European shares brush off German Governement worries

Today’s Overview:

• European shares brush off German Governement worries
• Volkswagen raises mid-term outlook for group profits
• Wall Street takes off ahead of Thanks-Giving week
• Marvell M&A
• EBA moves to Paris

After the failed Jamaica-Coalition talks the German DAX and Gold tumbled down to 12945 and 1276 respectively. The shock was short-lived and the Index move up to the 13030 in the afternoon, finally closing at the 13060 mark. The big movers in the German market were Volkswagen rallying up 2,78% and RWE incurring a loss of 1,58%. Volkswagen raised its mid-term outlook for group profit and sales on Monday, sustaining investor hopes that the carmaker can further its recovery despite shouldering billions of costs for its electric-car offensive. The world’s largest automaker by sales announced on Friday more than 34 billion euros ($40.06 billion) of spending on zero-emission cars and digital mobility services by the end of 2022, revising up an investment pledge for more than 20 billion euros made in September. VW said rebounding emerging markets such as Brazil and Russia and demand for new VW-badged sport-utility vehicles (SUVs) may together lead group revenue to exceed the 2016 record of 217 billion euros by more than a quarter by 2020. On Monday evening German chancellor Angela Merkel said she would prefer fresh elections to ruling with a minority government after talks on forming the three-way coalition collapsed. This resulted the DAX to open on the lower-end and the Euro Sterling to reach an 8-day low.

Wall Street managed to make some progress yesterday, as they commenced a new week. At the close of trading, the Dow Jones Industrial Average was ahead roughly 72 points; the broader S&P 500 Index was up three points; and the technology heavy NASDAQ was higher by nearly eight points. Market breadth was positive, with winners ahead of losers on the NYSE. From a sector perspective, the industrials and the technology issues pressed ahead, while the energy and utility names retreated. Meanwhile, there was just one notable economic report released this morning. Specifically, the Index of Economic Indicators advanced 1.2% in the month of October, which was quite a bit better than had been widely anticipated. Tomorrow, existing homes sales for the month of October are due to be released. Technically, the stock market has been holding up reasonably well lately. Looking ahead, with the year drawing to a close, it remains to be seen if the bulls can find the strength to produce a holiday rally.

In further news the Chipmaker Marvell Technology Group Ltd said on Monday it would buy smaller rival Cavium Inc  for about $6 billion, as it seeks to expand its wireless connectivity business in a rapidly consolidating semiconductor industry. Shares of Marvell were down 0.8 percent to $20.14, while Cavium was up 7 percent at $81.14 in early trading.

The European Union is relocating two of its key agencies from London to Amsterdam and Paris post-Brexit. On Monday, the EU announced that the European Banking Authority (EBA) will be moving to Paris an early sign of the potential costs for the United Kingdom of leaving the political and economic union.

Todays Earnings Calendar:

• GameStop Corp.
• Guess? Inc.
• HP Inc.

Todays Economic Calendar:

• Chicago Fed National Activity Index
• Existing Home Sales

ProSiebenSat1 stock down 13%

Today the DAX fell to the 11900 point mark and is accounting for a loss of 1,60% one hour before close, standing at the 11930 point mark. At this time no stock is in the green range with the biggest loss coming from the German Media Behemoth ProsiebenSat1 with a booming 13% loss. Investors seem to be looking to invest in assets deemed safe such as Gold, which is up 0,6%.

ProsiebenSat1 warned that TV advertising revenues in German-language markets would decline in the third quarter and said it may look for external investors. The top German free-to-air broadcaster had already cut its TV advertising market outlook twice this year but said as recently as earlier this month it still expected a bounce-back in the second half of the year. Many major companies that rely on ad revenue have reported spending cuts by makers of fast-moving consumer goods such as Unilever, Nestle and Procter & Gamble – the world’s biggest advertisers – as they respond to weak global economic growth. Goldman Sachs downgraded ProSieben to “neutral” from “buy”. “We believe shares will remain under pressure until the first signs of market improvement (this is likely to affect other ad-exposed stocks as well),” it wrote. ProSieben shares were down 11.6 percent to 28.90 euros by 0820 GMT, at the bottom of the German blue-chip DAX and dragging the European media index down 2.5 percent.

Following a brief early tease to the upside, which saw the Dow Jones Industrial Average rise close to 50 points in minutes after yesterday’s market open, further reflections on the widespread damage caused by the hurricane that ravaged Houston and other parts of the southeastern portion of Texas over the weekend, the equity market quickly turned lower. As has been the case for much of this year, however, the pullback was relatively mild, with the Dow continuing to trade between 20 and 40 points lower, while the S&P 500 held just below the breakeven line. Breaking things down, the most of the morning saw more stocks decline than rise on the NYSE, although the differential was modest. One outlier was the NASDAQ, which gained nicely during this time. As for individual stocks, the Dow was pushed lower by a multi-point early decline in shares of Travelers. Energy prices also faltered on the damage brought on by the hurricane, with driller Schlumberger pulling back, and nearing a 52-week low in the process. As to other trading influences, with a heavy week of economic news before us, headlined by this Friday’s reports on employment and unemployment, along with key data on manufacturing, Wall Street was also consumed with the latest political news, where, this week, President Trump is expected to push his tax reform package, the timing of which could be in some jeopardy if costs to pay for the hurricane balloon in the months to come. Also, with pivotal data due on the economy, some focus will logically turn to the Federal Reserve, as it prepares to meet this month. Meanwhile, after this mid-morning Dow reversal, stocks steadied somewhat, so that as we neared the noon hour in New York, the blue-chip composite was nearing breakeven, while the NASDAQ’s gain was increasing. Then, as the afternoon got under way, stocks slipped anew, and within an hour, or so, the Dow and the S&P 500 were well into the red, while the NASDAQ’s gain, once 27 points, had eased to nine. Joining Schlumberger in the red, meantime, was food giant General Mills , with its setback bringing that quality issue to within a point of a new low. Stocks then stayed range-bound into the late afternoon, before some last minute buying almost wiped out the Dow’s deficit. Even so, at the conclusion of the session, that composite was off by only five points. A token gain, meantime, was tallied by the S&P 500 Index and a 17-point advance was inked by the NASDAQ. In the end, much of the day’s focus was on Hurricane Harvey, which was crippling the energy industry in Texas. As for the ultimate cost of the tragedy, above and beyond the human toll, it will be steep, with a partial offset from rebuilding. The potential of such rebuilding, in fact, did help one Dow stock to a hefty gain on the day, as The Home Depot jumped nearly $2.00 a share. Elsewhere, there was little excitement on this Monday in late August. Looking ahead to a new day now, we see that stocks were tumbling across Asia overnight, on jitters about North Korea that emerged late yesterday, while in Europe, the major bourses are now trading much lower, as well, on those same fears. In other markets, oil is little changed; gold, up sharply in recent weeks, is soaring again after North Korea launched another missile; and Treasury yields are down notably in a flight to safety. Finally, our futures are moving decidedly lower at this early hour, with the Dow suggesting an opening loss in excess of 100 points.

