Commentary: Markets teasing investors with more hardship on the way
NEW YORK (MarketWatch) -- Mark Twain once said history doesn't always repeat but it sometimes rhymes. Investors around the world hope that doesn't again prove true.
We asked last year whether we should sell in May and go away following the spirited sprint off the March lows. In the 12 months that followed, the S&P was sliced in half as a confluence of negatives combined to create the financial equivalent of a perfect storm.
We humbly offered in January that 2009 could see two 20% bear-market rallies that litter the landscape with false hope and empty promises. As we digest the initial lift, the obvious question is whether we'll see a meaningful decline before a second such move arrives later this year.
The most constructive possible path at the end of March was a sideways digestion of the gains as a function of time rather than price. That worked off the overbought condition and created potentially bullish reverse head-and-shoulder patterns across the major indices. We must respect that scenario if it triggers with a trade above 875 on the S&P.
Be that as it may, I believe the current rally will prove a massive stock tease. We monitored the cumulative imbalances as they built through the years and it would be myopic to assume we've swallowed the bitter pill in its entirety. While there are two sides to every trade, we must remember that social mood and risk appetites shape financial markets.
I don't know how conditions are where you live, but through my lens, times are tough and tension is elevated. While news is always worst at the bottom and best at the top, our finance-based global economy is dependent on employment, leverage and the velocity of money. One way or another, the bar bill of our collective excess must be paid by this generation or the next. The big picture is made of many smaller ones, and the destination we arrive at pales in comparison to the path we take to get there. As such, as we gaze across the global horizon, I wanted to touch on five dynamics that should remain on our radar as we find our way through this prickly fray.
When pigs fly
As if we didn't have enough on our minds, the specter of a global pandemic adds another layer of uncertainty to an already complicated equation. The World Bank estimated last year that an influenza pandemic could cost $3 trillion, trigger a 5% drop in global GDP and lead to 70 million deaths. As we hope for the best, risk management requires that we respect potential contagion, particularly if the specter that the virus was manmade seeps into the mainstream mindset.
Pakistan
One of our 10 themes for 2009 was the evolution of societal acrimony to social unrest and geopolitical conflict. The world stands at a critical crossroads, with orderly debt destruction and eventual globalization on one side, and isolationism, protectionism and the unfortunate truth that all world wars were born from economic hardship on the other. See link here. With the Taliban 60 short miles from the Pakistani capital of Islamabad, we would be wise to keep this nuclear state on our radar.
He said, she saidThe back-and-forth between embattled Bank America CEO Ken Lewis, Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Hank Paulson has massive implications for the psychology surrounding the government's role and responsibility in the capital market structure.
As Minyanville offered in August 2007: "The Federal Reserve attempted to buy time on the back of the tech bubble with fiscal and monetary stimuli that encouraged risk-taking, reward-chasing behavior. While debt is front and center, credit of a different breed -- credibility -- has emerged as the issue at hand. If and when investors begin to perceive that central banks are no longer larger than the markets, a crisis of confidence will ensue.
Stress test
The "more adverse" scenario offered by the government is a 3.3% contraction, 8.9% unemployment and a 22% decline in home prices, followed by a rebound in GDP of 0.5%, 10.3% unemployment and 7% degradation in home prices the following year.
That's debatable at best. It's clear that some banks will need to raise more capital, further diluting equity holders, and others won't make it to the other side of this prolonged socioeconomic malaise.
I, like most of you, stand to benefit from an economic expansion that buoys our spirits with the rising tide of good fortune. The popular opinion is rarely the profitable one, however, and my hope is that sharing these potential caveats provides utility as we collectively prepare for the future.
Financial staying power, risk management over reward chasing and proactive financial intelligence remain three staples of any successful investment approach.
Thursday, April 30, 2009
Fidelity Says `All Things in Place' for Bull Market (Update1)
April 30 (Bloomberg) -- Anthony Bolton, president of investments at Fidelity International, said a bull market in equities has already begun and financial shares are poised to drive recent gains higher.
Low valuations indicate advances that began in March are the start of a bull market, Bolton said. He favors financials, consumer cyclical, technology, and "value stocks," such as retailers, automakers and construction- related shares.
"All the things are in place for the bear market to have ended," Bolton said in an interview with Bloomberg Television in Hong Kong. "When there's a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I'd like to bet against that.
"The MSCI World Index has dropped 3.2 percent this year, extending last year's 42 percent slump, the worst annual performance since at least 1970. Shares plunged as a collapse in U.S. consumer spending and a freeze in credit markets sent the U.S., Europe and Japan into their first simultaneous recessions since World War II.
The declines dragged the gauge's price-to-book value, or the ratio of stock prices to company assets, to 1.5, down from 2.4 at the beginning of 2008.
Bolton, who is based in London, said that in September he started putting money into Fidelity's China-focused fund, which invests in Hong Kong-listed H shares of Chinese mainland companies, and into Japanese stocks.
Not Bear Rally
Investments in money market funds in the U.S. have reached a record and could fuel a bull market during the next two to three years, he said.
Bolton's view contradicts that of Nouriel Roubini, the New York University professor who predicted the financial crisis. Roubini said last week he was "still bearish" and that an economic recovery is going to take "longer than expected."
"Nearly all the broker research I read says `bear-market rally,' that's one of the other things that makes me think it's the beginning of a bull market, not a bear-market rally," Bolton said. "When everyone is extremely negative, I want to bet against that. If you wait for things to get better, you'll miss the rally.
"Fidelity International managed about $157 billion as of January, according to Hong Kong-based spokeswoman Megan Aitken.
Low valuations indicate advances that began in March are the start of a bull market, Bolton said. He favors financials, consumer cyclical, technology, and "value stocks," such as retailers, automakers and construction- related shares.
"All the things are in place for the bear market to have ended," Bolton said in an interview with Bloomberg Television in Hong Kong. "When there's a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I'd like to bet against that.
"The MSCI World Index has dropped 3.2 percent this year, extending last year's 42 percent slump, the worst annual performance since at least 1970. Shares plunged as a collapse in U.S. consumer spending and a freeze in credit markets sent the U.S., Europe and Japan into their first simultaneous recessions since World War II.
The declines dragged the gauge's price-to-book value, or the ratio of stock prices to company assets, to 1.5, down from 2.4 at the beginning of 2008.
Bolton, who is based in London, said that in September he started putting money into Fidelity's China-focused fund, which invests in Hong Kong-listed H shares of Chinese mainland companies, and into Japanese stocks.
Not Bear Rally
Investments in money market funds in the U.S. have reached a record and could fuel a bull market during the next two to three years, he said.
Bolton's view contradicts that of Nouriel Roubini, the New York University professor who predicted the financial crisis. Roubini said last week he was "still bearish" and that an economic recovery is going to take "longer than expected."
