RIM

Research in Motion reported the earning which is a penny shy of expectation. I think the earning is not bad and expectation for next quarter is good as well. I am more concerned about long term competition. Apple, Google, Nokia, Samsung, LG and MOT are all getting into this space and it is getting crowded. Eventually, margin will get squeezed. One advantage RIM has over Iphone is that its data use much less bandwidth and has less pressure on carrier's network. A 10-14 P/E will be fair for RIM which translate to 56-76 U$. If you want to buy, entry point should be around 66 U$.

positives and negatives about the market

There are many experts are telling you either the market is going up another 10% or we are heading back to a bear market. I would like to list both the positives and negatives and you can judge which direction market will go

Posiitives
1. Economy is in recovery and the risk of second dip is very low. Therefore, for most companies, revenue is going to grow and will be better than expected.
2. The cost cutting so far has improved margin which in return makes the earning better than expected.
3. Bad loans on banks' book have improved.
Negatives:
1. Interest rate is moving higher. The argument that a bear bond market is good for stock market does not hold water this time because the huge bond sales by governments around world. Money has to to government to support all the deficits.
2. Inflation pressure is building because of the higher commodity costs, in additioon, emerging market is going to export inflation. Companies will experience margin pressure if they can not increase their prices. e.g. Iron ore price increased 100% and steel companies has to increase their prices or their profits will disappear.
3. Trade wars happened more often and it is getting worse.
4. Market valuation is high. S&P forward P/E is around 15. Given 30 year bond is close to 5% (translate to equivalent P/E about 14). Why don't you buy a risk free asset
My view is overall market is not cheap and probably is over-valued but there are some companies or sectors maybe undervalued.

summary for march 29, 2010

The market up slightly and bond yield continues to move up. I do see commodities prices to come down a bit. If not, either profit margin will suffer or inflation will become a problem.

Closing value:
Portfolio 1 (U$): 113192
Portfolio 2 (C$): 80668

citigroup

Government is going to unload its citigroup stake and which is positive for the stock. Fundamentally, citi is doing very well on international side but still has lots of trouble in U.S.,. Bad loan is getting better but long term profitability is trending down because the higher capital requirement. I would sell my stocks around 5.5-6.

bond auction and interest rate

The auction of U.S. Bond did not go very well. Interest rate is moving up quickly. The stock market did not pay much attention to it and I think it is a mistake. When 10 year yields more than 4%, it will be very competitive against stock market. Unless Fed restarts QE, I do not see the yield come down. I wil keep most of my money in cash right now.

risk taking and google

The swap market showed that AAA corporation bond's yield is lower than U.S. Government's bonds. It shows the market is embracing risk. It is not rational.

Why Google got out of China? All the reasons it gave were not convincing. 1.It knew the conditions when it entered the market. 2. It has developed some good clients, especially among large corporations, so I do not buy the notion that it failed in the Chinese market. 3. Cyber attacks. This is not limited to Google. Most big companies, include Chinese companies get attacked. My take is there are some unspoken reasons, probably related to U.S. government. We will probably find it out in a couple of years.

China observation 2-housing market

The real estate market in China is red hot and prices in major cities increased 50-100% in 2009. There are many experts outside China think the housing market is in a bubble and the pop of the bubble will be painful and drastic. On the other hand, when I talked to people in China, no one believes that the housing prices will drop. Who is right?

First let's look at the negatives: 1. housing price and income ration is in 20s in major cities, compare to 5 in U.S. 2. There is no economic case for investment property because return from rents is less than 3% on average. 3. Speculations are ramped. There are over 15% empty houses in Shanghai and Beijing.

Now the positives: 1. rapid urbanization. The population in big cities are increasing rapidly. 2. Central bank's loose monetary policy is still intact. 3. There are very few investment opportunities in China which force both individuals and companies to invest in real estate market. 4. Expectation on RMB appreciation has moved oversea capital into Chinese real estate market and it continues.

My analysis is that there is a bubble in real estate market but the question is when it is going to burst. It really depends on interest rate and taxes. If interest rates move up 200 bps, watch out. Taxes is being considered but probably 2 years away.

China observation 1-high speed train and subway

When I traveled around China, I was impressed by the construction of high speed train and subways. China is spending trillions on building a high speed train network and most of them will be finished by 1012. It will benefit second tier cities along the train line.

The negative impact will be on airlines. If you can travel between Shanghai to Beijing in 4 hours by train there will be fewer demand for airlines. I am very cautious on Boeing. Not only Chinese demand for planes will diminish in 3 to 5 years but also the defence budget in U.S. will be cut because of the budget constraints.

Back from China

I was in China for three weeks and had the opportunities to talk to various people and visit different cities to observe first-hand on what's going on China. I will blog my thoughts and observation in next few days.

Health care reform passed in U.S. Everything being equal, stock market over long term should have lower valuation because of higher taxes on dividend and capital gains.

Google is exiting China as I expected 2 months ago. When I talked to people in China, Google has strong market share in business sectors. Most large businesses use Google to do their search. Google is going to lose more business than searching in China.