Pound/Euro declines due to US QE - Full Market Report

Good morning everybody. Last week was a very volatile one that saw a big drop in the GBP/EUR rate, but in contrast the GBP/USD rate rose to a 5 month high. Today I'll take a detailed looks as to why this happened, and what it means going forwards.

In this week’s Report:

• Pound/Euro rates in dramatic decline
• US QE announcement main cause of volatility
• Pound/Dollar soars to 5 month high as dollar weakens
• Round up of the week’s other data that may affect rates

Sterling vs. Euro;

Last week the Pound continued its downward trend against the Euro, sliding away from the 4 year high of 1.2865 we saw at the end of July back down to the mid 1.23s. The main reason for the drop in the rates was actually due to news from the US after the Fed said it would pump billion into the economy each month until it saw signs of improvement in its struggling jobs market (which will be discussed in further detail in the dollar report) and growing confidence in the euro zone rather than any data from the UK.













The confidence in the single currency mainly came from the news that the German Constitutional Court gave the go ahead for the regions new rescue fund and the European Central Bank laying down bold plans to lower the borrowing costs for struggling countries. This gives investors greater confidence that the euro zone will be able to withstand continued financial storms as they pulled money out of the dollar and back into the riskier single currency.

This week, the most important mover of the GBP/EUR cross is likely to come of the back of continued discussions with the ECB around Spanish, Italian bailouts as well as minutes from the Bank of England MPC meeting released mid-week. The minutes will give a full account of policy discussions including any conflicts of opinions. They will also show which way the individual committee members voted. This will give a good indication of whether the BoE has a dovish or hawkish stance on the outlook of the UK economy. Any indication of a positive outlook or talks of an increase in interest rates would be very beneficial to the pound and would push the sterling/Euro rates up.


What does this mean if I need to buy Euros?

With such a dramatic fall in Sterling/Euro exchange rates in recent times, anyone looking to buy Euros in the near future would be wise to consider locking in today’s rates with the use of a forward contract to protect themselves against any further falls in the market. On the other hand, anyone looking to sell Euros can take advantage of any spikes with stops and limits contracts allowing you to target rates not yet available in the market. To discuss these type of contracts, send me a free enquiry now.

With a property purchase of €200,000 costing you just over £6000 more than it would have done a couple of months ago, it outlines the importance of getting the right information to make an informed choice of what to do.

Sterling vs. US Dollar;

In this section I will have a look at what events have dominated the GBP/USD cross and how they have affected the markets. Last week the single focus of cable was the run up to the Federal Reserve interest rate and Quantitative Easing meeting on Thursday.













Even as early as Monday the market was pricing in some sort of stimulus intervention as Cable reached a 4 month high. The trend of sterling strength against the dollar was maintained on Tuesday as markets continued to price in movement coupled with a threat by ‘Moody’s Investors Service’ that the US was in danger of losing its triple A debt rating, if next year’s budget talks do not result in lower debt to GBP ratio.

When the results finally came in late Thursday UK time the conclusion certainly didn’t disappoint those expecting some action. Ben Benanke backed the purchase of Billion of mortgage backed securities every single month until US growth as well as the US job market improves. In addition Fed Chairman Benanke added to his commitment to get the US economy moving through spending by confirming that interest rates in the US would remain low and wouldn’t be raised until 2015 at the earliest.

This is probably the most decisive action that the market has seen from the US to deal with the financial crisis since its inception. At the very least it sends a clear signal to the rest of the world that the US are prepared to do everything necessary, including trying new strategies to navigate their way out of recession and into competitive growth.

Dollar weakens significantly after announcement

Naturally following this announcement cable continued its upward trajectory as equities and perceived riskier currencies (including Sterling) made gains against the Greenback. With the Fed Chairman indicating that he would be prepared to pump Billion into the economy every month until it has an effect, the market has the potential to continue the current trend of Dollar weakness. Essentially Mr Bernanke has embarked on an endless amount of quantitative easing and so it will be interesting to see how far the markets move off the back of this uncertainty.

Whilst this is undoubtedly a great time for dollar purchasers to be taking advantage of the recent gains, it would be wise to approach the market with some trepidation as the FX markets are notoriously volatile. Despite a clear shift in fundamentals there is no absolute guarantee that the technical levels will follow suit, and indeed there have been countless occasions throughout history where a sharp market movement has been followed by an equally sharp market retraction.

