STI Index - an Update on the technical outlook

Last 2 weeks, I have been updating on the STI index chart and suggested that the index looks like it is turning. I said that the what is most likely for the index is that after breaking the uptrend support line, it will go up and "kiss" the uptrend line before making a plunge down.

The market seems to play my script out exactly.

Given the fall in the Dow Jones yesterday (27 Jul 2007), I believe that the STI has more room to go down. However, I also believe that the STI should find support at 3000-3300 level. This is only a preliminary assessment. Market is changing everyday, and when new information on the chart unfolds, than I can fine tune my assessment.

Is Japan really that expensive for visitors?

I need a break.

After a long while from my previous holiday back in Feb 2006, I am now planing my next holiday in Japan, Hokkaido. "Japan again!" are my friends reaction when I told them that I am heading to Japan for holiday. Well, it is understandable that they have such reaction, because this will be my sixth time to Japan.

They (my friends) alway think that Japan is an expensive place to have holiday. They compare the prices in Japan and Singapore and just complain about the price they need to pay for every meal. Logging is expensive, they reasoned, and also not forgeting the train fare when compared to the MRT of Singapore.

Is Japan that expensive? I always tell them that while Japan is expensive on an absolute level, it is not expensive in a relative level. So what do I mean by that?

Take a meal in Japan for example. Unlike Singapore, Japan do not have hawker centre or coffeeshop. If you want to eat a meal, you go to a restaurant or an eating house. You probably get a meal for about 800 yen in an eating house, but say you eat in a causal dinning restaurant, and it is about 1,100 yen per meal. This is about SGD14.50. Now, if you were to go to a Japanese restaurant in Singapore and have the same meal, it will probably cost you at least SGD15, or about 17.50 including service charge and Sales Tax. And mind you that in Japan, the amount you pay is net of GST and service charge. Moreover, the service you get in Japan is second to none!

I one went into a conveyor belt sushi restautant in Kyoto, and they charge 120yen per plate for sushi. That is about SGD1.60....this cheaper than you can get in say Sushi Teh in Singapore. And I can tell you that the fish is about 5% larget and fresher than those you get in Singapore!

Transportation wise, the train fare in Tokyo is definately more expensive and more crowded. However, when you consider the inefficient network of the Singapore system, the difference in price probably make up for it. In Tokyo, the network of the subway is so extensive that you hardly need to change to a bus inorder to go to your destination. In Singapore, the system is designed such that you have to change to a bus. The transfer cost you money, the transfer cost you time.

So if one take these into consideration, Japan is not that an expensive place to visit... so why don't make Japan your next place for your holiday?

Why Selling Options is not as dangerous as it seems.

I have been receiving questions on my trading of options. In particular, some of the people out there are wondering if it is too dangereous to sell nake puts or calls. After all, this is what they were told :

1) Theoraticaly, if you sell a call, your lost is unlimited as the stock price can go through the roof;
2) If you sell a put and the company goes bankrupt, you will lost alot of money.

My answer to them? This is not really true.

Selling naked option is not really dangerous. The academic and the broker like to tell you that. I believe you heard them said something like "oh, selling option have unlimited risk because in theory the price of the stock can go up and up, or it can go down to zero, so you will be caught...etc etc."

This will not happen for the following reasons :

1) you trade short options like you trade long options. You get out if you know you are wrong, or your stop loss is triggered;

2) your broker will not allowed that to happen because they monitor your margin like a hawk. Once your losses is greater than the margin, they will buy back your short option to ensure you have sufficient margin;

3) option has an expiry date, so do you think that within a 1 month period your stock will go through the roof or go down to zero?

Having said that, there is always the possibility of a stock like Enron that collapse overnight, and if you happen to short the put, than you are caught. However, your risk is really nothing more than if you own the share of Enron! For example, if you bought Enron share at say $100 for 100 shares, you pay $10,000. Now, if you sell a naked put on Enron share for strike at $100 for 1 option contract, you have an underlying exposure of $10,000.

