China raised interest rate again

High inflation in China has forced the hand of Chinese central Bank again and the interest rate is raised again by 25 bps. It may push down commodity price in short term. but given Fed's ultra loose monetary policy, it is hard to see oil and other hard assets to stay low. The world is heading into stagnation.

CSCO is up today. I would take profit @22.

Tax cut extension

The tax extension deal is not good for the fiscal health of United States. There is no way deficit will be cut to 3% GDP in foreseeable future. The tax cuts will benefit retail sales especially on the high end.

Bank of Montreal did a deal today. It seems Canadian banks try to use their excess capitals. Current yield curve is good for banks.

Fed meeting

Federal reserve had a meeting today and nothing has been changed. The Fed claims that the inflation is trending lower which gave them the reason to continue QE2. With both food and gas prices surging, and cotton price is reaching new highs, I do not believe there is deflation or disinflation at all. Inflation will be a big problem in one year. By the end of next year, we may see high inflation, high deficit and high unemployment.

The market is expensive. But there is always some opportunities. I am interested in getting POT again @ around 135 (sold @47 2 weeks ago).

interest rate

The interest rates on longer term bonds have increased 50bps in 2 weeks despite Fed's QE. The implications are

1. The FED would not dare to stop QE2 which is going to fuel inflation.
2. Debt and deficit problems in U.S. are getting worse everyday. Deficits in short term is a fiscal boost for economy but longer term is a crisis waiting to happen.
3.The steepening yield curve is good for banks and insurance companies.

too much speculation in the market

The market is overall pushed up by a few high flying stocks, such as Netflix, amazon and etc. The P/E for some stocks have reached crazy levels in early 2000. I will be very careful on those high growth stocks. I will not buy anything right now.

time to sell POT

I bought POT@140.1 C$ after the BHP was rejected by the Cdn. government. It is now trading around 146.5. It is not bad to make $600 in 3 weeks.

The European problem is spreading and it is giving a boost to U$. I think all paper money will be devalued against precious metal.

north Korea's attack

The attacks by North korea on South Korea is more serious than any other previous skirmish. It is the first time since the end of war that North Korea attacked inside south Korea and killed people. I will guess that South korea will respond strongly with no other choices. North Korea is in the process of power transfer and the attack maybe part of the power struggle. I will not dismiss this one as just another incident.

some opportunities

The market is down and the QE2 is facing lots of resistances and the Fed is defending it. I do believe the Fed is going to do more harm than good in long term. However, the short term support from the easy money is going to support the stock market.

I will put an order in for CSCO @19.5 and IMG (C$)@16.8

Stocks to watch

The market is starting to realize that high energy and food prices are having a real negative impacts on consumers. The Fed may get its wish earlier than expected which is high inflation. I will put the following stocks on my watch list.

IM Gold (IMG), BPO, and CSCO. I will get into these names after another 5%down

net effect of QE2

The QE2 has pushed up all assets classes, from stock market to bond market and to commodity market The wealth effect will make people and corporations more confident and increase economic activities.

However, the negative effects are huge as well. The sharp rise of commodity prices and ever lower U$ will translate to higher inflation whether the CPI number reflects it or not. If for some reasons, companies can not pass the higher raw material costs to consumers, then, profit margin will suffer. The best example is Dean Food.

Eventually, the higher inflation will push FED to withdraw the excessive money supplies, then the bubble will burst. whether it is stock market or commodity market.

As an inflation hedge, the best assets market is U.S housing market right now.

What's next for Potash

Canadian government rejected the bid for Potash from BHP on Wednesday. The stock was down to below 140 U$ yesterday as expected. I bought 100 shares @ 140.8 C$. There are some probabilities on other bids or BHP coming back. However, if there is no more bids, the company is worth about 150 U$, given how weak the U$ is. The easy money policy will eventually lead much higher commodity prices.

back from travel

I was travelling last week. The market is still enjoying the easy money policy by the Fed. I believe it is going to announce a 500 billion QE II on Wednesday. Over long term, this will bring inflation to life in U.S and emerging market.