Wall Street suffers amid White House instability

The Dax is finishing off the weak on a low. Pre-Markets brought down the DAX to the 12100 point mark. This bearish sentiment is stained by the weak U.S. performance, which has quoted the biggest loss in 3 months, with what seem to be a big correction in the U.S.

on Wednesday, we saw the stock market break to the upside initially, before giving back much of that gain later in the day on political concerns at home, notably the furor growing out of the President’s reaction to last weekend’s events in Charlottesville. An extension of these latter worries pulled equities down early yesterday and did so sharply. Also worrying traders was the flow of earnings reports from additional retailers. In all, the Dow Jones Industrial Average, off moderately at the open and during the first half hour, fell further as we proceeded into the middle stages of the morning, surrendering 125 points at its low. In part, this reaction came in spite of the release of better-than-expected earnings from Dow component Wal-Mart Stores. One analyst commented that this was not a blowout report. Also, the big chain reduced its 2017 guidance. In total, the second quarter, a good one, in general, for Corporate America, has been only a mixed affair for the nation’s retail establishments. As critical as earnings continue to be, even as reporting season draws to a close, it is the political situation in Washington that is yielding most of the shifting sentiment. On point, the Street has had to contend this week with the fallout from the President’s dissolving of two advisory forums made up of some of the nation’s top CEOs, a number of whom had announced departures in the past 48 hours. Those departures reflected dissatisfaction with Mr. Trump’s aforementioned assessment of events in Charlottesville over the past weekend. Things worsened as we moved into the afternoon, with the Dow’s early loss of some 125 points ballooning to just over 185 points by the early afternoon. The NASDAQ, under even more pressure, fell back by 90 points as the session moved long, with losses spread all across the board. And then after word broke that there had been an attack in Barcelona killing 13 people, stocks fell further into the close. Meanwhile, as to Washington, stocks plummeted later in the day after word spread that Gary D. Cohn, the President’s chief economic advisor was considering leaving the Administration. He quickly denied this story. Still, the damage was done, and the market continued to descend, falling to the day’s low at the close. In all, the Dow shed 274 points; the S&P 500 lost 38 points, or more than 1.5%; and the NASDAQ toppled at a session-worst 123 points, or 1.94%. Losses of well over 1.7% were suffered by the S&P 400 and the Russell 2000. Among individual groups, all 10 of the equity sectors ended lower, with just the utilities failing to fall a full 1%, or more. The telecom, technology, and basic materials groups did the worst, on a day that saw declining stocks overwhelm gaining issues with the late selling rush.

Alibaba has another blockbuster quarter

After a strong week, the DAX is slowing down today and losing some of its momentum, quoting a downward movement. The German Index started out strong but reverted back to the mean very quickly. 2 hours before close, the German DAX is down 0,20% from its previous close. A reason for this cool down in the German markets might be that German investors are on their tiptoe amid the AirBerlin and Lufthansa deal. Oil and Gold are down 0,39% and 0,22% respectively.

In the U.S. the bulls began trading yesterday with a new head of steam, as the leading averages all moved out to impressive early gains. On point, after we had passed the first half hour of market action, the Dow Jones Industrial Average had rung up a gain of some 70 points. Modest rallies also were under way on the S&P 500 and the NASDAQ. Also, yesterday, unlike Tuesday, the S&P Mid-Cap 400 and the small-cap Russell 2000 were comfortably in the black, as well. As to the Fed minutes, Wall Street was looking for clues about the Fed’s interest rate intentions. The report, meantime, suggested that there was now a split developing on the Fed regarding whether to tighten the monetary reins again this year, citing concerns about low inflation balanced out by improving GDP growth. Our sense continues to be that the Fed will raise rates just once more in 2017, and that such an adjustment might not come until late this year. Meantime, the market’s advance remained in place as the morning wound down, with the Dow’s advance holding in the 60-85 point range as noon arrived in New York. The NASDAQ, up haltingly early in the session, strengthened as the afternoon approached, with its advance surpassing 25 points. The stock market then stayed near the upper levels of its range for the next hour, or so, but ill winds politically, as other companies now have decided to abandon the President’s manufacturing council following last weekend’s violence in Charlottesville and the Administration’s changing response to it, fueled some selling as the 2:00 PM hour approached. In all, the Dow’s advance went from more than 85 points down to fewer than 30 points at one time. Still, the market had a generally strong tone to it, which suggested at the time that unless the minutes held some unwanted surprises, the day would end higher for stocks. The Fed minutes had little impact, with stocks initially rising then pulling back, with the Dow’s gain at one point nearly evaporating. Our thinking is that this Fed release will have little meaningful impact, with political headwinds probably more of an influence at this moment on market behavior. Traders, meantime, then backed off somewhat as we headed into the close, with the Dow ending the session ahead by a modest 26 points, while the NASDAQ, which waxed and waned late in the day, finally ending matters up by 12 points. Meantime, the Russell 2000, once ahead strongly, edged down a trifle at the conclusion of the day’s action.

Walmart has poured billions into its e-commerce and tech to integrate its digital business with its stores, and the strategy is paying off handsomely. The retailer said comparable sales at its 4,000 U.S. stores, a $300 billion a year business, rose 1.8% on the year in the three months to June, well above Wall Street expectations for 1.3% according to Consensus Metrix. That gave Walmart U.S. its 12th straight quarter of growth. More crucially for the world’s largest retailer, shopper visits also increased, rising 1.3% and showing that Walmart’s massive investments in features like grocery curbside pickup, in-store order retrieval, its own mobile payment app and the expansion of its online assortment are spurring shoppers to come into stores. In an effort to be able to compete with Amazon, Walmart made some big investments in its e-commerce division. But investments, along with more aggressive pricing generally, cost money. The company disappointed Wall Street with a profit forecast of 90 cents to 98 cents per share for the current quarter, compared with the 98 cents analysts expected. Wal-Mart Stores shares, which had been on a tear of late, slipped 1.5% in pre-market trading. “Sales growth is coming from across the business – including stores, e-commerce and a combination of both,” CEO Doug McMillon said in a statement. The chain also got a boost from its massive grocery business, which generates 56% of its revenue. Food saw its best quarter in five years, aided in large part by an overhaul of the fresh food business that aimed at better competing with the likes of Whole Foods Market, which is being acquired by Amazon. Other bright spots for the company included the performance of Sam’s Club, which chronically underperforms its rival Costco Wholesale. Comparable sales, a metric that strips out the impact of newly-opened or closed stores, rose 1.2%, but shopper traffic was up 2%. Further afield, nine of Wal-Mart Stores’ eleven markets saw comparable sales increases, including a first rise in sales in three years at its Asda unit in the U.K. Still, the investments took a toll: Walmart earned $1.08 per share, slightly above $1.07 expected by analysts and roughly on par with a year-ago levels. Total sales were $123.36 billion, a hair above the $123.15 billion markets were expecting. Short after opening Wal-Mart is down 2,20%

Ireland’s finance minister said the European Commission’s demand that Dublin collect up to €13bn in back taxes from Apple was unjustified, in an interview with Germany’s Frankfurter Allgemeine newspaper. The European Commission ordered Apple to repay taxes to Ireland after ruling last year that the US technology company paid so little tax on its Ireland-based operations that it amounted to state aid.

Cisco reported FY4Q17 earnings on 8/16, after the close. Revenue and EPS came in as expected. Looking at revenue by products, there are puts and takes but nothing major to note. Gross margin for the quarter came in at 63.7%, or 20 bps lower than expectation, while non-GAAP operating margins came in 40 bps ahead of expectations at 31.5%. However, guidance is a tad weak. FY1Q18 revenue and EPS are about in-line, but non-GAAP gross margin was guided to 63-64% vs. 64.1% consensus, and non-GAAP operating margin was guided to 29.5%-30.5% vs. 31.3% consensus. Overall, the quarter is uninspiring, which is reflected in the stock trading down 2.5% in the aftermarket on high volumes.

Alibaba had another blockbuster quarter of business as its profits almost doubled. The Chinese e-commerce giant reported net profit of 14 billion RMB ($2.1 billion) for its recent quarter that finished June 30 — that’s up 96 percent year-on-year. Total revenue grew 56 percent to reach 50.2 billion CNY ($7.4 billion), easily exceeding estimates, with the firm reporting 466 million active buyers over the previous 12-month period. Alibaba’s core commerce business brought in the majority of revenue — 43 billion ($6.4 billion) — but its 58 percent annual growth was topped by its smaller business units. That’s a sign of the future, according to CEO Daniel Zhang. “Alibaba had a strong start to fiscal 2018, reflecting the strength and diversity of our businesses and the value we bring to customers on our platforms. Our technology is driving significant growth across our business and strengthening our position beyond core commerce,” Zhang said. Of those units, its aggressive cloud computing business, which TechCrunch profiled earlier this year, was one of the more impressive. It grew 96 percent to reach 2.4 billion RMB ($359 million) in revenue while losses narrowed to 103 million RMB, or $15 million. The company noted that its cloud computing customer base passed one million for the first time. Alibaba’s digital media and entertainment business, which includes video service Youku Tudou, saw revenue jump 30 percent to four billion RMB ($602 million). The company has spent the past year expanding its business outside of China, which this quarter again shows accounts for the lion’s share of revenue, and the results are beginning to bear fruit. Alibaba said its international e-commerce services reached “meaningful scale” with 2.6 billion RMB ($389 million) in revenue. It credited Lazada, its business in Southeast Asia which it recently invested a further $1 billion in this year, and AliExpress for increasing revenue by 136 percent from last year.