"Nearly all the broker research I read says `bear-market rally,' that's one of the other things that makes me think it's the beginning of a bull market, not a bear-market rally," Bolton said. "When everyone is extremely negative, I want to bet against that. If you wait for things to get better, you'll miss the rally.
"Fidelity International managed about $157 billion as of January, according to Hong Kong-based spokeswoman Megan Aitken.
Monday, April 27, 2009
Swine Flu Virus Infects World Stock Markets
As authorities around the world rush to work out where swine flu will turnup next, the movement of markets Monday was far more predictable. Withcases of the new H1N1 virus confirmed from Mexico to Spain — and tests onpossible cases underway from New Zealand to Britain — investors battledtheir own nerves.
Recovering slightly from earlier losses, Britain's FTSE100 index of leading shares was down just under 1% in early afternoontrading. Indices in France and Germany, likewise up on their earlier lowsMonday, were nonetheless subdued amid the global jitters triggered by thespread of the flu virus. Earlier, shares in Hong Kong closed down 2.74%.For investors already wounded by the global economic crash, news of apotential pandemic came as a further blow.
"As if we didn't have enough tocontend with," strategists at the Royal Bank of Scotland wrote in a noteto clients Monday, "it's just what we need now, a flu pandemic in themidst of the biggest financial crisis since the Great Depression." Amidthe sell-off, travel industry stocks fell sharpest. Shares in Lufthansa,Europe's second-largest airline, tumbled by more than 12% beforerecovering slightly.
Those of rival British Airways pulled back fromsimilar lows, trading 8% down by mid-afternoon in London. Tour operatorsand hotel groups took similar hits. (See pictures of the swine fluoutbreak in Mexico.)From the volatility of global travel, investors sought the calm of safehavens. Both the dollar and the Japanese yen rose against majorcurrencies. Defensive stocks, such as pharmaceuticals, registered healthygains. Shares in Roche, the Swiss maker of Tamiflu, an antiviral drugeffective against swine flu, had climbed almost 6% by Monday afternoon.
Rival GlaxoSmithKline, which makes the influenza treatment Relenza, sawits shares rise even higher. (Read: "Swine Flu: 5 Things You Need to KnowAbout the Outbreak.")How long stocks hold those positions in the face of the threat from H1N1remains to be seen. The fact that shares hit hard early had regained lostground Monday suggests markets had earlier "responded in the time honoredfashion," says Howard Wheeldon, senior strategist at BGC Partners inLondon, namely with "a degree of overreaction.
"Given the lack of clarity over the threat posed by the virus, that'sperhaps understandable. But gauging the impact of the outbreak — formarkets and economies just as for health officials — takes time. Shouldthe virus's potential for a pandemic be realized, though, its financialimpact would be severe.As with the outbreak of severe acute respiratory syndrome (SARS), whichdevastated the Asian economy in 2003, economic consequences would bemeasured "not so much in the number of people that go down with it, orunfortunately are killed by it," says Justin Urquhart Stewart, investmentdirector at Seven Investment Management in London, but by "the impact ofthe potential [population] that could be effected. Once it starts togather momentum, it takes very little to start knocking serious percentagepoints off global trade and GDP." Right now, that's a momentum we couldall do without.
Recovering slightly from earlier losses, Britain's FTSE100 index of leading shares was down just under 1% in early afternoontrading. Indices in France and Germany, likewise up on their earlier lowsMonday, were nonetheless subdued amid the global jitters triggered by thespread of the flu virus. Earlier, shares in Hong Kong closed down 2.74%.For investors already wounded by the global economic crash, news of apotential pandemic came as a further blow.
"As if we didn't have enough tocontend with," strategists at the Royal Bank of Scotland wrote in a noteto clients Monday, "it's just what we need now, a flu pandemic in themidst of the biggest financial crisis since the Great Depression." Amidthe sell-off, travel industry stocks fell sharpest. Shares in Lufthansa,Europe's second-largest airline, tumbled by more than 12% beforerecovering slightly.
Those of rival British Airways pulled back fromsimilar lows, trading 8% down by mid-afternoon in London. Tour operatorsand hotel groups took similar hits. (See pictures of the swine fluoutbreak in Mexico.)From the volatility of global travel, investors sought the calm of safehavens. Both the dollar and the Japanese yen rose against majorcurrencies. Defensive stocks, such as pharmaceuticals, registered healthygains. Shares in Roche, the Swiss maker of Tamiflu, an antiviral drugeffective against swine flu, had climbed almost 6% by Monday afternoon.
Rival GlaxoSmithKline, which makes the influenza treatment Relenza, sawits shares rise even higher. (Read: "Swine Flu: 5 Things You Need to KnowAbout the Outbreak.")How long stocks hold those positions in the face of the threat from H1N1remains to be seen. The fact that shares hit hard early had regained lostground Monday suggests markets had earlier "responded in the time honoredfashion," says Howard Wheeldon, senior strategist at BGC Partners inLondon, namely with "a degree of overreaction.
"Given the lack of clarity over the threat posed by the virus, that'sperhaps understandable. But gauging the impact of the outbreak — formarkets and economies just as for health officials — takes time. Shouldthe virus's potential for a pandemic be realized, though, its financialimpact would be severe.As with the outbreak of severe acute respiratory syndrome (SARS), whichdevastated the Asian economy in 2003, economic consequences would bemeasured "not so much in the number of people that go down with it, orunfortunately are killed by it," says Justin Urquhart Stewart, investmentdirector at Seven Investment Management in London, but by "the impact ofthe potential [population] that could be effected. Once it starts togather momentum, it takes very little to start knocking serious percentagepoints off global trade and GDP." Right now, that's a momentum we couldall do without.
Thursday, April 23, 2009
Kim Eng Indonesia Equity Daily, 24 Apr 09
Our Comment
Teguh Sunyoto published an update on Total Bangun Persada. The management indicated that the 33% YoY net profit decline in 1Q09 was mainly attributable to higher-than- expected operating expenses and higher tax rate (final tax 3% on revenue vs. old system 30% on pretax income).
On a positive note, 1Q09 net profit has already represented 78% of last year´s net profit of Rp17b.. Gross margin was up to 7.9% in 1Q09 (from 5.6% in 2008 and 7.6 in 1Q08), as expected. This was not only helped by lower cost of construction but also because of the successful management strategy to break up and subcontract (delegate) its large-size projects which typically command smaller margin (gross margin 4% or less) to other smaller contractors.
We reckon there are at least three repeat customers, which potentially will give an important contribution to Total business. Those are the Para Group, Ramayana and Bina Nusantara Group. Para Group´s subsidiary, Bank Mega for example, plans to open nearly 300 new micro banking unit/branches up to 2010.
