Category Archives: Vocabulary

technical analysis: golden cross and dead cross

February 1, 2012 By in golden cross/dead cross, Recent Market Action, Technical Analysis Tags: , , , , , , Leave a comment

what golden crosses and dead crosses are

They’re cool-sounding names.

They should probably have their own tee-shirts.

But…

…what they are is technical indicators.

They’re descriptions of behavior of short-term vs. long-term moving averages.

In both cases, two moving averages, one short-term, one long-term, for the same index or security are being charted on the same graph–usually values on the vertical scale, time on the horizontal.

A golden cross occurs when the short-term moving average, which has been below the long-term moving average on the chart, crosses and moves above the long-term average.  The claim is that this signals a significant upturn.

A dead cross (or death cross) occurs when the short-term moving average has been trading above the long-term average but crosses and breaks down below the long-term average.  This supposedly signals a significant downturn.

They’re called crosses because in both cases the two lines cross one another.

different moving averages for different indices, different markets

The short-term and long-term moving averages used to determine the crosses differ both by country and with the index being analyzed.  In the case of the S&P 500, for example, technical analysts typically use 50-day and 200-day moving averages.

If the 50-day moving average for the S&P is below the 200-day, this means that more price action over the past 2 1/2 months (assuming 20 trading days per month) has been weaker than the average over the past ten-month period.  If the 50-day moving average subsequently turns up sharply enough to break through the 200-day line, proponents of the indicator believe the weakness has ended and a significant rally has started.

In similar fashion, if the 50-day moving average dives below the 200-day, then a period of strength has come to an end and significant weakness lies ahead.

my thoughts

I’m not a fan.

I first encountered people actually using the two crosses in Tokyo and Hong Kong.  That was mostly, In think, because they had nothing better.  They didn’t have professional securities analysts forecasting earnings; they didn’t apply any macroeconomic data to help figure out the general market direction, either.  So they were left with either the entrails of chickens, which would have been pretty messy, or stuff like the cross twins.

important in Asia

The crosses did then, and still do, have a significant effect in Asian markets because people use them–not that they have any particularly important objective significance..

making a comeback in the US

In the US, technical analysis, including the idea of the two types of crosses, seems to me to be making a comeback after over a half-century of neglect.  How so?

–I think some hedge fund managers who cut their teeth trading commodities are trying to use the same technical tools on stocks

–brokers fired most of their experienced analysts during the Great Recession, so there isn’t as much easily available, reliable fundamental information around as before

–discount brokers can supply technical indicators to their active retail traders at low cost.  They’re cheap; they require little effort to learn; it seems to make the customers feel good to spout obscure jargon (who doesn’t like showing off this way?); and, since the clients “read” the charts themselves, brokers don’t incur the legal liability they would if they were supplying actual stock analysis.

Why write about this now?  The Dow made a golden cross a few weeks ago and short-term traders have been making a fuss since.

a final note on the Olympus scandal

December 26, 2011 By in Current Market Thoughts, Japanese development, Stock ideas, tobashi Tags: , , , , , , , , , , Leave a comment

a recap

During the summer, the newly appointed CEO of Olympus, Michael Woodford, followed up on an account in a Japanese magazine of severe financial irregularities at Olympus (TYO: 7733).  He discovered a number of failed M&A transactions involving gigantic payments to obscure companies that disappeared from existence soon after receiving the money.

He was fired for his pains.  He promptly left Japan, saying he feared for his personal safety.  Once in the UK, he disclosed everything to the world financial press.

An independent panel was appointed by the Olympus board of directors to investigate the situation.  The panel determined that Olympus had engaged in speculative “financial engineering (zaitech)“, presumably arranged for it by its investment bankers, starting in the late 1980s.  Like virtually everyone else who did this in Japan, Olympus lost its shirt.  It covered the losses up, again presumably using a service (tobashi) provided by its brokers.  This generated a cycle of progressively larger cover-ups and money-losing speculations that lasted over two decades.  The fake M&A was an attempt to get money to pay off creditors and end the cycle once and for all.

what’s new

Olympus has avoided delisting by providing the Tokyo Stock Exchange with accurate accounting statements by a mid-December deadline.  The “new” Olympus has book value of about a third of what it had previously claimed.

The stock lost about 60% of its value since the Woodford firing.

Two American funds managers appear to have held close to 10% of the company’s stock at the time the scandal broke.

The newest chairman of Olympus appears to me to be proposing that:

–the company’s board needs only a symbolic shakeup (where one or two members make a ritual expression of regret and resign), and

–Olympus should recapitalize by issuing stock to other members of the Fuji group, like Canon or Fuji Film.

my thoughts

Olympus is a typical Japanese technology-related company.  It’s torn between the need for constant innovation to keep up in  an increasingly complex and rapidly evolving world and its presence in a social/cultural environment where preserving the status quo is acknowledged as perhaps the highest goal.

Current management seems to be in the process of arranging a “traditional” solution to Olympus’s problems–one that doesn’t probe too deeply and where a new corporate direction launched by change of management is completely out of the question.  It sounds like other Fuji companies are willing to help this happen.

