19.0 The Third Wheel

If business, as they say, is war then rightly so the stock market is its daily battlefield where the bulls, the bears, and the bullshits meet. I have been in this market for more than a year now to recognize that apart from the bulls and the bears who are continually locked in battle, there is a third wheel that influences and manipulates market sentiment and trader psychology for its own devious purposes. This third wheel, who I call with a less than flattering name as the "bullshits", ultimately wants to control price. 

Like the TV Program bearing the same title, the third wheel is a seductive master or, to make it more gender neutral, a master seducer who plays her/his part very well. He/she can be beguiling and enthralling one time, and a doomsayer and scare monger the next whenever it suits his/her self-serving designs. Regardless of the direction he/she wants the market to take, expect it to be a rough and deadly ride at the end for that is when the third wheel dumps the bull's shit on the unsuspecting. Hence, the name. 

I came to sense the existence of the Third Wheel a year ago when a shell company was rumored to be bought out by another who was planning to go into the gaming industry. When the Exchange inquired into it, both parties flatly denied such rumors. But even with such denials the rumor continued, fanned mostly by people who knew better than the rest. The result? A mind boggling increase in the stock price by 1,887% in less than a month's time. But as soon as other traders jumped into the fray hoping to catch windfall gains as price pierced through the roof, boom! the third wheel dropped the bomb and the price to this day is back near the level to where it started. The ploy worked - the bulls became greedier going up and the bears scurried in fear going down like puppet toys being masterminded by its bullshit master.  


This scenario would be repeated several times over and just did so very recently. An agri-based company had a very successful IPO at P7.50 per share. In only nine days of trading, its closing price jumped more than three times from P7.70 to P23.95 and there were speculations it could hit in the vicinity of  P50.00 in a few more days. Having had my lessons learned last year, alarm bells were ringing in my ears. Although I was tempted to join in the fray, I held my guns silent. Everywhere else, it created a lot of excitement and adrenaline rush at a time when global and domestic sentiments were down and sorrowful. It was like the only stock being traded that defied all the odds; the only man left standing in a street littered with blood. 


I monitored its trading every day and noticed a wide disparity between the volumes of the bid and ask prices - bids were thick in millions while asks were thinly spread in hundreds and tens. Somebody was jockeying it up - a term I learned only recently when I joined in an online social network of this profession. The bullshit jockey did his/her job quite well in padding a false demand. But then history repeats itself and cold blooded murder took place on the two days that followed as the price of the stock nosedived by 59.0%. Again, there is blood in the streets. You could only guess who benefited from it the most and who scratched their heads in clueless frustration.

I am writing about the Third Wheel to caution my fellow traders who, like me, are new in this stock trading business to tread very carefully and not to fall into the trap. There are dark shadows everywhere and their motives ill. A Third Wheel is easily spotted to be in the works when the stock price suddenly moves sharply without any accompanying disclosure to support such trading behavior. How else could that be explained when the IPO price has supposedly discounted the company's foreseeable future cashflows? Novice as we are, we know for a fact that perhaps somebody got ahead of information we are not privileged to obtain as is always the case. 


How must we then better respond to these machinations? We only have two options  - to stay clear of trouble by playing possum (not participate) or beat the Third Wheel in its own game by always getting ahead of him in the curve (contain your greed and jump ship before he unloads that filthy dung). I was actually happy for those independent traders who did earn money when that particular stock went up but mourn for those who fell wasted. Well, there is always something to be learned at every turn and we can only hope not to become willing victims again.   


To the Bullshits, not a single glass would I raise. We will someday beat you in your own game as others have already done. To the Bulls and the Bears who trade honestly in this market, I stand in ovation as we perpetually dance to the excitement and buzz of this trade. We are the true wheels of this market and not the Third Wheel.