 The Earnings Outlook for tomorrow are Deere with an Actual EPS of 1,95, Foot Locker with an EPS of 0,902.

Todays Economic Calendar:

I) Jobless Claims

II) Industrial Production

III) Leading Indicators

IV) Fed Balance

V) Money Supply

 

 

 

Ryanair files anti-trust complaint

1. DAX Review
2. U.S. Review
3. Ryanair files anti-trust compliant
4. Amazon 16 billion bond release
5. Gigaset Earnings
6. Economic Calendar

In case you missed out Elliott Wave Technical Analysis Report, make sure to catch up on it.

The DAX is recovering from its recent losses. 3 hours before close the German Index is up by 0,83% reaching the 12278 point mark. With this actual form it does seem that the DAX will be breaking its August high. There are no major international signals, as the Brent and Gold seem have to stabilized at 50 USD and 1270 USD respectively.

Following a strong equity market rally on Monday, as simmering tensions eased a little with North Korea, and fears of an imminent armed conflict with that nation lessened to a degree, Wall Street calmed down a bit yesterday morning, too. Indeed, after a small early extension to the rally in the first few minutes of yesterday’s session, stocks faltered somewhat within the first hour of trading, and an early 35-point gain in the Dow Jones Industrial Average quickly faded, with that blue-chip composite falling into the red during the second hour of trading. The other averages went into the red, as well. Meantime, a big individual story, one day after the shift away from North Korea, was at giant home improvement retailer The Home Depot, which issued quarterly results yesterday. And while the top and bottom-line results were better than expected, the gains, and the raised full-year forecast did not satisfy the Street, as that stock tumbled, losing nearly 4% of its value early on. The loss in HD turned the Dow negative, costing that index some 40 points. However, after that initial turn down by the Dow, that index returned to the black shortly thereafter. Also in the retail category weak earnings hurt Coach stock in early dealings. Still, the resilience of the bulls was evident yesterday, with that late-morning attempted comeback in the Dow. Meanwhile, in other market moving news, the Commerce Department reported that retail sales had posted an increase of 0.6% in July. That was above the 0.4% rise forecast. Also, June’s result was pared back from a rise of 0.4% to one of 0.3%. Excluding motor vehicle sales, core retail spending was ahead of 0.5%. Here, too, the gain was above consensus. Contributing to the pickup were sales of furniture and home furnishings, and building materials. Sales over the Internet soared, meantime, advancing by 1.3%. The market remained in somewhat of a mixed pattern as the noon hour arrived in New York, with the Dow near the breakeven line, and with the S&P 500 and the NASDAQ each off incrementally. The small-cap Russell 2000 and the S&P Mid-Cap 400 also were in the red, but in a more meaningful way. As has been the case recently, it was the retail group suffering once again, with steep losses in some high-profile names, such as Under Armour. Also, more stocks were lower than higher on the Big Board at that time, by a count of two-to-one while among the core groups, energy, basic materials, and consumer stocks were leading things lower. The weak tone persisted through the middle of the afternoon, and while the Dow held near the breakeven line, and the large-cap S&P 500 and the NASDAQ were just down incrementally, the smaller indexes and the advance-decline ratio were notably off. It was, to that point, a somewhat sobering day, even as the economy continued to show relative strength and the news out of North Korea was somewhat reassuring, for now. The equity market then would firm up slightly as the session wound down, but the overall weaker tone would persist into the close. When all the numbers were in, the Dow, with some last-minute selling, would end the session ahead by just five points; the S&P 500 would conclude matters just about where it began them; and the NASDAQ would end the day off seven points. Losing stocks easily led gains, though, and the small- and mid-cap categories showed noted weakness.

Germany on Wednesday rejected a claim by budget airline Ryanair of a conspiracy behind efforts to keep bankrupt rival Air Berlin afloat until a new owner is found. The Irish airline lodged a complaint with European Union competition authorities after Air Berlin filed for bankruptcy protection and then got a 150 million euro ($177 million) loan from the German government. Ryanair said late Tuesday there’s “an obvious conspiracy” between the German government, Lufthansa and Air Berlin. The loan will help Air Berlin to keep flights running for the next three months, while it is negotiating a possible deal with Lufthansa and another unnamed carrier, reported by German media to be easyJet. A spokeswoman for Germany’s Economy Ministry said it was “absurd” to claim that the rescue package had been staged. Beate Baron told reporters in Berlin that the government expects the loan to Germany’s second-largest airline to be repaid. Air Berlin filed for bankruptcy protection Tuesday after its main shareholder, Abu Dhabi-based Etihad, said it would make no more financing available following years of unsuccessful turnaround attempts. The airline, which carries some 80,000 people a day mostly on short-haul destinations, made a loss of about 782 million euros last year.

Amazon.com Inc. on Tuesday completed a $16 billion bond deal to fund its planned $13.7 billion acquisition of Whole Foods Market Inc. The issue came a day after ratings agency Moody’s Investors Service assigned the deal a Baa1 rating and revised Amazon’s credit outlook to positive from stable. S&P Global Ratings assigned the credit a higher rating of AA-minus last week. Amazon raised $16 billion in a seven-part offering that included a 40-year tranche, underwritten by Bank of America Merrill Lynch, Goldman Sachs and J.P. Morgan Chase. As expected, the bonds priced at the tight end of guidance, but the new concessions were still attractive, according to research firm CreditSights, which had upgraded its recommendation on Amazon’s bonds to outperform from underperform based on the initial price talk. Initial price talk on the 10-year tranche was 110 basis points above comparable Treasurys, which later tightened to Treasurys plus 90 basis points. CreditSights analysts led by Jordan Chalfin said at the price, the notes were still a bargain.

Gigaset reported a drop in first-half sales and EBITDA but reiterated its outlook for higher sales over the full year, thanks to growth in new market segments like smartphones. In the first half, smartphone revenues rose to EUR 3.7 million from EUR 1.1 million a year earlier, following the launch of two devices. Over the first six months of 2017, total revenues fell 3.6 percent to EUR 128.3 million due to a continued contraction in Gigaset’s main market, cordless home phones. Sales in the consumer segment fell to EUR 98.1 million from EUR 110.7 million a year ago, while the business market grew 25.7 percent to EUR 25.4 million, driven by strength in its home market Germany.  EBITDA fell to EUR 5.7 million from EUR 10.6 million in the first half of 2016, hurt by increased spending on marketing and R&D, including the ramp-up of mobile sales. Excluding the extra EUR 4.6 million in costs, EBITDA would have been largely stable for the full year, Gigaset said. Free cash flow was a negative EUR 24.1 million versus an outflow of EUR 13.1 million a year earlier.  Despite the lower H1 results, Gigaset maintained its outlook for higher revenues over the full year, with a low double-digit million euro increase thanks to the expanding smartphone business. Core EBITDA is expected to reach EUR 15-25 million over the year, while cash flow should be just a mid single-digit million euro outflow.

Today Economic Calendar:

1. MBA Mortgage Applications
2. Housing Starts
3. Atlanta FED Business Inflation Expectations
4. EIA Petroleum Status Report
5. FOMC Minutes

 

Technical Analysis: Elliott Waves

In todays Weekend Special Edition we will be discussing Elliott Waves. For some technical analytsts Elliott Waves are a vital tool. As any investor the Technical Investor will want to have a reliable forecasting method. The possibility of easy profits by forecasting the market has been the underlying force that motivates so many investors. Elliott’s market model relies heavily on looking at price charts. Practitioners study developing trends to distinguish the waves and waves structures that we will refer to later in this article. The application of the Wave Principle is a form of pattern recognition. To obtain a full understanding of the Wave Principle including the terms and patterns, I recommend Elliott Wave Principle by A.J. Frost and Robert Prechter.

