snow day

It is another snowing day in New York and the market will be very quite. I sold My 200 BAC @ 16.6. The European situation does not bode very well for financial industry. But the cash reserve is strong in BAC. Will buy it back around 15.

correction underway

Greek debt issue did not go away and I do not see how it can be solved. There is a strong public opposition in Germany to bail out Greece. Japan and U.K.'s debt are alarming as well.

Corporation's balance sheets have been improving and high yield bonds may be a better investment than stocks and government bonds.

I will go to China for next week and will let you know my experience on how sustainable the growth will be. I may not blog regularly in next few weeks.

I will close out HXD @13.4

summary Feb 24, 2010

The market gets a rebound after Fed chief's testimony. The market is tired.

Closing value
Portfolio 1 (U$):111716 (started on Nov.1 with 110k)

Portfolio 2(C$):80463 (started on Nov. 1 with 80k)

The cause of bubble and Fed's responsibility

There are many reasons for the finacial bubbles we experienced in history. On the surface, they always involved greed and lax government regulations. But deep down, they were caused mostly by the mis-pricing of risks. When price of the risk is low, people will borrow to speculate, whether it is stock market, real estate or art. It creates bubbles. When risk is priced too high, then, economic activities slows down and recession would occur. Most of the time, the problem is the risk being priced too low.

Economists always look at credit spread to judge the price of risk. I think you have to look the level of the rates as well. A spread of 3% is different when the base is 1% or 5%. 4% interest rate will not discourage speculation while 8% may. Federal reserve does not admit it played a role in creating the housing bubble because they did not see much changes in the spread. However, the absolute level of interest rate was very low that speculations are everywhere. I truly believe, the current zero interest rate will create risk mispricing again.

real-estate bottom

Is there value in real estate market in U.S. (residential)? There are lots of noises, from government stimulus, FED subsidies on mortgage and foreclosure preventions. The market has been distorted. One most important measure, however, is the replacement cost. My sense the real estate value has fallen close or below replacement cost in lots of places, assuming labour cost, material cost and environment costs will stay relatively the same. Over long term, purchase a house right now in U.S. represents good value. I am not too sure about builders. Some of them may rebound but market can stay low for a while.

The market is having a down day today. I put an order in to close my HXD position @ 13.4 (bought at 12.98)

summary Feb 22, 2010

The market came down a bit. I will take profit on Bank of America if it goes above 16.5. Husky is changing CEO and I do expect it will spin off its Asia operation soon. It should add 3 dollars to its value.

Closing Value

Portfolio 1 (U$): 112062
Portfolio 2 (C$): 80667

not convinced

I am not convinced
1. there will be no inflation in U.S for next 2-5 years. CPI and Import prices all point to higher inflation. Unless FED to withdraw liquidity quickly, inflation will come sooner rather than later. There is a official report out of China today which estimates that China right now has a labour shortage about 2-5 million. It is going to push up labour cost at least 10%.
2. there will be smooth sailing for all the government borrowing. I can see some difficulties in U.S, U.K and Japan government bonds sales. Investor will demand a higher risk premium to compensate out of control deficit. At the end of day, the only way to repay all the debt is for central banks to print money to monetize the debt. There is no political will for government to either raise tax or cut spending.
3. there is a super bull market for commodity because all the BRIC growth and population growth. In my view, high price will push down demand and increase supply. The cyclical nature of the commodities is still there, albeit the price curve shift a bit upward.

fed's move

Federal reserve increased its discount rate by 25 bps. It was expected but the timing is earlier than expected. It was most symbolic because very few banks go to discount window right now. In short run, it will move up U$ and put some pressure on the market. I will be more interested in CPI, If CPI is high, it will force Fed's hand.

One area is deteriorating is municipal bonds in U.S. There will be a few bankruptcies this year. States will get help from Federal Government and they can raise taxes but municipal governments have very few options.

summary Feb 18, 2010

Bank of Switzerland intervene in FX market which rally the Euro. All commodities benefit from it. But this is temporary. Germany public opinion is very much against bail out Greece. More weakness in Euro will reemerge. The inflation will force FED to withdraw liquidity sooner than they want.

Closing value

Portfolio 1 (U$):112130
Portfolio 2 (C$):80679

marginal cost (2)

This is a continuation of discussion on marginal cost. I am going to focus on crude oil.