We upgrade our recommendation on Total to BUY due to the expectation on higher profitability and its promising prospect especially from its repeat customer base. Our target price of Rp180 is based on 7x FY10 P/E which is 33% below valuation of Malaysian construction firm at 10.5x FY10 P/E.
Bank Danamon reported that a net profit declined 30% YoY to Rp393b in 1Q09., below consensus estimate. Lower net profit was mainly caused by higher provision, higher operating expenses and non-recurring expense from arising foreign exchange forward contracts. Net interest income slightly increased by 5% YoY.
Total Loan in Q109 showed growth of 13% YoY, driven by growth in mass market and micro and small-scale business which grew by 25% YoY and 4% YoY respectively. Gross NPL increased by 60bp to 2.9% as deteriorating operating environment has impacted the credit quality. Capital Adequacy ratio (CAR) declined to 16.9% in 1Q09 from 20.8% in 1Q08 due to growing in earning assets and a decline in Tier 2 Capital (the bank has fully amortized its US$300m subordinated debt in March 2009).
Indonesia stock market experienced technical problems in relation to the new system implemented by the stock exchange. The market was forced to close early. Directors of the exchange said that the problems have been fixed this morning. We see that volume will probably be lower today as market players hold their trading while making sure that the system is running well.
Golkar announced Jusuf Kalla as candidate for President. Golkar-Partai Demokrat break up has caused concerns in the market. We see that announcement of President Yudhoyono´c running mate will erase the uncertainties.
By - Katarina Setiawan
Highlights
o Total Bangun (BUY): On the right track
o Bank Danamon: Net profit declined 30% YoY to Rp393b in 1Q09
o P Gas Negara (BUY): Government to cancel Duri-Medan pipeline
o Telkom (HOLD): Obtained tax incentive
o Semen Gresik (HOLD): To appoint Bank Mandiri to seek financing
o Timah: Production may fall below forecast
Teguh Sunyoto published an update on Total Bangun Persada. The management indicated that the 33% YoY net profit decline in 1Q09 was mainly attributable to higher-than- expected operating expenses and higher tax rate (final tax 3% on revenue vs. old system 30% on pretax income).
On a positive note, 1Q09 net profit has already represented 78% of last year´s net profit of Rp17b.. Gross margin was up to 7.9% in 1Q09 (from 5.6% in 2008 and 7.6 in 1Q08), as expected. This was not only helped by lower cost of construction but also because of the successful management strategy to break up and subcontract (delegate) its large-size projects which typically command smaller margin (gross margin 4% or less) to other smaller contractors.
We reckon there are at least three repeat customers, which potentially will give an important contribution to Total business. Those are the Para Group, Ramayana and Bina Nusantara Group. Para Group´s subsidiary, Bank Mega for example, plans to open nearly 300 new micro banking unit/branches up to 2010.
We upgrade our recommendation on Total to BUY due to the expectation on higher profitability and its promising prospect especially from its repeat customer base. Our target price of Rp180 is based on 7x FY10 P/E which is 33% below valuation of Malaysian construction firm at 10.5x FY10 P/E.
Bank Danamon reported that a net profit declined 30% YoY to Rp393b in 1Q09., below consensus estimate. Lower net profit was mainly caused by higher provision, higher operating expenses and non-recurring expense from arising foreign exchange forward contracts. Net interest income slightly increased by 5% YoY.
Total Loan in Q109 showed growth of 13% YoY, driven by growth in mass market and micro and small-scale business which grew by 25% YoY and 4% YoY respectively. Gross NPL increased by 60bp to 2.9% as deteriorating operating environment has impacted the credit quality. Capital Adequacy ratio (CAR) declined to 16.9% in 1Q09 from 20.8% in 1Q08 due to growing in earning assets and a decline in Tier 2 Capital (the bank has fully amortized its US$300m subordinated debt in March 2009).
Indonesia stock market experienced technical problems in relation to the new system implemented by the stock exchange. The market was forced to close early. Directors of the exchange said that the problems have been fixed this morning. We see that volume will probably be lower today as market players hold their trading while making sure that the system is running well.
Golkar announced Jusuf Kalla as candidate for President. Golkar-Partai Demokrat break up has caused concerns in the market. We see that announcement of President Yudhoyono´c running mate will erase the uncertainties.
By - Katarina Setiawan
Highlights
o Total Bangun (BUY): On the right track
o Bank Danamon: Net profit declined 30% YoY to Rp393b in 1Q09
o P Gas Negara (BUY): Government to cancel Duri-Medan pipeline
o Telkom (HOLD): Obtained tax incentive
o Semen Gresik (HOLD): To appoint Bank Mandiri to seek financing
o Timah: Production may fall below forecast
BNBR Tick Chart with Trade Volume Index
TRADE VOLUME INDEX
Overview
The Trade Volume Index ("TVI") shows whether a security is being accumulated(purchased) or distributed (sold).
The TVI is designed to be calculated using intraday "tick" price data. TheTVI is based on the premise that trades taking place at higher "asking"prices are buy transactions and trades at lower "bid" prices are selltransactions.
Interpretation
The TVI is very similar to On Balance Volume. The OBV method works well withdaily prices, but it doesn't work as well with intraday tick prices. Tickprices, especially stock prices, often display trades at the bid or askprice for extended periods without changing. This creates a flat support orresistance level in the chart. During these periods of unchanging prices,the TVI continues to accumulate this volume on either the buy or sell side,depending on the last price change.
The TVI helps identify whether a security is being accumulated ordistributed. When the TVI is trending up, it shows that trades are takingplace at the asking price as buyers accumulate the security. When the TVI istrending down, it shows that trades are taking place at the bid price assellers distribute the security.
When prices create a flat resistance level and the TVI is rising, look forprices to breakout to the upside. When prices create a flat support leveland the TVI is falling, look for prices to drop below the support level.
Overview
The Trade Volume Index ("TVI") shows whether a security is being accumulated(purchased) or distributed (sold).
The TVI is designed to be calculated using intraday "tick" price data. TheTVI is based on the premise that trades taking place at higher "asking"prices are buy transactions and trades at lower "bid" prices are selltransactions.
Interpretation
The TVI is very similar to On Balance Volume. The OBV method works well withdaily prices, but it doesn't work as well with intraday tick prices. Tickprices, especially stock prices, often display trades at the bid or askprice for extended periods without changing. This creates a flat support orresistance level in the chart. During these periods of unchanging prices,the TVI continues to accumulate this volume on either the buy or sell side,depending on the last price change.
The TVI helps identify whether a security is being accumulated ordistributed. When the TVI is trending up, it shows that trades are takingplace at the asking price as buyers accumulate the security. When the TVI istrending down, it shows that trades are taking place at the bid price assellers distribute the security.
