“Durable Competitive Advantage”, Companies’ Hidden Wealth

Durable Competitive Advantage (DCA) is certainly a hidden wealth and a valuable quality for any company to possess. Mr. Warren Buffet company selection process is based on this concept through which he identifies and isolates these companies and invest in them when their prices are falling and historically cheap.

Mr. Buffet selects the companies which have a durable competitive advantage in the market. This is the main pillar of his investment wisdom. Nowadays, investors are applying a growing number of excellent investment methodologies and great hedging strategies to enhance their investment return and manage their risk. But investing strictly in the companies which possess “DCA” in the market when their share prices are falling is a profitable investment strategy and works forever in every market around the globe.

This approach cleverly selects the best companies to invest at the time when their share prices are falling. Mr. Buffet is acting on his teacher advice “Ben Graham” who believed that there was not such a thing as good or bad stock. a share is either expensive or cheap and "value-investing" is all about buying the undervalued stocks.

However, competitive advantage must be durable and last for many years as Coca-Cola or Hershey has been selling the same products for the last half a century. Their products have not changed and are not expected to change in the future because they own a piece of the consumer’s mind. These companies could grow without spending large sums of capital for the machinery and/or R&D to stay competitive. Warren says investing in the “low- cost” producers with durable competitive advantage are profitable and safe if one buys them in the bear market.

Warren believes that investors should not invest based on the belief that a company is going to grow and change the market. Instead, they should focus on the companies with “low cost durable competitive advantage”. He targets the low-cost companies that produce unique products or services that people need them repeatedly. Brand names, fast foods, advertising, cleaning, credit cards, big retailers’ industries are among them.

A brand name or regional monopoly is considered a competitive advantage that enables a company to control the price of its products and services due to its monopolistic position and earn steady increasing profit. Coca-Cola, Hershey, H&R Block, Visa, Walmart, Costco are some examples of such businesses

The certainty of the outcome is the cornerstone of Mr. Buffet's philosophy. He is a “selective contrarian investment strategist who identifies and selects the companies with durable competitive advantage and then he waits for the right time to invest in them. The right time to buy for a contrarian is when the prices are falling which happens in an in a bear market, a correction or a panic sell-off during a bull market.

The investor might successfully identify many companies with "low-cost" durable competitive advantage, but he must be very cautious not invest in them unless their share prices are falling and look historically cheap.

Short sellers generally avoid these companies because of their strong business economics and take a contra Buffet approach to draw a shorting strategy. A contra approach is a two-step approach:

First, the short seller looks for the companies with Price Competitive Disadvantage in the industries such as manufacturers, airlines and so on and specifically identifies the less known companies that their products or services are not unique and not considered a certain need for the public.

And at the second step, he monitors and waits for the market and/or the identified stock prices to fall. Generally, the best time to short is the last stage of the bull market when the share prices are historically and irrationally inflated. Shorting the selected stocks solely when their prices are historically expensive is the key to the certainty of the outcome.

May 01, 2018

BPIs are warning of possible market corrections or crash in 2018

After the Second World War, the investment industry felt the need for an index to measure and quantify the “market risk “. Consequently, in 1955, Mr. Abe Cohen developed the concept of “Bullish Percent” and introduced the Bullish Percent Index (BPI). This index is designed to evaluate and measure the “market risk” and help the investors to deal with all kind of market situations. It is vastly used in the “P&F” technical analysis methodology to plan the market entries and investment strategies.

As an example, if the Bullish Percent for “S&P500” is 36%, it means only 180 (500*0.36) stocks in this index are having a buy signal in the “P&F” technical analysis system, and the 320 stocks remaining have sell signals. Scary?!

The first step to a successful investment is to evaluate the market condition. Studies have shown that three-quarters of investment risks are hidden in the general market conditions and the active industries in the market. In other words, good stock selection accounts for 25% of risk involved with our investments. So watching the BPI as a market risk indicator will definitely enhance our investment return and keep the market risk in control during the volatile markets in the coming months. The Bullish Percent Index (BPI) shows us that the market is bullish or bearish and its extent of bearish or bullishness. So in order to appraise and measure the current market risk, let us look at the “BPI” for three US major Indices:

Dow Jones Bullish Percent

The BPI for Dow Jones Industrial Average ($BPINDU) is 30% as of today Monday, April the 2nd of 2018. It means that only 30% of the Dow Jones stocks show buy signal in “P&F” technical methodology and the remaining 70% are carrying sell signals. According to this “P&F” chart, the Dow Jones average BP has gone to Bear Confirmed signal since March 20th, and since then it has been falling without showing any sustainable strength and rebounding signs

S&P500 Bullish Percent

The S&P500 Bullish Percent ($BPSPX) is standing at 36% as of today Monday, April the 2nd of 2018. It means that only 36% of the 500 stocks in S&P maintain the buy signal in “P&F” technical methodology and the remaining 64% are carrying sell signals. According to this “P&F” chart, the S&P Bullish Percent has gone to Bear Confirmed signal since March 23rd, and since then it has been falling without showing any sign of strength and recovery.

