A few lines of code wrong in your database engine and you get really whacky results such as this:
I lost count after counting quadrillions. This is probably the entire float of Canadian dollars traded a trillion times in a single day!
When you have no time to research in the market, forcing trades is a great way of gambling. You might get lucky, but you probably won’t.
The last two weeks has been the most positive in the markets in quite some time. This came to a halt on Friday when the market reacted heavily on some US data concerning jobs and employment, but the new economic paradigm is that human labour is expensive and businesses that attempt to automate all processes to avoid the human element will do better than those that are labour intensive. There are a lot of industries with labour costs that can not be automated (e.g. full service restaurants) and they will continue to become more and more expensive as government continues to raise the cost of labour.
Arctic Glacier (TSX: AG.UN) gave their unitholders the mother of all dilutions when they announced that they will be allowing their convertible debentures to mature into units. While this will allow the company to avoid creditor protection, their market capitalization is currently $12.7 million on a 32.5 cent unit price, versus the $90.6 million of debentures that are to be redeemed. Doing some simple mathematics says that unitholders will be holding 11.7% of the original company. Ouch!
Keep solvent, readers! The broad markets continue to be choppy.
The sentiment out there is feeling very negative – it appears that the momentum in the marketplace has completely stalled out – in fact, it can easily be described as negative.
There will probably be some sort of technical micro-rally in the next few days that will take the S&P 500 up a few percentage points, but my guess at the moment is that the next leg to drop are going to be commodities – even more so than present.
I am struggling to think of any “safe havens” for cash, and only core utilities (power, natural gas) come to mind – but these assets have been bidded up.
It may be that the only safe haven is cash.
Whenever I do equity research, I perform a stock screen for certain metrics, and then I give a superficial scan of the stocks that get spat out of the screener. It takes about a couple minutes per equity for me to determine whether it is worth my time to look further into the company or not – typically I throw out 90-95% of the companies in this process. For the remainder, I queue them up to look more thoroughly using a fairly standard methodology (a basic guide), and then if I continue to like what I see, I do some more depth on the industry in question and competitors, and other research.
Most of the time, when I do this extensive research, the equity is over my accumulation price target. More times than not you can rationalize why the market is giving the company the value it is currently trading at, so I end up setting a price alert if the stock goes under a certain price. An email gets sent to my inbox when this occurs. I then “set it and forget it”, and usually do not keep the stocks on my watch list until the price target is hit.
Once the stock hits the threshold price, I then re-evaluate the position to see if anything has fundamentally changed in my original analysis to justify the drop. The point of this process is to make sure that the news the market is pricing in is not fundamentally damaging to the business. Once this is done, then I can set some buy limit orders and then accumulate.
The whole point of this post is that there are typically dry spells when nothing reaches the price target. Then there are times where everything you set a limit for has the price target alert hit your inbox. Today was notable in that a couple stocks are now below my alert price – perhaps an omen?
I have deployed a good chunk of the idle cash balances (presently earning 2%) into slightly higher-yielding debentures which should mature within a 1-year time frame with little risk – the underlying companies have cash and/or liquidity to pay off the debt without too much difficulty and could withstand a 2008-style financial crisis. The transaction can also presumably be reversed without too much difficulty in case if I need to deploy the capital into a more efficient area.
Researching the public markets is like trying to find those proverbial needles in the haystack – each hour you pour into the haystack increases your chances of finding needles, but in no way are you ever guaranteed to finding them. Also, the way you sort through the hay might be more or less efficient than other haystack sorters, but your own output is proportional to the amount of time you put into the effort.
The markets also give you some hints on how many needles are in the haystack – right now everything appears to be “stable” and there are no world crises occurring of any significance, hence, the broader markets are likely to be closer to efficient pricing than when things were really rocking a couple years ago. I would suspect the number of needles (at least the ones made out of platinum) to be found are few. There are likely to be more silver needles and a lot of lead!
I have not had a lot of time over the past few weeks to efficiently sort through hay, hence, I have been a bit inactive and parking my portfolio into a very risk-averse position. The easiest way to lose capital is to force trades through without some sort of justification why you are getting sale prices on what you are buying. Companies like Hewlett Packard (NYSE: HPQ) appear to be on sale, but I typically shy away from companies with such huge capitalizations. That said, if you told me to pick HPQ or the 10-year treasury note yielding 3.05%, I’d take the equity of HPQ.
On the right-hand side of my bookmarks, I posted a 5-year performance of about 22% compounded annually. This is a high number, and as the years tack on, this will likely become lower. 2011 is going to likely be a low single digit percentage year.
The mean value theorem in mathematics can explain why such a level of return is not likely to continue. Let’s pretend that every company I put my money in will have a 15% earnings yield (either retained or given out in dividends; it does not matter). In the long run, my portfolio will be able to increase 15% a year. However, in order to achieve a 22% return, I must invest in something that has a greater than 22% return.
If I cannot find those investment candidates, then in order to achieve 22% on a 15% investment base, I need to borrow money at a rate less than 15% and put it into that 15% investment.