When prices create a flat resistance level and the TVI is rising, look forprices to breakout to the upside. When prices create a flat support leveland the TVI is falling, look for prices to drop below the support level.
Friday, April 17, 2009
Still, Cheapest Coal Stock…Upgrade to BUY
We upgrade our recommendation on BUMI from Hold to BUY and put BUMI’s Target price back on its DCF valuation without any discount of Rp1.302. Higher investor’s risk appetite with huge liquidity on market justified our action to put BUMI’s on it’s normal valuation and ignoring corporate governance issues that already dimmed by now. With selling pressure easing and strong bullish momentum on Indonesian market, we believe BUMI will get the most beneficiary as investor start looking the cheapest stock available. BUY.
Higher Risk Appetite as the Main Catalyst on BUMI Shares
We believe, investor’s risk appetite currently are higher compared to last quarter on the back of optimism on bottoming global financial crisis and brighter outlook on economic recovery. This will become the main catalyst on BUMI’s shares on market as investor are become more eager to buy stocks, especially the cheapest one and ‘ignoring’ some risks behind it.
We believe, investor’s risk appetite currently are higher compared to last quarter on the back of optimism on bottoming global financial crisis and brighter outlook on economic recovery. This will become the main catalyst on BUMI’s shares on market as investor are become more eager to buy stocks, especially the cheapest one and ‘ignoring’ some risks behind it.
Highest Liquidity among Others
Compared to other peers, BUMI is the most liquid coal stocks on market with Ytd average turnover of Rp243 bn/day compared to peer’s average of just Rp60.8 bn/day. Even almost four times higher than its closest competitor of PTBA with only Rp64.6 bn/day. This should give BUMI the best leverage when market starts to entry the bullish path.
Compared to other peers, BUMI is the most liquid coal stocks on market with Ytd average turnover of Rp243 bn/day compared to peer’s average of just Rp60.8 bn/day. Even almost four times higher than its closest competitor of PTBA with only Rp64.6 bn/day. This should give BUMI the best leverage when market starts to entry the bullish path.
Best among the Under-owned Group
In our view, BUMI is the best asset in Bakrie Group portfolio and also the biggest weighted on BNBR’s earning. As we know, Bakrie group stocks had underperformed the market since Oct ’08 after BNBR announced its liquidity problems and result in a Repo Mess. Currently, those selling pressure are overdone as BNBR liquidity profiles had improved and the best will prevail.
In our view, BUMI is the best asset in Bakrie Group portfolio and also the biggest weighted on BNBR’s earning. As we know, Bakrie group stocks had underperformed the market since Oct ’08 after BNBR announced its liquidity problems and result in a Repo Mess. Currently, those selling pressure are overdone as BNBR liquidity profiles had improved and the best will prevail.
Don’t Forget the Dividend Offer
Even if we’re believe that this issues had mostly being factored in the market, but we are positive on BUMI’s huge dividend yield about 10% (Rp110/share) will be able to create a base on its price movement. Not many companies offer 10% dividend yield for fiscal year of 2008, even not those SOE’s.
Even if we’re believe that this issues had mostly being factored in the market, but we are positive on BUMI’s huge dividend yield about 10% (Rp110/share) will be able to create a base on its price movement. Not many companies offer 10% dividend yield for fiscal year of 2008, even not those SOE’s.
Valuation: Put BUMI back on its DCF Value of Rp1302
We eliminate our discount for BUMI’s DCF valuation and put our Target price of Rp1.302 using WACC of 14,1% and 0% LTG. Currently BUMI traded at F09 PE/PBV of 3.2x/1.4x and EV/EBITDA of only 2x. Other peers average valuation hovering at F09 PE/PBV of 5.3x/2.1x and EV/EBITDA of 2.9x. Evem with current rally on stock prices, BUMI still the cheapest among others with a lot of un-factored positive catalyst. BUY.
We eliminate our discount for BUMI’s DCF valuation and put our Target price of Rp1.302 using WACC of 14,1% and 0% LTG. Currently BUMI traded at F09 PE/PBV of 3.2x/1.4x and EV/EBITDA of only 2x. Other peers average valuation hovering at F09 PE/PBV of 5.3x/2.1x and EV/EBITDA of 2.9x. Evem with current rally on stock prices, BUMI still the cheapest among others with a lot of un-factored positive catalyst. BUY.
By Adrianus Bias Prasuryo
Thursday, April 16, 2009
CLSA INDO: Panin Bank downgrade, higher NPL risks
Good Morning. It's been less than a month when we talked about howunpopular we, stock brokers, have been. How even property brokers ignore usand many people feel sorry for us at gatherings (Cocktail party theory ofPeter Lynch). Some even thought we are the mastermind behind this globalbust. "All guilty", that is everyone in finance. Then we saw our majorcompetitors in the broking community has just dramatically scaled down theiroperation in Indonesia and even rating agency Moody's decided to shut downtheir Indonesia office (feels like Phase 5 of the emerging markets cycle asnoted by Marc Faber in Tomorrow's Gold). Seeing all the evidence that themarket had reached max pessimism, we at the sales desk turned more positive.
However, what caught us by surprise is how fast and strong this market hasrebounded (The Rp is now the best performing Asian currency YTD) and howsentiment took a 180 degree turn just like that. Yesterday, my salescolleagues Eugene and Daniel went to a popular bar for happy hour, andamazingly, they are popular once again. Friends and acquaintances startedasking them what stocks to buy. Talk about from hero to zero to hero again.Very scary indeed. Resembles the ultra high volatility global markets wesaw in the 1970s when inflation raged.
Amazingly enough, CLSA's Feng Shui Index predicted the current rally..lookat month by month predictions. April 5 to May 5 - the return of the Dragonpromises wealth for the watchful and the fleet of foot, so jump back in andfill your boots.....5th May - 4th June - Beware the Slippery Snake..but lookforward to 7 August - 6th Sept - Watch this cheeky Monkey scamper high abovethe earth, carrying a pouch of metal money on his back...this month holdsgreat promise for those who have been carefully and cleverly building solidpositions... (ask me if you want to copy again but who needs Feng Shui nowwhen everyone could be a stock picking genius)
While we are wildly bullish on the longer term outlook for commodities hencethis market, it would be sometime until we see actual data pointing toinflation from deflation. As such, we will be a little more cautious in theshort term.
Research Today: Panin Bank downgrade, higher NPL risks
Nico Oentung downgrades Panin Bank (PNBN IJ) from BUY to SELL. New TP isRp450 (from Rp800). Nico also downgrades PNBN's earnings by 5-26% reflectingweaker revenue dynamics (slower loan growth, thus lower NIM) and higher NPL.
One of the main reasons to buy PNBN is the M&A catalyst. As global bankscontinue to de-leverage and focus on the domestic market, M&A catalyst isunlikely to return in the near future. Key points from the report:Higher NPL risk due to aggressive loan growth.
