Any equity trader could improve its portfolio's growth by considering two decks of cards which have in total only 108 cards. The normal procedure will be to consider 52 cards to represent all the investments done in one single company at a time during the lifetime of the portfolio. For example, if the trader opened a position for a single company by betting the ranch, he will put away one card from the deck of cards. And he will repeat this process for the remaining investments. The red ones will represent the investments which resulted in a loss while the black ones will represent the investments which resulted in a gain.
Once the deck of cards is out cards, the equity trader can not make any more investments at all. Under those rules, he will be forced to think carefully about what he is going to do and thus, in the long run, he will do much better.
One will ask himself why such an approach? Quite often, the traders overemphasize the concept of portfolio diversification while their initial capital is low. Then, they have a tendency to think of placing their limited capital here and there, and then wait for the results while hoping for the best. Instead, they should concentrate upon one company at a time and set to themselves a take-profit level; once reached, they will transfer the grown capital into another company and this will continue until a satisfactory level is reached. Thus, with the use of a deck of cards, this will simplify the matters and put some discipline into the affairs.
This approach is very simple and is very efficient in changing the life of the trader. It will help him quite a lot in beating the market by a wide margin over a long period of time.
Sunday, 1 June 2014
Tuesday, 27 May 2014
THE EQUITY TRADER: FIGHTING THE BATTLES AND NOT THE WAR.
When I operate in the stock market, I prefer to use technical analysis instead of fundamental analysis because I am, basically, a visual person. I always question the validity of the fundamentals as the news pour in regarding a particular stock. As an individual trader, I have to make some decisions as to whether to buy, to sell or to stay by the sidelines. Thus, I do not rely upon the fundamentals as much as others do, especially when they have under their command. a group of analyst who do the research and present the reports. Technical analysis is a tool that permits me to make investment decisions for myself. That does not mean that technical analysis is superior to fundamental analysis; it merely helps me in taking my investment decisions such as going long or short in certain positions or to do nothing at all. Of course, the main focus is the money management aspect of the trading which permits me to be profitable. In my investment decisions, the fundamental analysis represent only 5%-10% in terms of weight whereas the remaining is technical analysis. When there is a big news that is going to come out, I just stay away from it and I avoid trading it. And if I have positions that are going through while the big announcement is made, I have clear cut rules as to what to do which are based upon the importance of the news that is coming out.
Fundamentals are always important in the equity markets but I prefer to use technical analysis. Certainly, every trader is supposed to know very well the markets he will operate and I have preferred to concentrate on equity markets rather than F/X markets, despite I have an eye on it. And I concentrate on two major stock groups: S&P 500 and S&P/TSX Composite. I keep abreast about what they are doing and the interrelations between them. If I were to follow the fundamentals alone, I would not be able to keep up with all of the stocks. As far as the fundamentals are concerned, they are simply to know when the news are going to come out, to know what are going to be the interest decisions which are going to affect all the markets and to look at the technical picture in order to time my entry.
I use a limited number of screens in order to follow the markets. When I did my military service, I was taught to use several screens at the same time in order to have a snapshot about the events, to understand what was going on and then to shape them in my mind in order to arrive to a conclusion which in turn would set the base of my decision. The vast majority of the traders are facing too many screens and the information that is being pumped in is far too much. And this leads to excessive analysis which in turn becomes analysis paralysis. The trader gets confused and starts to mash up keys as he is overloaded with data and becomes an impulsive trader.
Basically, I prefer to use a single laptop with a few pages open and I don't need any fancy recent high tech features which I believe as to be useless. If you are not able to trade on your laptop, then having a dozen screens will definitely not improve your trading.
In terms of great trading profits that can be made in trading great trends, the vast majority of the markets have a well defined trend only 30% of the time and the remaining 70% of the time, the markets spend their time in the range bound environment by moving between the support and resistance levels. If one follows trend following method and the market is in the range bound environment, he will get chopped into pieces. When a market is moving in a very nice and smooth trend, one may take profits too soon. For example, if the trader had a period of losing trades and sees some profit on the table, he immediately takes it and sees afterwards the market going up. Consequently, the traders have to find a simple way to determine that there is trend, then join and stay with that trend in order to acquire the good results.
There are for M's of trading: Markets, Method, Money and Myself.
Markets:
There are several thousands of different instruments that one can trade and which are offered by various brokers across the globe and they are grouped under the following headings: equities, commodities, F/X and bond markets. Within these groups, one has thousands of instruments that can be traded. Thus, it is very important to know in what type of market and instruments you are going to trade based on your risk profile, your lifestyle, your character, your size of trading capital, your goals and outcome. In short, you have to know the right market that you are going to trade. The other thing that the trader has to know is whether the market is in trending or is in band consolidation. The trend markets go up or down in a consistent fashion with very small pullbacks. The other type of market is the range bound where the price is bouncing between the support and the resistance levels. The vast majority of the traders love trading in a trend environment but in the vast majority of the case, it is the range bound consolidation that prevails. One has to know which type of market he faces in order to decide what to do.
Method:
Every investor loves to hear about strategy and they surf the internet for it and talk to other traders/investors on the matter. One can find a lot of these strategies on the internet alone but the reality is that it is far less important than one thinks it is. What is important is when to exit a position. The trader has to know whether his method works better in a trend environment or in a range bound consolidation. Basically. if the trader's method is following the trend but the market is operating between a given support and resistance level, the chances of making money are slim. Alternatively, if the trader is using the range bound strategy and the market starts to trend, the trader has to struggle a lot. Consequently, the trader has to trade the right method in the context of the right market environment.
Money:
It involves money management and risk management. All new traders have to focus on this area first before looking to other areas. The trader should ask himself whether he is well capitalized for the market, for his method and also for his trading goals and outcomes. For instance, to aim to grow 1.000 USD into 1.000.000 USD in three months has very little probability of realization despite the fact that in the markets, everything is possible. So, the trader has to ask himself whether he is capitalized rightly and adequately for the thing he wants to do. Once this is solved, the trader has to work on his risk profile. The risk profile ranges from extremely conservative to extremely risky. This, in turn, will determine how much the trader is going to bet in one individual trade and how he is going to bet it. For this, the trader must never trade without a stop loss and must trade only a fraction of his capital for when he faces a loss, he will be able to come back.
