Archive through April 14, 2008

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rdumas

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Post Number: 1313
Registered: 11-2006

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Thursday, April 10, 2008 - 08:17 am:

Hi Ody,

Whilst Rudi (with an i) makes some very good points, two things that he doesn't mention is that:

1) if you express the US market in terms of A$'s they have in fact faired worse than the Australian market. You would have to look back a few weeks to where Resillent1 provided a chart to reflect the true state of the indexes.

2) Australia doesn't have a PPT (Plunge Protection Team) manipulating the market as is done in the US. The PPT was the name given to the President's Working Group on Financial Markets

The Working Group on Financial Markets (also, President's Working Group on Financial Markets or the Working Group) was created by Executive Order 12631,[1] signed on March 18, 1988 by United States President Ronald Reagan.

The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 ("Black Monday") to give recommendations for legislative and private sector solutions for "enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence".[1]

As established by Executive Order 12631, the Working Group consists of:

The Secretary of the Treasury, or his designee (as Chairman of the Working Group);
The Chairman of the Board of Governors of the Federal Reserve System, or his designee;
The Chairman of the Securities and Exchange Commission, or his designee; and
The Chairman of the Commodity Futures Trading Commission, or her designee.

If you ever wondered how the US market on many occasions tends to defy gravity then I would suggest that this group has a lot to do with it.

The article below whilst written in August 2007 it still is very relevant at this point in time.

http://www.marketoracle.co.uk/Article1771.html

Just one extract from the article is shown below:

===============================================================

Is the “Plunge Protection Team,” Myth or Reality?

Is the legendary PPT just a myth, conjured up by a bunch of conspiratorial nuts? Former president Clinton advisor, George Stephanopoulos told “Good Morning America” on Sept 17, 2001, “There are various efforts going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the market, what is called the “Plunge Protection Team.”

“The Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges have an informal agreement to come in and start to buy stock if there appears to be a problem. They acted more formally in 1998, during the Long term Capital Crisis, and propped up the currency markets. And, they have plans in place if the markets start to fall.”

On August 8th, 2007, President Bush hinted at government intervention in the US stock market. “Treasury secretary Paulson and his advisors are paying close attention, as the market begins to readjust its assessment of risks and are watchful for any downturn,” he said. “There is a lot of liquidity in our system and liquidity will provide the capacity for our system to adjust,” Bush added, alluding to the Fed's tolerance of double digit M3 money supply growth.
==============================================================

ody

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Post Number: 2318
Registered: 10-2006

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Votes: 0


Thursday, April 10, 2008 - 11:20 am:

RUDY: US AND AUSTRALIAN STOCK MARKETS

You are of course quite right to point out that if you take the currencies into account, then for an Australian investor investing in Wall Street there would have been a loss that there would not have been for the American investor. But I think that most often the way these matters are looked at - and certainly should be if investor sentiment in two different countries are considered - is how an investor actually living in either country would feel. Rudi (not you: Rudy), like many Australian investors, is concerned with a fall that to Australians is larger than one would, from our economic performance, expect. And if you were a cynical American living in the US the market performance there of late hasn't looked that bad at all. So, from a global perspective matters look as you say, but to an investor in each country investing from within each of them, DOMESTICALLY they do not.

It is probably indeed for one thing the plunge protection team, along with the naive ("can do") mentality of many US investors, that must be held responsible for the (in American terms) superior performance of their market.

Rudi should have mentioned that we have no such glorious team, so Australians are actually less exposed to this kind of "positive" manipulation. People here tend to see things more for what they actually are, particularly once they have been deprived of an optimistic fallacy: during much of 2007 the Aussie attitude to the credit crisis was "it can't happen here", and "China will see us through". Australians were far too complacent then, but as the reality of the crisis has struck home the nation's attitude has moved to one of strong concern - which is ultimately going to be far more helpful to this country than the US's phoney cheerfulness will be to it.

