Analysis: Global Recession Due

Hi all,

It has been another interesting week that will make history in the global financial markets where the US markets lost a total of $1 Trillion on the market bourse, as Dow was down 777 points closing 10,365.45, Nasdaq down 199 points closing the day at 1983.73, S&P 500 down by 106 points closing the day at 1106.39, in the US market trading.

Asian bourses was pretty weak gaining what was lost from the opening at mid-day with STI closing down 2.43 points at 2358.91, Nikkei 225 closed down 483.75 points at 11259.86, Hang Seng closed up 135.53 at 18016.21 (where tomorrow will be a public holiday), and Chinese stock exchanges closing for the week for National Day.

The selling in the earlier session was sparked by a rejection of the bailout plan that was proposed by Henry Paulson, and his Fed aides, as many market participants held high hopes of the implementation of the proposed rescue package. In my opinion, a veto on the proposed bailout plan may not exactly be a wrong move for the US economy on the long term. I may not be a US taxpayer, but to be transferred an obligation, and to 'foot the bill' for mistakes made by others, would make me feel upset about it as well. 

These troubled institutions have, for the past decade adopted a loose system in assessing the credit-worthiness of their borrowers, and thus, lent out billions of dollars to NINJAs (No Income No Job or Assets Individuals). As a result, causing a vacuum in the credit system. With fear of further failure with banks, the Federal Reserve has, since March, spent on these items:

1. JP Morgan's takeover of Bear Stearns, brokered by the government ($29B)
2. Liquidity Injections such as Term Lending Facility and Term Auction Facility ($200B)
3. Economic Stimulus Package ($168B)
4. Refinancing of failing mortgages into new and reduced principal loans with a guarantee ($300B)
5. AIG's bailout ($85B), can be up to $400B due to AIG's CDS on CDOs, CMOs, MBS, and etc...
6. Fannie Mae and Freddie Mac $200B, can be up to $800B
7. Money market insurance (likely another $50B)
8. MBS purchases ($10B), up to $800B.
9. Global credit market injection $300B just last Friday.
   
10. Repayment to JP Morgan for providing liquidity to Lehman's bankruptcy ($300B)
11. What if the 2nd attempt of the bailout proposal succeeds this Thursday? ($700B)
12. Taken from an article in Reuters, US banks and money managers had to borrow $188B a day to keep afloat.
    

Do you think the Fed has been successful with such spending and injections? What is it about another $700B of injection, will the system stabilise because of these injections? 

As of 30Sep2008 Libor Fixing

         Tgt   O/N    1mo    2mo  3mo  3m chg
US   2.00%  6.875  3.926  3.966  4.053   17.0
UK   5.00%  6.781  6.075  6.156  6.300   3.9
EUR  4.00%  4.449  5.050  5.130  5.277   4.0
JPY  0.50%  1.031  0.926  0.950  1.015   5.4
CHF  2.75%  3.333  2.800  2.860  2.955   2.5
CAD  3.00%  4.500  3.997  4.100  4.208   0.8
AUD  7.25%  6.938  7.775  7.725  7.800   3.7

Taking a look at LIBOR (London Interbank Rate) which is a rate for interbank lending, is at a nervous state, as banks begin to lose confidence with one another, loans offered by banks to retail customers are also shorter, and do you think bulk cargoes that are shipped long distance by ship easily get their financing as well?  

Next, let's take a look at European banks, are they any better off than us? Here are some numbers:

• More than $300B of credit insurance were written by AIG to the European banks.
• Deutsche Bank leverage ratio is 50x, 80% of Germany's GDP.
• Barclay's leverage ratio is 60x,  100% of UK GDP
  
• Fortis's leverage ratio is 30x, 300% of Begium's GDP.

Scorecard: Avg Leverage Ratio (US Banks) 20x Vs Avg Leverage Ratio (EU Banks) 35x

The numbers speaks for itself. If you have read the contents that was written above, you would derive that we are currently in the phase of a global slowdown, also called a recession. Let's not deny that. 

So where do we invest our money in? Writing Blogs? Not a bad idea in fact, well I happen to come across a website (http://www.postiecon.com) lately, and they seem to be providing some very interesting ideas as to how successful blogs can be created. Look into them if you are keen.

