Exams are finally over, now I can put some focus in reading up what was missing in between the period. Seems like the market is getting spooked again last night by the feds talking about the 'bad' economy moving forward. Dow was maintaining its support at the 13k mark before plunging back to the 12600+ mark again.
Apart from that, oil has made record again of closing above $USD130. With JPY/USD at 102.87-102.88 - 0.44, it has been trading around this range despite oil prices increasing. I remember reading 1 article or a video recently on oil, probably on money.cnn.com. The person was talking about oil prices, and why it went up and probably will move uptrend till a point where alternate energy has to be in place to replace the fast declining oil supply.
This was also re-enforced by Warren Buffett, where there was a question posted to him on oil prices. He mentioned that people tend to view oil prices on current day as compared to years ago, probably 5-10 years period. Probably 10 years ago, oil prices are factored at $30 (I'm posting a theoratical example), and supply was 100 compared to demand at 90. Taking note of the supply demand curve, you can't possibly sell at a higher price when supply meets demand or supply is more than demand. However, within our 10 year cycle, due to technological advancements, more sophisticated machineries etc etc, it is notable that consumption of oil will increase to support more production. Just like personal computers, it just gets more and more powerful, and in order to support that, you need more power a.k.a electricity to use it. In the oil case, probably as of now, demand is probably 200 and supply is at 90, and this overdemand will be interpreted as a under-supplied market and this only allows oil to increase in price eventually. Oil, eventually as a natural resource doesn't come that easily and it requires many years to be even made (complicated science that I think you can google it out (: ). Of course it is not as simple as this is, but this is a rough overview of how things move.
Oil, as compared to commodities like rice etc are almost the same though in my opinion. As technology advances, for example, better soil/fertilizers/machinery/cropping skills, with the same amount of land, farmers should be able to harvest more at a short time frame as compared to the past. However, take note of the increasing population globally as compared to the supply of such commodities. I don't have any information on the mean average annually on the rise in population, so I am just making some theoratical assumptions. Looking at history, baby boomers was the super rise in population right after World War II. That was the spark in the economy globally. If the supply from last time was 50 and demand was 50, commodity prices should be quite fixed and I believed the goverment policies protect commodity prices from soaring too high as well. This is indicated in the CPI, which sums up those basic necessities and provides an indicative value (CPI stands for consumer price index and it is used to indicate inflation). However, this is only indicative as I stated. The reason is because inflation hits us harder than we expect and this CPI is under-estimating inflation. To simply this rationale, the CPI probably takes the price of bread, rice, toothpaste etc, basically whatever we NEED to use for our most basic life. I forgot the actual formula for calculating but basically it sums up the value and derives a value from this. Taking into account for a normal hike in rice, this CPI will rise accordingly to the rise in rice. BUT, it doesn't take into consideration, that food sellers/distributors/wholesalers etc increase their price too. It's simple logic actually, MOST of the sellers(food sellers) will jump on the bandwagon to raise prices once they heard or suffer this price hike to minimise their cost. Basically if rice producers sell $1 more per sack to the buyers, do you think food sellers like those chicken rice stalls will remain the same price? In general, to retain their profits, they will raise their price to sell at $3.30 instead of $3 for example. I don't know how many plates of rice can be sold for 1 sack, More of the time is due to the media that is showing all these negativity. I hope this example clears up the air :) .
Currently, I am reading "the new Buffettology" and I do recommend this book to investors who wants to know more investing long term. I gain alot of insights from this book and it teaches alot of technical skills in terms of modelling a 10 year prediction of a company's EPS and earnings on average with a estimated deviation based on past results. The first thing to learn from this book on investing is to indentify durable competitive advantage. More to come when I complete the book.
5th May 2008
The start of the new week, nothing much or big happened over the weekend. Some information to share from Warren Buffett's speech:
We are happy to invest in businesses that earn their money in euros in France or Italy or sterling in the UK, because I don't have a feeling that those currencies are likely to depreciate against the dollar," said Buffett. "Overall I think that the U.S. continues to follow policies that will make the dollar weaken against other major currencies.... I feel no need to hedge purchases of companies that earn profits in other currencies." Buffett added that major U.S. multinationals, like Coca-Cola (KO, Fortune 500), are a natural hedge against the dollar, since they earn most of their profits offshore -- which, he said, "will be a net plus over time."