Apparently Britain is about 6 months behind the US in the unwinding of the credit crisis, and here in Australia the belief that all was well persisted for so long, and there was of course so much money moving around, that we have only recently come to see some of the negative developments that are daily events in the US and even the UK. We probably have quite a bit further to go yet. Admittedly, our banks, for example, are probably more inherently robust than those in the US. Still, I think that a major reason why the market here fell so strongly at so late a date was that we had "held off" for far too long, believing that Australia was a case apart.

It also IS, I think, a class apart in the matter of interest rates, as Rudi argues. Even now the RB does have a case about inflation, and it sounds premature when people claim that the next move (soon, they hope) will be down. Of course, for retailers it cannot come fast enough, but the RB will have wider issues to consider. Certainly it does seem as though there is SOME connection, at least, between the more optimistic attitude of Americans on the one hand, with their low interest rates, and us on the other, with higher interest rates, and - IN DOMESTIC TERMS - a poor share market performance vs. - AGAIN IN DOMESTIC TERMS - that of the US.

There must, in short, be some reasons why on the whole Australians seem if anything more despondent than Americans, and I would mention such factors as the plunge protection team (which you mention, and which has indeed played a crucial role in changing US sentiment); the fact that the credit crunch was after a very brief August fall in the share market simply not taken seriously by Australians until the end of 2007 (and even now many tend to underrate it); and, as Rudi argued, the fact that interest rates here are high, and not yet definitely stabilising, leave alone due to fall.

We do have the materials sector, and it will help, but outside that there are a great many strong negatives, and we are far from being "out of the woods". And underlying optimism about China there is nevertheless fear - surely to some extent justified - that it is not invulnerable, both to external shocks and internal ones. So attitudes towards the materials sector are somewhat ambiguous and uncertain, even if it is the standout sector.

ody

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Post Number: 2319
Registered: 10-2006

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Thursday, April 10, 2008 - 11:52 am:

rudI again - this time on commodities

And VERY interesting it is, too:
----------------------------------------------------
Question: would oil be at US$108.50 per barrel if it wasn't for the weaker US dollar?

Answer: one can never be too certain about these things, but I'd be inclined to think the answer is negative.

Similarly, the market entrance of investors and speculators ("financial market participants") into resources and energy sectors has had a sizeable impact as well. This is even more so with more and more financial products being developed that allow investors to diversify into base materials ("stuff") without having to choose between listed companies on the share market.

It is usually argued that playing the commodities theme via the share market is a less risky option as futures markets, and especially those for commodities, can be notoriously volatile. Witness, for instance, the movements in the gold market over the past month. However, not only is there now a whole plethora of new investment products available that are easier accessible than futures, now that producers are struggling with higher costs, a tight labour market and unfavourable currency movements, one has to question whether playing the commodities theme through the share market is not simply equal to taking on board a few extra layers of risk?

Investors will have noticed shares of listed companies do not always trade in synch with price developments of the underlying product. This was especially the case during the first three months of this year when global equity markets were going through a severe de-valuing phase, while prices for the likes of gold, copper and oil were recording new all time highs.

No matter how hard one believes in the concept of the Commodities Super Cycle, I am sure that at times investors find it easier to lose money than to actually benefit from it.

The share market aside, we can safely say that the direction of commodity prices is being determined by three key factors: supply and demand dynamics, investor activity and the US dollar. Get the first one correct, but one of the other two wrong and you can still end up miserably wrong. In addition to these three key elements most commodities will have at least a fourth important element in play. For oil that's the so-called geopolitical factor.

Geopolitics can also be important for the direction of gold, but at times selling by central bankers can play an even more important role (or as is presently the case: selling by the IMF). Sometimes, and this is especially the case for agricultural products, government policies need to be kept an eye on as well. The most obvious examples of this would be restrictions on genetically modified crops, or on imports and exports and the push to promote ethanol as an alternative to oil products.