Myself:
Many traders often forget that managing myself is the fundamental key to the managing of the remaining 3 Ms. When talking about the Myself segment of the trading, I mean the physical health and to be in a good position to handle the stress. It also means understanding the emotional health. When engaged into a trading, one faces risking his financial capital as well as his emotional capital, especially in day trading activities. If the trader is trading in order to pay down debt or meet its monthly expenses, he is already in a bad position. There is also the mental health where the trader looks at himself, how he sees himself as a trader, what kind of an image he has about himself. A negative mental health will impact negatively upon the trades. The trader has also to build a support structure around him for he is also a social human being. When sitting alone at home as a trader is frustrating and the trader has to go out and meet other traders. The trader should share his trading adventures with other traders and this will help him to manage better himself.
Back testing:
Back testing forms an important part of the trading strategy but sometimes people take it too far. I have developed some very good ideas just by looking at the charts, noticing how the market or the stock has moved. Most of the time, I have back-tested the chart configurations manually in order to assess whether the idea is valid enough in order for me to start to test it with real money in the market. What I have discovered was that one gets rapidly to the area of curve fitting. The markets change all the time and I have tried to forward-testing my ideas with real money and that when I started to see really was whether it worked or not based on a sample size of trading. If it works, then I start to consider the size of the betting. It's a part of a process and just by simply basing real money trading upon the back-testing is dangerous.
Growth or Income?
You must determine whether you are a growth trader or an income trader. Unfortunately, most of the traders' accounts are not big enough to generate income and thus they become growth traders. Realistically, they can only be growth traders until their account become substantial at which point they can become income traders. Another option would be to have two separate accounts in which one would serve the income aspect and the other would serve the growth aspect. But the trader must have a clear mind when doing this. The trader should not consider seriously his money on the account but instead should concentrate upon his trading. If he starts to consider his money on the account, then his mind will be blurred and his trading activity will be adversely affected. The money is just the outcome of the trading activity and as the trading are all recorded, a mere study of them will be sufficient to evaluate one's trading approach as a whole.
Trading exit strategy:
After I have done the technical analysis of the stock, I determine the stop loss level in case the position goes wrong thus cutting my losses in order to live another day. But when the stock behaves as expected, I have to devise an exit strategy. If you want to be a successful trader, you have to develop your own analysis style. Part of the routine to get into the game is to analyze the chart, to put the relevant support and resistance levels as well as the trend, to determine the probable course of the stock and to place on paper the possible stop loss levels as well as take profit levels. I set the entry point slightly above the support level and the exit point slightly below the resistance level; whereas I set the stop loss level slightly below the support level of the stock price. As far as the trend based trading is concerned, I use the trailing stop in order to catch the bulk of the movement. Basically I don't listen to the news and I just focus on doing my own analysis, planning my own trade, trading my plan and manage my own risk. This approach makes me a better trader for I am taking responsibility on how the trade fared. If the trade fails, the responsibility is mine and I don't blame anyone on this matter.
What to do when successive trades went wrong?
When I recognize that I am in a losing game, I stop trading. Then I go out for a walk or take some days off. After that, I study my losing trades, organise my thoughts and then proceed again. I review my basic points and keep a good diary of all my trades whether they are losing or winning trades which serve me as a compass for my future trades. Together, they will constitute the basis of a successful trader. When a trader has a slump, by going back to his notes and the point formulated above, he can recover quickly. For example, if a trader finds out from his notes that 50% of his losses were generated in the trading performed on Mondays and Fridays, then when he stops trading on these days, his results will improve dramatically. The traders always ask themselves whether it is possible to recover from catastrophic trades? I suggest yes because I have seen individuals achieve that. It has to do with context. If you have lost a sizable fund, it will have a catastrophic blow upon your emotional as well as your physical health. The crucial question will be how they respond to that? For some people, it will be too much for them. Other may get into a spiral of revenge trading in order to get that money back but that seldom works and actually they compound their losses. Some others take a few days off in order to assess what happened, what went wrong and then work upon a plan that will permit them to turn around the situation. It may take a year to recover the loss taken in a foolish day; it can be done but it has to be done in a right way. To recognize is a part of the trader's journey.
Trading badly or being unlucky?
As soon as I see someone who is managing badly his risk, not keeping good records, diverting from his method or strategy, not preparing for the trading day, I can surely say that this person is trading badly. It definitely tells me that there something that is going wrong with that person; it could be his life or his health. The best thing to do is to redefine what success means. If I plan my trade and manage my risk, then that trade is a successful trade, regardless of its outcome. Planning the trade and managing the risk are the only ones that I can control. And this provides me to take away the pressure I feel in the trades. By focusing on what I can control, my performance got better thus having a better confidence on myself, a better belief in what I was doing as a trader. This does not happen overnight; it's a long process with a turning point. Plan your trade, trade your plan and manage your risk; that's all you can do. You may have an excellent chart of a particular stock; you plan your trade and place your bet. Then suddenly, an unexpected news hits the trading floor and your stock heads south and takes you out from your stop loss level. Anything can happen in the market and the best thing to do is to plan the trade and implement it; that's all that a trader can do. Once the bet is placed, the only thing that the trader can do is to watch things happen.
Fundamentals are always important in the equity markets but I prefer to use technical analysis. Certainly, every trader is supposed to know very well the markets he will operate and I have preferred to concentrate on equity markets rather than F/X markets, despite I have an eye on it. And I concentrate on two major stock groups: S&P 500 and S&P/TSX Composite. I keep abreast about what they are doing and the interrelations between them. If I were to follow the fundamentals alone, I would not be able to keep up with all of the stocks. As far as the fundamentals are concerned, they are simply to know when the news are going to come out, to know what are going to be the interest decisions which are going to affect all the markets and to look at the technical picture in order to time my entry.
I use a limited number of screens in order to follow the markets. When I did my military service, I was taught to use several screens at the same time in order to have a snapshot about the events, to understand what was going on and then to shape them in my mind in order to arrive to a conclusion which in turn would set the base of my decision. The vast majority of the traders are facing too many screens and the information that is being pumped in is far too much. And this leads to excessive analysis which in turn becomes analysis paralysis. The trader gets confused and starts to mash up keys as he is overloaded with data and becomes an impulsive trader.
