Stock market bloodbath

seems like the bear market is global. is short selling now allowed in pse? that is, selling a borrowed stock at high price and return the stock when the price goes down further. that way you can still make a nice profit when the market is down.

buying opportunity!

seriously!

There is a fundamental difference in savings and investments.

Not to be confused with economic investing.

There are now three levels of banking. merchant banking, retail or consumer banking and commercial banking and investment and trust banking.

Investment and trust banking are run by professional who do the investing on their account or for others.

Anyone who wants to play investment or trust banker by their individual self had better be careful.

Savings are only guaranteed by the state up to the level of M2 or to savings and commercial banks.

If you put your money in investment accounts or mutual funds there is no protection in case of loses.

The credit crisis now evident in the worlds financial markets are with investment banks non- banking institutions.

Their blow up is now moving into the balance sheets of commercial banks.

This has caused a freeze up of credit markets. A bank run of gigantic proportions at the level of investment banks.

The credit slowdown is the precipitating factor that is moving to pull the economy further and thus creating other credit problems in other credit markets which in turn will create further pull back in demand which will further create a steeper slowdown.

The U.S. Central Bank has thrown inflation fighting out of the window for now as it is now starting to aggressively address this most serious of deflationary expectations to arise since 1929.

Simple case - if you expect prices of assets to drop you wait till it hits bottom.

So everyone pulls back and stops buying homes and waits for better prices and lower rates and this results in a spiral downward that will migrate to other sectors in the economy. A race to the bottom ensues.

This is where fundamental investors and speculators separate.

Those with cash wait out the storm and get ready to buy when they spot heavy bleeding.

Yesterdays drop compared to the one or two year rise is nothing.

Continue to sell dollars and buy pesos and go to liquid cash instruments.

Continue to lend to Big Mike and GMA's government and the limited number of Philippine blue chips. Pray that Big Mike and GMA do more stealing as then interest rates will rise in the Philippines a lot more than the dollar rates. It is a good short term bet.

Anyway the people who will pay the debts are not yet born. No one will complain.

The Philioipines is a good short term bet.
Thank God for corrupt governments.

@don2x

can u cite a specific example of short-selling? from whom will u borrow & on what terms?

@ oda

two words:

caution & timing!

I'm staying off financial news and taking a break from peaking at the stock market right now :)) Now let me get back to my tabloid reading. What on earth is Britney Spears up to now?

i've seen the market correct bigtime last Feb 2007 and August 2007, and i know that the market will recover eventually. the question is -- when? some brokers and investment houses have made projections of a PSEi of 4000 to 4200 by June 2008, and they claim that this is because the Philippines is not so dependent anymore on the US market. rather, we're more reliant on China and India. but since the decline in the stock market is felt worldwide, i don't know if the forecast still holds true. in my case, i'd ride it out in the meantime and wait for the market to recover. that or buy more now since the prices are low, and sell high later on.

don,
Citisec online allows members to borrow stocks. If you can borrow stocks, you can short sell. If you can borrow stocks from friends, you can short sell their stocks. If I were salve’s friend, I’d sell my stocks and buy again when price go down. It’s like short selling. If you do that, no matter where the price go, up or down, you’d be better off than doing nothing. Do the math you’ll see why.

Salve,
For some reason, I haven't been receiving feeds. I don't know why. I thought you were not updating your blog. I used to check inquirer's page now and then except the past weeks because I'm busy. But don't I already subscribed again.

My problem is the comments. When I click comment feeds, some texts come out of screen. Any tip?

Regards,
Nina

I think I got it. The URL has changed. I also managed to subscribe to the feeds. Thanks.

despite this gloomy scenario i'm "bullish" coz as they say tomorrow's another day... hopefully waking up to a better market day... =)

I am loaded heavily in Apple (AAPL). I bought at $1.92 and am extremely worried about a meltdown. Should I weather the storm or sell short> Any advice?

@george

the mechanics on short selling can be found in pse website under Securities Lending Program. however, i'm not sure if this is now implemented as online service do not offer this.

