Category: Trading

Condoms and Nappies: A Tale of Two Commodities

On By Chen Yu YanIn Policy, TradingLeave a comment

Today is the so called “Singles’ Day” in China. The name derives from the fact that it is 11th of November, thence 11-11 #foreveralone (though I can be certain that you won’t be reading this on the 11th). Mainly because I had to gather some data (population growth, policies, and equity market index figures to be precise) which took far more time than it should. Could this be the time that I bust out the charts and tables? No. I already have a shit time doing that for my actual research project (No, seriously, so many tables and charts. I feel that I should have taken pure maths, which seems to have ironically less maths than finance… also, on a different note the spelling for ‘ageing’ really irks me. If I ever start learning German, English grammar is the culprit that drove me into it. )so I don’t want it to flow into this, which is something I actually enjoy immensely. As for why I gathered the data, I’ll get to that in a little bit. Anyways, the reason I bring up Singles’ Day is several folds. I want to talk about the loosening of China’s One Child Policy (OCP) which is now a Two Child Policy (TCP); Japan’s rapidly ageing population; purchase patterns according to population change and how that interacts with our markets.

Now, now, I know that the TCP has been all over the news and I promised to cover things that isn’t so mainstream. Well, to draw the parallels, today’s story needs to start here. China is feeling the weight of its OCP in the recent years. With an ageing population and massive gender imbalance, China sense, correctly, that it is not going to have a good time if the OCP persists. A close neighbor, close distance wise at least, Japan, is already a strong cautionary tale. Faced with a declining workforce, and an ever ageing population that just refuses to die, the next generation has work cut out for them. Good luck! This is made worse by the recent social phenomenon where young adults actively avoid marriage due to financial burdens.

Now, a correlation between population growth and economic growth is undeniable. If I had one person working, and now I had two, then I am going to assume that I’m getting more work done (though GDP per capita isn’t really directly correlated. It’s more to do with technology and policy choices but I digress…) Taking Japan once more as an example, post World War Two population boom really pushed the economy to a whole new level. Contrary to widespread belief, Japanese policies back then were not really great. The boom pretty much came from an immense boom in population and a focus in technology.

It should be noted that the policy changes are affecting how many condoms and adult diapers are being sold. It should also give you some longer term investment goals in mind. For example, Okamoto Industries (Japanese condom maker) dropped in price as soon as the TCP was announced. I didn’t check the stock prices for the parent companies of Durex or Trojan because I’m lazy like that and you shouldn’t expect too much from me.

On the other hand, milk powder and nappies… holy shit! Expect a rise in that. The fucking power (this is one of the rare cases where ‘fucking’ isn’t being used as an adjective) of 1.5 billion people should not be underestimated. Given the problems with Chinese milk, milk powder should be considered on the near and medium term future. Possibly more if the Chinese government takes up more actions to loosen policies regarding population control. On the ASX, anything to do with milk is getting boosted via the powers of what is expected to be an incredible population growth.

I am going to keep this short because I just got better so if you were expecting another thousand word entry, sorry. On the other hand, if you were looking for shorter snappier entries, then yeah, totally did all of these just for you, so be thankful! So that’s all for now.

 

My everyday life in the age of super long and unnecessary titles and the future sticky impact on icecream

On By Chen Yu YanIn Environment, Futures, TradingLeave a comment

Among my work and research, somehow summer crept in without me noticing. The cool winds of winter replaced by the fiery sun is a nice change of pace. Although this year, summer arrived a little too quickly (even by Australian standards). I recall merely a week or two back when people were complaining about the harsh wind and rain and pretty much sacrificing their first-born just to get some sun. I’m pretty sure it went above 40 C (104 F) yesterday. The immense heat struck me as I was lazing about thinking about what to write, which in turn made me want to write about the heat. (It’s worth noting that I don’t necessarily write all of this in one sitting so the day I publish it, in this case today, can be a completely miserable day)

