The Value of Technical Analysis

Warren Buffett recently remarked that he does not wish to know the price of the stock prior to his analysis. He would rather do the work and estimate a value for the stock and then compare that to the current offering price. In particular, he opined that knowing the price in advance may influence his analysis. In short, Buffett values the company first before checking against its price to ascertain whether to buy into the company. What about technical analysis? It is using price as a starting point to determine if it is attractive to buy into the company. Hence, technical analysis turns Buffett's consideration on whether to purchase on its head.

Furthermore, does valuation of the company come into the picture of a chartist? Apparently not if you are looking purely at indicators such as moving averages, Japanese candlesticks, momentum etc to make your assessment. By extension, the next question to ask oneself is whether valuations matter?

Graham once famously remarked that the stock market is, if I may paraphrase, a weighting machine in the long run while it is a voting machine in the short run. His profound statement succinctly suggests that the true valuation of a company will shine through only in the longer time frame. It recognizes that the short term fluctuations are dependent on the whims and fancies of the herd who may base their decision on chart patterns or other such indicators. My sense about the value of technical analysis is that it should be looked at as a tool in the broader context of behavioral finance to understand prices in the short term if one wishes to ride its ups and downs.

Technical analysis relies on many assumptions which one may easily poke holes at. For one, it relies on the historical data to predict the future. It requires past prices to be a prologue to the future. In essence, it is driving forward while looking in the rearview mirror. Do you have a stomach for it?

China makes Soros' mouth water

Soros addressed another packed audience comprising of academics and tertiary students at the Raffles City convention hall on 11 Jan 06. However, his talk was largely focused on his current pet cause of championing for an open society.

Even though Soros kicked off his 20 minute speech by saying that he was thankful for the publicity generated when certain governments attributed the Asian financial crises to him, the speech and the follow up discussion was largely a philosophical one and hence, is of no relevance to this blog. Instead, this blog whips up a mix of the nuggets of financial information he offered during this and Monday's talk.

Soros says today's opportunities in China is, literally, mouth-watering. The current situation reminds him of the under-developed financial markets which he used to do very well in. Generally speaking, he thinks that the current share prices do not reflect values of the Chinese companies. This difference arises because of the issue of corporate governance where the interest of management and shareholders may not be aligned. His point echos that of Charlie Munger who once remarked that the agency problem is an important question which investors in Chinese companies should ask, but often forget to do so.

To which, Soros continued that he is beginning to observe increased alignment of interests. When this agency problem is corrected, he expects big opportunities to present.

Soros considers the intervention of governments necessary because the authorities can prevent financial markets from swinging to extremes. In fact, he thought that the then Hong Kong treasury secretary was correct to use the reserves to shore up falling equity prices during the Asian financial crises and turn in profits subsequently.

When queried if markets were efficient, Soros opined that he was of the view that only 50% of the market is efficient while the other half is not. The answer should not come as a surprise for it is the existence of in-efficiency which allowed him to make his fortune and retire from active fund management at the age of 50.

The Alchemy of a Global Slowdown

Soros: US recession in 2007

Billionaire investor and philanthropist George Soros has warned about a possible global slowdown in 2007 brought about by a recession in the US economy. Soros is in Singapore and his remarks were made at a talk organized by the Singapore Institute of International Affairs to a sold out audience at the auditorium of the Singapore Exchange during lunch. Soros served up plenty of food for thought by suggesting that the US economy could face a hard landing caused primarily by the bursting of the property bubble.

When the US economy slows down and interest rate hikes stop, the US dollar is likely to depreciate. In a bid to fend off inflationary pressures, he expects the US Fed funds rate to hit 4.75% before the central bank eases off. Soros suggests that the Fed is likely to overdo their rate hikes as they will not stop until the economy shows obvious signs of slowdown, during which it would be too late.

He does not believe that demand from Asia or a recovering Japan could counteract the slowdown caused by the US economy. This is because consumer spending in America has been greater than Asians who are traditionally savers. In response, Asian governments could reduce their export dependency by stimulating domestic demand. Red hot oil prices are also not expected quell soon as demand from a rising China will continue unabated while additional supply may only come on stream in a year or two.

The ominous warning by the chairman of Soros Fund Management came on a day when the DJIA breached the psychological 11,000 barrier for the first time in over four years and as the local press carried a headline offering bullish analyst forecasts for the Straits Times Index.

On Wednesday, Soros is scheduled to speak at another event organized by the Institute of South East Asian Studies. Exclusive notes of his dialogue will be made available.