This week is critical to Potash. If government rejects the deal, then the stock may go down to 140 level. It would be a good buy around 140 U$. If government approves it with a condition, then the stock will trade to 150-155 U$.

Is Potash deal doomed?

BHP bid for POT is facing provincial government's opposition and the final federal government's decision is on Nov. 4. The concern is a 10 year tax revenue loss of 3 billion dollar for the provincial government. I do not believe that 3 billion dollars will be a big obstacle for BHP, considering the deal size (around 45 billion at the end). The most important issue is still the takeout price. I do think that BHP does not want to go beyond $155. If POT is not satisfied with that price then the deal may fail.

China raised interest rate

China has moved to curb its inflation by increasing interest rate 25bps. It is unexpected but a correct move.

The commodity market has retreated because of the Chinese move. But the obvious trade sometimes is not the right trade. I do not believe that The Fed will abandon its QE2 and probably will increase the amount of QE2. The increased money supply will stimulate emerging market more than U.S. itself. The dilemma is QE2 will hardly move the U.S economy (maybe 50bps for GDP) but will inflate CPI in emerging market.

I will buy 500 IMG @17.1 (C$) today.

What's wrong with big banks in U.S

The big banks are trading around 52 weeks low and the problem is not new. The CDOs and mortgage backed securities they sold a few years ago are coming back to bite them. There are lawsuits to force banks to buyback these products. If these lawsuits are successful, the liabilities could reach a few hundreds billions.

I will wait a while to see the situation develops to bargan hunting

intel and JPM number

Intel's number is relative strong. I like its position as more intel based ipad like devices getting into the market. My target is 24.

JP Margan's number is ok. The strong equity market since September will give it a boost in trading revenue next quarter. The foreclosure legal mess may pose a risk for large financial institutions.

The market is strong because of the expectation of QE II.

Japan moves

Central Bank in Japan is doing QE again to try to weaken its currency. The competitive devaluation is intensifying. The Fed is going to do QE II in early Nov. In short term, it is going to inflate both physical assets and financial assets. But in ling run, it is going to end badly. Some bubbles will be inflated and bursted. Gold and precious metals will be benefiting from all these madness. I will buy some IMG today below 18.

When to take profit on Gold

Gold is reaching new highs everyday and it is quite possible there will be a correction. However, I believe the uptrend is still on tack as long as the Federal reserve and other central banks are printing money like crazy. The only thing will stop them is higher inflation. I will sell gold when inflation starts to go up. On good indication is ten-year treasury yield. If the yield go above 3.5%, take profit on gold.

Anything to stop QEII

The Fed is on the way to QEII which will result a competitive devaluation of global currencies. A global inflation is unavodable which will be a disaster in two years. Gold, silver and real estat will be good investments right now.

The only possible reason that may stop the FED to start QE II is the inflation but it will not rise for a few more months.

Fed's impact on Gold

It seems the Fed is determined to do QE again and the most obvious impact will be on gold. Gold will go up to at least 1350. I would buy IMG around 18.

When QE starts in November, it may push up market initially because assets allocation. All the new money from FED will inflate all assets prices. I will close out my HXD position today.

POT is in the lower range and I will buy it @ 146.9 U$ (150,50 C$).

fed meeting

Federal Reserve is going to decide whether it wants to do more QE. Given the Fed's willingness to stimulate economy at the expense of the currency stability and inflation, I will not surprised that it may announce some steps on how it will engineer a second QE. The market will like it but I will sell into rally.

oracle and RIM results and how to invest

The oracle result is out and it beats estimates by 3 cents. The stock moved up to 26. I do not like it at this level. It is trading at 20xP/E and they are getting into more and more lower margin hardware business. The hire of Mark Hurd is not a wise decision.

