Friday, November 23, 2012

10 yrs Cycle and the KLCI

In response to a reader's question whether this cycle theory applicable to the KLCI. Below are the charts for the analysis:

1. 1980 - 1989
In the 80's we can see from the chart above, the KLCI was choppy with a horizontal trend with price index ranging from 200 to 500. It didn't follow the 10 year cycle theory whereby the first few years should be low, and there should be a run-up in the middle of the decade, finally reaching a peak at the later years and follow by a crash. However, in 1987 there was a crash of about 50% from its peak.

2. 1990 - 1999
In the 90's we can see clearly that the KLCI followed the theory whereby there was a nice run-up till 1997 and followed by a severe down turn with price index dropped 80% from its peak.

3. 2000 - 2009
Again during the millennium decade, there was a consolidation in the first few years, then price index had a steep rise from 2006 on wards and reaching the peak in 2008. This round, the KLCI dropped 42% from its peak.

From the above findings, we learned:

  • except the first chart, first few years are consolidation years whereby prices are lower compared to the later years.
  • prices tend to double from the year 0 to the peak. In the 80's KLCI started with 200 and reached a peak at almost 500 in 1987; In the 90's KLCI started with 600 and ended up at 1200 in 1997; Except in 2000, KLCI started with 1000 and reached a peak at 1400, but if you were to count from the low of 600 in 2001, it was more than double.
  • In the 10 year period, there are phases of consolidation whereby prices move within a tight range before a breakout either to the upside or the downside.
  • The crash is usually steeper and the duration is shorter than the bull trend.
There are many reasons for the way stock prices behave, in the technical analysis perspective, it is assumed that history repeats itself, from the past data we can predict future price movement. 

Having said that we have to acknowledge the importance of knowing the fundamental analysis too. The best trader will use both in their analysis. 

Wednesday, November 21, 2012

The Benefits of Utilizing Twitter for your Business

Every business out there is looking for the one thing that is going to give them the edge over the competition. Most businesses believe it is all in the products and services being offered. However, in reality, the marketing plan of the business is one aspect that has a huge effect on the number of consumers the business sees throughout the years. With this being stated, the business who wants to take their marketing campaign to the next notch will find using Twitter has several benefits for the business.

Opening up Communication

When most businesses find employees or customers are not happy this is due to the business not communicating effectively with these people. Twitter changes all of this for the better. Those who use Twitter can voice concerns about the business, whether this be concerning the product that is offered or the work environment. The business can read the tweets and form a plan to get these problems taken care of. The key to getting the varied communication line is to have numerous followers. You can buy twitter followers with ease, to make it easier to use Twitter successfully for your business. 

Improves Traffic to your Business

Twitter followers

Though buy followers twitter, the chances of having increased business is dramatically increased. With the use of Twitter, the business becomes known to those who may have no idea that the business even exists. It allows a person to increase the chances of someone finding their business since they are using social media to their benefit.

Strengthens the Ties to the Community 

The use of social media and letting the world know what is on the mind of those who are in the business, the tie that the business has to the community is strengthened. For example, if there are problems with the local community, a business can tweet their feelings on the issue. This can win over a few people who may have not decided to use the business or not. It makes for a great way to get followers to your Twitter account.

Monitor Competition

One of the biggest benefits for a business to utilize Twitter is the ability to watch competitors. Other businesses out there are going to post new products and upcoming products. As a business on Twitter you can see these posts as well to ensure that you are staying competitive in the market. It could mean the difference between having a failing business and one that surpasses what people thought would happen.

Overall, a business will find that through using Twitter, they will reap the benefits for months and years to come. Once the business has established themselves on Twitter as a great business that is friendly towards customers, it increases the presence of the company on the web. This can result in more customers to the website and to the business itself. In the day and age in which technology is ruling the world, it is prudent that businesses have the use of a Twitter account to keep up with the ever changing social media world. 

This guest post by Tommy Stretton of A site to go to Buy Twitter Followers and get more likes..

Friday, November 16, 2012

Jefferies: Comfortable in its Niche

In finance circles, Jefferies, the mid-sized, New York-based investment bank, is a "tweener"--too big and mature to be a young upstart, but not  large or imposing enough to earn the label "bulge bracket" or "too big too fail." Like a Knight Capital or MF Global, if Jefferies were in danger of sliding into oblivion, government regulators and market counterparties would let it go.