The problem with having so many factors in play is how do you know what is more important and when? For example: many a resources skeptic will argue the sector's outperformance in the first quarter had more to do with speculators seeking alpha than anything else. Others have been arguing for months that commodity prices have been predominantly enjoying the automatic push from a sliding US dollar. But what's going to happen once the greenback finds its bottom? (The problem with this thesis thus far has been that the US dollar has simply continued falling even though it has been forecast to find a bottom at various stages throughout the past years. And as long as the Federal Reserve continues cutting interest rates, and others such as the ECB, the RBA and the Bank of China do not, this is likely to remain the trend).

Many silver market watchers believe increased supply will push the market into surplus this year. Yet, many others, including highly regarded industry consultant GFMS Ltd, argue that it is increased investor demand that will continue pushing silver to new highs (get the first one correct, but the second one wrong and you likely end up still miserably wrong). Similarly, spot uranium would have never reached as high as US$136/138/lb last year if it wasn't for excessively bullish investors who kept on buying product on the spot market, only to find out later there were no other buyers once they started looking to crystallise their paper profits.

Lee Jee-Hoon, research fellow at the Samsung Economic Research Institute in Korea, has tried to assess the importance of all of the above factors for commodities. He concentrated his analysis on the top four contributors of the IMF Commodity Price Index -crude oil, wheat, copper cathodes and iron ore- in an attempt to forecast future price movements. Here are the conclusions of his analysis:

Price movements of West Texan Intermediate (WTI) crude oil futures between January 2007 through February 2008 can be attributed in the order of 40.3% to what we all would describe as "speculative money"; geopolitical risk "only" represented 39.7% of the price movements, while the US dollar's weakness is believed to have contributed 4.5% with supply/demand taking up the remaining 1.8%. (Those with a quick mind, and a penchant for instant mathematics, will have observed that the teller has stopped at 86.3%. Unfortunately, it is not clear where the remaining 13.7% has gone. We have to assume that only the most important price contributors have been listed).

Even if those figures are not necessarily 100% correct (after all, what is?), if our Korean researcher has done a relatively good job, this should give investors a much clearer insight into what determines the direction of the oil price - it certainly is not the direction of the US dollar.

As far as his price prediction for calendar 2008 goes, Lee Jee-Hoon refers to the Asian standard, the Dubai crude, which he predicts will average 24% higher in price this year compared with 2007, with the price in the first half of the year expected to be higher than in the second half "as speculative buying, geopolitical risks and the [US] dollar's value are expected to calm down or even reverse".

As you would have expected, one cannot take the example of crude oil and extrapolate it to other commodities. For wheat, for example, Jee-Hoon's analysis has revealed that speculative money plays a role of 48.1% (which is much higher than in the case of crude oil), while government policy actions take up 16.8% in direct influence. The US dollar comes third with a direct price contribution of 15.6%. Supply/demand dynamics only account for 1.4%.

The forecast is for an average price increase of 33% this year for wheat.

Let's move on to copper cathodes. Surprisingly, perhaps, the main price factor for copper is... the US dollar, with Jee-Hoon ascribing as much as 54.8% of copper's price rise to the US dollar's weakness. This is, explains Jee-Hoon, because Chile is the largest producer of the metal and therefore everytime the US dollar weakens against the Chilean peso the price of copper has to go up to make up for the loss.

Supply/demand characteristics rank second (as opposed to crude oil and wheat) with a calculated contribution of 26.1%. Speculative money only comes third with a direct contribution of 7.2%. There is a little twist to the copper figures: labour strikes' importance receives a 0.0% - but that's because there were none, explains Jee-Hoon.

His forecast is for the price of copper to average US$8,340 per tonne this year, 12.5% more than in 2007. Similar to crude oil, he expects to see a higher price in the first half than in the second part. The main caveat he has built into this forecast is: in case of any labour strikes in the second half, the outlook could change materially.

