The US stock market dropped nearly 10 percent last Monday, after the $700 billion rescue plan was rejected at the House of Representatives. Did the business prospect of all the listed companies go down with the rescue plan? The PSEi was at 3,677 on 2 October 2007. On 30 September 2008 it was 2,569, a decrease of 30 percent. Did the Philippines' business environment deteriorate that much during that time?
Many investment education programs, including the CFA program, emphasize fundamental analysis, which looks at a company's income prospect, liquidity ratios, debt to asset ratios and so on. However, in the past 14 months, what dominated the US stock market were the housing market's condition, and, more significantly, the availability of credit, and these factors also have an overriding effect on the stock markets in far away countries, some of which undoubtedly have strong trade ties with the US, but the extent of the impact on their stock market still seems disproportionate to the trade impact.
Analysts who relied solely on fundamental analysis would see the stock prices of many good companies battered to 'unreasonable' levels. In ordinary market conditions, the analysts would disregard short-term price misalignments, or even regard them as opportunities. For example, Warren Buffett's fund bought shares of USG, a US building materials manufacturer, in mid 2007 at around $38. However, this time round, the 'misalignment' has lasted more than 14 months, and who knows how much longer it will last. USG is currently trading at below $26.
Is it time for analysts to admit that the supply of liquidity and market sentiment are also important factors in determining stock price levels? and at certain times, these factors can override fundamental factors by a large margin and for a long time?
Monday, September 29, 2008
Thursday, September 11, 2008
Investment Research Challenge - Kick Off Event Coming Soon!
The IRC will officially start on September 26, 2008, 3-5PM at the PSE Tektite Trading Floor, Pasig City.
The 5 participating schools are the ff.:
1. Ateneo de Manila University
2. De La Salle University
3. University of Asia and the Pacific
4. University of the Philippines
5. University of Santo Tomas
Which school shall represent the Philippines?
The 5 participating schools are the ff.:
1. Ateneo de Manila University
2. De La Salle University
3. University of Asia and the Pacific
4. University of the Philippines
5. University of Santo Tomas
Which school shall represent the Philippines?
Tuesday, September 2, 2008
Questions, Comments and Suggestions as talked about in ANC! - For All Visitors
This is the place for all visitors from all around the world to post your thoughts and questions. What issues would you like CFA Philippines to discuss? What questions do you have about investing in stocks, bonds, funds or UITFs?
Officers:
PRESIDENT - Vandermir T. Say, CFA, VICE PRESIDENT -Maria Victoria Mangonon-Caintic, CFA, VICE PRESIDENT- Raymund Abara, CFA, TREASURER - Denis Du, CFA
SECRETARY- April Lyn Chua-Lee, CFA, DIRECTOR - Mark Yu, CFA
DIRECTOR - Ernesto Francisco Jr., CFA
Officers:
PRESIDENT - Vandermir T. Say, CFA, VICE PRESIDENT -Maria Victoria Mangonon-Caintic, CFA, VICE PRESIDENT- Raymund Abara, CFA, TREASURER - Denis Du, CFA
SECRETARY- April Lyn Chua-Lee, CFA, DIRECTOR - Mark Yu, CFA
DIRECTOR - Ernesto Francisco Jr., CFA
Did you know that there are only 86 CFA Philippines members? CFAP members are literally, 1 in a million!
Monday, September 1, 2008
Finance and Its Fancy Lingo
There has always been a continuous debate as to whether finance is more properly characterized as an art or as a science. I am not to make a claim but for me, there is something so artistic and fascinating about the world of finance that separates it from undoubtedly scientific fields like Mathematics: its ever extravagant lingo.
Mathematics is a very systematic study – systematic even in the way it gives a term for something. First, it often uses Greek letters predominantly for numbers, sets, functions and spaces. It needs a large number of symbols to stand for these abstract objects but its wide use of Greek letters provides a collection of useful symbols to supplement the Roman letters. Second, it sometimes uses Greek prefixes as is the case in naming polygons, polyhedra, and polynomials. Such simple, systematic and consistent way of coming up with a terminology is not observed in the field of finance.
In Math, we know that Euclidean geometry, Euclidean metric, and Euclidean algorithm are all from Euclid just as Abelian groups are from Abel, and Eulerian graphs are from Euler. Likewise, Roman numerals are so called because they are a numeral system originating in ancient Rome. This makes me question why Eurobond and European option are so termed if Europe has nothing to do with them!