Irregularities in temperature has been all the crazy for a while now. A notable changing point, for me at least, is when I saw Al Gore’s An Inconvenient Truth. How does this affect trading? You ask as you lower your sunglasses ever so slightly while enjoying the last of the Mediterranean sunset (once again… I don’t always have the best grasp on what my reader demographic is like) . Well, that’s a fair question. If you actually read till the end of my title, you’d know that it’s about icecream (which everybody loves… apart from those with allergies, but even then). If you happened to be eating an icecream while reading my title, apologies if the length made it melt away…

Before I am accused of unsound research, let’s grab some figures first ( I am going to go by my favourite icecreams because they’re delicious). June 1996, a Golden Gaytime (fuck you if you laugh at the name, it’s one of the best icecream I’ve ever had) cost $1 AUD in just about any supermarket you go to if you just buy one block (Sydney prices). A Golden Gaytime today in a similar store would cost $2.70 (if you’re lucky enough to find it. For a while, these things were impossible to find). That’s a 170% increase in the span of 20 years! If you annualize it compounded, some simple math would yield you the sweet sweet 8.5% return per annum not adjusting for inflation. If we calculate the returns on the S&P500 index between June 1996 and September 2015, we get an annualized return of 7.67% (this is with reinvested dividends. Without is only 5.77%). So basically, the icecream is outgrowing the benchmark by almost 1%! Scoops of icecreams at the same time in Australia were $1 AUD, today, you can easily expect $3 AUD. When you consider the inflation in Australia over the past decade has never gone above 4% on an annualized basis, the price is crazy!

Now, you’d question my argument and say that the S&P index is well diversified while icecream holds a lot of idiosyncratic risk. You can also argue that my research is incomplete as I only used one icecream in my sample. That is correct. Feel free to complete my research in your own time (if you can bothered digging through the internet for prices of icecream two decades ago). Regardless, what I want to discuss next is my main purpose.

In case you didn’t know, basic ingredients of icecream are milk, butter, sugar, and probably a huge freezer. The freezer aside, milk, butter, and sugar are all available to trade on the futures market (I don’t know what you call a basket of the three but I’m going to call it the icecream basket… or as a friend calls it, the ‘icecream tub’ because who really stores icecream in baskets). Let’s just leave the world of trading for a minute and come into the real world where the graphics are good but the game play and story sucks. Who eats icecream? Mainly children, and parents who steals a bite or two and end up eating everything anyway while their child watches leaving them traumatized and not knowing how to feel because they’re only 5 and can hardly pull together a coherent sentence to express their thoughts. What about when? Well, I know that summer is a big season for icecream (citation required). And I’m also fairly sure that they’d sell in spring and autumn (the name of the season that comes after summer for those who uses ‘fall’ as if the season is purely based on falling leaves. By that logic, falling rain, falling snow, everything is going to be fall!). Heck, when I went to Europe with friends in December, I ate gelato almost everyday while in Italy (I ate other stuff too, not just gelato). Geography? Well, anywhere that has electricity would store icecream right after beer is stored to an acceptable level. Basically my point is the demand will be there. It almost always will be there since it is somewhat a ‘luxury’ good. And cheap luxury goods will always be in demand (look at the Daniel Wellington watches. Tasteless? Yes. Overpriced? Yes? But it takes advantage of human weakness in that it creates an illusion of elegance, and via clever marketing fools its audience into buying it because hey, paying $200 for a piece of shit that is luxury is worth it! Mainly because you can afford it. Which is also why you don’t see everyone just go around in that sweet Vacheron Constantin. All just my opinion… if you like DW watches, good for you… and please stay away from me). The demand in affordable luxury will not wane because of human psyche. Hence icecream will always be around. That or because it’s delicious…

