Monday, January 21, 2013

General Election - Crisis or Opportunity?

Yesterday KLCI plunged 40 points (2.5%) to 1635, while the KLCI futures plunged almost 60 points to 1624! Technically speaking, KLCI has violated 50 day and 100 day moving averages, and looks like the next supporting level 1620 (200 day moving average) is shaky. 

All these happened because the latest speculation on the election date is March 30th 2013 which has caused investors highly uneasy as they are worried about the outcome of the election.

In my personal opinion, (no offence to any party), that there are 2 possible scenario: either the BN will win by marginally or lose by marginally, assuming the opposition party increases their parliamentary seats from 20% to 40%, ie, from the current 82 seats increases 20% to 98 seats based on the assumption that the MCA (Malaysia Chinese Association) will lose majority of its 15 Parliamentary seats plus several seats from other BN parties. Or for the opposition party to win marginally, they need to secure 112 seats out of the 222 parliamentary seats, in other words, 14 more seats on top of the above scenario. 

Given the above scenario, in either case, most likely we shall see the opposition party gaining more seats in the parliament. In the eyes of the foreign investors, this is good news because this may mean there are more checks and balances in the country. For Malaysians, this is good for us too as no matter which party win, the winning party will work extra hard to gain the people's votes so that in the next election they can retain the power; while the losing party will also try their best so that they can win the next election. 

Currently, as the EU and US economies are weak, Asia is still the no.1 choice for the multi billion international funds. Not only that, as the global interest rates remain low, rich investors from Japan, Korea, China and Singapore will buy up the properties and shares in the ASEAN countries and they will even set up factories here. 

Rosy picture like this is happening but it is slow due to the uncertainties in our election. However, once the election is over, foreign investors will come in big wave if they see that both the ruling and the opposition party work together to fight against corruptions, reform the education system, bring in more FDI, and to build a truly 1 Malaysia for its people. 

So from now till the polling date, the KLCI will continue to be volatile, political linked stocks will sell down, but I believe in any crisis there is an opportunity. Warren Buffett said, "Be fearful when others are greedy; and be greedy when others are fearful".

Happy investing,
Pauline Yong

Friday, January 18, 2013

Making Demands on Diversity

Rogers: "We are just not fighting hard enough."
Last fall, John Rogers of Ariel Investments found a convenient forum to discuss the state of diversity in finance. At a SIFMA diversity conference last October, he scolded executives and the rest of the industry about the woeful numbers from under-represented groups in senior roles. "The state of diversity in the industry," he reportedly said, "is appalling."  He added, "Ninety percent of leaders talk a big game, but...we have gone backwards. We are just not fighting hard enough."

Rogers is Ariel Investments' founder and CEO. He, also, happens to be a pioneering African-American in the industry, one who has been a prominent investor and leader in mutual funds for 30 years. Hence, Rogers is no new kid on the block, not an industry novice who just appeared on the scene to make this striking, candid observation.  He has seen dozens of market trends and phenomena, endured more than a few volatile markets, and followed a few decades of diversity patterns. The patterns, he says now, appear to be as unsettling as occasional market collapses.

He stepped into the investment arena in the 1980s, and with sufficient backing and varied contacts courageously started his own mutual-fund company in 1983. Like many minorities who surfaced on Wall Street (or in Chicago, where he has always been headquartered) years ago, Rogers perhaps had high expectations regarding diversity. Perhaps he expected over three decades, minorities would have prominent, visible, and impressive roles in every senior niche in every aspect, perch or segment of finance--in banking, trading, investing, funds management, securities processing, etc. Everywhere.

Three decades would have been ample time for the first wave of large numbers of minorities and women in finance to appear now in substantial numbers in board rooms, corner officers, and trading rooms. Within three decades, blacks, Latinos, Asians and women should have prominent roles within  those hush-hush huddles that determine who gets promoted, who gets paid handsome bonuses, who is tasked on headline-wining deals, and who gets the precious amounts of capital that is allocated for business expansion and investment.

But in 2012-13, he tells eFinancial Careers: "It's unfortunate. One of the most lucrative parts of the economy; it's so dynamic, offering so much wealth, and people of color have not participated."

He adds, "Here in Chicago, at so many funds and banks, you can count the number of black partners on one hand.  That's just the reality of it. It's something that needs to be addressed.  People aren't demanding that industries reflect the societies in which they live."

