Wednesday, June 28, 2017

Why Companues Go Public: Rationality Comes First

This is a post that was written as a response to the post on FB. Here is the link: 

1.       IBs: These banks largely have 2 purposes that they work towards: (1) Act as an intermediary between entities who have capital, and the entities who needs capital. (2) Act as a broker/advisor/manager in the negotiated transactions, that we commonly call M&A transactions. As such, these intermediaries serve an important role of acting on behalf of the initiating party. The IBs are referred to be “sell-side” agents, which basically mean that they work for the party that is on the selling side of the trade. Hence, without engaging in the illegal matters, they are free to express their views according to their convictions. To express their views, IBankers produce a document, called “prospectus”, which usually covers such topics as: business description, business related risks, strategic initiatives, financial summary (at least 5 year history), industry and economic outlook, planned use of proceeds etc. This document is usually written off by an in-house legal team, which basically means that most of the times this document is written by using a dry legal language, so the words such as “unprecedented growth”, “high profitability” and “leaders of the market” are not common. IBs are institutions who care about their long terms prospects, and hence they do usually are the epitomes of conservativeness and rationality. However, companies themselves are free to use any language that they prefer in producing investor related materials.      
2.        Lock up period: First, if we talk about US based IPOs, then the main regulatory body, “Securities and Exchange Commission” which regulates the market participants, does not require companies that are going public to have a “lock-up period”. Rather, it is a phenomenon that companies themselves choose to implement.
Second, the investors who will have to deal with the “lock-up” are the insiders, or early investors, who bought into the company before it goes public. Understandably these investors are usually institutional players who possess big chunks of company shares. These players usually get better terms in terms price or other privileges, such as warrants, covered call or convertibles.  Regular investors/traders who buys shares after it goes public or at the moment of going public are exempt of any sort of lock-up, hence this shouldn’t concern them at all.
Third, the “lock -up period” is necessary for a number of reasons. One big reason is that it allows the stability of the price right after it goes public. This is necessary for both the markets and for the ethics related reasons. Because, insiders often possess information that might send the wrong message to the public, even if their selling is not company specific. In any case, the investors who will have to deal with the lock-up have to have the capacity to do their homework and be ok with the lock-up.
3.        "Эти коэффициенты, типа current ratio, EBITDA, leverage, бла-бла там на хер никому не нужны." - These factors on a stand lone basis, might have a little meaning, but should be considered as a part of a bigger picture analysis. Qualified investors, should be able to analyze companies and be able to form a qualified opinion or leave this matter on the hands of professionals.
4.        The reasons for going public: There are several reasons why companies might decide to embark on this journey. Number one, its all about cost of capital. In a broader sense, there are only 2 types of capital: debt and equity capital. Both of them have several advantages along with their disadvantages. It will take too much space to explain here, but sometimes one option might be more preferable than the other.
But, these are some of the reasons for going public: (1) founders or early investors consider the IPO as an exit from the investment; (2) companies might consider getting more credibility; (3) shares of companies can be considered as a currency in engaging in M&A activities, in meeting their operational expenses etc. One example is the practice of stock options that companies might grant to their employees; (4) albeit subjective factor, but some companies might consider the price for shares as a measuring stick. Of course, the higher the better.
5.        In regards to Kazakhstani IPOs: I would not have a strong opinion as of now, but if the AIFC launches with the set of rules and principles similar to those that are being advertised, then our companies, with the right value propositions might be considered for investing to participate in the growth of the company. I personally am avid supporter of Air-Astana, as I have been following the company’s financials since 2010. With the right pricing, I would very much consider it to add to my portfolio. But then again, both the legal and macroeconomic framework is of utmost importance.

Thursday, April 20, 2017

April 2, 2017
Astana, Kazakhstan

Frist Quarter (Q1) 2017 Update Report

Dear Partner,

During Q1, the Green Valley Fund (“GVF”) appreciated by 17.94% on a gross return basis and 13.45% net of performance allocations to the General Partner. During the first quarter, the S&P 500 index (ETF: SPY) returned 5.46%.

Main characteristic of our portfolio, was that we swung only at long plays, the exact reason will be provided below. Our quarter was marked by an extremely strong performance by one name which is, claps please…Amazon Inc. (AMZN). The name has blessed us with 18%+ gain! At a current rate our portfolio is heavily skewed towards technology names, and especially to AMZN. However, without going into details we will lay out some plans that we are planning in regards to portfolio imbalance.

During the second half of the quarter, we have taken a number of positions in the energy sector, using the price decline of the underlying commodity: Oil. In short, we see higher prices come April and May.

For the quarter, the biggest winners were Amazon Inc. (AMZN), Boeing Inc. (BA) and Murphy USA Inc. (MUSA).  First two are our holding from the last year, while Murphy Oil is a new acquisition for our portfolio.

But, we had some losers too that we mistakenly misjudged our ability to correctly value or judge the worthiness of the business. Nike Inc. (NKE) is one of the names that we had high hopes but it seems that the fundamental changes taking place in the athletic apparel business is going to have a considerable effect on the performance of Nike’s top line growth. It might take a while and more consolidation before the investment merits might get noticed in the investing community. Meanwhile, we are keeping the position in the red, we are planning to take a final look closer to the end of April, and decide whether we will keep or just sell it out.