As for my personal opinion as to where funds could be invested, for the moment, even though stock valuations are already at one of its lowest levels, I still believe cash is king, for those who are not involved in the forex markets. But if you are into trading forex, crude oil and gold for the week, I would suggest everyone to only try holding on to short term positions, as news of intervention and further injections from central banks may come anytime, causing the markets to be a little volatile at times. 

Video: The Last Lecture

Before I end my last note for the week, I thought this video could be good for the soul. Let's pay a tribute to Dr Randy Pausch for his many years in education.

Have a great weekend.

Analysis: Volatility Increased As Market Waits

As the trading day ends for the week in a few hours, the world anticipates for news on Paulson and the members of the Treasury to disclose details on the bailout plan. The current market's  sentiment, judging from how equity indices are performing (volatile), indicate that market participants are running dry on patience, as they begin to doubt whether anything would be passed to restore liquidity in the markets, and save the sinking boat. 

In my opinion, restoring liquidity may not save all the firms from failing, but it is likely to calm the markets as well as those OTC derivatives creators who are still writing credit default derivatives.

Monday's market open would likely be another interesting one, as the markets will likely begin to discount the outcome, as it may no longer matter if the Bill is passed or not. Here is a short article of an enthusiastic party to this bailout plan:

UK banks hold 95 bln pounds of sour assets that could qualify for US bailout plan - Times of London

Times of London reports Britain's five leading high street banks have as much as 95.3 bln pounds ($175 bln) of distressed assets on their books that may qualify for the American bailout scheme. If the British banks tap the rescue fund being set up by the US Treasury and the Federal Reserve to the maximum, they could secure one quarter of the $700 billion being made available. Under the terms of an outline agreement that appeared to have been reached by US policymakers last night, Britain's lenders will be able to use the facility... According to analysts' estimates, and the banks' own recent filings, HSBC (HBC) has as much as 45 bln pounds in structured mortgage debt and other soured assets sitting on its balance sheet that it might look to exchange with the Fed under the plan. Next are Barclays (BCS), with 17.4 bln pounds; Royal Bank of Scotland (RBS), with 16.2 bln pounds; and HBOS, the UK's largest mortgage bank, with 13.3 bln pounds, analysts said yesterday. Lloyds TSB (LYG) follows some way behind in its exposure to the troubled mortgage securities, with assets of about 3.4 bln pounds.

Let's look forward to next week, where the Chinese exchanges will get an entire week's holiday for their national day. And I will be looking forward to this weekend's F1 in Singapore. Have a Great Weekend! 

Analysis: Market Outlook

The world markets today will remain focused on further developments on the U.S. financial bailout program, that has just about worked its way through Congress. It now appears to be a done deal. The strongest reaction has been in equty markets, which have improved. The USD really does not know what to do with it, but its tone improved as the day wore on. It may indeed be a dramatic

The major question now is whether interbank liquidity will start to improve once the bill officially has been passed as the interbank lending had dried up pretty drastically. As simply, banks who have cash do not want to let it go for credit/liquidity reasons.

Next Monday will be an interesting day because on that date, markets will start trading the three month maturity over the turn of the year. Equity markets and the bond vigilantes will have the final word on the bailout program and have already rallied in anticipation of its passage.

The USD is trading steady to lower against EUR, CHF, JPY and GBP. Crude Oil starts lower at 106ish away from yesterday's high at $108 per barrel. Gold is also lower

Asian bourses traded lower with HSI 18771.02 -163.41, Nikkei 225 closed at 11893.16 -113.37, STI currently trading at 2409.90 -34.26, and Shanghai 2293.784 -3.717. 10-yr JGBs were a touch weaker. European bourses rallied. E-Z bond prices have gained.

U.S. equity markets closed up stronger yesterday. Likely to follow with a weaker opening in the US markets today. Bond prices are also weaker.

Comic: What Will Happen If Market Uncertainty Persists

Ever wonder what will happen to your stockbroker if the financial situation persists?

Analysis: Correlation Charts

Thank you for your kind support and encouragement. I am glad my info has been useful to some. 

Just last week, a reader asked, if there were any currencies that showed a correlation with specific commodities, so in order to answer this query, the above image may speak for itself. 

