THE JANISSARY'S SWORD: A METHOD TO THE STOCK TRADER

If there is a myriad of strategies that can be used for trading in the stock markets, there's only one good trading strategy...

It does not consist of trying to run after the small details of the galaxy of financial securities and/or markets for such a broad approach requires a lot of time and consequently carries with it frustration as well as unforeseen losses. What is required instead is specialization, especially if one does not trade full time. Expertise in a defined field is not required; the trader has to be excellent at something instead of smattering in everything regarding the financial market. This could be a certain industry or sector; but it could also be a specific or defined strategy...

In Turkey, many successful investors (or amateur traders) have followed the strategy of following one stock and made fortunes. This strategy is also used by the traders in major investment banks across the world and they are expert in a specific field such as currencies, stock, bonds or repurchase agreements without excluding futures, options and commodities.

But this approach borrows a lot from the trend following approach. The strategy requires holding a stock for a few weeks or months and being sufficiently expert enough in that particular stock in order to set a take profit level which indicates when to sell, i.e. when a major change in the trend occurs in the market. Essentially one buys until the trend reverses and then one switches the process.

When I traded in the ISE (Istanbul Stock Exchange), I was jumping on every stock but generally my position went to nowhere other then meeting barely the inflation rate. It wasn't until I specialized in a half a dozen large stocks that I started to make substantial amount of money. I was betting on the seasonal effects and using technical analysis to adjust my timing. I did not accumulate additional positions in any given stock but tried to buy it at a reasonable level, a level that was sure enough to avoid heading south.

It takes time to develop an expertise but once it is developed, one has an edge over the herd. The important thing is to set a take profit level where the position will be closed and to stick to it. Once the take profit level is reached, the position is closed.

When you concentrate on a defined industry, it allows you to control the market just once a day in order to check the prices. If there is no signal that triggers a buy or sell order, you control it the next day and so on. Focusing only in a certain industry permits you to avoid major decision mistakes and grow your capital rapidly. But the prerequisite for the success of this strategy is to  have a capital that you can afford to lose; it has it's financial as well as it's psychological reasons: if the money will be needed for something else, the trader will be afraid and thus will be unable to make the right decision.

MONEY AND DEBT: THE CORNERING OF THE EMERGING COUNTRIES

If we were to look to this previous week in general, we would see that the emerging countries’ currencies have gained in value, the interest rates dropped and the stock markets rebounded. If the financial markets had been able to price everything, they could have said that the worse things are in the past now. But let’s leave these things aside and have a look on what’s going on in the World. If we were to look into the countries with whom there’s cooperation, we can see that uncertainty and fragility are on the rise thus the situation is getting worse. Either what is seen regarding the exterior is wrong or the emerging markets’ financial places are pricing some kind of a dream. Things don’t hold together; they do not confirm each other. As everybody says, the deflationary pressures in Europe are mounting.

What does deflation mean? The general price stability refers to the icon that everything goes well. It also means that trends are sustainable, there’s no serious problem or any kind of fragility thus there’s a price stability. But there are two types of major deviations in the price stability. First, there is the rise in the prices which we call inflation; once this begins, it creates serious problems and must be dealt with before getting worse. The other deviation that destabilizes the price is the situation where prices start to fall instead of rising. The environment where the prices start to fall can be said to be deflationary. So what happens in a deflationary environment? The demands weakens, the economy stagnates and moves towards a crisis, unemployment increases, the volume of non-performing loans climbs geometrically, thus the economy enters into an unsolvable crisis. You cannot solve the deflation through the fine tuning of the monetary policy by manipulating the markets. The situation of the emerging markets is as follows: deflation is a serious danger which requires a surgery and by taking a pain killer, you are deceiving yourself. We are taking this pain killer, the dose is getting a bit larger and thus we dive into a world of fantasy and we hope that we can keep our people calm. In the emerging countries, you can keep your people calm but you cannot calm down the foreign investors who came here. You can provide them with the opportunity to get out of the markets without loss or even with a profit but you will hurt your people and this will come to the surface with time.