Initial position was established in July 2016, then we added more in September of 2016, and finally we bought more in February 2017 with a plan to see through the quarterly report, but it didn’t impress us at all. The main thing that we expected a buildup in the inventories they carried through the quarter, and it doesn’t show any sign of improvement. Though sales and EPS growth were in line or better, we judge the performance of the company by the amount of inventory that they carry to reach the sales targets. So it seems that Nike will have another year of rough performance.

Portfolio Related Events

Since the Election Day, the market have appreciated considerably due to the mostly optimistic approach to the new government’s pro-growth initiatives. In general, it is a normal practice to expect different approach to business and markets from the new administration. However, the statistics show that end of ‘16, and early ’17 run was among the largest and only time will show if plans will materialize to compensate for the run in the indexes.

In general, we are of the opinion that 2017 will be a great year for market participants, especially to those who are optimistic about future and mostly long. Here are the main proposals that are expected from the new administration to deliver:

1.     Tax cuts: Tax cuts are expected to fuel new investments both capital and into the markets
2.     Infrastructure investments: In general new investments are always considered to be accretive to the markets growth. There are many articles and discussions on the topic that you can find by googling.
3.     Military buildup: This is a tricky topic but favorable to the names like Lockheed Martin and our favorite in the group: Boeing Inc.

Portfolio Names
In 2017, market participants expect a number of rate rises. Further, rates rising from ultra-low to merely low would add a fiscal stimulus because the higher interest payments would add to deficit, we are of the opinion that rate rises combined with the benefit to savers will add to fuel to an accelerated economy.
In light of the above, here are our thoughts in regards to some of our current positions:
·        Long Amazon Inc. (AMZN): The name has been on and off in our portfolio many times before. The latest position was built in the range of December ’16 – January ’17. We started buying the name in the low 770s and into 810s in January. However since then we have stopped adding it, but I have to admit that, should we have continued adding it, we would have been in a better position than we are now. The main idea behind the name is that AMZN is a unique company that it is impossible to pinpoint in which industry it is competing at. It has one of the best CEOs that US Business history have ever seen. And having one the innovative thinking leaders help the company to grow manifold. One statistic would blow anyone’s mind. Here it is: Over the 10 year period AMZN has returned more than 2129.5%! However, we have to always stay focused and be on alert. Any business has ups and downs, which is inevitable. Therefore, we are planning to trim some of the AMZN in the coming month, before earnings report date. We are of the opinion that AMZN can grow manifold in the next 5 year period and we are ready to be patient.
·        Long Boeing Inc. (BA): Right after the Election Day, we have started accumulating the name on the dips. The first stake were bought at 150ish  level, and we added one more time on January 19th at around 158, just before it broke the critical 160 level. The main thesis behind the name was that it will benefit from the new administrations focus on military buildup. Boeing is one of the companies that has both geographic reach and economic scale to considerably expand its operations. But the mindshare that Boeing Inc. has in the minds of its customers is a different topic itself. For the last 30 years, the name has seen both ups and downs, but managed to come back stronger. We believe that on any dips we will be adding to our core holdings. However the price has to be no more than 160ish level.
·        Long Murphy USA Inc. (MUSA): The name has been on my radar since 2014. Murphy is engaged in the marketing of retail motor fuel products and merchandise through a chain of retail stores. The Company operates through the Marketing segment. The Marketing segment includes its retail marketing sites and product supply, and wholesale assets. As of December 31, 2016, its retail stores were located in 26 states, primarily in the Southwest, Southeast and Midwest the United States. Out of the total 1,401 stores, 1,152 were branded Murphy USA and 249 were Murphy Express locations, as of December 31, 2016. Murphy is one the companies that has a widest possible moat in terms of road side coverage for truck drivers, tourists which benefit greatly from the increased level of travel within the States.
·        Energy: We believe that overall deleveraging and increased amount of infrastructure projects in US, will substantially increase the demand for energy. In talking about commodities, we believe that longer term horizon outlook has more impact that just focusing onto the short term. It’s always difficult to pinpoint exact turns when the supply and demand balance will balance, but it will come. When the time arrives we will be ready with our names in our portfolio. The other reason is that valuation in the energy sector has been pressured for so long that we decided to buy some of the low valuation names that has a potential to grow in the coming years.
We have been fully invested for the last 2-3 months, but we are planning to take some gains while we have them and sell some of our positions in April. Main idea is that, at the next correction be it in energy sector or on overall markets, we will be ready to pull the trigger.
We are not married to our names, and we reserve the right to sell positions when we see fit.
As the statistics show the first months of each quarter, gives us better opportunities, this quarter was not an exception as we captured some nice prices in some names. So we are overall ready for the possible volatility during the April month. We have almost 15% of our assets in cash ready to be deployed.
On the last page, we have copy and pasted an excerpt from the 2016 Annual Shareholders Letter from Warren Buffett (Berkshire Hathaway) to his shareholders. The excerpt in our view perfectly captures the essence of making money in the markets. And that is (1) to stay in the game as long as possible, (2) to do sensible things and (3) be content with the gains that markets provide.
Usual Disclaimer (that will appear on all of our reports)
1.     Our Philosophy: However, we define investing as “acquiring and holding quality securities at suitable prices”. We are not trying to predict the short term movements but consider ourselves to be partners in companies that we are in, which basically means that we stay through thick and thin with the companies that we have selected to be a part owner of. These companies might have lagged in performance, but it has no bearing on their attractiveness in our eyes. The collection of companies that we own, are fine businesses that has yet to show its true value. As the Benjamin Graham once said, “The market can stay irrational longer than you can stay solvent”, we take our tasks seriously and do not have any margin at all. In addition to that, we keep certain amount of our capital in cash, to seize opportunities when they arise. Probably, you have already guessed that our collective view for the markets and many securities, at a current time is that they are being very overvalued and frothy. We believe that some sort of market correction seems imminent, though we are agnostic as per the date for that event. We have time, and we are waiting. Just be sure, that when the time comes, we will be ready to load our vaults.
2.     Performance: You should also understand that, I will be providing updates at quarter ends only, so that we all have certain yardsticks to measure performance. And, you should also understand that I can’t guarantee that results will always be positive, as I don’t know what prices will do the next day, next week or even year. But, what I do know is that businesses we have taken positions in and will take in the future, will become substantially more valuable in the next 2-3 years. Please do let me know your thoughts in regards to the current quarterly update letter.

