2008 in numbers

Best performing stocks in 2008

  • EBS +413% / Biotechnology
  • STSI +345%/ Cigarettes
  • CRD – B +258% / Business services
  • GAI +245% / Appliances
  • AIPC +224% / Processed and Packaged goods
  • MXC +210% / Independent Oil and Gas
  • DARA +194$ / Biotechnology
  • KIRK +173% / Home Furnishing Store
  • FINL +151% / Apparel Stores
  • GBR +147% / Oil & Gas exploration

Worst performing stock markets in 2008*

  • Iceland -94%
  • Bulgaria -80%
  • Ukraine -73%
  • UAE -72%
  • Serbia -71%
  • Lithuania -71%
  • Romania -70%
  • Slovenia -68%
  • Vietnam -67%
  • Greece -66%

* local currencies valuations
The Island’s crone was crashed and in terms of US dollars, the decline in Iceland’s stock market is 98%. The Dollar gained 4.5% against the Euro in 2008, therefore if the decline in many European markets is measured in USD, it would be steeper. Another fact that needs to be mentioned is that most of people in Eastern European countries don’t invest their money in the stock market. They tend to prefer to use their savings to start their own business, buy a house or just keep them in a bank, which tends to pay 5 to 7% annual interest on one year deposits in euros or dollars.

Best Performing Stock Markets in 2008*

  • Tunisia +10%
  • Costa Rica -4%
  • Morocco -6%
  • Venezuela -9%
  • Botswana -15%
  • Slovakia -19%
  • Lebanon -21%
  • Chile -23%
  • Mexico -25%
  • South Africa -27%

*valuation in local currencies, therefore the table represents nominal growth. If we take the inflation into account, some of the numbers won’t look that encouraging (if one digit negative growth is considered good). Venezuela is “enjoying” an enormous inflation and this trend is expected to continue in the near future. Zimbabwe used to top the list of best performing stock markets (in local currency), but the reason for that is not healthy economic growth, but gigantic hyperinflation. It is not uncommon to see a Zimbabwean to hold a single 500,000,000 banknote in his/her hands (yes with eight zeros behind) and such a banknote is rarely good for even a simple lunch.

Commodities performance in 2008

  • Oil -55%
  • Copper -58%
  • Platinum -42%
  • Natural gas -22%
  • Orange juice -50%
  • Wheat -25%
  • Silver -29%
  • Corn -14%
  • Coffee -29%
  • Gold +5%

Many investors believe that gold was the best performing commodity in 2008, but they are wrong. Cocoa was up more than 60%, as the insatiable people’s demand for chocolate was not easy to met due to poor harvest.

Let’s hope that 2009 will bring better numbers and more reasons to smile in everyone’s house.
Happy New 2009!

The way to learn

Learning to trade is not very different from learning any other discipline. It takes a lot of efforts and finding the right teachers. At some level of experience, the best teacher for you will be you, but before such level is reached having someone to show you the direction of least resistance is priceless.

For example, in his early years, one of the most notorious composers ever –  Mozart, imitated and mimicked the work of others. From their lessons, later in his life, he gradually builds his own unique style. This is a common path to success in music. Common path to success in trading.

In music first you learn the notes. Then you try to replay other guys’ compositions until one day you start to compose in your own unique style. In trading, first you learn the basics of supply and demand, some common market anomalies and basic market psychology. Then you read about other, already successful, people’s methods and try to mimic them until one day you become experienced enough to create your own style of trading that satisfy you financial and personal goals best. These are three different levels of expertese in each field and they should be mastered in the mentioned sequence.

Open your eyes

Seth Godin has an interesting article on finding the one, who can really help you. Very thoughtful and a must read.

“People in charge can rarely help you, because they are rarely (truly) in charge. Billionaires can’t help you, either, because they have their defense force fields on full strength during meetings like this. In fact, the person who can help you the most is almost always someone who doesn’t appear that powerful on the surface.

Remember, it’s not just that they can help you. It’s that they want to help you. Famous people qualify in neither category.

So, who is it? Hint, it’s not the Wizard of Oz or the Pope or Barack Obama. It’s someone not famous, someone who actually makes things happen and someone who actually cares. Think hard… Got it?”

Step by step…

1. Create a clear, concise method that will serve you to find trading ideas. A method consist of simple to implement consecutive steps based on market anomalies. A method should be derived from your trading goals and it always incorporates in itself money management techniques for capital preservation.

