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Tuesday, 26 March 2019

WE ALSO WROTE A LETTER TO THE SECURITIES COMMISSION.... (A PARODY)






Dear Securities Commission of Malaysia,


I am writing to register my complaint about the conduct of some investment banks and their analysts, whose recent downgrade of my favorite stock has caused the price to drop considerably.

I am of course writing about TalkCock Industries (TCO), an investment education company that had gone through tough times but whose financials have been recovering. The stock fell to RM1 recently, after gaining 250% since January to RM1.80. 

I have repeatedly told readers of my blog that TCO is worth at least RM4. How did I come up with this? Simple - my 'platinum rule' is when the company records three consecutive quarters of profit recovery. Never mind that the sector is cyclical, vulnerable to broader market factors, and that the company has yet to prove that talking cock is an inherently sustainable business model. These are not as important, OK?

My logic is very simple. TCO reported earnings per share of 12 sen in its latest quarter. Multiply by four quarters, assuming it will report at least this much EPS, and you will get annual EPS of 48 sen. From this observation, and assuming a conservative PE ratio, the stock is undoubtedly worth RM4 at least. This observation is worth the content of at least ten research reports.

My followers and blog readers evidently shared my unbridled enthusiasm. This explained the recent 250% rally - I did not tell them to buy the shares, of course! Not even once, twice, or four times. 

I now find myself in the awkward situation of explaining to them why they have lost money, though probably not as much as what I have lost.. This is clearly unacceptable, so I have a list of demands.

I urge the SC to reprimand the analysts whose stock analysis skills are undoubtedly subpar. Please don't give me acronyms like CFA and SWOT analysis - my platinum rule trumps them all. I am of course very happy when the research reports support my stock position. When they reverse course, not so much.

One of the analysts had the nerve to downgrade his target price for TCO, saying that 'the last quarterly performance is unlikely to be repeated'. Another analyst - presumably very young and has no clue about trading shares - dared to say in his report that 'investors would be wise to take some profits'. What is going on here!

This stock price movement after the UNREASONABLE downgrades are a TRAVESTY.


These downgrades, and the concerted efforts by certain parties, have caused me considerable grief as I have lost vast sums of money. I am at a struggle to explain why; I have always used my margin account and utilised the leverage responsibly.

I challenge these investment banks to prove that they do not hold any TCO shares. Additionally, they each have to provide a written confession that there is no conspiracy to destroy Malaysia's fledgling talking cock industry. 

After that, I urge them to reimburse me for the sums I have lost due to these unforeseen downgrades. My followers are unhappy that my target price are nowhere near being met. I expected better out of them as there were no complaints when TCO did nothing but go up, every day.

Investment banks' research reports are such dangerous things. Analysts can be so irresponsible sometimes. To these people, I am willing to forgive them for their lack of experience and market nuance. I am also willing to help them make better investment decisions and analysis, simply by following what I say and write about.

A properly well-informed analyst would easily share my views; TCO is worth at least RM4 and not one sen less. With an expected GDP growth of 4.9% this year, and higher subscription rates for classes where investment gurus do nothing but talk cock, I am certain the business will pick up. 

The SC has a responsibility to protect shareholders' interests. Especially when I tell people to buy and now they're angry at me for being stuck at high prices.

These people will hold everybody accountable when they lose money trading shares : the SC, TCO's management, Tun Mahathir, Najib, and even myself. I am not saying I am the same but somebody, anybody has to be held responsible when I lose money. Enough is enough.



Sincerely,

Concerned Shareholder

**this post is purely a work of fiction.










Sunday, 24 March 2019

TRADE OF THE WEEK #7 : HSI-H6F (HANG SENG INDEX PUT WARRANT)



 
For us, the market's been quite boring lately. We have missed rallies (that we think are unsustainable) and lost money (when we go into such rallies since we don't know any better). Trading volumes have largely improved since, but only due to speculative positions in certain oil and gas counters.

We took a step back and tried to reassess things. The current market environment? OK-ish, but uncertain to continue. We are fundamentalists at heart; where is growth coming from?

Last week, the US Fed finally explicitly said that there will no longer be planned rate hikes for the foreseeable future. This 'dovish' view failed to boost the markets. Why? We think it's because everything has already been priced in since October. US markets have rallied by 15% since; so did Asia's key markets.

No matter how speculative we seem, our world view is grounded in the fundamentals. We see news items like 'China's exports fall 20% in February' and can't help but view the market in a bearish lens. 

Global markets have already priced in the 'dovish' Fed stance. A weaker dollar may be good for emerging Asia but to what extent really? Central banks in Asia can afford to cut rates further? Yawn; we don't think that's such a compelling angle.

Take Malaysia as an example. It's clear that the KLCI has severely underperformed global markets so far this year. Political and stability risks continue to persist. Only a foolish company would expand their capacity now by making acquisitions, expanding landbank, growing their workforce etc.

