rethinking of deep sea oil

The blowup of BP deep see platform is a warning to the oil industry. The recent finding around Brazil and other deep sea oil may not be available to us for long time. It certainly changes the supply picture completely. It is also negative for big oil companies rely on deep sea drilling, like petrobra.

too big to save in Europe

The Greece problem is spreading to other PIIGS countries like wide fire. The question is not whether German will approve the aid package, (yes, they will). The problem is what happens after Greece. Can Germany save Spain and Italy? I don't think so. Is it too big to save? My guess at the end of day, European central bank will start to buy sovereign bonds (printing money) just as the Fed did. When that happens, gold is going to shine.

goldman, Greece and the market

Goldman is on capital hill today and I do not think they will get a fair hearing which is going to damage its reputation. Greece is in a showdown between the market and the government and the market is winning right now. Germany is very reluctant to give out money. Pay attention to Portugal and Spain. If their CDS explode, then there is no enough money to bail them out.
China is trying to softland its property market and its stock market is at 6 month low. The market is in trouble in short term.

Greek solutions

Greek bond is trading at unsustainable level. Everyone is looking for a solution. The best way for Greece is to restructure all their debt and it will result big losses for European banks but reduce its debt burden. But this would be a slap on the face of Euro. The most likely solution is to strike a deal with IMF and central bank. It will be short term cure but long term pain for Greece.

The market is wary about the situation.

European debt problem getting worse

The problem in Greece is getting worse and the market does not believe that Germany is willing to stand by it commitment. It probably will rely on IMF and European central bank more than Germany.

I closed out my Morgan Stanley today @31.50

summary for April 20, 2010

The market is up a bit today. Most strength came from commodity and high tech. If Chinese government's effort to cool down property market is successful, then, commodity will decline. Apply seems in a league of its own. The earnings are very impressive and the stock probably will shoot up tomorrow to 260. You have to give the credit to their product development and marketing power. But the law of large number will prevail in sometime. The market value of Apple is 250 billion. If it grows 30% every year as expected by some analyst, then in 10 years, it will be a 4 trillion dollar company and it is just impossible mathematically. Same as revenue growth. When the number reaches certain point, there is no way you can growth 30% annually. My guess is a p/e of 20 on forward earning would be a fair value which gives a 280 target in one year.

Closing value
Portfolio 1 (US): 114638
Portfolio 2 (C$): 82540

Goldman and the market

Goldman Sachs is having a huge image problem. The civil charge against itself is not a big deal, at most cost it 1 billion dollars. But the damage to its image will be huge and investment banks rely on their reputations. The Ash on the European sky is causing another problem for airline industry. If it can not get back to normal by next few days, we will see a few airlines have trouble to pay their debt and governments' assurances will be required again. The market is due to a pull back.

I will buy back 200 shares of HSE (C$) @28.40 today (sold 200 @30.50 a week ago).

buy MFC today

I bought 500 MFC today @ 19.70 (C$). It traded in U.S. as well. Same symbol.

The rational:
1. Manulife is highly leverage to equity market. It has the biggest variable annuity in North America and about 50% of the exposure are unhedged. The rises in stock market will reverse the charges and improve earnings. I also believe MFC will use the strength of the market to hedge more so the earnings will be more stable.
2. All life insurance companies will benefiting from rising interest rates. Most of the premiums are invested in government bonds. So the increase in interest rates are good for MFC.
3. The improvement in commercial real estate will benefit MFC a lot. MFC have 10% of assets in real estate market.
4. MFC is the best foreign life insurance company in China and the valuation does not reflect that.
5. The company raised lots of capital over last year and the balance sheet is strong.

China GDP and UPS

China GDP is growing at 11.9% and the inflation pressure is building. The real estate market is red hot. I expect the central bank will start to increase interest rate soon and to cool down the economy. It will have impact on global economy. The reasons for most global companies, like intel and UPS, to post strong earnings can be attribute to China more than to U.S.

By the way, the earning surprise on UPS should not be treated as a buy signal. The valuation is not cheap on UPS and the higher fuel prices will have an impact on its earning going forward. My feeling is 2010 and 2011 will be the peak earnings for UPS and other transportation companies. Most of them are traded close to 20P/E. I am not comfortable.

Intel

Intel reported very strong earnings. Both revenue and profit exceeded expectations. The profit margin was very impressive. I like Intel the most among large high tech companies for the following reasons:
1. It is the strongest in the industry and its competitors are weak. Intel has over 80% market share and AMD has 15%. I do not see new companies get into this space. So Intel is likely to keep its profit margin.
2. The demand is strong. Netbooks and laptops are becoming essential for most people. Developing countries' demand are very strong as well. Corporations are upgrade their computers right now because of window 7.
3. The life span of a laptop/netbook is shorter than desktop.
4. Apple's mac is using Intel chips as well.
5. The company has very strong balance sheet.
6. Intel pays a 3% dividend
7. The valuation is very reasonable.

My target price for INTC is $28, which implies a 14X p/e

China observation 4-auto industry

The auto demand is very strong and there is a waiting list for some imported cars. The gas price is as high as those in U.S. There is not much financing going on for auto purchasing and most people pay cash for their cars. The strong demand in auto, real estate and high speed train has pushed up steel demand and the iron ore price will sure ignite inflation.

The tightening in China will have a profound impact on global economy, probably more so than the Fed.

summary for April 9, 2010

Dow is at 11,000 and it is higher than I expected. The major reason is the liquidity created by the FED. The valuation is not cheap but Fed and central banks all around world are creating money rapidly. The Fed increased its balance sheet by 2 Trillion dollar. Money supply increased over 40% in China last year. All these money are finding their ways to risky assets. It is real estate in China and stocks and junk bonds in U.S and other market.

Closing Value
Portfolio 1 (Cash, 200 intc, 1000 c, 200cyb, 200 brcd and 200 ms): 113942
Portfolio 2 (Cash, 100 TD, 200 HSE and 300 HXD): 82517

Greece situation

Greece situation is becoming worse everyday and it had impact on European banks and Euro itself. Eventually the problem will be solved. The question is at what cost. Germany is not going to throw in a lifeline easily and it will impose tough conditions. The long term problem is the social unrest in Greece. I do not see it has a major impact on U.S. market.

negative impact of low interest rate

The ultra low interest rate has discouraged savings and encouraged consumptions which is a short term boost for GDP but problematic over long run. There is another negative impact of low interest rate which is not discussed in the market: it increases pension liability. Pension liabilities are discount back to present value by long term interest rate. The lower the rate, the higher PV of liability and a bigger shortfall of pensions. More companies (defined contribution) will have to put more money into their pension because of the low rates.

China observation 3-consumer spending

Chinese consumers are overall optimistic. Most restaurant are full and car sales are up 30-40% annually. However, the sky-high housing price is going to put a damp eventually on consumer spending.

Salary is rising fast among skilled labour in China and the potential of RMB appreciation will export Chinese inflation to U.S.

Luxury goods and electronics (computers, flat screen TV and etc.) are seeing huge demand and probably bodes well for high tech companies such as Intel, CISCO and Microsoft.

oil price and job number

Oil is hovering around 86 dollar and 10 year bond yields over 4%. I do not believe U.S. economy can stand these pressure. I sold 200 HSE today @30.6.

Employment data was good on Friday and will continue its upward trend for a while but the market is way ahead of itself.