Ensure that you take advantage of a free consultation and explore the possibilities of both Stop Loss orders and Limit orders so that you are able to take advantage of any market gain, whilst at the same time protecting yourself should the market move against you.

Weekly Economic Data that may affect exchange rates

Monday – The main data today is Trade Balance data from the Eurozone, showing imports and exports. Elsewhere we have UK House Prices. There are no significant releases from the USA today.

Tuesday – Some important UK data today including Inflation data, House Prices and Retail Sales, all of which are a barometer of overall economic health. In the Eurozone we have Economic sentiment surveys from Germany and the EU. In the USA we have a speech from the Federal Reserve, and some Housing data.

Wednesday – The Bank of England release their minutes today, which often causes volatility for Sterling. In the Eurozone we see the latest construction data output. In the USA there are Homes Sales data and another speech from the FED. Over in New Zealand we see the latest GDP figures at 11:45pm.

Thursday – UK Retail Sales are released today, showing full monthly and annual comparisons. On the Eurozone we have inflation data from Germany, Manufacturing data from Italy, German and France. We also see measures of EU Consumer confidence. Over in the USA we see the latest Jobless Claims, Manufacturing data, and yet another speech from the FED.

Friday – We end the week on a quiet note, with the only UK data of note Public Sector borrowing. There is nothing of note from the EU today. Over in the United States we have, you guessed it, another speech from the FED.
Getting the best exchange rates

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Source | Foreign Exchange Rate Forecasts | http://foremostcurrencygroup.blogspot.com/2012/09/poundeuro-declines-due-to-us-qe-full.html

Forex Market: The Big Dogs Or Cool As A Cat?

I have a dog and also a cat.

I live in a fairly rural part of an island where there is an abundance of lizards.

Both my dog and my cat like to catch lizards.

Both are very dedicated to the task and spend many hours each day in this seemingly endless pursuit.

As I have said, both the dog and the cat have the same goal, and yet they approach the task in very different ways.

Ted, my dog, rushes out as soon as the door is opened, tail wagging, barking at full cry and starts his ritual hunt. If he can actually see a lizard he rushes straight after it, but of course the lizards know he is coming almost before he has left the house, and they retreat in a flash to their hideaway.

Undeterred, Ted continues his energetic search of all of the nooks and crannies in which he once saw a lizard.

Rarely if ever does Ted catch a lizard, but he loves to try.

My cat, (no name) could not be more different from Ted if he tried.

Cat never rushes out of the house, but prefers a leisurely stretch, a slow but scrutinizing stroll to his favourite vantage point where he makes himself very comfortable and then he just sits still, sometimes for hours.

Every once in a while, an unwary lizard moves within striking distance of what appears to be the statue of a cat and in an instant, Cat has added another lizard to his long list of trophies.

Cat is a formidable lizard hunter.

So what has this to do with currency trading?

Aside from being a professional forex trader, I also sell copies of my forex trading system, The Amazing Stealth Forex System and I offer a free unlimited email support facility to all of my purchasers.

I receive, as you can imagine, a great many questions and comments with two particular themes being received more often than any other.

One is in relation to my thoughts on what "the big dogs" are doing and the other is why the system did not "recommend" any (or many) trades Yesterday – Last night – This morning - or whenever the particular trader in question wanted to trade but did not get a system trade set up.

My answer to the first question is usually similar to this:

I really do not worry about what the "Big Dogs" are up to as it will not affect my system trading, but if you really want to know, you can look them up for free at the "Commitment of Traders" (COT).

And to the second my answer is:

Even a great forex trading system like The Amazing Stealth Forex System can only alert you to high probability trades if there are any. The system highlights the opportunity, it does not control the market.

The most successful traders are the ones who have learned to have the patience and self discipline to watch and wait for the right opportunity…..and then they strike.

It was whilst idly watching both my dog and cat that I realized that if they were both traders, the attributes of the Ted would put him in the category of the 95% of traders that lose money.

Ted is all enthusiasm with no patience. Lots of energy but no self control. Eager to the task but not prepared to watch and wait.

Whereas the attributes of Cat would easily place him in the top 5% of traders that make money.

He has a method that works and he sticks to it. Cat is infinitely patient and has fantastic self discipline. Cat knows that it is pointless to make a move until the conditions put the odds firmly in his favour. When everything lines up, Cat strikes.