The Elliott Wave Theory was introduced by Ralph Nelson Elliott during the 1930’s. Elliott a full-time accountant believed that stock trends follow a repeating pattern which can be forecasted both in the long and in the short term. The Elliott Wave Theory was published in his book “The Elliott Wave Principle” in 1938. Using data from stocks he concluded that what seems to be a chaotic movement, actually outlines a harmony found in nature. Elliott’s discovery was completely based on empirical data, but he tried to explain his findings using psychological reasons. The main principle of this theory was that a pattern consists of eight waves as can be seen in the Image below.

It is visible that Wave 1, Wave 3 and Wave 5 follow the cyclical trend while waves 2 and 4 correct the underlying trend waves A, B and C correct the overall trend , while Wave A and C follow the correction and Wave B resists. Elliot observed that each wave consists of smaller waves which follow the exact same pattern as is shown in the Image below, thereby forming a super-cycle. The numbers in the Image represent the number of waves when counted in a different scope. For example the whole diagram represents two big waves, the impulse and the correction. The impulse consists of 21 usb-waves which in turn consist of 89 smaller waves, while the Correction wave consists of 13 sub-waves, which in turn, consist of 55 even smaller waves. As can be observed all of the above numbers are part of the Fibonacci series. According to the Elliott wave theory, when Elliott first expressed his theory he was not aware of the Fibonacci series.

Elliot believed that there are nine cycles, of different durations, the bigger of which, is formed by the smaller ones. From the largest to the smallest cycles there are:

1. Grand supercycle: multi-century
2. Super-Cycle: multi-decade (40 to 70 years)
3. Cycle: one year to several years
4. Primary: a few months to a couple of years
5. Intermediate: weeks to months
6. Minor: weeks
7. Minute: days
8. Minuette: hours
9. Subminuette:minutes

The duration of these cycles varies from minutes to decades. Each pattern (cycle) is outlined by the following rules:

1. The Second Wave cannot be longer than the first wave and cannot return to a lower price than that set at the beginning of the first wave
2. The third wave is never the smallest wave compared to the first and the fifth.
3. The fourth wave does not return to a lower price than the price found at the end of the first wave. The same applies for wave a.
4. Usually the third wave shows a greater dynamic, except in some cases where the fifth wave is extended (the case when the fifth wave is made up of five smaller waves)
5. The fifth wave usually leads to a higher point than the third.

When it comes to the interpretation of the waves we will present a short overview of the general dynamic of the waves. The first wave is the “new beginning” of an impulse. Opening a position at this point will be the most profitable scenario. It is difficult to differentiate it from a correction of a previous downtrend, and therefore it is not a powerful wave. Most investors prefer to wait for better timing. The force behind the wave pattern is the number of investors that decide to enter and exit the market at a given time. After some initial winnings, investors decide to exit the market as the price becomes higher, and the stock becomes overpriced for these few investors. This behavior translates in the second wave. As the price begins falling, the stock becomes more attractive for a great number of investors that regretted not having entered the market during the first wave. As the price begins falling, the stock becomes more attractive for a greater number of of investors that regretted not having entered the market at a higher price. Those who entered in the beginning of the wave, are satisfied with their winnings, and have most likely exited the market. Investors realize that the price has reached a level making it difficult to attract any further investors. Demand begins falling, which leads to the fourth wave. Major investors are out of the market, waiting for the end of the fourth wave, to enter again and reap in the profits of the fifth wave. It is important to note that the fourth and the fifth wave are the easiest ones to follow, as they come after the third wave which is the easiest to spot, due to its length, power and speed. Major investors have bought stocks on lower prices, from investors that had bought them during the end of the third wave who feared the price might go lower. However as the major investors enter the market again, they create a small hype, the fifth wave, smaller than the third wave, which usually reaches the peak of the third wave and sometimes even higher. Investors who know the market, know that the market is extremely overrated and therefore have exited the market. Wave A is a corrective wave which is often mistaken for a second wave. This explains wave B. Smaller investors think that wave A corrected the price enough, so that it can lead to an upward trend. Unfortunately, this is the Wave where most smaller, and occasional investors lose huge amounts of money, as Wave C starts, pushing the price lower until the price gets underrated again, for a new pattern to start.

The above explanation is by no means a statistical explanation of the wave behavior, but explains the difference between major and occasional investors and their knowledge of the market. It is exact to know the exact wave patterns , otherwise it is very easy to misinterpret signs. It is important to note that the following explanation regards an overall impulse trend. The opposite would happen in case of an overall correction.

Atsalakis et al (2011) compared the Elliott Wave principle to a Buy and Hold Strategy with remarkable results. The Elliott Wave Principle was tested with the stock of the National Bank of Greece. A paper portfolio worth 10.000 Euros was simulated. Buy and sell decisions did not take into account the confidence index, as it is subjective, depending on the risk the investor is willing to take, even though a threshold of 52% is widely acceptable. Stocks were bought whenever the forecast was positive, and the position was closed when the forecast became negative. Transaction costs were not taken into consideration. The system was tested for period April 2007 to November 2008, for a total of 400 trading days.s. It is worthy to note that this period also includes the great recession of October 2008, were the system achieved interesting results. For the whole period of 400 trading days, the hit rate was 58.75%, mainly due to the crisis. By breaking this period in four sub-periods of 100 observations, the hit rates achieved are 58%, 64%, 60% and 53%, respectively. During this period of 400 trading days, the WASP system made 63 transactions. This gives a rough average of 1 transaction every 6 days.

European stocks fall amid North-Korea conflict

In Case you missed out our Weekend Special Bitcoin article make sure to catch up with it.

The North-Korean conflict is staining the stock markets. European stocks fell sharply across the board today as investors around the world piled cash into safe-haven assets amid increasingly dangerous rhetoric between North Korea and the United States. President Trump presented a statement warning North Korea that any threats to the United States would be met with “fires and fury.” Gold and Silver are up 1,26% and 2,84%respectively.On the other hand all major European Stock Indices ,with a few exceptions such as the ATHEX, are quoting a negative net change. The DAX is no different and as such is down 1,17%, two hours before close. After a pretty slow week, the DAX opened by climbing a little and reaching the 12226 point mark 30 minutes after opening. After reaching the intraday high, the DAX went crashing and is now down 1,17%.

Following a mostly higher beginning to the trading week on Monday, Wall Street got off to a somewhat weaker start yesterday, with the Dow Jones Industrial Average, a 26-point winner on the first session of the week, moving down to a 40-point loss in early dealings. With the economic calendar light and no new political headlines of note until late in the day, the focus was again on earnings, which continue to pour in for the second quarter. To be sure, most of the nation’s larger companies have reported already. Now, we are starting to hear from some smaller names, as well as results from a few retailers, which often have July ending periods. As has been the case almost uniformly, however, the bulls didn’t stay down for long, and as we ended the first half hour of trading, the early setback was pared, although the indexes remained a bit under water. That would change in the next half hour, as the Dow would make it back into the black, with the bulls hoping for a 10th straight record close. Meantime, the big item of note on the earnings calendar was yesterday afternoon’s pending quarterly release from Dow stock Walt Disney, which is noted below. Some retailers also were on the docket, as noted above. Indeed, with respect to the latter item, the retail reports made surprisingly good reading, with better-than-expected results from both Ralph Lauren and Michael Kors Holdings helping to turn things around as the morning wound down. In fact, as we approached the noon hour in New York, all three large-cap indexes were securely in the green, with the Dow seemingly on course for a 10th straight record close, with a mid-session gain of some 50 points. All told, corporate earnings have been up some 10% for the second quarter, which is well ahead of the 6% increase that has been forecast. Little wonder stocks are strong. The good news would continue into the first part of the afternoon, affirming that when the focus is on earnings, rather than politics and even the economy, this overbought stock market has continued to do well. And yesterday, the gains extended to the S&P 400, the mid-cap benchmark and the small-cap-dominated Russell 2000. Meantime, the gains increased in the first part of the afternoon, with the Dow’s intraday uptick reaching 60 points. But that would prove to be the high water mark for stocks, and as the afternoon moved along, the sellers entered the fray. However, there was little intensity to that pullback. The mid-afternoon selloff, albeit modest, did continue into the close, with the energy and basic materials sectors leading the way lower, with an assist from health care. Few groups showed any noteworthy strength, although recently soaring Apple Inc. shares did press ahead to an all-time high of just over $161. Still, while the Dow and the S&P 500 Index both set intraday peaks, each fell back below the neutral line in the final hour of trading–especially during the closing half hour. Also, losing stocks held a plurality on winning issues on the Big Board and the NASDAQ. The late selloff, meanwhile, was driven largely, it would seem, by President Trumps statement.The weakness then accelerated somewhat into the close, with the Dow at one time dropping by some 60 points. So, when all the numbers were added up, the blue chip composite was off by 33 points; the S&P 500 Index was lower by six points; and the NASDAQ’s deficit was 13 points, as more stocks fell than gained on the session. Then, after the close, Disney chimed in with a profit beat, but a shortfall on the revenue side, causing that stock to falter in after hours trading.