Tribute from George Soros

Paulson cannot be allowed a blank cheque
By George Soros 

Published: September 24 2008 20:28 - Last updated: September 24 2008 20:28

Hank Paulson’s $700bn rescue package has run into difficulty on Capitol Hill. Rightly so: it was ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency – the ultimate fulfillment of the Bush administration’s dream of a unitary executive.

Mr Paulson’s record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.

Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson’s hand and he had to take them over. 

Trade: Closed Out With Losses

Hi all,

As I write this, I have been stopped out of my short position in GBP/USD, with total damage of USD $105. My total damage is 1.05%, where I have already reached my daily limit to risk my capital on. The image above is a snapshot of the statement in the account.

Let's look forward to a better trading day tomorrow.

Cheers. 

Trade: Market call on GBP/USD

Hi all,

I am short 20,000 GBP/USD @ 1.8857 and 1,000 @1.8 and 1,000 GBP/USD @1.8554. The stops for both entry will be at 1.8604 and 1.8607 respectively.

Introduction: Weekly Reporting

After much thoughts as to how my market calls should be made in order to create the best effect and authencity, here are some details that I would like you to know:

1. All trades made on this trading account no. 77104 will be 'real' live trades.
   
2. A report in the format (shown on the right) will be reported on a weekly and monthly basis.
3. Trades and market calls made by me, are only for the purpose of reference, and is no indication for you to trade and follow. 
4. Entry and exit of trades may be in a matter of minutes, therefore, I would urge readers to follow them closely or to backtrack the results with the use of their charts for authentication of results.

See ya soon on market call.

Analysis: Managing An Economy

Back in the 80s, when the US government had to deal with a crisis where the Resolution Trust Corporation, which is a holding company formed and housed within the Treasury, to deal with distressed real estate that was funded by loans and savings, the strategy was deemed a sucess where it was later reused by the HK and Indonesian government during the asian financial crisis. This indeed managed to give immediate liquidity and confidence to the markets during such turbulent times. In addition, this came as a win-win situation for the governments, because as these distressed assets were bought in a 'fire-sale' price, which was significantly cheaper than its face value, the governments made profits from such transactions, where in today's case, the similar situation applies.

The target of this plan for the purpose of restoring order in the banking system, so banks will remain confident to lend, as well as to free up funds for further lending and use when the economy grows. 

After reading the above information on the bailout plan, I question if laissez faire can really be made real in capitalism, but as history repeats itself over and over again, I am convinced that by adopting a neo-keynesian approach to the management of monetary systems may seem like a better approach.  

Analysis: Market Outlook

The markets are still waiting for details on the US financial markets bailout program, as later today 13:30 GMT, Paulson, Bernanke and and Cox will address in a testimony on this issue, which the highlight may pose to be an event risk for the evening. By observation on the FX markets, the market seems to be anticipating a bearish trend underlying for the US Dollar, due to the loosening of monetary and fiscal policies of the US, which is usually seen as a problem for a currency. Currently, the USD is trading weaker against the majors.

Be reminded that central banks have injected massive amounts of money over the weeks, if the bailout scheme does not turn out to be as welcoming as expected, then we may have to keep a close watch on the USD and US equities markets for a roller coaster ride. The hope is that this bailout program could work to improve liquidity and provide banks the opportunity to liquify their balance sheets, but hope may not always come true.

On the maturing Oct crude oil contract, we witnessed a short squeeze on the maturing contract as prices spiked higher for some unusual reasons, as by logic, traders tend not want to get caught on the final day of trade for a commodity.

Nikkei is closed for holiday. Shanghai and Shenzhen managed to revive earlier losses, but it still closed negative. The death of toll of young children has increased, for the melamine mixture in one of China's dairy products producer, remain to creep in the news on most asian newswires.

Straits Times Index remained lower as investors remain careful to the Paulson, Bernanke and Cox's testimony.  

US equity markets will be opened mixed later. Bonds prices are also higher.

Trading Rules: A Nutshell

Hi all,

I'm finally done with the setup on my new Forexyard Demo account. 

As on our previous posts, trading calls will officially commence from today, and we will review the result of trading on a week to week, month by month, and year by year basis (hope I'm that determined). Let us move in small strides to make this work on a long term.