Research in Motion is also beating the estimates as well. The street does not like this name. Apple and Android phones are eating its lunch. The stock valuation is not expensive but competitions are increasing and margins are shrinking. The stock may pop tomorrow due to short covering. Sell quickly if you own it.

likely outcome for Potash

I do not think Chinese companies will bid for Potash. They may participate in some sorts of financing. The most likely case is BHP comes back for a friendly offer around 155 U$. Anything above that will require a vote from BHP shareholders which will add lots of uncertainties. The process may frustrate traders because it will be slow. I will buy under 146 U$ and sell above 150U$. The downside is 130 U$

basel III and tax cut

Basel III is kind of light on bank capital which give the financial sector a short term break. The market is rallying on the news. But is it good for the long tem health for the banking sector? We have to see. Loan demand is still very weak in U.S. and the spread is narrowing which is not very good for banks' profits. On the other hand, the loan quality is improving and loan loss provision is decreasing. I am neutral on the sector. I will buy Bank of America under 13 and sell them at high 14s.

U.S. congress is debating keeping Bush tax cuts. One question always raises heated debate is whether tax cut generate more government revenues. The conservatives say yes, and their evidences are Reagan and Bush tax cut brought more tax revenue to government. The liberal says no and the evidences cited before had more to do normal business cycle than tax cuts. My take is both of them are not honest or intellectually incompetent. There is an optimal point for tax rate to raise the most revenue. Just like you throw a ball, everthing being equal, the angle you throw determine the distance. Both zero degree and 90 degree get you nowhere. Of course the optimal point in economy is dynamic and can change over time. But my feeling is it change slowly .

The positives and negastives of the market

The prevail sentiment currently is that the market is undervalued but there is enough uncertainty in economy to prevent money shifting to stock. My view is the market probably is fair valued because the earnings may come down next year and there are many companies' pension obligations in deep holes.

However, there are some positives as well:
1. Overall, competitions have decreased over last two years. Lots of supplies have be taken out.
2. The barriers are high for new companies to come into market because of tight credit situation for small and new companies.
3. The credits are cheap and available, on the other hand, for large and mature companies.
4. M&A activities are increasing.

How do you read Chinese steel market

Over the last two days, Chinese steel prices have jumped between 2-5%. Does that mean that Chinese construction is red hot again? The answer is no. the reason for the price increase is Chinese governments (local and central) had ordered the closing of some steel companies to meet their energy consumption target. It is a supply shock. It can be reversed anytime. Be careful to base your investment decision on the steel price in China.

The market is due for a correction.

what's next

The market had a very good rally yesterday and suddenly everyone is bullish again. To me this is still a range trading market between 1010-1130 for S&P 500. TSX is breaking out its range a bit but 150 points can be attributed to POT. I am bearish on TSX because I feel the banks in Canada are overvalued. Most of them trade over 2X book value.

sold BAC and CSCO

The market is going up nicely and I sold my Bank of America @13.05 and CSCO @20.5

stock rally on China PMI

Chinese PMI data increased a little bit and the markets all over the world is excited. I do not think it was a big positive and Chinese market was down actually on the news. I bougt 200 CSCO yesterday @ 19.85 (sold @ 24 about a month ago). If it goes to 20.5, I am going to take profit.

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.

Europe is doing better

European crises is over and the actions from countries in Europe to cut their budgets so far have impressed the market. The credit spreads have narrowed between Germany and Spain. Germany is doing extremly well. Its economy probably is the best among developed countries. The low and stable Euro helped German exports. The better European economy has reduced the risk of global slow down. That's why stock market refused to go down despite worse economic data from U.S.

Why earnings are diverging from economices

The earnings so far are very good. But the macro economy is not performing at par. There are some reasons behind the earning surge.
1. The deep recession and tight credit have reduced the number of competitors and increased the barrier of new entries.
2. Cost cutting has made corporations lean and more profitable.
3. Many companies are more rationalized and they took out extra capacities. The margin is high. The best example is airline industry.
4. Overall inputs have stabilized and commodity prices did not jump.

Some of these factors are more permanent and some are temporary. Pay attention to the turn.

earnings and economy

The earnings overall are positive but economy data is worsening. So what's going to happen next? My sense is that the earning upsides are most coming from global operations. However, given the high cash level of corporations, a double dip is unlikely. That's why I purchased BAC and CSCO. However, I do not believe the overall market is cheap. The era of 15X multiple is over.