Walt Disney will stop providing new movies to Netflix starting in 2019 and launch its own streaming service as the world’s biggest entertainment company tries to capture digital viewers who are dumping traditional television. Walt Disney will launch two Netflix-like streaming services, one for sports and another for films and television shows. As a reaction to these news Disney is up 0,19% and Netflix is down 2,61%, as these move could be a predecessor for further pullbacks.

Office Depot‘s profits fell on weaker sales in the second quarter, missing analysts’ estimates. Second-quarter sales declined 9 % to $2.4 billion YoY, the Boca Raton-based office supply retailer said Wednesday. Same-store sales — those open at least a year — fell 6%, Office Depot said. Retail sales were $1.1 billion for the quarter compared with $1.2 billion a year ago. Office Depot had lower traffic, transaction counts and average order value, according to its regulatory filing. It saw lower sales in most categories, including ink and toner, computer and technology products, offset in part by cleaning and break-room products. Office Depot had previously said 2017 sales would be lower due to store closures. The company said it closed 31 stores during the quarter, ending with a total of 1,408. For 2017, 75 stores are scheduled to close.

The airlines of the Lufthansa Group welcomed 13.1 million passengers on board in July 2017. This shows an increase of 16.9% YoY. The available seat kilometers were up 12.4% over the previous year, at the same time, sales increased by 12.8%. The seat load factor improved accordingly, rising 0.3 percentage points to 86.3%, compared to July 2016. In total the airlines of the Lufthansa Group carried more than 73 million passengers this year until July. The overall seat load factor reached a historical record with 80.2 percent.

Todays Economic Calendar:

1. MBA Mortgage Applications
2. Productivity and Costs
3. Wholesale Trade
4. EIA Petroleum Status Report

Michael Kors Income drops 15%, stock is up 14% pre-market.

In Case you missed our Bitcoin Weekend Special, make sure to catch up on it.

The summer season seems to be affecting the German DAX. After a strong start in the afternoon and a slide-off in the afternoon, the Index reverted back to its previous close being off by 0,03%. If there can be a mention of a clear winning stock, REWE the German retail group would be it, being up 1,43% from its previous close.

The same kind of holiday boredom seems to have hit the Wall Street. Following a rather eventful week on Wall Street, as one month ended and another one began, with a succession of all-time highs being set amid some mixed economic data being issued, the latest five-day span began with prices initially headed somewhat higher. On point, the old week featured confirming evidence that the economy was still pressing ahead, if irregularly. Specifically, the reports showed a solid level of manufacturing growth, a slowing rate of non-manufacturing improvement, and a surprisingly strong employment report. Given that still largely positive backdrop, it is not all that surprising that stocks have been on the ascent. After all, with solid, but not inflationary, economic growth, a cooperative and cautious Fed, and strong earnings, the market backdrop is positive enough to keep the bull alive. On the other hand, multiples are rather stretched, so the margin for error is quite small. Accordingly, although stocks continue to head higher, the gains are not easily secured. And that was the case again yesterday morning, as the initial gain was pared rather quickly. But as has been the case this year, no serious selling took place. Thus, stocks again headed higher as the morning wound down, and the afternoon began. By midday, it looked as though another record in the Dow Jones Industrial Average would be set. The major beneficiaries yesterday were the consumer staples stocks, which performed nicely on the Dow. Slightly weaker performers included the energy stocks, which eased as oil prices fell, and some basic materials names, including recently weak Mosaic. On the other hand, some tech names strengthened, as the NASDAQ, with a mid-afternoon gain of 30 points again led the way. One big tech name doing well yesterday was Apple, which pushed up close to another all-time high. Holding the 30-stock Dow down, with a sharp loss on the day was United Technologies. That issue fell on news that it might be going after a major merger partner in Rockwell Collins. Meanwhile, stocks stayed irregularly higher as the afternoon wound down, but stayed in a tight band throughout the afternoon. As the final bell sounded, the major averages were all in the black, with the Dow’s 26-point gain securing that composite’s ninth straight record close. A four-point advance by the S&P 500 Index and a 32-point surge by the NASDAQ rounded out the session. Going forward, we will get inflation data later in the week along with earnings reports from some of the nation’s retail chains.

Michael Kors said Tuesday that its net income attributable to the company dropped 15 percent to $125.5 million, or 80 cents per share, from $147.1 million, or 83 cents a share, a year ago. Last year’s figure included one-time costs related to the acquisition of a Greater China licensee. Excluding that charge, Kors had earned 90 cents a share. While its profits fell, Tuesday’s results outpaced both the company’s and analysts’ expectations. According to Thomson Reuters, analysts on average were predicting Kors would earn 62 cents per share. That was also the midpoint of the company’s own forecast range. Total revenue for the first quarter came in at $952.4 million, again topping analysts’ estimates for sales of $918.6 million, according to Thomson Reuters. But this was another drop — by 3.6 percent — from last year. The drop in revenue wasn’t a surprise, Saunders commented, but it’s more of a “necessary evil” as Kors gets out of retailers that no longer fit the brand’s fresh strategy. “Reducing ubiquity comes with a price attached.” Michael Kors’ same-store sales dropped 5.9 percent during the period, coming in better than expected. Analysts surveyed by FactSet had predicted a decline of 9 percent. Shares of Michael Kors climbed more than 14 percent higher on the news in premarket hours.

The VW brand said it would offer buyers trading in an old diesel a discount on cars meeting the latest Euro 6 emissions standard, ranging from €2,000 to 10,000€ on its compact cars. And the carmaker proposed an additional discount of between 1,000€ and 2,380€ for those buying more environmentally friendly hybrid, all-electric or natural-gas-powered vehicles. VW was “acknowledging its share of responsibility for climate- and health-friendly mobility on German streets,” it said in a statement.

Ralph Lauren Corp reported better-than-expected quarterly profit and sales as the luxury apparel maker kept a tight leash on discounting and inventory, sending its shares up 5 percent in premarket trading. Ralph Lauren, like other U.S. apparel chains, has been struggling with weak sales due to sluggish spending on clothing and accessories and fierce competition from Amazon.com and fast-fashion retailers.  In a bid to turn its business around, the company has been pulling back inventory from wholesale partners, reducing sales in the off-price channel, engaging in fewer promotional periods, shuttering stores and exiting underperforming brands.  Ralph Lauren’s adjusted gross margins rose 210 basis points to 63.2 percent in the first quarter ended July 1, helped by a double-digit decline in costs.  The company also lowered its inventory levels by 31 percent from a year earlier.  The company’s net income was $59.5 million, or 72 cents per share, in the first quarter ended July 1, compared with a loss of $22.3 million, or 27 cents per share, a year earlier. Excluding items, the company earned $1.11 per share, while sales fell 13.2 percent to $1.35 billion in the quarter. Analysts on average were expecting adjusted earnings of 94 cents per share and revenue of $1.34 billion, according to Thomson Reuters I/B/E/S.

Todays Economic Calendar:

1. NFIB Small Business Optimism Index
2. Redbook
3. Jolts

 

German DAX generates losses on weak German economic data

If you missed our Bitcoin investor guide, make sure to catch up with it.

After opening at 12’303 the German DAX was able to rally up and peaked at the 12’325 point mark 4 minutes after opening. The joy was off short time, as after reaching the 12’325 point mark, the German DAX started tumbling down on news of weak German economic Data. 2 hours before close the German DAX is down 0,46% from its previous close. The notable winners/losers are Deutsche Telekom (up 1,41%) and Fresenius Medical Care AG & Co KGaA (down 1,49%). After the German healthcare company released solid earning end of July, the emerging news of Fresenius acquiring NXStage seem to shake up investors.

