Fundamental analysis (FA) is aimed at capturing both systematic risk and idiosyncratic risk associated with a given security. While the market risk encompasses the macroeconomic factors – like monetary policy, economic cycle or unemployment rate, the residual risk includes company-specific factors – like financial ratios, management style or market share. Technical analysis (TA) is a method of evaluating securities by analyzing statistics generated by market activity, such as price and volume. It does not measure the intrinsic value, but instead it uses charts to identify patterns that can predict future price activity. Knowing how to perform both fundamental and technical due diligence is essential for successful investors and traders. Continue reading ‘FA, TA or FA&TA?’
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As we recall, the credit markets had an exceptionally difficult year in 2008, when risk appetite declined, prices collapsed and yields rose dramatically. High-yield, or junk, debt is rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s. These days, Goldman Sachs is recommending staying investing in high-yield corporate bonds, especially BB and B bonds, and taking profits in the CCC papers. Over the last 12 months, BB bonds have returned over 39 percent, underperforming the CCC tier by 66 percentage points. The Merrill Lynch US High Yield Master II index gained almost 5 percent this year, following a 57.5 percent return in 2009 while debt graded in the CCC tier and below has more than doubled in the past year. Leveraged loan prices climbed to 91.9 cents on the dollar, the highest since June 2008, while the CDX HY BB Index, a credit-default-swaps benchmark for 34 BB-rated US corporations, rose to $108.20. Continue reading ‘Back Into Junk Bonds’
During the second half of 2009, the apparently endless and prolonged slide of the once mighty greenback against most of the other major currencies was primarily attributed to the Federal Reserve’s near-zero interest rate policy. The relatively cheap dollar funding has led to an escalation of the carry trade, where investors were borrowing USD and investing in commodities or higher yielding currencies. We all remember that China, the world’s largest holder of FX reserves, and Russia have both called for a new global currency to replace the US dollar as the global currency reserve. On top of that, Bill Gross – PIMCO manager, claimed that the dollar would continue to weaken as long as the US was pumping massive amounts of money into the economy. According to an Italian money manager, “the diversification out of the dollar will accelerate, and people are buying the EUR not because they want that currency, but because they want to get rid of the dollar.” At the beginning of this year, the median estimate of more than 40 economists and strategists was for the dollar to end the year at $1.47 per EUR. Continue reading ‘EUR:USD – The Sultan Of Swing’
On January 11 2010, though CBOE Volatility Index [VIX] dipped shortly under 17.00 mark it did close at 17.55 – the lowest level since May 2008. Right after Lehman Brothers bankruptcy and the demise of AIG, the VIX hit its historic high of 89.53 on October 24, 2008 on concerns about the banking system stability. Prior to this crisis, the VIX had peaked at 38 on August 8, 2002. By definition, the volatility index measures expectations of volatility, or fluctuations in price, of the S&P500 index. Higher values for the volatility index indicate that investors expect the value of the S&P500 to fluctuate wildly – up, down, or both – in the next 30 days. The index is also known as the “fear index” because a high VIX represents uncertainty about future prices. Warren Buffett once said “Sir Isaac Newton gave us three laws of motion, but his talents did not extend to investing. He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men”. If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.” Continue reading ‘Fear Factor’
The New York Stock Exchange (NYSE) has withstood a number of financial shocks during the last century. We have read about the Great Depression when the world economy went through a long and painful recession. We have learned about the 1973 oil crisis and the resulting dramatic spike in inflation. I have personally witnessed the September 11 events, when NYSE has been closed for four business days. However, the greatest one-day crash in the history of the Dow Jones happened 22 years ago on “Black Monday”. On October 19th, 1987, the Dow index plummeted 508 points to close at 1,738 points. That fall represented a total drop of 22.6%, which is still to this day the biggest one-day percentage drop in the history of the Dow Jones. Continue reading ‘Black Monday – Deja Vu’
On December 29, 1989, the Nikkei-225 hit an intra-day all-time high of 38,957 yen. The Nikkei-225 (N225) is a stock market index that contains 225 of Japan’s largest publicly traded companies, including the likes of Toyota, Honda, Mitsubishi, Sony, Panasonic and Toshiba. From 1985 to 1989, the N225 grew exponentially, trading from around 10,000 to an unbelievable 38,916 in just a few years. The 1990s – referred to as the “Lost Decade”, were characterized by massive losses across both the real estate and stock markets, while the economic growth was nowhere to be found. Japan took on an enormous amount of debt in an attempt to stimulate the economy – however, these efforts were largely in vain, as the economy endured a long, L-shaped depression. According to World Bank’s statistics, Japan had a GDP of $3.57 trillion in 1990 and $4.49 trillion in 2008. On March 10, 2009, the Nikkei-225 was trading at 7,055 yen. While the GDP has increased by 26%, N225 lost around 82% of its 1989 peak value. Could that be a possible scenario down the road for US and EU? Continue reading ‘Nothing New Under The Sun’
The stock market has rallied tremendously from the twelve-year lows that were seen in March 9 2009. The Dow Jones index traded as low as 6,547 and it has rallied more than 3,200 points in just six months. Similarly, S&P 500 index traded under 670 points in early March and recently topped the 1,060 mark. An incredible rally to be sure – one of the biggest six-month rallies that we are likely ever to see. The million-dollar question now becomes: is this a powerful “bear market rally”, or the beginning of a secular bull market? Many investors agree that the worst news is now behind us, and that this is the beginning of a bull market. However, many hedge fund managers are betting against the rally, expecting that the US economy will have some trouble moving forward. Continue reading ‘The Bear Market Rally’
Speculation is certainly not for everyone, but trading is definitely not a snobbish occupation of an exclusive club of Ivy League graduates. There are many things to be said about trading. However, two points are paramount in becoming a successful trader: a rock-solid discipline and a timely acceptance of the losses.
In a nutshell, investors could have either a bullish or a bearish sentiment. That practically translates in the expectations that the markets will rise or fall within a pre-defined time-horizon. Under a quick classification, any financial instrument could be either a spot product or a derivative product. For instance, when you buy 100 shares of Apple [AAPL] you create a long position in that stock. For every dollar that AAPL share goes up in value you make a $100 in profit. Your profit & loss (P&L) account goes up or down linearly with the underlying product. However, when you trade futures or options products, the relationship does not work anymore. An option is a derivative, as it derives its value from an underlying asset. As the price of the underlying asset, such as a stock or commodity, moves in the marketplace, the price of the option changes in harmony. Continue reading ‘Options Trading 101′
Friday we witnessed another big gain for the S&P 500 index. Markets have risen a long way over the past five months. Back in March 2009, when the markets reached a 12-year low (i.e., on March 6th S&P traded at 666), there were plenty of analysts that had predicted a total collapse of the global financial markets. The bearish sentiment triggered a panic-driven sell-off with investors expecting the worst scenario with S&P index down to 500-point level. In their defense, they had some valid points: 1) a further 15% decline in home prices, 2) a worldwide-spread recession, 3) significant future earnings declines and 4) a considerably trimmed down debt market.
Continue reading ‘From Panic to Euphoria’
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