Interesting Week Ahead.

Here we are, at the edge of the cliff and yet we are only 60 points down in SPX from the high of the year and that was almost 90 days ago. It has been incredibly choppy during all these days. So if we have stayed on the sideline with respect to equities for the last 90 days, have we really missed out on any great opportunity, particularly, if we are not day traders?  Bad news has piled up but equities refused to correct in any meaningful manner. One reason being the liquidity that is being pumped by the central bankers around the world. We know that it is not going to end well, one way or other, but we do not know when exactly.  The best thing to do in such situation is to keep the time horizon small, be ready to run quickly on any short trade and look for opportunities everywhere, not just in equities.

Last Friday was another teasing day. I sent out a tweet in the morning highlighting the levels for shorting the market.  Almost in each case the EOD was close but did not go below that. As a result short trades were not initiated. That is the beauty of following a system, when we can override emotions. As you know, most trading mistakes are made because of emotions. As of now the short side is bit over crowded and everyone and their grandmother are dead certain that bottom is going to fall out. It may not be so.

A correction can happen in price, in time or with both. In the last 90 days we have had a correction which consisted mostly time factor, less in price but the end result is none-the-less same. Folks out there are gloomy and they hate this market with a passion. Just look at the short interest.

The short interest is at levels next only to seen in last June.

This coming week, we may see some more price choppiness but definitely not a waterfall. If I may remind you, bear markets start at the height of euphoria, not on bad news.

While cycles are still down for most of the asset classes, they are now about to flatten out in the next 7-10 trading sessions and that makes me uncomfortable going short without price confirmation. There is simply not enough time. The most notable feature of Friday was the drop in US Dollar index. Apple tested its lows. I think it has another 5% to fall and that would drag the Indices down by about 2%-2.5% and that is the max. downside I can see for now. I will be going through all the data and algos over the weekend and the weekly newsletter will highlight if there is any trade worth taking. But safety comes 1^st and I am not going to be a testosterone driven rash adventure seeking aggressive bungee jumper. Been there, done that, learned my lessons.  

Not a day passes when we read some kind of gun violence and yet there is no political courage to stand up to this monster. Children pay the price and politicians shed crocodile tears. Its good television but after few days, everyone forgets about this killing to discuss the next. I feel sad for the kids who died in this senseless act of violence but more than that I am angry at the duplicity of the politicians and the authorities. How on earth a mentally unstable man could get his hands on assault weapons in the 1^stplace. The blood is in the hands of the politicians.

Enjoy the weekend with your loved ones and take some time to remember how blessed we are. See you all tomorrow evening with the newsletter.

Jacky Cheung Tribute Concert

Try not to miss this if you are a Cantopop fan. The 3 singers are bound to give an exhilarating performance, they are very good singers in their own right. Brought to you by PopPopMusic, the premium niche music label that brought you wonderful music by artistes such as 2V1G, JZ8, Winnie Ho, Zyan, Roger Wang, Tay Cher Siang, ... The band will be led by maestro Tay Cher Siang, probably Malaysia's top jazz pianist now and a brilliant arranger as well. The 3 singers are Jeffrey Lim (2V1G), Worm Lee Jenn Nam and an exciting new female voice in Yeh Foong.

Bookings are going fast for the 2 nights only event @ NO BLACK TIE. Cover charge is RM50pp. Call Leslie at 012-2083790.

19th & 20th December, Wednesday & Thursday
9.30pm-11.30pm

More Business Stories .....

A landscape gardener ran a business that had been in the family for two or three generations. The staff were happy, and customers loved to visit the store, or to have the staff work on their gardens or make deliveries - anything from bedding plants to ride-on mowers. For as long as anyone could remember, the current owner and previous generations of owners were extremely positive happy people.

Most folk assumed it was because they ran a successful business.

In fact it was the other way around...

A tradition in the business was that the owner always wore a big lapel badge, saying Business Is Great!

The business was indeed generally great, although it went through tough times like any other. What never changed however was the owner's attitude, and the badge saying Business Is Great!

Everyone who saw the badge for the first time invariably asked, "What's so great about business?" Sometimes people would also comment that their own business was miserable, or even that they personally were miserable or stressed.

Anyhow, the Business Is Great! badge always tended to start a conversation, which typically involved the owner talking about lots of positive aspects of business and work, for example:

• the pleasure of meeting and talking with different people every day
• the reward that comes from helping staff take on new challenges and experiences
• the fun and laughter in a relaxed and healthy work environment
• the fascination in the work itself, and in the other people's work and businesses
• the great feeling when you finish a job and do it to the best of your capabilities
• the new things you learn every day - even without looking to do so
• and the thought that everyone in business is blessed - because there are many millions of people who would swap their own situation to have the same opportunities of doing a productive meaningful job, in a civilized well-fed country, where we have no real worries.