For this reason, I highly recommend that you stop trying to trade like a Big Dog and consider trading like a Cat.

http://best-online-forex-articles.blogspot.com/feeds/posts/default

Source | All The Best: Online Forex Articles | http://best-online-forex-articles.blogspot.com/2008/11/forex-market-big-dogs-or-cool-as-cat.html

World War III and the Stock Market (and other random thoughts)

I've read the 1934, 1940 and 1988 editions of Securities Analysis but haven't read the 1951 and 1962 editions.  For whatever reason, they slipped through the cracks.  I really love the 1934 edition because it is the first edition and really digs into what went wrong in the 1920s and early 1930s (sounds exactly like the 1990s bubble), and the 1940 edition.

I think Buffett has said that the 1940 edition is his favorite.  He said he has read it at least four times over the years.  A sixth edition was published recently with comments by some of the current great investors and those 'essays' alone are worth the price of the book.   The sixth edition is just a reissue of the 1940 edition (updated) with these essays added. 

The commentators are:

•   Seth Klarman
•   James Grant
•   Roger Lowenstein
•   Howard Marks
•   J. Ezra Merkin (?!)
•   Bruce Berkowitz
•   Glenn Greenberg
•   Bruce Greenwald
•   David Abrams
•   Thomas Russo

Anyway, here are the links to the various editions (of course, from the Brooklyn investor store; I just set up this bookstore for fun.  I wanted to understand how this stuff works (after following Amazon for so many years) and did it out of curiosity, plus I find myself recommending the same books over and over to people so figured I would put it all up somewhere.  I haven't really finished stocking it up and organizing it, though).

1934 Edition
Sixth Edition (1940 reissue)
1951 Edition
1962 Edition

If you haven't read any of them and only had to read one, I would say start with the Sixth Edition  (The 1988 edition was not written by Graham).

1951 Edition
Anyway, so I started reading the 1951 edition and in the preface dated October 1951, there was a paragraph that struck me as relevant to today (well, everything he says is still relevant today):

This preface is being written when the possibility of a third world war weighs heavily in all our minds.  We need to say only a word about this unhappy subject in relation to our present work.  The effect of such a war upon ourselves and our institutions is incalculable.  But in the field of securities analysis we need consider only its bearing on the choice between various securities and between securities and (paper) money.  It seems sufficient to observe that since war and inflation are inseparable, paper money and securities payable in specific amounts of paper money would seem to offer less financial or basic protection than soundly chosen common stocks, representing ownership of tangible, productive property.

And in the footnote, there was an excerpt from an essay Graham wrote for the Analysts Journal in the first quarter of 1951 titled The War and Stock Values.

Here is a quote from there:

Stock prices as a whole may be expected to rise, sooner or later, to reflect this cheapening of the dollar.  The course of the stock market from 1900 to date (1951) shows a fairly close over-all correspondence between the rise in stocks and the general prices, although there have been significant divergences for fairly long periods.

This is relevant today because most people seem to fear now high inflation due to all the pump-priming around the world.  This is not news to stock investors; many believe that stocks are better than cash and bonds, but others are worried that high inflation will cause stock prices to go down; they think they should wait by holding cash (despite inflation risk), gold or look into investing in 'hard' assets like real estate.

Hard Assets or Stocks?
I wrote a lot about what I think of gold here so I'll talk about other assets.  There is somewhat of a boom in farm land around the world with purely financial buyers bidding up prices.   The story makes a lot of sense; there will be inflation in the future so own hard assets.  Food demand will continue to grow on increasing population so farmland prices will go up.

But it's important to remember (and nobody really talks about anymore) that the housing bubble in the U.S. was driven largely by people wanting to own a 'hard' asset.  They got killed in stocks in the 2000 internet bubble.  They vowed, no more stocks!  And they rushed into real estate.  It's a hard asset, right?  It will hold it's value.  The Fed will always print more money at every economic downtick.  The government will keep spending money.  Inflation is inevitable.  So why not own houses and real estate?  Land bank stocks boomed too back then.  They don't make more land, right?  But they do keep printing more money. 

So it made perfect sense.  Buy houses, land, land bank stocks etc.  And what's more, you can borrow to do so.  Borrowing money is shorting the U.S. dollar.  And sometimes you can do it with positive carry or zero carry (cash savings or rental income pays interest and other expenses so you get the rise in prices for free).

This was a major factor in people rushing into real estate, I think. 

And there are people driven to certain investments today for the same reason and I am a bit skeptical of them.