The marginal cost for crude oil is more complicated. There are about 4-5 million spare capacity in OPEC countries (middle east oil). The marginal cost is about $10-20/b. After that, the marginal cost jumps to $50-70/b for oil sand and deep sea oil. It is more difficult to forecast oil price because OPEC does interfere with free market. However, on a long run, if global demand grows 0-1%, then, oil price will be in current range (60-85). If Growth is around 2-3%, then in 3 years, we will exhaust all OPEC spare capacities and crude oil will be over 100. If electric car works and crude demand drops then, we will see oil trade in low 30s again.

inflation and jobless number

The inflation is up and jobless claims is up as well. It is a bad combination for stock market. The reason for inflation can attribute to central banks' Quantitative Easing (Printing money) to debase their currencies. What Fed should do is to withdraw excessive liquidity quickly while keep interest rate low for a while.

Marginal cost

Price is always determined by supply and demand. There is no exceptions. Over short term, demand shift will have a stronger impact on prices because supply adjustment is slower, especially when there is a shortage. However, over long term, supply will always adjust to demand. Marginal cost is the most important factor in determine price over long term. When market price is much higher than marginal cost, there is no question you will see supply comes on line quickly.

I would like to examine the marginal cost on commodities.
First, let's look at copper. The demand shift in copper because of China had a strong impact on copper. The price went up 300% in last 10 years. Currently, the marginal cost for copper is $1.60/lb and the market price is over $3.20/lb. There will be oversupply in copper very soon, if not already exists.

I will look at marginal cost on oil tomorrow.

Bigger Picture

If global growth keeps at 4-5% (stock market assumes), then every 15 to 20 years global GDP will double. In 100 years, GDP would grow 32 times. Is it reasonable? No! Can our earth support this kind of growth? NO!

Now let's look at where growth will come from. In last century, it was population growth plus industrial revolution. During 1990s, it was information revolution. Growth from technology and population growth has slowed since year 2000. In order to push the growth, government and companies started to use financial leverage to expand. It was a debt induced growth in last 10 years. It was also a decade of BRICs emerging. The debt bubble has since been bursted. Population growth is slowing. Environment issues (Global warming, clean water and pollutions) have put restraints on growth as well. In addition, resources shortage eventually will put a brake on growth.

I truly believe global growth will not exceed 2% over long run. So stock market growth will come from efficiency rather than revenue growth.

summary Feb 16, 2010

The market rallied 1.5% today and financials had a good day. I still expect commodities will be under some pressure, especially copper.

Closing value
Portfolio 1 $(U$): 111640
Portfolio 2 (c$): 80747

fiscal discipline

President Obama is talking about freezing spending and raising tax on rich. It is more about politics than real fiscal restraint. The budget situation will get much worse. It is quite likely that we will have another recession before 2019, which is not in Obama's budget projections. The only way Governments will reduce deficits is being forced by the b0nd market. The bond market is too friendly right now but will get tougher. I do not see Federal reserve to continues to underwrite government debts. The 10 year yield can move up 100 bps easily in next 18 months. It will happen not only in U.S., will also happen in EU, Japan and China.

housing in Canada

Bought HXD @12.96 and will sell @ 13.45.

Canadian Government is tightening mortgage rules. I won't say Canading housing market is in bubble territory right now but it starts to move closer there. The rent can not cover the carrying cost and there is no investment case on cashlow basis. If interest rate move up 100 bps, there will be pain for lots of home owners.

central banks

Most central banks are worried more about growth than inflation. Interest rates will be kept artificially low for a long time. The consequence is bubble economy. Easy money will chase assets, whether it is capital assets (stock and bonds), hard assets (gold, oil and other commodities), real estate or consumer goods. Since the money can flow freely globally, bubble can pop anywhere.

Greece debt problem did not go away. It is politically difficult for Germany to bailout Greece.

The market is in a see-saw range as expected. Canadian market is probably at the high end of its trading range. I am going to short the market a little bit. I will put order in for purchasing 300 HXD (ETF for shorting TSX) @ 12.96C$. This is a short term hedge.

summary Feb 12, 2010

The market performed better than I expected. I still felt the market has more downside risks, especially commodity companies. I will be very careful on Canadian market because the exposure to commodities. Lower price on energy and metals are good for U.S. economy in long run.

Closing Value
Portfolio 1 (U$):111,195
Portfolio 2 (U$):80,621

China tighten reserve requirement

China raised reserve requirement by 50bps before Chinese new year. It will put pressure on commodities. China is in negotiation on long term contract for iron ore, potash, coal and want to buy gold to diversify its foreign reserve. So it is in their interests to push commodities down right now.

Retail sale in Jan. in U.S. is OK. But a big part is gift card from Christmas. Feb retail sales will be low.

The market is at the high end of the range right now.

