Lesson # 2: Buying Shares

Huwag habulin ang presyo ng stock. Huwag magpadala sa sulsol ng mga hypers o sa tsismis. Maraming nalulugi sa ganiyang istilo ng trading, at unang-una na ako. Sa 181k na capital, 76k na ang total loss after a year of trading. Masyadong mahal naman yata ang ganiyang tuition fee bago matuto magtrade. 

The key is patience. Find a stock that is despised, and then wait. This is a better way than running after a climbing price.  

Trading Lesson # 1: Buying and Selling Your Shares

Sa takot mong maiwan, you buy up your chosen stock only to see later that your original bid was correct. This is the problem in buying. Greed is the primary emotional barrier.

Sa kabilang banda naman, sa takot mong lumaki pa ang loss, you cut prematurely only to see later that your original exit plan was correct. This is the problem in selling. 

Lesson # 1: Buy when you and traders around you are in panic. Be patient and throw your emotion. Sell when you and traders around you are euphoric. 

If you cannot do this, stop trading. The field is not for you. If you continue being controlled by your emotion, it is the certain way to ruin your savings and your capital. 

I think this is the reason why they say that the strongest enemy of the trader is himself. It is not market, neither bashers nor the hypers, but yourself. 

Buying a Stock: MRSGI and IDC

Before buying a stock, knowing its book value per share provides me a basis to determine whether the price I am paying for the stock is not overpriced. Such information is provided by PSE Edge. For example, you can check the book value per share of DNL by looking at its financial report. As of September 30, 2015, its book value per share is 1.69. Though in a downtrend, buying it at its current price at 8.80 is still expensive. If you divide its current price by its BVPS, you will arrive at 5.20 as the price to book ratio per share. Of course, there are other numbers to consider such as the company's balance sheet, earnings, and cash flow. And besides, with the good reputation of the company, many buyers consider DNL's market price still cheap. They consider it part of their long-term value investing in a growing company. 

Take another example. This time, let us look for PX. Based on its financial report as of September 30, 2015, its book value per share is 5.45. Compare it to its current price at 4.95 and compute its price to book ratio per share and you will have 0.90. Immediately, you will see PX is a bargain. But many avoid this stock simply because the mining sector particularly a gold stock is in a downtrend due to the price of gold in the world market and other regulations imposed by the government on the mining sector. 

How about IPOs? How can you determine if the price you are paying is not overpriced? This is my primary concern in this article particularly the two recent IPOs: MRSGI and IDC. If you are to check PSE IPO list, you will see that the offer price for MRSGI is 6.10 and for IDC is 4.20. 

In MRSGI's prospectus, you can find the same price, but in the case of IDC, its 3.60. On their IPO debut, MRSGI's starting price was 3.99 and IDC remains 3.60. MRSGI ended its first trade with a 0.25% increase at 4.00 while IDC with 17.22% increase at 4.22. At present, they are trading at 3.83 and 3.86 respectively. What puzzles me about these two stocks is the information provided in their prospectuses related to their prices prior to and during their IPO. Here's MRSGI's number:

   

There you can see that MRSGI's price as of June 30, 2015 was 1.27 described as Net Tangible Book Value per Share (NTBVPS). After the offer, the pro-forma NTBVPS was 2.28. And then the final price described as "dilution to investors in the offer" was 3.82. 

Now my question is, where did MRSGI get the 6.10 offer price posted at PSE IPO list and found in its prospectus? Why is there such a big discrepancy between 3.99 as starting price on its IPO debut and 6.10 as posted at PSE? Is this the standard format in doing IPO? If it is, how come IDC did not follow such format on its debut day and followed instead the 3.60 price given in the prospectus? 

Someone said that MRSGI was actually discounted on its IPO day. Really? If it was, how come its underwriters were selling on the first trade? Is it not because the pro-forma NTBVPS of MRSGI is far below than its 3.99 offer price? 

Let us turn to IDC. In the case of IDC, there are two prices given as its NTBVPS as of June 30, 2015: 0.50 and 0.39. Which one is true? The Pro-forma NTBVPS after the offer is 1.14. The dilution to investors is 2.46. 

  

Now my question, where did IDC get the 4.20 posted at the PSE? If MRSGI right now is trading at 3.82, which is the price labeled as "dilution to investors," is it possible that the 3.86 current price of IDC is still overpriced and that the stock could also go down to that "dilution to the investors" price at 2.46? 