@pinoy investor

i do not see short selling being offered at citiseconline website.is there a list of stocks available for lending? an equities fund manager who is good on this can still add value to the fund even during the bear market. however i read somewhere that short selling is just 10% of all transactions in the new york stock exchange.

I think the prices are pretty low by now.

We have the country with the biggest stock market loss this year (15%) among SE Asia (per Bloomberg). For me, I will just stay put and stick with my original strategy. Also, as the hot money are all going out, I think its about time that the domestic investors take a larger slice of our stock market so that we will not be TOO much reliant on the US—so BUY!

don,
I understand it’s a new service of citisec. Better contact them directly. I don’t trade online I use a stockbroker.

There are only few short sellers and they are the best traders. Carl Icahn made a fortune short selling. He’d attack the company in media and spread nasty rumors. When the stock drops he’d short sell. George Soros is also a short seller. He’s now saying this is the worst market crisis in 60 yrs. I bet he’s already in a short position.

“Unless you’re a short seller or a poet looking for a wealthy spouse, it doesn’t pay to be pessimistic.” – Peter Lynch

er i dont think most of the posters here really know what selling short is all abou...

@pinoy investor: a true shorter like you deem icahn to be would sell short first then spread the rumors, not the other way around : ) whats the purpose of selling short when the price has gone down?

also, short selling is not as simplistic as "borrowing stocks from friends"...there's more to it than that...

ever heard of margin calls?

@don: mutual fund managers are generally not allowed to short sell, unless its a hedge fund they're managing.

@geoff: maybe you mean APPL at $192.00, not $1.92 unless you actually bought apple shares in the mid 80's which i highly doubt.

i also wanted to add--selling short after markets have capitulated to bearish pressures (in whatever form) is a strategy too late. you'd want to sell short when the market is at the peak, not when its already hit bottom (or is on the way there) else get ready to get whipsawed

finally, the pse and phil trading platforms are neither sophisticated enough nor regulatorily-ready to handle shorts...

so frankly, the discussion on shorting phil stocks is, well, pointless...

oda

in light of this topic and what's happened in the mkts recently, i'd like to share these 7 common investing mistakes (from one of our own client-friendly mktng pieces):

1. Loss aversion
If you are like most people, you are not risk averse. You are perfectly willing to take on risk appropriate to your circumstances in exchange for the potential for extra return.

But what happens when instead of
providing this extra return, your stocks go down? The natural tendency is to hang on to losing stocks in the hope that they will rise again. This is because people are loss averse, not risk averse.

cont.

2. Regret theory
When a stock falls, many investors feel they have made a bad decision and a feeling of regret sinks in. To avoid admitting that they may have been wrong, they hold on to losing positions in the hope that the market (i.e., other investors) will vindicate their judgment and prove them correct in the end. This generally has a negative effect on portfolio performance.

3. Anchoring
Th is refers to our tendency to latch on to a figure that should have no bearing on our decisions. Investors often anchor to their purchase price and judge subsequent price changes in relation to this value. Anchoring can adversely affect performance, as investors are reluctant to sell investments for less than they paid and/or sell winners too quickly.

4. Mental accounting
Investors generally look at investments separately rather than in aggregate. Th is can result in a cafeteria style of investing whereby their portfolio consists of a hodgepodge of poorly diversified investments with no overall plan.

5. House money effect
Derived from the gambling term whereby gamblers take greater risks with winnings than their initial bets, in the investment world this refers to a version of mental accounting where investors have one
mental account for their initial invested capital and another for profits or earnings. Th is often results in investors taking on undue risk after making a gain.

6. Herding instinct
Also known as crowd psychology or peer pressure, we buy what everyone else is buying. Th at way, if the investment doesn’t work out, our ego is protected, since everyone else was buying it too. Th e technology run up of the late 1990s is a prime example of herd mentality in action. We all know the outcome of that story.

7. Overreaction
Investor overreaction to new information and
market events has a powerful effff ect on stock prices.
Earnings announcements are a prime example. If a company’s earnings fall below expectations, investors can be quick to express their dissatisfaction with
management and oversell the stock. Taken to the extreme, investor overreaction can lead to stock market bubbles and crashes.