Best regards.
GP - Talgat Akhmetov
Date: April 2, 2017

Appendix: An excerpt from the 2016 Annual Shareholders Letter

Q: How to make money by investing? What should people do? (The highlights is of ours)
A: “America’s economic achievements have led to staggering profits for stockholders. During the 20th century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends. The trend continues: By yearend 2016, the index had advanced a further 72%, to 19,763.
American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.
Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.”
During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.
As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase. Nonetheless, Berkshire’s collection of good businesses, along with the company’s impregnable financial strength and owner-oriented culture, should deliver decent results. We won’t be satisfied with less.”

Tuesday, April 4, 2017

Ways To Go About Shorting AMZN

AMZN is a difficult stock, as it has a cult like following (Cramer, I guess invented this phrase). So every time AMZN get beaten down, it rises up like a phoenix from its own ashes. 

Been there done that. 

So, here is my advice to anyone who wants to short this name. 

In general, you have 2 choices in going about shorting.

First, you MUST find a fundamental flaw in the thesis of AMZN business model, This might some costs that are rising, or some markets that are gonna be in decline or any other sort of fundamental feature of the overall AMZN story that is overlooked by the markets, You might say its impossible as markets are efficient. But you will be wring. 

Second, wait or a catalyst event, be it news or some other thing that will negatively affect AMZN's performance. Maybe some major acquisition (think NFLX), or something like that. So in general, you gotta have one of these two like hard, ideally both of the at the same time. Otherwise, AMZN is one of the hardest names to bet against.

Shorting is much harder strategy just going long, as by shorting you are going against the normal course of the markets direction, which is higher by the time passes.

One has to think deep and long before embarking into this journey which is full of pitfalls.

Saturday, December 10, 2016

Living Off Of Trading

Why is trading considered to be the hardest jobs one can have to make a living?

There is a saying that majority of traders fail at the attempt  of making a living off of trading. But this is true for a real business too. There is at least hundreds of failure stories for each successful individual in business. In case of trading, that number might be in the thousands not hundreds.

Here are my thoughts that might give some clues as to why that is the case.

Let's think up a fictional person who would serve our purpose of explaining my point of view. I will call him Jeb. So, let's think that Jeb is a hard working fellow who has been at his regular 9-5 job for the last 10 years. For a long time he has been thinking about quitting his job to start his own business to be his own boss. But he has a dilemma, he doesn't know what business are might suit him the best. He is not after big money after all, as his main criteria is to make a decent living. He has been working at a construction business, but he had no heart in it. So he wanted to change his are of work completely.

Jeb was an avid fan of burgers, so he had an idea to start his burger joint so he could serve his recipe for a crusty, fresh burgers to his customers. But, here is another problem. He was not fan of physical labor.

One day, he received an invitation for a reunion. So he had reserved that day to visit his former classmates, where he met Mark. Mark was a trader, and he worked his own capital to make a living. Mark was so eager about his job that all he talked was about markets and his speculations in it. Jeb was fascinated by Marks stories that he decided to devote time to study markets.

At first, it seemed so easy to him. "Just buy at a lower price and sell it when it becomes higher,. This must be so easy that I will become a millionaire in no time" - thought to himself Jeb. He even decided to shortcut his studies, and just start trading. He deposited $50 thousand to a brokerage account. $50 thousand was 100% of his saving or close to it. To make his first trade didn't take much time. On the first day, he went ahead a bought Apple Inc. shares for 102.45 and started furiously following each tick of the stock. Apple was his favorite company, as he had been using Apple products for ages. It must be a wonderful company. That was his ides behind his trade. After he made his purchase, Apple share continued their rise, and it closed that day at 102.66. The next day, Apple shares opened lower because of the overall market fall. Jeb decided to leave his position and went for a business trip. He had been checking the quotes on the road, and it made him happy but sometimes, when prices went lower he became angry and confused. Jeb was not an emotional person, but for some reason he started feeling depressed and angry at no reason, other than being that Apple share were going lower.

After 2 weeks, shares of Apple slided lower to 93.44, at that point he decided to sell his shares in Apple for a loss. After the sell, he felt that a huge load was lifted from his shoulders. He has visited gym for a number of days now, as he lost motivation. He lost sleep and had some terrible headaches. This was all new to him. He couldn't believe that his newfound hobby/fascination might have brought so much pain to him in such a short period of time.

This continued for a number of weeks, before he calmed down and decided to trade more to make back the lost capital. But as was with Apple shares, he lost considerable amount of his capital after a number of unsuccessful speculative trades.

In the end, after 5 months of lost capital and time, he came to realize that this trading thing is not easy after all. But all was lost o Jeb as he decided not to trade any more. Later, he went ahead with his original idea of burger joint which made him nice money and he was happy about it.