Recent Market Updates: Notes for Today

1. Yuan/Renminbi will be officially accepted into IMF's SDR this end of November.


2. As a result of the FED's hint of rate hike this December 16 and US recent job report, mainstream investors are predominantly bearish in their view of the stock market.


3. George Soro is liquidating his gold holdings both in Barrick Gold and Market Vectors Gold Miners.


4. Investors are dumping precious metals and banks forecast more price declines.


5. VLL disclosed last 17 November that Manny Villar bought 81,120,701 worth of VLL shares @ 7.15 last November 11. 

Gold Haters and Gold Bugs

Since the huge decline of gold's dollar price last July 20, numerous articles were written predicting for deeper decline. For these analysts, gold has just started its real bear market, and blamed the gold bugs for the big loss suffered by those who followed their advice.

Photo Credit

(To the blogger's mind, nobody best represent a gold-hater and a gold-bug than Ben Bernanke and Peter Schiff respectively.)

Let us start with gold-haters. Here's one from Wall Street:

"Gold is supposed to be a haven amid hard times and soft money. So why, even as Greece has defaulted, the euro has sunk against the dollar, and the Chinese stock market has stumbled, has gold been sitting there like a pet rock?" - Wall Street

http://blogs.wsj.com/moneybeat/2015/07/17/lets-be-honest-about-gold-its-a-pet-rock/

And another from Washington Post: 

"When you think about it, a bet on gold is really a bet that the people in charge don’t know what they’re doing." - Matt O'Brien, 25 July 

http://www.washingtonpost.com/news/wonkblog/wp/2015/07/25/gold-is-doomed/

And two articles from Bloomberg: 

"Prices will drop to $984 an ounce before January, according to the average estimate in a Bloomberg News survey of 16 analysts and traders." - Debarati Roy and Eddie Van Der Walt, 29 July 

http://www.bloomberg.com/news/articles/2015-07-28/gold-out-of-style-like-bell-bottom-trousers-signals-lower-prices



"Other countries, however, are bigger gold bugs . . . countries like Lebanon, Egypt, Laos, Pakistan, Kazakhstan and Turkey all have a bigger share of gold in their reserves than Russia does, and so face bigger problems from the price collapse." - Leonid Bershidsky, 29 July

http://www.bloombergview.com/articles/2015-07-29/russia-can-t-help-being-a-gold-bug

And finally, from Market Watch:

"Earlier this week, he told me that the gold community now needs to consider the distinct possibility that gold will trade for as low as $350 an ounce." - Mark Hulbert, 30 July

http://www.marketwatch.com/story/investors-need-to-consider-that-gold-may-fall-to-350-an-ounce-2015-07-29?siteid=rss&rss=1

On the other hand for the gold bugs, what happened last Monday is a sign that gold's bear market is about to end. They don't deny the reality of further decline, but they are positive that the sign or reversal is close.

Here's from Business Insider: 

"Gold has had a terrible year so far, dropping to a five-year low in July to $US1080 an ounce, but analysts at Macquarie think the price could rally in 2016." 

http://www.businessinsider.com.au/the-178000-tonnes-of-gold-in-the-world-might-be-worth-more-in-2016-2015-7

And then from Kitco:

". . . gold thrives in the face of monetary turmoil, disorder and uncertainty, . . . 'I think we have all three of these things.'” 

http://www.kitco.com/news/video/show/Kitco-News/1035/2015-07-31/REPEAT-Im-Bullish-On-Gold-Fed-In-A-Hurry-To-Raise-Rates---Jim-Grant

And here's from Zero Hedge: 

". . . gold would experience a severe correction before beginning its real bull market. We are seeing his prediction unfold before our very eyes. What he also said is that as gold approached the $1,000 per/oz mark or even below, everyone would proclaim that 'gold is dead' and start making comically bearish statements." - Tyler Durden, 29 July 

http://www.zerohedge.com/news/2015-07-29/4-mainstream-media-articles-mocking-gold-should-make-you-think

And finally, from King World News:

" I’m not a day trader of gold; I’m a long-term holder. The bottom line is that I believe that the gold market has now seen the worst. Could it go just a bit lower? Yes. But compared to an upside potential of well over $2,000, the downside risk is low.” - Gerald Celente, 22 July 2015 

http://kingworldnews.com/gerald-celente-the-panic-thats-happening-right-now-is-much-bigger-than-just-the-gold-market/

What inspired me to collate the above quotes both from the gold haters and the gold bugs is my reading of a book written by another "gold bug" (Of course, Jim Rickard doesn't like to be classified as "gold bug"). In his book, The Death of Money: The Coming Collapse of the International Monetary System, I found two interesting sections related to gold market. In chapter 8, he wrote: 

"On April 16, 2009, just days after the G20 summit, President Obama sent letters to the congressional leadership requesting its support for a $100 billion commitment to the new IMF borrowings. . . . The letters to Congress stated that the new funding was a package deal intended to increase IMF votes for China and to force gold sales by the IMF."

