Archive for July, 2008

The 10 percent FILTER

10 per cent moves may be a normal volatility on an emerging market like ROMANIA. But when a stock makes a year high while broad market is still making new lows, we have more than a bad volatility case here, we have outperformance. There are only seven stocks which are positive for the year and only six of them delivered a 10% positive performance. And all this six have been highlighted by us over the last few months. These stocks are AZO (275%), UARG (34%), AMO (31%), VEGA (30%), SOCEP (19%) and ERCA (12%). While these stocks were performing and conserving capital, there are stocks that fell 91% over the last 12 months.

There is nothing that speaks like price performance. Hence catching or tracking it early in the day is a key indicator. This is one of the key objectives of XTR INDICES to keep you updated with the price changes. This week, Energy topped the sectoral performance. Except Oil Terminal, which witnessed a marginal loss (down 1.83%), all Energy stocks gave a positive performance. Energy is also the top performer of the year. Staples major ALBALACT (up 12%) outshined in the XTR 30 Index.

In the market capitalization category chart (Slide 4), LC (Large Capitalization) category perform better (week over week) compared to the other categories. Between the SC (Small Capitalization) category, XTR 100 and XTR 30 constituents also gave a positive return. Among the indices, XTR LE (Late Economic) continues to be the best performer, with a positive return of 3.37%. As expected, XTR EE (Early Economic) and XTR ME (Mid Economic) underperformed. All the rest Orpheus indices delivered a positive performance. BET NG, the new BVB index was down -10.89% and BETFI (-5.68%) continued to fall registering the worst performance for the week.

The best performance for the week, was of 30.77%, given by the Materials stock component ELECTROPRECIZIA (ELZY). Utilities outperformer for the week was NAVROM (24.62%). The stock remains in a positive mode above its 50 days moving average since the 5 July. Even energy sector component ROMETROL (VEGA), remained above its 50 days moving average. Materials component VRANCART (9.24%), which was the top performer for the previous week also remains positive on the moving average crossover. The 10 per cent filter should witness more winners screened out in the weeks ahead.

Enjoy the latest XTR INDICES.


XTR.INDICES is our analytics product, which creates and manages Romanian market indices like XTR 21, XTR 100 and XTR 30 (Free Float). We also run models based on breadth indicators (Advance Decline ratio) and statistical parameters (correlations, betas, volatilities, top price changes, 200 day moving average etc.) XTR 21 - THE BLUE CHIP INDEX. REUTERS RICS COVERED.TRPS.BX, VNCA.BX, AMSL.BX, PEXI.BX, BATR.BX, ARTM.BX, COMI.BX, PTRI.BX, BRDX.BX, BRKU.BX, ARTM.BX, SNOS.BX, ARSB.BX, ALRO.BX, AZOM.BX, OTSP.BX, ALUM.BX, MOPN.BX, TSEL.BX, TGNM.BX XTR 100 - BROAD MARKET INDEX. XTR 30 - FREE FLOAT INDEX. XTR – EE (XTR EARLY ECONOMIC INDEX), XTR – ME (MID ECONOMIC SECTOR), XTR – LE (LATE ECONOMIC SECTOR)


How good is GREED?

Warren Buffet calls it calculated, Ivan Boesky (1987 Wall Street Arbitrageur) said its good, Catholicism considers it one among the top seven sins and environmentalists may call it a disease. Greed means different things to different people. And speculation though considered the foundation stone of the capitalist society, in its extreme form, greed, can bring everything down.

It does not take much, to tip over the other side, the cycle of human folly repeats, says Peter Hamilton, in his book, ‘The stock market barometer’. The greatest essentials in the development of a nation, speculation leads to healthy risk taking. However, pushed harder, the virtue loses its balance and moves to the other unbalancing extreme. Greed is defined as the selfish desire for or pursuit of money, wealth, power, food, or other possessions, especially when this denies the same object to others. So how does something so virtuous become so vicious?

People are mentioned as universally greedy, when they link emotionally with rising prices or potential increase in demand of a commodity. Greed clearly talks about attaching too much importance to money, possessing it as an end in itself rather than anything else. Seeing money making in everything is an extreme imbalance. Martin Pring, market trainer explains in his book, ‘Investment psychology explained’. He calls extreme leverage or need to make money fast, as greed and a recipe for a disaster.

A study published by Bard M barber, University of California questions the idea about success of day traders. The study is based on the Taiwan market. Day traders are not only highly leveraged market participants but also heavy traders. The market participants account for one fifth of the total trading volumes of the market under study. Individual investors account for virtually all day trading volumes (97%). Though the study admits that day trading is not entirely a fool’s game, heavy day traders as a group fail. And barely two of ten day traders make money, fewer do so consistently. No wonder other strategies apart from extreme leveraging, like pyramiding, overtrading, constantly staying in the market, all are classified as typical greed errors. The few big traders who do make money emphasize the need for care with calculated and small bets.