Summarizing some facts before we start on making market calls, here are some rules that I will be following:

1. Stops are pre-determined before any entry of trades
2. Size of trade is determined by the total size of the account, total risk should not be more 1% of the total value of the trading account at any time.
3. My target return per week is to achieve 0.5% gains weekly. Compound it by 56 weeks, you should get our annual target. (Gains are tabulated on a weekly basis only)
4. Term of trades may vary between minutes and even up to weeks.
5. Weekly P&L on the Demo Account no. 77104 will be published at both http://systematic-trading.blogspot.com and http://momentum-trading.blogspot.com
6. Not necessary to trade every day.
7. Active momentum trading hours will likely commence from early asia hours at (GMT00:00) to 11pm (GMT15:00). This will be subject to the availability of time to post. I will be making my live calls with a few other friends' at www.marketasiahub.com, as it may be the most suitable platform for real-time trading communications. 

I hope this is sufficient for now. Would welcome more as we move along. The key motive for having this introduction is to maintain a set of rules to decision making which is as systematic as possible. The implementation of more planning tools will be made and discussed in time to come. 

Will be looking forward to your support.

Cheers

Analysis: Market Outlook

Markets await details on the Fed's proposed bailout program, as the significance of this event is likely to pose bearish sentiments on the US dollar, as a combination of a loose monetary and fiscal policy, is usually seen as a problem for a country's domestic currency, similary over time, this countercyclical moves may be presumed to improve liquidity in the economic pipeline, and to provide firms the opportunity to realign their balance sheets. The bond markets may very well have to witness an increase in the outstanding U.S. government debt.

Currently, US Dollar trades weaker against the EUR, CHF, JPY and GBP.

Asian bourses closed higher with the Nikkei gaining. Shanghai and Shenzhen gained modestly making an approximate 20% over 2 days, following steps taken by the China government to boost stock prices. The U.S. equity markets will be opening lower later.

10-yr JGBs were also weaker. Commodity currencies are broadly mixed. Gold advanced only modestly. Oil is firm as it looks now like it wants to hold above the $100 line.

Stay tuned for my next post as I will describe further on the mechanics and rules of my trading system.

Cheers.

Note: Weekend Changes

Hi all,

Hope you guys have enjoyed the 2 videos.

Dropping by for some update and information on the markets. Below is a link to where you can find a list of US financial companies whose shares that cannot be shorted as imposed by the SEC on Friday. Find it here: No Shorting

Another small bank, Ameribank, just joined the bank closure list, I wonder if the list will continue to get longer, click here to access for details:  Failed Banks

UK PM Gordon hinted that the FSA will be given more power if needed to regulate the financial system, and the UK is prepared to borrow more and use public expenditure.

Paulson said foreign banks will be able to unload bad financial assets under a $700B proposal to restore order. Details are still being negotiated.

So let's look forward to tomorrow.

Video and Analysis: Hitler and His Margin Call

Here is a short USD trading outlook and a short entertaining video for your enjoyment towards the close on Friday trading. Looking forward to see you guys here again this next Monday. Have a great weekend ahead!

The financial markets have a lot to digest today as they attempt to assess the implications of the USD 500B bailout plan for the US financial system, where the assumption is that, this program could greatly improve liquidity and allow affected firms to salvage their problematic assets, and put an end to scares/panics made by the market on these big firms. Therefore, because of this, the U.S Treasury markets gain another USD500B of new debt. As I understand that many investors now may feel that the current strain is far from over, I still urge everyone to observe equities closely, if you remember yesterday closely, you would understand that the net change of the indices at the end of the day is more important than its change before the open.

I would believe that the markets may very soon focus its attention as to how the US Treasury could sustain its 'liabilities' which it has attained from the private sector over this 2-month period.

In summary of today's events in Asia markets, Shanghai and Shenzhen stock exchange closed sharply higher, trading within a very thin range on intraday trade, as the Chinese government took steps to bolster stock market prices. STI, Hang Seng, Nikkei and most other asian exchanges followed suit as sentiments of 'the panic may be over' mood sets in.

Libor and JGBs yields were traded less erratically as compared to how it was quoted over the past 3 days. Treasury Bond prices are also weaker as the market goes into 'the panic may be over' mood.

