VOLATILITY OF THE MARKETS: AN EXAMPLE

By Roland Lee, 22 March, 2008

At about 7pm ET Sunday 16 March (Asian time 7am Monday), I sent the following message to those who subscribed to my shortlist for virtual trades:-

“Fed decreased discount rate by 25 basis points on Sunday 16 March. On 18 March expect 75 basis reduction of Fed Fund rate. Expect market this short week to be bullish by the Fed action. Consider Calls this week for GME and QLGC. Also monitor Calls for GS and MS due to Fed action.”

On the same morning at 10pm ET Sunday 16 March (Asian time 10am Monday), after I read news of massive concerns in the Asian markets, I sent a second message following the opening of Asian markets:-

“The Asian markets are down. Concerned that Bear Stearns bailout could mean more problems in banks. US markets expected to open down on Monday. So be careful this week. Can be volatile.”

For readers familiar with the US markets, the market on Monday 17 March, 2008 was indeed volatile. The Dow was down 193 points by midday and the Nasdaq and S&P 500 were also in the negative. At the close of the market the Dow recovered and closed with a positive 21 points whilst the other two indices remained in the red. Bear Stearns, the venerable US investment bank, was sold at an unexpected price of $2.00 per share to JP Morgan Chase. This led Bear Stearns to close on Monday at $4.81, a drop of 25% off last week’s close.

At Monday’s close, Goldman Sachs (GS) and Morgan Stanley (MS), closed at $151.02 and $36.38 respectively.

Guess what happened on Tuesday 18 March, 2008 after the Fed announced a 75 basis point reduction to the interests rates? The market soared to a record, with the Dow closing at 412 points. My shortlist performed very well. GS closed at $175.59 (up 16.27%), MS closed at $42.86 (up 17.81%), GME closed at $48.55 (up 3.30%), and QLGC closed at $16.25 (up 3.44%).

Being a short week as there were no trading on Good Friday, the markets closed up on Thursday 20 March, 2008. The Dow was up 262 points, the Nasdaq up 48 points, and the S&P 500 up 31 points. My shortlist closed with three of the shortlist performing well, namely, GS closed up at $179.63, MS closed up at $49.67, and GME closed up at $50.18. The volatility of the market saw my last shortlist, QLGC closing down at $15.12.

The markets are indeed volatile! For the less weary investor, it can be costly. A way to mitigate the potential of losses due to such volatility will be for the investor to be equipped with the correct knowledge and skills to handle investments or trading in the stockmarkets. Note however that such knowledge and skill does not completely mitigate an investor from losses because systematic risks that are difficult to foresee can indeed swamp the best of forecasts.

What good investment and trading courses will do for the investor is to make the person more aware of the potential traps the market can present. Afterall, winning in the markets is always a game of odds. You just need to give yourself that higher probability of winning and that’s what a good training course must offer you! Take care.

The upcoming 2009  4-day trading workshops start on Saturday, January 17  and February  15, at 9.30am - 6.00pm.

Participants to the 4-day Trading Workshop will learn a variety of tools and techniques so that they will be fully equipped to trade the stockmarket using both equities and stock options. Amongst the topics they will learn include:-
** How to interpret macro-economic news that impact the stock markets

** How fundamental analysis and value investing are carried out

** How to use powerful technical analysis techniques for acute timing of entry and exit

** How to use trading strategies and techniques to suit one’s risk-taking appetite

** Learn when to use stocks and when to use options

NOTE:  There are 4-day Trading Workshops conducted every month. Weekend and weekday classes available. If you do have any date or month that you are interested in attending the workshop, do email us at: roland@investsmart.com.my. Thank you

Upon completion of the workshop, the participants are equipped to select any stockmarket of their own choosing to make their own money from the markets.