The risk of this is that my capital might “blow up” and I will be forced to liquidate my assets at precisely the wrong moment. Another way of thinking about this is that I want to be investing at precisely the moment that everybody else is forced to liquidate, rather than an arbitrary point in time such as now.
Unfortunately at present I am having grave difficulty identifying candidates that will give these types of returns. I also do not feel comfortable with employing leverage, so I will continue to twiddle my thumbs and wait for a better opportunity. I also do not think ploughing into commodities is any sort of “fix” to this problem – there are much better lower-variation equities out there that will give you a more stable return on investment and also be able to provide inflation-adjusted returns over the long run. Even though it is abundantly clear that commodities such as inexpensive-to-mine oil is rapidly depleting, it is still no reason why the price of such commodities at some point will not go to marginal cost of extraction, or even lower (e.g. natural gas). Commodity markets are cyclical and investors should never assume that the trend will be continuously straight-line up. There will be brutal price corrections in the interim – they are just very difficult to predict.
Curiously, the VIX, after spiking in the aftermath of the Japanese earthquake, and the onset of the military action in Libya, went to a peak of about 30, has slid back down to about 20:
Most people make the mistake of thinking that the VIX is predictive – it is not. It does anti-correlate with the S&P 500, however.
The real question that investors should be asking themselves is that was this just a single ripple in the market pond, or is this a good time to be loading up on index put options while the volatility is still cheap?
Notably, the April VIX futures closed at 21.50 today; going further out, July closed at 23.10. These products are not easy to trade profitably unless if you have a sharp computer model working in your favour.
My very quick judgment is that “buy Japan” has been contrarian mantra issued to so many people that it now is conventional wisdom.
There is always opportunity to invest in companies that are in the middle of massive public scandals (e.g. BP), but whether such opportunities become a good value is whether people massively misjudge expectations.
In the case of BP, it was a political execution that translated into a disproportionate hit on the share price. In the case of “Japan”, it is very difficult to make the same judgment.
Hence, I’m keeping my eyeballs elsewhere.
When I have tolerance for it, I browse the Canadian Money Forum. There are a staple of regulars there, some that know what they are talking about, and some that sound like they know what they are talking about, but don’t. Then there are the batch of people that don’t know what they are talking about. It is a surprisingly good indicator of retail sentiment, especially in the younger age category (who presumably don’t have access to millions of dollars of capital and can’t move markets, but would generally be indicative of the mentality of higher risk-taking individuals).
A large misconception I see concerns dividends. I will state the misconception:
Misconception: Dividends add value.
They do not. Dividends represent a direct transfer of cash from the company to the shareholder.
Sometimes dividends subtract value, when the consequences of taxation are considered. In Canada, the eligible dividend tax credit mostly eliminates the penalty of double-taxation for non-registered accounts. In the USA, qualified dividends receive preferential tax treatment, at least until December 31, 2012 with existing legislation.
A mistake that retail investors make is that a higher dividend yield means the company should be more valuable.
I noticed with amusement (courtesy of MaoXian‘s links) of some commodity trading company advertising the fact that they have cots in their offices, just in case if the market has a meltdown while sleeping – presumably they will be there to liquidate their risk.
Just in case if the link becomes broken, I will post the images:
I note with curiousity that this person’s desk has five screens, plus one screen on a notebook, plus huge billboards with coloured text display. There is enough room on the wall for a static painting depicting a trading pit. Other images of desks of “stereotypical traders”, especially those working at home, seem to concentrate on having as many flat panel displays as possible, presumably to alleviate themselves from having to get enough sunshine for the day because they can glow with the light from their screens.
I don’t know how such a setup actually improves decision-making ability. Throughout my life, I have made most of my investing decisions sitting in front of my “trusty laptop”, which has evolved from a 15.4″ screen to a 17″ screen. Most of the trades I create are done in the late evening, and I most often get up later than the 6:30am Pacific Time market opening to see what happened. My style is significantly different than trader-types: I don’t really care about the intraday charts of stocks other than just as a curiousity. I also do not sleep with my computer.
Obviously it would be stupid to be a chart-trader working off of a 10″ netbook, but there has to be a point of diminishing return before there is just simply too much screen real estate in front of you and your actual decision-making ability becomes blurred with all the junk that is presented in front of you.
There is a quote on the commodity trader’s website:
Last Friday when corn made a limit move before the sun had come up and most brokers had brewed their first pot of coffee, an entire world of million-dollar opportunities came and went. For this very reason, we’re seeing a dynamic shift in the names and faces that are most successfully monetizing these markets. And it’s tremendously gratifying to see hard workers rewarded for their efforts across a more level than ever playing field.
Making the most money you possibly can from these markets, indeed, requires a whole new level of dedication. And given the great many friends and acquaintances I’ve made after-hours on Twitter, I realize that a lot of traders are quickly discovering this reality. And they’re cashing in on it every day. Along the way, they’re lending credence to the famous quote from Elbert Hubbard: “Folks who never do any more than they get paid for, never get paid for any more than they do.”
This might be true, but do you really want your portfolio manager to wake up to an alarm generated by the computer and then having to make a snap trading decision while you’re still shaking off the cobwebs from REM sleep? For some it might work, but for me, I prefer less dramatic techniques to extract money out of the marketplace.