I had a boss who retired two years ago. He has majority of his retirement money exposed to equities. He gets nervous when the stock market drops.

@oda

thanks for the info. even if pse system is not yet capable of handling short-selling, i'm sure they are in the process of upgrading/ implementing the system inview of the Securities Lending Program in their website. does mutual fund prospectus say anything about short-selling? how about uitf fund managers? are they also not allowed to short-sell?

@leo

if the stock market can drop to more than 20% in just a matter of days, it's understandable a lot of investors/ traders get nervous including your boss. a poorly balanced portfolio may even get worst performance. imagine a P3M portfolio reduced to P2M in just a matter of days. you could have bought a new car instead of the loss.

there is just one thing i wanted to say.... anything that did not kill you, will make you stronger.... if you get clobbered in the last week.... get up and move on....

oda,
Yes short sellers take a short position first, then buy when price go down to cover their short position. They make money when they buy low.

I ask my stockbroker friend to ‘lend’ me his 1000 shares and then sell it at today’s price of 100. I promise to return the 1000 shares in 30 days. So he did and gives me the sale proceeds of P100,000. After 30 days, the price is at 90. I ask my stockbroker friend to buy me 1000 shares. So he did and I give him P90,000 to cover my buy order. Then I give him the 1000 shares as payment to the shares I borrowed a month ago. I also pay him 1% interest or P1,000 for lending me his stocks for 30 days. I made P9,000 without any capital. I just completed a “short sell.”

@pinoy investor:

have you ever sold stocks short, or are you just reading all this from a book or magazine?

it appears to me you have a basic yet flawed knowledge of shorting. let me tell you thats not how it works in the real world.

as i said earlier, its not as simple as "borrowing shares from a broker-friend" to sell...this does NOT happen in real life.

your statement that you made P9000 without any capital is simply wrong. its also wrong to say that you "promise" to return the borrowed shares in 30 days.

for starters, you have to have sufficient margin to cover your short position in case the markets move against you. your account actually has to have a LARGER capital when shorting than when you're buying shares on margin.

second, there's no such thing as promising to return shares sold short in xx amount of days.

@don2x:

mutual fund managers are not permitted to short their positions. shorting is not a valid strategy for equity funds unless the fund is a hedge fund that explicitly allows for it.

its simply for investor protection.

@ oda, baka sa virtual trading nag short si pinoyinvestor.. pwede ba sa virtual?

imo, impt ang fund management during a volatile market. if you invest everything, you'll notice that you are very sensitive to market news.

if you have cash to invest during a downtrend, you'll treat it as heaven's sent..

your thoughts?

regarding shorting

i think there's also an uptick rule, meaning you can't sell short a stock at market price but at one fluctuation above

example : if market price is 100, you can sell short at 101 but not at 100 or 99

just an amateur, no shorting experience

in this downtrend, i have my shopping list ready and at what super barat prices i intend to buy

fund allocated for a certain stock is divided into ten tranches, buying a tranche at a time as price goes down

Yes there are SEC rules governing short sales. I’m just showing how to “do it yourself.” I’ve not short sell any stock. I’ve been out of the stock market for more than a year now. I’ve done more complex deals than that. I don’t care what the books say. The real world is more interesting than books.

@eicon: a cash position during mkt downturns serves two purposes in a portfolio: defense and opportunity.

also, pinoy investor answered your question about his shorting experience.

@melvin: yes, the uptick rule is in place for short sales. its obvious why.

@pinoy investor: how can you show others how to "do it yourself" when you've never done it yourself?

I can do that deal because I’ve done more complex deals. The difficult part is not the deal structure but the risk of losing if stock price goes up. That’s the risk all short sellers take.

I sold my stocks because I shifted funds to real estate. I might invest in stocks again. I just learned an old friend sits on the board of this listed company. I’ll have a chat with him. If I invest, I’d be in the top 100 stockholders. Small compared to his investment. He’s in the top 10. I figure since he invested that much, it must be good. :-)

@ pinoy, mukhang ang layo ng sagot mo kay oda.