There are many foolish companies, but none are keen to spend right now. An interest rate cut makes borrowing more appealing, but who wants to spend so quickly? Malaysia can suddenly undergo a huge political turmoil at any moment; that's what you face when your prime minister is a 93-year-old.

But we digress. Today's post is on the Hang Seng, which we have some experience in. The angle is simple: we trade in anticipation of momentum. The Hang Seng index has struggled to stay at the 29,000 level recently. Good news have dried up. Yet another trade war related fakery won't keep this ship afloat. As we have been for a long time, we are negative on the index.


Toppishness in the Hang Seng Index. Daily chart from early February until 22 March.

As we have said previously, index linked warrants are inherently risky to trade. They can gain 10% in value in the morning before losing 20% in the afternoon session. To avoid pain, there are strict rules to be followed.

To maximise the chance of succeeding, here's our abbreviated list of 'shit that's necessary to happen if we were to trade Hang Seng put warrants'. 

Oh, and in case you're a newbie, put warrants profit when the markets fall. Given our market views, they are of course a very important part of our strategic thinking.

So, the rules:

1) Get a catalyst
2) Charts must be good
3) Markets should have reacted weakly to supposedly 'good' news
4) Buy into weakness, always.


(2) is already covered; anyone with a basic understanding of charts should be able to see the struggles of the Hang Seng index since earlier this month. (3) is the news about the Fed above; markets reacted, but not strongly. There was a distinct lack of enthusiasm, replicated by the Asian markets.

(1) is as follows : on 21 March, Tencent (the gaming + WeChat + everything company) posted its worst quarterly profit drop (of 32%). The company, given its size and prominence, and its stock commands outsized influence on the Hang Seng index. Indeed, like Apple and the Dow Jones, Tencent's stock price movement dictates the Hang Seng's trajectory.

There may be other catalysts, but we chose this one to highlight this fact: you have to look for things that actually impact the index, and in this case it's just these two - Tencent's stock, and the overall global market sentiment. Both were not good, which gives us confidence to pursue a bearish view. 

(4) is basically a remedy for getting hit squarely in the face. Since we know about a put warrant's potential volatility, it is important to trade only when the stock is in a losing position. This will give you a better buffer/margin of safety  in case the volatility is much stronger than expected.

But to do this you basically have to buy into the opposite direction. Call it micro-contrarianism; since our time period is short, we are not going for the crazy gains. We set modest profits and a predetermined timeline to see if this trade works out.

THE TRADE

You may ask; there are so many index warrants on Bursa. Which one to trade?

The answer is : whichever suits your wallet (same answer to: how many shares should I buy?). But do pay attention to day-to-day liquidity and average trading volumes. Choose something that is neither too liquid (they  tend to be priced cheaper, perhaps at the 10 sen range) or too illiquid (more expensive but don't see regular trading action). 

Our preference: actively traded index warrants priced in the 20-35 sen range. We are familiar with them and are comfortable with putting a large position. It also helps to have them in your watchlist for observation before you decide to commit; we are in the love-before-marriage camp.

For this trade we chose HSI-H6F, a reasonably volatile put warrant with a long remaining tenure (warrants nearing expiry tend to be far more volatile, and there are no guarantees of liquidity).

So, we did set some parameters for this trade angle, also abbreviated:

1) Trade the put warrant.
2) Have to exit position within the day. This angle cannot be carried overnight.
3) Reasonable size to buy : 50,000 lots or more.
4) Target as usual : 10% returns 
5) Priority is on hitting the profit target, rather than maximising it.
6) Only buy if the price is below yesterday's close (to get that margin of safety)

To put it another way, the put warrant would have to be weaker than the day before for us to go in. This means that the market would be rallying, and we're going against the grain. Understanding market dynamics is the key to making this work; you better have damn good reasons to anticipate that rally to suddenly stop, moving the prices (and profits) in your direction. It takes time, trial and error to have this skill. A lot of all three, actually.

Anyway, HSI-H6F fell to 20.5 sen on 22 March, a 1 sen drop from the previous day's close. We bought into it at that price as the put warrant turned weaker, hitting a bottom of 20 sen.

About an hour later, prices began to move in our direction. The put warrant hit its break-even (same price as yesterday's close) of 21.5 sen. This is the beauty of getting that margin of safety; it gives us the chance to dispose at break-even (with a RM500 profit) or, if our angle is wrong, to sell back at 20.5 sen, costing us nothing except hurt pride and intraday brokerage fees. 

This is what you have to understand about momentum: when you're right about Thing 1 (the market reversing), there's a better likelihood that you will be right about Thing 2 (there will be enough movement to hit our profit target). We designed this trade so that it can plausibly hit our predetermined profit target of 10%. This requires HSI-H6F to hit 22.5 sen, a 1 sen increase from its break-even. If it does, we exit.