* PNBN has almost doubled its loan book in the last two years vs. 65%for banking sector. * New loans now account for 50% of its total loan portfolio vs. 39%for the sector. * Sharp pick-up of NPL and special mention loans in 4Q08. . Weak revenue dynamics + higher volatility: expect NIM to be underpressure as loan growth continues to slow from tightening of underwriting. . PNBN has the lowest provisions in the sector at 79%. We expectprovisions to almost double in 09. . Valuation not attractive. PNBN trades at 1.5x P/B and ROAE about8% (due to weak revenue dynamics + rising provisions). As a comparison, BankDanamon (BDMN IJ) also trades at 1.5x P/B but ROE is higher at mid-teenpercentage.
News Headlines/Others: Mandiri (BMRI IJ) is proposing 7% divestment. Local press reported thatMandiri intend to capture 5% tax benefit resulting from having 40% freefloat. Currently, free float for the bank is 33%. Comment: We estimate a 5%reduction in tax rates will add about Rp400bn to net profit or 7%additionalearnings growth and 110bp boost to ROE. However, Mandiri will needgovernment approval for the divestment which could take some time given thecurrent election process. We continue to maintain U-PF on Mandiri due to itshigher risk loan portfolio, especially large exposure to corporate segment,under current economic downturn.New margin and short selling regulation will go in effect May 2009. The newregulation puts a limit of 1:1 margin (the margin facility can only be aslarge as the customer deposit). Also, the ban on short selling will remainin place.
Elnusa (ELSA IJ) stake for sale? Tri Daya intends to sell its 37% stake inthe oil services company Elnusa. The stake is valued around Rp1tn. SOEPertamina controls 41.1% of ELSA. Local media reports that Pertamina,Malyasian Petronas, and Northstar Pacific are interested bidders.SOE miners Antam (ANTM IJ), Timah (TINS IJ), and Bukit Asam (PTBA IJ) to getnew BOD? Local media reports that the SOE Ministry is in the process ofchanging the BOD.President SBY's running mate cannot be a political party chairman. TheDemocrats, buoyed by last week's election have decided that party chairmanwill not be eligible to be running mates of President SBY. This means thatcurrent VP Kalla would have to relinquish his chairmanship of the Golkarparty. Separately, the Democrats have commented that a presidential ticketof SBY-Kalla is still very possible. The VP candidate will be announcedthis month on April 25 during the Democrats national meeting.
International Airport Terminal 3 launched yesterday. Currently, theremaining work is in finishing several supporting facilities such as parkinglot, ticket booths, and shopping arcades. This new terminal is designed tobe an environmentally friendly and energy-saving building, and expected toaccommodate as many as 4m passengers each year for two airlines. Reclamation project to be constructed this year. This project whichreclaims the North Jakarta coastal area and is planned to prevent flood inJakarta due to low land location. The area will include industrial zones,tourist sites, offices, business districts, transportation facilities, andresidential areas. Arpeni Pratama (APOL IJ) to discontinue derivative transaction contract.Due to losses in derivatives transactions (Rp361.58bn in 2008), APOL has nowdecided not to extend its derivatives contracts and start to operatebusiness conservatively
Chart of the Day:Thermal coal price FOB Newcastle and Richard BaySome supportive data for thermal coal from Europe and China, and this mightindicate that downside risk on spot thermal coal price in Asia and Australia(Newcastle Spot) is somewhat limited. We have assumed contract price of US$72/t for FY09 while Newcastle spotprice currently hovered around US$63/t. Note that since average FOB cashcost for thermal coal from Indonesia and Australia hover around US$45/t toUS$50/t, there had been concern that spot thermal coal price could dipcloser to this level. Thermal coal future in Europe (API4, the blue line) bounced strongly fromits low in the last 4 weeks, massively outperforming spot thermal coal pricein Newcastle, Australia (CLSPAUNE, the red line).
Our sources in the industry mentioned that thermal coal fundamentals inEurope remain weak as port and power station stockpiles are still at highlevel, seasonally coal burn is falling due to milder weather, and gas pricesare declining. There are, though, some positives that supported Europeanthermal coal price, including
. Russians suppliers pulling out from the market as they have thehighest cash costs, around US$65/t, . No supply from the US for the same reason as the Russian, . South African supply remains tight because of inland transportconstraints.
. Colombia has endured a series of strikes for about 3-4 weeks,affecting many producers.
Worth highlighting that the US export was quite strong, up by 38% YoY inFY08, but no official data is available of export during 1Q09. Key Indicators: JCI:1,593.66 +23.40 (+1.49%), T/O USD 418.61 mil, YTD: +17.58%ADR: TLKM US$27.57 = IDR7,489ISAT US$25.95 = IDR5,639
The market is set to continue its recent run. Sentiment is running high aswe have seen both local and foreigners moving back into the market. Foreignfocus on the big caps, and local focus on miners,plantations, property names.- RUPIAH: very strong this week (post-parliamentary elections) and up 6%now. Asset reflation plays, like banks and property, have been strong intandem, and the currency has helped overall sentiment tremendously.As of this morning, we are 2x better buyer.Did You Know That?
Java and the Madura islands are no longer separated. A new 5,438-metre- longbridge that connects the city of Surabaya in Java and the island of bullracing Madura is now almost fully completed. The bridge is designed to lastfor 100 years and the construction work began in 2002. It is funded bysoft loans from the Chinese govt and employed 3,500 workers from Indonesiaand China. Total cost is around Rp4tn (US$368mn). The bridge used up 28ktons of steel and 600 tons of steel mixture. But the construction processwas not all plain sailing. Last month, 4 fishermen were arrested for allegedsteel theft at the bridge construction site. The men stole the material over3 months using magnets and managed to collect about 3 tons of steel rods!!
Best regards,Wuddy Warsono, CFACLSA Indonesia Head of SalesPhone: (62-21) 573 9460Toll Free - HK: 800 938 000Toll Free - SIN: 800 621 1104Toll Free - US: 800 460 2581
However, what caught us by surprise is how fast and strong this market hasrebounded (The Rp is now the best performing Asian currency YTD) and howsentiment took a 180 degree turn just like that. Yesterday, my salescolleagues Eugene and Daniel went to a popular bar for happy hour, andamazingly, they are popular once again. Friends and acquaintances startedasking them what stocks to buy. Talk about from hero to zero to hero again.Very scary indeed. Resembles the ultra high volatility global markets wesaw in the 1970s when inflation raged.
