WHAT’S IN STORE FOR 2007?

First of all, I’d like to wish all my dear readers a MERRY CHRISTMAS AND A HAPPY NEW YEAR!

I am really looking forward to 2007 and another of year of trading and learning about the markets. I hope that you will join me as I continue on the quest to find my holy grail and ultimate financial freedom. As was the case in 2006, I will continue to share my thoughts and ideas for free (because I get so much joy out of this).

Furthermore, I will be planning some updates to this blog to enhance your reading pleasure as well as the educational benefits it brings.

Here are some of the features lined up:

• Move to hosted server (this will allow me to add more bells and whistles to this site! Yaaayyyy)
• Search facility for posts and analysis I conduct on companies (Many sites charge for this!)
• Sub posts – To segregate posts into different boxes depending on the subject matter (So that my posts don’t appear too random)
• Forum / shoutbox (For my readers to communicate with each other).

If you have any ideas on how to improve this site feel free to write me at easternlethal@gmail.com or leave a comment.

Until then – Adios!!

Thai Currency Controls

Why is it that Xmas always gets manic around the office? I really do feel sorry for traders in Bangkok who woke up on Tuesday. “Whaaaaad de fuuuuuug????” You could almost hear them and since then it has been phone call after phone call after phone call to figure out exactly how this is going to play out. Then yesterday another mini bombshell dropped when the controls were ‘relaxed’ for equity market investments which caused another round of phonecalls, meetings, etc. How many people (especially bond traders) now wish they hadn’t gotten rid of Thaksim? Oooh many many I am sure…

But whatever it is, I have been reading a lot in the blogosphere comparing this to Malaysia’s currency controls. Let me clarify this for my readers. The Thai controls are not that similar to Malaysia’s. These are designed to prevent the Baht from appreciating (whereas Malaysia’s controls were designed to prevent the ringgit from depreciating). Also, unlike Malaysia it is not an outright prohibition (it is actually a tax) and most importantly we discovered yesterday that equity market transactions are not subject to this rule. Having said that, currency controls are currency controls and by definition they are heavy handed (the usual way to manage currency strength is through setting interest rates). Foreign investment will be seriously affected and the general view (which I agree with) is that for a market that depends so much on foreign investment (about 40% of the thai stock market is owned by foreigners) this is a heavy heavy blow.

Okay so much for the economic “analysis” (I’ll leave the more in-depth stuff to the experts). As traders we must realise a) that this is an emerging market and b) governments aare not as good at managing their economies as their counterparts in the West. Therefore it is likely that something like this will happen every few years, which is why long term portfolios spread their risk in different investments more widely than short term portfolios.

Here is my two cents: I think that this will take the shine off emerging market economies as investors wake up to the fact that country risk exists and is real (India, Pakistan and Indonesia were also affected and Malaysia would also suffer if it didn’t have so little foreign liquidity in the country to start with.) Negative sentiment will spread like a contagion and the big money will punish several other countries as well as Thailand by taking its business elsewhere.

But when the tigers get weak, I and other value players  will be there circling slowly like vultures…… can u smell the fear? come to me ..bwah hah hah hah…

Another interesting tidbit..

If you think that we in Malaysia are hard done by, check out this latest documentary about the state of coffee growers in Africa – the only country to have gotten poorer in the past 20 years (www.blackgoldmovie.com) where the coffee grower gets less than 0.10% of the price of a Starbucks coffee.  The very simple point this documentary makes is that markets are not always efficient and money generated by demand does not always flow to the provider of its commodity, i.e it does not always fly to value. Many people make a living out of exploiting these anomalies, including us traders, but somewhere along the line there must be rules to protect the weak and defenceless. I really feel sorry for their plight. If you’re interested to know where your coffee comes from, you owe it to yourself to watch this.

Interesting Article: Warren Buffet’s 2006 Letter to Shareholders

Here’s an interesting link to one of Warren Buffet’s letters to shareholders which has been doing the email rounds. Most of you have probably got it already but for those you don’t – take a read of it. (You can download it here: rl_04-06-buffett_05_chairman_letter.pdf). It provides a great comment not only on the financial services industry and will, I hope, inspire you take more control of your own financial future.

So what are you doing over Xmas?