In perhaps the final chapters of his career, Rogers is recommending that those in positions of influence should call for or take bold action: Make stronger demands, ask questions, and push harder for banks, firms and funds to do something. He recalls an occasion recently where, in working with a bank on a specific negotiation, he asked curtly why he didn't see minority representatives. By the next meeting with the same investment bank, he said, the firm had hired its first black banker.

Why might it be time for bold, aggressive tactics? Why do his words resonate? It's likely frustration and disappointment after so many years of effort. It's the puzzlement about what can be done and where do go from here, especially as major institutions struggle with current business models and announce lay-offs routinely. It's also the squashing of lofty expectations from the 1980s and 1990s, when banks and Wall Street firms opened their doors (with some outside thrusts, of course) to minorities and women and welcomed them to entry-level analyst and associate programs. They hustled to find competent, diverse talent, while at the same time, the talent sought them out.

The expectations then were that after 10-15 years of doing deals, managing portfolios, teams and large client relationships, trading large sums (in the tens of millions), doing research, making sales calls, overseeing complex financial models and advising on investments, the vast wave of minorities would now be running operations, sectors, business segments, subsidiaries in Europe or Asia, or much of the firm itself.  They would be the ones with significant roles in deciding how to restructure a large banking unit, deciding whether to acquire other funds or banks, or deciding where to invest billions of dollars of capital over the next few years.

Granted, there are some minority and women bankers in such roles. And some have risen to the top echelon--either leading the institution (American Express or Merrill Lynch, e.g.) or leading an entire sector (investment banking at Citi or Credit Suisse, e.g.). (Women have previously held the CFO slots at Citi, Morgan Stanley, Lehman, and JPMorgan Chase and chief risk roles at Lehman and BoA.) But expectations had been much higher long ago, because many thought the hardest part about Wall Street was simply getting through the door.

In ensuing years and even today, getting into a lucrative Wall Street spot is still complex, agonizing and difficult. Yet retention and promotion to the top rungs remain even more complex, agonizing and difficult.

Diversity initiatives, retention efforts, networking, and mentoring programs sometimes work. They pave the way for opportunity, provide support and encouragement, and help instill confidence in those who sometimes shrug and want to give up.  Rogers now suggests that all these efforts, and more, need to be capped off with strong demands.

Many institutions nowadays are struggling with reorganizations and uncertainty about reform, but with improved market conditions, they don't have the excuse of having to fight for survival while the financial system is about to collapse.  To their credit, most major financial institutions devote enormous amounts of time, funds and priorities to diversity. And they support internal "affinity" programs to provide career support for women and professionals of color. On the other hand, private-equity firms, financial sponsors, hedge funds  and venture-capital firms, often indifferent about such initiatives, operate as if it were the 1970s.

The pipeline continues to dwindle at mid-levels, as senior associates or junior vice presidents, including women and minorities, become discouraged about senior opportunities or pathways to managing director or become more demoralized, disenchanted, marginalized, or "plain ol' tired" of figuring out how to get to that top echelon. Many depart before they reach their fifth anniversary in the firm.

Thus, throughout the year, when institutions explore the candidates eligible for promotion to the top ranks, many women and minorities have already opted out or the few who remain are not well known to many or don't want to expend the enormous emotional energy to fight the fight.

Rogers suggests institutions and funds--big and small and in all facets of the industry--need to go beyond the placid endorsement of programs. They need a swift kick sometimes in the rear to be reminded that all can do better. All must do better.

Tracy Williams

See also:

CFN: Affinity Groups at Major Institutions, 2011
CFN: Venture Capital and Diversity, 2011
CFN:  Diversity Update, 2011
CFN:  Diversity:  Staying on the Front Seat, 2009

Thursday, January 10, 2013

Today's "Bulge Brackets"

Who comprises the Bulge Brackets of 2013?
"Bulge brackets" in investment banking was once an acclaimed list of investment banks that dominated most of the activity in the industry--from staid, conventional bond underwriting to mergers-and-acquisition advice to flamboyant IPOs.  "Bulge bracket" signaled dominance and prestige. It implied a bank was a major player. Statistics and market share determined who made the list or not, and it was often a moniker awarded to banks that finished in the top five in most finance categories.

Say "bulge bracket" and those who trade and do deals and those who follow the industry think immediately of Goldman Sachs and Morgan Stanley.  Just a few years ago, Lehman Brothers and Merrill Lynch were "bulge bracket" mainstays.  Go back decades, and banks such as Salomon Brothers, Drexel Burnham, First Boston, and DLJ might have squirmed their way into a top-5 listing. Often they did, back then. Today, they don't exist or were absorbed into oblivion long ago.

