Timber related stocks initial coverage part I

In 2015, the value of Malaysia total export was RM779.95 billion (Read more here), while the total export of timber product was RM22.14 billion (Read more here), about 2.8% of total Malaysia export value.

According to the statistics published by Malaysia Timber Industry Board (MTIB), more than half of the total value of timber product export were contributed by Wooden Furniture and Plywood.  See Figure 1 for detail.  The top destination for Wooden Furniture export was USA while the top destination for Plywood export was Japan. The similar trend has been observed for the past five years.  See Figure 2, Figure 3, and Graph 1 for details.

Figure 1

Figure 2

Figure 3

Graph 1

Graph 2

Graph 3

Graph 4

Graph 2 shows the trend of Malaysia timber export from 2003 to 2012 from a research report (Read more here).  It is quite similar to the US housing start trend, as depicted in Graph 3.  Both trends were showing a sharp drop during 2007 – 2008 then gradually recovering since 2009.  The 3 years and 5 years moving average of the US annual housing start crossed over on 2012, and the uptrend is still intact.  Graph 4 is the US monthly housing start.  It is trending upwards at a cautious pace.  As long as the long term trend is intact, the chances of a sudden sharp reversal of the upward trend are low.

In another report (Read more here), it showed that since 2013, for the first time the Chinese outbound direct investment into the US exceeded US investment into China.  The largest portion of the investment inflow went into the real estate sector.  On 2014, the Chinese investment into US real estate was at a record $38 billion.  This trend is in line with the US house hold start and also the Wooden Furniture export data.  As long as the policy does not change, the trend may continue to grow.

In Japan, 90% of the plywood supply was used in housing sector (Read more here).  Graph 5 and 6 are the Japan building start trend, yearly and monthly respectively.  The trend is declining since 2013.  It is projected that the 2016 demand will remain flat compare to 2015.  Both yearly and monthly charts are trending below their three and six periods moving average.  2020 Japan Summer Olympic might boost the demand of plywood but this may not lift the overall housing slowdown trend.  A flat outlook is more likely for the next few years.

Graph 5

Graph 6

Based on the above data, the stock selection will focus on timber stocks that derived majority of their earnings on US and Japan market.  The valuation model in part II will assign slightly upward bias growth for Wooden Furniture and flat outlook on Plywood.

Disclaimer:  The above analysis does not imply any buy or sell recommendation.  The author disclaims all liabilities arising from any use of the information contained in this article. 

Buying insurance for your stocks using option (structured warrant)

After reading my previous articles on option (structured warrant) (Read more here), (Read more here), many people asked me about the high risk level associated with option (structured warrant) trading.   Thus, I am writing this article to share my answer to everyone.

Yes.  It is indeed very risky if you trade naked call or naked put warrant.  Buying or selling a call or put warrant without owning the underlying asset is termed as naked call or naked put trading. 

Example of naked call warrant trading.

You do not own any stocks listed on Bursa Malaysia.  You have a strong opinion that the market will go up soon.  So you buy the call warrant of FBMKLCI.  By doing this, you expose your position to the following risks.

1.       Time risk – Warrant has expiry date.  Its value decays over time.  In my previous calculation (Read more here), the warrant value reduces about 4% in one week and will eventually reduce to zero value at expiry date if it is out of money.

2.       Volatility risk – The price movement of warrant is very huge.  It is not uncommon to see warrant value moves up or down by 30% in one day.

Why trade warrant if it is so risky?

In fact, the intention of financial derivative is for hedging purpose.  It is a very useful financial instrument for risk management.  Investor could utilize warrant trading as buying insurance for your portfolio.  One example is the “Protective Put” strategy. 

You own a diversified portfolio consisting Bursa Malaysia stocks using fundamental analysis, and you plan to use buy and hold strategy to achieve long term capital growth.  Lately, the market moves to new high and you are anticipating a market correction soon.  It may not be appropriate for you to sell all your stocks and then buy them back after the market correction, but you would like to minimize your risk.  Thus, you apply the “Protective Put” strategy by buying some put warrant of FBMKLCI.  Table 1 is the possible outcome of your strategy if the market correction happens.

Table 1

Market loss	Stock Portfolio value	Put warrant gain	Put warrant value	Total Portfolio value
1.00%	89100	9.00%	10900	100000
2.00%	88200	18.00%	11800	100000
3.00%	87300	27.00%	12700	100000
4.00%	86400	36.00%	13600	100000
5.00%	85500	45.00%	14500	100000
6.00%	84600	54.00%	15400	100000
7.00%	83700	63.00%	16300	100000
8.00%	82800	72.00%	17200	100000
9.00%	81900	81.00%	18100	100000
10.00%	81000	90.00%	19000	100000

Assuming the value of your diversified stocks portfolio is RM90,000, and you hold RM10,000 cash.  If you choose not to do anything during the market correction, your stock portfolio value will reduce to RM81,000 if the market drop 10%.  Your total portfolio value after market correction will be RM91,000.  If you use the cash to purchase RM10,000 of FBMKLCI put warrant with gearing of 9x, it serves as the insurance to “protect” your stock portfolio value because put warrant will appreciate during market downtrend.  As such, your total portfolio value will remain at RM100,000 even the market dropped 10%.

What if the market correction did not happen and you did purchase the put warrant?  Table 2 shows outcome of this scenario.