Stocks are Real Assets Too
People tend to brush off stocks as a piece of paper and forget that it's a partial ownership of real assets, or "tangible, productive property" as Graham called it.  Of course, this is not true for all stocks.  As I mentioned in a post a while back, Coca-Cola has done really well over time despite the inflation that has occured in the past century.  As Graham says, stock prices eventually catch up to the rise in general price levels.  (I wrote about KO and inflation here)

If a business has a good product, good management, good business etc., then inflation won't be much of a problem.  The only problem is that if inflation ticks up, stock prices may go down in the short term (Earnings may go down too, but if it's a good business, they will be able to reprice and do well over time).

I think this is what most investors worry about.  They remember stocks at 7x p/e back in the late 1970s and think it can go back to that level when high inflation inevitably comes.

In the above mentioned The War and Stock Values essay, Graham wrote:

War conditions could be destructive to stock values but the mere possibility proves nothing of significance.  It is the weight of probabilities that is important.

This is another key point.  People worry about inflation, but it is important to weigh the probabilities.  Many smart people do think inflation is inevitable (as I do too), but we don't really know when and how much.  Some feel hyperinflation is inevitable and others have more moderate views.

But nothing is certain.  When a scenario is certain and absolute (and many agree), you should look elsewhere anyway as you can only make money on the divergence between perception and reality.   (There is a conundrum here as gold and other hard asset prices says inflation is inevitable but bond prices say deflation).

Stocks Outperform Inflation Over Time
OK, so I'm going to borrow this chart from Bill Gross' (PIMCO bond guru) recent, controversial letter that I will comment on later.

This shows that stocks over time have handily outperformed inflation, bonds and cash.  But the key words are "over time".  Of course, stocks were flat in the inflationary 1970s.  One might have averted that flat period by successfully timing the market, but I think it's been proven that nobody can time in and out of markets over time successfully (most individual investors lose money or underperform because they get in and out of stocks at the wrong time!).

(I have shown here that there is a class of investors (residents of a village) that can make good returns in a flat market period without resorting to getting in and out of the market.  This group has outperformed in all sorts of market environments over long periods of time.  I have yet to find similiar performance figures for tactical asset allocators and market timers).

Fear of 7x p/e Stock Market
So anyway, yes, if inflation spikes up like in the 1970s, stock prices will go down and may go down really hard. But we don't know when and how much things will go down. One big risk in avoing stocks until such event occurs is that it may not happen as planned. Back in 1987, people thought a 1930s-like depression was inevitable (so they stayed out of stocks). Others thought that the market won't bottom until the market p/e gets to 7x.  They looked at a long term chart of market p/e ratios and they saw that the market went down to that level in 1932 and 1972.  So they figured it must get there in 1987 or 1988 too.   In fact, many called for 7x market p/e's in 1990-1992 too during the Iraq crisis, real estate / Citibank crisis etc.  I heard people call for it in 1997/1998 too.

If there were two times it should have happened, it was after the 2000 bubble collapse and of course the financial crisis.  The market p/e didn't get low then either.    You can fairly argue that stocks haven't done much since 2000 so it doesn't matter; staying out of the market wouldn't have cost much.

But it's still not a certainly that we will get 7x p/e's in the near future. 

So what if it does?  Odds are that people who get out now and wait for a 7x p/e before jumping back in will do worse over time than people who ride it all the way through.

Cheap Can Be Good for Current Stockholders
There is a big difference between thinking that the bear market will bottom at 5x or 7x p/e and thinking that stocks will get to 7x p/e and stay at that valuation forever.  If you think the former, it doesn't matter.  If you think the latter, then maybe you are better off staying out of the stock market (even though you have to calculate the odds that you may be right etc.).

People want to keep cash on the sidelines so that they can buy stocks when they get cheaper, or so they can moderate the losses on the downside. 

This is something each person has to figure out on their own and do what is comfortable for them.  But it's important to remember that even if you are fully invested, that doesn't mean you can't take advantage of a cheap market.

Charlie Munger talked about this at a recent annual meeting.  He said low stock prices is good because it allows good companies to grow.  He said this is how Rockefeller, Carnegie and others got rich.  They were around in bad times to buy stuff on the cheap to get bigger.   Without the bad times, they wouldn't have grown as big and wouldn't have gotten as rich  (I assume Munger meant Rockefeller/Carnegie got big at the company level; strong balance sheet and good cash flow to reinvest in bad times to expand).

If you own a stock that generates good cash flows, then you are going to benefit in bad times as long as the people who run the business know how to allocate capital.  They will get better deals than most individuals and even most professional investors will get. 