Amidst all the post-election squabble about "fiscal cliffs" and recent stomach-churning market volatility, Jefferies quietly slipped into the business news this month. It agreed to be acquired by its minority owner, the conglomerate holding company Leucadia.  The transaction won't shake the broker/dealer world. It may hardly move anybody in any way.

But it brings to mind the consistent, stable performance of a niche investment bank, one that has always been too small to be a threat of any kind to behemoths Morgan Stanley, Goldman Sachs and JPMorgan. Yet it is one that is a bit too large to be called a specialized boutique (like Greenhill or Evercore) and too broad in scope to be a Lazard.  The quiet acquisition reminds us how one firm through decades of incarnations and shake-ups has survived when others (bigger and better known) like Bear Stearns and Lehman couldn't.

MBA students interested in banking and finance usually don't know the firm as well as it should. Jefferies is not widely known to criss-cross the country to visit top business schools and make flashy corporate presentations, hungry to recruit the best MBAs. And some might rate its diversity  record slightly less than satisfactory.  Bankers and traders across the globe are from various ethnic groups, many backgrounds and countries. The board of directors and executive committee, however, appear to be a club of long-time Jefferies executives--with virtually no representation from under-represented groups (women and minorities).  

The firm, which used to promote itself the go-to investment bank for the "middle market," has endured its share of troubles, problems and scares. When the dust often settles--whether they were insider-trading problems years ago or European-debt turmoil of a year ago, Jefferies appears to wipe itself off and proceed with its normal course. Or it sometimes swoops in to purchase the valued pieces left behind by other firms that failed.

The acquisition by Leucadia will come with synergies and provide a resource for more capital, if and when it needs it. (Leucadia, known also to be a "Baby Berkshire," manages private investments in multiple industries.) Jefferies will continue its business as usual. In times when capital is king, Jefferies likely decided that it should have a parent that could provide capital at a moment's notice--without it having to fall into the hands of the big boys like JPMorgan or Credit Suisse. Jefferies can now have access to capital, but still be Jefferies after all.

The bank manages a diverse array of businesses (sales & trading, investment banking, equities, fixed-come, precious metals, and brokerage) with a $3.3 billion capital base--too large to be called a pure-advisory boutique like Greenhill or Moelis, too small to be in the league of Goldman or Morgan Stanley.  To its credit, it has never aspired to go head-to-head with Morgan Stanley in most of its business lines.

Years ago it pronounced itself as the favorite investment bank for middle-market clients, seizing upon a niche that even the boutiques and bulge-brackets often ignored.  Growing, middle-market companies are enterprises that issue modest amounts of new equity and high-yield debt to support growth. Jefferies elected, too, to tap aggressively into the high-yield niche, when boutiques couldn't do so and the bulge-brackets wavered about their commitment to "junk bonds."

The bank has certainly withstood its share of storms. Its founder, Boyd Jefferies, got caught in the whirlwind of insider-trading scandals of the 1980s. At the time, the firm was better known as a "third market" trading firm, making markets in equities after normal trading hours. More recently, as the financial crisis unfurled, the firm got caught with excessive amounts of high-yield and mortgage securities on its balance sheet (just like its larger peers). 

Last year, when the whole world watched the crumbling state of finances in Greece and Spain, market watchers turned suddenly to Jefferies and wondered whether the firm was overloaded with European debt or other related exposures.  Rumors swirled, and its stock price tanked. When MF Global collapsed, partly because of excessive Europe exposures, financial markets wondered if Jefferies would be next. Markets always play a guessing game of who's-next. Some made unfair, ungrounded accusations about what toxic waste might be hiding on Jefferies' balance sheet.

Somehow Jefferies escaped that tumult and pulled through to have a stellar, profitable year in 2011.  In 2012, it's on its way to a $250-million-plus earnings year (good enough for a respectable 8-10% ROE).

Every other year, there are industry shake-outs. While firms like DLJ, Drexel Burnham, A.G. Edwards, Alex Brown, Hambrecht & Quist, Montgomery Securities and L.F. Rothschild have disappeared to the back financial history books, Jefferies plods along. Richard Handler is its CEO, who roared often when others claimed the firm was overloaded with Greek exposure, and will also become the head of Leucadia.