Commodity currencies like CAD, AUD and NZD were mixed. EUR, CHF, JPY and GBP traded lower against the USD.

Gold eased modestly as well, as investors target for higher returns from other instruments, other than the refuge instrument. Oil remains firm, but look out for the $100 line, as it may seem like a pivotal price for the instrument.

Lastly, should time allow, take a close look at Eur/Usd and Oil. Does it say anything to you?

Now, let's enjoy this short clip from hitler, and enjoy a great weekend ahead.

Cheers ;)

Analysis: Effects Of Banning Short Selling

If the SEC temporarily bans short selling, it will actually INCREASE the cost to banks of raising new capital, and the market's floor might be removed.

- "The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling," writes the WSJ. "SEC Chairman Christopher Cox briefed Congress late Thursday of the agency's intention to take the extraordinary step of interfering with the market's regular functioning."

- This move will affect hedge funds that use short positions to hedge investment risk during a rights issue or placing. If they're not able to provide liquidity during a rights issue, the costs to banks of raising new capital will increase. 

- Shorts provide a floor, buying (i.e. covering shorts) when there is no one left to buy. If you can't short, the only way to reduce your risk is to sell, which may exaggerate downside pressure in the event of a market sell-off. A simple illustration: Look at China's stock market, where no short selling is allowed. The Shanghai composite went from 6100+ to 1800 in the space of a few months...

Video: Stop Loss?

I hope this video is an enlightening moment for some of us. This video does contain some vulgarities and obscene languages, so please watch only if you can accept the language.

Stock Futures Trader losses it all and flips out - Watch more free videos

Analysis: Market Outlook

*DJ Philadelphia Fed Sep Business Index 3.8 Vs Aug -12.7 
*DJ Philadelphia Fed Sep Price Paid 31.5 Vs Aug 57.5 
*DJ US Conference Board: Aug Leading Index -0.5%

*DJ US Jobless Claims +10K To 455K In Sep 13 Wk; Survey -10K 
*DJ US Sep 6 Week Continuing Claims -55K to 3,478,000 

MS and Wachovia about to start serious and advanced merger talks - CNBC

European power and gas traders have lost confidence in US investment bank Morgan Stanley and are shying away from engaging in deals with the Wall Street major, market sources told Platts on Thursday. Morgan Stanley is the one of two remaining independent Wall Street investment banks, next to Goldman Sachs, after the fire-sales of banks Bear Stearns and Merrill Lynch and the collapse of Lehman Brothers. 

Swiss National Bank leaves target range for the three-month Libor unchanged at 2.25–3.25%

Next time someone asks "what good a would a Fed rate cut do?" the right answer is "what harm would it do if they do not?" and pull out yesterdays headlines, price action and negative yields. As usual, the global central banks are a day late and $247 billion dollars short in addressing the issue. Having said that SP is +16 as of this writing. Cycle guys get all lathered up this time of year as the autumnal equinox (9/22) has marked some major turning points in financial markets. One can only hope. Amazingly, the bullish divergence is still in play as yesterdays deeper new low was still not confirmed by 9day RSI (chart). Another potenial divergence is the AAII Bull/Bear index. It has made higher lows with each subsequent lower low in price. I'm not willing to hang my hat on that either one but it is interesting. Crude and nat gas have quietly rallied significantly over the past two sessions. 

The change of tide in Asia trading was indeed very astonishing, as the STI, Hang Seng and Shanghai markets were very bearish, till the combined central bank effort to revive the market's liquidity towards the final 3 hours of market trading. 

BOJ also interestingly for the first time in history became a lender. For details on the lending, go to: http://www.boj.or.jp/en/type/release/adhoc/un0809a.pdf 

In addition, my trading calls as mentioned on my previous post will commence from next Monday, as there are some permissions and arrangements that has to be done with my sponsor. So do stay around next Monday.