   

18.0 Staying Alive

As I am writing this, the temperature outside the house has already gone past 36 degrees centigrade for the past several days. It is indeed hot, really hot, that my six-month old daughter does not anymore wear the usual sweater and pajama clothing even though the airconditioning is running at 19 degrees. Before summer took over, the airconditioning inside the room normally ran between 21 - 22 degrees and my daughter would be soundly sleeping, fully clothed from head to toe. This is no longer the case and staying alive in this oppressive summer heat is already a concern as I suffer from headaches and colds from sheer heat exhaustion. 

There is one other thing that is giving me headaches these days - the stock market. Ever since that fateful day of August 5, 2011 when world stock markets crashed (see previous blog "The Year of Trading Dangerously"), my trading objective has been reduced to staying alive. This means not losing more than 15% of my investment capital in these turbulent times. My original objective of earning 60% ROI annually has to take a backseat. I have to pull myself back on the ground given the reality of the world that we are living in today no longer operates in the same parameters as before. 

In order to stay alive, I started carefully analysing chart patterns and technical indicators on when stock prices move up and down and when trends reverse.  When I started applying my so-called stock-selection methodology, I soon found out that the new methodology does not produce consistent results. I was beginning to question the usefulness of technical analysis and at the same time I was beginning to doubt my technical skills as losing trades piled up one after another.      


In the month of September 2011, my accumulated losses racked up to a high of 11.4% of capital before settling down to 9.2% . In October, this went up to as high as 13.7% before going down to 7.7%. Then I started recovering my losses slowly in November going from 6.1% to 4.8%. But in December, I made trading mistakes as the market went sideways and my losses went up again from 5.3% at the beginning of the month to 9.0% at the end of month. It was frustrating to see my portfolio being sucked back into the mud. My mood was not celebratory in the season of hope. But hope did come in January 2012. With the announcement by the government to fasttrack several Public-Private Partnership Projects (PPP), the PSEi went wild up. I was ecstatic as I cut my losses from a high of 9.7% at the beginning of the month to only 1.8% at the end of the month. Then on February 8, 2012, my portfolio turned in a 0.06% profit for the first time since I started stock trading full time as a profession. It was a career-best high to date - paltry yet symbolic.

Turning my losses around and earning a profit for the first time gave me a false sense of invincibility. I aggressively bought three speculative stocks - CPG, CLOUD, and AAI in February. Then disaster struck as the prices of the three stocks nosedived. Believing that the dip was only temporary, I stubbornly held on to these securities even as they all lost value every single day thereafter. It hurt my pride and I was tossed in confusion. When I finally decided to sell them off, my losses were 7.14%, 16.93%, and 40.33% for CPG, CLOUD, and AAI respectively bringing back my losses to as high as 10.51% in March before cutting it down to 8.9%. For a moment I lost all confidence in trading  that I did not trade for days. It was the same feeling as being involved in a car collision for the first time.


Then April came making summer really hot for all to care. But as hot as the summer is, so is the stock market which began breaking the ceiling again. Hope turned into ecstasy as 9 out 12 stocks turned green cutting losses from a high of 9.31% to a low of 4.29%. Thinking that the stock market would continue breaking higher grounds I decided not to realize any profits and allowed my stocks to continue running. But the market sharks sensed blood and made a killing turning my portfolio to lose value again. As the market closed today, April 30, 2012, my portfolio loss stands at 6.7%. 

It has been almost eight months now since August 2011 and my portfolio has yet to rise above the zero line. Even if it has yet to achieve that, I am grateful that I was able to steer clear from real trouble. I have heard of investment funds worth billions running dry in the US and if that is any benchmark then I possibly have to congratulate myself for staying alive. The lessons learned from losing and not losing enough to be out of this market are more valuable than what I have learned in school, from the books, or websites combined. And for this, I can say that I have already won half the battle. As one of the great optimists around, I have to say this, "You ain't seen nothing yet. I have stayed alive all these chaotic months and I will start kicking soon."