Over the years, MBAs in finance with eyes toward Wall Street often wanted to work at "bulge brackets," because they were movers and shakers, the behemoths that shaped, dominated and influenced corporate and municipal finance. They were the firms that generated the most revenues, carved out the greatest market shares, swept up much of the prestige in doing deals, and--to the delight of MBAs wanting to work there--paid the biggest bonuses.

The term is not used as much today. Some still use it, but the financial media don't flaunt it as much, if it all. That's likely because of (a) the disappearance of some of those storied names in American finance (Salomon and Lehman, e.g.), (b) the dominance of banks with commercial-banking heritages on current lists (JPMorgan, Citi, Bank of America, Deutsche and UBS, e.g.), (c) the continuing blending of traditional investment- and commercial-banking roles, and (d) the ongoing uncertainty of who will survive rapid changes in the industry. 

In the past and even today, if there were one list bankers wanted to dominate, it was often the list of M&A advisers. Mergers and acquisitions in investment banking has often been the heart, soul and core, not because they generated the most revenues, but because M&A bankers have a direct line to CEOs of the client companies.

M&A bankers strive to be the conscience guiding the CEO and board members on corporate strategy, business expansion, new investments and significant acquisitions. They steer CEOs, knowing that CEOs, too, can direct other business to the bank--business including bond underwritings, project finance, new equity offerings, and corporate lending.

The "bulge brackets" in M&A activity today include the same, familiar names (Goldman Sachs and Morgan Stanley). Meanwhile, institutions with traditions in commercial banking or foreign operations have shoved their way to spots near the top. After they decided in the late 1990s to exploit their large capital bases and balance sheets and thanks to loosened regulation, these institutions (the JPMorgans and Citis) earned lead roles in underwriting activity (especially in bonds and loans) and found a back door into strategic M&A. It also helped, too, when they raided other investment banks for top talent or acquired other established investment banks to propel them through M&A doors. 

In 2012, Goldman Sachs and Morgan Stanley were the top two M&A banks (according to Thomson Reuters), based on total deal value.  Not a surprise.  JPMorgan and Citi rounded out the top 5. Also not a surprise.  Barclays emerged as no. 3--a surprise leap, spurred mostly by a surge of activity in the U.S.  The M&A unit at Barclays, remember, includes bankers with old Lehman ties after Barclays acquired Lehman's U.S. broker/dealer during the financial crisis, 2008.

At Bank of America, its Merrill Lynch unit seems not to have had a similar influence--at least in M&A.  BoA slipped to 8th in recent lists.

Some juggling and repositioning should continue into 2013, because all of the above are scratching their heads figuring out the impact of regulation and straining to squeeze more revenue out of an uncertain business model. Even this week, Morgan Stanley hinted that it needed reduce the scale of its fixed-income unit.

All of the above, as well as Credit Suisse, Deutsche, and UBS (three more names also in the top 10), are major financial institutions, subject to tough capital and liquidity reforms called for by Basel III and Dodd-Frank. Hence, in 2013, all activities in investment banking--from trading to underwriting and strategic advisory--are on the table, subject to revamping if necessary to reach return-on-capital targets.

UBS is in a peculiar place. It claims to be doing now what other banks will need to do over the next two years--withdrawing from any investment-banking activity it can't rationalize. Nonetheless, in 2012, it ranked as a major investment bank--at least based on league tables. It placed 9th in M&A activity--garnering a notable share of deals, especially in Asia.  In late 2012, it made prominent announcements about vast reductions in investment-banking staff--especially in fixed-income markets.

It may still choose to support its mergers team, because M&A requires less capital and hardly needs use of the balance sheet. But trends today suggest that being big in all other investment banking units (including corporate lending, mezzanine financing, bond underwriting) helps drive M&A--not necessarily the other way around.

Meanwhile, don't discount the "boutiques."  They lack capital. They can't swing for the fences with big balance sheets, nor can they provide bridge loans or mezzanine financing to clench deals or get them done quickly. (Lazard and Evercore rank in the top 13 among M&A advisers.) Their bankers are the ones who whisper to CEOs they do deals without the blatant conflicts of interests the "bulge brackets" often have.

And just as important, because they are organized in simple structures without trading arms, lending units, and armies of industry teams, "boutiques" are not subject to the vast amounts of regulation, reform and re-engineering "bulge brackets" will encounter this year and the year after and the year after that.