Favourable indicators help the foreign investor to get out of the markets. Why are the markets so optimistic in their pricing? If they were to price the reality, the balance sheets would deteriorate, the exit would accelerate and thus they would lose the control. In order to delay this, they find the solution in clutching at straws, in the intake of drugs. But this will not provide the desired result. On the contrary, it will cause the unfavourable situation to endure more in the medium term, thus increasing the damage. During the 2008 global crisis, everyone was watching the USA. The investment banking was about to end. First, everybody talked about Bear Stearns, then Merill Lynch and Lehman Brothers; Lehman Brothers went down and Merill Lynch was rescued while the panic increased. Why? They had inflated severely the asset values. The role of the optimistic pricing of the market was important and following the crisis, everyone curses the capital markets as well as the investment bankers; they said “They are the ones who created this problem”. And now, the emerging markets’ finance people are doing the same thing. People should should not trust them; this optimistic pricing gives to the person who is carrying the risk the following message: “calm down, hold on onto what you have”. And to the one who has some money, they say “do you want to earn some money? Come!” Thus they encourage them to take risks. Its equivalent to the encouraging prostitution. The system currently looks for people that it can push in order to save itself.

IMF report does not expect a significant recovery in the world. The financial markets of the emerging countries read it but are not able to price it. If they were to price it, the following would happen. First; you are a country that has a saving gap. First of all, the interest rates have to increase and one has to accept the rise in the exchange rate too. Asset values, securities and real estate will decline because the credit volume will be rapidly shrinking; then it will become apparent that things don’t look like they should seem to be, everyone will flee from risk and suddenly the system will begin to collapse. They cannot find any other option than to cling to a lie in order to delay it. Does this lie find any support from abroad? Some parties seem to have some projects with the south-east of Turkey and are trying to delay the collapse until they reach their goal. In other words, not only the future of Turkey is put under a lien, but also a political support is provided to the losses related to the country’s territorial integrity.

The ECB is in a desperate situation. The central banks do not have the problem-solving ability; they just buy some time to the politicians. They provide painkillers; other than that, they do not have any other feature. They act like anesthesiologists. Currently, everybody hopes that the central banks will undertake quantitative easing in order that the pain will not be felt and people will go on sedated as usual. Even in the IMF’s report, it is mentioned how vital is the quantitative easing that Europe and Japan are going to make. There is a need for more painkillers because the pain is increasing. Draghi wants to provide plenty of money but there is the brake of Germany. The repo auction has received 81 billion of demands, roughly a quarter of what was expected; the purchases of bonds, especially covered bonds are not good at all with being 1.7 billion in the first week. Draghi is forcing to give the message of “we will provide you with money, stay calm, do not give up hope” but the problem is the following. Europe’s expertise area is the industrial production. They failed to create a new area of expertise. Europe is ageing and its load has increased a lot. Its service sector reached very abnormal levels; it moved to the post-industrial society but basically it has lost its competitiveness on the elements. The central banks’ policies will not bring a solution to the loss of competitiveness. The coming of the favourable days in the European market is not expected any time soon. But some parties are trying to take some advantage of Europe’s helplessness by saying “I will take advantage of this, I’ll take some painkillers and try to appease my people”. It is due to this that there are abnormal prices in the market.

As far as the USA is concerned; the chairman of the Fed had a statement. It will soon undertake non-conventional policies because the conventional policies do not work any more. We're talking about the traditional fiscal and monetary policies. This situation makes it difficult to see the results of the US moves. First; it has direct consequences in the USA. Second; it also has consequences in the world.  The results upon the world have a boomerang effect upon the USA. One is confused about the second impact for they do not know and the uncertainty is very high. When looking at the Fed officials, some of them say that the interest rates shouldn't be raised until the end of 2015, others say until 2018. It is obvious that the Fed is trying to look cute to the markets; it may be lobbying or it has something else in mind. The markets do not want to hear about the rise on the interest rates. Because they have inflated so much the asset values (and the biggest problem lays in the bonds), if the interest rates were to start to rise, the system currently in place in the world will collapse. Thus they are very uncomfortable with the interpretation of the rise of interest in this regard. US will no longer be making monetary expansion and the dollar will continue strengthening. The world needs something that will counter-balance this. There are attempts trying to handle this by softening the negative situation through the drop in the oil prices and quantitative easing which will be undertaken by the central banks of Europe and Japan. This is done continuously by broadcasting, there is continuous brainwashing activities. Are these things enough? No, they are not. You only temporarily relieve the pain with drugs, but you will fail to stop the worsening of the problems.