If Enron goes under overnight, you lost $10,000 you bought the share. If you short the put, you lost $10,000 as well, but you still get to keep the option premium. You are no worst than those guys that bought the shares.

Moreover, I trade Exchange Traded Funds (ETFs), and because it's underlying shares are a basket of shares, ETF's will never goes to zero, unless each and every of the company in the ETF goes bankrupt, which is unlikely to be the case!

Why I never place Foreign Currency Fixed Deposit Part II

In my previous posting, I shard with the reader the cost of placing foreign currency deposit (FCD) and how the banks rip the customers off by giving them a wide spread.
Many readers thus wonder how can they place a FCD in an efficient and cheap manner.

The way we professionals do it is by way of foreign exchange forwards, whereby we get the same risk and reward exposure but yet in a cheap and efficient manner.
In order to illustrate how the professionals do it, let us walk through an example of a customer who go by the conventional way of buying the foreign currency and placed it into the fixed deposit.

Let us assume that the customer walk into a bank and wanted to place a USD fixed deposit of USD100,000 for 6 months. The bank will sell the USD to this customer at a rate of 1.5235. So the customer needs to pay the bank :

USD100,000 x 1.5235 = SGD152,350



The customer placed the USD100,000 with the bank, whereby the bank will pay the customer an interest rate of 4.745% for 6 months. The interest the customer will received at the end of 6 mths is :

USD100,000 x 4.745% x 183 days/360 days = USD2,412.04




The principal plus interest the customer has at the end of the 6 months period is therefore :

USD100,000 (principal) + USD2,412.04 (interest) = USD102,412.04


Now, assuming that the USD/SGD exchange happens to remains the same as it is, and the customer decided to convert the USD back into SGD, he will then receive :

USD102,412.04 x 1.5105 = SGD154,693.39

The profit for the customer is thus SGD154,693.39 – SGD152,350 = SGD2,343.39

Now, a professional fx trader will go by the FX forward market by going to a futures trading house to do the transaction. This is how he does it.

He will buy a fx forward of USD100,000 at an all-in forward rate of 1.4963. This fx contract will mature only 6 mths later, which is essentially the same as the 6 mth deposit.




Now fast forward to six months later. Again, assuming the USD/SGD rate remains unchanged, the spot rate is 1.5155, and the professional trader than “square-off” his position by selling away the USD100,000.

The profit the fx trader so thus USD100,000 x (1.5155- 1.4963) = SGD1,920


Because the trader is only entering a FX contract, he still has the SGD152,350 with him, which he will than placed it in a SGD 6 mth fixed deposit with the bank. Please note that because the fx trader need to place a margin with the futures house, he will not have the full SGD152,350, but a reduced amount of SGD142,350 (the SGD10,000 is for the margin). He placed the SGD at 1.70% as follow :

SGD142,350 x 1.70% x 183 days / 365 = SGD1,213.29




The fx trader total profit is thus SGD1,920+SGD1,213.29= SGD3,133.29
Compared the customer’s profit of SGD2,343.39 with the fx trader’so profit of SGD3,133.29, the difference is a whopping SGD789.90, or 33% difference.

STI Index - An update

A few days ago, I mentioned that I expect the STI index to trade higher and "kiss" the uptrend line before it turn lower.

The STI is now at such juncture. Will it play out exactly to my script? Let's wait and see. Nevertheless, investors should be caution at this stage of the rally.

Investment is a game of chance, and if the odds is against you or not in your favor, why take the risk?

Is the US Dollars turning?

The U.S. dollar has been falling for the past few months and the dollar index (DXY)has declined over the past three weeks from a high above 83 to a recent print near 81.5. A move below the April low at 81.25 will take the index to a new two-year low.

Many traders have been watching the 80 level on this index. The dollar almost certainly will move lower in the long-term given its fundamental. However, in the short-term, they can generate short-term countertrend moves that go against a fundamentals- driven trend for longer than most expect.

