Wednesday, 30 October 2013

Not for sissies

Bette Davis once said Old age is no place for sissies (my wife alerted me to this being the original quotation. I had heard it repeated by someone else using the word wimps. I have re-titled the piece appropriately). Stock market trading, the way I do it, is not for sissies either.

I need to remind you for the umpteenth time that I am not attempting to grow my portfolio, or even preserve, my capital so that I have a nice little pile to leave for posterity. I earn my livelihood from what I make in capital gains. I retired prematurely some 15 years ago with a totally inadequate pot of money. Since then I have only been able to afford a decent lifestyle because I have been able to generate exceptional returns from my meager pot. No superannuation, no regular flow of cash from any source. Just me and my savings. The returns I have made, exceptional as they have been, are too small to grow the capital, so continued high returns are essential. I have managed to navigate through two major stock market crashes and it is only in these last couple of years that I have found the going really tough causing my little pot to dwindle.

I put this down to the fact that I can't get my head round how the new players in the market operate. These are the banks and funds that are the beneficiaries of what is perhaps the biggest income redistribution I have ever known. After the banks lost almost all of their capital and pushed the economies of the developed world to the point of bankruptcy, governments have been furnishing them with social benefits on an unprecedented scale to help them rebuild their balance sheets. This money has found its way onto all the major capital markets  in the world (stock markets, foreign exchange, commodity and interest rates) and it and has distorted their operations.

Running risks

Enough winging! I have to make my living and I can only do that by reviving my talent for making my money work really hard. And the only way to do that is to take big risks. The last few days have demonstrated that risk taking is a two way street and I can lose as well as win.

The stock market continues to defy gravity and I can see no end to its upward movement. So, belatedly, I decided to dive in. I scouted round the US market and found that the big winners  through the gyrations of the US market over the Summer and the Autumn (Fall) were the Chinese shares quoted on the US market. Fine I thought. Good track record, good story (China is where the future lies). I'll go for this.

On the very day I bought in the news hit. NQ Mobile was accused of falsifying revenue and profits data. According to Bloomberg:

"NQ Mobile fell the most on record last week after Muddy Waters said the company inflated revenue and lied about cash balances in an Oct. 24 report. NQ denied the allegations, holding a two-hour conference call on Oct. 25 to discuss details of its financial statements." 
Their shares crashed taking with them all the shares that I had bought.

In two days those shares had lost 13% of their value. At certain intraday points the worst of the shares had lost over 30% of its value.

Big decision, Do I cash in my losses and run for cover or do I work on the principle that this will blow over? There is no road map, no sat-nav to steer me out of this hole. Just nerves of steel and self belief. I've held my nerve and held on. By the end of yesterday the portfolio of five shares had recovered 5% of its value.

You see what I mean about risk. If I had gone into that market just a few days before I would have made 13% in just a few days instead of losing it. But it took me time to build the courage and I missed the opportunity. And when I did take the plunge someone drained the tank of water and my dive into the market left me with a bloody nose. There's nothing to say what today will bring but taking risks is the only way I can make the money. I have to keep reminding myself: I've done it before, I can do it again.

Not a game for sissies.

Saturday, 26 October 2013

The stock market bites

That never ending rise in the stock market has frustrated me. So I decided to jump aboard the train. I prepared myself as well as I could using the strategies I know. I looked for the Vector Vest Unisearches that had done well over the past couple of months. I looked for ones which had done well if I had bought at the top of each rally and ones that had done well if I had bought at the bottom of pull backs. I found the ones that had systematically done well. I did not want to fill my portfolio so I picked five UK shares (bought Friday) and five US shares (bought Thursday).

In the UK shares I have had one winner (WIN up 3.6%) one neutral (JMI) and three losers. (CLDN III and RTT). A reasonable start since there were no real baddies and I more than covered costs.

The US was a different story. I found that the best performing selection was one that picked high VST Chinese shares which had been going great guns. I bought the best group (CSIQ EJ BITA FENG VIPS) and on Friday I watched one of my picks dive 20% before recovering and ending the day 8% down on my purchase price. I leave you to imagine my state of mind as the day progressed. I could easily have pulled out as my loss exceeded 20%. Luckily I hung in. But I will go in on Monday with frayed nerves.  Here's how the day panned out.

And this is what it looks like on the daily chart. Chartists among you will say that I was mad to go in. The chart screams correction. But I was buying on fundamentals. For me sharepicking is the name of the game. I have cash so I can weather the storm, I hope.

We're promised a storm on Sunday night/Monday morning. Lets hope we weather that too. 


 As well as the clock change that happens tonight. One less hour in bed.