In the States it continues to be mostly about earnings these days, as the dog days of August continue, with favorable reviews from the investment community, interspersed with a few notable setbacks among individual stocks, being the rule. That was the case again on Friday, as generally solid profit reports helped lift the Dow Jones Industrial Average further into record territory, with that index going well past 22,000 in a modest buying campaign. A few headline movers, such as Weight Watchers, benefiting from an earnings beat, paved the way for the early gain that carried the market solidly higher in the morning. As we moved into the early part of the afternoon, the Dow was ahead by 40 points, while the other large and small-cap indexes were up modestly, as well, with gaining stocks retaining a small lead on declining issues. All told, the session was a positive one to that point, even though there were a few headline makers on the downside, such as Fluor, which while posting better-than-forecast second-quarter earnings, still weighed in with lower orders and backlogs, and much-reduced guidance for the 12 months. The stock tumbled to a 52-week low, in response. The equity market remained range-bound over the final few hours of trading, as investors further digested the benign jobs report and the likelihood that the Fed will not be unduly influenced by it. Another generally constructive earnings day proved supportive, as well. So, all of the averages stayed on the plus side of the ledger, but the gains were far from formidable. As to stocks on the Dow, the financials did better, while most other issues on that composite moved little.  The lone negative on the day was a rise in bond yields on the better jobs data, with the 10-yesar Treasury note climbing to a yield of 2.27%. The market drifted until near the close, when there was a late spurt of additional buying, which helped cap off a week of generally higher prices. At the close, the Dow was ahead 67 points; the S&P 500 was better by five points; and the NASDAQ, on selective strength in technology, was in the black by 11 points. Meanwhile, there were more gaining groups than declining sectors, while on the Big Board, the earlier advantage held by advancing issues was retained into the close, with rising stocks holding about a four-to-three lead. Next week will be a lighter one for economic news, while earnings releases will start to slow down.

Sprint Corp.’s resumed talks about a potential merger with T-Mobile US Inc., being held at the same time as discussions with cable companies, shows the lengths billionaire Masayoshi Son is taking to build scale for a wireless carrier facing increasing competition in the U.S. The two wireless operators restarted discussions after Sprint’s exclusive negotiating period with Comcast Corp. and Charter Communications Inc. expired at the end of July, according to people familiar with the situation who asked not to be identified because the information is private. Sprint shares rose as much as 2.9 percent to $8.95 in early trading in New York Monday.

Todays Economic Calendar:

1. Gallup US Consumer Spending Measure
2. Labor Market Conditions Index
3. TD Ameritrade IMX
4. Consumer Credit

A beginners guide to Bitcoin investing.

Initial Comments:

So I have decided to post this article as a Weekend Special Edition. Bitcoin is a topic that I have invested a lot of time in myself. This article is a long read for people who really want to try and understand the Bitcoin technology.

As there is no uniform terminology we will refer in this article to Bitcoin as the technology and to bitcoin as the underlying currency itself.

This article will be solely focused on Bitcoin and the underlying Blockchain and is divided in 5 sections:

1. Introduction
2. What is Bitcoin? How does the Blockchain work?
3. Is the Bitcoin setup impenetrable?
4. An empirical analysis on the usage of bitcoins.
5. Valuation of bitcoins

1. Introduction

Bitcoin is a digital currency that creates unique, non-duplicable electronic tokens using software (dubbed mining) with an asymptotic limit of creation of 21 million tokens. Every four years the number of bitcoins created is scheduled to be cut in half until 2040 when creation is supposed to go to zero. The system operates by clearing transactions in a peer-to-peer decentralized system. If you don’t understand the previous sentences, it’a fine as we will come to the core of Bitcoin and the workings of the underlying technology. Since Bitcoin first started trading (on stock exchanges) the 16th of July 2011 the price has increased by baffling 5’209’254% (as of 29.06.2017). Officially Bitcoin was introduced to public in 2009, when Satoshi Nakamoto (allegedly a pseudonym) introduced his whitepaper entitled :”Bitcoin: A Peer-to-Peer Electronic Cash System”.

The bitcoin has enjoyed an enormous increase in valuation, reaching a total market capitalization of 40 billion USD. As shown in the graph above Bitcoin surged for the first time in November of 2013 reaching an all time-high, at a market cap of 13,9 billion USD. Bitcoins plummeted afterwards and hit the floor on a market cap of 2,4 billion USD. On the 11th of June 2017 bitcoins rallied up to a record-breaking 2895,44 USD. Given this recent , nearly unseen rise, it’s astonishing that many people don’t understand what Bitcoins are and how they work. In this article we will try to get to the core of Bitcoin and the underlying blockchain, we will support our assumptions with empirical analysis. One resource will be the whitepaper released by Satoshi Nakamoto. As the concept of Bitcoin is technically complex we will be quoting the most relevant extracts, try to paraphrase them and supplement them with practical examples. If you are a curious and tenacious mind I suggest you read Nakamotos paper yourself.

2. What is Bitcoin? How does the Blockchain work?

“A purely peer-to-peer version of electronic cash would allow online

payments to be sent directly from one party to another without going through a

financial institution.”

This first quote is taken from the abstract and elaborates on the Bitcoins doctrine, a decentralization of cash-flow. Our current methods of making transactions require our money to go through Financial Institutions such as Banks, the FED or any other governmental institution. For years we have trusted financial institutions as middlemen for all of our transactions, the repercussions can be enormous as history has proven. In 2015 Greece was facing a sovereign default, with the Banks having no liquidity and with no re-financing possibilities at first. People were standing on the streets, raiding every ATM they could find in the hopes of saving what was left on their bank deposits. The Greek Government debt crisis has various catalysts, among them a corrupt government and rigged banks. Private Greek banks started according dubious loans and creating a credit bubble that burst in 2010. Two years beforehand Lehman Brothers, a real estate hedge fund disguised as an investment bank, was the originator of the subprime-mortgage financial crisis when it filed for bankruptcy on the 15th of September 2008. By that time, Lehman had assets of $680 billion supported by only $22.5 billion of firm capital. From an equity position, its high risk commercial real estate holdings were three times greater than capital. In such a highly leveraged structure, a three- to five-percent decline in real estate values would wipe out all capital, which finally ended up by happening and causing a financial mayhem . So this really begs the questions: “Why do we entrust banks with our money?”. Because we plain and simply lack alternatives to them. Clearly having all our financial transactions , like loans, credit transactions and savings-account, handled by banks bears a concentration risk. Projects like Kickstarter have been a real alternative to banks, crowdfunding projects thus replacing the process of inquiring for loans at banks. What Nakamoto proposes is that there is a possibility to replace banks as middlemen for online transactions. If we think about electronic money transfer, we have to think this process is just an entry in a register, as no physical cash gets exchanged. If we are able to set-up a public and anonymous register, are we then able to construct an online transaction network without middlemen?

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.”

This paragraph extracted from the Introduction accurately pinpoints which problems need to be faced to institute a decentralized network. Nakamoto proposes that the “inherent weaknesses of the trust based model” is a hurdle to online transactions. Completely non-reversible transactions are not possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. Nakamoto suggests that the trust-model should be replaced by a mathematical model. We will now slowly start to dig into how the blockchain works.

Imagine you are a group of 5 friends sitting in a circle. Everyone in the circle has a sheet of paper and a pen. Friend A wishes to make a 10 euro transaction to friend B. He will now say it out loud and notify the whole group. Everyone in the group verifies if friend A has enough balance to pay friend B and then takes note of the transaction. Whenever enough transactions have been made and documented, all friends put their respective page away in their own folders and start a new one. As you might be able to tell everyone will store away the same amount of information. But before putting away the page, the group of friends needs to make sure that no one can alter the content of what has been documented. The pages need to be sealed with a code that everyone in the group agrees to. In the Bitcoin jargon the process of sealing is defined as mining.

“We define an electronic coin as a chain of digital signatures.”