Emerging countries are countries that are overly dependent on outside sources. Monetary expansion in the USA is over. The monetary expansions of Europe and Japan are of no use for the emerging countries for the time being; how will the emerging countries finance their current account deficit? The ratio of short-term debt to the total debt is on the rise. The increase of the interest rates, the risk aversion and the contraction of capital flows is a nightmare for the emerging countries. One doesn't know how the need for external financing will be met and is never spoken; in order to avoid that this comes to the people’s mind and the markets price it, the statements related to the monetary expansion of Europe and Japan  are exaggerated. The financial markets of the emerging countries are trying to give the impression of “we are not afraid” but in reality, they are afraid to death. They don’t know what will happen two months later. In all the emerging economies, with China being a probable exception, there is a big fear. Some things are changing and they will not be the same as it was during the last 10 years. Money will not rain from the sky miraculously when they will get into trouble.  They know this but they don’t know what to do in order to avoid people’s panic. They just say whatever comes to their mind, the exaggerate everything that is optimistic and they ignore all the negative things. This also prevents the efficient use of scarce resources, activates bad pricing and worsens the problems.

The current state of the affairs aggravates the structural problems. IMF states that they should keep their promise regarding these structural problems. What do you want as IMF? Do you want to prevent the aggravation of the structural problems or are you giving free passage to the process that causes the aggravation of the structural problems? Which one do you want? In fact, they want to see people being sedated.

External dependence is growing and the emerging countries are in the debt spiral. First; they said that emerging countries’ economies have serious structural problems. Second; what will happen to the banks if sources do not come from abroad? Would the banks’ situation worsen? Would the cash flow in the economy get damaged? In the future, if credits do not come from abroad to the banks, there will be serious issues due to the structural problems. Why? Because they have become too dependent to outside. They say that there’s no problem; it’s a big lie! The emerging countries want to grow at the rates of minimum 5% or 7% in order to avoid the increase in unemployment. When they try to grow, the current account deficit grows dramatically. This means that the emerging countries’ growth is very problematic.  Then what needs to be done? The emerging countries need to grow but while doing it, they must not have a current account deficit. In order to achieve such a goal, one needs to undertake major structural changes. Major reforms have to be undertaken in all areas but do the global conditions allow this? No.

If there was a problem in only one emerging country, the domestic demand would be reduced through price adjustments, the competitiveness of the exports would be increased, the structural changes that would make this possible could be undertaken if the global conditions were normal. However, if we have the same problem in all emerging countries and they all try to apply the same recipe, none have a chance of success. Because they have to narrow the domestic market and return to the exports and all will be doing the same. The stated structural reforms will not work in the present circumstances and shall ensure the sedation of the masses. And when the structural reforms are undertaken, the bill will be paid by the masses. When the purchasing power of the large segment of the population decrease and its debt is growing, the domestic market is being slaughtered. And without the domestic market, one cannot do anything in the foreign markets.

Then where does come the definition and the proposal of these structural reforms? The definition of the structural reforms has been spoken in the latest IMF summit. One needs to give some confidence in order to have the foreign capital coming into the emerging country. And in order to provide such a confidence, every requested thing is done. And the bill regarding the demands of the foreign capital is put before the masses. Meanwhile there is a conflict of interest that is growing and one cannot correct the economic structure by deteriorating the public’s situation. The places will turn into a quagmire, the pool in its bottom will grow and will never get filled; no one will invest in such a place nor live in it…

Since 1980, there is a need for a new world order. What did the USA want? She wanted to be the sole superpower and to define this new world order according to her interests. After the Russian crisis of 1998, the situation changed. There is no consensus about the new world order because the USA is no longer the only superpower. The world is becoming multipolar and it is not possible for everyone to protect its own interest. Some of them will be sacrificed; Russia and China are not coming to terms. China has become a great centre of attraction and this has become apparent in the APEC summit. USA is not a country that can content itself with remains and the tension is escalating. Even if they come into terms among themselves, the bill will be put before the emerging countries. Emerging countries do not have friends, they have to take their power from their own people but instead they are putting the bill before their people while money comes from abroad.

