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Shayne Heffernan

Again the Reminder on Risk

Risk is everywhere including trading the markets; you must learn to manage risk.

When you seek profits in trading markets there is a certain factor that creeps; it is the "Greed" factor; then comes the Risk factor that gives rise to the Fear factor in trading.

Likely, many bad trades are the results of a misunderstanding of/or an initial failure to pay attention to risk.

Once that risk becomes real for many folks, it can turn into fear and panic. Risk means we can lose something we have, and often traders fail to realize just how much is at risk until it is too late for them

One of the most compelling facts regarding risk of loss in the market is that if a position loses 50%, it must then double, i.e. move up 100% to get back to even.

It is important to note that risk in the buying of stock in the market is one of the riskiest things on the planet.

When buying a stock, the total investment is at risk. And as we have seen recently, formerly great companies can fall to Zero.

You ask, Red Are there ways to reduce the risk of losing my entire investment when buying stocks? Sure, we have discussed them in previous articles. One is employ stop loss orders in place or trailing stop loss orders.

In most situations, these orders can work to prevent losing everything. It is unlikely that a stock will drop from USUS$50 to US$ Zero overnight, and most stocks that fail often post warning signs; and while they often fall fast, they usually take a bit of time to hit Zero bottom. In such circumstances, the stop loss may work to preserve capital.

Here is another way to protect an asset (some of us call it Insurance) That is to buy a protective Put. A Put option is a contract whereby the buyer of the Put has the right, but not the obligation, to force someone to buy his stock at a pre-determined price called the strike price any time before the option expires.

To obtain that right, the buyer of a Put pays a premium. The situation is at least analogous to an insurance policy where the insured (stock owner) pays a premium in order to assure that a loss is limited to the premium, plus any deductible.

You can learn about managing risk with options but the major risk in options strategies is that options expire, so your puts and calls only have value until expiration; and assuming no change in the price of the stock, the call becomes less and less valuable as time passes, until there is no time left. Insurance…

Another thought that is often espoused is to diversify. There are differing schools of thought regarding diversification and there are many ways to diversify.

The above discussion lists some of the ways traders reduce and manage risk in a stock purchase transaction.

All of the above is intended to motivate you to seek a greater understanding of Risk and in doing so help you Win.


Again, think Education First.

For news and information please go to , and sign up for RSS feeds on the latest US Market News, ASEAN and World News, Twitter, and the Hot List, it’s Free

Some ask, Red what is the reason for writing Red's Edge?

Simple; I wish to help people succeed in the business of trading markets. And the proof is that I do not sell books or subscriptions to my markets reports or newsletters; it is all Free.

This business is fun, challenging and rewarding in more ways than making money. My mates know that I do "my thing" to keep be sharp in my own endeavors.

The Key is that a person can choose to believe or not believe, trust or not. The fact is that it is all just common sense and when applied diligently the risk is managed and lessened. The rest is up to you!

Download “Knowledge is Power,” Red’s Road to Riches, It is Free.

The difference between winners and losers is that the winners take it seriously and they always add to their knowledge. They read, study, learn nuances, attend seminars, and sometimes use a coach or a mentor.

Successful traders are not those who say coaching or seminars are too expensive. They understand that they can recoup such costs in a single trade.

The unsuccessful folks have the opposite POV, shying away from and ignoring the benefits of a trading education because of the minimal cost. Remember, Knowledge is Power; it will change your life for the better. Red

My pal Wally Stein’s Words of Wisdom

Buy Low, Sell High or at least in the Middle, Wally’s Lullaby

Sooner or later, those who win are those who believe they can!

Red’s Quote of the Week Appreciation means a blend of thankfulness, admiration, approval, and gratitude. In the financial world, something that ‘appreciates’ grows in value. So, with the power tool of appreciation, you get the benefit of both perspectives: as you learn to be consistently thankful and approving, your life will grow in value.---Paul A. Ebeling, Jnr. Aka The Red Roadmaster.

This Week’s In View

Scapegoating the Chinese Yuan for political gain is unhealthy

It appears clear the some members of the US Congress are playing a dicey game by scapegoating the Chinese Yuan for political gains.

These Congressmen, prompted by a need to appease American worker/voters frustrated by the loss of millions of jobs in the global financial crisis and to woo constituencies in elections to be held later this year, are resorting to the tactic of blaming everything that's bad in the USA on China.

They are claiming that China's foreign exchange policy is costing America jobs and threaten to impose tough trade sanctions against Chinese imports.

However, conveniently, these same congressmen and women ignore the fact that an appreciating Yuan cannot re-balance trade issues or help create jobs for American workers.

The trade imbalance and high unemployment are deep economic problems that can only be addressed when the United States implements necessary structural reforms.

These congressional folk claim they are the Champions defending the interest of the American people when in fact; they are politicians trying to swing voters by manipulating the Chinese Yuan debate. In doing so they divert the public attention from the USA's serious domestic economic problems, which are caused in part by them and their quest for the seats in the US Senate and Congress.