This is why it's important to invest in companies with solid businesses with high moats, not too cyclical and strong balance sheets.

Most investors are afraid of the mark-to-market losses they will have to take on a decline in the stock market and they don't think about what happens on an upturn after that.

So even if you have no cash and are fully invested, that doesn't mean good companies you own can't take advantage; in one sense, you are not fully invested.  (Think about the companies that I write a lot about here; BRK, LUK, L etc.  A lot of these companies have good cash flows and excess capital they are waiting to deploy.  This is true for strong operating companies too).

Culture of Equity is Dead
So Bill Gross wrote a letter stating that stocks are basically dead and even said that the stock market is a sort of Ponzi scheme.  He points to the difference in real stock market returns over time of 6.6%/year versus a real GDP growth over time 3.5%/year and says it is unsustainable as the stock market is just skimming 3%/year off the top.  Many have already pointed out the error in Gross' thinking; that difference is basically dividends that get paid out. 

He confused growth in stock market capitalization and total return. 

In any case, there was something else I thought about while reading that letter.  Even if the stock market as a whole can't outdo GDP over time, I do think that great companies can (not that we can always identify great companies).

For example, Walmart has been taking market share from unlisted, small mom and pop shops for decades.   This would show up in an increase in stock market earnings over and above GDP growth.  The same could be said of some great restaurant companies. Roll up strategies might give the same effect.  Globalization can also contribute to this trend; McDonalds, YUM Brands, Coke all get a lot of growth outside the U.S. and yet book earnings here in the U.S.

As usual, regardless of what the macro, top down charts show, at the end of the day, it's all about the individual businesses and the price you pay for them.


P.S. Market Up More Than 11% YTD
Not that short term stock market movements matter much, but I just couldn't resist pointing out yet again the futility of macro-analysis for stock market investing.  All year, we have been worried about a real implosion in Europe and even China.  I too was convinced that a real crash may happen and things really might get out of hand.  Reading the newspapers every day was a scary thing to do; sometimes I just wanted to not read the paper at all.

And yet here we are with the S&P 500 index up over 11% on the year.  As I said many times before, if you took all that has happened this year, went into a time machine to the beginning of the year and told them what would happen, I don't think people would have guessed the stock market would be up at this point.  (On top of the Europe problem, slowing China and the fiscal cliff, we also had JPM's whale problem etc.)

Louis Bacon recently gave back some of his investor's capital saying the markets are too tough to trade with all of this macro noise (or more the government interference).  He is supposed to make money off of that.  He complained that political meddling / interfering in the markets has made it hard to make money.  I scratched my head because it seems that that has always been the case.  Remember the Greenspan put?  Remember the Plaza accord?  Central bank intervention in foreign currency markets?  Rubin's bailing out of Mexico?  LTCM bailout?

I think it has always been pretty hard.  I would guess that Bacon's problem is size, and possibly even information flow.  I think some hedge funds were privy to some good, advantageous information (not necessarily illegal inside information) in the past and due to the crackdown on banks, independent research firms, insider trading busts and overall heavier regulatory scrutiny, maybe that sort of information doesn't flow as much as it used to.   But that's just a shot in the dark guess.  (I noticed that a high performance hedge fund's return started to slow dramatically also around the time that independent equity research companies started to be investigated.  This may be a coincidence, but I always wondered about that. Still, size is probably the biggest hurdle to high performance).

For equity oriented hedge funds, Sarbox and Reg FD may be a factor too in flattening the information flow; previously analysts were able to get access to more information and pass that on to favored institutional investors including hedge funds.  These new regulations made it harder to get good information.

This is nothing new; I am not making any allegations.  Michael Steinhardt himself has said in one of the Money Masters books that one advantage he had was that he paid Wall Street so much in commissions that he was a valued client.  Therefore, he often got the first call on upgrades, downgrades etc.  And when he didn't get the first call, he would go ballistic.  

The world has changed quite a bit since then, and this may be a factor in the moderation of hedge fund returns lately.

Source | The Brooklyn Investor | http://brooklyninvestor.blogspot.com/2012/08/world-war-iii-and-stock-market-and.html

Foreign Exchange Market Commentary

EUR/USD closed lower due to profit taking on Tuesday while extending last week's trading range above the 20-day moving average crossing. The low-range close sets the stage for a steady to lower opening on Wednesday. Stochastics and the RSI remain neutral to bullish signalling that sideways to higher prices are possible near-term. If it extends the rally off this month's low, June's high crossing is the next upside target.