Course Fee for the 4-day trading workshop:  Only RM3,800

( This is a real value-for-money, hands-on comprehensive stock and options trading workshop for a serious participant)

Registration:

Email roland[at]investsmart.com.my

THE CURRENT U.S.ECONOMIC SITUATION AND ITS IMPACT ON THE GLOBAL INVESTOR

By Roland Lee, 15 March, 2008

There is an on-going flight to safety. This can be witnessed from a decline in the yield of the 3-Month U.S.Treasury Bill (T-Bill) to below 1.5% in March 2008 compared to being above 4.7% in October, 2007. This indicates that the demand for the T-Bill is significant and it represents an uncertainty of how the market will pan out in the short term.

The demand for this short-term T-Bill will not be good for the stockmarket in this three-month period as it removes money from investing in the market.

The uncertainty is exacerbated by many outstanding issues. The market is uncertain as to how successful the solutions that the U.S.authorities are putting in place will be. Some of the outstanding issues include:-

• Sub-prime loans. The negative impact of problems created by U.S. mortgage-backed securities globally does not seem to be over. Even well-rated mortgage-backed bonds are currently only fetching a fraction of their face value. Unless amicably resolved, this problem will be a constant drag on the recovery of the stockmarkets.

• U.S.jobs. In February 2008, instead of an expected 23,000 more jobs, the news that came out showed 63,000 fewer jobs. This cannot be good for an economy like the U.S. that is dependent on consumer spending. Fewer jobs and a slowing economy means more people will be careful on how they spend. This will have an impact on the retail sector which in turn will impact the manufacturing sector and related sectors.

• U.S.economy. The meltdown in the pace of growth of the U.S.economy will be felt globally as many countries worldwide have the U.S. as their main trading partner. The recent announcement by the Federal Reserve (the Fed) that they plan to pump in $200 Billion into the U.S. economy is certainly good news. The latest news that the Fed has used a rare procedure to support troubled Bear Stearn companies, coupled with the expected announcement of another significant drop in interest rates when the Fed meets on March 18, 2008, clearly shows that the U.S. authorities are doing everything possible to avert a collapse of the U.S. financial system. Hopefully the measures undertaken can stop the negativity that is prevalent currently in the market. Certainly it may help the market recover for the short-term and holdout for positive earnings reports from U.S. companies in the coming April earnings season. If that pans out then the market may fractionally recover over the April / May period. The market has a further chance of sustaining a positive outlook further than the month of May as US taxpayers may start spending their $150+ Billion worth of tax refunds from the fiscal stimulus passed by Congress earlier this year.

• U.S.Dollar. There is concern that the $200 Billion package proposed by the Fed may result in the further weakening of the U.S.Dollar against other major currencies. Such weakening of the U.S.Dollar should be a big help for U.S.exports but cannot be good news for global investments based on US Dollar terms.

• Commodities. The weakening of the U.S. Dollar is certainly driving commodity prices, literally through the roof. It is no longer an imagination to see crude oil above $100 per barrel, and gold above $1,000 per ounce. It is actually unfolding in front of us and the expectation is that commodity prices are still on their way up for the foreseeable future. This news has to good for those ready to invest in commodities or commodity funds. But it is not good for the consumer who will be faced with having to pay higher prices. Higher prices will then mean higher inflation rates and that in turn will not be good for economic growth.

For the global investor, what is currently happening to the world’s largest economy is not good news. In fact it is scary, to put it mildly, as there is nothing the investor can do but watch and hope as the U.S. authorities do their best to turnaround a difficult economic situation. However, for some investors, the current situation does offer opportunity to make some money from a weakening U.S. Dollar and the escalating commodity prices.

For the global investor, it is certainly worth the while to monitor closely how the situation unfolds in these coming months. Hang in there and have success!

In the review of asset classes for an individual, it is obvious that the ability to make money from the stock market is an important skill to possess over the long run. Executed correctly, the individual can enhance his own wealth significantly. Fund managers of many unit trusts and mutual funds have long recognized the importance of the stock market to generate profits for their funds. The challenge for both the fund managers and the individual is how to make money consistently from the stock market.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers. Apart from providing information on listed securities, the stock market is an important source for companies to raise capital. A successful stock exchange provides investors with the ease to quickly buy and sell securities.