Their continuing irresponsible remarks, showcased and hi-lighted by the US media, are perhaps meant to mislead the American public, and cloud the atmosphere of Chinese-USA economic cooperation.

China is the 3rd largest export market for America's goods, and it will likely become Number 1 sooner rather than later. A growing Chinese economy has really delivered substantial benefits to the American workers.

By "gaming" the national Chinese Yuan debate, some American politicians may make short term political gains, but on the other side of that coin the chance putting the long-term super powers bilateral relations in question.

The US politicians that come out as anti-China by claiming the role the strong defender of American interest, are pressing the US government to take a radical stance on the issue of the Yuan's exchange rate, and by doing this they are constricting the Obama administration's policy options.

At a recent Senate hearing (did you see it?), US Treasury Secretary Timothy Geithner was questioned by a group of politicians, some of whom did not even refer to the Strategic/Economic Dialogue forum on major strategic and economic issues concerning the two world economic powers. They approached the hearing as if this Key dialogue did not exist. In the past the US government leaders said that they respect China's sovereignty when it comes to its foreign exchange policy, and they will seek to resolve the issue through dialogue and cooperation.

It is interesting that now in a mid-term election year that some congressional leaders are gearing up for confrontation with China as perhaps the economic "enemy' of the USA based on a claim they are the real protectors of US interest, and preach it as "high moral" ground.

We at LTN believe that China and the United States are committed to building an overall positive and cooperative relationship in this 21st century. This relationship is of Global significance requiring cooperation on wide-ranging economic issues.

I have been watching this currency issue for the past several years, and it is only part of an important and complex relationship.

So, I believe that it is the responsibility of the both powerful governments to offer their citizens the facts, and in the case of the those US Congresspersons who insist on playing a dicey blame all ills on China game for short term personal political gains and chance derailing this generally constructive relationship, I say find an honest way to get the votes of your constituents, America needs China as its "friend", work on it! --Paul A. Ebeling, Jnr.

Chartists Plot Your Points

US Key Indices Support and Resistance

DJIA: Close at 10,211.07


10,285 is the late December consolidation high

The 200 day SMA: 10,313

10,365 the late September 2008 low

The 50 day EMA: 10,447

10,496 the November 2009 high

10,609 the Mid-September 2008 interim low

10,730 the January 2010 high

10,920 the May 2010 high

10,963 the July 2008 low

11,100 from the July 2008 low

11,205 the April closing high

11,734 from November 1998 high


10,120 the October 2009 high

9829 the September 2008 closing high

9918 the September 2008 high

9855a early September 2009 high

9835 the late September 2009 high & the February 2010 low

9774 the May 2010 intra-day low

S&P 500: Close at 1091.60


1101 the October 2009 high

1106 the September 2008 low

The 200 day SMA: 1108

1114 the November 2009 high

1119 the early December 2009 intra-day high

The 50 day EMA: 1121

1131 the bottom of the January 2010 consolidation

1133 a September 2008 intra-day low

1151 the January 2010 high

1156 the Sept 2008 low

1170 the past March 2010 high

1174 the May 2010 high

1181 the April 2010 selloff low

1185 late September 2008


1084 the September 2009 high

1078 the October range low

1070 the late September 2009 high

1044 the October 2008 intra-day high & the February 2010 low

1040 the May 2010 low

1020 the bottom of the late summer 2009 consolidation

946 from June 2009

NAS: Close 2243.60


2245 from July 2008

2278 the April 2008 lows

2273/2282 the bottom of January 2010 lateral high

2292 a low from January 2008

The 50 day EMA: 2311

2319 the September 2008 high

2326 the January 2010 high

2324 resistance from early 2008

2382 resistance from 2008

2412 a high in 2007

2434 the May 2010 high

2453 the August 2008 high


The 200 day SMA: 2239

2205 the November 2009 high

2185 to 2195 a support level in years: 2004, 2005’a consolidation, the January, March and July 2008 lows, and October 2009 high.

2177 low from March 2008

2169 the March 2008 closing low: Double Bottom

2168 the September 2009 intra-day high

2167 from the July 2008 intra-day low

2155 the March 2008 intra-day low

2100 the February 2010 low

Hot Topics for this Week

Warren Buffett lunch price tops US$2 million

Winning bid for lunch with Warren Buffett is US$2.6M, breaks online charity item record

The price of lunch with billionaire investor Warren Buffett has topped US$2 million once again, breaking a previous record for the most expensive charity item ever sold on eBay.

The final price of US$2.6M was announced Friday night after this year's online charity auction wrapped up at 10:30 p.m. EDT.

The amount is even pricier than the US$2.11M bid in 2008's Buffett lunch auction. Robert Chatwani, director of global citizenship for eBay, said it's the "largest ever single auction for charity that's been sold on eBay" in its 15 yr history. "I tell you, some people really want to have lunch with Warren Buffett, huh?" Chatwani said. "It's really exciting."

The lunch auction benefits the Glide Foundation, which provides social services to the poor and homeless in San Francisco. A Glide spokeswoman said Friday's winning bidder wants to remain anonymous.