In other words, business as usual in Japan.

My guess is that this is the most likely outcome.  After all, except for what I think of as counter-culture companies run by younger Japanese, this has been standard operating procedure when companies get into trouble for the twenty-five years I’ve been watching the Japanese stock market.

Any signs that this time will be different should be studied carefully for potential to be a bellwether of change. (I’m not optimistic, though.)

I’m most curious about the foreign professional investors who  held large positions in Olympus.  Didn’t they know anything about Japan?  Did they really think that buying companies with low price to book or price to cash flow ratios would bring the same kind of success it does in the US?  Didn’t they see that this approach has failed time after time in Japan?

Apparently not.

raising capital–traditional IPO, venture capital, crowdfunding (I): a traditional IPO

December 7, 2011 By in Industry Analysis, Investment firms, preliminary and final prospectuses, securities markets, stock market Tags: , , , , , , , 2 Comments

I want to write about what I think are the implications of the new legislation circulating in Congress to permit greater use of crowdfunding by start-up companies raising money.  But to do this I think I should outline the way corporate equity capital is typically raised today.

going public through a traditional IPO

This is still the best way to raise LARGE amounts of money for expansion.  That’s not the only reason for going public, however.

One of the many clichés on Wall Street is that small companies should raise equity capital when they can (in other words, when investors would kill to acquire shares in a hot new concept), not when they absolutely need to.  Better to have cash you don’t have a present use for than to find the equity market closed to IPOs in a recession.

A public listing will probably be seen by potential business partners as a sign of company maturity and stability.

A public listing allows a company to pay employees in stock and stock options rather than cash.  For techy start-ups, it’s the possibility of making a fortune on stock options by being in on the ground floor of the next Google or LinkedIn that lets the fledgling firms attract top-notch talent.

the IPO process

Anyway, let’s say a firm decides to go public through a traditional IPO.  What happens next? The firm contacts an investment bank.  It may be that the company’s CFO already has connections on Wall Street.  It may be that brokerage house securities analysts (who in many ways are marketing agents for the bank) have already been calling on the firm for a while and the company selects the firm the most influential of them works for.  Investment bankers may have made marketing pitches as well.

The investment bank performs several functions:

1.  it helps the firm gather the materials it needs to file a registration statement with the SEC

2.  it performs its own investigation that allows it to vouch for the company with its clients

3.  it forms an underwriting group and a selling syndicate to market the issue.  The salespeople will already have the necessary national and state licenses to sell equities; the firms will already have established that the securities are suitable investments for the clients they sell them to.

4.  it prepares a preliminary prospectus (called a red herring in the US because the fact it isn’t final is highlighted in red print) to circulate within its client network and obtains informal indications of interest

5.  it arranges a sales campaign that may include meetings between management and potential buyers

6.  it recommends the final issue size and price.

Until the past few years–when the big brokerage houses laid off most of their experienced analysts–the investment bank would also commit itself to have continuing analyst coverage of the firm.

there are lots more ins and outs, but that’s the basic process.

plusses

The traditional IPO route gives a firm access to the investment bank’s distribution network.

It also gets the company a lot of publicity.

In normal equity offerings, the underwriters buy all the stock from the issuer and take the (usually negligible) risk of selling the issue to investors.  At the very least, the issuing company gets a specified price on a given date.

minuses

The traditional IPO is expensive.  The investment bank may charge as much as 10% of the issue for its services.

In pricing the issue, the investment bank’s loyalty is divided.   The issuer wants a high offering price, so it gets the most money.  The bank’s biggest customers, on the other hand, want a low offering price so the stock will go up a lot on opening day.

Many small companies are below the minimum size that will interest an investment bank.

 

That’s it for today.  More tomorrow.

the SEC, Citigroup and moral hazard

December 1, 2011 By in Banks, Derivative instruments, Industry Analysis, Investment firms, moral hazard, securities markets, Securities regulation, short selling, Where are the customers' yachts? Tags: , , , , , , , Leave a comment

This is an update and elaboration on my November 11th post about Judge Jed S. Rakoff, the SEC and Citigroup.

moral hazard

Moral hazard in finance is the situation where the existence of an agreement to share risks causes one of the parties to act in an extra-risky manner, to the detriment of the other.   In a sense, the willingness of the party who ultimately gets injured to enter into the agreement causes, or at least allows, the bad behavior by the other to occur.  He inadvertently sets up a situation where the bad behavior is rewarded, not punished.

examples

–Systematically important banks have been able to take very big proprietary trading risks, knowing that they are “too big to fail” and will ultimately be bailed out by the government if their risky bets don’t pan out.  The rewards of such risk-taking go as bonuses to the bankers; the cost of bets gone bad is borne by the general public.

–One of the reasons Germany is so hesitant to bail out Greece is that doing so rewards the latter country’s reckless borrowing behavior over the past decadeand shifts the costs of cleaning up the resulting economic mess onto the citizens of the rest of the EU.

the Rakoff case and moral hazard

Judge Rakoff has just rejected a proposed settlement of a case involving Citigroup and the SEC, on what appear to me to be similar moral hazard grounds.