For the individual, there is plenty of ‘noise’ in the marketplace. To get the investors’ attention, the noise can come from many sources including a mix of financial journalists attached to newspapers or magazines, television commentators, stock analysts, stock brokers and even from chat rooms and message boards. Some tips may pan out to be correct but many have over time been shown to be just noise without much correct substance in their content.

The efficient market hypothesis (EMH), commonly presented in formal investment courses, indicated that share prices are affected only by fundamental factors such as profits or dividends declared by companies and that all price movements are non-trending and random. However, there are other studies especially from technical analysis that shows that there are periods where stock markets do trend over periods of some days or weeks.

Sometimes prices of stocks have been shown to move based only on the sentiment of traders or investors, sometimes without any financial justification. Some researchers put it down to psychological factors or even the phenomenon of ‘group think’ that can result in exaggerated stock price volatility. Many a time, markets have been swayed by adverse press reports, circulating rumors and unverifiable tips.

How then can the individual rise above such a situation and be able to differentiate what is correct and what is not correct?

One safer way is for the individual to learn a disciplined, systematic process of investing or trading the stock market. In the course of such learning, the individual should amongst other things, likely learn how to read stock market cycles, how to pace between risk versus returns, how much trading capital to use per trade, how to use stop-loss orders, how to follow trends, how to set up defined trading strategies and plans and how to diversify.

There is also the issue of whether the individual should be an investor or a trader. The investor usually puts capital into the stock market under the assumption that the investment will increase over time. In a bull market the chances are better as strategies of buying low and selling high should work out well. But there are also protracted periods in a bear market where share prices even of good stocks can get knocked down badly. In such situations, a knowledgeable trader is more likely to profit as there are ways to make money when the market goes up as well as ways to make money when the market tanks.

Equipping yourself with a trading process does not automatically mean you can always make money in the stock market. It does provide some assurance that compared to less informed investors, you have a higher probability of winning. Afterall, winning in the stock market like most investments, is a game of odds. You want to give yourself as high a chance of winning and surely you do have that higher chance if you have a disciplined process and knowledge to guide you along.

The upcoming financial workshop will commence here:
Date: 8 February 2009             Time: 9.30am - 5.30pm
Venue: Petaling Jaya

Using a case study that typifies the life-style of many young families, participants will learn various financial planning tools necessary to better plan for themselves. Amongst a varied number of topics that are covered, they will learn the following:-

** How to calculate children’s education needs

** How to calculate their own retirement needs taking EPF into account

** How to identify what is a good investment and what is not

** How to calculate the returns from a business

** How to identify a good business worthy for investment

** How to select life insurance policies that match with their own needs

Course Fee: RM480

Registration

Email roland[at]investsmart.com.my

The upcoming 4-day trading workshop starts on January 17 & February 15, 2009, 9.30am - 6.00pm.

Participants to the 4-day Trading Workshop will learn a variety of tools and techniques so that they will be fully equipped to trade the stockmarket using both equities and stock options. Amongst the topics they will learn include:-

** How to interpret macro-economic news that impact the stock markets

** How fundamental analysis and value investing are carried out

** How to use powerful technical analysis techniques for acute timing of entry and exit of trades

** How to use a range of trading strategies and techniques to suit one’s risk-taking ability

** Learn when to use stocks and when to use options

** Learn different stock and option trading strategies

Upon completion of the workshop, the participants are equipped to select any stockmarket of their own choosing to make their money from the markets using both stocks and options as trading instruments.

Course Fee: Only RM3,800

( This is a real value-for-money, comprehensive, hands-on stock and options trading workshop for the serious participant conducted by an experienced lecturer)

Registration: Email roland[at]investsmart.com.my

It is that time of the year again when all of us are likely to review how 2007 has flown by and how we are to usher in 2008.

