2013 RANKING AND MARKET UPDATE

George Soros is back and did it again. With the $5.5bn return he made 29% profit, which is the second best performing year for him.

Top 10 managers by net gains in 2013, according to LCM: 

1. Quantum Endowment, George Soros, $5.5 billion 
2. Bridgewater Pure Alpha, Ray Dalio, $2.4 billion 
3. Baupost, Seth Klarman, $4 billion 
4. Paulson & Co., John Paulson, $2.6 billion 
5. Appaloosa, David Tepper, $4.2 billion 
6. Lone Pine, Steve Mandel, $5.2 billion 
7. Brevan Howard Fund, Alan Howard, $500 million 
8. Farallon, Tom Steyer, $3 billion 
9. Viking, Andreas Halvorsen, $4.5 billion
10. Moore Capital, Louis Moore Bacon, $2.5 billion

Market Update:

As we forecasted the DJIA took out the key resistance level at 15.750. The uptrend now is clear again and in longer perspective the market hasn’t violated in the last six weeks the bullish trend. Usually the market goes up like an escalator and down like an elevator, but seems to me this is different now. The two days rally last week deleted the 50% of six week correction and in row the last three days in the DJIA closed at the highest daily price.

Today expectation is that after the yesterday consolidation but slightly green day, we are going to have a strong bullish rally today. The upside potential is serious now and the first target is 16.000. Most of the investors left the market in the last couple of weeks. Why? Because they moved to the bond market right before the stock market rally got started last week. They act like the cat on the hot tin roof, always in move and try to be smarter than the market itself. Timing the market is a fruitless effort so don’t do that just hold your long position on DJIA or SP500.

This morning all Asia indices are in green:

• Hong Kong (Hang Seng Index) up 1.6% 
• Shanghai (Shanghai Composite Index) up 0.4% 
• Sydney (S&P/ASX 200) up 0.6% 
• Seoul (Kospi) up 0.5%
• Mumbai (Sensex) up 0.3%
• Taipei (Taiex) up 0.4% 

Look at the DJIA chart. If the 16.000 would be taken today or max. tomorrow the area is opened up to the historical highs around 16.500. We are very optimistic about the followings week rally.

The BFM Assets Team.

THE GREAT SENTIMENT TRANSFORMATION

U.S. indices finally turned into green and finished the week with modest gains. The two-day rally helped indices break the losing streak. The DJIA gained 0.6% over the past week. SP500 recorded a 0.8% weekly gain after three straight losing weeks. The European stocks moved higher too and Asia shows strength and they broadly stay higher this morning.

• Dow 15,794, +165, 1.06% 
• Nasdaq 4,126, +69, 1.70% 
• S&P 500 1,797, +24, 1.33%

After a long period of correction the investor’s sentiment has turned around. Beginning of the year everybody was in euphoria. But I am really scared when no one seems to be worried about anything. Finally, the picture is different, which is a good sign for possible market gain.

In the beginning of 2014 the bullish sentiment rose to its highest levels since January 2011 (55%). Recently after six weeks of market correction - according to AAII Sentiment Survey – bullish sentiment declined to 27.90% last week. This is the lowest bullish sentiment since April 2013. The optimism is not with us anymore.



In another survey we could see the same pattern. The Marketwatch made a survey which says the followings:

• The correction is over: 30,7%
• Is not yet over: 45,9%
• Not sure about: 23,4%

http://blogs.marketwatch.com/thetell/2014/02/07/poll-is-the-stock-market-correction-already-over/

All in all. The investors have fears now which I like. Without that fear the market couldn’t gain further. So we really needed this change of sentiment and our bet is the market goes back again into the bullish trend and will go up to new highs again.

The BFM Assets Team.

EMERGING MARKET CONCERNS

Remember when the big diving got started in indices in January the argument was the emerging market fundamental problems. The market recovered yesterday in fast mood after the great tumble.

• Dow 15,629, +189, 1.22% 
• Nasdaq 4,057, +45, 1.13% 
• S&P 500 1,773, +21, 1.22% 

The question is the emerging markets are doing better? Shucks. It was only one kind of fear which was overestimated, but some countries is true are still struggling. We don’t have to watch Brazil, Argentina, South Africa – but I know the investors are fixed on those. Everybody knows they have problems. So no worries if some bad news comes from those countries, it is business as usual. Nobody was speaking at the end of 2013 about the Turkish lira or Argentina.

But if we have some bad news from other emerging markets like China, South Korea we have to be concerned. If they start to crumble that could be a bad scenario.

The flu of fear from recession is still with us. But on the other the last couple weeks correction might be healthy either. The fear is still with us and honestly I like the fears. I am scared when no one seems to be worried about anything. We are always worried about unforeseen future.

So when the fear occurs on the market stay calm, don’t buy, be watchful until the things cools down and put money again if the markets going up again. Our forecast for this year is still bullish and expecting at least 8-9% gain in SP500, maybe will hit the 2.000.

The BFM Assets Team.

IT IS NOT A PANIC

... but I recommend stay on the sideline. After a long time of bullish market we are on the sideline recently and waiting from some indicating signal which way go the indices going up or going down. That is the best you can do at this point. The falling so far has been fast enough and maybe we might see another Dead Cat Rebounce within few days.