USD/JPY closed higher due to short covering on Tuesday but remains below the 20-day moving average. The mid-range close sets the stage for a steady opening on Wednesday. Stochastics and the RSI remain bearish signalling that sideway to lower prices are possible near-term. If it extends Monday's decline, the reaction low crossing is the next downside target. Closes above the 10-day moving average crossing are needed to confirm that a short-term low has been posted.

GBP/USD closed lower on Tuesday as it continues to consolidate above the 20-day moving average crossing. The low-range close sets the stage for a steady to lower opening on Wednesday. Stochastics and the RSI are neutral to bearish hinting that a short-term top might be in or is near. Closes below the reaction low crossing would temper the near-term friendly outlook. If it extends this month's rally, June's high crossing is the next upside target.

USD/CHF closed lower on Tuesday while extending this summer's trading range. A short covering rally tempered early losses and the mid-range close sets the stage for a steady opening on Wednesday. Stochastics and the RSI have turned bearish hinting that a short-term top might be in or is near. Closes below the 20-day moving average crossing would temper the near-term friendly outlook in the market. If it extends the rally off June's low, trading range resistance crossing is the next upside target.

Source | Forex Update | http://adeel-forex-update.blogspot.com/2009/07/foreign-exchange-market-commentary.html

DF Spinoff, Mr. Market, When to Sell etc.

So it's been a while since I posted.  Some late summer, beginning of the school-year business, some laziness and some dead-ends is my excuse. 

Dean Foods / WhiteWave Foods Spinoff
I spent some time digging into the Dean Foods (DF) WhiteWave spinoff but couldn't get over the fact that it just looks like a really crappy business.  Sure, sales have been growing at WhiteWave in double-digits which is rare in the food industry, but their operating margins is in the high single digits; much lower than other branded goods.  It was hard for me to give it a high multiple which would be needed to make this an interesting sum-of-the-parts/spinoff play.

Maybe WhiteWave after the spin improves operations and gets their margins up, but they didn't really indicate that on their recent conference call.  I think they have said in the past that high single digits is the normalized operating margin they expect over time at WhiteWave and when an analyst asked if that is still the case in a post-spin-announcement conference call, they said they don't want to comment on that now.  So my take is, why would it change after the spin?

Looking around in stores, I wonder what the moat is in the WhiteWave business.  Most of the brands are relatively new, and I think that it's the concept of non-dairy milk that is the attraction, not so much the brand name itself.  For example, if I was going to buy soy milk, does it have to be "Silk"?  I wonder about that.

Not to mention all the debt that these guys have to deal with.  In any case, having looked at this for a while, I didn't come up with anything interesting enough to merit a whole post.  If things change, I may post something on it later.

Mr. Market
When I was looking at asset managers to come up with comps in a recent post (the OAK post), I came across GAMCO Investors (GBL).  Of course, we all know Mario Gabelli, a bubblevision regular and long time Barron's roundtable member.  GBL has been listed for a while too and has been talked about over the years.  I've always paid attention to what Gabelli has to say but never really looked that closely at GBL.  It still seems like an OK stock, nothing really exciting.

But what was interesting is that in the last few years, Gabelli has this excerpt from the Intelligent Investor at the beginning of his annual reports.

Imagine that in some private business you own a small share that cost you ,000.  One of your partners, named Mr. Market, is very obliging indeed.  Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or sell you an additional interest on that basis.  Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them.  Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market's daily communication determine your view of the value of a ,000 interest in the enterprise?  Only in case you agree with him, or in case you want to trade with him.  You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low.  But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

- Benjamin Graham, The Intelligent Investor

This is nothing new.  We all talk about Mr. Market all the time, but I do think that sometimes people forget about that.  For example, all the complaining about high-frequency traders, market distortions due to leveraged ETFs, hedge funds making markets more volatile, the frustration with the "risk on/ risk off" modes of the market (which reminds me of the "inflation day / deflation day" markets not too long ago) makes me wonder if we forgot that Mr. Market is irrational.  It doesn't matter what form it takes; in one era they were daytraders and SOES bandits, in another it was the index arbitrage and portfolio insuring delta hedgers using futures.  How about the days (before my time) when markets moved based on money supply figures published on Thursday nights?    Now the players are different, but still irrational.

We need these people as value investors.  We need people to be trading stocks based on things other than fundamental values.  Value investors love people who sell a stock because it breaks below support and think it will go lower and buy stock as it gets more expensive.