Basically, I prefer to use a single laptop with a few pages open and I don't need any fancy recent high tech features which I believe as to be useless. If you are not able to trade on your laptop, then having a dozen screens will definitely not improve your trading.
In terms of great trading profits that can be made in trading great trends, the vast majority of the markets have a well defined trend only 30% of the time and the remaining 70% of the time, the markets spend their time in the range bound environment by moving between the support and resistance levels. If one follows trend following method and the market is in the range bound environment, he will get chopped into pieces. When a market is moving in a very nice and smooth trend, one may take profits too soon. For example, if the trader had a period of losing trades and sees some profit on the table, he immediately takes it and sees afterwards the market going up. Consequently, the traders have to find a simple way to determine that there is trend, then join and stay with that trend in order to acquire the good results.
There are for M's of trading: Markets, Method, Money and Myself.
Markets:
There are several thousands of different instruments that one can trade and which are offered by various brokers across the globe and they are grouped under the following headings: equities, commodities, F/X and bond markets. Within these groups, one has thousands of instruments that can be traded. Thus, it is very important to know in what type of market and instruments you are going to trade based on your risk profile, your lifestyle, your character, your size of trading capital, your goals and outcome. In short, you have to know the right market that you are going to trade. The other thing that the trader has to know is whether the market is in trending or is in band consolidation. The trend markets go up or down in a consistent fashion with very small pullbacks. The other type of market is the range bound where the price is bouncing between the support and the resistance levels. The vast majority of the traders love trading in a trend environment but in the vast majority of the case, it is the range bound consolidation that prevails. One has to know which type of market he faces in order to decide what to do.
Method:
Every investor loves to hear about strategy and they surf the internet for it and talk to other traders/investors on the matter. One can find a lot of these strategies on the internet alone but the reality is that it is far less important than one thinks it is. What is important is when to exit a position. The trader has to know whether his method works better in a trend environment or in a range bound consolidation. Basically. if the trader's method is following the trend but the market is operating between a given support and resistance level, the chances of making money are slim. Alternatively, if the trader is using the range bound strategy and the market starts to trend, the trader has to struggle a lot. Consequently, the trader has to trade the right method in the context of the right market environment.
Money:
It involves money management and risk management. All new traders have to focus on this area first before looking to other areas. The trader should ask himself whether he is well capitalized for the market, for his method and also for his trading goals and outcomes. For instance, to aim to grow 1.000 USD into 1.000.000 USD in three months has very little probability of realization despite the fact that in the markets, everything is possible. So, the trader has to ask himself whether he is capitalized rightly and adequately for the thing he wants to do. Once this is solved, the trader has to work on his risk profile. The risk profile ranges from extremely conservative to extremely risky. This, in turn, will determine how much the trader is going to bet in one individual trade and how he is going to bet it. For this, the trader must never trade without a stop loss and must trade only a fraction of his capital for when he faces a loss, he will be able to come back.
Myself:
Many traders often forget that managing myself is the fundamental key to the managing of the remaining 3 Ms. When talking about the Myself segment of the trading, I mean the physical health and to be in a good position to handle the stress. It also means understanding the emotional health. When engaged into a trading, one faces risking his financial capital as well as his emotional capital, especially in day trading activities. If the trader is trading in order to pay down debt or meet its monthly expenses, he is already in a bad position. There is also the mental health where the trader looks at himself, how he sees himself as a trader, what kind of an image he has about himself. A negative mental health will impact negatively upon the trades. The trader has also to build a support structure around him for he is also a social human being. When sitting alone at home as a trader is frustrating and the trader has to go out and meet other traders. The trader should share his trading adventures with other traders and this will help him to manage better himself.
Back testing:
Back testing forms an important part of the trading strategy but sometimes people take it too far. I have developed some very good ideas just by looking at the charts, noticing how the market or the stock has moved. Most of the time, I have back-tested the chart configurations manually in order to assess whether the idea is valid enough in order for me to start to test it with real money in the market. What I have discovered was that one gets rapidly to the area of curve fitting. The markets change all the time and I have tried to forward-testing my ideas with real money and that when I started to see really was whether it worked or not based on a sample size of trading. If it works, then I start to consider the size of the betting. It's a part of a process and just by simply basing real money trading upon the back-testing is dangerous.
Growth or Income?
You must determine whether you are a growth trader or an income trader. Unfortunately, most of the traders' accounts are not big enough to generate income and thus they become growth traders. Realistically, they can only be growth traders until their account become substantial at which point they can become income traders. Another option would be to have two separate accounts in which one would serve the income aspect and the other would serve the growth aspect. But the trader must have a clear mind when doing this. The trader should not consider seriously his money on the account but instead should concentrate upon his trading. If he starts to consider his money on the account, then his mind will be blurred and his trading activity will be adversely affected. The money is just the outcome of the trading activity and as the trading are all recorded, a mere study of them will be sufficient to evaluate one's trading approach as a whole.
Trading exit strategy:
After I have done the technical analysis of the stock, I determine the stop loss level in case the position goes wrong thus cutting my losses in order to live another day. But when the stock behaves as expected, I have to devise an exit strategy. If you want to be a successful trader, you have to develop your own analysis style. Part of the routine to get into the game is to analyze the chart, to put the relevant support and resistance levels as well as the trend, to determine the probable course of the stock and to place on paper the possible stop loss levels as well as take profit levels. I set the entry point slightly above the support level and the exit point slightly below the resistance level; whereas I set the stop loss level slightly below the support level of the stock price. As far as the trend based trading is concerned, I use the trailing stop in order to catch the bulk of the movement. Basically I don't listen to the news and I just focus on doing my own analysis, planning my own trade, trading my plan and manage my own risk. This approach makes me a better trader for I am taking responsibility on how the trade fared. If the trade fails, the responsibility is mine and I don't blame anyone on this matter.
What to do when successive trades went wrong?
