No Random Walking!

A friend of mine asked my opinion on the HK-listed PetroChina. Here is my take:
Having done little research on the fundamental of the company, I have only the charts that I can use as the basis for making my decision. More specifically I rely on the stock's relative strength compared with the markets, in this case, with the US market which I try to beat [which by the way is the main objective of my investment], with the Hongkong market where the stock is traded, and with the oil market, i.e., the sector that the company is in.
The stock has been basically following the oil price. On the daily chart(below), PetroChina began to weaken against the US market (Nasdaq) on around Aug 17, at a price around 8.9. That's when the stock needed to be sold if he is conservative. If that wasn't enough, later, on Sept. 4, the second sell signal occurred when the daily chart showed a double bottom breakdown in relative strength against the Hengseng Index (orange line) as well as in stock price (blue), when the stock was traded around 8.8. That event also completed the formation of an head-and-shoulder which is a very bearish pattern.

For an investor of longer horizon, the stock was also showing weak relative strength against both Nasdaq and Hengseng index in mid-August, when the stock was traded at 8.5 HKD a share.

Conclusions: Without any other information and based solely on my technical analysis, the stock is a sell now. This probably applies to most of the oil stocks.
However I've also notice that, though in a down trend, this stock has shown strong relative strength against the overall Oil Index (chart not shown), which means that, relatively speaking, the stock is probably one of the better stocks among all oil plays. It may suffer less if the down trend continues and shot up more powerfully if the oil price recovers.
Different people invest with different horizon in mind. If he (1) is a long term investor, (2) if he is confident on the continuing strong demand for oil in the world, (3) if he is confident on China's pace of development, and (4) if he knows what the speculators are going to do with the oil price; and (5) if he has done extensive research on PetroChina's earning prospect and the research shows that the stock is undervalued, then it can be considered a buy or hold. However those are a lot of IFs, i.e., all are speculations. For me and for now, the real data I can trust are the charts. And the charts are telling me to sell. The up-trend may resume in the future, but I won't know that until that actually happens.

Betting the House and Losing Big: NYT

Amaranth’s funds, among the hottest hedge funds of recent years, have lost $6 billion, or nearly two-thirds of their value, in recent weeks as once-profitable bets on natural-gas prices suddenly turned bad. Amaranth made $800 million for investors in energy trading in 2005 and got around 250 million in performance fees.
The Fund applies a "multi-strategy" for its funds, which really means that the fund managers are free to do whatever they like to do, including utilizing one single strategy and putting all money in one bet with margins:

The debacle confirms what many in the hedge fund business know but perhaps too often ignore: Betting the house can result in enviable returns; it can also take down the house. ... The fund’s mettle was tested in the bear market of 2002. When the major indexes fell 17 percent or more that year, Amaranth Partners, one of its flagship funds, produced returns of 11.33 percent. During the next two years, Amaranth delivered consistently solid, if not spectacular, returns.

Amaranth’s problem would become one all too familiar to financial firms: liquidity. Mr. Hunter[the firm's genius trader - R.W.], bet that the spread between natural gas futures for March 2007 and April 2007 would rise. In fact, it collapsed. Mr. Hunter could not sell his positions. Others in the market saw that his bullish bet was wrong, that he was losing money and they continued to bet against the market, pushing prices lower. ... Once the trade went sour, Amaranth was trapped: selling into a falling market, scrambling to meet margin calls from nervous lenders, stuck in a position in a market where — to use a common phrase on Wall Street — “you get your face ripped off.”

The excuse by the fund management also sounds familiar:

“Sometimes, even the highly improbable happens, ... That is what happened in September.”

Isn't that the same excuse by those genius traders at the now-infamous Long Term Capital Management (LTCM)? Statisticians have repeatedly demonstrated that the extreme events - the "long tail" - do occur much more often than one normally expects.
For the rest of the story, see the New York Times article: Betting the House and Losing Big.

Starbucks currently operates barely 200 stores in China, is already profitable at the store level and presents enormous growth opportunities.

Starbucks operates about 8,500 stores in the U.S., and has been opening about 500 new ones a year. Starbucks aims to double that to 1,000 new stores in fiscal 2007.

International growth is where the real money may lie. Currently, Starbucks operates just 3,500 units in 36 countries. But company managers would like to expand that to 15,000 stores outside the U.S., for a total of 30,000 stores worldwide. "The big target of opportunity is in the international market," says Goldman Sachs analyst Steven Kron. And the business has become highly lucrative.

Source: USA Today

Contrary to my intuition, the Chinese markets, which are much lower in trading volume than those in US, actually has lower short-term fluctuation, as shown in my earlier post. I guess it is due to the availability of "news" or data available to the market: in US there are all kinds of often-conflicting news and opinions on a daily basis, pulling the market in opposite directions, in an effect making the market more efficient [the dot-com era was an exception]. In China, however, where there is little reliable economic and business data available to the public, it is the market momentum (the crowd effect) that plays a more important role in the short-term market direction. It is common in China that even the real economic data, such as changes in interest rate, GDP and employment data do not have any impact on the market at all.
However, the crowd effect tends to make the market go to the extreme - albeit in a steady fashion - so it has to correct itself later to reflect the market fundamentals. As a result, the longer term variation, such as that of annual return, of the less-liquid markets as China's is greater than those in the US.

The Chinese media - print, TV and Internet - are all filled with so called security analyses that are really technical analysis at best, and more likely frauds and scams in disguise - a remarkable difference from what's in the US media which are more entertaining and somewhat honest (except for some corrupt stock analysts that upgrade and downgrade stocks).