EU Bluffing

The market is excited about the Greece bailout. But the language is so vague, you just wonder if it is just bluffing. It is quite possible that any loan guarantee will not pass the German Parliament. Remember, Chancellor Merkel has a minority government and which is not very popular right now. Eventually, the market will force EU to show its hand. The reason Germany and French government want to support Greece is their banks have enormous exposure to Greece and other PIIGS countries. A showdown among market, government and public opinion may happen soon. Stay tuned.

INTC

The market is up over 100 points. I reduced half of my intel positions. I sold 200 INTC @20.15. I still like intel but felt the market has further downside risk. Would love to buy them back around 19.

Greece agreement

As I expected, EU had reached an agreement to aid Greece. The agreement is vague which means no consensus on how to do it. In reality, there is only one country, Germany, in Europe has the capacity to help. France is OK but not strong enough. All other countries are weak and most of them need help. I can see investors start to attack Portugal in next few weeks.

summary Feb 10, 2010

The market is waiting for Europe to take action on Greece. The most likely case is a vague pledge of support from Germany and France on condition of Greece government implementing the spending cuts.

China's PPI number is 4.3% which is very high. The inflation is going to be a big problem if China does not tighten aggressively.

Closing Value
Portfolio 1 (U$): 111005
Portfolio 2 (C$): 80393

bought MDVN

Bought 100 MDVN @ 36. I gave the reason yesterday. I will hold this one until the phase 3 trial finished (June this year).

High speed train vs. plane

The buildup of high speed train in China and potentially in U.S. will put pressure on airlines. China is building high speed train from Shanghai to Beijing, Guangzhou to Beijing and other route and most of them will be finished by 2012. Some finished part already put pressure on the airline. Airline has to discount 80% of its price to compete against high speed train. The demand for airplane from China will start to diminish in 3-5 years which will have a negative impact on Boeing and Airbus.

Greece bailout?

It is being reported that Europe is going to help Greece on its debt. The market is very excited. I think the bailout is more difficult than the market thinks. People are still angry about the bailout for financial institutions. Now Germany and France are being asked to bailout another country, how furious people will be. If Germany bailouts Greece, then what about Portugal and Spain? Regardless of the bailout, Greece will be asked to cut spending dramatically and large scale of strikes can be expected.

Alzhermer drug?

The market will rebound at the opening. I do not expect it to be strong. I may sell 200 HSE if it reaches 27.3.

Pay attention to MDVN. Its Alzheimer's drug is in phase 3 trial and could become the most important drug in 10 years. I will buy 100 @36. Be aware that it is a high risk investment.

summary Feb 8, 2010

The market had a late day sell off. It is still too early to be aggressive buyers. I will buy selectively if market continues to go down. IBM earning is very stable and did not went down last year. I will be interested in it around $120. I do not see European debt problem blown to a crises but it will have some impact on government spending (a warning to many countries).

How to balance inflation and growth is huge task for Chinese government. Given the wage and raw material increase, I do not see how they can contain inflation without bursting the real estate bubble. Containing inflation probably will not be a priority this year.

As Greenspan pointed out, stock prices (wealth effect) will have an impact on real economy. If stock market continues to go down, it will have an negative impact on GDP 3 months from now.

When I start this blog and my portfolio, I stated that my objective is to outperform the market while have much less volatility. As of today, the market is down 2% since I started. My portfolio is up. But more importantly, I only had one negative day in more than 3 months and the volatility is less than 25% of the market.

Closing value
Portfolio 1 (U$): 110715
Portfolio 2(C$): 80421


Closing value

Insurance, cash and etc

One question is always being asked is how much liability insurance we need. It is always good to have some but too much is not necessary a good thing. Same thing maybe true for companies. Too much cash reserve is not necessary a good thing. Toyota has billions of cash reserves and it attracts so many lawyers right now in U.S. to sue damage. I am afraid all the cash will be spent on the court. An unfortunate truth is how much you will be sued depends how much insurance or cash you have. The more you have will not make things better for you.

Husky Oil (HSE) is trying to spinoff its Asian operation by the mid of 2010. My guess is they would sell the Asian operation to a Chinese company. It should give some supports for the stock.

The market is still range bounding. I will be interested in IBM (@120) and INTC @18.8

Summary Feb.5, 2010

The market had a late reversal and ended flat. I closed IMG @14.5. Greece and other European countries' debt problems can probably be controlled. The unwinding of carry trade may cause some failure in financial institutions. I do not see much upside in the market. Take profit when opportunity comes.

Closing value
Portfolio 1 (U$)110907
Portfolio 2 (C$): 80501

public opinion and government action

The public opinion has turned against government intervention. It has limited the options governments have to deal with next crisis.

Bought 200 IGM @13.9. Will sell it @14.5.