When I recognize that I am in a losing game, I stop trading. Then I go out for a walk or take some days off. After that, I study my losing trades, organise my thoughts and then proceed again. I review my basic points and keep a good diary of all my trades whether they are losing or winning trades which serve me as a compass for my future trades. Together, they will constitute the basis of a successful trader. When a trader has a slump, by going back to his notes and the point formulated above, he can recover quickly. For example, if a trader finds out from his notes that 50% of his losses were generated in the trading performed on Mondays and Fridays, then when he stops trading on these days, his results will improve dramatically. The traders always ask themselves whether it is possible to recover from catastrophic trades? I suggest yes because I have seen individuals achieve that. It has to do with context. If you have lost a sizable fund, it will have a catastrophic blow upon your emotional as well as your physical health. The crucial question will be how they respond to that? For some people, it will be too much for them. Other may get into a spiral of revenge trading in order to get that money back but that seldom works and actually they compound their losses. Some others take a few days off in order to assess what happened, what went wrong and then work upon a plan that will permit them to turn around the situation. It may take a year to recover the loss taken in a foolish day; it can be done but it has to be done in a right way. To recognize is a part of the trader's journey.
Trading badly or being unlucky?
As soon as I see someone who is managing badly his risk, not keeping good records, diverting from his method or strategy, not preparing for the trading day, I can surely say that this person is trading badly. It definitely tells me that there something that is going wrong with that person; it could be his life or his health. The best thing to do is to redefine what success means. If I plan my trade and manage my risk, then that trade is a successful trade, regardless of its outcome. Planning the trade and managing the risk are the only ones that I can control. And this provides me to take away the pressure I feel in the trades. By focusing on what I can control, my performance got better thus having a better confidence on myself, a better belief in what I was doing as a trader. This does not happen overnight; it's a long process with a turning point. Plan your trade, trade your plan and manage your risk; that's all you can do. You may have an excellent chart of a particular stock; you plan your trade and place your bet. Then suddenly, an unexpected news hits the trading floor and your stock heads south and takes you out from your stop loss level. Anything can happen in the market and the best thing to do is to plan the trade and implement it; that's all that a trader can do. Once the bet is placed, the only thing that the trader can do is to watch things happen.
Tuesday, 20 May 2014
THE KAISERSCHLACHT OF THE CAPITAL MARKETS
The investors keep waiting for the imminent market correction that has taken place since the summer of 2013. And yet, the chances for this to happen are growing stronger ever since. Then the question that comes to their mind is: when?
To be sure, the bear market that should characterize such a decline is taking place partially. The well known North American indices have a hard time to go further despite being near their all-time highs. But this event hides a different reality: many average stocks present within these indices have already started to drop significantly thus entering to the bear market phase. And these average stocks will inevitably force the large-caps to follow suite by the time the actual indices start to show some signs of weakness.
This situation is due to the divergence between the rise of the index in question through the price hikes of large-cap stocks and the decline in price of the mid- and small cap stocks. The market breadth, or the number of advancing stocks versus declining stocks had a tendency to fall since last summer and has accentuated its pace since January 2014.
All major indices have either set a new record or were close to it and this event has led the investors to believe that everything was fine, at least on the façade. But the number of stocks that are pulling up the indices has a tendency to drop. The late declines point to a major correction which may last until August before the traditional rally starts. Consequently, I don't say that the investors should liquidate their stock portfolio but they should recognize that the performance of these stocks, despite being in some cases spectacular, is overdue and they should think of placing stop loss levels in order to limit possible losses in case of a severe market downturn. And they should also think of taking their profit in some of their stocks and place the balance into the bonds, just for the sake of being in the safe zone.
Investors are currently blinded by the large-cap stocks that have performed quite well until recently and consequently, they do not see yet the signs of a major correction lying ahead when considering the broad market benchmarks; the performance is masking the price weakness of the majority of the mid- and small-caps. This is mainly due to the shift toward the larger caps, other than large caps.
Up today, the bull market, which has entered to its sixth consecutive year, is characterized by the traditional broad participation of the majority of the rising stocks. And from a historical perspective, one could say that the large-cap outperformance as seen this year is a feature of the market tops. This may not be a sign that the stocks are going to reach the peak or have reached it already but the declining market breadth suggest that a major correction is on its way. Sooner or later, the large-cap stocks will not be in the position of supporting the underlying trend of the late bull market. Thus, a point will soon be reached where the market will reverse its course.
The behaviour of such stock markets have some consequences for the investor. The future prospects are not as good as it used to be and thus, it will become more difficult for the diversified portfolio to perform well. This market favors the intuitive stock pickers and currently the major picks are large caps. One can see this in the portfolio rotation of the institutional investor who shift their positions from risky growth stocks into large and safe companies. The logic is that large stocks drop less than the others when the market declines significantly. Also, such an environment should force the investor to think cautiously about possible buying opportunities during the market pullbacks for a point will be reached when such an approach will not work. A possible avenue of investment could be to switch to some sectors that tend to do better during the mid or later stages of a bull market.
Finally, this situation will last until August 2014 at which point, the market should start its rally lasting until late this year. But. beginning next year's spring, the expected rise in the interest rates will affect adversely the stock markets and one may expect a severe correction that may last a couple of years and then a slow recovery with wild fluctuations, coupled with rising inflation and interest rates environment. The consequences for the economy may be a slower growth and a mild stagflation. As far as the market correction is concerned, a drop by 1/3 of the major indices would not be met as a surprise but will also set the ground for the rise of small-cap stocks while the large- and mid- cap stocks will be trading sideways.
To be sure, the bear market that should characterize such a decline is taking place partially. The well known North American indices have a hard time to go further despite being near their all-time highs. But this event hides a different reality: many average stocks present within these indices have already started to drop significantly thus entering to the bear market phase. And these average stocks will inevitably force the large-caps to follow suite by the time the actual indices start to show some signs of weakness.
This situation is due to the divergence between the rise of the index in question through the price hikes of large-cap stocks and the decline in price of the mid- and small cap stocks. The market breadth, or the number of advancing stocks versus declining stocks had a tendency to fall since last summer and has accentuated its pace since January 2014.
All major indices have either set a new record or were close to it and this event has led the investors to believe that everything was fine, at least on the façade. But the number of stocks that are pulling up the indices has a tendency to drop. The late declines point to a major correction which may last until August before the traditional rally starts. Consequently, I don't say that the investors should liquidate their stock portfolio but they should recognize that the performance of these stocks, despite being in some cases spectacular, is overdue and they should think of placing stop loss levels in order to limit possible losses in case of a severe market downturn. And they should also think of taking their profit in some of their stocks and place the balance into the bonds, just for the sake of being in the safe zone.