The settlement involves Citi’s creation and sale of $1 billion in securities ultimately tied to a pool of sub-prime mortgages selected by the bank.  Citi neglected to tell the buyers of the securities that it wasn’t simply an agent.  It was making a $500 million bet that the securities would decline in value sharply–which they subsequently did.  Investors who bought the securities from Citi lost $700 million.

I don’t know precisely how much money Citi made on this transaction.  But I think I can make a good guess.  To make up rough numbers, collecting a 2% fee for creating and selling the issue would bring in $20 million or so.  A 70% gain on its negative bet on the issue would yield $350 million.  If so, the much more compelling reason for creating the issue would be to design it to fail and then short it.  In any event, let’s say Citi cleared $370 million before paying its employees who thought up and executed the total deal.

The proposed settlement?

–fines and penalties totaling $285 million

–Citi doesn’t admit or deny guilt, which means

——the settlement doesn’t create any evidence to support a lawsuit by the investors who lost money, and

——the settlement doesn’t trigger the sanctions against future illegal conduct that are contained in prior settlements with the SEC.

–only low-level Citi employees are reprimanded.

Assume the SEC allegations are all true.

If so, what a deal for Citi!  The SEC “punishment” is that the bank keeps $85 million in profits and gets a slap on the wrist.  Who wouldn’t agree?

What would make this moral hazard is that this is is the worst case outcome for Citi.

And, if you figure that the SEC looks at one suspicious deal out of ten, the situation is even less favorable for investors.  The decision whether to create another issue like this one is a layup.

Would it be so easy if Citi stood a chance of losing money?  …or of triggering clauses in prior settlements prohibiting illegal behavior?

What about the legal team that decided what he minimum disclosure in sales materials should be?  Would they have insisted that Citi must reveal its proprietary trading position in those materials if fines were larger, or if they could be held professionally liable for the information’s exclusion?

What if the Citi executives that okayed everything risked being barred from the securities business for a period of time–would they have acted in the way they did?

grandstanding?

I don’t think critics are correct that Judge Rakoff is trying to raise his public profile by insisting that the SEC either obtain a better settlement or go to trial with its case.  Others are saying that the SEC takes settlements like this because it doesn’t have the legal skill to get anything better.  But these are ad hominem arguments  –like saying the parties are wearing ill-fitting clothes, they’re distracting, but irrelevant.

But it is true that this case comes at a time of growing public anger that bank executives are showing few ill effects from the devastating economic damage they helped cause.

It will be interesting to see what new settlement the SEC and Citi come up with.

Stay tuned.

brain drain in 2012

November 20, 2011 By in brain drain, China, Current Market Thoughts, economics, Recent Market Action, Strategy Tags: , , , , , , , , , , Leave a comment

what it is

“Brain drain” is a term coined in the UK after WWII to describe the outflow of human intellectual/scientific/economic talent from a country.  Motivation for the outflow can sometimes be religious or ethnic persecution in the home country.  More benignly, brain drain is more likely motivated by economic prospects that are perceived to be significantly better away from the home country.  According to Wikipedia, the term may have been initially used to describe the movement of British citizens to the US, or to the inflow into the UK of citizens of India.

where is it happening today?

What forms of brain drain can be seen in today’s world?

the Eurozone

–I think we should watch the EU carefully, especially southern Europe.  On the one hand, government finances in Italy, Greece… can’t be fixed by raising taxes.  People will move into other parts of the Eurozone, for one thing,  History also shows that higher tax rates invariably trigger increased tax evasion.  So higher rates can end up generating lower revenue.  (This isn’t just a European phenomenon:  New Jersey has just released an economic study showing the state is suffering a net loss of $150 million in annual tax revenues as a consequence of two income tax rate hikes early in the last decade).

Even though cost-cutting will be the main tool European governments will use to balance heir budgets, the economic stagnation that austerity measures will produce may cause an outflow of intellectual talent from southern Europe to France or Germany, or outside the Eurozone to the UK.

the US

–Anecdotal evidence suggests there’s a budding trend toward emigration from the US to China, because of the latter’s superior economic prospects.  There’s also a movement on the Northeast to create publicly funded schools that emphasize Asian culture and history–and where instruction might be in Mandarin.

–a combination of high taxes, lack of home-grown engineering graduates and immigration restrictions that severely limit the number of Indian and Chinese engineers able to work in the US has meant a continual outflow of technology manufacturing away from the US.

China

–To my mind, the most curious case of potential brain drain is that recently reported by the Wall Street Journal.  It’s the potential outflow of wealthy Chinese from the mainland.  They’re not seeking political or economic freedom, or at least not simply that.  What’s prompting them to consider emigration–overwhelmingly to either the US or Canada–are social concerns, including:

–poor schools

–bad medical treatment

–pollution

in that order.  Also:

–unsafe food (local municipal authorities sometimes offer industrial waste disposal sites for lease as agricultural land), and

–the one-child policy.

investment implications

At this point, these developments are more curiosities than anything else.  But events in southern Europe bear close watching.  That’s the place where emigration has the most potential for economic disruption, in my opinion.