Advisable bang mag invest ka dahil ur friend is invested big time in a company? pero syempre, kanya kanyang diskarte yan. no offense pare.

lastly, shifting funds from stocks to real estate? indi ba against da rule yan na buy low, sell high. imo, sobra taas ng prices ng real estate ngayon. except kung foreclosed yan (meron ba nito? sobra baba na ng interest); stocks naman in a downtrend so more opportunities for future gains. again pare, opinyon lang.

eicon,
Officially, wala pa gumagawa ng short selling dito dahil di pa nai-implement ng PSE ang rules. Pero ginagawa yan ng mga stockbrokers ‘do it yourself’ tulad ng sinabi ko.

Advisable mag-invest kung naniniwala ka sa friend mo. Ako naniniwala sa friend ko dahil dati siyang investment banker at yumaman na sa pag-iinvest. P100 M na kinita nya. Mas credible sya kesa mga analysts dahil hindi sila tumataya. Pag malaki ang taya mas matindi ang analysis.

Tama ka buy low, sell high. Pero di ako bumibili ng foreclosed properties. Mahal yon. Bumibili ako direct sa owner. Tama ka down stocks ngayon kaya nga namimili na ako. Salamat sa opinyon mo pare.

thanks for the reply pare..

i fully agree na ang investment adviser natin dapat ay yung yumaman na sa investment nya.. or least man lang yung naka gawa na ng investment thru stocks, re, bonds..

meron kasi dyan ang lakas mag advice ng investment strategy pero pag tinignan mo yung portfolio nya panay TD and mutual fund lang. ni hindi man lang nakapag invest pa sa stocks, re, bonds atbp.

for personal finance -- saving, getting out of debt etc.. yung mga nag theories lang tulad ng mga rfp sa tingin ko ay ok na..

can we do a "Stop Loss" order to sell in philippine stock ? that is, for example the current price is 10, i want to sell at 9.5 but the price goes up to say 10.5. I would then adjust my selling point to say, 10...etc. Is this possible in the Philippine stock ? i noticed there is only the BUY and SELL order. Maybe i can use GTC (good till cancelled) order to sell in place of the "stop loss" order. Is it possible? thanks

hi robert, i'm a bit confused. why sell at 9.5 instead of at 10 per share? don't you want to sell at a higher price?

Robert, if you put a sell order at 9.50 and the highest bid is 10. Your order will match a lower bid at 9.50. But if 10 is the lowest bid, your order will automatically match 10 because your sell is lower than the lowest bid. So watch the trading screen or your broker might buy your stock at 9.50 and sell it at 10 and pocket 0.50.

salve,
You are right, the idea is to sell a t higher price. But the reason of stop loss order is to protect my gain/loss. For example, i bought a share at 10 and to protect my loss to a minimum if the stock price goes down, i order to sell at say, 9.5 (Stop Loss). If the price goes up to 11, i adjust the stop loss to 10.5 (or whatever number you prefer) but this time to protect my Gain. If the price goes up further to 12, again i order to sell at say, 11.5 (to protect my gain) etc. If the price goes down to the stop loss limit i give, then either i loss a little or i have protected my gain.

pinoy investor,
do you think the broker will do that ? i mean to buy my stock at 9.5 when in fact the stock price DID not go down to 9.5... just to pocket the difference? I would certainly doubt that. What you are saying really is that Stop-Loss transaction IS NOT yet available or implemented. Have anybody done a similar transaction before in the philippine market... giving a sell order at a lower price than the current price to exercise the STOP-LOSS transaction ?

robert,
What I think is only my opinion. The fact is if you're not trading in real time, you wouldn't know how your broker executed the trade. He could just buy your stocks himself without placing your order and sell at higher price, or he could simultenously place your sell order at 9.50 and his buy order at same price then sell later at higher price.

It's a fact that arbitrage is lucrative. It's only my opinion that brokers play arbitrage with your stocks.

I don't think you can do stop-loss electronically. But you can certainly give a stop-loss order to your broker.