Which brings us to iron ore. Amidst all the stories we hear, and read, about an extremely tight market for iron ore, not in the least because global demand for steel has continued to surprise to the upside, Jee-Hoon has come to the conclusion that 55.4% of the price of iron ore is being determined by US dollar weakness. Chinese demand only comes second with a direct contribution of 32.2%. Market dominance of producers is placed third with a relative price importance of 12.4%.

In his end conclusions, our Korean researcher acknowledges the above mentioned factors cannot be seen as being totally independent of each other; there is an interaction such as, for instance, that a change in the supply-demand balance will attract more speculators.

As far as the overall conclusion goes, this is what Jee-Hoon has to say:

"Overall, it appears speculative investing, [US] dollar depreciation and geopolitical risks have driven the strong surge in commodity prices since January 2007, not supply/demand dynamics. In particular, speculation money and the dollar's depreciation appeared to account for 56.5% of the recent price spikes on average.

"Since speculators account for more than 40% of the four commodities analyzed, the recent price spike can be seen as only a temporary phase. If demand eases from China and other emerging markets, speculative activity could also roll back. Consequently, market watchers could not dismiss the possibility of sudden and big drops in commodity markets."

rdumas

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Post Number: 1314
Registered: 11-2006

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Votes: 0


Thursday, April 10, 2008 - 12:26 pm:

Hi Ody,

That article on commodities and what parameters influences the pricing was a real eye opener and highlights the difficulties faced by investors when attempting to use fundamentals to gauge the likely direction of the prices.

What it tells me is that this is probably one case where the use of TA is a better option in determining when and what to buy.

resillent1

Member

Post Number: 417
Registered: 10-2006

Rating:
Votes: 1


Thursday, April 10, 2008 - 01:17 pm:

One star.

Ody, it was me that gave both you and Rudy one star that you strenuously objected to.

I normally post, but in wanting to limit my time input, I thought I would just rank a post that I didn’t rate highly, in the hope that the writer might review them for themselves. Obviously you took much more from the action than I intended.

To clarify why I gave 1 star.

Rudy’s post: Eugenio mention of entire portfolios, alluded to the importance of the “size of exposure” when it comes to measuring true out performance. Rudy didn’t address that point. He questioned Eugenio’s honesty, which I though was poor form. Refuting the logic of the strategy, is not the issue- The question is can it actually be accomplished over a long period of time. Anybody can fluke it a few times.

Ody’s post:

I only read this post because Rudy’s post referenced it. The dollar amounts don’t impress me and I wonder what they have got to do with anything. The return on total assets available for investment is what counts. Over a period from 1982 until now a few selected positive examples don’t count either.

I think Ody should provide some real evidence for his claims. The logic of market timing is sound if it can be done but just about all studies suggest that it hasn’t been done consistently over extended periods of time.

Ody I don’t know what capital you have injected for investments or when. But when 100K becomes 3.5 Million from a buy and hold strategy over the time period you are talking about, than I would expect you to be a billionaire if reality reflects your posts.

Given that I haven’t seen your name in the rich list I conclude that what you are saying doesn’t undermine all the other studies I have read.

Any rate I’m still not advocating buy and hold. But am still suggesting that exceptional claims should be properly substantiated.

Ody my last post seemed not to be understood but I reckon you will get what I’m digging at now and I reckon it will go down about as well as the 1 star rating.
That’s O.K, I guess it’s more me changing than you guys but I’m finding this thread really hard to read lately. I reckon it’s a lot of academic scribbling and self-delusion, something that I no longer wish to afford myself of.

http://pages.stern.nyu.edu/~adamodar/pdfiles/invphil/ch12.pdf

ody

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Post Number: 2320
Registered: 10-2006

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Votes: 0


Thursday, April 10, 2008 - 03:17 pm:

Resillent: time in the market etc

Resillent, I think you are expecting a great deal from me in supposedly having to produce my actual financial history when you yourself have explicitly refused to do so when making statements about your own wealth. So we really are in the same boat as far as that is concerned. There are some privacy issues involved.