Amazingly enough, CLSA's Feng Shui Index predicted the current rally..lookat month by month predictions. April 5 to May 5 - the return of the Dragonpromises wealth for the watchful and the fleet of foot, so jump back in andfill your boots.....5th May - 4th June - Beware the Slippery Snake..but lookforward to 7 August - 6th Sept - Watch this cheeky Monkey scamper high abovethe earth, carrying a pouch of metal money on his back...this month holdsgreat promise for those who have been carefully and cleverly building solidpositions... (ask me if you want to copy again but who needs Feng Shui nowwhen everyone could be a stock picking genius)
While we are wildly bullish on the longer term outlook for commodities hencethis market, it would be sometime until we see actual data pointing toinflation from deflation. As such, we will be a little more cautious in theshort term.
Research Today: Panin Bank downgrade, higher NPL risks
Nico Oentung downgrades Panin Bank (PNBN IJ) from BUY to SELL. New TP isRp450 (from Rp800). Nico also downgrades PNBN's earnings by 5-26% reflectingweaker revenue dynamics (slower loan growth, thus lower NIM) and higher NPL.
One of the main reasons to buy PNBN is the M&A catalyst. As global bankscontinue to de-leverage and focus on the domestic market, M&A catalyst isunlikely to return in the near future. Key points from the report:Higher NPL risk due to aggressive loan growth.
* PNBN has almost doubled its loan book in the last two years vs. 65%for banking sector. * New loans now account for 50% of its total loan portfolio vs. 39%for the sector. * Sharp pick-up of NPL and special mention loans in 4Q08. . Weak revenue dynamics + higher volatility: expect NIM to be underpressure as loan growth continues to slow from tightening of underwriting. . PNBN has the lowest provisions in the sector at 79%. We expectprovisions to almost double in 09. . Valuation not attractive. PNBN trades at 1.5x P/B and ROAE about8% (due to weak revenue dynamics + rising provisions). As a comparison, BankDanamon (BDMN IJ) also trades at 1.5x P/B but ROE is higher at mid-teenpercentage.
News Headlines/Others: Mandiri (BMRI IJ) is proposing 7% divestment. Local press reported thatMandiri intend to capture 5% tax benefit resulting from having 40% freefloat. Currently, free float for the bank is 33%. Comment: We estimate a 5%reduction in tax rates will add about Rp400bn to net profit or 7%additionalearnings growth and 110bp boost to ROE. However, Mandiri will needgovernment approval for the divestment which could take some time given thecurrent election process. We continue to maintain U-PF on Mandiri due to itshigher risk loan portfolio, especially large exposure to corporate segment,under current economic downturn.New margin and short selling regulation will go in effect May 2009. The newregulation puts a limit of 1:1 margin (the margin facility can only be aslarge as the customer deposit). Also, the ban on short selling will remainin place.
Elnusa (ELSA IJ) stake for sale? Tri Daya intends to sell its 37% stake inthe oil services company Elnusa. The stake is valued around Rp1tn. SOEPertamina controls 41.1% of ELSA. Local media reports that Pertamina,Malyasian Petronas, and Northstar Pacific are interested bidders.SOE miners Antam (ANTM IJ), Timah (TINS IJ), and Bukit Asam (PTBA IJ) to getnew BOD? Local media reports that the SOE Ministry is in the process ofchanging the BOD.President SBY's running mate cannot be a political party chairman. TheDemocrats, buoyed by last week's election have decided that party chairmanwill not be eligible to be running mates of President SBY. This means thatcurrent VP Kalla would have to relinquish his chairmanship of the Golkarparty. Separately, the Democrats have commented that a presidential ticketof SBY-Kalla is still very possible. The VP candidate will be announcedthis month on April 25 during the Democrats national meeting.
International Airport Terminal 3 launched yesterday. Currently, theremaining work is in finishing several supporting facilities such as parkinglot, ticket booths, and shopping arcades. This new terminal is designed tobe an environmentally friendly and energy-saving building, and expected toaccommodate as many as 4m passengers each year for two airlines. Reclamation project to be constructed this year. This project whichreclaims the North Jakarta coastal area and is planned to prevent flood inJakarta due to low land location. The area will include industrial zones,tourist sites, offices, business districts, transportation facilities, andresidential areas. Arpeni Pratama (APOL IJ) to discontinue derivative transaction contract.Due to losses in derivatives transactions (Rp361.58bn in 2008), APOL has nowdecided not to extend its derivatives contracts and start to operatebusiness conservatively
Chart of the Day:Thermal coal price FOB Newcastle and Richard BaySome supportive data for thermal coal from Europe and China, and this mightindicate that downside risk on spot thermal coal price in Asia and Australia(Newcastle Spot) is somewhat limited. We have assumed contract price of US$72/t for FY09 while Newcastle spotprice currently hovered around US$63/t. Note that since average FOB cashcost for thermal coal from Indonesia and Australia hover around US$45/t toUS$50/t, there had been concern that spot thermal coal price could dipcloser to this level. Thermal coal future in Europe (API4, the blue line) bounced strongly fromits low in the last 4 weeks, massively outperforming spot thermal coal pricein Newcastle, Australia (CLSPAUNE, the red line).
Our sources in the industry mentioned that thermal coal fundamentals inEurope remain weak as port and power station stockpiles are still at highlevel, seasonally coal burn is falling due to milder weather, and gas pricesare declining. There are, though, some positives that supported Europeanthermal coal price, including
. Russians suppliers pulling out from the market as they have thehighest cash costs, around US$65/t, . No supply from the US for the same reason as the Russian, . South African supply remains tight because of inland transportconstraints.
. Colombia has endured a series of strikes for about 3-4 weeks,affecting many producers.
Worth highlighting that the US export was quite strong, up by 38% YoY inFY08, but no official data is available of export during 1Q09. Key Indicators: JCI:1,593.66 +23.40 (+1.49%), T/O USD 418.61 mil, YTD: +17.58%ADR: TLKM US$27.57 = IDR7,489ISAT US$25.95 = IDR5,639
The market is set to continue its recent run. Sentiment is running high aswe have seen both local and foreigners moving back into the market. Foreignfocus on the big caps, and local focus on miners,plantations, property names.- RUPIAH: very strong this week (post-parliamentary elections) and up 6%now. Asset reflation plays, like banks and property, have been strong intandem, and the currency has helped overall sentiment tremendously.As of this morning, we are 2x better buyer.Did You Know That?
Java and the Madura islands are no longer separated. A new 5,438-metre- longbridge that connects the city of Surabaya in Java and the island of bullracing Madura is now almost fully completed. The bridge is designed to lastfor 100 years and the construction work began in 2002. It is funded bysoft loans from the Chinese govt and employed 3,500 workers from Indonesiaand China. Total cost is around Rp4tn (US$368mn). The bridge used up 28ktons of steel and 600 tons of steel mixture. But the construction processwas not all plain sailing. Last month, 4 fishermen were arrested for allegedsteel theft at the bridge construction site. The men stole the material over3 months using magnets and managed to collect about 3 tons of steel rods!!