The chart below shows the dollar index from April 2005. The index has declined over the past 18 months, but it has done so in a way that possibly sets up a more bullish outlook in the coming year. We can see that the index is trading in a falling wedge formation. This type of formation will ususally result in a breakout in the reverse direction. This suggests a bullish move in the dollar is possible with a break above the upper trend line.

U.S. Dollar Index 2005-2007




But I say “possibly” because sometimes these formations lead to a breakdown followed by a fast decline, and I have no way to know in advance which way it will go. However, if the US$ index does go the way I expected, i.e., higher, it should do so in an explosive manner. The support 80 level is very critical. The dollar has bounced off this level for almost 20 years, and a breakdown would send a clear signal that a whole new phase of the dollar’s decline has begun.

U.S. Dollar Index 1984-2007



With the dollar index currently trading near 81.5, it is halfway between two critical points. If the index does trade above 83, I forsee a sizable countertrend rally that ends in the 95-105 resistance area. If the index falls below 80, all bullish bets are off and we can expect more downside to take place.

I suggest readers take note of the news magazine cover story. If the news cover story of say The Economist is about a falling U.S. dollars, chances are that the turning of teh US dollars are just around the corner.

What to look out for in a housing loan?

Every Singaporean is in debt. Yes, you see it right, housing loan, credit card debt, car loan, renovation loan, and many others on hire purchase. However, it is without doubt that housing loan will be the biggest debt one has to take on. Therefore it is important to choose the correct loan package.

A typical loan will last for about 2-30 years, and below, I listed some consideration :

Interest rates

This is the most important consideration. Most banks offer “promotional” rates, but the reality is that the borrower do not get to enjoy it very much. This is because by the time the borrower starts to draw down the loan, the promotional rate will almost be coming to an end.

Most banks peg the housing loan rates at a discount off their bank lending rate (BLR) and for different period for the promotional rates. Therefore one has to consider and compare between different banks the rates both within the promotional rates period and beyond.

“Promotional Rate” starting date
This is where the bank starts to ripe the customers off. While they may say that there is a promotional rate for say a period of 3 years, for example. However, the starting date for the “promotional rate” may be the day the bank approved the loan.

Therefore if a buyer is buying a property that is under construction and the payment is a progressive or deferred payment scheme, by the time the buyer draw down the loan, a substantial part of the promotional period would have lapsed.

Early redemption penalty

Will the bank charge you a penalty for early redemption? The bank incurred much time and money to process the housing loan for the buyer, and it is understandable that there will impose a penalty for early redemption. Check the fine print for the amount of the penalty.

Legal Fee

Does the bank pay for your legal fee? The amount can be substantial.

Refinancing

If you wanted to refinance your housing loan, what sort of penalty is there? Can you refinance it with another bank at a cheaper rate without much cost?

Loan period adjustment

Can you prepay the bank partially without additional cost? This will help in reducing your interest cost should you have spare cash.

How to invest in Chinese Currency RMB in Singapore?

The rise of China has led to many people wanted to invest in the Chinese currency RMB as they think that with the economic growth of China, the RMB will continue to rise, especially RMB is currently undervalue against other currencies.

The problem with “investing” in the RMB is that there is no foreign currency deposit in RMB for investors to deposit in. So how does one play the RMB currency in Singapore? This question was posted to me a few times.

As the RMB is not a free currency that has offshore market, it is virtually not possible to buy RMB outside China.

One way to play it is to invest in the Chinese stock market. This is not a direct play, however, as the value of the Chinese stocks are influenced by other factors which may not be the same as those factors that affects the currency. Nevertheless, if the general growth for the country continues, the equity market should continue to perform well, so will the currency. A word of caution, as the Chinese equity market has run up much more than the currency, if there is a correction in the Chinese market, the lost on the equity investment may be more than the currency depreciation.

The other way is to open a RMB account with a bank in Hong Kong, as Hong Kong is allowed to take in RMB deposit. However, this route is impractical for many people. Furthermore, it is unclear if non Hong Kong resident can open a RMB deposit account.