Thursday, 24 October 2013

At last! A chink of light in my personal cloud and a link that throws some light on the foggy world of Quantitative Easing

My struggle with knowing what to do in the markets goes on. Yesterday's pullback looks as though it will be short lived So I still have the nightmare decision: do I jump aboard this speeding train?

However, I do have one bit of good news. GVC is performing at last. I first bought it in 2012 at about £1.60 and realized a chunk of profit during one of the one of the 2012 pull backs. I sold at 229 realizing 43% profit and pocketing a dividend which added another 7 percent to my bundle.

The share was suspended for a time while it absorbed its purchase of part of Sportingbet. When GVC re-listed I had to pay 263 to get back in so I lost a potential 15%.

This is currently my very best investment and as usual with these top performers there is something a little different. In this case we have a company providing services to the gambling industry internationally. It has a policy of running the business for cash and aggressively distributing that cash in dividends. It announced that it would move to a quarterly distribution before it was suspended. It has restarted paying dividends earlier than first announced and it has reported that it expects results for the current year to be ahead of market expectations.

Immediately following its first ex dividend date the price started to pull back very sharply. You can imagine that I felt very nervous especially since, currently, this was my only holding. (Attentive readers will know I've pulled out of my other shareholdings.) Nevertheless I felt confident in this share and bought more, twice, once as the price was falling (never catch a falling knife) and once at the bottom (still catching a falling knife but sometimes you're lucky).

The price fall has been caused by one of the major shareholders disposing of its stake (they been in the company for a while and they must be sitting on a hefty profit). The problem when one big seller tries to dispose of a big stake is to find a buyer. Too early to say for sure but it looks as though this a buyer has been found and a huge sale yesterday, or was it a negotiated buy, brought the price slide to an end.  Early to say but it looks as though my faith in the business may have paid off. Good thing too I have now well over 20% of my portfolio invested in just this one share. Not to be recommended! Incidentally I should repeat my ever present warning: I do not recommend ANY shares or ANY strategy. I am simply describing my own efforts to play the game.

So why have I been so convinced that this share is worth holding. Two reasons: I purchased the bulk of my holding when GVC's PE ratio was below 6 (earnings yield of almost 17%) and that was on a historical basis (i.e. not taking into account EPS increases, and the dividend yield was about 12%. And, it appears, there are no obvious nasties in the business. It screams cheap.

Anyway, net result is a sigh of relief that my gamble paid off and I look forward to banking those chunky dividend payments.

So back to the real world of hard decisions. It looks as though I may have to go back into the market. I'll give that some thought later today All the QE money is inflating the stock market and if it goes on that train beckons. I shall just have to be a bit smarter in picking my shares.

I have another radio program to recommend which addresses the horrors of Quantitative Easing and the looming disaster that it is hiding. As I listened I was chilled to the core. All that money we are printing (governments are us) is redistributing wealth to the rich and distorting commodity as well as stock markets. And no-one cares.

Monday, 21 October 2013

What have we here?

The fiscal cliff has been pushed into the beginning of next year. We have a whole lot of delayed statistical news to come in the next week or so. This will affect the thinking of the FOMC will alter their take on the future of QE. So more uncertainty. But a part of the market powers on. While the DOW is stalled on its run up, the S&P has taken heart from the fact that the US will not default on its payments (yet) and has risen to a new all time high.

A contrast that makes it hard to draw any conclusions.

Obviously I'm kicking myself for not being in the market. But safety, like everything else has its price. There is a good economic phrase which describes the price I am paying. It is "opportunity cost". I've missed my opportunity to profit, by sitting on the sidelines. Frustrating but there you go.

I have done a couple of things. When the fiscal cliff loomed I bought some more shorts on US treasury bonds. This time shorter term ones code PST. As the cliff moved away, they fell a bit.

GVC (a UK share) carries a 12% yield and a PE of 5.5, following a pull back on its price since it went ex dividend. I already had a hefty chunk of these shares and am sitting on a decent profit. I took the price pull back as an opportunity to pick up a few more. Remember I am not here to recommend anything. Just to report on what I'm doing.

Wednesday, 16 October 2013

Are shares still too cheap?

Until we discover whether US lawmakers will reconcile their differences there is little to do so I thought it might be fun to reflect on theory. Specifically the theory of valuing shares.

Put very simply a share is best valued by measuring its PE ratio. This compares its price with its earnings per share (Price/EPS=PE).  The reciprocal of the PE is known as the earnings yield (EY) and can be compared directly to the dividend yield on a bond. However there is more risk involved in a share's earning yield because earnings are not guaranteed from one period to the next and they may fall or rise abruptly. Long tern investors look for shares whose earning per share have a long record of steady increase. Owning these shares has an advantage over bonds because the yield will rise over time.