NASDAQ Composite Bullish Percent

The Nasdaq Composite Bullish Percent Index ($BPCOMPQ) is standing at 54% as of today Monday, April the 2nd of 2018. It means that 54% of the 2500 stocks in Nasdaq Composite show buy signal in “P&F” technical methodology and the remaining 46% are carrying sell signals. According to this “P&F” chart, the Nasdaq Composite Bullish Percent has gone to Bear Confirmed signal since March 29, and since then it has been falling without showing any sustainable sign of strength and rebounding.

So when the Bullish Percent for all the three major US indexes signaling that the markets are falling, the investors should be alerted and take these bear sell signals as a serious warning of a possible crash or deep correction in the coming months. Stay Alert and good luck.

اخطار شاخص درصد صعودی (شاخص ریسک بازار)

شاخصی که ریسک بازاررا اندازه میگیرد وآشنایی با آن برای  سرمایه گذاران غیرحرفه ای جدا ضروری است . زیرا ارزش سرمایه گذاری آنها  را دربرابر سقوط و نوسانات بازاردرماههای آینده بیمه خواهد نمود.

در نیمه اول قرن بیستم و پس از جنگ دوم جهانی نیاز به یک شاخص متفاوت در بازار که بتواند بدون وزن و تعلق شرایط بازار را ارزیابی کند احساس می شد، تا اینکه در 1955 آقای کوهن مفهوم درصد صعودی را ابداع نمود و با استفاده از این مفهوم، شاخصی حاصل شد که شیوه تعامل با بازار را به روشنی دیکته می نمود و مفهومی بسیار پراهمیت و حیاتی تلقی شد. شاخصهای موجود در بازارهای سرمایه گر چه شرایط بازار را منعکس می کنند و نشان از شرایط اقتصادی و بازار دارند، اما در بسیاری مواقع نه تنها برای سرمایه گذاران پیامی ندارند، بلکه باعث ضرر و زیان او نیز گردیده اند.

شاخص های موجود در جهان، مصرف تحقیقاتی و اقتصادی دارند و نمی باید مورد استفاده سرمایه گذاران در تشخیص شرایط بازار و زمان یابی ورود و خروج از بازار قرار گیرند. شاخص درصد صعودی در 1955 برای سرمایه گذاران ابداع گردید و امروز کمتر سرمایه گذار حرفه ای است که از این شاخص بهره نگیرد. شاخص درصد صعودی به سرمایه گذار جهت می دهد که در مقابل بازار چگونه عمل نموده و با آن تقابل نماید.

اجازه دهید شیوه ساده محاسبه "درصد صعودی" را به عرض برسانم تابه ساختارواهمیت آن درشناسایی زودهنگام خطرسقوط بازار اشراف حاصل نمایید.شاخص "S&P500" را در نظربگیرید. "درصد صعودی" این شاخص امروز 31 مارس معادل  42% میباشد.این به زبان ساده بدان معنی است که 42 درصد از 500 سهم موجود درشاجص "ُS&P500" خوب و 58% بقیه بد و در سیستم تحیل نقطه و شکل "”Point & Figure” دارای سیگنال فروش هستند. این عدد همچنین اخطارمیدهد که بازار ریسکی است و اکثریت قاطع سهام بازار در تحلیل نقطه و شکل دارای سیگنال فروش هستند.

توصیه می شود سرمایه گذاران حساب شاخص "درصد صعودی" را از شاخصهای معمول بازار جدا کنند، زیرا شاخصهای بازار عملکرد یک دسته سهام خاص را نشان می دهند. شاخص درصد صعودی به سرمایه گذار جهت می دهد که در تقابل با بازار چه نوعی از استراتژی های تدافعی یا تهاجمی را اتخاذ کند. این مفهوم بهترین شاخص و اندیکاتور بازارهای سرمایه محسوب می شود.