To save the day by finding debt from abroad is a recipe for running to a disaster. One has to avoid this incorrect understanding. First, one has to prevent the growth of the lien placed upon the future of the people. If this situation requires a serious economic recession, it also needs to be prepared for digest. But if one does not give up the gains, it will mean doing what the foreigners want and the problems will be exacerbated. This is what the governments, bankers and the markets say. The people of these emerging countries pay the taxes and the government should not jeopardize their future. But if the control is given to the foreign capital, everything will go in reverse…

GOLD: THE OUTLOOK FOR THE MINING COMPANIES.

GOLD: 

THE OUTLOOK FOR THE MINING COMPANIES.

The gold had dropped significantly to its four-year low on 05112014; it caused a fear among the producers for they have lost their room for action due to the long but painful drop in precious metal prices. The latest drop in gold has augmented the fears that it could drop further to 1.000 USD, a price which is below the break-even point of many gold producers around the world.

This severe drop in gold prices came as the major gold mining companies had started to report grim results for the third quarter, presaging worse results for the last quarter. These results came despite the efforts from the same companies to reduce their costs.

The investors who lost money in this process are facing a tougher picture: the gold price may drop to 1.000 USD. And this probability scared the investors and consequently, they sold the whole industry.

When the gold dropped significantly, the major producers undertook to reduce their costs, augment their production efficiency and put into shape their financial statements. But as the gold prices are in a severe downtrend, the investor has the fear that there isn't much room left for additional cost cutting without reducing the production itself.

The severe drops seen in the share prices of major gold producers is a sign that the investor is leaving the gold and acquiring interest-bearing assets, despite the fact that some of these companies had posted good results that had beaten analysts' expectations.

The main cost cutting program for the major gold producers can be summed up as: reducing expenses, recording write-downs, stopping the work in some projects and selling some of their deposits. Such moves should bring the cost of producing 1 ounce of gold to less than 1.000 USD; even some of these major companies could force 900 USD.

Once the price reaches the bottom (if it ever happens), a limited rebound should take place where the gold price would reach 1.150-1.200 figure after which the price should stabilize for while in a narrow band of 1.250 - 1.400 USD; the gold mining stocks should follow suite. In the short run, the EUR/USD which trades at around 1.2500 may drift lower to below the 1.2000 figure thus forcing the gold to drop further towards 1.000 USD due to the inverse relationship between the two. But this should not last long and we should see a rebound towards 1.3000 or more which should have a positive impact upon the price of the gold.

When gold is rising, mining companies deliver to investors superior operating  leverage for their profits rise quickly. When they add an extra leverage such as debt, the mining stocks offer very good returns when the gold rises.  But when gold trades between 1.100 - 1.200 USD, the mining companies stop growth spending, continue cost reductions and dividends cuts. Once the gold drops below 1.100 USD per ounce, the equity value starts to diminish significantly.

When the gold mining company carries a lot of debt, it makes it less appealing if gold prices are stagnant or falling. But gold mining companies that have a better debt profile are generating more demand. And the lower the debt level, the better it is in terms of low cost production. Thus such a company is best positioned to withstand a gold price downturn.

Currently, the average cost of producing 1 ounce of gold is about 1.150 USD and the producers made plans in which they forecast 1.300 USD. Most of the producers have a production cost that is around or slightly above this figure and a prolonged lower figures in the gold price will force many gold producers to leave the industry (the bloodbath) and subsequently form the basis of a rise in the gold price due to the imbalance between supply and demand and of course, trigger another bull market for the gold mining stocks. But this will take some time and is tightly linked to the course of the USD in the future as well as the level of the interest rates and inflation. The demand for gold should be stable for some time but a pick-up is likely as early as 2016. In a strong rally occurring in such an environment, one may see the gold price hitting the 2.000 USD figure...