A strategy of remaining comfortable and aggressive within its niche, allowing itself to seize pockets of opportunity when they arise, has probably made the difference. It would, however, be nice to see it do better in diversity at its top rungs.

Tracy Williams

See also

CFN:  MF Global and Its Collapse, 2011
CFN:  Knight Capital's Darkest Day, 2012

Thursday, November 15, 2012

Cycle Analysis and The Stock Market

When we talk about cycle analysis we will definitely think of WD Gann, the legendary stock and commodity trader who had made tons of money from the financial markets. It was estimated that in his lifetime he made $50 million from stocks and commodities. Imagine how much is $50 million 80 years ago translated to today's money. What was his secret?

He had the ability to forecast the market by studying the historical prices. He said, "Everything works according to past cycles, and that history repeats itself in the lives of men, nations and the stock market." (more quotes from him)

In 1928 the year before the crash he successfully predicted the crash in 1929 and said that it would take years for the stock market to recover. You may read his detail prediction  here.

Today I want to talk about one of his famous theory on the cycle analysis, its known as the Decennial Cycle or the 10 year cycle. According to Gann, he compiled the past 100 years of price data and put them on a chart. He plotted the y-axis as the price while the x-axis as the year ending with 1,2,3,4,5,6,7,8,9,0. The actual chart was very blur as it was a very old chart, so I try my best to illustrate on the chart below:

From the above chart, we can see that the year that ends with 1,2,3 such as 1981, 1982, 1983, 1991, 1992, 1993 and 2001, 2002, 2003 have a similar price pattern, they start from low price levels. Year that ends with 7 or 8 usually experience crashes.

Below is an extract from Gann's teaching:

Each decade or 10-year cycle, which is 1/10th of 100 years, marks an important campaign. The digits from 1-9 are important. All you have learn is to count the digit on your fingers in order to ascertain what kind of a year the market is in.

No.1 in a new decade is a year in which a bear market ends and a bull market begins. Look up 1901, 1911, 1921, 1931...

No.2 or the second year is a year of a mirror bull market, or a year in which a rally in a bear market will start at some time. See 1902, 1912, 1922...

No.3 starts a bear year, but the rally from the second year may run to March or April before culmination, or a decline from the second year may run down and make bottom in February or March, like 1903, 1913, 1923...

No.4 or the fourth year, is a bear year, but ends the bear cycle and lays the foundation for a bull market. Compare 1904, 1914, 1924...

No. 5 or the fifth year is the year of Ascension, and a very strong year for a bull market. It can be a new bull market or a big correction in an existing uptrend. See 1905, 1915, 1925...

No. 6 or the sixth year is a bull year, in which a bull campaign which started in the 4th year ends in the fall of the year and a fast decline starts. See 1896, 1906, 1916, 1926...

No.7 or the seventh year is a bear number, and the seventh year is a bear year because 84 months or 84 degree is 7/8 of 90. See 1897, 1907, 1917, 1927...

No.8 or the eighth year is a bull year. Prices start advancing in the seventh year and reach the 90th month in the eight year. This is very strong and a big advance usually takes place. Review 1898, 1908, 1918, 1928...

No.9 the highest digit and the ninth year, is the strongest of all for bull markets. Final bull campaigns culminate in this year after after extreme advances and prices start to decline. Bear markets usually starts in September or November at the end of the ninth year and a sharp decline takes place. See 1899, 1909, 1919, 1929...

No.10 the tenth year, is a bear year. A rally often runs until March and April; then a severe decline runs to November and December, when a new cycle begins and another rally starts. See 1910, 1920, 1930...

This is just one of the cycle theories, there are also the Presidential cycle (4 year cycle), secular bull and secular bear, yearly cycle, monthly cycle and many more. From the study of past cycles, we see a very clear picture that history seems to repeat itself and by learning more technical analysis theories we can make better investment decision to help ourselves to grow our wealth.

Finally, I'm going to end this article with a statistical table to show how accurate is this theory:

Happy investing,
Pauline Yong

Monday, November 5, 2012

UBS Throws in the IB Flag

UBS, the Zurich-based global financial institution, announced last week that it plans to dismiss 10,000 employees as it continues, like most big banks, to review, revamp and re-scale its business units around the world.  That's not an unusual news item. In financial services, that's a news blurb we see almost every other day.