آقای کوهن مبتکر شاخص درصد صعودی معتقد بود که شاخصهای بازار سرمایه گذاران را گمراه می کنند و هنگامیکه قیمت ها گران هستند، توصیه به خرید می کنند و در زمانی ارزانی سهام تصویری ترسناک از بازار ارائه می دهند.

شاخص "درصد صعودی" برخلاف خرد بازار و سرمایه گذار امروزی که منبعث از شاخصهای بازار است عمل می کند. سیستم تحلیل نقطه و شکل تحلیل را از شاخص درصد صعودی که تعیین کننده استراتژی ورود به بازار است، آغاز می کند. شاخص درصد صعودی سرمایه گذار را به سوی سهامی سوق می دهد که ارزش بازار آنها کمتر از ارزش ذاتی شان می باشد که از این جهت شبیه به تحلیل های بنیادی "ارزش پایه" بدنبال سهام زیر قیمت می گردد.  در روزهای آینده گزارش مهمی از وضعیت بازار و ریسک سقوط سهام را دوستان ارایه خواهم داد. با تشکر. َMarch 31, 2018

محمود گنابادی Ph. D.  , F.C.S.I 

Trade War & WTO Governance

The free world countries are becoming increasingly worried about the U.S.  protectionist policies that initiating chaos in the international trades and weakening the global institutions such as the World Trade Organization(WTO), and International Monetary Fund(IMF).

These institutions were established in the 1940s to regulate, monitor, and expand the international trades. They have governed the international trades since then and have become powerful and well settled global organizations. But President Trump’s Anti Global and “protectionism policies are challenging the governance and authority of these institutions. So, the concern about the sustainability of the current world order is increasing due to the imminent clash between institutionalized globalists and the US protectionists such as President Trump. 

US administration is talking about fair trade vs. free trade and unilaterally push for renegotiating the multilateral trade agreements such as NAFTA. It is claiming that it has been taken advantage of by almost every country during the last decades which must be stopped and compensated Although most of the analysts believe that the Trump protectionist views will not prevail, but they might also ignite a trade war and ends to chaos in the world order and hurts the consumers particularly those in the small countries.

Soon after his inauguration, President Trump withdrew from Trans-Pacific Partnership (TPP) and started talking about fair trade vs. free trade, criticizing the multilateral agreements, saying they have hurt American interests for decades and asking for bilateral agreements and renegotiation the existing agreements such as NAFTA.

On Thursday, March the first, Mr. Trump suddenly announced 25% tariff on steel and 10% on imported aluminum. This announcement was not welcomed by the US allies and some influential cabinet members. The US allies warned of a trade war. The secretaries of state and defense warned that it could endanger the US national security and his chief economic advisor “Gary Cohn “resigned in opposition to the president style of "Protectionism".

But he did not back off, and on the 8th of March, he signed an "executive order” based on which a broad tariff on imported steel and aluminum was initiated unilaterally. A controversial move that threats the world trade order and if continues it might create a deep global chaos. Canada & Mexico were exempted temporarily to see if he can get a good deal with NAFTA negotiations. The US administration also left the door open for its allies to negotiate for tariffs exemption. Apparently, he has taken the tariffs as a hostage to push for bilateral new agreements.

The World Trade Organization is the largest organization in the world with 164-member countries. Its main mission is to ensure the global trades are running smoothly and freely and all members are complying with the rules. WTO is the only authorized institution that settles the disputes between the parties in case a country violates the rules. Naturally, the "protectionism" policies tend to ignore the international trade rules monitored by the world trade organization(WTO) and unless for any reason the Trump’s " protectionism” policies stop, the WTO will have to engage and stands against the US policies and protect its member countries which will be in dispute with the US administration in the coming months.

 If the Trump's " Protectionism" model and the world "Anti Globalism" movements help the populist nationalist leaders to gain power in the coming years and if they also choose to change their trade policies and get out of the international trade treaties. Then the global institutions such as WTO and IMF will face a big governance challenge and the globalists who have been running the global economy for the last 75 years will have to compromise and let a different regime of global economy replaces the current one. But during this economic regime change, the world could reasonably expect all kind of financial and national debts and currency crises as well as economic recessions and global depression. In other words, if the current global trade order changes, the global economy will experience a period of chaos and faces different crises before the new regime of international trade is fully operational.

