The Invisible Hand

This is a post from the Share Investor forum. It's a bit lengthy but has very good information about the big boys, who "runs" the market.

Postings by Mossie first, followed by posting by Warren *********************************************************************
A bit of introduction.In my previous postings, I have often referred to the work of "the invisible hand". It's important to understand who they are; their thinking which prompts them to buy when others are selling; and their motivation.Their buying action is often revealed in charts, displayed in such formations that are collectively called bottoming out or reversal patterns. Some if these individual formations are called Inverse Head and Shoulders, Cup and Saucers, Double Bottoms or "w" shape, extended bottoms or "u" shape, falling wedges etc.If you are not certain what they mean, I have linked to a glossary of technical terms http://www.asiachart.com/glossary.html. If you want fuller explanations, there are many good books around.

Why do prices gradually stop falling? Invariably, when the market has fallen a great deal, the stock becomes attractive to the "invisible hand". They are people who can see tomorrow's values TODAY!They step in to buy and absorb the selling and hence, arrest the fall of the share price. Over time (six months or more), their buying action creates bottoming out formations that I have mentioned above.Who are they? They are insiders, deal makers, fund managers; people who can see VALUE in the down and out company that nobody else can.Collectively, I also call such people SMART MONEY (as opposed to dumb money). They are legions of deal makers who have made their piles and now become players. They fund projects. They know balance sheets and they know how to restructure businesses. They know how to restructure debt, create holding companies to place their debt etc.They are the brains behind every operation. They employ lawyers,stock-brokers, bankers, accountants to do their legwork and due diligencebefore any action is taken.Now that the introduction to the "invisble hand" is done, I will begin my segment to "stalking the prey" using some life examples like Pertama.Do look out for them.

Continuing my thread, in order for the "invisible hand" to stalk his prey (stock), the stalker (buyer) has to think like the prey(the stock).Before I begin proper, all I am doing is share some thoughts of the stalker. But please, I don't claim to know the answers and I value all of your contributions.

In this instance, I am stalking Pertama. To think like the prey, it's important to understand J Harvey, the business-man. What makes him tick? Isn't he aware of the risks? Isn't he aware that S'pore is renowned for high rents? What is he going to do to preserve margins?Isn't he aware K mart failed in the past? Isn't he aware that there is competiton in Courts, Safe, Pennslyvania House, IKEA etc etc? How does he intend to create his own comparative advantage against the others.How what he do to survive against stiff competition in Australia? Was it by pricing competitively, or raising service levels, or a combination of both? What did he do to compound 30% in his share price over six years? What MARGIN of SAFETY do I the stalker have, if I catch my prey and realise that it's not exactly what I caught (that is, got it wrong). Is there intrinsic value in the prey? Is the cash of $27million sufficient as a buffer? What does George Goh of Ossia know?? He is, after all, a FELLOW STALKER!I am not disputing your concerns on Pertama. But I feel that if I can answer those questions and put myself in Jerry Harvey's shoes, I know what are the pitfalls and, therefore, prepared to ride out the business risks with him.

You see, the stalker may be monitoring SI and all our postings.After all, SI is becoming one of the main financial portals. It is all part of the stalker's game to drive up the share price, entice ALL THE SHORT TERM PLAYERS INTO THE FRAY AND then DUMP the shares to you.Please remember prices condition people's minds. If a stock price goes SOUTH, people say "get me out". But if prices go NORTH, everybody, house traders etc will shout "Blood" and go into a feeding frenzy.(Remember, most of the time, the stalker spends most of his/her time waiting, studying, seeking information about the prey before he pounces). Again, I profess not to know much about the retail industry and I value your feedback. Your input have provided gaps in information that I need to bridge with people who are in-the-know.