A bit of an example should make things clearer. Lets imagine a company that makes a variety of foodstuffs and call it Munch Incorporated:

  • It has a share price of $20 and its earnings per share are $1. 
  • Its PE ratio is 20 (20 divided by 1) 
  • The reciprocal of this is 5% (1 divided by 20 is .05, multiply this by 100 and you have 5%) 
You can compare this to the yield on bonds which may be 3.5%. Lets say that Munch has had an unbroken record of increasing its Earnings per Share (EPS) by 10% per year and you can see that the premium which investors expect for owning a share with its inherent risk is the 1.5% difference between the yield on shares compared with bonds.

If we take an average of all shares on the market and look at the movement of their PEs we capture the movement in several measures

  • Movement in bond yields. If bond yields fall then unchanging EY will begin to make shares look more attractive so prices will rise to bring EY back into line
  • A general rise in earnings prospects brought about by, for example, a strong economy will shift sentiment and raise the expectation of earnings and EY in future. This anticipation will raise prices and reduce EY until the improvement in earnings become a reality
  • Extra cash coming into the stock market because of the printing of money or because investors become over exuberant about earnings prospects will all raise prices and reduce EY
I prefer to think about EY than PE because a 5% yield is easier to understand and compare than a 20 or 25 PE (25 is equivalent to 4%). The relationship between the two is unchanging. Here is a part of the run of ,the relationships.

           PE       EY %
7 14.3
8 12.5
9 11.1
10 10.0
11 9.1
12 8.3
13 7.7
14 7.1
15 6.7
16 6.3
17 5.9
18 5.6
19 5.3
20 5.0
21 4.8
22 4.5
23 4.3
24 4.2
25 4.0
26 3.8

So what has been happening to PE ratios over time? Robert Schiller has made a study of this and has calculated his own version of PE ratios over time. He adjusts earnings for inflation and takes a 10 year average to compensate for cyclical movements. His calculations result in a graph shown below.

We are currently at quite a high level with prices pushed higher by excess demand generated by QE. However, it is hard to argue that an above average PE is simply a bubble. The returns on bonds are very low so a lower level of EY is not particularly surprising. A PE of 24 is equivalent to a to a yield of 4%. A rise in bond yields would, however shift the goal posts. A rise in interest rates, which could follow a US debt default could trigger a sudden fall in PE ratios with share prices falling to offer better earnings yields.

The following chart shows the movement of unadjusted PE ratios. This shows the current PE to be about 19 (EY equivalent 5%) compared with the average of 15. Again the figure is high but it does not look outrageous. 

Sunday, 13 October 2013

All the world is made of faith, and trust, and pixie dust.

That quote from J.M. Barrie, author of Peter Pan, sums up the sentiment behind the current rally in the markets.

We are five days away from the US government running out of money, unless it is given the go ahead to borrow more. President Obama has rejected an offer of an Elastoplast (Band Aid) which would allow borrowing to continue for another couple of months. So a deal has to be made now for a long term solution. At of the time of writing no solution has emerged.

What does that mean. Lets assume that those Republicans, who are holding up the process, remain intransigent. The day will come, in the coming week, when the US Treasury is due to pay interest on its massive debt. If it has not got the cash, which it hopes to raise by issuing more bonds (best understood as  a further increase in its massive debt) it will fail to pay the interest it owes.

The US's creditors are investors and institutions around the world and they rely on the arrival of the money to pay their own debts. If interest is not paid it's as though the salary cheque does not arrive. And then a horrible spiral begins. Banks that do not have enough cash will be unable to fulfill their obligations. Bank failures will begin on an unimaginable scale. The same would be true right across the financial industry.

Will this happen? It is possible but the markets obviously think it unlikely That's why they are rising. They are probably right (as per yesterday's Churchill quote: The Americans are willing to do the right thing after exhausting all the other possibilities.) But in the mean time it really is faith, but mostly pixie dust. Remember that if the crisis is averted it is because the US Government will borrow even more. Will that money ever be repaid? Trusting that it will is where the pixie dust comes in.

Today's chart is the Vix index. Wikipedia defines it as " the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period." It is not particularly high at present. In November 2008 it was over four times as high. But what it does show is that sentiment is currently very volatile.

Friday, 11 October 2013

Not the big one

So we've been caught out by the market. The market broke support and then rose again on the second day. And what a bounce. Over 300 points!

It could be because I had judged the support line incorrectly. I have drawn a second line (in blue) to show an alternative interpretation which would have picked out the bounce off the bottom almost perfectly. It is still not as good as my original orange line because it did not signal the previous retracement which the market made beginning the end of August. What it does show is that watching the market and interpreting its moods is an art, not a science.