"China wanted additional votes at the IMF, and it wanted more gold dumped on the market to avoid a run-up in the price at a time when it was acquiring gold covertly."

"It was curious that just as Federal Reserve officials were publicly disparaging gold’s role in the monetary system, the president felt the need to mention gold to the Congress as a confidence booster. Despite disparagement of gold by academics and central bankers, gold has never fully lost its place as the bedrock of global finance."

And then in Chapter 9:

"The total gold supply in the world today, exclusive of reserves in the ground, is approximately 163,000 tonnes. The portion of that gold held by official institutions, such as central banks, national treasuries, and the IMF, is 31,868.8 tonnes. Using a $1,500-per-ounce price, the official gold in the world has a $1.7 trillion market value. This value is far smaller than the total money supply of the major trading and financial powers in the world. For example, U.S. money supply alone, using the M1 measure provided by the U.S. Federal Reserve, was $2.5 trillion at the end of June 2013. The broader Fed M2 money supply was $10.6 trillion at the same period. Combining this with money supplies of the ECB, the Bank of Japan, and the People’s Bank of China pushes global money supply for the big four economic zones to $20 trillion for M1 and $48 trillion for M2. If global money supply were limited to $1.7 trillion of gold instead of $48 trillion of M2 paper money, the result would be disastrously deflationary and lead to a severe depression."

"The problem in this scenario is not the amount of gold but the price. There is ample gold at the right price. If gold were $17,500 per ounce, the official gold supply would roughly equal the M1 money supply of the Eurozone, Japan, China, and the United States combined."

(Source: James Rickards, The Death of Money: The Coming Collapse of the International Monetary System, 2014, pp. 140, 151-152)

The above paragraphs are self-explanatory. If the information provided by Jim Rickards is accurate, then the mainstream gold-haters are mistaken, and it is actually them that are misleading investors and traders. 

Future Hyperinflation in the US and Current Condition of Greek's Financial Sector

Just finished reading two articles from the Zero Hedge. They are about a possible hyperinflation scenario in the US and an interesting event in Greek's banking industry. 

The writer enumerated several concrete steps for Americans to protect themselves in case of hyperinflation. I could not relate with his other suggestions except those related to investment in natural resources, agriculture, and commodities; and to the purchase of tradable items such as jewelry, food, and foreign currency. It is also interesting that though he thinks it could be sooner depending on the turn of events, he gave "the mid-2020's to early 2030's" as a tentative period where this event could take place.   

The other article is about what's going on right now in Greek's financial sector. The writer talks about those who are taking risky decisions in continually trusting the banking sector. They include big stockholders and bondholders, the ECB, blue-chip investors, the Greek government, speculators, retail investors, and Greek depositors. Among the blue-chip investors are Fairfax Financial Holdings, Capital Group, Wellington Management Group, Hedge Fund Paulson and Company, and Dimensional Fund Advisors. The first three actually increased their stakes, while the last two decided to stick it out. What follows are relevant statements that describe the situation:   

". . . any new recapitalization of the banks is likely to hit shareholders and certain bondholders under a new set of European regulations—the Bank Recovery and Resolution Directive—enacted at the beginning of the year."


"This becomes all the more obvious when observing that the ECB itself is now the single biggest stakeholder in the Greek banking system, with some €130 billion in claims, well above the total amount of deposits, suggesting that any other Greek bank liabilities are now almost certainly null and void." 

"The Greek state already owns sizable chunks of the major banks following a recapitalization in 2013. Existing shareholders were given warrants by the government to buy back their stakes; the share prices have, however, continued to collapse following the bailout."


". . . speculative investors, including a number of Greek retail investors and high net worth investors, picked up stocks in Greek banks."


". . . bank depositors are nothing more than unsecured creditors. If and when the reality of the Greek economic collapse is fully tabulated (as the IMF appears to have finally done) it won't be just the equity that is wiped out - depositors themselves face the risk of creeping haircuts to their 'liabilities.'"

Other institutional investors chose the other way; they sold their shares. They include "the Dutch national pension fund, Franklin Templeton, TIAA-CREFF, and emerging market hedge fund Charlemagne Capital, . . ."