However, my sources in Australia have told me that HN practices an innovative franchise arrangement that allows staff to share in the profits of a store. Unlike a traditonal franchisee relationship, staff are encourage to enrol as franchisees without the need of coming out with their own capital. This instantly gives the potential franchisee a sense of ownership without capital being a restrictive factor.In Australia, HN's staff are legendary in their service commitment. Why? Because they NO longer see themselves as staff but as OWNERS of their own businesses.Next, they are coming with an innovative financing scheme that allows the customer to pay the same price for products regardless of whether the purchase was made by cash or hire purchase.

These innovative schemes have been practised in Australia for years but, I guess, have not been followed in Asia.Also, my friends in Australia told me that HN's staff practice a motto: do all you can to get the customer back into your shop. What do I mean by that? If you had purchased a phone from vendor A (somebody other than Pertama), and if that phone breaks down, they are prepared to take in that phone for repairs at no cost. How about that for service? Suggest that to Singtel or M1? They will flip!!My point for sharing is this: competition is everywhere and in every industry. You and I are in business and we know competition is a given. But it takes somebody who thinks totally "out of the box" to rock the very foundations of that industry. The person who keeps questioning the assumptions and is an out-of-box thinker constantly innovates and keeps the customer coming back into the shop.Jerry Harvey is one such visionary who I feel comfortable to bet on. He has the track record to back it up.Frankly, I am looking forward to their arrival because I am quite tired of the poor service quality that I have been receiving. Service level in S'pore needs to raised. One way of raising service level is to make employees feel like owners through options, franchise arrangements that do not require them to come up with capital etc.

Since I am on this topic, let me cite another example. Today, I went to Funan looking for some software. The chap who served gave me smiles and took pains to answer all my questions. I thought that was great. But the moment the sale was made and he left me to the cashier, the cashier's rudness undid all the good impressions created. My guess is that the salesperson is incented by commissions but the cashier wasn't. And it really showed.

In this posting, I will be introducing another strategy that is the favourite of "the Invisible Hand".This strategy can best be described as using "Other People's Money" or OPM. OPM is centred around the principle of LEVERAGE, making your money work hardest for you, doing more with less, getting more returns from $1 of capital.If you are in business, you will be familiar with leverage. The most successful businessman use OPM and, I daresay, your success or failure as a businessman would depend on whether you mastered the art of using OPM. The most basic form is borrowing from banks for capital to start a business, mortage to buy a house etc. Seldom do you buy a house with 100% of your capital. To get the "maximum" return possible, you use a combination of your own capital and other people's money (in this case, bank debt).

The more advanced form of using OPM is practised in the stock market. How is this so, you may ask?Well,when you list your company, you add another currency. That currency is the stock price. Having a company listed and having that new currency (stock price) is equivalent to adding another weapon to the stalker's arsernal to negotiate deals, issue derivatives (like warrants), serve as collateral to banks for addtional debt and so on. Also, having a public listing allows a stalker to "borrow" from the public by issuing rights issues to the public, enticing them with warrants and other freebies. What I have stated above is nothing new to most of us. What I have done is encapsulated the principal of leverage.

However, understanding how the stalker uses OPM (leverage) in the stock-market will, hopefully, prevent you from falling into one of the stalker's schemes. This is one of the hardest concepts to explain in a forum such as this. So please ask me to explain any concepts that are unclear. I look forward to learning from one another. Yes, we need constant reminding of the workings of the "invisible hands". Remember, money is always made on the way down. "Invisible hands' are not charitable organisations. They will not buy and chase prices up. Why? Because that will only benfit every one else. They BUY only when prices fall. Why? They are buying somebody else's losses (or cut losses). "Invisible hands" understand the psychological effect of what prices do to people. They know that prices condition people's minds. They know when punters are disinterested when prices fall and how punters will chase and get all excited when prices move up. They know how to use this info to amke $$ for themselves.I make no apologies for repeating this message again and again. Forumers must be made aware how the Mr Market robs those who was disinformed!!A monumental posting on the IH written by sifu Warren. Reproducing here for archival purpose.