Best regards,Wuddy Warsono, CFACLSA Indonesia Head of SalesPhone: (62-21) 573 9460Toll Free - HK: 800 938 000Toll Free - SIN: 800 621 1104Toll Free - US: 800 460 2581
Tuesday, April 14, 2009
Worst May Be Over for Stocks And US Economy
Worst May Be Over for Stocks And US Economy, Cohen Says
The US stock market appears to have hit bottom and the nation's economy might see an upward shift in the latter half of the year, widely watched investment strategist Abby Joseph Cohen told CNBC.
"One thing to keep in mind is that we have undergone many months of very dramatic declines in earnings expectations, and also in revisions to the economic forecast by macro-forecasters," said Cohen, president of the Goldman Sachs Global Markets Institute. "And something has changed over the past month and that is that the consensus numbers aren´t being adjusted very much. I think that means that many investors now believe that the forecasts are finally as low as they need to be."
Goldman Sach is forecasting that the S&P 500, currently around 850, will hit 900 by the end of this year, Cohen said in a live interview.
Meanwhile, investors should be more trading-oriented than usual to take advantage of the market's volatility.
"What we´re suggesting to many of our clients is that they be somewhat more trading oriented than normal because the markets are more volatile," Cohen said. "Just last week, our analysts in the retail sector indicated that they were seeing some opportunities among some securities with a little higher beta. We´ve also had significant opportunities in some of the categories related to natural resources and industrials."
Cohen said the markets are more normal than they have been in the past few months, a reason investors can feel more comfortable.
"This applies not only to the equity market but also to the bond market," she said. "We´re beginning to see some better news appear, but let´s keep in mind that we have some bad news, particularly with regard to unemployment. The question for investors is whether or not that bad news is already incorporated in share prices."
Monday, April 13, 2009
Goldman 1Q earnings surpass Wall Street estimates
Goldman Sachs earns $1.66B in 1st-quarter, surpassing Wall Street's estimates - by Sara Lepro, AP Business Writer
NEW YORK (AP) -- Goldman Sachs, in another sign that banks may be turning around, beat Wall Street's earnings expectations as it reported a profit of $1.66 billion for the first three months of this year. The bank also said it planned to raise $5 billion in stock to help it pay back government bailout funds.
The New York-based bank said it earned $3.39 per share, easily surpassing analysts' forecasts for profit of $1.64 per share. This compares with earnings of $1.47 billion, or $3.23 per share, in the quarter ended Feb. 29 of last year, and is a huge improvement over the $2.29 billion Goldman lost in the fourth quarter.
Goldman's news, released a day earlier than anticipated, came days after another top-performing bank, Wells Fargo & Co., said it expected to report record first-quarter earnings of $3 billion, well above Wall Street's estimates. That news fed a huge stock market rally Thursday, but with companies including Citigroup Inc. and Bank of America Corp. still to report their first-quarter results, it's too soon to say the banking industry is indeed finally recovering from the devastating losses caused by the credit crisis and the recession.
Investors showed some caution after Goldman's announcement, which followed the close of regular trading on Wall Street. Goldman shares initially rose in response to its report but then slipped 1.5 percent. Citigroup, which surged 25 percent during regular trading, rose a more modest 1 percent in after-hours activity while Bank of America rose 0.7 percent after jumping 15 percent during regular trading. Morgan Stanley fell 3.3 percent in late trading after jumping 6 percent during regular hours.
Morningstar Inc. equity analyst Michael Wong said Goldman benefited from the fact that it has more traditional investment banking and trading operations than more retail-focused banks like Citi and Bank of America.
"What allowed Goldman to outperform is solely tied to their brokerage operations," he said.
Still, Goldman's first-quarter performance put it in a strong enough position to plan the public stock offering of $5 billion which it said would be used, with additional resources, to pay back its government debt. Goldman received $10 billion in government funds during the downturn last fall as part of the U.S. Treasury Department's program to invest directly in hundreds of banks and try and help alleviate the nearly frozen credit markets.
Goldman executives have said for months that the company wanted to repay bailout funds this year, and last month, company spokesman Lucas Van Praag said the main reason Goldman wanted to return the money is that it doesn't need the funds.
Many banks have chafed under restrictions, including limits on executive compensation, imposed by the government as it dispensed the bailout money. The banks have also come under sharp criticism from lawmakers and the public for a variety of business practices.
Goldman said its first-quarter profit was bolstered by strong revenue growth in its fixed income and currency businesses. The Treasury market and the dollar were beneficiaries of investor uncertainty during the first two months of the year; in March, the stock market began a five-week rally that lifted the major indexes off 12-year lows.
Goldman's total revenue was $11.88 billion during the quarter, compared with $18.63 billion in the prior-year quarter. Analysts forecast revenue of $7.19 billion.
Goldman's fourth-quarter loss was its first since becoming a public company in 1999. The company, like other financial firms, was hurt by the plunging value of its investments as the credit crisis eroded the value of mortgage-backed securities, stocks and many other assets.
When Goldman became a bank holding company last fall amid the mushrooming credit crisis, it switched its reporting cycle so its fiscal quarters were in line with calendar quarters beginning Jan. 1. To adjust its reporting schedule, Goldman began fiscal 2009 on Jan. 1 instead of Dec. 1 of last year. The bank said for the month of December, which fell between the change in reporting cycles, it lost $1 billion, or $2.15 per share.
Shifting the start of its fiscal year certainly helped the bank's overall results, said Denise Valentine, senior analyst at Aite Group, a Boston-based research firm.
"It's a little bit of fancy footwork, but for the market as a whole it's good news and it was needed," she said. "When your star does well or does what is expected, you breathe a little easier."
Valentine was quick to note that other areas outside of Goldman's fixed income and currency businesses showed some pain during the quarter.
Investment banking revenue totaled $823 million, down 30 percent year-over-year as far fewer merger deals were done. Its asset management revenue declined 28 percent to $949 million.
Its earnings improvement lends support to what bank CEOs have been saying in recent weeks: That business conditions have started to stabilize.
Encouraging words from several big bank CEOs that they were having a better quarter than most expected have helped fuel hopes for an economic recovery -- and led the stock market to its best four-week performance in more than 75 years. Many hinge the end of the recession on the health of the nation's banking system.
Goldman also declared a dividend of 35 cents, down from 46.7 cents but still a healthier payout than many banks have been able to give shareholdeers.
Kim Eng Indonesia Equity Daily, 14 Apr 09
Our Comment -by Katarina Setiawan
Bisnis Indonesia daily reported that Bakrie Sumatera Plantations has revised six accounts in its FY08 financial statements. Management claims the revision is due to some reclassifications and typos made by the company auditor. Biggest revisions are found in cash flow statements items. On income statements, the company omitted loss on written off plantation Rp1.5b in FY07. It seems that there is no impact on FY08 net profit.