However, the institutionalized globalists are very powerful, and it is hard to imagine that one single country such as the US could threaten the world trade order. A coalition or group of many countries might be able to change the current world trade order, but most of the countries are satisfied with the current trade order and reluctant to change it.  

while no one could guess how far the trade disputes could go in the future, but the US trade policies surely influence all kind of financial and physical asset prices in the coming months, so we should stay alert and monitor the asset prices trends and unusual fluctuations to avoid any financial loss and take advantage of the asset price fluctuation in 2018

March 12, 2018

Mahmoud Gonabadi

Ph.D., FCSI, CIM, FMA

Fund & Wealth Manager

Central Bank & Independent Monetary Policies

Iran central bank independent of the executive branch is the key to a sustainable financial reform and enforcement of monetary policies. If Iran Central Bank (ICB) reports to the legislative branch rather than the executive branch, it will have the necessary power to enforce its rules and policies. The special interest groups are very powerful in Iran and ICB is not able to enforce its policies under its current organizational chart.

Fiscal and Monetary policies are designed to promote a healthy growing economy. But each uses different tools for achieving the same goal. Fiscal policies are focused on implementing their predefined budgets, while monetary policies are focused on predefined interest and inflation rates. Although monetary policies are basically coordinated with fiscal policies, at the same time, they should be structurally independent of each other and report to the separate branches of government to be fully effective.

To resolve the current banking crisis, we should enhance the ICB organizational position. We have to reorganize its upper organizational chart and make it an independent institution which reports to parliament or superior power. This is the main key to start a sustainable and meaningful financial reform in the country.

I have been writing and talking about the necessity of having an independent and powerful central bank for many years. A central bank which could stand against the pressure groups and implemented its rules and policies powerfully.

Fiscal policies are working to promote the economic growth and monetary policies are making sure that the growth is sustainable and healthy. While the government is spending, the central bank is monitoring and controlling the volume of money to avoid inflation/deflation.

So, if we want a healthy financial system in Iran, the first step is to correct the central bank organizational chart and let it become independent of the executive branch and start reporting to Parliament. Otherwise, the existing powerful pressure groups will make it difficult for the central bank to face the current banking problems and enforce its rules and policies as always.

Tuesday, Sep 12, 2017

Janet Yellen and her unfinished business

Tomorrow Friday, August 25, 2017, Janet Yellen will have a speech at the central bank’s annual conference in Jackson Hole, Wyoming. Some market participants say it might be her last but historic speech and the end of an outstanding decade in the FED history. Her term will be finished in Feb. 2018, and there is no indication by Trump administration that she will stay.

Dr. Yellen became the President of FED Bank of San Francisco since 2004, selected as the vice chair of the Board of Governors in 2010. She was one of the architects of the recovery plan and when appointed as a chair of FED for four years term in Feb. 2014, she was fully aware of the state of the economy and had a clear and predefined agenda to lead the central bank.

She is a confident assertive “New-Keynesians” economist with a strong background and impressive resume. I wrote her biography in the Persian language printed in Tehran- “Donye-Eghtesad” newspaper in Jan. 2014.As she announced from the start, she gave priority to labor market over price stability and maintained an open, transparent, and flexible approach leading the monetary policies. She has been able to improve the labor market and keep the interest rate under 2% which is the target rate.

In January 2009, the banking supervision committee (BASEL) reported the result of its research on the roots and causes to 2008 financial crisis to G20 financial and banking authorize along with 17 recommendations to do for a sustainable and healthy global system. This historical report showed that the human greed did not let the supply/demand approach work properly as it claims on paper. The report was basically saying that all three sections of financial industry namely Banking, Insurance, and Securities had been taking advantage of the grey areas and flaws of old and obsolete twentieth century regulations and deregulations in early years of 2000, and in some areas, lack of rules for new financial products such as Credit Default Swaps, and Hedge Funds.

Making the long story short, FED has implemented the” “BASEL III” recommendations and successfully upgraded and strengthened the US financial and banking system during the last few years and could survive the tough economic situations. Today the state of growing economy is steady and sustainable. The unemployment rate is 4.3% down from 6.7% when she started, and the core inflation rate is around 1.7% while all indicators show that the economy is growing moderately and continuously. Yellen has led the FED to the best of its performance and transparency during the last four years. FOMC has been willingly explaining its decisions on monetary policy to the public in every meeting and opportunity openly and clearly, believing that the well-informed public could make better decisions and indirectly help to lessen the economic uncertainties. ,

The FOMC in its last minutes has stated that following the assessment of current conditions, inflation, employment and the future outlook, they have decided to keep the rate unchanged (1% -1.25%). They also said that the monetary policy would remain accommodative for more improvement in labor market and return to 2% sustainable inflation rate. They have decided to keep the funds' rate unchanged while they are watching the state of inflation closely and ready to raise if necessary.