In Math and other disciplines, we typically use the Latin prefix semi- to an object that is half of or partly something. We have such words as semicircle, semiperimeter, semiannual, and semiformal. Now, how come a combination of American and European style options is never named semi-American or semi-European? It is because the people from Wall Street have found just a more ingenious name for it: Bermuda options! Note that it only makes sense if you're aware that Bermuda is that tiny place that is nearly halfway between the United States and Europe.
As you may have already noticed, financial jargon has very rich etymology. More often, it is influenced by popular culture. There exist countless financial terms now that alludes familiar elements in pop culture so as to portray something in finance. A good example is voodoo accounting which describes a form of financial statement manipulation. In western countries, the word “voodoo” suggests witchcraft and mysterious occurrence. Hence, in voodoo accounting, what is likened to”witchcraft" is the use of accounting gimmicks to conceal what it truly going on with the firm, resulting to "mysteriously" high revenues or assets. Another example is Santa Claus Rally, which takes place between Christmas and New Year’s Day. Just like Santa Claus who allegedly gives presents to the children, this rally brings presents to the investors in the form of a climb in the share prices.
Sometimes, a financial term can have biblical reference. You probably have heard already the phrase “baptism of fire”, citing Matthew 3:11. It is generally used to denote a first painful experience and in finance, it describes a tough challenge faced particularly by a company. It can be a situation like an IPO, merger or acquisition, or election of new officers. Other times, finance derives its terms from concepts from other fields, such as Chemistry. For instance, the term acid test ratio comes from the method of determining whether a metal is a real gold. Gold, unlike other metals, does not corrode when immersed in acid. Just as the acid test becomes a test of reliability, the acid test ratio becomes a test of financial integrity for firms.
Also observe how people from Wall Street come up with a name for a graph: it just requires a rich imagination. Unlike in Math, you don’t have to discuss the concavity, slope, or curvature of the graph. You are not required to identify its critical points, points of inflection, or intercepts. To recognize a pattern, you just have to think of the thing that it most closely resembles. For instance, cup-and-handle pattern is a popular chart patterns in technical analysis and as you might imagine from the name, this pattern resembles the shape of a tea cup. Needless to say, a head-and-shoulders pattern looks like a head with two shoulders. Hence, you should not wonder anymore how the flag and pennant patterns, and saucer bottom patterns should appear. Other non-technical analysis graphs like volatility smile, butterfly spread and Christmas tree also share the similar etymology: their names are a hint of what they look like.
The world of Mathematics will bombard you with alphas, betas and gammas. You’ll also become accustomed to hearing or even using phrases like almost all, arbitrarily large, sufficiently close, if and only if, and without loss of generality. If these are not yet nauseating enough, you’ll encounter more seemingly sophisticated terms like isomorphism, axiomatic system, parametric equation, affine planes, etc. This makes the subject sound dry, uninteresting and intimidating for many people. In contrast, the financial sector uses the language that everyone speaks. Though it may sound like good news, the truth is this language is embedded with mysterious codes that if you’re new to the industry, it can take a lot of untangling. So, to end my discussion, here are few more terms I have “untangled” when I first plunged myself into the sea of finance and its fancy lingo:
Fannie Mae and Freddie Mac are not famous Hollywood fraternal twins.
Pac Man is not the classical arcade game, nor is it the alias of a boxing champ.
Sleeping Beauty is not the popular fairy tale classic and Walt Disney animated film.
Whoever says being a technician does not pay well is wrong. In fact, in the world of investing, it is a white collar job that offers a lucrative pay if you’re good at it.
Detecting liquidity and solvency is a task not just for chemists. In fact, financial analysts love doing it too.
A lobster trap is made not to trap a lobster just as a shark repellent measure is done not to drive sharks away.
A golden parachute is not golden, nor is it a parachute. The same is true of a silver parachute.
A plain vanilla is not an ice cream flavor. It isn’t sweet, and most of all, it isn’t edible.
Mathematics is a very systematic study – systematic even in the way it gives a term for something. First, it often uses Greek letters predominantly for numbers, sets, functions and spaces. It needs a large number of symbols to stand for these abstract objects but its wide use of Greek letters provides a collection of useful symbols to supplement the Roman letters. Second, it sometimes uses Greek prefixes as is the case in naming polygons, polyhedra, and polynomials. Such simple, systematic and consistent way of coming up with a terminology is not observed in the field of finance.