This story illustrates interesting point. And that is, that trading might seem like a structured and straightforward business process, but in reality it consists of more psychological elements rather than physical processes. Mike Tyson is famous for his one liner: "Everyone has a plan until they get punched in the face", which in essence describes the business of trading. We all know and can put in writing 99% of our action plan before hand, but that 1% part makes it almost impossible to become a consistent winner in this game of trading. And that, my friend why there are more losers than winners in this business.

We can all write down, what we are going to buy, at what price, and where we might exit the trade and what the appropriate size should be for our trades. But when it when it comes the time to take action and after taking action, things change and stocks might not act like we predict.

Here is a real life example from the trade that I made on Friday (December 9, 2016).

First, I will post the chart here and later will provide my analysis.

On the chart above we can see, that 112.43 was a key level of resistance that AAPL was trying to break above for some time. It had been accumulated for a number of weeks before it decided to do that. On friday, before open, I noticed that AAPL was acting in a way that it wants to go higher. But we can't be 100% sure about anything, so I had waited for the open and it started climbing higher, and I placed stop buy order at 112.50 level with a hard stop at the low of the day at 112.31. Fortunately stock has acted in my favor and my stop loss wasn't triggered. I am sure of one thing. and that is one has to always think about losses first, as gains will take care of themselves. I am keeping 100% of my position in this name as it has a potential to get back to 120 level, as we can see from the weekly chart.

The above example is a clear representation that trades don't happen every day. Sometimes, I wait for weeks before trades happen. And when they do, I have to be ready to take bigger risk, than normal. Swing trades, generally has a potential to become bigger winners than intraday scalp type trades.

This is just one essay in regards to the toughness of this business. It require more stamina than typical sports contest requires. The reason being that trading has many more variables that can affect performance than sports. So one has to take proper measures of risk before plunging into this wonderful business.

Next time, I hope to elaborate on the positive sides of trading.

Sunday, November 13, 2016

Analysis of Holdings as of November 13, 2016

Current Holdings (Nov 13 2016):
1. Visa (V): I own Dec 16 80 calls that were bought for 3.50. They closed at 2.92, so I am underwater as of this writing. My thesis is week, I have to be frank. The weeklu chart shows some form of a possible move higher from the last weeks support level of 80. Plus I can see a bullish wedge formation that might move this name higher. We will see. The plan of action for the next week is to watch carefully, and in the case of inverse move lower, I will just bail. I decided to start with v as my thesis seems to be very weak. So I consider this trade as amistake.
(click to enlarge)
2. Nike Inc. (NKE): I own Dec 16 50 calls, that were bought for 1.60. Calls closed on Friday at 1.65, so I am slightly above the water and in the green. Here is the analysis. Daily chart shows a bounce from the 50 level, which is a strong support level. But on a shorter(1H) tmeframe, we see that 51 now has become a resistance level. I expect that this name to move higher with a b/o from 51 level, or else I am gonna just bail.
(click to enlarge)
3. Home Depot (HD): I own Dec 16 130 calls that I bought for 3.06, and they closed on Friday 3.15. 130 seems to be a resistance level, that I anticipate it to break higher before the ER on next wednesday.
(click to enlarge)
4. Sstarbucks (SBUX): I own Dec 16 52.5 calls that were bought for 1.80, and they closed at 1.97. Thesis for SBUX is simple, on a valuation basis, it's inexpensive and I apln to hold it for long time.

Tuesday, November 1, 2016

Controlling Risk in Trading Options

Trading is not complicated. All you have to do is wait for a really high probability opportunity and swing it. However, in reality it's not as easy as it may sound. For one, what part of capital one should use per each trading opportunity? What kind risk measures to take? How to determine the price target objective?

Al these questions are important in of themselves. But, the one issue takes the precedence over the others. It's the risk.

Any trade, however profitable it might be, without taking a risk measures, it's not sensible to take it.

But, how to control risk? What are the ways to take risk under control in taking a position?

Size of a Position

We agreed that for any one trade, in considering whether to take it or not, we should first calculate the approximate amount of risk per this given trade (I am deliberately leaving technical matters aside, as they might confuse readers). After admitting the risk, we can proceed with structuring our trade..

To achieve our goal, we can take as small position as we feel comfortable. This concept perfectly works in the options trading. Because, in options (if we trade directional call or puts), we can take the size of a position as a risk per trade. Therefore we can take the total size as a sum we can feel comfortable losing.

Monday, August 29, 2016

Having an Edge in Investing

How to make money by correctly allocating assets among asset classes, instruments is a topic of much discussions and debates. I would like to make a little effort of mine that might add value to anyone who is interested in learning what one a great investor.

But, first let me start with the basics. What is investing? Investing is an conscious act by a rational person who decides to buy a certain item, so that sell it at a later time for a greater price, which after taking into consideration the element of time, should provide more in buying power to the investee.

How successfull investing is done, is another question. The matter of investing comes, to who has the most edge. The edge might have various definitions, such as the informational edge, edge in time (duarion in which company might stay invested), analytical edge.

Here are the definitions for each of the edges listed above:

1. Informational Edge: this is the most miunderstood edge that any investor might have. Most people might confuse it with having an inside type of imforamtion,. however, I believe that a curious and open minded investor might just by absorbing evey bit of material about a company, identify a certain type of information that might help him form a well rounded thesis on a company.