Tracy Williams

See also:

CFN:  Morgan Stanley: Can It Please Analysts? 2012
CFN:  UBS Throws in the IB Flag, 2012
CFN:  Goldman Sachs: How Does It Do It? 2010
CFN:  Banking Boutiques: What Are the Advantages? 2009

Wednesday, January 9, 2013

Rules For Trading In Stocks Part 2

Today I'll continue with 2 more rules.

Rule No.4: Buy and Sell on 3 Weeks Advance or Decline
Markets do not go up forever! There must be some profit taking involved along the way. In Gann's rule, he said "buy when the market is decline for 3 weeks in a bull trend". What this means is that when the market is up for about 2-3 months, there'll be a correction, this correction usually takes in the form of 1-3 weeks decline, after which  the bull trend resumes. So to apply this rule, we have to wait for the market to decline for 3 weeks, then start buying, but remember to put a stop loss should the decline extend further. If the market only decline for 1 week, no entry. Similarly, in a bear market, markets do not fall forever, after a few months of decline, there will be a pull back. In Gann's rule, sell after 3 weeks of bear rally.

Chart 1: KLCI 2010

The above chart 1 illustrate this perfectly well on our KLCI in the year of 2010. The 3 sell down in the month of Feb, May and Nov lasted about 3 weeks or 15 days (1 week = 5 trading days).

Next, Gann said, "after the market advance or decline 30 days or more, the next buy or sell point is 6 or 7 weeks. And after a market rallies or declines more than 45 to 49 days, the next time period to watch is 60 to 65 days."

To illustrate his statement, let's take a look at the chart below: Chart 2 KLCI 2011

In the first half of 2011, news on the euro debt crisis causing the market to react negatively. Between mid January to mid March, the sell down lasted about 7 weeks, which is 36 days in exact. In addition, in the second half of 2011, the US debt ceiling crisis resulted in stock market crashes around the world. KLCI reacted with a sell down for 60 days! After which the long term bull trend resumed.

Now, the question is how do we know what's the duration of the decline? We do not know, we just need to keep our stop loss at bay to protect ourselves.

Chart 3 KLCI 2012

Recently in November 2012, we had exactly 16 black candles, that was unusual as it was consecutively black candles with no white candle in the middle. However, 16 days is close to the 3 weeks of Gann's rule, so the rule still applied for this case.

Rule No.5: Market Moves in Sections
Market moves in sections or waves. Usually for a bull market, you will see 3 or 4 up waves before you can consider the top.

Similarly, in a bear market, never consider the market final bottom when you see the first decline wave because it will run 3 or possibly 4 sections before the bear campaign is over.

Chart 4 KLCI 2006 - present

From the chart above, we are currently on the 3rd wave. We do not know how long this wave will last, or there could be a 4th wave. Only time will tell. My advice for long term investors is to use the 200 day Moving Average as a reference, sell when your stock falls below this line, and get back in once it is above the line again.

Happy Trading,
Pauline Yong

Friday, January 4, 2013

Rules For Trading In Stocks

In November last year I said the market would turn around by 30 Nov 2012 and the market did recovered around that time. When it comes to trading, technical analysis can help us to make some forecast base on how prices behave in the past. In today's article, I would like to share with you 3 stock trading rules by W.D Gann, in his book titled "45 Years In Wall Street".

Rule No.1: Determine The Trend
Always identify the primary trend first. This can be easily identify using trendlines and moving averages. As a rule of thumb, 10,20 MA are for short term trends, 50, 100 MA medium term and 200 MA for long term trend. When the price is above the 200 MA or the long term trendline, it shows that the stock is in a long term bull trend such as the diagram below.

Rule No.2: Buy at Single, Double or Triple Bottom
Buy at single, double or triple bottom. This is an important rule especially for double bottom when you see that the second bottom is higher than the first bottom, it would be a compelling buy signal.

Similarly, sell at single, double or triple top as these are obvious price patterns that most traders will see and they will act on it at the same time. Always remember to determine your stop loss point and follow your plan strictly.

In addition, do not overlook the fact that the 4th time the stock reaches the same level (either top or bottom), it is not safe to sell or buy because it nearly always go through.

Rule No.3: Buy and Sell on Percentages
Buy or sell at 50% decline from any high level; or 50% advance from any low level. This is because 50% is an important support and resistance level.
Above is the chart for Genting Singapore. It fell from S$2.36 in November 2010 to $1.18 in November 2012, exactly 50% decline. Although, sometimes it may decline beyond 50% but as a rule of thumb, start buying when you see 50% decline from the peak won't go too wrong.

Today I'll just talk about 3 rules, next week I'll share with you with a few more rules from this book.

Happy Trading,
Pauline Yong