And so the list went on. And no matter how miserable a person was, they'd usually end up feeling a lot happier after just a couple of minutes listening to all this infectious enthusiasm and positivity. It is impossible to quantify or measure attitude like this, but to one extent or another it's probably a self-fulfilling prophecy, on which point, if asked about the badge in a quiet moment, the business owner would confide:

"The badge came first. The great business followed."

I cannot emphasize the importance of being positive. It is contagious and puts our mind on the 'right path'. Reasonable skepticism is good to discover faults and find room for improvement, but the over riding attitude must be positivity - it hints at what is possible and probable; it allows us to assume risk from a position of strength; it builds camaraderie and team spirit moving in one direction.

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Once there was a very rich and greedy man. He loved and hoarded jewels. One day a visitor asked to see them. So the jewels were brought out, amid much expensive security, and the two men gazed at the wonderful stones.

As the visitor was leaving he said, "Thank you for sharing your jewels with me."

"I didn't give them to you," exclaimed the rich man, "They belong to me."

"Yes of course," replied the visitor, "And while we enjoyed the jewels just the same, the real difference between us is your trouble and expense of buying and protecting them."

Greed, ownership, accumulation of wealth, proper perspective of wealth, hoarding or enjoying life.
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"God, I've been thinking.." says Eve one day.

"What's on your mind Eve?" says God.

"Well, I know that you created me and this beautiful garden and all of these wonderful creatures, but lately I've been feeling that maybe there's more to life."

"Go on..." says God.

"Sometimes I get a bit bored - I fancy a bit of fun. And I get a bit fed up with all the heaving lifting and carrying, and warding off the mammoths and sabre-toothed tigers, not to mention that bloody snake. This garden can be dangerous place."

"I see," says God, pausing for thought.

"Eve, I have a cunning plan," says God, "I shall create Man for you."

"Man?" asks Eve, "What is Man?"

"Man..." says God, "Is a flawed creature. He will have many weaknesses and disgusting habits. Man will lie, cheat and behave like an idiot - in fact mostly he'll be a complete pain in the backside. But on the plus side he'll be big and strong, and will be able to protect you, and hunt and kill things, which might be handy sometimes. He will tend to lose control of mind and body when aroused, but with a bit training can reach an acceptable standard in the bedroom department, if you know what I mean."

"Hmm," says Eve, "Seems like this Man idea might be worth a try, but tell me God, is there anything else I need to know?"

"Just this," says God, "Man comes with one condition... In keeping with his arrogant, deluded, self-important character, Man will naturally believe that he was made first, and frankly we all have better things to do than argue, so you must keep all this a secret between us, if that's okay with you. You know, woman to woman.."

Business is still a male dominated arena. One must know how man behaves and what makes them tick. Too often, the ones with the ego will lose to the one who understands there are infinitely more important things in life than ego to succeed in business strategy.

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This is a true story. Some years ago the following exchange was broadcast on an Open University sociology TV programme.

An interviewer was talking to a female production-line worker in a biscuit factory. The dialogue went like this:

Interviewer: How long have you worked here?

Production Lady: Since I left school (probably about 15 years).

Interviewer: What do you do?

Production Lady: I take packets of biscuits off the conveyor belt and put them into cardboard boxes.

Interviewer: Have you always done the same job?

Production Lady: Yes.

Interviewer: Do you enjoy it?

Production Lady: Oooh Yes, it's great, everyone is so nice and friendly, we have a good laugh.

Interviewer (with a hint of disbelief): Really? Don't you find it a bit boring?

Production Lady: Oh no, sometimes they change the biscuits...

• Do not impose your own needs and ambitions on to other people who may not share them.
• Don't assume that things that motivate you will motivate someone else.
• Recognise that sources of happiness may vary widely between people.

For banks, nothing is illegal

This would be literally unbelievable, except that we've all become desensitized to the double standard of our justice system -- enforcement of laws against ordinary people, and systematic collusion with large banks and corporate offenders to keep anyone from going to jail. I think Matt Taibbi offers the most honest take on this shameful decision to slap HSBC with fines only, rather than pursuing what should have been slam-dunk prosecutions for money laundering and drug smuggling on a global scale:

Wow. So the executives who spent a decade laundering billions of dollars will have to partially defer their bonuses during the five-year deferred prosecution agreement? Are you fucking kidding me? That's the punishment? The government's negotiators couldn't hold firm on forcing HSBC officials to completely wait to receive their ill-gotten bonuses? They had to settle on making them "partially" wait? Every honest prosecutor in America has to be puking his guts out at such bargaining tactics. What was the Justice Department's opening offer – asking executives to restrict their Caribbean vacation time to nine weeks a year?