2. Time Edge: What makes Warren Buffett from most of the investors, aside from his capital allocation skills, it's a the time that he gives the investment to work. In one of his speeches, he gave a clear message, that he is perfectly ok with holding invesments for a long times, and some of the businesses he intends to hold forever. This is clearly an edge that differentiates him from most of the investors. It's easier to know what will happen,. rather than when. Therefore, it's a huge advantage if one can hold investmnents for long stretches of time.

3. Analytical Edge: In an analyists mind, the more information does not necceasiry mean better results. The more high quality information the better. However, sometimes, another factor sets in that makes the difference. It' snot just the quality and quantity of information presented to the analyst, but it's actually who he or she does with this piece of information. What makes Mr. Warren Buffett unique in the field of investing is not the quantity of information that he possesses, but rathher his prodiguous ability to correctly process the information that make a whole lot more sense. That fact alone makes him an important figure in the world of common investing.

What the above three factors tell us is that, in the field of common stock investing, it's absolutely important to have an edge that would place you ahead of the pack.

Monday, April 4, 2016

Valeant Pharmacauticals and Ackman Story

Mr. Ackman has been one of the investment masters that I looked up to. I used to take his ideas and work on them independently to find out more about the company and his reason for investing. Usually I would come up emplty handed as I would not find compelling argument for or against the stock.

A little more than a year ago, I came across the article in Barrons, which had a glowing article on Valeant. But it was another famed fund Sequoia manager, who was braggin about the companys business model and its bright future. That time, I decided to give myself more time to study the company. I didn't find anything negative about the business model perse , but I was not sure about the platform company structure. Also, the stock price has shot up by more than $50 by the time I finished my research, so I moved on.

Trading and investing has one distinct difference, which is the account time horizon. I am a short term trader, and if the stocks has given me a gain, I would definitely place my stop loss on the breakeven. However, investors with longer term horizon, wait for some negative catalysts to load up on share at a better (lower if he is bullish) price. The reason for me, as a technician, I don't have price targets or fair value target or anything. I just care about the price action and the chart. Chart says to me where to enter and exit. However, big boys like Ackman has different agenda, they initially identify their edge and place bets. But part of their plan include that they might get shares at better prices for some reason. Sometimes, it happens because of the macro events that has no bearing on the stock itself.

The current story of VRX is not in line with the aforementioned logic. Because, the reason why share become less expensive HAS TO DO with the BUSINESS PROCESSES of the company, so Ackman had made a mistake in not taking a loss and move on (just like Buffett did some years ago with his bet in Tesco). Buffett said that he had an idea about the business processes of the store, but it has changed, so he is taking a loss and just moves on. Ackman, either has better information that we all don't know or has no idea what he is doing.
I think that we might give some time Ackman, and just see what he can do with this stock. If he manages to turn around and come out even, then he will prove that he is indeed a king of hedge fund world. If not, then..

Thursday, March 17, 2016

Grow Your Account By Trading Right Instruments

There is a general misconception about the size of capital one needs to start trading/investing in the capital markets. Often times, this perception is reinforced by the mass media outlets, through news, movies and reality shows.

However, the reality is much different and quite the opposite. My view is that, actually having small amounts of capital is not bad, it's a good thing. The limited amount of capital will help the person not to fall prey to human temptations, like greed and fear.

Now, let's turn to the instruments that one can use to grow his/her capital.

Options: Options is a way underrated instrument that many people with small base capital can utilize. Directional bets might payoff huge if donecorrectly, with proper trade and money management principles.

Here is an example of an actual trade:

In the first picture, we can see the 1 hr chart of a stock, that has found a support at $58.50 - $59.00 level, and next leg is planned to be to the upwards.

Accordingly, on the 2nd picture we see that I have entered into a call option at a price of $1.60. So one could theoretically could have bought 5 contracts for a total sum of $800!

On the 3rd picture, we can see that the price of a call option has appreciated to a level of $3.3 per contract. The gain of 106.7%!!! So, I have doubled my money in a couple of days, by purchashing call options at the right time.

On the 4th picture, you can see the price action of a stock up to the day of sale of call options.

Of course, this might seem to be easy on hindsight, but, with proper risk managment techniques and emotional stability one can easily find such opportunities from time to time.

It's not necessary to trade every day, or make concentrated bets. However it is vital to have identified a technical levels that can be used to profit and be able to sit through market ups and downs...

In the next post, I will provide my perspective on using futures.

Saturday, January 16, 2016

Decoupling Theory: Is it still valid?

Below you can find a text of a paper that I produced in 2009 on the topic of decoupling. I am posting it here, as I consider it to be valid today as it was then. When I wrote it, we were in the midst of a full blown recession and many things were unclear.