To understand what is happening it is best to imagine the realities which these chart movements represent. Reality is just one thing: the balance between buyers and sellers. What happened yesterday is that the sellers, who've had 14 days of ascendancy with just 3 days when the buyers got a look in, lost out. Big time. On Tuesday they really did rule the roost and pushed the price way down. Then Wednesday they had a fight on their hands but they only lost by a small margin.

And then yesterday the buyers were out with a vengeance, inspired by the hope that the US Government would make a deal with its opponents in congress and and therefore would not have to default on interest payments. Once the ball had started to roll it found no resistance. The sellers were exhausted and had little appetite to sell more. So the buyers had a clear run and were probably joined by erstwhile sellers, fearful of being left behind.

Towards the end of trading more good news poured in and the market consolidated the move higher. One of the news reports I read on the compromise being thrashed out between Obama and his opponents, at the last minute, quoted Churchill: The Americans are willing to do the right thing after exhausting all the other possibilities.

It looks as though the market recovery will follow through today.

This leaves me with the dilemma: do I jump on board too. I'll have no trouble picking the shares I would want. But I will struggle picking my moment. Jumping in too soon could already be too late. Leaving it till later could make me later still.

Wednesday, 9 October 2013

Something to write home about

Yesterday was the day when the DOW broke support and stayed down. Also the FTSE broke out of its channel. So now we need to be on the qui vive.

There was something else that I had missed. I am not a very organised person and I can't keep tabs on too many things at once. Although I follow the DOW and the S&P I tend to ignore the NASDAQ.

Have a look at this chart of the NASDAQ Composite. It has had a fabulous rum up with none of the hesitation that we have seen in he DOW. To be fair it's still a long way from its all time high. Anyway, key point is that yesterday saw it stumble significantly for the first time in a while. People are getting nervous.

The S&P also fell sharply and hit a support line (not the most fantastic of support lines) very close to the 78.6% retracement. So we could see a bounce. But read on.

The DOW made a clearer break out from support. It would be fully confirmed by a return to the resistance line and a bounce back down. The futures market is indicating a recovery this afternoon.

The other feature of the DOW is the possible development of a triple top. One of the strongest indicators of a market reversal. The pattern would be more convincing if he three tops were closer in height instead of being on a rising trend. Still it could turn into one hell of a signal.

I've pulled my remaining long positions in the US. The confirmation of a triple top would be a fall below the first low in the formation. If we see that I might risk a short.

So guys hold onto your hats, this could be the big one.

Tuesday, 8 October 2013

Silence is golden

When I listen to news broadcasts I am always impressed by the fact that an important part of a journalist's job requirement is a capacity for verbal diarrhea. It helps them through those many days when nothing has happened and yet they have to keep talking. The best journalists have a talent for  making nothing sound interesting and above all exciting. It takes a brilliant imagination and the ability to make their flights of fancy sound profound. No wonder that some have to resort to hacking into people's private conversations to provide them with material, while others move on to writing fiction. They've already had the practice.

I have tried but failed to wean my wife off watching the news. To my mind it is almost always the same. Tsunamis are few and far between, as are dust clouds from volcanoes.  The Berlin Wall has only been torn down once in my lifetime. And you only have to think back to the first election of Tony Blair to realise that nothing changes. Zoos change the enclosures they use but the animals are always the same.

One of the benefits of the internet is that it takes seconds to scan the headlines and to be sure that, yet again,  nothing has happened. Even when something has happened reporting is always the same. The same bunch of talking heads are asked the same old questions and their comments could easily have been taken from a couple of books entitled "100 Useful Responses to Journalist's Questions" and "10 Heartfelt Reactions to Tragic Events".

I don't know if you ever watched "Drop the Dead Donkey". Ever since seeing Damien Day's on the spot reports I have been unable to take any foreign corespondent seriously. Even the hallowed Kate Adie.

But I digress. My point is that I have little to say other than the market is moving as expected and although we are getting close to the moment when something interesting may happen it hasn't happened yet. Maybe today will be the day. But we just have to watch and wait.

Thursday, 3 October 2013

Boring, boring, boring.

On 22 May the FTSE came withing 70 points of its all time high. It then dived by 13%. Next it recovered 78.6% of its the fall (a Fibonacci number). It's been trading in a 4% range since mid-July. Very boring. No money to be made. Very easy to lose. Best policy: stay away.

There is a long term support line that started life in May 2012. If the range gets broken on the downside this will become the line to watch.

It's so dull sitting on your hands. Best not to give into temptation though. Wait for a clear signal of one sort or another and sit on cash, or shares you really believe in.