The last method, which to me is the purest play on the RMB, is going through the futures market. The Chicago Mercantile Exchange (CME) has a USD/RMB futures contract. Therefore if one is bullish on the RMB, one should short the USD/RMB futures contract. This is not for the faint hearted. Furthermore, futures contract has expiry date whereby one needs to rollover the contract if he still wants to continue to have the exposure, unlike fixed deposit whereby the bank can rollover automatically for you. However, the futures contract does provide a cheap and efficient way of having an exposure in foreign currencies, much more efficient than the fixed deposit market.

Jim Rogers sold out emerging market

Jim Rogers, who predicted the start of the global commodities rally in 1999, said he's sold out of all emerging markets with the exception of China because they're ``over-exploited.''. He hope that he can buy it back in the next big correction. Jim Rogers, chairman of New York-based Beeland Interests Inc., said in an interview in Singapore on 2 Jul 2007

The emerging markets index has jumped 17 percent in 2007, but MSCI World Index only gained 8.2 percent gain.

My view is that valuations are not super-attractive as these markets have run up quite a lot. Therefore, while it is not expensive in my view, it is not cheap either, and a correction in the market is possible in the near term.

If we take a look at the STI chart, the STI has broken the uptrend line, which means that chance for a correction is getting higher. A likely situation is that the STI will trade higher to “kiss” the uptrend line before making a bigger correction down.

How I trade options - A personal Journey

The email below was an email I wrote to a forum whereby the participants are all students of a option trading course. I sort of summarised my personal journey in option trading so far. Hope it help others that are seeking some advise.

Hi Everybody,

After reading the article in "Today" and the responds I saw in the
group forum, I thought of just sharing my experience with all of you
concerning trading and the courses offered.

I used to be a FX trader with a foreign bank before I left to join
the corporate, but I still do trading for my company. Year in and
year out, I make money for the company. But when I trade on my own
account, I lost quite a lot of money. Apparently, something is
wrong, why should I be making money for my company but not making
money for myself? This is when I think my trading style is not
suitable for trading small account, and of course, the emotion
aspect comes into play when trading own money.

I attended a course (I shall not mentioned the name of the trainer). My personal experience was that his method try to make money by buying options before earnings
announcement. This is precisely why he can advertise by claiming his
students can make 1,000% or make a few thousand US$ per night. It is
true, no doubt about it, but the problem is that that may be the only
trade of that student making that time of return. Out of 10 trades,
maybe only one trade make that type of money, the rest of the 9
trades may be looser. Therefore, be careful of those claims in the
advertisements. It may be true, but may not be the whole truth.

An excellent example was that I went to one of the students house.
At that time, there was an ads claiming that he make something like
over $20k in one night. When I was there, I asked him about it, and
he confirmed it is true, but he also told me that his other trades
are losing big time, and overall, he is about break even. How do I
know what he said is true? He showed me his IB account. So to me,
this method looks abit like "ti kum ti kum".

Therefore, it seems to me that the trainer is more of a marketing guy
who really package his course. Also, he employed alot of
motivational techniques in his seminar to motivate the students into
believing in themselves and that it is possible to become millionair.
While this is important, but after striping out the motivational
speech and one thinks about it, the actual content in trading has
been watered down somewhat.

I attended another trainer's course later. This other trainer's method is a more technical approach, which suits me better. However, I still did not make
money. I stopped trading for a while to review where I went wrong.
Finally, I decided to modify the "TAB" method to accomodate my
situation and my personality. Well, it works so far and I am
consistantly making about 2-3% return per month (or 20-30% per
year). Now, I do not need to monitor the market every nite, I place
my order in the morning when I reach office and can forget it.
Sometimes, I still need to monitor the market in the evening if the
my position is not in good shape. But by and large, my current
method suits me fine.

Therefore, for those who thinking of attending other courses like
those by Clement or other trainers, you may want to consider if their method suits your own situation and personality. What works for them may not work
for you.

Cheers.