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Price & Volume studies

Elle,I thought I'd add my 2.5c worth of how I use price and volume studies to detact the action of IH. I use the charting system by Bridge Information Services where they have many different programmes that allow the manipulation of data to show whatever configuration I might want. Be it intra-day charts for 1 day to 21 days, daily charts with price feeds for one year, weekly charts for price feeds over 5 years and monthly charts for upto 12 years, or howsoever much data there exists for that particular stock. All these price data is accompanied by volume figures which get charted at the bottom. They also have the ability to chart volumes (and this one I like the best of all) , along various price bands that gets displayed on the lefthand side of the chart.Armed with that capability, I go hunting in the market, hoping to stalk the path taken by IH.My reckoning is if IH is active at a particular stock, his presence will be felt by the amount of volume that changes hands along a price band. You see, whenever collection/distribution takes place, it is done based on price, not time. If one decides to collect millions of shares one will naturally do it in within specified price limits, and continue to do so (of course taking market sentiment into account) irregardless of time taken.

Now, for the collection campaign to be successful, there must be enough volume passing through within those price limits. Not enough and the campaign maybe just a minor exercise. Plenty of volume changing hands and the campaign is usually a prelude to some future price assault.What I'm looking for in the chart is to find price congestion bands where large volumes have changed hands. Now if the price bands are near the top of the chart and volumes are high, you can bet that active DISTRIBUTION is taking place. Naturally, for that to have occurred, some previous collection must have taken place some time back. The result will be market peaks which could take the form of head-and-shoulder, double tops, triangles etc, collectively known as rounding tops. After sufficient stock has passed from strong to weak hands, price breakdowns occur, and the sheer weight of all that stock passed at the highs will cause prices to weaken once the bear market begins.The converse is ACCUMULATION. Look for price congestion bands near the bottom of chart and where prices, after a long and deep plunge, begin levelling off and seem to meander along a somewhat sideways pattern. The price ranges are tighter and volumes, while not especially high, are significant. There will even be occassions when the chart 'breaks' and prices drop down to new lows for a while, but only to come back within the observed price congestions.

The result will be market bottoms which could take the form of head-and-shoulder, double bottoms, rectangles etc, collectively known as rounding bottoms. After sufficient stock has passed from weak to strong hands, price breakouts or bull flurries occur as IH triggers the start of a new uptrend. With sufficient stock firmly tucked away in firm hands, the upside thrusts (initially on high volumes), will continue as IH walks the stock to whatever level desired.So large volume at the highs means distribution, while large volumes at the lows signify collection. That simple? Not really. There are many other tricks they employ (Carol had highlighted some of these in this thread earlier on) to throw the scent off and hide their tracks. What I use then is the weekly and monthly price/volume tables to determine their actions. Bear in mind that action is being taken around price limits, so you can spot that clearly when the price ranges start getting narrower and narrower such that theprice range between highs and lows on the monthly table tighten.

I look for a clear stretch of time when this occur and add up the volume figures, and if these add up to significant %age of the total issued capital of the stock, I start getting excited. For I know that the IH had been active, and I better be on guard for a new (and unexpected) trend will emerge.Naturally, if congestion price ranges were near the lows and large volumes had changed hands, the next trend will be upwards. I investigate more of the stock, conducting other TA studies like MACDs, RSI, Stochastics to determine if the timing is ripe for the planned move. What usually is the missing piece from this jigsaw puzzle is the TRIGGER. That is where, with the benefit of FA and an active imagination I set about scenario planning likely outcomes. I map out what sort of corporate actions would set up the stock for a market re-rating. Oddly enough, these usually produce outcomes that eventually become the subject of market rumours. Once done, I plan my entry into the stock and await the IH to show his hand.

Folks, there you have it, my personal method to track and spot winners and losers in the market. I hope it could be of use to you, for it has worked well for me. Thanks for the patience in reading this posting.Warren.