2. Use those trading ideas to create a plan of action.

3. A plan of action usually consists of two or more scenarios. For example if X happens, I will go with trading idea A; if Y happens, I will go with trading idea B. We create different scenarious, because we can’t control the market. We forecast what might happen and plan how we will react if certain event or a process happens.

Having a clear method helps you to be consistent and disciplined in finding new trading ideas. Creating a plan helps you to profit from your trading ideas. It assist you to focus on your goals.

The curious case of crude oil

Last week’s production cuts and further weakening of the dollar were not able to offset the expectations for slump in demand and crude oil fall to four year lows. OPEC claims that the severe decline is not based on fundamentals and it is pure overreaction. If they truly believe that the current price of crude is unfairly cheap, let step up and start buying oil futures as every self-respected company would buy its shares in a similar situation. Such behavior might seem extreme, but it will have better appreciation impact on oil futures than production cut.

During the last three weeks we experienced a small rally in many commodity related industries. All, except oil. The demand was highest for Gold. If smart money is truly expecting an economic recovery in 2009, it would be buying crude, not gold. Bidding up gold and treasuries is a sign of fear and uncertainty. It reflects a perception of higher risk. It is a desperate move aiming to save some of the purchasing power of the current wealth, which is devastated by FED’s favorite sport – dollars printing.

In the end of last year I wrote a post about crude oil, trying to explain that too high price of the black gold will be devastating for oil producing countries in long-term perspective. First, an extreme price of oil gives people an incentive to invest in alternative, more energy efficient technology. If a human being is motivated to achieve something, sooner or later, it succeeds. Second, high oil price changes people’s habits. They find a way to consume less and tend to stick to this newly found behavior even when the economy starts to recover. At the brink of extremes, people change.

It is fair to point out that OPEC didn’t and doesn’t have a major impact on crude futures. It is well known fact that they were bid up by financial institutions. Disregarding that, oil producers liked the thickness of their wallets and said that they can’t impact the price of oil. Why do they think that they will be able to do it today? They became complacent and didn’t think about the long-term ramifications of high oil price for their economies. Oil was found about 100 years ago and it was adopted as energy source, because it was cheap and efficient. Once those variables change the whole equation changes. People go and find a better alternative.

Earlier this year Bank of Kuwait came up with a report, revealing the break-even price of crude for the different oil producers. It claims it is $17 per barrel for Kuwait, $30 for Saudi Arabia, $33 for Canada and much higher (in the lower 40s) for many others. All small numbers that should suggest that at the current level of crude, many countries should stop producing. I don’t believe these numbers. Oil producing nations have sold profitably its products at even lower prices during the last several decades, even when inflation is taken into account. I would like to see a similar report for break-even prices from an unbiased entity.

What strikes me the most is not the break-even prices, but the claims that many oil producing nations have based their 2009 budgets on $70, $80 and even $95 per barrel. If for a moment we assume that this is true, countries like Venezuela, Iran and Russia are in big trouble. Not only many projects will be postponed (scratched), but their cash reserves will evaporate faster than a glass of water in a dessert. Extreme budget deficits will affect substantially the living standards of their citizens and it won’t be surprising to witness cases of massive civil disobedience. Ironically, political destabilization in any of the major oil producers will lead to far more efficient appreciating shock on oil futures than any coordinated cuts. An extremely low price of oil will lay a solid foundation down for its fast appreciation in a 3-5 years horizon, as an extremely high oil price caused what we are currently witnessing. Remember that for the next 20 years oil will most likely remain the cheapest and most efficient source of energy.

Assuming that the current short-term trend of weakness in crude oil continues, which industries would be the biggest benefactors? The fist groups that come to mind are Airplane carriers and trucking companies, which bottom line should get a boost from cheaper oil. So far there is no sign of that happening. Oil is only one variable in their EPS equation. The current decline in their input cost is more than offset by a decline in their output – people travel less often, companies sell less; less packages need to be transported.

The only industry that currently should thrive in an environment of low oil price is Gold mining. Not only crude accounts for substantial part of its expenses, but gold has been outperforming everything else this year. If this trend continues, and there are no signs that it will end any time soon, gold mining companies’ EPS should get a nice boost. Higher EPS growth often leads to higher stock prices. Certainly EPS is not the only factor that affects price. It is actually of secondary importance when put next to investors’ confidence. A simple way to measure confidence is through P/E ratio. It is self-evident that recession hits investors’ confidence big time. Often a rise in bottom lines of solid companies is offset by general lack of confidence.