One bright spot is that M&A activities will heat up given the high cash level and cheap credity. Most companies have to look cost savings to increase earning. One way is to merge to take out competitors and realize cost savings.

Big U.S banks

The market is disappointed on most big U.S. banks earnings. But I look at the positives. The earning quality is much higher because the strict loan requirements. I will expect the loan reserve will come down and this is more important than short term profitability. I will put an order in for 200 Bank of America for 13.38.

bought CSCO

Just bought 200 CSCO @22.20. Given the cash CSCO has and the dominant position it has in the router market, the stock is undervalued. My target is 26 in six months

flat yield curve

Bank of Canada has increased interest rate to .75%. The yield curve in Canada has flattened, which is negative for banks. I would be very cautious on Canadian banks.

The weather is very hot for North America and Europe. It has a negative impact on crops. It may surprise people on food inflation over next few months.

IBM and texas Instrument results

Just as I wrote a few days ago about Intel's results, you can not project INTC's result to other tech companies. There are lots of competitions in PC, notebook, and computer software. The competition in service which IBM is in has been increased gradually. That's why IBM still enjoys a high margin. Most companies do not change their service provider regularly and it gives IBM a stable revenue. IBM is a mature company should trade 10-12 multiple which is 115-130. I will be very comfortable to buy IBM around 115.
TXN is another story. I would not touch it until it drops to 20 or below. There are too many variables in mobile semiconductor space and I do not know who will be dominant player yet.

BP STOPS THE OIL FLOW

It is very good news for BP and environment. BP stock has jumped over 30% in last two weeks in anticipation of this news. Now the slow pain starts for BP. There will be thousands of claims and lawsuits, record fines from the government and billions of clean up cost. In addition, the revenue side has also been hit. The energy trading business is in trouble. Deep sea drilling is slowing. my guess BP stock will not perform for years to come.

Intel

Intel's results are great. I have been bullish on Intel for a long time for the following reasons:
1. Computers are becoming necessities, not discretion items anymore. Most families have two or three computers.
2. Emerging market are catching up quickly. Most households in China have computers.
3. The data and videos on Internet have exploded. More servers are needed.
4. Intel is enjoying almost monopoly status which keeps its profit margin very high.

Will the good results from Intel spread to HWP or Dell? Not necessary. The reason is simple. The competitions in PC manufacturing are fierce and margins are low. One worrying sign is semiconductor companies in Taiwan are slowing down.

My target on Intel is $24. However, I will sell around 23.5.

summary for July 13, 2010

Intel has reported very good earnings. I will discusse more on intel tomorrow.

Closing value
Portfolio 1 (U$):113118, up 3%
Portfolio 2 (C$): 82,738, up 3.3%.

prepare to take profit

Just as I wrote a week and half ago that there were some positives in the market when S&P was down to 1000. Today, I would like to remind people that all the worries are still there. Chines property market is cooling down, government stimulus is running out, and inventory restoration is almost done. I do not believe that S&P should trade over 1120. If INTC's results are good today, I will take profits tomorrow.

Anything changed?

The market went down 5% two weeks ago and up 5% last week. Did anything changed during last two weeks? not really. Basically, the market is trading around by traders and they are very comfortable with a range of 1000-1100 for S&P 500.

I believe the tight credit market is good for large blue chip companies because the barriers for new entries have been set up unreasonably high. Especially high tech companies. I already owned INTC and interested to purchase some CSCO around $21. The commodity companies, especially base metal companies are in trouble in short term because of the fiscal tightening. I am neutral on energy companies.

The improvement in loan quality probably bodes well for commercial and retail banking but not very positive for investment banking. I like Bank of America around $14 and CITI.

fair value for S&P500

You have heard some experts saying the sky is falling down and S&P 500 is going to crash to 500 while others suggested that current valuation is the best in a generation. What is the fair value for S&P 500?