UBS provided more details.  Most of the dismissals will come in its investment-banking group.  More specifically, its fixed-income businesses will suffer the most.  The dismissals, the down-scaling and shrinkage are unfortunate. The announcements are, nonetheless, not shocking, since they are a common event in the business press.

This might, however, be the first wave of dismissals in finance, where the bank stepped up to admit  blame solely on its inability to justify business lines because of hefty capital requirements from the new wave of regulation. UBS says new regulation (in Switzerland and from the reforms of Basel II, II.5, and III, and new Dodd-Frank and Volcker rules) will require substantial increases in its equity capital base just to continue doing existing business. And barring any spectacular periods of revenue growth, the increases in capital will push down returns on equity to levels that can't be explained to shareholders.  About as simple as that.

(See CFN on Basel III, 2010 for more background on Basel regulation. In effect, the combination of Basel and Dodd-Frank would virtually double the capital requirements at large banks (those commonly thought to be "too big to fail") between now and 2019. The requirements will step up in increments over the years.)

For all practical purposes, UBS has decided to withdraw from huge-scale investment banking after having decided years ago to attempt to be a bulge-bracket bank.  It has decided it can't make the numbers make sense for it to be a Top-10 investment bank.  Sure, it will continue in certain niches--equities, research, brokerage, and investment management.  But it will not try to compete head-to-head with Goldman Sachs, JPMorgan, Deutsche Bank, and Morgan Stanley.

UBS, through the years, had built up its investment-banking practice through acquisitions, corporate-banking relationships, the reputation of its investment-management and private-banking businesses and the heft of its capital base. Some may recall how in two decades it penetrated U.S. borders by acquiring the well-known retail brokerage Paine Webber and the boutique firm Dillon Read. It absorbed those operations years ago and used them as a base to compete in the U.S. in many areas.

UBS's rationale makes some sense.  It articulates that it seeks to generate a return on equity (ROE) from 12-17 percent. That varies with business cycles and market volatility. On average, it strives to seek returns of 15 percent.

New regulation throws a thorn into its side.  The bank must, as it has done the past year or so, reduce leverage, get rid of bad assets, and push costs down significantly. It also had to deal with the $2 billion loss of a rogue trader, repair risk management and trading operations and improve controls.  While sprucing up controls and balance sheet, new regulation comes along and adds the burden of boosting capital and taking leverage down even more.

If it decides that it must boost capital by 10-20 percent, then ultimately it would need to increase net earnings by 20 percent or more. Increasing net earnings in the current environment--one of uncertainty, volatility and fierce competition from the other big banks--might be near impossible, unless UBS decided to cut costs vigorously.

So where do you cut costs? You do so in businesses where regulation will require big increases in capital, where profit margins are already slim or vulnerable and where costs can be cut swiftly.  Its fixed-income businesses (corporate bonds, municipal bonds, government bonds, interest-rate derivatives, corporate lending) became the first target of deep cuts. This includes (within fixed-income units) corporate-advisory activity, underwriting, trading and market-making.

Senior management may have deduced that, at best, ROE would hover around 5-7 percent in those businesses. ROE in the range of 0-5 percent for a business that already uses up significant amounts of capital would be a certain drag on the bank's overall ROE.  An unsatisfactory result for shareholders, who too dream of earnings growth, stock-price increases and a nice, reliable dividend.

UBS Investment Banking won't go away. It requires a certain amount of investment banking (underwriting, market-making, securities distribution and equity research) to complement other profitable or growing business lines:  investment management, private banking, brokerage, and corporate banking. Yet with massive departures in London and in fixed-income activities, there will be minimal activity in corporate bonds, short-term instruments, mortgage securities, structured securities, private placements, subordinated debt, mezzanine debt, interest-rate swaps, and any of the products and activities that fall under the fixed-income spectrum.

UBS in its announcements hints this is not a cowardly business act. It claims to be making a tough business decision (at the expense, unfortunately, of thousands who must seek employment elsewhere) that all of its old peers must inevitably make over the next few years. It is patting itself for making that decision now.

Tracy Williams

See also:

CFN:  Basel III and Capital Cushion, 2010
CFN:  Big Banks and Dreadful Downgrades, 2012
CFN:  JPMorgan Chase and Regulatory Rants, 2012
CFN:  Big Banks and Where Do We go from Here? 2010

CFN:  The Volcker Rule, 2010
CFN:  The Volcker Rule, Part 2, 2011