Investors are currently blinded by the large-cap stocks that have performed quite well until recently and consequently, they do not see yet the signs of a major correction lying ahead when considering the broad market benchmarks; the performance is masking the price weakness of the majority of the mid- and small-caps. This is mainly due to the shift toward the larger caps, other than large caps.
Up today, the bull market, which has entered to its sixth consecutive year, is characterized by the traditional broad participation of the majority of the rising stocks. And from a historical perspective, one could say that the large-cap outperformance as seen this year is a feature of the market tops. This may not be a sign that the stocks are going to reach the peak or have reached it already but the declining market breadth suggest that a major correction is on its way. Sooner or later, the large-cap stocks will not be in the position of supporting the underlying trend of the late bull market. Thus, a point will soon be reached where the market will reverse its course.
The behaviour of such stock markets have some consequences for the investor. The future prospects are not as good as it used to be and thus, it will become more difficult for the diversified portfolio to perform well. This market favors the intuitive stock pickers and currently the major picks are large caps. One can see this in the portfolio rotation of the institutional investor who shift their positions from risky growth stocks into large and safe companies. The logic is that large stocks drop less than the others when the market declines significantly. Also, such an environment should force the investor to think cautiously about possible buying opportunities during the market pullbacks for a point will be reached when such an approach will not work. A possible avenue of investment could be to switch to some sectors that tend to do better during the mid or later stages of a bull market.
Finally, this situation will last until August 2014 at which point, the market should start its rally lasting until late this year. But. beginning next year's spring, the expected rise in the interest rates will affect adversely the stock markets and one may expect a severe correction that may last a couple of years and then a slow recovery with wild fluctuations, coupled with rising inflation and interest rates environment. The consequences for the economy may be a slower growth and a mild stagflation. As far as the market correction is concerned, a drop by 1/3 of the major indices would not be met as a surprise but will also set the ground for the rise of small-cap stocks while the large- and mid- cap stocks will be trading sideways.
Wednesday, 16 April 2014
OBESITY OF TURKEY: NEW PERSPECTIVE
Half of Turkey’s companies are constituted by weak
companies in terms of debt payback capacity following the financial shock. Turkey’s
strength lies upon the public balances whereas its weakness lies upon the
companies’ debt as well as its fragility against the growth, exchange rates and
interest rates. If the political
instability continues this way in Turkey, the shrinking external financing will
see its credit note drop.
As long as the capital inflow coming to Turkey drops, the
current account deficit drops too. In a conjuncture where the capital inflow
has stopped, the current account deficit drops due to the less money coming in.
The exit continues in the portfolio accounts as well as in the short-term
capital. During the month of February, the total amount of stock, bond and
deposit that have exited amounts to 2 billion USD. During the December –
February period, this total was 7 billion USD. In the exit stage from the
monetary expansion in the United States, it is well known that the developing
countries will get into trouble for it is going to be a troublesome period for
them.
During this process, the most critical area is the
following: what will the debtors that have high debt load and low debt service
capacity do? In a conjuncture where external funding has decreased and capital
inflows have reversed, the corporate sector will become more sensitive. During
such a period, debt costs rise and revenues fall. In other words, the companies
of the developing countries accumulated debt very rapidly and they will face
difficulties in servicing their debt.
In a sensitivity analysis in which one incorporates some
small and large company samples, in case there is a rise of 25% in the costs
and 25% drop in the revenues, there is a net increase in the number of weak
companies and non-performing loans. If the EBIT of the companies in question is
less than twice the debt service, these loans enter into the risky category. According
to this analysis, half of Turkey’s companies are constituted of weak companies
which carry risky loans.
In the last 5 years, Turkey has become an obese by eating
everything that has been served to her. In the debt change following the 5
years after the global crisis, Turkey has reduced its public debt whereas the
households, companies and banking sector have seen a credit growth which stands
as the champion...
Monday, 31 March 2014
THE AFTERMATH OF THE TURKISH LOCAL ELECTIONS
The local election results were interpreted all over the world as AKP's undisputed victory and it has been celebrated as the end of the political instability in Turkey. Actually the results contain very worrying regional defeats and pessimistic trends.
Now let's look a little further. What will happen if the general elections of 2015 result in this way? Some simulations have been performed and accordingly, the number of the seats of AKP falls from 326 to 290 and the possibility of changing the constitution ends forever.
Should this election be compared with the previous local elections or with the referendum on the constitution or with the last general elections? If Erdogan says "this election is a referendum for me", then it is. Let's take a look at the votes AKP received during the constitutional referendum and the general elections:
Constitutional referendum of 2010: %58
General elections of 2011: 50%
Local elections of 2014: 45.5%
These results cause much concern for there is a long term trend. AKP loses the title of "everyone's party" and is pushed back to the conservative-Islamist base. A "yes" or "no" vote is given in the referendums. Erdogan has lost this referendum by a wide margin. This nation said clearly NO to his political style and to his wish of acquittal from corruption through the polls.
BDP has become the first party in some parts of the East and in all the Southeast. The claim that AKP was representing the Kurds disappeared with this election. The Kurds will seek heavy concessions in order to resume the peace process. The statement that the tapes circulated by the Cemaat did not weaken AKP's image is a plain lie. The 15%-16% performance of the MHP shows that a portion of the conservative votes went to this party. The MHP and the BDP-HDP which have been very successful in this election represent two opposite ends. In what kind of a compromise will this polarization result? If the Kurdish demands are not met before the presidential elections, will they take to the streets again?
Can Erdogan be elected as the next president following these results? He will definitely be a candidate but he will also not entrust the party to Abdullah Gul. AKP will go to the elections of 2015 with a weak leader. But Erdogan has more than 60% chances of winning the presidential election. The equation looks something like this:
The four parties will enter to the race with their own candidate. In the second round, the candidates of AKP and CHP will compete because the said parties will receive the most of the votes. The voters of MHP and BDP will start to look for a new leader. But the MHP votes will not go to Erdogan because he is making a grave mistake by disdaining the opposition leaders. As a result, the votes of MHP will go to CHP and Erdogan will need BDP's votes in order to win. One can wonder what BDP will request from Erdogan in exchange of its support.