Generally we are still bullish on the market because it is still a bull market, and as the old rule says on the bull market three positions you can possible have. Really bullish, kind of bullish or neutral. Don’t go short on a bull market. Our bet now is for a proper position is being neutral. The bull trend is not yet violated only the rally got stopped and could rally again, but for this we need some clear confirmation by Mr. Market. This is not a bear market at all. But true we have had severe and pretty nasty correction this year. This is the time to gnash the teeth, and sometimes is hard to accept this kind of corrections. 

In term of technical analysis the Dow needs to close above the 15.750 key level that would be a confirmation of tracking back. But in the worst case scenario the DJIA could back test the 14.000 support level, which was the 13 years trend channel’s top. The only problem is that in the last two days after the big dive on Monday the market doesn’t show strength and couldn’t recover at all from the ground. This is not a good sign.

The BFM Assets Team.

INVESTMENT & OUR BRAIN

In the book of Your Money & Your Brain, by Jason Zweig, I have found some remarkable and fascinating things. Since for a long time I have been trying to understand better the mental side of trading and I am pretty convinced this is the key part of our job. If we don’t understand and underestimate the mental side of the trading that is the second biggest mistake after the not right money management.

I collected out few point from the book:

• Our brain works in trading like a drug user. We always want more and more like cocaine user. We like the addiction of profit and risking more and more to get that reward.
• The result what we planned is not enough. We need more. That is why we are increasing the position size and taking bigger positions because we need bigger dopamine hit. 
• Losses and gains both effect on our body and brain. We have a stress in our stomach and higher blood pressure if we lose and we feel euphoria when we win. 
• The losses create mortal danger for us. We have bigger emotions if we lose. That is why we are not buying when the market in panic. On one hand we want to make huge profit but our fear from the loss is much bigger on the other hand. 
• Our brain loves to gamble. We always believe sometimes we will hit the lottery prize. And that is why we are taking too much risk on the markets and increase the postion size. Our brain is greedy. We are buying many times overvalued stocks. 
• Gain doesn’t give us happyness. Our mind is weird we always want to win and if we have, finally we are not really happy with that and forget that within the short period. 
• Our brain loves to predict the unpredictable things. But we are extremely poor at forecasting the future. 
• We are always greedy and want more and more. Nothing is enough. Zweig quote a statistic for that: In 1957, the average American earned about $10,000 (adjusted for inflation) and lived without a dishwasher, clothes dryer, TV, or air conditioner. But 35% of people surveyed then said they were “very happy” with their lives. By 2004, personal income had nearly tripled after inflation, yet 34% of the people now said they were “very happy.”

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The BFM Assets Team.

THE BLINDFOLDEDMONKEY IS STILL HERE

I hope all you heard about The Blindfoldedmonkey’s fascinating story, which is actual again.

“… it means that a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts”. Burton G. Malkiel, A Random Walk Down Wall Street.

Professor Burton Malkiel, the Princenton professor once asked his students create charts of fictional stocks by flipping a coin. The starting stock price was at 50$. The stocks either gained or lost 50cents depending on the coin flip. After a while Malkiel showed these charts to a technician analyst and the guy said “What is this company? We've got to buy immediately. This pattern's a classic. There's no question the stock will be up 15 points next week.” The lesson for all that most of us love to see patterns and predict the future, but many times flipping the coin is easier and better.

Malkiel’s random walk hypothesis does not mean that companies and stocks are rising and falling randomly. But mean that in the short term we are wrong. We are not able to see the short term fluctuations in prices. Most of the short forecasters are only charlatans. In Malkiel’s test the Blindfoldedmonkey do better job than financial analysts.

Later in 1990s one contest held between pros and the monkey. The pros won 61 of the 100. But they lost 39% of the time. The performance of the pros versus the Dow Jones Industrial Average wasn’t impressive, only 15% could beat DJIA. Simply investing passively in the Dow, an investor would have beaten the picks of the pros. But found that the pro’s portfolios were much more risky and paid out less in dividends than the stocks picked by dart.

This story reminds us being always humble and don’t overestimate the forecast because no one sees what holds the future.

The BFM Assets Team.

RISK OFF JANUARY

January was disappointing for investors after the great Xmas rally, nobody expected this kind of falling markets.

• DJIA -5,3%
• SP500-3,6%

This was a sobering month. There is a concern about tapering that FED won’t rescue the market again. Most of investors turned into risk off mood and left the market and covered their losing positions in January. This drop means whole year decline? We cannot be sure about that but not a good signal for the whole year. The first month direction is clear – bullish.

There were plenty of concerns in January about the FED tapering, emerging market risks, disappointing American company results and the some emerging market currency issues. But in my view those were not the real effects behind the sell-off. The only reason was that, the markets are rallied too much in last year and Mr. Market needs some refreshments. So the two digit correction easily could come. No worries. 

In technical view the 15.750 support level is lost at DJIA so down way now is pretty opened. The area is opened for further sell off and investors could stay in risk off mood.

The BFM Assets Team.