         After the first symptoms of recession of US financial markets, many investing firms and funds have changed their focus to emerging markets of Europe and Asia, specifically to China and India. One of the avid supporters of “decoupling theory”,  the president of Euro Pacific Capital, Peter Chiff, has confessed in his video blog on August 24’ 2009: “If you look at the big economies such China and India, they never even went into recession, they slowed down a bit, but now they are expanding even more strongly; they avoided recession. Some of the larger more advanced economies in Europe and other parts of the world, dipped into recession but now they are already out of the recession. It is the United States that is still in a recession. And initially, based on 2008, everybody thought - oh, no! When US catch a cold, the world gets pneumonia! Well, that did not happen. Everybody was afraid that was going to happen in 2008. That’s why US dollar rose; that’s why foreign stocks sold off more that US stocks. Everybody was waiting the world will catch pneumonia; they did not. They caught cold just like us; they did not even get as bad as we did. So what’s happening is global markets are recovering, global economies are recovering, and I think what we are having is “decoupling”, because I do not believe that US economy is recovering”.
  Decoupling theory is postulated in this context for assisting the firms to reap from these emerging markets, but the validity of this theory is arguable and has been a topic for discussions in numerous TV-shows, conferences and live events.
         What is “decoupling”? Decoupling theory, as the name suggests, decouple emerging world markets from developed countries’ markets (particularly US markets). The followers of this theory believe that “because of the strong GDP growth of many developing countries, especially of China and India, their markets will remain bullish even at the time US and other developed markets are in a recession.” The theory was pretty logical and right till the end of last year (2008), but things have changed considerably during this year as well. Most of the Asian markets are now in a big recession after the crash of Dow Jones, in March of 2009. On the other hand, Indian, Chinese and Hong Kong markets fell considerably in the last year or so.
         The major drawback of “decoupling” theory is that, it has not considered the multiple economic relationships and globalization trends. Although the trades among Asian countries has grown tremendously, the major trading partner for all of major Asian countries is still United States and any recession in its economy will lead to recession in all of these countries. Simple explanation for that would be the degree of interconnectedness among these same countries. One of the major contributors for the growth of any country’s GDP is a trade between one country and another. So, trade has grown considerably in the last couple of decades between so-called developing nations and developed nations, though the effect may vary from country to country, according to the diversification of economies of participating countries.
         The “decoupling theory” is widely accepted as a valid thesis in many business and academic circles. It is also considered to be an explanation for asset allocation practices in numerous investment management companies. No one knows exact amount of money that has been lost by investors who built their models on unproven strategies that work only in theory but fails in practice, such as ‘decoupling’, but the amount is known to be significant. As trillions of dollars were wiped off the value of global stocks last year, meanwhile "decoupling" became the latest big idea to shrink dramatically when tested in the real world with real consequences.
  Decoupling theory claims that European and Asian economies are not correlated or became less correlated, especially emerging countries’ economies have broadened and deepened to the point that they no longer depend on the United States economy for growth, leaving them insulated from severe catastrophic events, such as fully fledged recession or even a depression. Faith in the concept has generated strong outperformance for stocks outside the United States - until last year. As opinion began to solidify after the start of the year that a recession, or something close to it, was likely in the United States, stock prices then, a little later, the values for securities accelerated their declines on major stock exchanges, with the selling intensifying in the 3rd quarter of 2008. It was a clear sign of panic among investors. Contrary to what the decoupling theory enthusiasts would have expected, the losses were greater outside the United States, with the worst experienced in emerging markets and developed economies like Germany, Japan and France. Exports make up especially large portions of economic activity in those places, but that was not supposed to matter anymore in a decoupled world because domestic activity was thought to be so robust. Decoupling was all the rage early last year when international financial markets all but ignored the increasing turmoil in the U.S. Main news networks publicly ignored the severity of coming crisis. Bear Sterns sale to J.P. Morgan Chase though did make front pages of major newspapers. Previously, collapse of California based IndyMac Bancorp Inc. also failed to trigger an alarm for the economy. It was just assumed that these accidents do not jeopardize the economic power of US and investors still had optimistic projections about the economy. Investment advisers pointed out, however, that the segments of the U.S. economy that were showing wear and tear then were those to which the rest of the world would never be heavily exposed.
         That is no longer true, they say, and markets are responding accordingly. "Decoupling is yesterday's story," Stuart Schweitzer, a global strategist at JP Morgan, said. "Last year, when the U.S. slowdown was driven almost entirely by housing, it made sense that the rest of the world kept right on going. Housing is a domestic story, plain and simple.” The nature of the slowdown has changed in two key respects. The credit crunch or/and shortage of credits that began in midsummer of 2008 is not just a U.S. phenomenon; the rise in risk aversion is global and will have an impact on credit terms and availability everywhere. And we finally saw evidence that the U.S. job market was losing steam and consumer spending is slowing.
         True believers in decoupling have ignored another theory that appears to be logically inconsistent with it, but has been popular for far longer and, most important, which has been shown to work in real life. Remember “globalization”? "If anything, global interdependence of economies is rising, not falling, with even more coupled economic and financial infrastructure" said Jeff Applegate, chief investment officer of Citi Global Wealth Management, in his Wall Street Journal interview. The notion that the U.S. can go into recession with no negative knock-on effect in the rest of the world doesn't hold up anymore. On the other hand, Andrew Foster, head of equity research for Matthews International Capital, a specialist in Asian markets, contends in his blog, that “it is possible for globalization and decoupling to coexist. In fact, one gave rise to the other”, he said. It was only through economic liberalization which comes through globalization that the juggernaut economies of Asia were able to grow as fast as they have, allowing for the development of conspicuously consuming middle classes. The irony is that these economies are more coupled and connected with the rest of the world than they ever were in the past, that's why they're so strong, and that has allowed them to become more independent. The new Asian consumers may not be able to compensate for all of the exports that would be lost during an American recession, but some of the companies that served their needs might still do all right for themselves. The true decoupling may be not so much between the United States and the rest of the world as between segments of the global economy that cater to the burgeoning new rich class in emerging economies on one hand and most other commercial sectors on the other.
         With the United States apparently tipping over into recession, many investment gurus are looking to fill their Asia portfolios with the first type of businesses, as long as they have not been bid up to unreasonable levels already. A couple of pockets of opportunity that they find are Chinese insurance companies and Indian health care providers. Many American corporate behemoths such as Pfizer, goes for hunting as well. In October 29th, Pfizer announced its plan to go ahead and acquire Indian “Wockhardt Pharmaceutical Company”, which was met with optimism in markets of both countries. The case here might be to invest in companies that don't derive their fortunes from products, services and especially commodities dominated by the global business cycle. Valuation is also critical for many investment professionals such as Michael Avery, chief investment officer of Waddell & Reed and a professed believer in decoupling - up to a point. He noted that the concept began to pop into the heads of professional investors, including his, during the last U.S. recession, in 2001-2002, although it had not yet achieved buzzword status.
  Many investors started thinking and strategizing about where the world was going to head in a post-9/11 environment. The U.S. economy had slowed dramatically in 2001, and there were places in the world like China and India that continued to grow at mid to high single digits. That set in motion the thinking that the U.S. might not be the leading economic force going forward. While some investors accept the basic idea of economic decoupling, they are not fanatical about it as an investment theme, at least not now. The emerging world will grow faster than the United States, but they doubt that sufficient growth can be achieved to justify the valuations being put on companies in those markets by the new wave of decoupling adherents. For instance, average P/E ratio for a Chinese blue-chip company is now in ranges of 25-35, which gives signals of coming huge asset bubble and price bubble in public markets.
         The big difference of 2002 events is that not many people placed bets on that outcome, so there wasn't much risk. Now if we go anywhere, and talk about China and India and the emerging middle class, people will agree that it's a huge difference from five years ago. One can still find value in some of the domestically oriented sectors in Asia, as well as in Middle Eastern markets that continue to benefit from one key export, crude oil. We can safely conclude that the growth of middle-class spending is promoting a healthy expansion of trade within the emerging world. Some people believe that China is rapidly moving from being dependent on exports to the U.S. to enjoying a virtuous circle of rapidly rising incomes for Chinese consumers and very strong momentum behind internally driven growth. The proof for this hypothesis is that Chinese government spent around $584 billion, as fiscal stimulus for further infrastructure developments and facilitating Chinese middle class actively participate in economic growth.
  There is momentum in Chinese stock markets, too, but in a different direction. Perhaps the biggest beneficiary of decoupling is giving back much of its enormous gains of the last few years as investors break faith with the concept. Economic trouble has spread far beyond the United States to major countries in Europe and Asia, threatening businesses around the world with the loss of the international sales and investment that have become increasingly vital to their sustenance. Only a few months ago, some economists still offered hope that robust expansion could continue in much of the world even as the United States slowed. Foreign investment was expected to keep replenishing American banks still bleeding from their disastrous bets on real estate and to provide money for companies looking to expand. Foreign demand for American goods and services was supposed to continue compensating for waning demand in the United States. One thing is for sure, that US economy is dependent on other countries. The macro policies being implemented by foreign governments make it more complicated to predict the possible future for decoupling theory.  
  Investors are still in search for models which will give them the returns they desire with risk appropriation they can afford, but now we can state with less certainty that emerging markets are the place to go.