These results may look like a victory to the AKP but this is not a defeat for the opposition nor for the Cemaat. During the long period until the presidential election, the Gulen community will continue its efforts in order to destabilize Erdogan and Erdogan will retaliate with an operation similar to the Ergenekon case. (probably, Erdogan will liquidate the Guven movement). In this case, it will be difficult to re-establish confidence in the economy. Even if the politics leave totally the arena in Turkey, the growth model is now blocked. It is very difficult to grow without raising the current account deficit to GDP ratio to 7% and the inflation to 10%. If AKP wants to increase its chances in the presidential election, it will have to keep the economy alive. It is hard to achieve this without scaring the foreign capital.
But the most frightening is the following: the situation that the analyst close to AKP say as "CHP has been squeezed in the Thrace and Aegean coast" is in fact that CHP is the first party (or showed a performance close to AKP) in the regions and metropolitan areas where Turkey's modern, well-educated people and high-productivity regions are present. AKP continues to be the party of the Black Sea coast and Central Anatolia which are conservative, poor and closed societies. Turkey is experiencing two simultaneous political races. The first is the struggle for equality and ethnicity between MHP and BDP. The second is the lifestyle war raging between CHP representing the "moderns" and the AKP representing the "conservatives". But no one will win this race. Turkey did not make any positive move for a long time in the peace process and it will continue to be ruled by a government who has been elected by a small majority but is hated by the everyone else.
The other possible scenario would be as follows:
Following this local election, Erdogan liquidates the Gulen movement by a series of arrests and trials. At the same time, he establishes his authoritarian rule by clamping down his opponents and dissent in general through the ruthless use of law enforcement and intensifying the censorship efforts (thus, he will start to become a threat to the democracy). He may wish to continue as Prime Minister for a fourth consecutive term by changing the AKP rules. Before the presidential elections, he choses a relatively weak person to run the AKP and joins the presidential election. Once he is elected as the president, he will rule AKP through this weak person until the elections of 2015. In this election, AKP will lose due to the economic crisis and political unrest and the CHP-MHP coalition government will replace it. This government will enact laws which will limit the powers of the presidency and thus rendering Erdogan's position as meaningless and in time, he will be liquidated. Then, the liquidation of the moderate Islamic movement will follow by the installment of a secular regime in its proper form. This will also be a marked departure of Turkey from the East by turning its face to the West and strengthen its ties with the European Union.
But for the time being, Turkey did not make its decision over whether it wants a democracy or an arbitrary autocratic rule. But the economy will be the criteria overriding all other necessities. Half of the corruption claims in ony other democratic country is enough for the collapse of the government but in Turkey, this was reflected only by a 5% loss in terms of support. Decidedly, the political recipe of Erdogan which is simply based on ruthless antagonism won the day again... But for how long?
Now let's look a little further. What will happen if the general elections of 2015 result in this way? Some simulations have been performed and accordingly, the number of the seats of AKP falls from 326 to 290 and the possibility of changing the constitution ends forever.
Should this election be compared with the previous local elections or with the referendum on the constitution or with the last general elections? If Erdogan says "this election is a referendum for me", then it is. Let's take a look at the votes AKP received during the constitutional referendum and the general elections:
Constitutional referendum of 2010: %58
General elections of 2011: 50%
Local elections of 2014: 45.5%
These results cause much concern for there is a long term trend. AKP loses the title of "everyone's party" and is pushed back to the conservative-Islamist base. A "yes" or "no" vote is given in the referendums. Erdogan has lost this referendum by a wide margin. This nation said clearly NO to his political style and to his wish of acquittal from corruption through the polls.
BDP has become the first party in some parts of the East and in all the Southeast. The claim that AKP was representing the Kurds disappeared with this election. The Kurds will seek heavy concessions in order to resume the peace process. The statement that the tapes circulated by the Cemaat did not weaken AKP's image is a plain lie. The 15%-16% performance of the MHP shows that a portion of the conservative votes went to this party. The MHP and the BDP-HDP which have been very successful in this election represent two opposite ends. In what kind of a compromise will this polarization result? If the Kurdish demands are not met before the presidential elections, will they take to the streets again?
Can Erdogan be elected as the next president following these results? He will definitely be a candidate but he will also not entrust the party to Abdullah Gul. AKP will go to the elections of 2015 with a weak leader. But Erdogan has more than 60% chances of winning the presidential election. The equation looks something like this:
The four parties will enter to the race with their own candidate. In the second round, the candidates of AKP and CHP will compete because the said parties will receive the most of the votes. The voters of MHP and BDP will start to look for a new leader. But the MHP votes will not go to Erdogan because he is making a grave mistake by disdaining the opposition leaders. As a result, the votes of MHP will go to CHP and Erdogan will need BDP's votes in order to win. One can wonder what BDP will request from Erdogan in exchange of its support.
These results may look like a victory to the AKP but this is not a defeat for the opposition nor for the Cemaat. During the long period until the presidential election, the Gulen community will continue its efforts in order to destabilize Erdogan and Erdogan will retaliate with an operation similar to the Ergenekon case. (probably, Erdogan will liquidate the Guven movement). In this case, it will be difficult to re-establish confidence in the economy. Even if the politics leave totally the arena in Turkey, the growth model is now blocked. It is very difficult to grow without raising the current account deficit to GDP ratio to 7% and the inflation to 10%. If AKP wants to increase its chances in the presidential election, it will have to keep the economy alive. It is hard to achieve this without scaring the foreign capital.
But the most frightening is the following: the situation that the analyst close to AKP say as "CHP has been squeezed in the Thrace and Aegean coast" is in fact that CHP is the first party (or showed a performance close to AKP) in the regions and metropolitan areas where Turkey's modern, well-educated people and high-productivity regions are present. AKP continues to be the party of the Black Sea coast and Central Anatolia which are conservative, poor and closed societies. Turkey is experiencing two simultaneous political races. The first is the struggle for equality and ethnicity between MHP and BDP. The second is the lifestyle war raging between CHP representing the "moderns" and the AKP representing the "conservatives". But no one will win this race. Turkey did not make any positive move for a long time in the peace process and it will continue to be ruled by a government who has been elected by a small majority but is hated by the everyone else.