Looking as the icecream tub, climate change does have its subtle effects. The price for processing butter, cream, milk, sugar, flavouring etc. has far exceeded inflation (citation required). After a bit of digging through the archives of the International Trade Centre (ITC) website,  when developed countries such as the US and Germany (I’ll just group the rest of the EU under Germany for simplicity), it causes problems. Both the US and the EU has tariffs and subsidies protecting its agricultural sectors. Hence, the sensitivity to policy changes can only be described as substantial. Given the current financial situation in the EU (the US’s contributions towards milk exports is fairly small next to the EU’s, with the EU contributing around 1/3 of the total production with their top 3 countries alone and the US making up around $4 billion of the $60 billion market). Any negative externalities to the environment becomes a global problem and hence key ingredient prices will be driven upwards because damn it, icecream demand isn’t gonna go down. That’s not how icecream price elasticity works, or as I mentioned, it’s not how the price elasticity for low-end luxury item works. As for the diversification risk? Well, if you want safe money, diversify by all means. If you want to make some money, concentrate your investments (citation required).

TLTR? Well, allow me to sum it up, mainly because I’m actually tired of writing.

Make less pollution, eat more icecream.

Technical Analysis: In the Beginning, there was Price!

On By Chen Yu YanIn Technical Analysis, Trading1 Comment

Most people who know me in a professional environment would know that I am very technical heavy with my analysis. Not that I have anything against fundamental analysis, it’s simply the fact that I don’t enjoy spending an entire day looking at the accounting figures and growth potential etc. Technical analysis to me is, as Kanye would put it, harder, better, faster, stronger. So if you want to read charts, and you can’t wait much longer, stick with technical analysis, else you can’t get stronger… and this is why I should never write anything while listening to Youtube mixes. Back on topic now!

I suppose since I am going to spend multiple posts diving into the intricacies of TA, I should really start at the… err… start…

TA, from a academic perspective, describes the type of analysis used by market participants who tries to generate abnormal returns using only past information. The ‘blasphemous’ theories implies a complete lack of market efficiency (and thereby pissed off thousands of academics, or so I would like to think) and is pretty much the modern equivalent of witchcraft and alchemy. Many attempt to disprove it via the inclusion of taxation, backtesting different strategies and showing fairly conclusively that they don’t work over the long term, by tossing coins and then spinning in a circle and throwing a dart, by diving into a pool and picking out a random marble hidden at the bottom of every tile (but behind every prime numbered tile, there is a golden one. Also, the latter two may or may not have happened. I can’t prove that they haven’t so……). However, some swear by it and one of the most famous trader of all time, Jesse Lauriston Livermore, the great bear of Wall St, made it big using TA. So why is that? How can something disproved make so much money for some while bankrupting others?

I guess I’ll describe the general logic behind why some believe that TA works before I go into the specifics. The first trader, even if by random chance would buy something because the price went up a little. Soon after, a different participant would look at it and think “Hey, I just saw this, and this is crazy, but I like this stock, so I’ll buy some maybe”. The price would go up further because of additional demand from other technical traders. Finally, the traders who missed the run then looks at the chart and thinks “Hmm… I missed it, I missed it so bad, I missed it so so bad”.

I’m sorry, I’ll turn off the music.

My favourite analogy for TA (I read it on a research paper but I forgot which one… if any of you know where this analogy came from, please refer it to me as I’d like to cite it) is if you throw 10,000 people into a small city and ask them to meet up. You don’t tell them when and where but some may assume that around noon in front of the town hall on a Saturday would be a nice time. In fact, I dare say that more than one would think that. So some people gather, and then the rest looks in awe at a sudden gathering reminiscent of flash dancing. So they group up too. Who knows, maybe they’ll even be starred in a viral Youtube video! Wouldn’t that be neat? Then the crowd attracts others and suddenly it’s massive. This is essentially what will happen in the market. It’s all about the stock price (no, I’m not listening to ‘It’s all about the Bass’) which makes sense as its arguable the most important element for stocks. We quote price before anything else (though the only other thing that comes to mind would be volume) and base a lot of calculations off of it regardless of using TA or FA.

So why does that skewer of demand and supply dictate what traders do? Well, that’s where cognitive dissonance kicks in. That’s where greed and fear kicks in. That’s where the next post in my technical analysis series kicks in.