The eventual outcome? We made a thousand ringgit within just over an hour. Sure, the put warrant kept going up, but here's the last lesson today: always trade the market at your own terms.

We don't care if the put warrant kept going up to 30 sen; a different trading plan would be needed. We are happy with the gains, and potentially the chance to replicate these trades in the future. Five of these and our lunch money for the next 5 years is assured (Ha!).




Outcome 
Gross profit : RM1,000
Return on investment (ROI) : 9.76%
Duration : Intraday, 80 minutes

















Thursday, 14 March 2019

TRADE OF THE WEEK #6 : NAIM HOLDINGS BHD



The profits from this week's trade is small compared to other TradeOfTheWeek installments we have published. However, as a moneymaking opportunity, this was arguably the best one. As a tactic, it's one of the finest we have in our list. The profit opportunities are large, and the downside is minimal, although it requires a bit guts to buy when everyone else is selling - not just the other way around.

While this is an overnight trade, our exposure in NAIM lasted about 10 minutes. We bought at the close on 13 March and sold almost immediately upon market open on 14 March. Given the trading activity on the day we bought the shares, our chances of making profits were almost assured.

In other words, this is as 'easy money' as it gets in trading. But there is a catch : you have to buy at the absolute price peak, and quite literally in this case.

NAIM staged a huge rally, obviously to the run up in PERDANA shares (a subsidiary) on the same day. While PERDANA immediately gained close to 50% on 13 March in a huge rally, NAIM only caught up later. As at 4:45PM (pre closing time), from 90 sen the day before, the stock was last traded at limit up levels of RM1.20, the absolute highest price it can reach on this day.

Our trading tactic is simple : we bought into the limit up. We managed to rustle up a small amount of 15,000 shares at RM1.20 as buying demand overwhelmed selling at the close period - a good sign that prices will open even higher the following day.

Your obvious questions : Do you need brains to do this? Why is this even a tactic? Even blind uncles know to buy into NAIM nowadays??

Our reply is this : even for obvious trades you will need to have grounded justifications. The trade has to make sense, otherwise it is just a plain old speculative bet.

With this trade, we are laying down the parameters that justify why the trade is low-risk with a higher-than-normal chance of profitability. We aren't gamblers; we have to be able to explain our actions.

TICK THE FOLLOWING BOXES

If you're a sensible human being, you shouldn't just buy into any limit up situations. In situations such as this one, there is always a likelihood of prices collapsing immediately. When a stock hits limit up, why shouldn't it give up its gains the following day?

In the case of NAIM, the positive signs were more apparent than usual. We break it down into seven main points; there are others, but we can't just share the whole ingredients to the special sauce. *wink*

1) Good broader market (KLCI and stocks on Bursa Malaysia)

2) Good sector sentiment (news flow on O&G sector from abroad and locally)

3) Proven sector rally (other O&G stocks already rallying)

4) Explicit link with peers (DAYANG & PERDANA, both linked to NAIM in terms of shareholding, both have rallied strongly)

5) A prior rally to justify this rally (NAIM already rose strongly following its 26 February earnings results, indicating good buying interest)

6) Good price/volume characteristics (liquidity profile - the stock is not encumbered by high volume sellers)

7) Good technicals (easily broke past the RM1 mark after a long consolidation period)

 NAIM, year-to-date daily chart. The long candle is the limit up point on 13 March 2019.


You can use this list in your own trading activity. Our golden rule : Anything less than 5 out of 7 in this list and we would not put on the trade.

By compartmentalising and creating rigid filters, you can save yourself from making bad trades. Never forget that this is a high-risk trade: anything could have happened to destroy the rally, such as sudden bad news, or an unexplained selldown.

Next thing to compartmentalise is the trading execution itself. This brings us to another set of parameters. (Editor's Note : sounds boring? congratulations for reading this far)


THE TRADE

The strong closing of PERDANA and NAIM compelled us to put on a small trade. At 4:50PM we acquired some shares at the limit up level, as the stock meets all the criteria in the above list.

We were anticipating good returns.


Last order didn't go thru.

Now, the compartmentalising: to be clear, we were not interested in riding the position, even though there's a good chance the rally will continue.
With this trade, all we're attempting to do is to lock up the spread: the gap between the closing on 13 March and the possible opening on 14 March. This was the 'easy money' part.

As soon as the market opened, we sold the position at RM1.25. 


So what happened next? We missed out on the rally from RM1.25 to RM1.40, but it doesn't matter to us. We had a simple plan and we stuck to it. 

The position could have been bigger too. Or we could have held on longer as the position becomes profitable. But these weren't part of our trade this time. It pays to be conservative: there's always a risk that prices will fall back to RM1, or that broader markets will suddenly sell off, or that the oil and gas sector rally will come to a halt (we're already cautious of this - it will happen eventually).