Given risk-free 10-year bond is around 3%, the required return for S&P should be around 7-10%. (most single A and BBB bonds are trading around 5-7, stock is riskier than bonds so it requires a higher return). A P/E between 10-14 will be justified for a required return of 7-10%. If I take the consensus earning estimates for 2010, which is 80 and discount it by 10% because of the unfounded pension liabilities (most pension plan assume a 8% return which is way off base over last 10 years), a fair value of 720-1080 is derived. Consider how accommodating the Fed and other central banks have been, the market is probably biased at the high end (900-1080).

Is RIM doomed?

Research in motion is in trouble. the stock is down over 50% from its high. I have been bearish on RIMM for a long long time. My rational was and continues to be that a mature high tech company does not deserve a premium valuation because competitions would come. Surely it did. (Same thing can be said for Amazon, priceline.com and even Apple). However, at price around U$50, RIMM is probably fair valued. There are some advantages in Blackberry. 1. It uses much less bandwidth than IPhone or Google phones. Everyone is complaining about AT&T but I see this is a Apple problem. The highway is limited and you cannot put bigger and bigger trucks onto it. 2. Privacy. RIMM has the best security among all smart phones. I do not see corporations and governments to switch to IPhone any time soon. It may become an attractive target for Microsoft or Nokia.

vacation

I have been on vacation over last few days. The market is weak. I still expect the market will trade in a range 1000-1100 for S&P 500 and 10500-11800 for TSX. There are some risks that the market may break down lower. I have been bearish for a while. But today I would like to write some positives:
1. Interest rates will stay low for longer than expected.
2. energy and commodity prices are stable or lower. It is good for cost control.
3. Labour has no leverage to demand higher wages, except in China
4. No capital for new businesses which is good for established ones.
5. Governments around world start to be serious about deficits control, which is a long term positive.

storm ahead

The worries in the market, whether they are European banks balance sheet problem, BP's credit impacts or governments' deficits problems are justified. I expect the market to trade down 3-5% at least.

I may close out my HXD @ 12.6.

financial regulation

The agreetment has been reached for Fin-reg. It is going to impact on long term profit for banks on one hand but reduce risks on the other hand. The market is going to rally because the uncertainty is gone. I expect the market to trade around 1100 for S&P 500 before it falls again. Take profit if you can.

rethink risk

If an oil spill accident can almost wipe out BP, we have to rethink the risks involved in investing in oil companies. When investing in oil and gas companies, analysts and investors usually consider the risk of commodity prices, exploration, access to capitals and political (country) risk. But given the accident in BP, I doubt any insurance companies would be willing to insure deep sea drilling given the unlimited liability.

The government needs to work with industry to set up a reasonable cap on liability (5-10 billion dollar range) in order for deep sea drilling to continue. Before that happens, I will be very cautious to invest in large oil and gas companies.

reality check

The market has finally realized that economy is slowing down and governments all over the world are hitting a debt wall. Stimulus are gone and slow growth is the new norm. The stock market will be range bound for a while. One last push high for the bulls may come from the finacial regulation. If finreg is watering down then, financials may get a strong bounce. Use it as an opportunity to take profit if it happens.

China moves on currency

China is moving to loose the control of its currency and the market is getting excited. Personally, I believe the impact will be small and some positives and some negatives:

Positives:
1. reduce pressure on inflation in China and lesson the chance of interest rate moving up.
2. Some positive impact on commodity prices.

Negatives:
1. reduce profits for exporting companies in China
2. small increase in inflation pressure in U.S. due to higher Chinese products prices.
3. more questions on U.S Global reserve currency status.

I am cautious on the market

another stimulus package?

U.S. economy is stalled. The growth in the second half of this year would be below 2%. Obama is looking for 2nd stimulus but was met by strong resistance from congress. The stock market will be much more difficult in the next few months. I sold my TD bank today @ 73.25.

Fedex and BP

Today, Fedex reduced its earning expectation for next year. Its excuses is the higher expenses because of strong business. I do not buy it. How can you have higher revenue but lower earnings? If marginal revenue can not cover marginal cost, then, stronger business is a negative.