The other possible scenario would be as follows:
Following this local election, Erdogan liquidates the Gulen movement by a series of arrests and trials. At the same time, he establishes his authoritarian rule by clamping down his opponents and dissent in general through the ruthless use of law enforcement and intensifying the censorship efforts (thus, he will start to become a threat to the democracy). He may wish to continue as Prime Minister for a fourth consecutive term by changing the AKP rules. Before the presidential elections, he choses a relatively weak person to run the AKP and joins the presidential election. Once he is elected as the president, he will rule AKP through this weak person until the elections of 2015. In this election, AKP will lose due to the economic crisis and political unrest and the CHP-MHP coalition government will replace it. This government will enact laws which will limit the powers of the presidency and thus rendering Erdogan's position as meaningless and in time, he will be liquidated. Then, the liquidation of the moderate Islamic movement will follow by the installment of a secular regime in its proper form. This will also be a marked departure of Turkey from the East by turning its face to the West and strengthen its ties with the European Union.
But for the time being, Turkey did not make its decision over whether it wants a democracy or an arbitrary autocratic rule. But the economy will be the criteria overriding all other necessities. Half of the corruption claims in ony other democratic country is enough for the collapse of the government but in Turkey, this was reflected only by a 5% loss in terms of support. Decidedly, the political recipe of Erdogan which is simply based on ruthless antagonism won the day again... But for how long?
Monday, 24 March 2014
THE OUTLOOK FOR THE TURKISH STOCK MARKET UNTIL AUGUST 2014
There is a perception in the market that not even the most objective data are unable to break: the ruling party AKP will be victorious in the municipal election of March 30th 2014, it will defeat its political opponents, it will also win the presidential elections and thus it will return to the old pragmatic days and will start the reforms that will permit the economy to grow again at 5%.
Turkey is still moving by indexing herself to the developments in the Emerging Markets. Therefore, if the Emerging markets' assets crash, the TL denominated assets may perhaps not rise but will depreciate less. There is the AKP bubble in Turkey and it is incorrectly priced in terms of historical measures. This error will start to be rectified in the second half of April and will last until the presidential elections.
The trust in AKP is not the only reason why the TL denominated assets have appreciated during the month of March. The message of the Fed has been finally interpreted correctly. The Fed will delay as much as possible the monetary tightening, and when it will start doing it, it will do it as slowly as possible. Therefore, the carry trade money that should leave the Emerging Markets stays where it is and the U.S. dollar as well as the U.S. bond interest rates are trading weaker. Fed's generosity prevents the markets in pricing the threat of the crash in China, Russia's economy entering into a recession as well as slowing down Turkey and Central Europe. But every strong macro-economic data coming from the U.S. will force the determination of the carry-traders and will cause the Emerging Markets to change direction very often.
In particular in Turkey, the investors do not accept the fact that Ankara is stubbornly analogous to Moscow thus the public authority has lost its credibility and predictability. The prices of the financial assets in Russia are among the Emerging Markets which got the most discount. But in Turkey, with six days remaining to the elections, there is almost no discount.
This perception will carry on for a week or two following the elections. If AKP earns 40% or more of the votes during the municipal elections, Erdogan will receive a vote of confidence from the public and will thus get a visa for the presidential elections. The elections of March are one of the most difficult to anticipate in recent years but according to the available surveys, AKP may have a result that is a little more the 40%. Therefore, the investors who place their bets on the election results will not be disappointed. Of course, if the opposite happens and the AKP earns less then 40% of the votes (say 35%), we will witness one of the wildest sale wave in recent history, because in that scenario, Turkey becomes unmanageable and will face a strong global pressure for early elections.
Why wouldn't the rally of the elections last? If AKP does not receive 50% of the votes, the Gulen movement will not stop the war. They possess thousands of tape and video recordings and they will publish them everyday. The closing of the Twitter shows that the nerves of Erdogan do not withstand this daily cupping. Following the March elections, Erdogan will will implement a very harsh punishment campaign upon the Gulen movement. During this campaign, TUSIAD and the main stream media which stay neural in this fight, will also receive a severe battering. A mindset that shuts down the Twitter for nothing may also do the same to Facebook and Youtube; so what will happen next? The strategy of "all-out war after the elections" that Erdogan has already promised will first destroy the public confidence and then we will see again that private sector will not undertake any investment nor spending. Following that, the reactions all around the world will increase so much that even the most cold-blooded fund managers will avoid risk by stepping aside. It is precisely at that time that the longest wave of selling in recent history will begin.
If AKP does not receive 45% or more of the votes, it will jeopardize its probability of winning the presidential election of August 2014. First of all, Erdogan and Gul are receiving votes as much as their party does because they have alienated the voters. Secondly, the pause that started in the economy will become worse during the summer and will reduce the loyalty of the AKP supporters. And lastly, if Ocalan's requests are not met, the Kurds who are voting for BDP-HDP will retrieve their support from the AKP. Until now, the motto "spend as much as you collect taxes" which was permitting to AKP to secure the budgetary balance will disappear as it embarks into an electoral populism and thus will shake the bond market.
Thanks to the endless public means at its disposal and most importantly with its non-compliant attitude, the AKP will win the presidential election or even Gul may win. That's when we will start to talk about whether the bear market has reached the end. But there is a 40% probability that AKP plays the wrong cards and a person from the opposition wins the presidential elections. Again Turkey will become once more unmanageable. Perhaps the ISE will come to the threshold of the longest bear market of its history since its debut by dropping below 40.000 and we start to envision the landscape that will arise following the general elections of 2015.
Turkey is still moving by indexing herself to the developments in the Emerging Markets. Therefore, if the Emerging markets' assets crash, the TL denominated assets may perhaps not rise but will depreciate less. There is the AKP bubble in Turkey and it is incorrectly priced in terms of historical measures. This error will start to be rectified in the second half of April and will last until the presidential elections.
The trust in AKP is not the only reason why the TL denominated assets have appreciated during the month of March. The message of the Fed has been finally interpreted correctly. The Fed will delay as much as possible the monetary tightening, and when it will start doing it, it will do it as slowly as possible. Therefore, the carry trade money that should leave the Emerging Markets stays where it is and the U.S. dollar as well as the U.S. bond interest rates are trading weaker. Fed's generosity prevents the markets in pricing the threat of the crash in China, Russia's economy entering into a recession as well as slowing down Turkey and Central Europe. But every strong macro-economic data coming from the U.S. will force the determination of the carry-traders and will cause the Emerging Markets to change direction very often.