In Math, we know that Euclidean geometry, Euclidean metric, and Euclidean algorithm are all from Euclid just as Abelian groups are from Abel, and Eulerian graphs are from Euler. Likewise, Roman numerals are so called because they are a numeral system originating in ancient Rome. This makes me question why Eurobond and European option are so termed if Europe has nothing to do with them!
In Math and other disciplines, we typically use the Latin prefix semi- to an object that is half of or partly something. We have such words as semicircle, semiperimeter, semiannual, and semiformal. Now, how come a combination of American and European style options is never named semi-American or semi-European? It is because the people from Wall Street have found just a more ingenious name for it: Bermuda options! Note that it only makes sense if you're aware that Bermuda is that tiny place that is nearly halfway between the United States and Europe.
As you may have already noticed, financial jargon has very rich etymology. More often, it is influenced by popular culture. There exist countless financial terms now that alludes familiar elements in pop culture so as to portray something in finance. A good example is voodoo accounting which describes a form of financial statement manipulation. In western countries, the word “voodoo” suggests witchcraft and mysterious occurrence. Hence, in voodoo accounting, what is likened to”witchcraft" is the use of accounting gimmicks to conceal what it truly going on with the firm, resulting to "mysteriously" high revenues or assets. Another example is Santa Claus Rally, which takes place between Christmas and New Year’s Day. Just like Santa Claus who allegedly gives presents to the children, this rally brings presents to the investors in the form of a climb in the share prices.
Sometimes, a financial term can have biblical reference. You probably have heard already the phrase “baptism of fire”, citing Matthew 3:11. It is generally used to denote a first painful experience and in finance, it describes a tough challenge faced particularly by a company. It can be a situation like an IPO, merger or acquisition, or election of new officers. Other times, finance derives its terms from concepts from other fields, such as Chemistry. For instance, the term acid test ratio comes from the method of determining whether a metal is a real gold. Gold, unlike other metals, does not corrode when immersed in acid. Just as the acid test becomes a test of reliability, the acid test ratio becomes a test of financial integrity for firms.
Also observe how people from Wall Street come up with a name for a graph: it just requires a rich imagination. Unlike in Math, you don’t have to discuss the concavity, slope, or curvature of the graph. You are not required to identify its critical points, points of inflection, or intercepts. To recognize a pattern, you just have to think of the thing that it most closely resembles. For instance, cup-and-handle pattern is a popular chart patterns in technical analysis and as you might imagine from the name, this pattern resembles the shape of a tea cup. Needless to say, a head-and-shoulders pattern looks like a head with two shoulders. Hence, you should not wonder anymore how the flag and pennant patterns, and saucer bottom patterns should appear. Other non-technical analysis graphs like volatility smile, butterfly spread and Christmas tree also share the similar etymology: their names are a hint of what they look like.
The world of Mathematics will bombard you with alphas, betas and gammas. You’ll also become accustomed to hearing or even using phrases like almost all, arbitrarily large, sufficiently close, if and only if, and without loss of generality. If these are not yet nauseating enough, you’ll encounter more seemingly sophisticated terms like isomorphism, axiomatic system, parametric equation, affine planes, etc. This makes the subject sound dry, uninteresting and intimidating for many people. In contrast, the financial sector uses the language that everyone speaks. Though it may sound like good news, the truth is this language is embedded with mysterious codes that if you’re new to the industry, it can take a lot of untangling. So, to end my discussion, here are few more terms I have “untangled” when I first plunged myself into the sea of finance and its fancy lingo:
Fannie Mae and Freddie Mac are not famous Hollywood fraternal twins.
Pac Man is not the classical arcade game, nor is it the alias of a boxing champ.
Sleeping Beauty is not the popular fairy tale classic and Walt Disney animated film.
Whoever says being a technician does not pay well is wrong. In fact, in the world of investing, it is a white collar job that offers a lucrative pay if you’re good at it.
Detecting liquidity and solvency is a task not just for chemists. In fact, financial analysts love doing it too.
A lobster trap is made not to trap a lobster just as a shark repellent measure is done not to drive sharks away.
A golden parachute is not golden, nor is it a parachute. The same is true of a silver parachute.
A plain vanilla is not an ice cream flavor. It isn’t sweet, and most of all, it isn’t edible.
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