We maintain SELL recommendation on the counter, mostly due to weak performance in FY08. Bakrie Sumatera is the weakest in the industry due to its high leverage and relatively high young age plantation portion resulting from acquisitions in the recent years..
Ramayana reported a 9.3% YoY sales decline in March. It seems that the layoffs (on domestic and migrant workers) and the declining commodity price have taken a toll on sales
The market rallied yesterday, supported by positive sentiment from the legislative election result. Rupiah also appreciated. Despite the recent rallies some stocks are still attractively valued.. Our picks include Bukit Asam, Gudang Garam, Indocement, Indofood, Indosat, Unilever, Wijaya Karya.
The US and regional markets were slightly down this morning after a strong rally yesterday.
Highlights
o Kalbe Farma (HOLD): To pay debt using internal cash
o Bakrie Sumatera (SELL): Revising FY08 financial statements
o Ramayana (UNDER REVIEW): Mar-09 sales down 9.3%
o CP Prima: Bapepam maintains quorum requirement From our chartist desk
o IDX: We see a high possibility of profit taking. But it will be only temporary, as we see a break in the IDX trend line and continuing appreciation of Rupiah (target is Rp10300/USD, from Rp11000/USD) . Today´s trading range is between 1384-1451-1495 (support) and 1562-1585-1651 (resistance) .
o BBCA: Middle line of Bollinger band, MA 12, MA 14 days are still intact in its upward momentum. We maintain target Rp3500. TRADING BUY
o TINS: Strong volume, supported by a reversal signal on stochastic. TRADING BUY
Wednesday, April 1, 2009
Money Management: Just Like Sex
An interesting article:
Getting a straight answer to that one may be tough. There's still a lot of confusion about risk or money management from so-called gurus. I recently saw the following comment regarding money management from a "guru":
This is NOT money management. When you hear someone describe money management like this trading guru, run don't walk the other direction as you are about to be conned.
In my opinion money management or position sizing or bet sizing just doesn't get the attention it deserves. Gibbons Burke of MarketHistory. com observes:
Think about money management as you would about getting into physical shape. You can't lift weights six times a day for hours each day for 30 straight days without hurting yourself. There's an optimum amount of lifting you can do per day that gets you ahead without setting you back. You want to be at that optimal point just as you want to get to an optimal point with money management. Trend follower, Ed Seykota, author of The Trading Tribe book, describes this optimal point with his concept of "heat".
Trading correctly is 90% money management, a fact that most people want to avoid or don't understand. However once you have money management down, your personal psychology will be 100% of your trading success. Once you have the rules, you still need to follow them!
Few traders make the move to a proactive posture in which risks are actively managed for a more efficient use of capital. How do you avoid trading less instead of trading the optimal amount at whatever capital you have? You need to create an abstract money world. Don't think about what money can buy. Just look at the numbers like you would when playing a board game like monopoly or risk.
There it is: the key is a risk understanding. That's what money management is really all about. Managing risk.
So how much thought have you given to money management recently? Or are you still too preoccupied by all kinds of indicators or fundamental buy, sell and holds to focus on the subject?
Eventually, however, you've got to ask yourself the most important question of all: "how much?" right?
Getting a straight answer to that one may be tough. There's still a lot of confusion about risk or money management from so-called gurus. I recently saw the following comment regarding money management from a "guru":
"[We] use very simple money management: Trade one contract per trading signal in the markets … with no pyramiding."
This is NOT money management. When you hear someone describe money management like this trading guru, run don't walk the other direction as you are about to be conned.
So if money management isn't some set amount of shares or contracts picked out of thin air, what is it? Money management answers the question of "how much?" At all times, given the risk you are taking, the money you have, and the volatility of the market -- you must know the optimal number of shares or contracts to be long or short.
In my opinion money management or position sizing or bet sizing just doesn't get the attention it deserves. Gibbons Burke of MarketHistory. com observes:
"Money management is like sex. Everyone does it one way or another, but not many like to talk about it and some do it better than others. But there's a big difference: Sex sites on the Web proliferate, while sites devoted to the art and science of money management are somewhat difficult to find."
Money management is ultimately a defensive concept. It keeps you in the game. For example, money management tells you whether you have enough new money to trade additional positions. Trend followers all realize that you need to make small bets initially to simply stay alive and play another day. So, if you start at $100,000, and you're going to risk 2 percent, that will be $2,000. You say to yourself, "Why am I only risking $2,000. That's nothing compared to what I've got to bet." But that's not the point. First things first. You can't predict where the trend is going to go, so you can't afford to risk all of your capital out of the gate. Trend follower Craig Pauley points out:
"There are traders who are unwilling to risk more than 1% but I would find it surprising to hear of any trader who risks more than 5% of assets per trace. Bear in mind that risking too little doesn't give the market the opportunity to allow your profitable trade to occur."
Think about money management as you would about getting into physical shape. You can't lift weights six times a day for hours each day for 30 straight days without hurting yourself. There's an optimum amount of lifting you can do per day that gets you ahead without setting you back. You want to be at that optimal point just as you want to get to an optimal point with money management. Trend follower, Ed Seykota, author of The Trading Tribe book, describes this optimal point with his concept of "heat".
"Placing a trade with a predetermined stop-loss point can be compared to placing a bet. The more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure - or heat - from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. In portfolio management, we call the distributed bet size the heat of the portfolio."
Trading correctly is 90% money management, a fact that most people want to avoid or don't understand. However once you have money management down, your personal psychology will be 100% of your trading success. Once you have the rules, you still need to follow them!
Why then do traders have such trouble keeping their trading proportional? Why is it so hard for them to find that optimal point? Fear. Trend follower Tom Basso points out that traders usually begin trading small and then as they get more confident increase their trading size. Once they get to a certain comfort level of say, 1000 contracts, they often stay there, suddenly fearful that turning up the "heat", to use Seykota's term, will increase their risk. For trend followers like Basso, the goal is to keep things on constant leverage.
Few traders make the move to a proactive posture in which risks are actively managed for a more efficient use of capital. How do you avoid trading less instead of trading the optimal amount at whatever capital you have? You need to create an abstract money world. Don't think about what money can buy. Just look at the numbers like you would when playing a board game like monopoly or risk.
And since your capital is always changing, it's important to continually rebalance your portfolio. Trend follower Paul Mulvaney points out that, "Trend following is implicitly clear about dynamic re-balancing which is why I think successful traders appear to be fearless. Many hedge fund methodologies make risk management a separate endeavor. In Trend Following it is part of the internal logic of the investment process."
There it is: the key is a risk understanding. That's what money management is really all about. Managing risk.
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