But let me make just two points. You published the following figures:
-----------------------------------------------------------
100K invested at the end of 1982 would be worth approx 3.6 million at the end of 2008 (Dividends reinvested and ignoring tax and imputation) with a buy and hold strategy.

100K at the start of the 2003 bull market would be worth about 250K today.
-----------------------------------------------------------

For me even to be ABLE to give you a comparable figure as from the beginning of 1983 one would have to assume that I had a particular amount which I set aside for investment in the share market at that point and which I have kept and used just for that purpose. The fact is that that is not how my life has run. In one way or another - disregarding super over which I had no control - I have had money in the market most of the time from 1983, but not consistently the same "pot". For example, when we exited in 1987 we used quite a bit of the money we had gained for completely different purposes, as we had made a good gain and were quite happy to employ some of the money elsewhere. So, without being in any sense evasive, I just cannot compare what I have done with what I or ANYONE might have achieved if all the money had been kept either in the market when in it or in deposits when out of it. And it would be impossible for me to retrace the various permutations.

I don't know what leads you to think I could EVER have been a billionnaire: we were relative paupers in 1983, and did not have (nor have ever had) anything like the money we would have needed, according to your own calculations, to be billionnaires by now - supposing even that we had aimed for that status! We were just plain professional people, not on high salaries, and with little spare time on our hands.

What I am prepared to say quite categorically is that, on a percentage basis, I have indeed easily outperformed the market - in part by timing - if I look at your second set of figures, viz. '100K at the start of the 2003 bull market would be worth about 250K today'. I would go further, and say that I would feel that I had wasted my time if I had NOT done better than that. I would have had brains enough to go for a buy-and-hold strategy if that would have got me, without doing any extra work, the same results as in fact I HAVE achieved. I point out, also, that for this period I CAN say that I have used one and the same "pot" to generate that higher return consistently, and that at this moment I am still comfortably ahead of where I would have been if I had used a buy-and-hold approach, going by your figures.

I can also say that from 1983-7 I outperformed in the terms we are discussing, and of course also for some period after would have done so if I had kept the money I had on deposit, since during the next few years those who stayed in the market were losing money, whereas someone who kept the money in the bank did not.

As a matter of interest, when "Crocodile Dundee" could be invested in, my wife and I did so, and our final gain was nearly ten times the amount we had originally invested. So that investment, at least, was better than being in the bank OR the share market. In the area of collectibles, too, we have all in all made VASTLY more money than we have lost, when selling. Many of them we do not sell but keep longer-term, and in general their value would have greatly grown. I stress, therefore, that certainly I do not see the share market as the only place to make money, as an investor, and that there are real alternatives to staying in that dangerous place at all times.

As for exiting the share market, I have never had a problem in knowing what was a good time to go out, and as for entering, it would be true to say that I do not do that at the earliest possible point, but while I am in the market I certainly make more than the index. All in all, I have no doubt whatever that on a comparative basis I make more than those who just follow the index all the way through. Again: the point is simple. It is a matter of avoiding losses when the market as a whole is likely to inflict them on one, and of making gains when the market offers a good opportunity for doing so. I can see no merit whatever in staying in the market when that plays havoc with one's money, and every point in being present when there is a more than even chance that one would make money simply by following the index, but can easily make more than that by adopting some relatively simple procedures for increasing one's total gain versus one's total loss.

I don't think I can explain matters better than this.

ody

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Post Number: 2321
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Thursday, April 10, 2008 - 04:52 pm:

STUDIES "PROVING" A PARTICULAR STYLE OF INVESTMENT WRONG OR OTHERWISE

Resillent, if there is one thing in your post which I really do rather object to it is the thought that studies supposedly prove that such results as I have reported (if you interpret them correctly, for I am not a billionaire!) are impossible or unsustainable.