Analysis: Downfall of an Investment Bank

Here are some details of the severe repercussions should AIG fall, take this to reference on the impact of the LEH collapse:

Sept 17 (Reuters) - (The following statement was released by the ratings agency)
Sept 17 - Moody's Investors Service announced today that is has placed its ratings of certain credit derivative transactions listed below (the "Transactions") that have exposure to Lehman Brothers Holdings Inc. ("LBHI") and certain UK Lehman companies, including Lehman Brothers International (Europe) ("LB-UK" and collectively with LBHI, the "LBHI Entities"), on watch for possible downgrade. Additionally, certain other Transactions were downgraded and left under review for further possible downgrade. Moody's explained that its rating action is based upon LBHI seeking protection under Chapter 11 of the U.S. Bankruptcy Code and LB-UK being placed into administration, a procedure governed by the Insolvency Act of 1986, on September 15, 2008.
The exposure of the Transactions to LBHI Entities arises from various roles performed by them in the Transactions, including (without limitation):
-counterparty under interest rate and currency swaps
-counterparty under credit default swaps
-guarantor
-liquidity provider
-repo counterparty
-remarketing agent
-depositor
-collateral manager
-servicer
-sponsor
-cash manager
-calculation agent
-paying agent
-collateral provider
-issuer
The Moody's ratings of the following Transactions have been placed on review for possible downgrade:

Arosa Funding Limited:
(1) 3 Tranches of Series 2006-2 Dynaso 2006-1 Notes
Current Rating: Baa3, on review for downgrade
Prior Rating: Baa3
Elva Funding Plc:

(1) Series 2006-6 through Series 2006-47 Credit Linked Notes
Current Rating: All on review for downgrade
Prior Rating: Various
Onyx Funding Limited:

(1) Series 2004-1 Class A Credit Linked Synthetic Portfolio Notes
Current Rating: Aa2, on review for downgrade
Prior Rating: Aa2

(2) Series 2004-1 Class B Credit Linked Synthetic Portfolio Notes
Current Rating: A3, on review for downgrade
Prior Rating: A3

Lastly, from tomorrow onwards, I will be changing the method of writing my blog, as I will begin to make posts on my market positions and price of execution, further commentaries will be made on http://systematic-trading.blogspot.com where a brief write up on the trade and fundamental arguments will be published. 

Be sure to lend me your views and support, as I hope to make this as interesting as possible, and please forgive me if i do not place my calls as promptly as I do need to place my own trades in the market first. A trade summary will be posted on http://systematic-trading.blogspot.com weekly and monthly to keep track of performance, where I will post all such details on my Forexyard demo account.

So see ya soon.

Note: Posts are also published here!

Hi all,

I publish some of my posts at Articles Base as well, so if you are keen to view them in another environment, feel free to view the links below:

Trading Approach:  http://www.articlesbase.com/day-trading-articles/a-trading-approach-563941.html

Volatility in the Credit Market: http://www.articlesbase.com/investing-articles/volatility-in-the-credit-market-can-we-still-trust-banks-562950.html

Cheers

Analysis: Federal Reserves and AIG

Seems like we can avoid another scene like that in AIA Singapore again. 

No rate cut was made. The Federal Reserve is readying a loan of $85B to AIG, in exchange for an 80% stake in the insurer. Barclays is buying some of Lehman's assets, where the US bankruptcy judge approves "automatic stay" status for JP Morgan to continue providing trade-clearing advances to Lehman's broker-dealer unit. WAMU is also up 16% due to talks of fresh interest from a large institution. 

Thus, has all these events salvaged the turbulence in Asia, and create a positive spur of sentiment for the international markets? Let's take a quick snapshot in early Asia and US closing markets in the morning.

All Ordinaries  Australia 4,843.4 8:28AM SGT 43.600 (0.91%)

Nikkei 225 Japan 11,830.34 8:28AM SGT   220.62 (1.90%)

KOSPI  Korea 1,425.59 8:48 AM SGT   37.84 (2.73%)

S&P 500 US 1,213.59 20.89 (1.75%)

DJIA 11,059.02 141.51 (1.30%)

Nasdaq 100 1,724.08  18.62 (1.09%)

As mentioned on my earlier posts, the move of nationalising more private sectors into public sectors may mean that the longer term growth outlook for the US may be dampened for the longer term. In my opinion, this nationalization of AIG may be for good as it is natural that money making institutions will be not be sold, where only companies that are in losses will be sold in the name of privatisation. With AIG having a globally omnipresent diverse structure with a trilion dollars worth in assets, it could be one lucrative asset for the government to generate revenues. 