On the macro side and being in a globalised world that we Malaysians are part of, many recent newspaper headlines and commentary had focused on problems related to U.S. mortgages, the bad news from the U.S. housing market, and the associated slowing of the U.S. economic growth, coupled with worries about rising protectionist pressures from different countries in the world. All these can adversely impact on the economic growth of Malaysia.

However, on the bright side for 2008, the November presidential election in the U.S., the summer Olympics in China and the planned implementation of projects from the Ninth Malaysia Plan can help our domestic economy override volatilities that will surely come from the economic slowdown of the world’s largest economy.

At time of writing this article, the U.S. Federal Reserve ( the ‘Fed’ ) had reduced the federal fund rate by a further 0.25% plus a 0.25% reduction in the discount rate. The market though unhappy with not obtaining a 0.50% reduction in the federal fund rate, realized that a reduction is better than no reduction and it strongly supports the believe that the Fed is committed to preventing a recession in the U.S. This means that where necessary, the Fed is likely to reduce the rate further in the future. It is likely that the Fed wants to restore a sustainable smooth functioning of the financial market that can ensure a real GDP growth for the U.S. economy. The growth of the U.S. economy will also ensure that the global economy will grow.

On the micro side, it is time for everyone to start making plans for the arrival of 2008. Many will be planning parties, attending parties and just spending time with that special someone. For working adults, this is not something new. We all go through this every year. Out with the old, in with the new. It is also an opportunistic period for planning to better our lives and ourselves.

But hold it!! Year after year. We make the lists, we make the promises, we set those goals and then what do we do? We usually fail. Maybe it is time we take a different approach. Maybe it is time we make a resolution to change the way we make resolutions?
Sounds difficult? Sounds weird? Maybe it can even sound like a possible way to achieve what we want?

One recommended way is to start by making a wish list(s). Do not write down that you want to loose twenty pounds or exercise five times a week. That is called a big wish and the bigger the wish the harder it is to attain. The more effective way is to take that same wish and break it down into parts. It is more realistic to say you wish to loose three pounds by the end of the month. This is more attainable.
Now you need to start deciding how you can do this. You do not want to cut anything out completely. If you do this, then you are bound to fail. Maybe you won’t fail in week one, but what about week four? If you think you eat too many cookies, try saying you will only eat one or two cookies only every other day, not every day. By eating less of something you love, you are satisfying your craving, not depriving yourself, yet you are meeting your goals. Do this with all the things in your diet that is fattening or sugary. Little steps like this can help you achieve your goal, albeit slightly slower.

Some financial resolutions worthy of attention for every working adult are as follows:-