Table 2

Market gain	Stock Portfolio value	Put warrant loss	Put warrant value	Total Portfolio value
1.00%	90900	9.00%	9100	100000
2.00%	91800	18.00%	8200	100000
3.00%	92700	27.00%	7300	100000
4.00%	93600	36.00%	6400	100000
5.00%	94500	45.00%	5500	100000
6.00%	95400	54.00%	4600	100000
7.00%	96300	63.00%	3700	100000
8.00%	97200	72.00%	2800	100000
9.00%	98100	81.00%	1900	100000
10.00%	99000	90.00%	1000	100000

The put warrant will depreciate as the market moves up, but your total portfolio value will remain at RM100,000 because the put warrant loses are offset by the stock portfolio appreciation.  This is a very attractive strategy because it helps to “protect” your capital even you made a wrong market prediction.

If you use structured warrant as a speculation vehicle, it is very risky!  However, if you use it as a hedging tool, it is a very good instrument!

Disclaimer:  The above structured warrant strategy is specifically designed for the paper portfolio in this article.  An appropriate hedging strategy requires rigorous analysis on the portfolio composition, market correlation, derivative instrument characteristic, and investors’ risk tolerance.  Investors who are interested to utilize structured warrant as hedging tool shall seek for professional advice.  The author disclaims all liabilities arising from any use of the information contained in this article. 

Daily MACD Divergence Tracking (HSI, Day4, 8th Sep 2016)

Today is the fourth day of daily MACD divergence tracking for HSI.  Hang Seng index closed at new one year high, 23919.  The MACD line closed at 414, which is higher than previous MACD 412.  This means that the MACD divergence no longer trending.  As such, today will be the last episode of daily MACD divergence tracing for Hang Seng Index.

Although the 120 minutes and 30 minutes charts of Hang Seng Index are still showing MACD divergence trending, and the daily Hang Seng Future index MACD divergence trending is still intact, it is now harder to estimate the reversal point with high accuracy as the daily MACD divergence for Hang Seng Index already disappeared.

Thanks for following the Daily MACD Divergence Tracking on the past few days.  I will reopen the tracking series once new opportunity emerges.

Disclaimer:  The above technical analysis does not imply any buy or sell recommendation.   The entry point, stop loss point, stop gain point and any other technical indications stated in the article are solely for experiment purpose.  The author disclaims all liabilities arising from any use of the information contained in this article.

Daily MACD Divergence Tracking (HSI, Day3, 7th Sep 2016)

Today is the third day of Hang Seng Index MACD divergence trending.  Hang Seng Index closed at 23741, slightly lower than yesterday closed but intraday achieved 23829, highest point in one year.  The MACD line recorded 391 at closed, still lower than the previous MACD point at 421.  The MACD pace is slowing down.  See table 1 for detail.

The divergence trending is still intact and it is closer to confirmation.

How to determine divergence confirmation?

Condition 1 – The delta becomes negative.  Which means MACD starts to reduce.  This can assume 70% confirmation.  Higher risk tolerance traders can pull the trigger at this point.

Condition 2 – The MACD line (green) crosses below signal (red) line.  This is 100% confirmed.

Stay tuned!

Table 1

Day	MACD	Delta
5th Sep 2016	340	-
6th Sep 2016	373	33
7th Sep 2016	391	18

  

Disclaimer:  The above technical analysis does not imply any buy or sell recommendation.   The entry point, stop loss point, stop gain point and any other technical indications stated in the article are solely for experiment purpose.  The author disclaims all liabilities arising from any use of the information contained in this article. 

Daily MACD Divergence Tracking (HSI, Day2, 6th Sep 2016)

Today is the day 2 of Hang Seng Index MACD divergence trending.  Hang Seng Index closed at 23787, highest level in one year.  The MACD line is at 373, which is still lower than the previous MACD line at 412.  On the other hand, formation of MACD histogram Hill 3 is getting clearer and still lower than Hill 1. 

As long as the MACD line does not go higher than 412, the divergence trending is still intact.  We have to keep monitoring.

Disclaimer:  The above technical analysis does not imply any buy or sell recommendation.   The entry point, stop loss point, stop gain point and any other technical indications stated in the article are solely for experiment purpose.  The author disclaims all liabilities arising from any use of the information contained in this article. 

Daily MACD Divergence Tracking (HSI, Day1, 5th Sep 2016)

I wrote about using MACD to detect trend reversal in previous article (Read more here).  I am going to start the daily updates on Hang Seng Index MACD divergence tracking as the MACD divergence is trending now.  This is a great chance to test the accuracy of this technical indicator.

In previous article, the explanation for MACD formation was meant for long position.  The same principle is applicable for short position.  The following are the criteria for the MACD divergence formation for short position.

MACD divergence confirmation criteria (short position)

• Closing price at new high but both MACD line (green) and signal (red) do not make new high.
• There are three distinctive MACD histogram valleys and hills, as indicated in the chart as number 1, 2 and 3.  (3 is not formed yet)
• The MACD histogram for hill 3 must be smaller than hill 1.
• During the period transitioning from hill 1 to hill 3, both MACD and signal lines did not cross zero line.
• The trigger point is near the hill 3 where the MACD line cut below the signal line.  (Yet to happen)

One good thing about MACD divergence is the ability to monitor the trend before it happens.  Today is the first day of MACD divergence trending.  As long as the index price stays at this level, the chances of MACD divergence formation are very high.  However, if the index keeps moving higher, the divergence formation may be invalidated once the MACD line achieves new high.  We shall monitor the situation closely.  Figure 1 is the MACD chart while Figure 2 is the scenario analysis.

Figure 1

Figure 2

Disclaimer:  The above technical analysis does not imply any buy or sell recommendation.   The entry point, stop loss point, stop gain point and any other technical indication stated in the article are solely for experiment purpose.  The author disclaims all liabilities arising from any use of the information contained in this article.