Lastly, I wonder if they may continue to sponsor Manchester United in 2009 again. ;) 

Analysis: Sectors Worth Consideration

Today has also been one very interesting day for the financial markets. 

With time running out for AIG's vault, it seems like all eyes are looking at the Fed to provide a bridging loan to lend the company a helping hand. Additionally, if rumours are right, WAMU may soon get off the radar screen if JPM has interest in them.

Looking at the market on the macro level, we have witnessed the more than $600B in share value that got worthless or disappeared in the financial and banking sector, and historically, equity markets on average drops 26% during a recession, where now S&P 500 has already reached 23%. In addition, current dividend yield of some stocks have begun to surpass yields from Treasury Bills products. One more evidence is taken from Thomas J. Lee, JPM Chief US Equity Strategist in New York, net cash balances in margin accounts at NYSE member firms are highest in at least 50 years, citing $932B has poured into money fund since Aug 2007.

So do you think this could be a possible turn?

For my personal preference, I will be keeping a good eye on medical, pharmaceutical and related industries to start with. For some reason, the value of such stocks tend to get undervalued after financial stocks get a big hitting, as the value of such stocks do get affected by the changes of sentiment of the stock market in general. 

Next, I will be back on the saddle to continue market momentum trading, as irrational moves in the market could have been greatly reduced, and therefore making it easier for momentum trades to be made on the FX (specifically GBPJPY/ EURJPY in Asia, and EurUsd/GbpUsd in Europe) and futures markets.

Tell me your views.

Note: Lehman Filing

Hi guys,

I will keep this brief. The link below will bring you to the list of creditors involved with the Lehman's Bankruptcy Filing.

Click Here: Lehman's Filing

Analysis: Paradigm Shift In the US Banking Sector

Today's events have indeed been a thrilling experience experience for the international markets. As I am writing this, the China Central Banks has just cut its key interest rate again by 27 basis points to spur growth, Lehman (est. 1844) has filed for Chapter 11 (Bankruptcy) , there are rounds of ECB having an emergency rate cut, UBS sneaking in to declare another $5B of writedowns, AIG seeking help from the Fed with a request of a $40B bridge loan after rejecting an offer by Flower to prevent themselves from joining the slaughterhouse where their CDs are currently gapping outwards, and it seems that the only few pieces of good news are probably that Merril had a merger with BOA, as well as a consortium of global banks have put together a $70B fund to facilitate liduidity and an orderly resolution between Lehman and their counterparties. ECB also joined in with $30B to curb liquidity woes as well. 

In my opinion, it seems like an obvious trend that all Fed Governors are challenged by the markets whenever the Chairman gets hot on the seat, where the Federal Reserve at this time in history chose to avoid providing support to Lehman as it could gravely cost the federal government to be in a financial position, after nationalising Freddie Mac and Fannie Mae. If the Federal Reserve is to continue taking on more liabilities from the private sector and turning them into a public sector, it may be worth want to rethink about the credit rating of the US Treasuries, as many investors may consider the risk of default. With reference to the article written by Morgan Stanley, where they quoted from Japan and Germany back in the 90s, that the explosion of both governments' debt was followed by a peak out and then a decline of private housedholds' indebtedness, and with the expansion of the public sector's balance sheet was mirrored by a contraction in the private sector balance sheet (always relative to GDP).

The consortium of events have really challenged the belief of many affluent investors and central banks today as to rethink about the safety of their funds with their investment banks (where Lehman is larger than Bear Stearns), and the use of leverage for their creative business models. These institutions tend to face more vulnerabilities as they depend heavily on short and medium term money market instruments to maintain operations, as compared to commercial banks such as JPM and BOA, where they are more dependent on deposits made by their customers to operate. In my opinion, if the economy is to reinvent the banking system, it may also also seem that huge bonuses awarded to CEOs of investment banks may be forgotten for a little while, till people can forget about what happened in 2008.

In my opinion, the effect of liquidation of these troubled institutions may also slowly creep into the US consumers, businesses and net exporters to the US in the coming months, where it may continue to hurt smaller institutions, home owners, other governments, pension/ welfare/ education funds, and corporations who have collaborated in business with these companies. 