Asked what's in store for the economy, Buffett said he doesn't have a clue and doesn't care.
"I haven't the faintest idea," he said. "We never talk about it, it never comes up in our board meetings or other discussions. We're not in that business [of economic forecasting], we don't know how to be in that business. If we knew where the economy was going, we'd do nothing but play the S&P futures market."
His simple point: As an investor, you don't need to predict the economic cycle (or even pay much attention to it). Instead, you should focus on evaluating individual businesses if you pick your own stocks -- or, simply buy the entire market in the form of an index fund. When a shareholder asked for the single best specific investment idea Buffett could recommend to an individual in his 30s, Buffett said: "I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform...and I could just go back and get on with my work."
Source: http://money.cnn.com/2008/05/03/news/companies/buffett.am.wrap/index.htm?postversion=2008050316
This is very insightful, for people to determine whether they want to be traders or investors. For traders, it is important to know and predict the economic cycle, as there are no long term holdings in a trader's playbook. So, which category do you belong to? After my exams on the 12th, I will start to re-assess my portfolio and make certain readjustments to my investments plans and strategy.
USD/YEN currently at 105.35-105.37 + 0.63, which is showing a very slow uptrend.
I was talking about the US market on how it works last week. Basically, Americans tend to spend on credit unlike us, Asians where we prefer to spend by cash first and save up money. Currently as it goes, consumer index wasn't that great for the past 3 months since the start of January, and this impact hurted the consumer markets with reports of dropping sales etc etc. Even stimulus package from the government didn't help in this area. In my view, people didn't want to spend that package because of a few reasons. Either they are stuck in the mortgage crisis, or they are unemployed. In simple terms, if the economic cycle for US is based on this credit buying, at the current situation where the buying force drops to a certain level, it is not possible to change people's mindset to start spending again when their pockets actually shrink. This is human pyschology in play with accordance to the markets. In this case, how can we say that the worst is actually over? This is a very simplified model, as there are many more factors that affect this as well.
Well, probably the subprime impact is almost over, noone is sure for sure, but the deflation of the USD is still there. Especially after the last rate cut, the impact on the dollar is not surfaced yet. With oil prices running all over the place, there's still quite a big room to clear up the oily mess first before everything settles down.
That's pretty much all for now. Time to go back for my revisions!
We are happy to invest in businesses that earn their money in euros in France or Italy or sterling in the UK, because I don't have a feeling that those currencies are likely to depreciate against the dollar," said Buffett. "Overall I think that the U.S. continues to follow policies that will make the dollar weaken against other major currencies.... I feel no need to hedge purchases of companies that earn profits in other currencies." Buffett added that major U.S. multinationals, like Coca-Cola (KO, Fortune 500), are a natural hedge against the dollar, since they earn most of their profits offshore -- which, he said, "will be a net plus over time."
Asked what's in store for the economy, Buffett said he doesn't have a clue and doesn't care.
"I haven't the faintest idea," he said. "We never talk about it, it never comes up in our board meetings or other discussions. We're not in that business [of economic forecasting], we don't know how to be in that business. If we knew where the economy was going, we'd do nothing but play the S&P futures market."
His simple point: As an investor, you don't need to predict the economic cycle (or even pay much attention to it). Instead, you should focus on evaluating individual businesses if you pick your own stocks -- or, simply buy the entire market in the form of an index fund. When a shareholder asked for the single best specific investment idea Buffett could recommend to an individual in his 30s, Buffett said: "I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform...and I could just go back and get on with my work."
Source: http://money.cnn.com/2008/05/03/news/companies/buffett.am.wrap/index.htm?postversion=2008050316
This is very insightful, for people to determine whether they want to be traders or investors. For traders, it is important to know and predict the economic cycle, as there are no long term holdings in a trader's playbook. So, which category do you belong to? After my exams on the 12th, I will start to re-assess my portfolio and make certain readjustments to my investments plans and strategy.
USD/YEN currently at 105.35-105.37 + 0.63, which is showing a very slow uptrend.