BP is going to set up a 20 billion fund to pay claims. I do not believe the 20 billion is enough. The stock is having a rally but not its bonds. if you own the stock, you should switch to bonds.

The market is performing quite good among all the bad news. I do not think it can last much longer.

BP bond being downgrade

BP's bond is being downgrade. It is more serious than market's reactions. Many hedge funds and financial institutions have to adjust their valuations because of the downgrade. The market is trading artificially today because of option expiration week.

I will buy 300 HXD (short TSX) @C$12.72.

crude oil

I expected that the oil spill in Gulf would have increased prices of crude oil but it did not over the last month. The crude is trading in the lower range of my target for this year. I still believe that oil will probably go up because of the long term supply concern.

The market is up today but I still expects a trading range between 1030-1130 for S&P 500 and 10800-11800 for TSX. The European debt crisis, BP oil spill and exhausted stimulus spending have made the current situation much worse that 2 months ago.

energy stock is rebounding

Energy stocks are rebounding strongly just as I expected yesterday. The market may rally for a couple days but I do not expect it to exceed my range (1000-1100 for S&P500).

British Government is going to get involved in BP dealing with U.S. government soon as I predicted a week ago. The market is also bringing the liability number to 40 billion as I predicted 3 weeks ago. I do not expect BP to go bankrupt. It will pay out the damage through future cash flow. The stock will be depressed for long time but there maybe opportunity in its bond. Wait until the bond to be traded under 50 cents on the dollar.

trading range

The market is still in a trading range. 1000-1100 for S&P500 and 10800 to 11800 for TSX. Energy stocks are due for a rebound (not BP). Chinese property market is cooling off dramatically. Major cities are seeing 60-80% down in sales.

Gold is becomging a new reserve among developing countries. It will trade between 1050-1300 this year.

BP in the news again

Finally, the news media and the market started to think the possibility of BP bankruptcy. New York times published an article about BP today to speculate the worst case scenario. I actually pointed this possibility in my blog on May 1 and May 21st. I would like to discuss the the most likely outcome. Since BP is a UK company and the failure of BP will cause panic and market crash in U.K., U.K government probably will negotiate a deal with U.S. on behalf of BP. It will be structured like a tobacco liability deal. BP will pay 10-20 billion dollar a year for next 5-10 years. BP will avoid bankruptcy and U.S. government and legal compensations will be paid.

wealth impact

The stock market decline will have a negative impact on economy. I would be very cautions on Canadian market because of exposure to commodities. I read that Chinese steel companies for the first time this year lowered their steel prices. This is not a good sign for mining companies. U.S. Market may perform better in short term because of lower energy price, low interest rates and continuous of deficit spending. But over long term, there are many negatives: higher taxes, higher energy prices because of supply situation in deep sea drilling, and higher interest rates due to budget pressure.

The market is in deep trouble

The employment number is not good. Europe problem is spreading and oil spill is not contained. The market is in trouble today. I will not be surprised if the market goes down 250 points. I will put an order in for 100 TCK.b @30 and 200 BAC@14.80

BP's attemp

BP has put the cap on. But from the live feed, I can see the oil spill has increased at least 50%. The cap is not tightly fit and oil is coming out from sides. I do not think BP can contain more than 50% of the oil.

a critical day for BP and the market

Today BP is going to try cap the leak. If successful, BP probably will survive and the market will have a relief rally. (There will still be problem if the hurricane season is active. Oil can not be collected if a hurricane forces out collecting ship).

If the cap fails. I doubt BP can survive. BP is spending 30 million dollars a day right now. It will be 3 billion dollars for 100 days. The additional cleaning cost will be at least 10 billion dollars. The legal and economic compensation costs will not be cheap. My guess the total cost will be at least 40 billion dollar.

Take some profit if the market goes up today.

BP and The market is in trouble

Just as I predicted, BP is in deep trouble. I will not be surprised that BP goes to bankruptcy protection if the new cap method fails. It will have a huge impact on U.K banks and the whole market.

I sold 100 TCK.B @35.50 today. (bought @31.50 2 weeks ago).