However, Dr. Yellen has an “Unfinished Business”. Following the October 2008 decision to buy the bad loans from the banks and financial institutions and agencies, FED started injecting money and credit to financial institutions and banks by many unconventional tools such as paying interest on bank reserves, buying their bad loans and securities so that the financial industry gets back to its normal daily activities. In other words, FED took the bullets for the financial industry and bought around 3.5 trillion of their bad assets during 2009 to 2014 for cash and put these bad long term assets into its own balance sheet. Today the FED balance sheet has 4.5 trillion of assets that is said to be reduced to 2.5 trillion. Who is going to reduce these bad assets in FED and how is it going to be implemented in a way to have the least impact on the economy, inflation and labor market?

FOMC is going to clarify about its balance sheet normalization plan which means reducing the securities assets for 2 trillion dollars gradually.In order to reduce the balance sheet assets, FED has to decrease its accommodative and reinvestment policies which will tighten the economic activities and act like raising the interest rate. So, FED might utilize the process of unwinding the balance sheet as a tool to keep the inflation close to 2% target.

While some analysts say that the central bank balance sheet will be reduced gradually and it will not have an impact on the economy. But many investors reasoning differently, saying that when the FED stops purchasing securities, the demand decreases due to the absence of the main buyer.The architects of recovery process who have inflated the FED balance sheet purposefully to save the economy have surely a plan for “unwinding the Balance sheet” as the last step of the exit strategy.

Yellen has been involved in FOMC monetary policies since 2004 and is one of the main architects of monetary policies during the crisis and recovery for the last 10 years. So, she might be the best economist to finish the job and normalize the FED balance sheet as the last step of recovery or exit strategy with no harm to the state of the economy.

Trump has a list of people who might be willing to take her place such as Gary Cohn his lead economic advisor and others, but he seems to be happy that Yellen has kept the interest rate low and is focused on the labor market.

However, this is a two-way street and Dr. Yellen might not be interested to serve for another term. Because she might not be comfortable with deregulations and other Trumps’ financial agenda, besides she is aware of the tax reform consequences and its huge impacts on fiscal and monetary policy and the economy in general. So if she does not serve for another term for any reason, then the FOMC committee will have 5 trump appointees in 2018 who might change the path of current monitor policies in favor of free market theories.

Tomorrow she will have a speech about financial stability and many expect to hear about her concerns and outlook about the state of the economy in 2018 and afterward.

So if there is going to be a new FED chair in place, then it better be a right choice, otherwise US economy will be seriously at stake in the mid term and ready for another collapse. The end.

Western Protectionism, an opportunity for China

Today January 27, 2017, Theresa May, the Prime Minister of U.K. will meet for the first time with President Trump. This meeting is very important for the western countries and the world. Because if they agree on protectionism policies such as fair trade Vs. free trade, and plan to renegotiate their past free trade treaties with their past allies, then it will be very likely that the Europeans countries exit the E.U. one after another and follow their own version of protection policies.

The Britain populists successfully led the first protectionism movement through social media in July 2016, and Trump as a populist led the second protectionism movement in the US through social media as well in Nov. 2016. So one could conclude that in 2017, all of the general elections in the Europe countries including Netherland, France, Italy, and Germany will vote for populists who stand for protectionism and plan to leave the EU unless the UK parliament do not approve "Brexit"

 If UK Prime minister finds out tomorrow in her meetings that President Trump’s policies are not aligned with  Britain and Europe interests, then the UK Parliament may not approve the Brexit for now based on the chaotic changes happening in the world order currently. A united EU makes it easier for European countries to renegotiate the trades with the United States and save the globalization. The parliament debate on “Brexit” is scheduled for January 31, 2017, 

So, many people are waiting to see the results of the discussions between these two longtime allies, if Britain agrees with protectionism policies in both countries, then Brexit gets approved by its Parliament, and the EU start falling off totally and protectionism policies prevail in the western countries. But if Britain disagrees or is concerned with Trump’s protectionism policies economic views and values, then it needs to disapprove the “Brexit” and stay with EU to have a strong united presence to face and negotiate with the US in many important areas.

In my opinion, if the western world shift from globalization to protectionism, the Asian countries and in particular China will try to lead and promote the globalization by supporting and participating in all kind of free trades treaties with generosity to be recognized the new leader of the world economy.   

-- 

Mahmoud Gonabadi

Ph.D., FCSI, CIM, FMA

Fund & Wealth Manager