Starting from this week, I will be attending a few too many Xmas parties to be able to post regularly and meaningfully so expect sporadic posts until the New Year. But here’s a couple of random thoughts /  observations:

In certain work places, especially financial institutions, internal compliance rules prevent employees from trading too actively on their personal account. The rules usually prohibit selling positions under 30 days or some other similar timeframe. This is partly to stop part time day trading which distracts people from their jobs, but also makes it easier for compliance departments to monitor people’s trades and catch insider/illegal trades. Whatever the merits of these rules are, in my experience, novices and intermediate traders who follow these rules to the letter actually turn out to be better traders than those who don’t follow it. This is because the rule forces them to look months ahead and be damn sure before committing their money. If you are starting out trading, I would seriously advise you to impose similar rules on yourself. This will train your discipline, which is in my mind #1 attribute to have in order to be a successful trader. At certain times of the year, I also try to take time away from my portfolio. On the whole I am usually pleasantly surprised at how things turn out after some time away. This is because a well planned trade has only to run its course and time is on its side.

Okay now here’s the dig: in the US, taxes are filed and bonuses are usually paid out at the year end too (Morgan Stanley is announcing bonuses today and Goldman Sachs did theirs a few days ago). The street is flush with money and people are wondering what to buy for Xmas. This is naturally the most opportune time to take that well deserved break from your portfolio. The effect of this on the market is that liquidity is taken out of it, and the stock market goes into neutral. As you can see, all major indices have now hit resistance and some have been doing so for a few weeks already. If you ask your broker, he will probably give you the same explanation. Now the natural inclination for new traders is to think: “Okay, there’s no action left on the table. I should just leave now and come back when the other players are back. Otherwise I may get killed by volatility. “

However, my view is that if you are a medium to long-term trader (i.e. your positions last more than 30 days), this is in fact a great time to put on some positions, especially for counters whose prices are driven lower by profit taking in the run up to Xmas.   When the fund managers and bankers come back after the New Year, they will start looking for things to put their money back into, and by then you will be sitting ready – like a surfer waiting for that big wave to ride on. So aim to have some ideas ready for the driest period of all – between Xmas and New Year. I have marked 28-29 Dec as a trigger date for me to go long some shares. Baring any unforeseen events, I expect my broker to work hard for me on that day.

So there are many times when you should take a break from the portfolio, but Xmas is rarely the time if you are a serious private trader.

Trading Tools: Debt and Leverage

Last week we looked at cash flow to determine the financial health of a company here. Today we look at another aspect of the company’s financial health, namely its debt position.

In this respect the question which Harry Domash poses is ” is the company sinking deeper in debt or is it digging its way out?”. To determine this, simply perform the following functions:

1.    divide total liabilities with total assets and compare this number year on year.

2.     divide current assets with current liabilities and see whether this figure is increasing or decreasing.

This simple test will show you whether a company’s balance sheet is growing because of increasing business or increasing debt.

And that is it! Easy is in it? later on I will show how to put these tests together to form an overall picture of the company.

Happy trading!

Trading: GHLSYS

Today GHLSYS broke out from a fractal. In a strong market like this where it has been trading rangebound, this looks like a little doggie who is lagging behind its owner and who has decided that it wants to catch up.

here lil’ doggy….

Trading Tools: Cash is King

Today I am fortunate enough to have a whole afternoon in front of the PC catching up with my own investment education and stock analysis and would like to share something from a book I have been reading called ‘ Fire Your Stock Analyst’ by Harry Domash.

In my previous posts I have talked about cash flow and how important it is in determining the prospects of a company. Harry Domash’s book expands on this further by breaking down what type of cash flow to look for and how to use that information. He states that the number to look at is actually the operating cash flow because that strips out receivables and shows you how much the company is actually putting into its bank account. Therefore a company with a high turnover but low operating cash flow tells you that it may not have received, or actually spent more than it earned. The next thing to look at is the company’s working capital. This is simply its total cash and current assets minus its current liabilities. This tells you whether the company is burning through its cash or not. If you take these two numbers and both the show positive, this tells you that the company is generating positive cash flow from its operations, and have enough working capital to pay its bills. There are four it is consistently adding more cash to its pile.

Let’s take a look at an example using JOBS again.

Its operating cashflow for 2005 was 16 million and its net asset liability was 27 million. In 2004 its operating cash flow was 3 million and its net asset liability was 24 million. These positive numbers show that the company is adding to its bank balance and is in no danger of running through its cash reserves.

Trading: More Bull…

Each core portfolio should consist of companies in a few industries which the holder believes reflects the strength of the country in terms of 1) its economic advantage over competitors and 2) its development stage  (i.e. fragmented industries operating in a growing market where barriers to entry are relatively high). In terms of 1, I believe that Malaysia can offer plantantion and contruction. In terms of 2, it is definitely telecommunications, utilities, finance and property (although some may argue many more than that). That is why most analysts like Public Bank, KLCC, Tanjong, Tenaga etc.  See this report.