So you might ask, what's the appropriate financial penalty for a bank in HSBC's position? Exactly how much money should one extract from a firm that has been shamelessly profiting from business with criminals for years and years? Remember, we're talking about a company that has admitted to a smorgasbord of serious banking crimes. If you're the prosecutor, you've got this bank by the balls. So how much money should you take?

How about all of it? How about every last dollar the bank has made since it started its illegal activity? How about you dive into every bank account of every single executive involved in this mess and take every last bonus dollar they've ever earned? Then take their houses, their cars, the paintings they bought at Sotheby's auctions, the clothes in their closets, the loose change in the jars on their kitchen counters, every last freaking thing. Take it all and don't think twice. And then throw them in jail.

Sound harsh? It does, doesn't it? The only problem is, that's exactly what the government does just about every day to ordinary people involved in ordinary drug cases.

And people wonder why the US falls year after year a little further down the Corruption Perceptions Index? As of 2012, we're just slightly ahead of Chile, Uruguay and The Bahamas. 

Confusion Compounded

The markets moved as expected and yet the confirmations of the roll-over are eluding us.

For e.g. I need SPX to close below 1410 to short it. The futures touched 1410 after close of the cash market and did not break it and are now creeping higher. I was looking for NDX to close below 2640 and here also it was close but not close enough to give the confirmation.

Same story with oil and silver.  I was looking for silver to close below $ 32.50 and despite intra-day below that level, silver did not close below that line in the sand. Oil did not close below $ 86 which would have made me comfortable to short it again. The US Dollar index stayed in flat line around 80.

All in all, it was kind of teasing frustrating day. Fingers itching to short and yet system tells you to hold on. Mind plays tricks that gosh, we are going to miss out and discipline holds back. I keep reminding myself it is not about winning the battle; it’s about winning the war.

Now, things may change overnight. /ES (SPX Futures) may test its high of yesterday and rollover and I would be happy to go along. But as of now, my belief and trading are not in sync and it would be foolish to risk capital based on belief and hope without confirmation. Giving up part of the profit while waiting for confirmation is more worthwhile than losing capital.

Let us keep in mind, time is running out for any meaningful short trade and that applies to all asset classes. We have max till end of the year for the cycles to bottom. While the downturn can be violent and severe in the next few days, it can also move sideways and create lots of whipsaws. That why confirmation is so important to me at this point of time.

For those of you who read ZH and have been brainwashed in believing that the end of the world is close, you may have read something idiotic like : "The Fed's QE half life is now down to 30 minutes of effectiveness."  This is far from truth and the system does not work like that. The best analysis of these kinds of stupid comments has come from Josh Brown of “TRB”:

First, the Fed is not a daytrader. They certainly don't make an announcement about hundreds of billions of asset purchases with the intention to "mark the close" on the day they announce.  Rather, what they are attempting to do is provide more time for housing to get off the mat and to push investors into riskier assets to improve credit conditions, balance sheet flexibility, and, indirectly, consumer confidence.

I'm sorry to inform those who are perpetually rooting for the next cataclysmic shoe to drop, but so far they're accomplishing these goals (even if not their greater, overarching goal - improving employment).  The housing market recovery is no longer up for discussion and one needs look no further than the inflows into high yield debt of all sorts to check off the "riskier assets" box on their scorecards.  As for consumer confidence, I am not a believer that the stock market is very important for the wealth effect (impact from housing is 10x that of the Dow Jones) but a glance at the market-leading consumer discretionary sector should tell you all you need to know about that.

But to pronounce a trillion-dollar program like this "DOA" after only a few hours' worth of trading is moronic. Please tune out the Twitter-addled, short-term myopics  who do so. They're living in a different world, one in which every headline is "playable" and every jerk in market has some kind of meaning.

It doesn't.

The Fed will continue to make cash intermediate-term inhospitable and bonds asymmetrically risky.

Act accordingly.

Very nicely said.

And it was one of the reason that I closed my short trades yesterday even when I continue to believe that risk assets have some more to correct.

Yes, the Fed will eventually blow things up but we do not want to be too early in the game, waste our capital and then miss the opportunity. May be that is what the doom and gloom gang want us to do.