I was talking about the US market on how it works last week. Basically, Americans tend to spend on credit unlike us, Asians where we prefer to spend by cash first and save up money. Currently as it goes, consumer index wasn't that great for the past 3 months since the start of January, and this impact hurted the consumer markets with reports of dropping sales etc etc. Even stimulus package from the government didn't help in this area. In my view, people didn't want to spend that package because of a few reasons. Either they are stuck in the mortgage crisis, or they are unemployed. In simple terms, if the economic cycle for US is based on this credit buying, at the current situation where the buying force drops to a certain level, it is not possible to change people's mindset to start spending again when their pockets actually shrink. This is human pyschology in play with accordance to the markets. In this case, how can we say that the worst is actually over? This is a very simplified model, as there are many more factors that affect this as well.
Well, probably the subprime impact is almost over, noone is sure for sure, but the deflation of the USD is still there. Especially after the last rate cut, the impact on the dollar is not surfaced yet. With oil prices running all over the place, there's still quite a big room to clear up the oily mess first before everything settles down.
That's pretty much all for now. Time to go back for my revisions!
4th May 2008
Sorry for the late postings, as I'm currently having my exams for my degree. The news lately is regarding employment figures and fed cuts during this week. Currently, USD/YEN is trading at 105.34-105.37 + 0.62, which is showing a slow recovery for the USD after the fed cut. However, do take note that oil has taken a leap forward to $116.32 (+3.27%) too.
Another view from Warren Buffett:
http://money.cnn.com/2008/05/03/news/companies/buffett/index.htm?postversion=2008050311
Another link to take note of the key rates:
http://www.bloomberg.com/markets/rates/index.html
It's pretty obvious that the LIBOR rates have been falling since the rate cuts started. What is the LIBOR rates?
From this website: http://www.wisegeek.com/what-is-libor.htm
LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. Due to London's importance as a global financial center, LIBOR applies not only to the Pound Sterling, but also to major currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar.
LIBOR is determined every morning at 11:00am London time. A department of the British Bankers Association averages the inter-bank interest rates being offered by its membership. LIBOR is calculated for periods as short as overnight and as long as one year. While the rates banks offer each other vary continuously throughout the day, LIBOR is fixed for the 24 hour period. Generally, the difference between the instantaneous rate and LIBOR is very small, especially for short durations.
The most important financial derivatives related to LIBOR are Eurodollar futures. Traded at the Chicago Mercantile Exchange (CME), Eurodollars are US dollars deposited at banks outside the United States, primarily in Europe. By holding the deposits outside the country, US depositors are not subject to Federal Reserve margin requirements, allowing higher leverage of the funds. The interest rate paid on Eurodollars is largely determined by LIBOR, and Eurodollar futures provide a way of betting on or hedging against future interest rate changes.
Interest rate swaps are another significant financial derivative dependent on LIBOR.
In an interest rate swap, two parties exchange sets of interest payments on a given amount of capital. Generally, one party will have a fixed interest payment, while the other will have a variable rate. The variable rate payment stream is often defined in terms of LIBOR. Interest rate swaps, and by extension LIBOR, are extremely important in providing a liquid secondary market for residential mortgages, which in turn allows lower interest rates on US mortgages.
While LIBOR does have implications for transactions conducted in Euros, the advent of the Euro has brought with it the creation of the Euribor. Conceptually similar to the LIBOR, the Euribor benchmark is defined and maintained by the European Banking Federation.
As far as it goes on STI, it has been trading within a frame of 3000 - 3200, which it breaked out a few times. Currently at 3236, it may probably fall back slightly on monday due to the gap on Thursday.
As I have mentioned last year, the inflation and deflation of the USD will be the killer of the financial economy. Basically, to fight inflation, people invest in commodities. Once this happens, most of the commodities like common food or staple products will rise rapidly. The prices of commodities can be viewed here:
http://www.bloomberg.com/markets/commodities/cfutures.html
Now look at what is subprime? I mentioned this during November last year (http://dimitric-trading.blogspot.com/2007/11/chart-for-celestial.html) which indicted this and now the whole world is trying to find inflation. Look at rice, even at my local hawker center, it used to be 30cents per bowl, and now it becomes 50cents! This time lag triggered alot of reactions from various governments by controlling the distribution, price, and alternative sources. But then, seriously, if you are used to eating rice, are you able to get a alternative product to replace it? Especially for Asian countries, it may not be that easy to convince the people to adopt.