"It means a lot for Glide. They have about a US$17M annual budget, and this is a huge part of that," spokeswoman Denise Lamott said. "We've been hurting from the economic crisis. This will help, and we're grateful."

The bidding started at US$25,000 last Sunday.

Last year, a Canadian investment firm paid US$1.68M to dine with Buffett at New York's Smith and Wollensky steak house. In Y 2008, a Chinese investment fund manager paid the US$2.11M. Buffett is chairman and CEO of Berkshire Hathaway Inc., and one of the world's most famous investors. His investment success and folksy wisdom have earned him a devoted following.

He has supported Glide ever since his late first wife, Susan, introduced him to Glide's founder, the Rev. Cecil Williams. Buffett has said the organization and Williams, who has led the nonprofit for more than 45 yrs, do a remarkable job of helping people recover after they hit rock bottom.

The date of the lunch will be determined later, once the winning bidder and Buffett agree on a time. ---Paul A. Ebeling, Jnr.

USA inventories rise for 4th month running

Inventories held by United States businesses rose for a 4th consecutive month in April while total business sales increased for a 13th month running.

The US Commerce Department said yesterday that inventories were up 0.4% in April after an upwardly revised estimate of a 0.7% gain in March. Total business sales rose 0.6% in April.

Analysts said the 1.2% May drop in retail sales, the largest in 8 months, will be worrisome if it is followed by further declines since consumer spending is 70% of total economic activity.

The April increase in inventories reflected gains of 0.5% in stockpiles held by manufacturers, increases of 0.4% in inventories at the wholesale level, and 0.2% in the retail level.

Total inventories had fallen for 13 consecutive months starting in September 2008. Businesses engaged in a massive liquidation of their stockpiles in an effort to trim costs during a severe recession.

The move away from slashing inventories to restocking has played an important role in supporting growth in the past two quarters ---Paul A. Ebeling, Jnr,

Moody’s calms EU bank debt fears

European banks would be able to absorb “severe” losses on their exposure to Greek, Portuguese, Spanish and Irish assets without having to raise additional capital, according to a new study from Moody’s, the credit rating agency.

The analysis, based on Moody’s own “stress test” of more than 30 European banks from 10 countries, may ease fears about the financial sector’s exposure to embattled EuroZone economies amid the specter of the Greek default.

“Based on our stress test, we believe that these banks would be able to absorb the losses that could arise from such exposures without requiring capital increases – even under worse-than-expected conditions,” said Jean-François Tremblay, one of the authors of the report.

European bank stocks have fallen sharply in recent weeks amid investor concern over the possible contagion effects of a worsening debt crisis in Greece as well as the credibility of the austerity programs being put in place across the region.

A US$1,000B (T) rescue package agreed by European finance ministers and the International Monetary Fund last month has failed to steady markets amid doubts as to whether governments in Greece, Spain and other countries would actually be able to enforce swinging cuts in public sector spending.

The Moody’s report does not disclose which European banks participated in its study. But it concludes that while those institutions surveyed are not “immune” against a wider systemic crisis, they already have adequate capital cushions to absorb losses even under “harsh” economic conditions.

The research also found that private sector debt was a more significant exposure for most banks than sovereign or public sector debt. ---Paul A. Ebeling, Jnr.

The EUR fell vs. the USD in New York markets Friday

The Euro fell against the Greenback Friday despite a weak report on US retail sales.

According to the US Commerce Department, retail sales tumbled 1.2%, the biggest and 1st drop since September, as consumers pulled back their spending from cars to clothing, analysts expected a moderate rise.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment increased to 75.5, the highest since January 2008, from 73.6 in the previous month.

The Euro dropped to US$1.2077 in late trading from US$1.2095 late Thursday.

The GBP fell to US$1.4514 from US$1.4702, and the USD rose to 91.60 Japanese Yen from 91.20 Yen.

In other late trading Friday, the USD rose to 1.0370 Canadian dollars from 1.0317 Canadian dollars, and gained to 1. 1505 Swiss francs from 1.1450 francs ---Paul A. Ebeling, Jnr.

BRIC: Brazilian Central bank governor says, stability essential to growth

Governor of the Brazilian Central Bank Henrique Meirelles stressed Friday that the economic stability is essential to the country's growth.

Meirelles said that the stability allows the planning to be expanded and enables the return of investments in the country's economy, which will lead to a higher productivity.

According to him, until 2003, when Brazilian President Luiz Inacio Lula da Silva took office, the productivity growth was low in Brazil, and from Y's 1995 to 2003, only 23% of the GDP growth in Brazil originated from the productive sector.

However, he added, from Y's 2003 to 2007 those figures jumped to 63% of the GDP growth due to the rise in the productivity.

Meirelles said maintaining economic stability is essential for the country to keep growing and defended the strengthening of the Central Bank to contribute in this process.

He also stressed the importance of maintaining the inflation rate target system, adding that investing in education, technology and innovation will contribute to Brazil's sustainable development....Paul A. Ebeling, Jnr.

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