If I have to pick up a mascot for my trading / investment style, I would choose “Leopard” . Silent like a shadow, fearless yet risk averse, when faced with a bigger or tougher opponent, it will leave its kill to retreat to fight another day and hunt another pray. Above all, opportunistic and patient.

Lets learn our hunting technique from this predator.

Equities' New Bull Run Started

The equity markets had a double boost last week thanks to Federal Reserve's QE3 (quantitative easing part 3). The Fed will start by buying $45bn worth of long term Treasury bonds and up to $40bn worth or mortgage backed securities each month till labour markets improve. The smarter move by the Fed this time is that its a continuous monthly action, and will continue basically till labour markets improve, i.e. drop in unemployment. These actions will go a long way to restarting a new uptrend for global equities. The combined $85bn buying will keep interest rates low for sometime still thus forcing more funds to seek out higher returns, e.g. moving into equities.

An equally important development was the weakening of the yen, which looked like the start of a sustained weakness in the yen. This has started a rush for Japanese exporters by investors. Following the QE3, it appears investors see no more need to hold the yen as a safety haven. That being the case, the Japanese economy badly needs the yen to weaken even more. Hence its a timely boost for Japanese equities as well.


The ringgit opened firmer against the greenback in early trade today following improved sentiment for risk appetite across the region, dealers said. At 9.23 am, the ringgit was quoted at 3.0500/0520 compared with yesterday's close of 3.0520/0540. The increased risk appetite was boosted by the US Federal Reserve, which in turn will benefit globally as the move will see more money being pumped into the world's largest economy. After a two-day meeting which ended yesterday, the central bank announced new stimulus, which, among others, will see interest rate decisions tied to unemployment rate and inflation. It would also keep short-term interest rates close to zero until the unemployment rate, currently at 7.7 per cent, dips to 6.5 per cent. 

Previously, the US Federal Reserve had said that interest rates would hover near zero until at least mid-2015. Besides, the central bank decided to introduce a replacement for Operation Twist, the expiring programme introduced last year of swapping short-term Treasuries for longer-dated ones. Previously, the goal of Operation Twist was to lower long-term interest rates to stimulate the US economy. This new asset purchase programme has been dubbed as quantitative easing four (QE4). With QE3 and QE4 together, the central bank will likely purchase US$85 billion a month of Treasury securities, stacking the Fed's portfolio with government-backed investments for an extended period. 
 
On the local front, the ringgit was mostly higher against other major currencies. The local currency rose against the Singapore dollar to 2.4980/5012 compared to 2.4984/5010 yesterday and appreciated against the Japanese yen to 3.6571/6612 compared to 3.6810/6856 Wednesday. It gained against the British pound to 4.9190/9229 compared to 4.9214/9256 on Wednesday but declined against the euro to 3.9839/9874 from 3.9713/9749 previously.

 The Starbiz had the headline as "higher risk appetite for ringgit", well, not really, its the start of a huge inflow of foreign funds. Thanks to the above factors, a lot of fresh funds have jumped into mainly indexed local stocks over the last few days. Many indexed stocks have just surged past their 52 weeks high or close to it: UMW, SK Petro, and most of the banks. The buying has been ferocious in local telco stocks. Generally the second liners and speculative stocks will take a backseat when the index stocks are surging. Once the indexed stocks have stabilised, you should see strong rotational plays in second and third liners.
 

Ben Moved the Goalpost.

And that is why it is so difficult to short the markets in this environment.

Although it does not change anything in terms of cycles, we have to respect the liquidity flow and the disruption it causes in the short term. That was the reason I closed my short positions in Crude and Silver, although I still think both will correct more. I expect crude to test its support at $ 80 and silver to test $ 30 by the end of the year. But with the additional bond purchase Bernanke again broke the back of US Dollar and that does not work well for our short trade. My thinking was it is better to be safe than sorry. Better give up some profit now instead of bigger loss later. I might enter the short trade again after things settle down for a day or two and price of crude and silver drops down a bit more. Protection of capital is more important in this crazy environment.

It is no good to trade or invest based on ideology or belief. As I have shown in that chart of yesterday, while there has been much discussion about cliff and doom, institutions have been buying.  I expect one good shake down soon before we get the chance to go long again, but time is running out.

I am not going to front run because SPX is up six days in a row and statistically, tomorrow should be red. I would rather wait to see SPX close below 1410 convincingly. Everything says that we are close to an intermediate term top but only price action can confirm that and we better wait for confirmation.

For now cash is king.