For the past three months:

last 12 months:

... and last 5 years:

The rates for Texas is slightly lower than the national averages:

A friend of mine and I had dinner in Taco Bell today and I actually liked the experience. Located in the upscale MIXc Mall in downtown Shenzhen, it is the only Taco Bell restaurant in the city (Shanghai has at least two). Guests are greeted "ole" by waiters/waitresses at the entrance. The interior decoration is ornately Hispanic and you can tell it is intended to be an upscale restaurant (similar to Pizza Hut in China). The customers are mostly Chinese yuppies and foreigners.
A dinner for two can cost you anywhere from $100 to 150 RMB without drink. The menu is similar to what you see in Mexico restaurants in US, complete with cakes and Margarita. But it definitely has items with appeal to Chinese. We ordered beef enchiladas, cream of mushroom soup, smoked salmon salad and baby-back ribs. Except for the soup, the rest was very good and tasted just like what I expected. My favorite was the baby-back ribs with sweet BBQ flavor. The dinner cost $126 RMB in total. Nacho was free.
Taco Bell, along with KFC and Pizza Hut, is part of Yum Brands, of which I am a shareholder.
[Photo source: Shenzhen Daily.]

IBD reports: Some Managers Dump Oil In Favor of Tech, but isn't the statement true all the time?
But still it is nice to learn from the article the names of several ETF funds. Mentioned are iShares S&P Global Technology Sector (AMEX:IXN - News), Technology Select Sector SPDR wid(AMEX:XLK - News), and Energy Select Sector SPDR (AMEX:XLE - News). XLK is the most popular tech ETF with actually high volume: averaging 1.6 mil shares traded per day.

I can't help but laughing after reading the following that is reported on today's Telecommunication World Net (?????, cww.net.cn):

UT???????????????

????????????????????????UT?????????RollingStream????????????????????????????????????????????????????10???????????UT???????RollingStream??????????????????????????????????????????????????????????????????????????... ... ???????????????????3????????10???????????????6000???????????????????????????????????????????????

Short translation: UTStarcom the Sole Winner in Bidding for the (Communist) Party-construction Project By Anhui Telecom. The project will connect 30,000 villages in the province so that the party members can study the Party's policies offsite. I guess the local Broadcast and Television Bureau won't stop such a politically important project, will they?
Nowhere in the article was the word IPTV mentioned, but it is obvious to everyone who is familiar with China's IPTV development. The article also says that the system will be put into use by end of October. How can they build (and test) such a system in less than two months? There is only one possibility: they started the project many months ago and didn't announce it until now, i.e., when it is almost done.

It is a shame that much of the academic community in finance and portfolio management still uses standard deviation (and its cousin beta) as a measure for risk! It should be clear to everyone that standard deviation is no more than a statistical measure of historical volatility. Similarly beta is a measure of historical volatility relative to the market. Neither of them has anything to do with the forward risk of a security which is what investors really care about. In fact high volatility is not necessarily bad as long as the price goes up (or down if shorting).
For me, risk is simply the possibility of suffering a loss in the future. It depends on the purchase price and on whether the position is for long or short. If a stock or the market is undervalued, the risk ahead is very low for the long and very high for the short, regardless of its past volatility which is always the same for both the long and short at any given moment.
An example: the 12-month trailing standard deviation for the S&P 500 index in early 2003 was 3.6 times of what is now (see figure below). Does it mean that the market was much riskier at the time than it is now? Absolutely no! In fact early 2003 was the safest time to buy stocks and in that year the market turned out the highest return in recent memory. Though the volatility is quite low now (in fact it is the lowest in at least six years), the risk is probably much higher considering the state of the US economy and the level of share prices.
Some of my safest investments have been in stocks with high volatility and high beta (> 2.) at the time of purchase. They are the safest because all available data suggests that the stocks were way undervalued or that a new uptrend was about to start.
So why those smart academic people are still using standard deviation and beta? I can only think of two reasons: (1) these metrics are still somewhat useful for uninformed investors who fear volatility and for fund managers who cannot assess the true risk of stocks independently, hence float and sink with the whole market; and (2) without standard deviation or beta as a form of generalization, risk would be very company specific or time specific [which should be the case to start with], hence they cannot develop or teach students about any generalized theory or model, including the famous capital asset pricing model (CAPM) and, as a result, would loss their job.

Field Name: Jack Field
Location: Walker Ridge block 759
Water Depth: 7000 ft
Total Depth: 29000 ft (TD? MD?)
Formation Age: Tertiary
Net Pay: 350+ ft at Jack #1
Reserves: 3 to 15 bn barrels (vs. 13 bn Prudhoe Bay Field, 29bn US Reserve);
Owners: CVX (opr., 50%), DVN(25%), Statoil (Encana? 25%)
Years before production: ~ 5 years.
Promising Tertiary Formations:
Other Recent (Lower) Tertiary Findings at GOM:
- Kashida Well at Keathley Canyon, BP(opr. 55%), DVN(20%), APC(25%). 5860 ft water depth. 800ft net pay.
- Alaminos Canyon Block 856, Total (opr. 70%) and Nexen (30%), WD 7800 ft at 2nd well; net 85ft,
CVX, DVN and APC are the three largest Tertiary lease holders.
Otherwise most of the Gulf of Mexico's oil found so far is trapped in rocks dating from the Miocene period (younger), holding 350 to 500 mln barrels of oil, which may not be big enough to be economic