17.0 The Pacman versus the Taxman: Rethinking Taxation

One headline-grabbing but otherwise alarming piece of news courtesy of the Taxman is the recent arraignment of the Pacman for contempt due to his failure to submit tax documents relating to his assets and income. Headline-grabbing because Pacman is a national treasure and one of the biggest individual taxpayers of this country and alarming because what they have done to the Pacman they can very well do unto you and me for as long as you and me are earning money.

The tax suit can only be fittingly described as scandalous and unconscionable, one that qualifies only as being more immoral than the crime it purports to foil. With the Taxman's desperate creativity, it can surely find legal basis for its action but that legal basis stands on loose moral grounds. Here is why.

The Pacman was born in this country dirt poor to parents struggling to survive every hungry day. Despite all the hardships, he boxed his way out of poverty and getting all the physical punishments in return while doing odd jobs in between that formed the early foundations of the Pacman's legendary status. With Divine Providence or not, Pacman fought to survive and survive he did plus a lot more than anybody in this country had ever done before. When he was poor and struggling, not a shadow of government support was ever extended to him because he was then an insignificant nobody, unworthy of any attention that the government and his Taxman now so lavishly but unduly giving him these days. But now, the Taxman suddenly sounds like a long lost relative who salivates after the Pacman's riches.

Pacman's story echoes on the multitude of individuals in this country who managed to survive and became successful despite the absence of government assistance or lack thereof when it was most needed. The same is true with start-up businesses that do not enjoy any government-sponsored perks and privileges such as those in ecozones but were otherwise taken advantage of and made doing business difficult by government factotums down to the Barangay level. But when they become big and successful, expect the Taxman to bully them for the government's much "undeserved" share of the income pie.

The point dear Brutus is that government does not have any moral basis to grab part of your hard-earned income and claim it as its own. Income taxes (and VAT) are despicably loathsome form of government extortion and must be disemboweled from its system of raising revenues.

It is fairly understandable to worry about how government would be able to continue financing and sustaining its various economic and social agenda if income taxes and VAT were abolished. With income taxes and VAT accounting for about 30% to 40% of government revenue, the loss from the abolition of income taxes and VAT will certainly render government ineffective if not irrelevant. Of course, this is not the objective. The objective is to make taxation equitable and voluntary. Is this possible? Let us rethink taxation.

In lieu of income taxes and VAT, the government must levy only Final Production Taxes and Final Consumption Taxes. Final Production Tax means that those manufacturers producing intermediate outputs shall not be levied a tax and only manufacturers that produce the final output that are not further processed, transformed, or converted into another output shall be taxed whether such final output is used for industrial, commercial, or personal consumption. The rationale for this is that if we look at one assembly line composed of different processes that is owned by the same entity, only the final output is taxed. Now, if these different processes are owned by different entities the same principle must be applied for these different entities though operating separately are actually part of one assembly line. As for the Final Consumption Tax this means that you will not be paying a tax for something that you will be using to further process, transform, or convert into goods. Only those that will be consumed without further processing shall be taxed.

Now how will these compensate for the loss in income taxes and VAT? And how will this be equitable and voluntary? The second question is easy. It is equitable and voluntary because you simply produce and consume those goods and services that you are willing and capable of paying for. If you do not want to pay the tax, you simply do otherwise. Easy right? Not only that. The bonus is that this will result to the efficient allocation of resources  as households and individuals shall have better control of their income as well as their future.

The second question is difficult but certainly doable. Firstly, we have to determine an input-output matrix and then determine which of these final output shall be levied higher tax rates. The same with Final Consumption Tax. We have to determine which of the final goods and services shall be levied higher tax rates. Theoretically, if the demand for and supply of final goods and services are not sensitive to higher prices, then these goods and services shall be levied higher consumption and production tax rates. Then there is the multiplier effect arising from higher personal disposable income as well as lower production cost coming into the picture (see previous blogpost). If we do the math right, we shall be having a better economy and well-being in this country as well as a stock market that will be soaring higher than ever. But of course, first thing first. The government and its people have to have the political will to make this happen.