There is another reason why greed takes over and is so prevalent in the market. Greed equates to gambling, while speculation is more of a calculated bet, far from extreme. Another research paper written by Alok Kumar, University of Notre Dame questions such gambling practices. And about who gambles in the market? The paper concludes with an observation that socionomic and psychological reasons that influence a lottery purchase also lead to excess investment in lottery type stocks. And individual investors invest disproportionably more in stocks with higher volatility, higher skewness and lower prices even though these stocks have lower mean returns. These preferences, the paper concludes are distinct from individual investors known preferences for certain firm characteristics such as small cap stocks, value stocks etc.

In contrast institutional investors prefer stocks with higher mean returns, lower volatility, lower skewness and higher prices. Collectively, the evidence in the paper suggests that people’s attitudes towards gambling are reflected in their stock investment choices and stock returns. We have a fundamental desire to gamble, the very reason the link between socio economic dynamics, and the stock market behavior may be stronger than currently believed. This should not come as a surprise, as psychological, social, economic, religious and political identities of an individual supersedes his identity as an investor. Gambling hence is greed, an extreme form of speculation, more leveraged than normal. Gambling comes with a fixed loss in lottery. This makes it a crude kind of Option, which expires worthless most of the times.

But despite this historical statistical record of worthless expirations, the greed cycle continues. Tulip Mania saw price of a single bulb at $ 76,000 in 1630’s. Isaac Newton himself lost 20,000 pounds of his fortune speculating on the South Sea company, one of history’s worst financial disasters. What started as exclusive trading rights for the South Sea became a mania when more money was made leveraging on issue of new shares than from actual commerce. In recent times we have Carlyle Capital corp., the private equity giant which defaulted on $ 16.6 billion debt, after leveraging 32 times its $ 670 million equity. In greed times, the debt to equity ratio of 2:1 is history.

Martin Pring suggests a balance between greed and fear as a solution in his book. He delves on the balance between subjectivity and objectivity, between greed and fear. How both emotions are at two extremes and destined to a financial loss. And just because it’s an extreme, greed takes little to tip over the fear side, vulnerable to outside influences followed by painful unwinding and dramatic changes in social behavior like wars and crashes.

There is more evidence that markets find a way out of extreme greed, sometimes by sharp crashes, and over a sustained period by changes in social behavior. The energy greed is already changing the way we look at OIL. The change is so profound that we already starting talking about the “blue oil”, water and how it’s the new OIL. Water conservation is a key issue, and speculators like T Boone Pickens are doing their bit to draw attention to it. But as we discussed about speculation, masses don’t know balance. This is why there will be greed on water too, taking it up 10-15 times from current levels. And then the old adage, “good things in life are free”, will no more be true. Greed would have changed that too.

XTR 21 - The new components

Last whole week we have been working on the new issue of XTR 21. Our leading blue chip index is 6 months old and a clear market leader. We have some performance history now and we wanted to rerun the model before we start the second half of the year. As we mentioned prior, statistical models are emotion free and clear rule based. The only discretionary work that we have done on the XTR 21 model is to set up limits and caps for stocks and sectors. The current model was updated with forward estimates. Rest everything was similar to what we did last time when we created the Index. It’s a clear system based approach.

The results are exciting. Last time in FEB, the model did not select SIFs and PHARMA stocks. We know what happened? Health sector and BETFI have the worst performing sector components of the year. Even now the model refused to select SIFs and popular health majors. But despite all this filtering, the model has changed a third of the XTR components.
Seven stocks got out and were replaced by new stocks. The model churned out a lot of INDUSTRIALS and a DISCRETIONARY major and selected four new material components. The model has selected one new BANKING stock and two fresh INDUSTRIALS. The new XTR 21 has both the utility majors. 75% of XTR 21 is allocated to the late economic sector components. For us, it’s not a coincidence that model valuations, sector rotation and price performance continue to point to late economic sector stocks. We have detailed out the specifics in SLIDE 11.

Week over Week, we had few gainers. PRSN and ELMA were positive gainers from the XTR 30. XTR 100 had eight gainers from late economic sector viz. ZAREA, SIOR, REFE, BUCUR, PRAE, VEGA, ALU and UARG. The broad market index also filtered out one DISCRETIONARY (NEPTUN) and one INDUSTRIAL component (CMVX). Week over Week XTR 21 continued to outperform all other market benchmarks. Year to date, XTR 21 remained the top performer followed by XTR LE (Late Economic Sector) and Materials sector.

Overall another interesting week, polarizing the market between future winners, outperformers and laggards. The current issue also contains the regular updates on XTR 30, XTR 100 along with the market annexure. We continue to believe in the late economic sector component stories and with barely 10% negativity on XTR 21 for the first half, we are confident of expected outperformance on the late economic sector components in the time ahead.

XTR is our analytics product, which creates and manages Romanian market indices like XTR 21, XTR 100 and XTR 30 (Free Float). We also run models based on breadth indicators (Advance Decline ratio) and statistical parameters (correlations, betas, volatilities, top price changes, 200 day moving average etc.)


ORPHEUS RESEARCH is also available on Reuters Knowledge, Yahoo Finance, Thompson ONE and Thompson Research. And can be accessed at the following links.



We cover Romanian capital markets, Indian Capital markets, Metals, Currencies, Agro Softs, Grains, Energy markets and Alternative Energy (Solar, Bio Energy, Water and Wind).