This is very interesting, with the whole world trying its best to fight inflation, my take is this inflation may be over faster than expected but the ultimate damage is already done. Why do I say that? Well, if a chicken rice stall has increased its price from $2.50 to $3, do you think they will reduce its price if rice supply regains normal? It is just like the 7% GST that occured last year and many people took the opportunity to raise prices which is much more than the additional 2%.
I will be reading up on past history, for those inflation periods and the methods they used to break out of this cycle, and identify the next industry or business which will emerge from here. I'm not sure whether there was a consistant pattern from the past, but history typically repeats itself, as the market is mainly dominated by human emotions eventually.
I will talk about the economy of US soon and attempt to break down its cycle on how the financials worked in the world's largest consumer market.
Another view from Warren Buffett:
http://money.cnn.com/2008/05/03/news/companies/buffett/index.htm?postversion=2008050311
Another link to take note of the key rates:
http://www.bloomberg.com/markets/rates/index.html
It's pretty obvious that the LIBOR rates have been falling since the rate cuts started. What is the LIBOR rates?
From this website: http://www.wisegeek.com/what-is-libor.htm
LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. Due to London's importance as a global financial center, LIBOR applies not only to the Pound Sterling, but also to major currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar.
LIBOR is determined every morning at 11:00am London time. A department of the British Bankers Association averages the inter-bank interest rates being offered by its membership. LIBOR is calculated for periods as short as overnight and as long as one year. While the rates banks offer each other vary continuously throughout the day, LIBOR is fixed for the 24 hour period. Generally, the difference between the instantaneous rate and LIBOR is very small, especially for short durations.
The most important financial derivatives related to LIBOR are Eurodollar futures. Traded at the Chicago Mercantile Exchange (CME), Eurodollars are US dollars deposited at banks outside the United States, primarily in Europe. By holding the deposits outside the country, US depositors are not subject to Federal Reserve margin requirements, allowing higher leverage of the funds. The interest rate paid on Eurodollars is largely determined by LIBOR, and Eurodollar futures provide a way of betting on or hedging against future interest rate changes.
Interest rate swaps are another significant financial derivative dependent on LIBOR.
In an interest rate swap, two parties exchange sets of interest payments on a given amount of capital. Generally, one party will have a fixed interest payment, while the other will have a variable rate. The variable rate payment stream is often defined in terms of LIBOR. Interest rate swaps, and by extension LIBOR, are extremely important in providing a liquid secondary market for residential mortgages, which in turn allows lower interest rates on US mortgages.
While LIBOR does have implications for transactions conducted in Euros, the advent of the Euro has brought with it the creation of the Euribor. Conceptually similar to the LIBOR, the Euribor benchmark is defined and maintained by the European Banking Federation.
As far as it goes on STI, it has been trading within a frame of 3000 - 3200, which it breaked out a few times. Currently at 3236, it may probably fall back slightly on monday due to the gap on Thursday.
As I have mentioned last year, the inflation and deflation of the USD will be the killer of the financial economy. Basically, to fight inflation, people invest in commodities. Once this happens, most of the commodities like common food or staple products will rise rapidly. The prices of commodities can be viewed here:
http://www.bloomberg.com/markets/commodities/cfutures.html
Now look at what is subprime? I mentioned this during November last year (http://dimitric-trading.blogspot.com/2007/11/chart-for-celestial.html) which indicted this and now the whole world is trying to find inflation. Look at rice, even at my local hawker center, it used to be 30cents per bowl, and now it becomes 50cents! This time lag triggered alot of reactions from various governments by controlling the distribution, price, and alternative sources. But then, seriously, if you are used to eating rice, are you able to get a alternative product to replace it? Especially for Asian countries, it may not be that easy to convince the people to adopt.
This is very interesting, with the whole world trying its best to fight inflation, my take is this inflation may be over faster than expected but the ultimate damage is already done. Why do I say that? Well, if a chicken rice stall has increased its price from $2.50 to $3, do you think they will reduce its price if rice supply regains normal? It is just like the 7% GST that occured last year and many people took the opportunity to raise prices which is much more than the additional 2%.
I will be reading up on past history, for those inflation periods and the methods they used to break out of this cycle, and identify the next industry or business which will emerge from here. I'm not sure whether there was a consistant pattern from the past, but history typically repeats itself, as the market is mainly dominated by human emotions eventually.
I will talk about the economy of US soon and attempt to break down its cycle on how the financials worked in the world's largest consumer market.
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