This is where it starts getting technical. Firstly we will have a closer look at hash functions, as they are the main component of the mining process. A hash function is any function that can be used to map data of arbitrary size to data of fixed size. Suppose you have the number 100 as an argument and run your hash function on it. The output will be “ghakjdhg”. Given our argument that we have now defined as 100. the output will always be the same, in this case “ghakjdhg”. No one will know how your argument got converted into “ghakjdhg” and moreover the process is irreversible, eliminating any possibility of backtracking the functions logic. This means that given the word “ghakjdhg”, it is impossible to tell what our input was, hence why hash functions are very helpful in cryptography. As you might have figured out, hash functions play a role when it comes to Bitcoin mining. To illustrate the usefulness of hash functions in the mining process we will come back to our example with the group of friends. Let’s assume that the total sum of all transactions on one page is equal to 275 Euro, so we label this page with the number 275. Then we will try to find a second number that when added to our number gives us an output of that starts with 4 a`s. After some calculation we may find that this number is 45678. In such a case, 45678 will become the seal for the number 275. To seal the page that bears the sum of 275 euros we will put a badge labeled 45678 on it. An altering of the transaction sum, to lets say 300, would change the output of the hash function. The sealing of numbers is called proof-of-work, as defined in chapter 4 of Nakamotos paper .

“To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system similar to Adam Back’s Hashcash, rather than newspaper or Usenet posts.The proof-of-work involves scanning for a value that when hashed, […] , the hash begins with a number of zero bits.”

So we have come to the conclusion that the combination of the sealing number and the total sum of transaction gives us a unique output. But who calculates the sealing number? Let’s go back to our group of friends, who has just finished another page of transactions. Everyone in the group engages in the process of calculating a matching sealing number. The first to figure it out will then announce it to the rest of the group. As soon as the sealing number gets announced everyone double-checks if it yields the required output or not.

Some readers now might be asking themselves: “Why should I waste time and energy figuring out a sealing number if eventually someone else might do it?”. This problem gets addressed in Chapter 6, named “Incentive”. Obviously in the real world the process of finding the adequate sealing number, takes up electricity and deteriorates your GPU and/or CPU. The twist is that the first one to calculate the sealing number gets compensated for his success. So imagine we get back to our circle of 5 friends and friend C is able to calculate the sealing number. Friend number C will be rewarded with a freshly printed 1 Euro piece for his efforts, effectively not decreasing anyone’s balance (disregarding any inflationary effects).

We will now advance to digital signatures and how they are embedded in the Bitcoin network. Digital Signatures play a critical role when sending and receiving bitcoins. Digital signatures are the public-key primitives of message authentication. In the physical world handwritten signatures are used to make contracts or documents binding. Similarly, a digital signature is a technique that binds a person or an entity to some sort of digital data and is much less susceptible to fraud.This binding can be independently verified by the receiver as well as any third party. A digital signature is a cryptographic value that is calculated from a secret key, belonging to the signer.

Depicted above we are able to see the flow of a standard normal digital signature process.

Each person involved in the signature flow will have a public and a private key pair. Generally the key pairs used for encryption/decryption and signing/verifying are different. The private key used for signing is referred to as the signature key and the public key as the verification key. The signer feeds some data to a hash function and generates a hash of that data. After obtaining a hash value, its is packed together with the signature key and the package is then fed to the signature algorithm. The algorithm will then proceed to create the digital signature. The signature is appended to the data and both are then sent to the verifier. The verifier then feeds the digital signature and the verification key into the verification algorithm. The verification algorithm gives some values as output, meanwhile the verifier also runs the same hash function on the received data to generate a hash value. This hash value and the output of the verification algorithm are compared. Based on the comparison result, the verifier decides whether the digital signature is valid. The digital signature will be unique, as it is created by the verifier’s private key.

“Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.”

To illustrate the Bitcoin transaction procedure we will annex the process flow chart from Nakamotos paper.

For person 1 to transfer a coin to person 2, person 1 signs the hash of the last Bitcoin transaction to occur and the public key of Person 2. Because the network is high-velocity, most of the major parts in the Bitcoin network are high performance supercomputers and dedicated servers that have enough processing power to manage all of the transactions across the continents.

It stands out that bitcoin transactions are very unique in the sense that transactions can be made between parties on opposite sides of the globe via the Internet. Due to the underlying mathematical models no middlemen, such as banks, are needed anymore.

3. Is the Bitcoin setup impenetrable?

While bank robberies and money counterfeiting are of course no problem for an electronic currency, Bitcoin online platforms face severe hacker attacks. Furthermore, due to the lack of regulation the Bitcoin ecosystem remains a “Wild West”. Because Bitcoin transactions are non-revocable, hackers have frequently stolen bitcoins of individuals leaving the victims without recourse. The most common source of scourge to afflict Bitcoin participants has been the denial-of-service attacks (DDoS). These are inexpensive to carry out and quite disruptive. Records show that competing services carry them out in order to improve their market share. A massive DDoS attack hit OKCoin, a China-based Bitcoin exchange, the 10th of July 2015. The platform saw a massive distributed denial of service attack on the which resulted in the international site being shut down for a week. Furthermore the platform compensated traders for losses incurred due to the DDoS. Other times exchanges similar to OKCoin have just shut down without explanation, often with customers losing their deposits. Empirical papers like Vasek et al (2014) show, the number of attacks has increased over time. Böhme et al. (2015) argue that DDoS attacks are especially attractive as stolen Bitcoins can easily be converted into money. We will not dwell into the depths of how such attacks occur but have a look at their frequencies and repercussions. Despite their apparent frequency, very little is known about the true prevalence of DDoS attacks.

From May 2011 to October 2013 142 DDOS attacks on 40 Bitcoin services were documented. Most currency exchanges and mining pools are much more likely to have a DDoS protection such as CloudFlare, Incapsula or Amazon Cloud. Vasek et al (2014) found that 7% of all known operators have been attacked, but that currency exchanges, mining pools, gambling operators, eWallets and financial services are much more likely to be attacked than other services. The study found that big mining pools (those with historical hashrate shares of at least 5%) are much more likely to be DDoSed than small pools.

This Graph issued by Vasek et al. (2014) plots the shift in the DDoS attack targets. We can see that the number and target of reported attacks varies greatly over time. Initially, in the second half of 2011, most DDoS reports concerned mining pools. Then there were very few reported attacks of any kind during the first half of 2012. During the second half of 2012, DDoS attacks picked up again, initially targeting pools, but more frequently targeting currency exchanges and other websites. During 2013, attacks on pools continued, but they were joined by DDoS on gambling websites, eWallets, and currency exchanges. Attacks on currency exchanges dominated the totals from March–June 2013, coinciding with rising exchange rates and unprecedented interest in Bitcoin.

This second table, also published by Vasek et al. (2014), allows a categorisation of DDoS events. Currency exchanges and mining pools make up for nearly 80% of the DDoS attack targets, whereas gambling sites make up for 9%. The figure on the left depicts a cumulative distribution function off how recurrent DDoS attacks are on certain entities. It can be observed that 44% are only attacked once while 15% are attacked on at least on five different occasions. The leader in suffered DDoS attacks was Mt. Gox, with 29 suffered attacks. Mt. Gox was responsible for almost 90% of all the exchange operations in the network before filing for bankruptcy. Mt. Gox has filed for bankruptcy protection from creditors in February of 2014. In April 2014, the company began liquidation proceedings. Out of the 1236 Bitcoin related services only a mere 203 services (16%) have adopted an Anti-DDoS application. The adoption rate among services who have been hit by DDoS attacks is with 54% comparably higher, nonetheless still considerably low.

The Bitcoin’s Proof of work system has been developed to prevent double spending schemes. A double spend attack, is a scheme which enable a certain set of bitcoins to be spent in more than one transaction. Karame et al. (2012) have been able to show that it is possible to bypass the proof of work. While the Bitcoin payment verification process is designed to prevent double spending, Karame et al. show that the system requires tens of minutes to verify a transaction and is therefore inappropriate for fast payments. The security of using Bitcoin for fast payments was analyzed. The paper shows that unless appropriate detection techniques are integrated in the current Bitcoin implementation, doubles spending attacks on fast payments succeed with overwhelming probability and can be mounted at low cost.