         What is the future course for economies of developed countries, emerging countries? What is the future trend for the financial markets?

         These questions are considered to be of utmost importance for anyone who has a little amount of interest in markets. Yet no sensible answer can be given under circumstances we are in now. Simply put, it is not knowable and not possible to predict. Future has never been certain, but one thing is clear that many more challenging times, busts and crises are ahead of us. However, the issue investors should be concerned about is the time frame when ‘confidence’ will return to markets. On the other hand, emerging countries should look for ways to bolster economies in the short term and work on making it sustainable on the longer term basis.
         With global stock markets plunging on fears of a US recession and the Federal Reserve cutting rates in the wake of their collapse, the theory that much of the world economy has 'decoupled' from the United States looks increasingly dubious.
         Decoupling was the latest of the periodic 'it's different this time' theories to sweep through the world's financial markets. The idea was that there is enough economic growth in and among emerging markets -- and perhaps even Europe -- that a US recession would not automatically drag down the rest of the global economy.
          Some experts expressed a bit extreme views such as, ‘the decoupling theory is lying in ruins’; others confided that they ‘never thought it was much of a theory anyway,’. Though the fact is that US is a quarter of the world (economy) and if its imports slow down, the rest of the world will slow down too. Here we see clear cause and effect relationship between US economy and its trade partner’s economies.
  It certainly ends the idea of 'pure decoupling'. The old saying was that if the US economy caught a cold, the rest of the world got the flu. It's clear that if the US gets the cold, there's no complete decoupling, the rest of the world's economies aren't immune from whatever ails the US -- or vice versa.
            Economists at Global Insight, for example, cut their 2008 global growth forecast to 3.4 pct for 2008, given 50/50 odds of a US recession. Markets reacted with 2.1% drop in one day, after the release of this prediction. Here we see markets’ sentiment towards, risk avoidance.
            There is a distinction to be made, however, between the world's actual economies and the world's financial markets. The financial linkages are much stronger than before. The financials are much more linked than the actual economy, in the sense that they are faster to process information.
            The unpredictable element of coupling in all of these forecasts is global investor psychology. It's being driven by sentiment and emotions than anything. In a state of panic and uncertainty, it's hard for the markets to decouple.
            The reality is clearly more complicated. Notable emerging markets will undoubtedly come out of the financial crisis with an ability to sustain significantly higher economic growth than its industrial counterparts. This ability reflects healthier financial conditions, greater policy flexibility through surpluses, and more dynamic sources of growth. However, it is clearly premature to consider emerging markets as independent sources of growth. The base effects are still low and a large portion of growth seen this year comes out of transitory and ultimately unsustainable means (massive stimulus in China, for example). For investors, reliable indicators that will signal a shift toward sustainable, independent growth in emerging markets will be domestic consumption levels and the extent to which policy recognizes and encourages the consumer rather than the producer. Specific policy measures would be a stronger social safety net (traditionally lacking in countries like China) and greater exchange rate flexibility.