Without these people, who will we sell to and buy from?  The crazier and more insane Mr. Market is, the better it is for the value investor, as long as they are not leveraged and have their fate dependent on the generosity of a prime broker.

Interesting Conversation
I was at Barnes and Noble the other day (I am such a boring person that nothing to me is as exciting as browsing a bookstore.  Oh, getting a fresh-off-the-press annual report in the mailbox is actually a little more exciting) and was wandering around in the business/finance section.  This particular bookstore was near some major financial firms so had a larger than normal finance section.

Anyway, I overheard an interesting conversation.  I almost jumped in but thought better of it and quickly walked away.

The conversation was between some young, pimple-faced kid (maybe early to mid 20s) and a young middle-eastern looking kid of around the same age. 

I heard the young kid tell the middle-eastern kid that he runs a macro hedge fund  (this reminds me of another time when young kids seemed to jump into something!).  He said why bother with stocks?  If you buy a stock you like, like a consumer staple, the stock can go down because of what happens in Europe even if it has nothing to do with the company you own.  Why bother with stocks then?  It makes no sense to own something where the stock price is impacted by factors that have nothing to do with the business.  So therefore, he explained, he primarily buys and sells corporate bonds, government bonds and foreign currencies.

Well, OK.  I was tempted to jump in with my thoughts, but I know how these conversations tend to go so I just thought better of it.

This reminds me of the Lind Waldock TV commercials not too far back.  The commercial was similar to the above conversation.  Some lady was talking to some guy and she says, why bother with stocks?  With stocks you have problems like p/e ratios and corporate scandals. Why bother with that?  Just stick to what you know, like coffee and crude oil.

As much as I am a fan of free speech and free market capitalism, I thought that was awful; to try to convince people in TV commercials that speculating in commodity futures is safer than investing in stocks.

Anyway, this conversation reminded me of the above Mr. Market story. We should love that markets go up and down for the wrong reasons.

When to Sell
So someone asked me when it's a good time to sell after buying a stock.  That's a really good question.  In the investing world, sometimes it's harder to figure out when to sell rather than when to buy.

For someone like Buffett or other super-long term investors, this is not an issue as his favorite holding period is "forever".  In that case, when to sell is not an issue (even though he regrets not selling Coke in the late 90s).

There are many reasons to sell.  An investment can be a mistake, an error in analysis etc.  Things can change at the company for the worse and it can turn into something that is different than what you initially imagined.  But I would advocate never selling due to short term concerns about the economy or next quarter's earnings.

Otherwise, if you buy something thinking it's worth 0 at , you typically would want to sell it at or 0.

But is it always that simple?  What if the company is growing at 10%/year and you think this is sustainable.  Wouldn't it be OK to hold it even at fair value if that fair value is growing at 10%/year?  I would say yes, assuming the intrinsic value calculation is conservative.

If what you own is an excellent company with great management with a great track record, I would be inclined to own it even at fair value or above.  How many people would have sold out of Berkshire Hathaway years ago after making money on it?  Maybe someone bought it at in the 1970s and sold it at 0 or even a whopping 0 (now trading, as we know, at 0,000/share).  Surely some people bought at and sold at 0 for the best trade in their investment lives.

A recent example is AAPL; I remember a good friend kicking himself for patting himself on the back with Apple.  I think he bought it at and sold out at .  Homerun!  He was complaining about this trade when it was at around .

Apple is not a great example because I too didn't see this coming either; after every hit product I wondered what the next thing will be.  I was late into the game and did well on it, but I don't know that AAPL is a company that will sustain their edge for the next ten or twenty years.

So back to the question; if I bought a stock because I thought it was cheap, then I would sell it when it is no longer cheap unless it is one of those 'great' companies that I want to own over the very long term.

Comparing to alternatives is also a good idea.  If you buy a stock for 60% of intrinsic value and then sell it at 90% of intrinsic value, where do you put that money?  Is there another stock trading at 60% of intrinsic value?  Is intrinsic value growing at a pace that makes owning the stock close to intrinsic value attractive?

Sometimes owning a company that is growing intrinsic value at 10%/year at intrinsic value is better than owning a non-growing company at 60% of intrinsic value, unless there is reason to believe that the discount to intrinsic value will close relatively soon.   This really all depends.

Greenblatt's book (The Little Book That Beats the Market) has shown that stock prices do routinely get undervalued, and really cheap stocks tend to get back to higher values in a year, so focusing on what something is worth should still be the primary goal (again, except for when structuring permanent, long term portfolios).