Job number

The job number came out a bit weak than expected, although the unemployment is lower than expected. The market will rebound at the opening but I will not buy into it. The trend is going down another 2-5%. I will put 200 IMG (C$) @13.90 (I sold it 3 days ago @15.6), 100 IBM @120 and 200 INTC @18.8.

Summary Feb.4, 2010

The Dow Jones is down over 260 points and barely hang on to 10000. S&P is down 34 points. The market clearly worried about PIGS. I will cautiously add some positions tomorrow if market continues its down trend. I will buy 200 INTC around 18.9, 200 IMG @14 (I did not get filled today @14.1) and 100 IBM @100.

Closing Value
Portfolio 1 (U$): 110779
Portfolio 2 (C$): 80285

Cisco, U.S $ and PIGS

Cisco had a good quarter and the business is experiencing an upturn. It seems the spending on technology is coming back and I expect it is going to be a good year for large tech companies like CSCO, MSFT, INTC and IBM. The question is valuation. I will rate the above four companies fair to slightly undervalued.

U$ is strong today, which would put pressure on commodity. I will be interested in IMG again around 14.2

PIGS (Portugal, Ireland, Greece and Spain) all have debt problems. How big the PIGS' story will grow is a question the market pay close attention to.

Toyota is having a huge impact on Japan. Toyota is AAA rated and cross ownership in Japan will make things complicated if its rating being cut. I expect the cost to Toyota could be billions of dollar. If there are successful lawsuits then, nobody will know the costs.

Volker rule

Paul Volker has been pushing to separate trading and hedge fund from commercial banking. It has got the support of Obama. The market seems dismissing the chance for it to pass the congress. I am not to sure about it. I personally believe it will go through. 1. It makes sense. 2. It gets global support which takes away the arguments of competitive disadvantage. 3. It has public support. 4. Volker has high credibility.

The Chinese market rebounded as expected. Overall, I do not see much going on in the market. Google is experiencing some troubles right now. I think it has a 50% chance to leave Chinese search market but still stay for the mobile market. If the stock falls below $500, it would be interesting.

Summary Feb.2, 2010

The market is rebounding from oversold conditions. I do not see anything to push the market another 10% in either direction right now. China stock market has been going down for 2 weeks and it probably will have a rebound as well. The biggest problem facing China is inflation. If you count real estate in, the inflation is huge. There are pockets of labour shortage in China already and the raw material cost are going up as well. I can see inflation running up to 5% this year in China. RMB is going to appreciate 5% by mid of the year to fight inflation. However, China central bank will move some foreign reserve from U$ to Gold to reduce the its loss before RMB appreciation. I can see its entry point for gold between 1000 to 1050 ( they want to buy gold below India's purchase price).

Closing value
Portfolio 1 (U$): 111583
Portfolio 2 (C$): 80493

take some profit

The market continues its rebound. I sold 200 IMG @ 15.44 and 100 TD @ 63.8 (all in C$). They are all good companies but I look for a better entry point (5% lower). My portfolio 2 right now only has 400 HSE in it and the rest are cashes ($69,645)

toyota's recall

Is Toyota undervalued because of the recall? I am not too sure about it. The fix is in. If it really works, then it can start to sell new cars again in a few weeks. The total costs probably run to 5-10 billion dollars (including the loss sales). However, the law suits are piling on. It could cost anywhere between a few hundred million dollars to billions and billions dollars. It is going to be there for long time. I will not touch Toyota at this moment.

China is going to accelerate the pace of acquiring oversea energy, base metal, iron ore, potash, and precious metal companies. They put aside 20-30 billion dollar aside for this year. Given the political sensitivity of Chinese takeover, I will assume the target company will be small to medium caps. They like resources locate in central Asia, Africa and south America. I will put HBM and S in Canada on my radar screen.

Summary Feb.1, 2010

The market had a reflex rally and may last another day or two. The market is cautious. So I do not see a big bubble burst correction or a violent rally. The budget in U.S is terrible but Obama probably did the best he can do. It probably is positive long term for precious metal, although the correction may go on for a while in short term.

I bought 200 HSE @ 26.6 today. It closed @ 26.9

Closing value
Portfolio 1 (U$): 111,337
Portfolio 2 (C$): 80350

confusion is the market

The market is confused. On the one hand, the earnings seemed robust. On the other hand, market is worrying about the deficit, sovereign debt, tightening in China and populism against the banks. I still believe the market is going to be range bound.

The market is oversold. I will buy 200 shares of HSE @ 26.60, 200 INTC@19.3. If IBM goes below 120, I will be interested. IBM has very stable income. It did not drop in 2009, which is very impressive. It did not have high growth either. A 10X multiple, given the stable income, low growth, and strong cash flow seems very reasonable.