4. An empirical analysis on the usage of BTC’s.

We will now take a closer look at what bitcoins are used for and by whom. There are many types of statistics and graphs about the Bitcoin network which can be readily downloaded from the Internet (https://blockchain.info/charts). However these types of statistics tend to describe some global property of the network over time such as the number of daily transactions, their total volume, the number of bitcoins mined so far and the BTCUSD exchange rate. It is very difficult to get accurate information about how bitcoins are used in practice. A paper released in 2013 by Dori Ron and Adi Shamir entitled “Quantitative Analysis of the Full Bitcoin Transaction Graph” provides a detailed understanding off the Bitcoin network . This paper gives a great insight off all transactions from the first time Bitcoins became fully operational up to the 13th of May 2012.The data was gathered from the Bitcoin wallet, which tracks all transactions anonymously Even though the landscape, as of 2012, might have changed this paper provides a great insight towards the typical behaviour of users.

At the time there were 3’730’218 different public keys. 3’120’948 of them were involved as senders in at least one transaction, while the rest of 609’720 appeared to form a network of receivers. One entity (person or company) can have multiple Bitcoin addresses. The paper determined that the total of 3’120’948 addresses can be attributed to 1’851’544 entities. Adding the 1’851’544 entities to the network of receivers only we get a total of 2’460’814 entities involved in the Bitcoins transactions. This implies that on average every entity has 1,5 addresses. However there is a huge statistical variance in the number of addresses an entity manages and in fact one entity is associated with 156’722 different addresses. The paper was able to determine the entity behind all these addresses as being Mt. Gox. The paper made one very interesting finding regarding the distribution of Bitcoins. Of the 9’000’050 bitcoins that were in circulation 7’019’000 bitcoins could be attributed to the 609’720 addresses which only receive and don’t send any bitcoins which were almost 78% of all existing bitcoins. 76.5% of these 78% (or 5’369’535 bitcoins) are what is defined in the paper as “old coins”, this meaning that these coins have not been moved over a time-period of 3 months. The analysis of the total volume of transactions resulted that 40% of all addresses had received fewer than one bitcoin and 59% of the addresses had received fewer than 10 bitcoins over their lifetime. Bitcoin allows for micro transactions, which are called satoshi and are of the order of 10^(-8), this is the smallest fraction into which a bitcoins can be broken up. The paper also goes to show that on the other end of the distribution there was only one address which received over 800’000 bitcoins. The current balance of almost all 98% of all entities was less than 10 bitcoins. 93% percent of all addresses had fewer than 10 transactions each, while 80 addresses used the network for more than 5000 transactions. The paper also goes ahead and dissected the nominal of each transactions. 84% of all the transactions involved fewer than 10 bitcoins. On the other hand large transactions are rare with only 340 transactions larger than 50’000 BTC’s. The paper also went ahead and filtered out 19 of the most active entities. I attached the Table below.

Source

The table shows that Mt. Gox had the most addresses but not the largest accumulated incoming bitcoins nor the largest number of transactions. Six out of the 19 entities have each made fewer than 30 transactions with a total volume of more than 400’000 bitcoins each. A fair conclusion that we can draw from this paper is that most of the mined BTC’s remain dormant in addresses which had never participated in any outgoing transaction. We can also concluded that there is a huge number of tiny transactions which move only a small fraction of a single bitcoin, but there were also hundreds of transactions which moved more than 50’000 bitcoins.

Bitcoin has also been massively linked to the Silk Road in the past, an anonymous, international online marketplace that operates as a Tor hidden service in the past. “More brazen than anything else by light-years” is how U.S. Senator Charles Schumer characterized Silk Road which was shut down March 2015. The Silk road had reportedly between 30’000 and 150’000 active users. The Silk Road was an online “black market” which offered a variety of goods but had a clear focus on drugs. The users were able to stay anonymous, bitcoins granting anonymity even trough the payment process.

5. Valuation of bitcoins

As of now we have only been assessing the design and the technology underlying the decentralized infrastructure of Bitcoin. As this is a financial-centered blog we will try do identify if there are any valuation models for bitcoins. To be able to assess if we can erode a bitcoins value we elaborate whether Bitcoin is primarily an alternative currency or just a speculative asset. According to Kaplanov a currency can be used as a mean of trade, a vehicle to store value, or a unit of account in order to compare the value of different goods or services. Dirk B. et al state that:

“Bitcoin cannot be considered a currency. Its high level of volatility makes a reliable exchange impossible and adversely affects the store of value and unit of account properties. In addition, the fact that it is not an official currency in any country and not backed by any government implies that the high level of volatility affects every Bitcoin transaction, within-country and cross-country transactions. […] Hence, Bitcoin might better be classified as an investment. Its appeal lies in the large historical price movements and expected future returns. Whilst most assets exhibit at least some fluctuations of its price and can thus be labeled risky, Bitcoin appears to be particularly risky and clearly belongs to a high-risk (speculative) asset class.”

Speaking in terms of exchange rates an empirical analysis on volatility shows that minima and maxima observed average daily return for Bitcoin are about 10 times higher than for the Euro or Yen.The standard deviation of realized volatility for the Bitcoin markets varies between 229 and 558 basis points per day, which is 100 times higher than in the FX markets. The Euro FX market exhibits an average of volatility of 50 basis points per day. The figure, published by Dirk B. et al shows that all markets but BTC and Zaydo, from the chosen sample these had the lowest market shares, exhibit moderate statistical skewness. For those two markets the chosen samples show a leptokurtic distribution.

As bitcoins do not provide the feature of an interest rate in contrast to traditional currencies, where interest rates are provided by central banks, valuation models relying on given interest rates are rendered meaningless. Users are left to determine the value of bitcoins themselves by gathering and evaluating information in news and web resources. The price is therefore determined on exchanges by demand and supply. Considering that there is a cap at 21 million bitcoins, as of 8 February 2017 there were 16’152’087,5 bitcoins in circulation, off which many may be lost or not in circulation, it follows that an increasing growth of the demand side is leading to increasing prices. An example how prices can be driven up by an increasing demand can be exemplified with Baidu. On October 14, 2013, Baidu, a web services company that runs the largest search engine in China, began accepting bitcoin. This single action opened the bitcoin network to roughly 570 million internet users in China and prompted other internet companies to consider the cryptocurrency more seriously. The closing price of bitcoin, which averaged just $124 over the 2-week period prior to the announcement, increased to $170 over the 2-week period following the announcement. As we have seen recently the mixture of media attention, the novelty of both the design and the features of a cryptocurrency, combined with its global availability over the internet , have lead to an exponential growth of demand. It seems to be a fair assumption to say that an increase in the number of Bitcoin participants is associated with an increase in the Bitcoin network volume, leading to an increase in the Bitcoin price. It follows that if Bitcoin participants seek to use Bitcoin primarily as an asset, they will not leave a footprint within the Blockchain. This is supported by the common practice of exchanges to keep internal accounts on behalf of their customers. That is, the exchanges are handling accounts of their customers in an internal accounting system, guaranteeing for keeping record of the on-exchange purchased and sold Bitcoins without actually transferring these Bitcoin through the Blockchain. We would expect that those users’ Bitcoins primarily remain within the exchange internal systems.

Users pursuing Bitcoin for its purpose as an alternative asset also lack a valid valuation method. Given that there is no fundamental pricing methodology available, sources of information, like the media, are likely to have a higher influence on prices. Negative news like the announcement of security issues revealed in the underlying protocol should concern users who are using Bitcoin for operational transactions and push some users to re-evaluate the utility and usability and eventually sell their Bitcoin, hence lowering prices on exchanges. Due to the volatile character and the volatile historical prices of the underlying an investor may be aware that they invest in an instrument with a high price uncertainty. Hence, it is a valid assumption that these users only invest a small amount of their total portfolio. They buy Bitcoin at an exchange and store it, waiting for prices to rise. An investor might also keep in mind that if Bitcoin is rendered illegal by change of law, the Bitcoin immediately lose their value. What seems to be noteable is the correlation between the price of Bitcoin and the daily English Bitcoin Wikipedia views, which has been pointed out by Florian Glaser et al. in 2014. This graph helps to identify the mass of particularly uninformed users who have only limited knowledge about Bitcoin and therefore acquire initial information from an initial source of information like Wikipedia.

 

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