I know what I have done since 1983, and - to take another phrase from your post - I am certainly not guilty of "self-delusion". You should not use such phrases about other people if in fact you don't know what you are writing about. I might, in your eyes, understate or overstate my wealth or my ability to invest successfully, but - unless you have some evidence or reason to doubt what I tell you - you'd be much wiser not to judge.

Anyway, of course I am well aware of the kind of study you refer to. They purport to show that a vast number of investors, and particularly when "they go it alone", make horrible mistakes in trying to time the market when they do: they sell at a low point when the market is just about to move up, and buy when prices are too high. I am not going to say that those findings are wrong generally, though interestingly I have never been among those questioned, which I find intriguing, since by the standards of most people I am (though not a billionaire) a "big" investor when in the market, and in terms of money I have available for investment.

Personally I find these studies worthless inasmuch as their purpose usually is to persuade you (this shows how important the issue is to the financial industry) that you either (a) should be in the market at all times, or (b) should leave it to "professionals" to decide when might be the best time to buy or sell. The implication is that the market just cannot be timed (unless, perhaps, a "professional" does it for you).

Hogwash, say I! The fact that other people - apparently in large numbers - cannot time the market with any success does not in any sense prove that SOME OF US cannot do it, or should rely on some supposed "expert" to do it for us.

In referring to those studies, I feel that you mistakenly assume that, from them, it can be safely concluded that because many people apparently cannot successfully do what I do, there MUST be something wrong about what I am doing: that either (a) I fail to provide all the evidence you need to be convinced (and am evading the truth that way), or that (b) I am deluding myself.

Rest assured, I write with total honesty, and neither am I deluding myself. This is where a post like your own really does not touch me, except that I feel I should explain to others that THAT particular element of your post is really quite mistaken.

As has been said many times by people like Rudy, mrlunch and others as well as myself here on this thread: there are several different ways that one can succeed in the market, and some ways suit some people, while others suit others. The "mature" investor is s/he who does know which style does get her or him the results required, according to what is being aimed for and possible.

I thought that this last point was something you also believed in, and to that extent am surprised to see that you now seem to imply something else.

ody

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Post Number: 2322
Registered: 10-2006

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Thursday, April 10, 2008 - 06:35 pm:

CHINESE TRADE SURPLUS DOWN

Important news, really, if you haven't yet seen it:

http://www.businessday.com.au/chinas-trade-surplus-shrinks-first-time-in-3-years /20080410-254g.html

ody

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Post Number: 2323
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Thursday, April 10, 2008 - 06:41 pm:

MACARTHUR COAL DOWN ...

That's just the sort of thing that makes me a coward. It may be remembered that I wrote about this very stock only recently, expressing hesitation as a result of feeling I knew too little. Yet it has been a great market favourite, and with high coal prices you'd think this would be one to aim for.

http://www.businessday.com.au/macarthur-coal-burnt-by-rating-cut/20080410-25ak.h tml

sway

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Post Number: 202
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Thursday, April 10, 2008 - 08:09 pm:

Ody

Nice one. You ARE joking this time, surely?

mcc1

Please give your bearish bias a rest will you. Look at the reality, not rubbish journalist fodder.

Sway

PS> I don't hold (unfortunately)

resillent1

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Post Number: 418
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Thursday, April 10, 2008 - 08:36 pm:

Ody

The scale of returns from 82 until today for a buy & hold plus the results of numerous studies is what leads me to doubt your claim of out performance. I’m sorry that my doubt offends you, but as some would say, I’m a cynic.

Now I never asked you to reveal any personal details, but return on available investment capital compared to a buy and hold strategy doesn’t seem too much to ask to verify an exceptional claim.

Could you imagine a business not knowing their return on capital?

You impute that I do not provide what I ask of you but I have on more than one occasion provided my actual equity curve for total capital http://forum.incrediblecharts.