1. Paying down your debt. Review your own monthly expenses. You may find, for example, that you have a credit card debt that has been sitting amongst your liabilities for a very long time. For some people it could be as long as the day they started working! Why this debt is still outstanding can be due to the ease with which credit card companies allow clients to make easy repayments towards their total credit card debt.
   Ideally, this situation with credit card debts should never be sustained. As an example, let’s say from fixed deposits you receive 3.6% per annum. But at the same time you must pay the credit card company for all your outstanding debt owing to them at a rate of 1.5% per month or 18% per annum. Imagine what a fantastic mismatch this is! It just means that the sooner you pay off your credit card outstanding the more net savings you accrue.
2. Set up an Emergency Fund. The concept of an emergency fund is based on the fact that there are occasions in a family where a sudden surge of spending is required within a short time. Such a need can arise, for example, if a family member falls ill and money is needed to pay for medical treatment and medications. The emergency fund can be parked in fixed deposits, savings accounts or any other liquid financial instruments. Liquid financial instruments mean any instrument that can be turned back into cash in a short time.
3. Set up a Retirement Fund. For most adults, at some point in their adult lives they do realize how fast time has flown by. For those with a grown family, was it not like yesterday that your children were still babies and you had to watch over them, guide them, nurture and educate them. And now they are on their own feet and some of them have married and have their own children. For those with young children, was it not too long ago when you and your spouse only had each other and now you have all the responsibilities that parenthood brings.
   Irrespective of how where you are in your active working life, you realize that one fine day you will retire and that time can appear in front of you, literally at a blink of an eye. Then are you ready for retirement? Retirement will mean you do not have an active employment income but you have every chance of living for almost as long as you have been working. This is a scary thought if you have not saved through your adult working life.
4. Make a Will. Today it is easy to make a will and at a cost that can be tailored to a person’s needs. One of primary rationale for making a will is that in the event of death of the will-maker, his wishes can be carried out which includes the way he wishes to see his net assets distributed. The other advantage of having a will is that the person would have died testate according to the law. Dying testate means that the probate process can proceed without delay and the distribution of the assets will be effected as a matter of procedure.
5. Cut health care costs. One effective indirect way to cut future health care costs is to loose weight and exercise. Exercising five days a week is ideal. But it may not be practical. Life gets busy. So say you wish to exercise three days a week. And on the days you cannot, you can make up by trying to walk more, like skipping that elevator for stairs. Little steps like this is better than doing nothing at all. Certainly for the most disciplined amongst us, keep a journal of your daily progress towards achieving that goal. A journal of your progress towards your goal is a great way to keep on track in minimizing future health costs.
   Reminding yourself about your goals is also an excellent way to achieving your New Year’s resolutions. One of the many popular ways to loosing weight is to take a “before” picture. Visual images of your loosing weight and getting fit is a wonderful motivational tool. Not only are they a constant reminder, but they help you to stay focused.
6. Get spending under control. It takes discipline to budget but this is one sure way of pinning down outflows being greater than inflows. Imagine how well your wealth will grow if you are able to ensure that every month you have a cash surplus rather than a cash deficit. Part of the cash surplus can then be used for investments that should contribute to enhancing your overall assets.

If you judge that maintaining certain wishes or resolutions is difficult, do tell a close friend about your New Year’s resolution. A close friend that will support you and motivate you towards your resolution is a great way to keep your eye on your goal. It is believed that the more people you tell about your resolutions, the better your chances are towards achieving your goals. Your friends can check up on you and
make sure that you are keeping good on your resolutions.

Apart from financial resolutions, there are other non-financial resolutions that many others have adopted at the start of a new year. Here are some of the popular ones:-

1. Learn a new skill, possibly one that could come in useful at work or business.
2. Learn or relearn a second language. In the Asian context, with the economic importance of China and India in the years to come, there are compelling reasons to make the effort to be able to interact in Mandarin, Tamil or even Hindi.
3. Improve your communication skills. Learn to be good in reading, writing, speaking and listening.
4. Watch less TV. Some adults spend 20 hours or more each week doing the couch potato routine in front of the set where what they consume does not feed their minds. If they had only cut out just an hour of TV each day, they would have found all new kinds of time for other pursuits.
5. Start working on a set of goals, divided between short-term desires and long-term achievements. But plan to revisit this set once a month, making changes as needed. By assembling your goals, you begin to think more about them and make it more likely you will take steps to meet those goals.
6. Refurbish your wardrobe, even if by just a few items each month. The better you think you look, your self confidence rises that can lead to better prospects for yourself.
7. Volunteer your time, particularly if you can find something that may increase your skill set, offer you satisfaction, or make a difference that you feel good about.

In short, the goals that you create must be realistic. Keep yourself positive! It is easy to gain negative thoughts, especially if you do not see immediate results. Give your resolution time. Great things were not achieved in one day. If you get off track, do not beat yourself up. Instead, make sure that you get back on track, and keep moving forward!

The suggested resolutions and other resolutions you bring forth might be something you want to do to improve your lifestyle for 2008. Persevere, stay on track and remain flexible! Your New Year resolutions CAN be achieved!