Fed is fighting the wrong war

Fed is likely to do QE again to fight the potential deflation. But in reality, there is no deflation in U.S. It is likely to monetize the debt and shake the confidence in U.S. currency. The QE may temporary force money to riskier assets and create some bubbles on the way.

I am cautious on the market, especially Canadian market. I would buy HXD (shorting TSX) @11.65.

Canadian Banks

Bank of Montreal missed estimates yesterday while CIBC exceeded the expectation. My sense is the banks are entering a more difficult period. Low trading volume, flat yield curve, very little IPO activities and low sales of mutual funds are some of the negatives for the banks. I will expect RY trade to 47, BMO around 52, and TD close to 62.

order in for BAC , CSCO and others

The market is going to sell off today. It is getting into the lower range in U.S. I would like to put some money into the market

I will put in order for 300 BAC @12.65 and 200 CSCO @20.3.

In Canada, I will put order in for 200 TCK.B @32.50, 300 BPO @14.6 and 300 TA @ 20.3

margin problem

The food prices are up, import prices are up and most commodity prices are up. All these present a serious problem for corporations, which is margin squeeze. The weak economy can not bear the price increase so the companies have to absorb the input prices inflation. On the other hand, the relative strong global growth will keep commodity and other import prices on a slow upward trends.

The Potash news has pushed TSX to the high end of its trading range. I will look for opportunity to short it. Canadian banks will have a slow profit growth quarter.

bad move for intel

Intel is spending 7.7. billion for Mcafee which I considered a unwise move for the following reason.

1. The computer security business is in decline. There is not much growth for MCaffe for the last couple of years.
2. The Price Intel is paying (3.3Xrevenue) is way too high.
3. It is a distraction for Intel and it may divert its resources for make next generation mobile chips
4. The purchase get intel into competition with software companies which is not very wise.

potash

POT rejected the offer from BHP. My sense is the final offer would be around 150-160 U$. But there is risk around. If commodity price collapses, then the deal may fall apart.

The market is excited by the takeover news. I expected more to come. On the other hand, the economy is slowing down. The earning revision would be on the downside.

Is 2008 going to be repeated?

The market is scared that 2008 is going to be repeated. I do not see that happening. The simple reason is credits are widely available to s&p companies. Junk bond yields are at all time lows and corporations are raising money in bond market to increase their cash levels. I do see share buybacks and M&A will put a floor on the stock market. I will slowly to buy on the weakness.

when to go back to BAC and CSCO

U.S. market is in a correction mood. Apparently, the market does not like the FED move and Cisco' number did not help either. But I still believe the market is in a trading range between 1000-1120 for S&P and 10800-11800 for TSX. I will take opportunities to get back into some companies.

I sold Bank of American at 14.05 and CSCO at 24 last week. I am looking to get back. I will buy CSCO @20.80 and BAC @12.70

why fed is wrong and how do you take advantage

Fed decides to keep the size of its balance sheet which means it will use the proceeds from mature bonds to buy treasury. It gave out a wrong signal, which is that Fed is willing to monetize government debts as long as the economy is weak. This will lower the confidence in U$ globally. The benefits of lower interest rates and lower dollar are outweighed by future inflation. It creates a very difficult environment for savers and retirees.

The precious metals (gold and silver) will enjoy upward movements. High dividend companies are also good bets because the lower yield from treasury. Commercial real estate may benefit as well because of the lowering borrowing costs. The flattening of yield curve will make banks' life a bit more difficult.

why japanes style deflation will not happen in U.S.

The Fed is worrying deflation like Japan. There are some similarities: 1. Housing market collapse. 2, population is aging (U.S. is much better than Japan); 3 Government is in serious deficit (Japanese people have lots of savings while Americans do not have). 3The labour market and wage are under pressure.

There are also differences: 1. U.S. is a consuming economy while Japan is an exporting economy. The importing prices will have a bigger impact on prices on U.S. than Japan. 2. China played a huge role for exporting lower prices goods in last 20 years which is being reversed now.

To me, the biggest reason why deflation won't happen in U.S. is simple: Japan experience huge inflation in 1980s. Even after 20 years of deflation and little inflation, Japanese consumer prices are still the highest in the world. It is the law of regressing to mean at work here. U.S. Prices are very reasonable and I will argue it is below the average in developed countries.

Fed should be very careful on printing more money. When inflation starts, it will spread quickly.

HP

HP is in the news and the resignation of CEO has put it in the spotlight. The GAAP earnings grew very slowly over last 5 years but none-GAAP is around lower teens. The revenue growth mainly came from acquisitions so it is difficult to say HP should exclude costs of acquisitions in its normal accounting. I will not buy HP today. I am more comfortable with Intel.

what did the employment number tell us

The employment in U.S. is worse than expected. What does that mean:

1. Fed is not going to tight for long term. It may increase its balance sheet again which is bullish for gold.
2. There is no labour shortage or wage pressure which is good for profit margin.
3. U.S. dollar will depreciate which will help export industry.

The market is at fair value and I still expect it trade in a tight range.

employment data

Tomorrow, employment data is coming and my expectation is it falls in the expectation range. I sold Bank of America (14.08) and Cicso (24) today.

Manulife's results are disappointing. It really depends on the stock market. The better performance in the third quater may reverse the loss. I would not sell at today's price.

I am interested in Brookfield property (BPO) which owns premium commercial real estate in New York, Toronto and Australia. The valuation is very interesting. I will buy some around 13.5 in Canada.

Corporate bond market

The yields on corporate bonds are dropping quickly, which is very good for big stable companies. The dropping in financing costs will boost earnings. In addition, it gives companies lots of flexibility to boost cash reserve at very low cost. The dividends are more secure for most companies. It is definitely bullish for dividend paying companies.

Can China control growth at its will?

The market is relieved yesterday that Chinese PMI is not fallen more. The market has a mistaken belief that Chinese government can slow down or bring up growth rate at its will. It is not true. On the surface, Chinese government has lot of power and tools to stimulus the economy or slow down it if necessary. But gradually, government's impact will diminish after ever larger intervention. Chinese people has a very high saving rates which gives government lots of rooms to direct bank loans. However, the risk on bad loans has increased dramatically over last two years. The banks are ordered to increased their common equities. Trillions new equities have been and will be issued. It is more difficult to finance new mega projects for banks. Real estates is the battle ground which will slow down the whole economy in China.