So for context : we made RM750 for about 10 minutes' low risk work with a 4.15% yield (4:55-5:00PM on 13 March, and 9:00-9:05AM on 14 March). Anything beyond this requires a different tactical approach, and the risk profile will rise considerably.

You get some, you lose some.

Outcome 

Gross profit : RM750
Return on Investment (ROI) : 4.15%
Duration : Overnight, total of 10 minutes









Sunday, 3 March 2019

TRADE OF THE WEEK #5 : V.S. INDUSTRY BHD


As we have demonstrated before in our past TradeOfTheWeek posts, a lot of the short term trading activity does not require substantive fundamental analysis. However, it is essential to know the basic facts about a company, the current investor and business sentiment towards the sector it operates in, its historical stock price, and its historical earnings performance.

For growth stage companies, their expected earnings growth means that the stock commands a market premium. But this trend reverses itself once it becomes clear that the previous expectations are far too rich.

Essentially, this is what happened to VS Industry Bhd, previously a high flier growth stock due to its leading status as a products assembler and manufacturer. Having a flashy client such as Dyson also helped.

But the growth angle hit a speed bump recently. The company warned that it expects slower client orders in the coming quarters. Since then, the stock has steeply declined but has shown volatile price activity - an invitation to traders like ourselves.

Note that we said you don't require 'substantive' fundamental analysis when analysing a potential stock to trade. But you do have to be familiar with the company's well-being from a business standpoint.

To overly simplify things, from a fundamental standpoint we always pay attention to the following in any company. Of course, these figures are readily available on the Bursa Malaysia website, for those who aren't too lazy to look for them:

1) Company's net asset value per share (a measure of intrinsic value relative to where the stock is trading now)
2) Its debt situation (is it normal for the sector?)
3) Its cash flow (constrained? Improving?)
4) Its available cash and reserves (a measure of prudency)

Fundamentally, VS is something we will continue to recommend (we have traded it many times) as it ticks all the right boxes.

THE TRADE

'The Spike'. Daily chart for VS back in January 2019. 

10 January price/volume data.

Let's contextualise this kind of movement. A price increase from 75 sen to RM1.03 in one day is highly unusual. But you don't need to know the reason behind such a move to trade the stock. We didn't and couldn't have figured it out, even if we had tried. 

Interestingly, the best trading opportunities tend to come when the rally cannot be explained. We have found that even market rumours tend to dilute the longevity of a stock price increase. And we do not trade when the news is out; neither should you.

Long story short, we managed to capture profits after identifying the stock's behaviour on 10 January as exceptional. For some reason, it is moving up, and far too fast for its own good. The strong volume was also a prominent sign that the buying interest is immense. Someone was buying - it could be fund managers, or bored uncles with retirement savings to burn. 

But more importantly, the price activity was aligned with our fundamental analysis of the company. It is a viable long term stock, and there is actual justification for it moving upwards.
Crappy companies tend to see their battered stock languish for years to come. But good companies tend to see their battered stock recover in fits and starts.

On this day, the movement was such that we knew there was a limited time frame for entering and exiting. The outcome:




Seven minutes ain't bad. The principles of short term trading are explained in painstaking detail on this blog; you don't have to look far to find them.

In a short period, we fortunately were able to contextualise the short term characteristics of VS. Think of the 'rubber band principle' : the longer the stretch, the faster it will contract. In other words, if a stock can move up by six sen (6.5%) in seven minutes, there's a good chance it can go down just as fast.

We got into the stock only because we identified the temporary market mania (at least seven minutes' worth); the large volumes, the quick breakout beyond 90 sen (a key resistance point), and the velocity of the price move, are all good indicators. When any of these start to recede, you will see a price pullback.

In fact, the price went beyond our exit point to RM1.03. But then it fell back hard.



And thus the trade window has closed for the day. Opportunities are finite in their potential and time frame; they are available in the market, but you always have to identify them.

TWO MONTHS LATER...

Contextualise a stock in a long term context and you will find different types of opportunities. If you're a smart buy-and-hold investor (we are not smart, and we are not long term oriented), you would have been able to capture VS stock at the 75-90 sen level. Value investing is such a crowded market that you will always find backers of truly valuable companies; they may arrive late, but there is no resisting a viable long term stock.

Just over two months later, as of 1 March VS has successfully broken past the RM1.03 mark. Enthusiasm has returned, and the smart long term investor would have realised a 30% gain in just under two months.

Slow but steady rise since 'The Spike'.

The lesson : find a strategy that works best for you and stick with it. 


Outcome

Gross profit : RM2,400
Return on Investment (ROI) : 6.5%
Duration : Intraday, 7 minutes










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