This is interesting because in his other book, I think he said that some of his best investments took two or three years before it really took off (I think he was talking about spinoffs).

When to Buy
And this leads to the other question; when to buy?  People are so concerned about all sorts of things that they don't want to own stocks.  So if you don't buy a stock you like now because of worries about a European implosion, the fiscal cliff or the elections, then when do you buy?   If these uncertainties clear, wouldn't stock prices actually be higher?  Yes, if the nightmare(s) are realized, stock prices can also be materially lower.

So if you get out of stocks now to buy back in later when it feels better, then the math that has to be done is:  What are the odds that the negative scenarios unfold?  What are the odds that stock prices go down because of that?  And then what are the odds that you will have the courage to be able to buy stocks when it goes down?

I was going to pull out some old spreadsheets and actually calculate the economic value of owning cash right now in front of all of these uncertainties.  You can use exotic option pricing models to see what the value of holding cash now is and waiting for a market decline.  This can be compared to just owning stocks now and what the long term expected return is based on the current price  (down-and-in knock-in call options, lookback call option (where call buyer gets to choose lowest price in certain period etc...) pricing models can be used to calculate the theoretical value of this optionality).

But it's a hassle, so maybe I'll do it one of these days but not today.

The point is, if you can buy a stock now with an expected return of, say, 10%, that's great.  It's probably better to forget about what can happen between now and the medium to long term.  Who cares?

If you know that the business will grow 10% per year and the stock price will move up with that, who cares if there is a crash in October that would allow you to buy it 20% cheaper then.  In fact, if you plan on holding the stock for a long time, then the 20% discount isn't even that important;  if you plan to hold something for 10 years, a 20% discount will bump up your annualized return from 10% to 12.5%.  Over 20 years, a 20% discount will bump up your return from 10% to 11.2%.

Of course, 2.5% is not trivial.  Over time, that compounds meaningfully.  But the point here is that the other side of the equation is that the 20% discount may not come and the stock can run away. 

As I keep saying again and again, if you go back to the beginning of the year and gave someone just the headlines throughout the year 2012, nobody would guess the market would be where it is now...

This is not to say that we should all be 100% fully invested.  As Greenblatt said in a column at his website (that I can't find there anymore), one should own as much stocks as one can stand to watch it go down 50% because the stock market *will* go down 50% every now and then.   The mistake people made in 2008/2009 wasn't that they didn't get out in time.  It was that they owned too much for their own comfort so they sold out in fear at the lows to make their losses permanent.

Also, Buffett has said many times that he has never not invested in something because of his or someone else's outlook on the economy, macro risks or anything like that.

OK, anyway, this was another meandering post but at least I put something up. 

I hope to be more active going forward with some interesting things to look at.





Source | The Brooklyn Investor | http://brooklyninvestor.blogspot.com/2012/09/df-spinoff-mr-market-when-to-sell-etc.html

How The Market Move

After looking at charts for over 1 year now, I have made a conclusion on how the market move. It may differ from other people point of view but at least this is how I made profit or loss in Forex Market.

The Market generally move once or the most twice a day. That is how much Forex market move. There is no point on being stuck in front of the pc the whole day since it will only move once. If you dont belive me look at any pair in timeframe 1 hour or less. Forex doesnt move in straight line but it has a tendency of moving to a particular direction in a zig zag motion.

The idea is to develop a system or set of indicators that will give you an entry early enough for you to profit when the market makes its move. There is no way you can tell the move before its moving. The price must move at least a little to a particular direction before you signal is triggered. Then you enter the market and take the remaining move.

The system must only give you signal once a day or twice the most. Because its a daily trade dont expect much. Sometimes condition are bad even 5 pip is enough. You must remember that if you are trading less than 1 billion you are small fish in the sea. Take what you need and leave or else get eaten by the big fish.

In developing the system that will take advantage of Forex movement characteristic, I sense that I have succeeded. I have a system that will give signal only once a day or twice the most. Like most Forex system in the world, there are difficulty finding the right entry and exit point. An entry and exit that will give you the most out of the move before it will retrace.

In the end, its about how and when you enter. There are no room for mistakes here since mistakes are costly. From the very 1st trade you make till the last trade, the risks are all the same. Experience is an advantage but its not an insurance. Once everything turns bad, there is no saving you.

Welcome to the World of Forex

Source | 24/7 UP To Date Forex News - Foreign Exchange Market | http://247forexnews.blogspot.com/2010/11/how-market-move.html