So in-lieu with the current jittery sentiment, where consumption and the labour market takes a hit in the slowdown, the availability of credit remaining low,  Europe and Japan in a recession, and the emerging markets having difficulties coping with inflated prices of goods over the past few months, where are the opportunities at?

Considering the events and gloom of the current market condition, we are inevitably experiencing one of the most interesting challenges of human history, that is an asset bubble that rippled into a credit crisis that will remain to challenge the monetary 'pipeline' for awhile. 

First, as a personal preference, I will be staying away from stocks in general, even though Asia may seem like a safer haven for equities investing, but no matter how, so long as there is uncertainty, these instruments should be left alone. Second, keep a close watch on central banks and currencies in both UK and the European region, where logic says we should be hearing some countercyclical monetary policies (rate cut) from them soon. Lastly, we may also begin to see lower prices in general commodities as the world's largest consumer may have to take a cut back on their general expenditure on goods and services, as well as their gross net worth. 

In my next post, I will be looking at which specific markets I would be trading on, and where would be my preferred entry levels.

Please understand that these are only my personal views, and is not intended for the purpose of providing financial advise. If you find the article interesting and would hope to dicuss further on your views on trading and investing, come join me at http://momentum-trading.blogspot.com (Momentum Trading) and http://systematic-trading.blogpot.com (Systematic Approach Trading).

See you soon!  

    

Strategy Discussion: Trading

So is there a trading apporach that could be universally adopted for trading success? In my opinion, I do not think so. The reason is simple, if you have ever heard of the turtle traders (Richard Dennis), one of the pretty much successful and talked about trend following strategist many years back, whom engaged a group of newbie traders that had no experience or idea about the financial markets. It was where Richard and his partner later trained this group of people to use their proprietary strategy, and with no stone unturned, to find out if they could attain the similar result that they had achieved over the years.

And yes, the result indeed turned out to be pretty surprising to many, as almost 70% of this group of trained trend followers failed to make profit from the market using their proprietary strategy, where the remainder either modified or refined it, and only a minority found success in following the system totally. But the final result of this interesting story was pretty interesting as well, among all, a few gave up being traders, a few were multi-million managers, and a few did marginal returns. So what am I trying to imply in this?

As it turned out to be, through these years of trading, interacting with many students, as well as making lots of losses to the market. I discovered that most traders go through these common stages all the time, first, they try to find their winning formula, second, even if their trading results are moderate they will always try to create a trading system out of the strategy, third, they move back into trading discretionarily to enhance their earnings, lastly, they finally get back to focus on risk and money management.

In my humble opinion, I personally would recommend a new trader to start from the basis on money management first. Reason is very simple, most new traders give up trading for a living mainly because they tend to lose their pockets after a few good runs on the market, and when they get so confident to claim that:" Yes! This is the run for the Bingo." they usually get so engrossed that they made the right decision till they lose their head. Now you know why bucket shops exist.

So let's say you have a set of pre-determined monetary level to limit such an error, do you think it may help? Not for all. Reason: I used to lose control also. What about anyone else? We are all humans mates.

Personally, I find the most effective method to prevent such a setbacks is to have a top down approach to your money management. Here is a very simple set of questions where I felt that changed my view on taking risks in the market:

1. How much losses (in monetary terms) incurred in this trading account would deem that I may have to relook into my trading strategy? (Calculate the risk tolerance in term of percentage)
2. How much profit (%) per year is your targeted Return on Investment? Multiply this ROI to your starting equity to check if this is what you really want.
3. Assuming you achieve consistent trading results where it will always be 20% profit/80% loss, ideally, how much risk should be taken as a result of your targeted returns (in monetary term), in order for you as a trader to stay profitable consistently at your ROI?
4. From all the above data calculated, what is your maximum risk tolerance per trade? If it is not realistic, how do you refine that? Increase equity? Increase profit targets? Etc..
5. After all the above steps are completed, then search for a trading strategy that will suit you. If not, rethink about your focus and commitment on trading.

I hope the above could be useful to you. These are just some questions where I found it useful in my discovery when I told myself that I want trading to be part of my life. Imagine if you are a full-time trader, where you consistently risk 5% or more of your inital equity on every single trade, and especially when your annual income is dependant on your annual trading performance.

I hope this is interesting for you although it may be a little long for some. Let me know if you need to clarify.