In particular in Turkey, the investors do not accept the fact that Ankara is stubbornly analogous to Moscow thus the public authority has lost its credibility and predictability. The prices of the financial assets in Russia are among the Emerging Markets which got the most discount. But in Turkey, with six days remaining to the elections, there is almost no discount.
This perception will carry on for a week or two following the elections. If AKP earns 40% or more of the votes during the municipal elections, Erdogan will receive a vote of confidence from the public and will thus get a visa for the presidential elections. The elections of March are one of the most difficult to anticipate in recent years but according to the available surveys, AKP may have a result that is a little more the 40%. Therefore, the investors who place their bets on the election results will not be disappointed. Of course, if the opposite happens and the AKP earns less then 40% of the votes (say 35%), we will witness one of the wildest sale wave in recent history, because in that scenario, Turkey becomes unmanageable and will face a strong global pressure for early elections.
Why wouldn't the rally of the elections last? If AKP does not receive 50% of the votes, the Gulen movement will not stop the war. They possess thousands of tape and video recordings and they will publish them everyday. The closing of the Twitter shows that the nerves of Erdogan do not withstand this daily cupping. Following the March elections, Erdogan will will implement a very harsh punishment campaign upon the Gulen movement. During this campaign, TUSIAD and the main stream media which stay neural in this fight, will also receive a severe battering. A mindset that shuts down the Twitter for nothing may also do the same to Facebook and Youtube; so what will happen next? The strategy of "all-out war after the elections" that Erdogan has already promised will first destroy the public confidence and then we will see again that private sector will not undertake any investment nor spending. Following that, the reactions all around the world will increase so much that even the most cold-blooded fund managers will avoid risk by stepping aside. It is precisely at that time that the longest wave of selling in recent history will begin.
If AKP does not receive 45% or more of the votes, it will jeopardize its probability of winning the presidential election of August 2014. First of all, Erdogan and Gul are receiving votes as much as their party does because they have alienated the voters. Secondly, the pause that started in the economy will become worse during the summer and will reduce the loyalty of the AKP supporters. And lastly, if Ocalan's requests are not met, the Kurds who are voting for BDP-HDP will retrieve their support from the AKP. Until now, the motto "spend as much as you collect taxes" which was permitting to AKP to secure the budgetary balance will disappear as it embarks into an electoral populism and thus will shake the bond market.
Thanks to the endless public means at its disposal and most importantly with its non-compliant attitude, the AKP will win the presidential election or even Gul may win. That's when we will start to talk about whether the bear market has reached the end. But there is a 40% probability that AKP plays the wrong cards and a person from the opposition wins the presidential elections. Again Turkey will become once more unmanageable. Perhaps the ISE will come to the threshold of the longest bear market of its history since its debut by dropping below 40.000 and we start to envision the landscape that will arise following the general elections of 2015.
Monday, 3 March 2014
ECONOMIC OUTLOOK OF TURKEY FOR MARCH 2014: THE VAIN HOPE...
All the articles and researches on the emerging markets have a common phrase: "The prices are very cheap." Indeed these markets are cheap but they do not guarantee a rally. There is an absence of a trigger in the emerging markets and in particular in Turkey that would create a rally in the financial assets. Quite the contrary; the risks outweigh everyday.
The CPI level of February will not support the markets in terms of a buy. The heavy reimbursement of the Treasury who is in need of borrowing is going to have a hard time in March. The Treasury has an accumulation of debt of 30 billion TL in the account of the Turkish Central Bank but the interest rates jump when the foreigners do not participate in the auctions. The most likely scenario would be the rise to 12% of the benchmark of the compounded interest rate of 2 years bond during the month of March.
The ISE-100 is oscillating in a narrow band with a noticeable contraction in the volume of transactions for there no story that can move the market. The financial results of 2013 are not bright and the eyes are turned towards the profits of the year 2014-2015. We will be able to evaluate as to how much the ISE-100 is cheap by the disclosure of March's economic data. In case that the economic contraction exceeds the expectations, we may see a drop in the ISE-100 with the downside revision of the profits.
The elections as well as the strife in the politics constitute a big threat. With the uploading of the first audio recording between the Prime Minister and his son on the Youtube has broken upwards the USD/TL trend. This cycle will set as a model for the month of March. The Gulen movement will feed the press with evidences that will undermine the confidence in the AKP. There is a serious probability that in retaliation to this, the AKP starts the gang related inquiries concerning the Gulen movement or gives a hard time to TUSKON - TUSIAD or the press thus disrupting the morale.
The markets will attempt to hold and go up with the momentum incoming from the exterior, or with data that exceed optimistically the expectations in the economy. Because Turkey is in the middle of the biggest political crisis in its recent history, it is hard to believe that these efforts will ever be successful. The market outlook will become clearer only after end of the local election of March 30th. Until then, nothing will be cheap at any price...
The CPI level of February will not support the markets in terms of a buy. The heavy reimbursement of the Treasury who is in need of borrowing is going to have a hard time in March. The Treasury has an accumulation of debt of 30 billion TL in the account of the Turkish Central Bank but the interest rates jump when the foreigners do not participate in the auctions. The most likely scenario would be the rise to 12% of the benchmark of the compounded interest rate of 2 years bond during the month of March.
The ISE-100 is oscillating in a narrow band with a noticeable contraction in the volume of transactions for there no story that can move the market. The financial results of 2013 are not bright and the eyes are turned towards the profits of the year 2014-2015. We will be able to evaluate as to how much the ISE-100 is cheap by the disclosure of March's economic data. In case that the economic contraction exceeds the expectations, we may see a drop in the ISE-100 with the downside revision of the profits.
The elections as well as the strife in the politics constitute a big threat. With the uploading of the first audio recording between the Prime Minister and his son on the Youtube has broken upwards the USD/TL trend. This cycle will set as a model for the month of March. The Gulen movement will feed the press with evidences that will undermine the confidence in the AKP. There is a serious probability that in retaliation to this, the AKP starts the gang related inquiries concerning the Gulen movement or gives a hard time to TUSKON - TUSIAD or the press thus disrupting the morale.
The markets will attempt to hold and go up with the momentum incoming from the exterior, or with data that exceed optimistically the expectations in the economy. Because Turkey is in the middle of the biggest political crisis in its recent history, it is hard to believe that these efforts will ever be successful. The market outlook will become clearer only after end of the local election of March 30th. Until then, nothing will be cheap at any price...
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