After seeing the present scenario in Greek's banking industry, I am thinking about the source of its primary threat. Will the Greeks continue to trust the banking sector after experiencing first-hand the pain of a bank run? Or will they rush into the banks and withdraw all the deposits they have? If the latter be the case, we are about to see what would be the next move of the authorities to restrain such distrust. 

PX: Downward Trend Again?

Though I know the economics of gold, still it is difficult to see the price of a gold stock, PX going down. I saw it came down from 6.20 to 5.56 and then bounced back to 5.97 during the first two weeks of this month, from July 1 to 15. Today, it seems that a downward trend is happening again. PX's closed near its low price at 5.90.

Photo Credit

I am tempted to sell my PX shares and wait for this stock at the bottom and buy again. Two technical analysts told me that it could go down as low as 4.50 before it would bounce back again. However, despite the fact that the price of gold today is reaching another historical low, I changed my mind after listening to the video below.

I hope the speaker is right that we will see the price of gold and precious metals rally the end of July up to August. I think I heard him say that even until the end of this year.

By the way, here's the current price of gold: 

Photo Credit

Latest Updates:

1. From SchiffGOLD

Why is it difficult for the markets to learn?

2. From Peak Prosperity

"During the selloff, gold hit 1141.90, just 30 cents above the previous low of 1141.60. It did manage to rally back, but not all that enthusiastically. Based on today's behavior, I'd guess the next try at 1141 will succeed. If the buck continues to rally, next stop for gold is 1130."


"The miners looked even worse, with GDX off -2.28% on moderately heavy volume, making a new six-year low just today. Last time we were here: October 2008."

"The dollar rose +0.51 to 97.28, making a new closing high for this cycle and inching up towards the May high of 97.88. The continued move higher in the buck is pressuring gold; while we here in the US whine about how horribly gold is performing, over in Europe they see gold moving more or less sideways over the past five weeks and right now it is about at the middle of its seven-week trading range. This tells me gold's swoon is entirely a currency effect. Strong dollar = weak gold."

"This suggest to me, if the buck keeps rallying, gold will most probably drop through 1130 support."

"Oil has dropped to the lower end of its recent consolidation range. My code says oil has further to drop."

"The code also thinks gold and silver are due for a rally. I have noticed that the code can be early - I see further downside ahead, given the strength in the buck."

"The buck is strong. There is no good news right now in metals or in commodities overall. If the buck continues to rise, commodities including PM will most likely continue falling."

As of 18 July 2015:

"Gold, silver, copper, platinum, palladium, miners, oil - all of the commodities I track fell this week. Gold actually held up better than most. However, gold also made a new 5-year low, which suggests to me that there is danger ahead. This tells me that, more likely than not, gold will break lower before it rallies significantly."

"Commodities are all looking bad. Dollar is rising, which is the likely cause for many of them. Oil is continuing to correct and has yet to find its low. . ."

"No catalyst yet for gold, or for silver, or for most of the commodity complex. Physical buying does not trump COMEX, and Shanghai doesn't look particularly excited to buy at the moment. Right now is a seasonally weak period for gold, improving somewhat in August. Likely, new lows are ahead. I hate to be a Gloomy Gus, but that's what I see."

"You may well say to yourself, 'the Fed will never raise rates' - but my sense is, the market believes they will, and that belief pushes the dollar higher. And of course, dollar strength right now ends up pushing commodities (and PM) lower."

"Senior miners sold off quite hard this week, dropping to new lows and ending Friday with hints of a capitulation, dropping to new lows last seen in October 2008. Miners haven't quite broken that 2008 low, but it is not so very far away. . . . Gold isn't the most unloved asset class in the world - that status is reserved for the gold mining shares."

As of 20 July 2015:

"Wow, what a bad day for gold. It fell -35.60 [-3.14%] on massive volume, with most of the damage happening during the Asia trading session. . . . This wasn't about the buck, or about commodities. Those things shape the trend; today's move was about a trading gambit pure and simple - and it worked."

"At 09:29 China Standard Time a huge number of contracts was unloaded onto the market; one article I read suggests the assault happened on the Shanghai Gold Exchange first, and then COMEX responded. . . . Regardless, the short assault snapped gold instantly through support and drove it down to 1080 in one minute. It was a $50 loss, clearly an engineered move designed to run the stops below 1130. . . .Bottom line: not enough traders wanted to buy the dip."