1. Max Wolff. “Debunking the Decoupling Theory”, Seeking Alpha  (January 27’ 2008)
2. Conrad De Aenlle. “Decoupling vs. Reality”, The New York Times (February 7’ 2008)
3. Daniel Pipitone. “Decoupling Theory of Emerging Markets”, NobleTrading (January 22’2008)
4. Heather Bell. “Is Decoupling Done?”, Yahoo Finance (January 8’ 2009)
5. Gavin Jones. “Decoupling: What really happens when US sneezes?”, Reuters (Feb. 5’2008)

6. Pedro – Pablo Kuczynski. “Are the Emerging markets Decoupling from United States?”, International Economy (2005)

Connection Between Oil Prices and the State of the Economy - My Perspective

My philosophy is to stay market direction agnostic at all times. I do not pretend to have powers to forecast and predict the flow of future events. I think, it is hard to understand the current state of affairs in the complex system of markets that I just don't see any point in having to try to predict the future and then act upon my predictions.

My view is that, as a trader or an investor, I just have to try to position my trades so that I can benefit from both falling prices and rising prices. That's a fiduciary duty, so to speak to my family, my investors and myself. Trading is tough, and there is no time for complacency, and bitching about things that didn't (or don’t) work. So one has to stay alert at all times.

Now, let's come to the core point of my article. Lately, one of the hottest topics in the news, mainly in the business news, was the state of the economy around the world. The other topic, which is no less popular is the falling prices for energy sources, mainly oil (crude and WTI). So-called experts on TV, often mix aforementioned topics with each other, to conclude that low prices for energy sources directly linked with the weakness of economies around the world. I don't quite agree with this thesis.

Major reason for low prices of oil, is the absence of demand or/and excess of supply. This is the fundamental rule of economics. Next, let’s talk about demand.

Can we categorically state that low level of demand indicates weak economic stance? Might there be other, underlying reasons for oil prices to fall. In my view, we should talk about the nature of demand and explore possible reasons for falling price of oil.

Let's try to dissect the nature of demand:

China has traditionally been a huge consumer of oil. So the real question is why China has stopped consuming certain amount of oil. The answer might be that businesses started consuming less oil, or because they became more productive and more efficient in using oil as a raw material. The other reason might be that China has started to rely on its own production of oil. As we all know, one of the policy measure that Chinese government is trying to push is the use of own raw materials and stop relying on imports.

Historically, China has been deploying protectionist policies in other types of raw materials from to time. In 2011, Chinese regulatory agencies placed a ban on exporting rare earth metals, which led to a temporary distortion in the world markets. Many consumer electronics companies rely heavily in Chinese exports, so many had to adapt to new market rules. Therefore, it is safe to say, that Chinese are trying to become more self-sustainable in its use of energy sources.

We all know that there are exporters and importers of oil. Oil is being traded around the world, on major exchanges. The price of oil is actually a price of a futures contract for a barrel of oil, with an expiration or delivery date of 3 months out. Initially futures were meant to use by oil exporters and importers to hedge their risks, of low and high prices respectively. However, now the oil markets are open for everyone to speculate on. Nowadays, the oil traders (the specialized firms that help producers to sell their products) trade mainly oil (of various sorts) for physical delivery. The last point is very important, as it shows that a certain body or agency, or cartel is not setting oil prices. Players of the market set the prices. Supply and demand in the markets for oil regulates the prices for oil futures.

Then, a keen observer from the outside might ask: What are the motivations for players in the oil market to sell or buy the commodity? This is an excellent question. The answer to this question will partly give us a clearer picture of the nature of prices of oil.

Market participants react to various statistical data. From the supply side, it’s the amount of produced oil in various countries, that has major market shares. One example of such a country, or in this case organization is OPEC (cartel). Traditionally, the OPEC countries satisfies the supply side of oil for about 30-40% of the total amount of produced oil. The news might come that OPEC countries have increased their production. This news is bearish for oil prices in general, if the demand is staying the same from the countries that has tradionally been consuming majority of oil produced. One such country is China. China as a whole has been consuming majority of oil produced around the world. Therefore, in our example, if wee that supply from OPEC has increased while demand from China is staying the same, then we might deduce that market participants will push price for oil lower. In our real case, the supply side grew their production with a ever increasing speed, while demand side dropped. China has been consuming less and less oil. All the other economies that used to be buyers of oil, now has stopped their procurement.

The founder of IBM, Tom Watson Sr., once uttered this:  "I am no genius, I am smart in spots, but I stay around those spots". Similar to Tom Watson's thinking, I also try to stick around the areas that I consider myself more or less knowledgeable, and that is trading/investing. I am not an economist, but I have my own opinions. But, what makes me different, is that I use my judgments in my trading/investing activities, so if I am wrong I lose money, if I am right I make money. I personally take risk with my own money. Many talking heads on TV do not have any personal responsibilities, as they are just “talkers”, which is unfortunate.

Why Companues Go Public: Rationality Comes First

This is a post that was written as a response to the post on FB. Here is the link: