also because that is usually reserved for things like dividend repayments, stock purchases or servicing debt.

So there you have it. A quick guide to valuing a company. Note however, that just because a company is good does not mean that you should run out and buy it – because its price may not be commensurate with its business, good as it may be. That’s where things like PE ratios come in. Special situation traders (like myself) like to see good companies like this get whacked when times are bad so that we can flock in and pick it up for cheap, somewhere near our preferred accumulation zones.

Trading: Edge of the Sandpit

In case you haven’t heard, the media has been hyping US Fed interest rate activity all week, so much so that it is actually making front page news. Reason? Because for the first time in 2 years the interest rates in the US may actually stop going up. Traditionally when this happens, stocks surge because cash as an investment becomes less attractive, the currency weakens and inflation goes up alongwith the prospects of a recession. Blah blah blah….

So why is this all so relevant for us, despite the view expressed by our beloved Bursa CEO that “we’re our own market”? The simple answer is: buyers. Although our politicians love living in a cocoon, our investment community is much hipper to the fact that the US consumer is the driver (directly or indirectly) of consuming power worldwide, and so if our companies can’t sell their stuff abroad, then we certainly aren’t big enough to be able to buy them all here. So there’s a sell off as investors brace for declining cashflows and rising PE ratios. Now, don’t lose sight of the fact that a US recession is definitely around the corner, no matter what temporary boost a pause in rate hikes will provide. If you want to read more about it, here’s a good link.

Okay enough about what should be happening, now let’s focus on what actually is happening. Although the KLCI is approaching oversold leves, it does not seem to want to sell off, so not wishing to be one to miss a good party, I am still dancing holding onto my positions and keeping my eye on plantation stocks. But I have one foot out the door and holding my carkeys in my hand.

Trading: Singapore

I just wanna lay down some general thoughts I have been having about the land of the merlion, having been based out here for the past 5 weeks and having spoken to as many people as I could.

Okay – compared to Singapore, Malaysia is a far richer country in terms of natural resources. It has land, oil and minerals. Geographically, it also has an advantage over Singapore in that it is more centrally located and within a shorter distance to India, China and other Asian countries. So it’s no surprise that the leaders of Singapore decided quite some time ago to focus its efforts on developing its only strength: human capital. Then, it filled its own government with the mostest and bestest human capital it could, and that resulted in a government beaurocracy and legal system which is one of the best in the world. Now as a fun-lovin’, creative, slightly rebellious guy, I didn’t care too much about that – I mean: it has a great transport system? zzzzzz. It’s one of the safest cities in the world? double zzzzzz. It is clean and there are no chewing gum stains? double zzzzzz (and don’t bother to wake me up). I just wasn’t up for visiting a city where everything can just be looked up in a directory and there is nothing to be discovered.

Despite what you or I may think about this country at a personal level, take a read of this article from the FT (www.ft.com):

Hedge funds flee HK smog for Singapore

By Florian Gimbel in Hong Kong

Published: August 3 2006 22:00 | Last updated: August 4 2006 04:25

Hong Kong’s worsening air pollution is prompting a number of hedge funds to move to Singapore, reflecting a trend that could undermine the territory’s financial sector.

Senior executives at Morgan Stanley and Goldman Sachs, the world’s biggest providers of hedge fund broking services, say health and lifestyle issues are causing rifts at the top of a growing number of Hong Kong-based funds, most of which are owned and operated by mid-career professionals…

You have to subscribe to read the rest of the article but the gist of it is that Hong Kong, which is the financial centre of Asia is suffering from enormous pollution problems and as a result, hedge fund managers are packing up and moving to Singapore, attracted by guess what? Its strong legal system, great city infrastructure and easy transport! (Not to mention the fact that property prices are also 3 times cheaper in Singapore than HK). Let’s think about that for a moment. Here is a country where participants in a multi-trillion dollar industry want to live and work, which has a policy of making things positively easy for them to do so, which is also much cheaper than its nearest competitor, who is experiencing some serious difficulties ahead. And I haven’t even begun to factor in its upcoming integrated resorts yet!

So as an investor, we are extremely fortunate to be living so near to a country at this particular juncture of its history, which we can literally just hop across and check out if we had any questions about it. So if I were you, I would seriously consider looking to invest in some eggs over here, either through its index via an ETF or in a REIT at least.

General: What would you trade for this..

This weekend I went to Bangkok and did this:

and then after that I did this:

and then I did this:

So unfortunately I didn’t do any homework! But don’t we always say here there’s more to life than stock trading?

Trading: Safari school…

One of the smartest things I have ever done was to learn to ignore my emotions. Part of that comes from maturity, but part of that also comes from one’s own ability to look at the bigger picture. One of the greatest errors a trader can make is to try to recoup his loss. That can mean doubling up when you should be cutting your loss, or overtrading.

Overtrading occurs when the market is not moving. Price ranges contract and volatility slows down. So, we try to come up with ingenious ways to make money, because we always want to be making money. We always want results. So, we start trading the range and taking bigger positions. If you’re one of those people – don’t do it. The only thing this leads to is stress. Your profits are not only likely to be small, but you will end up taking far bigger exposure than you would otherwise, and if the market start to really move, the small gains you have slowly accumulated can be wiped out within a single day, because your positions are so large. The only winner in that scenario is your broker. So if you hate to see him make more money than you, do the right thing: close your eyes, take a deep breath, and wait for that move to come. This is especially hard because you are looking at prices all the time and not doing any trading. That’s like sitting at the edge of the playground and not being allowed to play.

Yes it’s boring, but which would you rather be: the leopard that waits til the zebra comes to it, or the one who spends his life running around chasing it?

Trading: Parallel vision

In motor school, they always teach you to look up and ahead as far as you can when racing. This is so that you can anticipate obstacles to your vehicle with as much notice as possible. One of the ways we can do that in the stock market is to look at the cash equity ratios of the trading community as a barometer of how risky they think it is to trade in today’s market. I am therefore quoting a snippet of information which I gleaned from the internet:

Fund managers expect global economy to weaken

Fund managers have become more pessimistic about economic growth and corporate profits, and are lifting their cash holdings as risk aversion levels rise. According to the Financial Times, one of the gloomiest monthly polls taken by Merrill Lynch found that a net 60% of respondents expect the global economy to weaken during the next 12 months, the survey’s highest ever reading. The figure was 5% three months ago. At the same time, a net 44% of respondents believe that corporate profits will deteriorate during the next 12 months and 43% expect operating margins to weaken. The poll’s findings are perceived as surprise, coming after a period when markets seemed to be recovering their poise after the sell-off in May/June, and may have been influenced by the eruption of the Middle East conflict last week. The percentage of institutional investors who are overweight cash is at its highest level since the aftermath of September 2001, and risk appetite has deteriorated to its lowest level since the start of the 2003 Gulf War.