"The RSI-7 for gold is now hovering around 8, which signals a strongly oversold market. . . . I believe the gold market is ripe for a rebound, but so far, that's only potential. We have to see the buyers appear first. . ."

"Miner losses were catastrophic today, . . . Superlatives fail me, I've not seen losses this big in the mining shares ever. Its total and complete capitulation in the miners, everything is being sold. Usually this happens at or near the lows, but before I buy, I want to see a reversal pattern show up. . . . Juniors made new lows too."

"If you ever wanted to know what "capitulation" means, . . . of traders panic selling out . . . - regardless of price. Sell. Sell! SELL!!!"

". . . On days like today, a reasonable question is, when should we buy? Is now the time? What process might we use to decide?"

"One process is just picking a day and saying 'boy, XXX sure looks cheap, I think I should buy now!' Yesterday could well have been such a day for the mining shares - lowest prices in ages, a great deal to be sure. . . that strategy seems...sub-optimal."

"Another process is waiting for a 'reversal pattern' to appear. The concept is, before buying, you wait for the market to show momentum has changed direction. i.e. you wait for the knife to stop falling before you try catching it."

"How does this work? One simple method waiting for a swing low: a two-day chart pattern where the closing price of today is higher than the high of yesterday. . . . Waiting for the swing low would have stopped you from buying . . . That seems pretty good. At the very least, it would have saved you from today's disaster."

". . . I hate to say its a sure thing, but under today's circumstances, a swing low is a very powerful signal. Without high volume, without other signs of capitulation, the swing lows are more iffy."

"I like to say, 'wait for the buyers to show up.' The chart evidence for buyers showing up is a swing low: a two-day chart pattern where the second day's close is higher than the first day's high."

"So I should have mentioned that, after a major move like we saw yesterday, retail buyers (like you and me) see the lower prices, and rush out to buy. This will cause a big spike up in the morning, as retail buys the dip."

'However, once that first hour is over, then we get to see where things really go. Is the big money loading up, or selling the rally? This morning, GDX was up over 5%, and that rally peaked out at 10:26 EST, right at the end of the first hour of trading. It has faded a bit since then."

"This is why we wait for the close. The last half-hour of trading is when the big money decides to either buy and take whatever-it-is home for the evening, or to sell. "

"Many times I have been tricked into buying during that first hour. Sometimes its the right thing to do, such as when you see a major break above resistance, but in today's circumstance, when the market hasn't yet proven it wants to reverse course, its a bit dangerous, as that first hour rally often fades and by end of day, perhaps even turns red."

'I believe the PM market will turn, and soon. We have a great buying opportunity in the very near future. Capitulation is exactly what we want to see to set up the low, and we definitely saw capitulation yesterday. But we need to wait for the market to show us that it is ready to reverse. That could be today, or tomorrow, or the next, but I believe it is not far away."

As of 30 July 2015

"If the dollar keeps rising, we'll test the 1072 lows soon enough, and I'm not sure they will hold."

"Commodities are trying hard to reverse. It's not clear if they'll manage that now, or if they need to fall to a lower level to find buyers. Some parts of the commodity complex have marked lows, but the strengthening dollar may short-circuit any commodity rally if it continues. How long will this dollar move last is anyone's guess - my sense is it was driven by increased optimism for a Fed rate hike following the FOMC meeting that ended Wednesday."

"All we can do is watch and wait." 

3. From CNBC

"Ultimately, Garner said the key level to watch for gold is the support around $1,125 to $1,120. If the price can break above $1,230, that could trigger to make the bulls happy all the way up to $1,305 or $1,400."

4. From Williams Lindsey

5. From Profit Confidential

6. From Zero Hedge

". . . 1080 happens to be the multi-decade channel limit above which it breached in 2009 and the 50% retracement of the uptrend from 1999 low to 2011 high."

"Although Gold is holding the channel median support, RSI depicts an increase in bearish momentum resulting in the break below the up sloping channel in force since 2 years."

"This suggests the down trend could extend further towards January 2008 highs of 1045/1030 but also, from an Elliott wave standpoint, the projected target for the 5th wave of the broad bearish cycle that started at 2011 highs."

"Short-term, in light of daily RSI which is sustaining a 1-year low (blue line) a rebound looks under way. However, it should be viewed as corrective so long the Head and Shoulder pattern persists i.e. 1130/1146 levels hold."

7. From King World News

"I’m not a day trader of gold; I’m a long-term holder. The bottom line is that I believe that the gold market has now seen the worst. Could it go just a bit lower? Yes. But compared to an upside potential of well over $2,000, the downside risk is low.”