The upside is limited

The recent turmoil in the market has turned off retail investors. I do not see sideline money coming to the equity market. The market is mainly traded by hedge funds and traders so it is more technical based. The cash level in mutual funds is very low right now. S&P will trade between 1020 to 1120. TSX will trade between 10800 to 11800.

BP's impact on the market has been under-appreciated. It is quite possible that BP will cut dividends and its bonds will be downgraded. The liability can run to tens of billions dollars. There is a slight chance that BP can file chapter 11 to limit its liability.

the market how low can oil go

In the beginning of this year, my prediction for crude oil is between 60-85. I have not changed my position yet. The reason is simple, the economy for offshore oil and oil sand will disappear when oil is below 60. So you will not have long period time for oil trade below 60. The fundamental change may happen when electric cars become viable.

The market is in panic and will last for a while. There are facts and noises in the market. Facts: Global economy will be slower than expected because of European situation; China property is cooling down which means the base metal prices is levelling off; U.S real estate market has stabilized and will improve because of the low price and low martgage rates; Low oil price will benefit consumers; Federal reserve is very dovish; High U.S exchange rate will decrease corporate earning for global companies. Noises: potential breakup of Euro (it is not going to happen any time soon); Big U.S. banks have lots of stress due to European debt (most big Bank's balance sheet are much stronger than a year ago and will make lots of money because of the yield curve).

BP's liability

If you still own BP, you should think again. The liability will exceed 10 billion dollar. the 75 million cap is irrelevant because there are safety issues violations. The dividend is in danger. I would not touch it until the spill is stopped and you have a clear picture of the liability.

shopping list

Today the market is in free fall and may give you some opportunities. If you want to put orders in, please put them way down of the market. Also do some switches.
In Canada:
BCE should be sold over 31. List of buy: CNR @55. TA@19.20; HSE@24.50; TCK.B@29.80; POT@98.

In U.S.
BAC@15; V@68; INTC@19.80; CSCO@22; CHL@44 and IBM@120.

a rebound is close

The market is close to 10% correction and a rebound is likely. I bought 100 shares of TCK.B @31.50 C$ (around 30 U$ for TCK). My target is 34 C$. I also put an order in for 100 POT @C$101 or U$96.

When the market bounce, it should be sold to.

summary for May18, 2010

The market wanted to go lower. So it is a good time to establish some positions. I have not got the shares I wanted yesterday. But I will continue to put the same order in.

I have not update my portfolio for a while. This is the updates

Portfoilio 1 (Cash, 400 INTC, 200 CYB, 200 BRCD and 1000 C): U$113,369
Portfolio 2 (Cash, 400 HSE and 100 TD): C$81925

the market is in correction and build some positions

The market is in serious correction for the first time in a year. I will slowly to build some positions. I will put an order for 100 shares of TCK.B for 31.5 or TCK (in U.S.) for 30.50. 100 shares of POT at 100 C$ or 97 U$. 200 BAC at 15.

another interesting Weekend

Last weekend, EU central bank decided to buy governments' bonds. It gave a lift to Greece and other EU countries bond a lift at the expenses of Euro. You may see next week EU may intervene in the Foreign exchange market, with the help with FED.

In Asia, Thai is in deep trouble. The protesters and government is in war. Investment community so far is ignoring the risk but I can see it become a bigger problem next week. China is still trying to engineer a soft landing on property prices.

The gulf oil spill is still going on after 3 weeks. It is much longer than expected. If they can not stop the flow this weekend, the damage will show up on shore next week.

Be cautious on the market. I can see the market correct another 5%.

oil sand play

China is investing 800 million into Penn west energy in Canada. The is the second investment by China in oil sand in 2 months. Given the difficulty in deep sea drilling, Canadian oil sand is becoming More attractive. I can see big American and European oil companies coming into this space as well. Husky is trading at a very attractive level. It probably will be taken over in 12 months.

Is the rescue in Europe going to work

The success of European 1 trillion dollar rescue depends on two things: The first is whether Germany is willing to subsidize its southern neighbours. The government may not have other options but the voters may revolt. The second question is whether PIIGS countries willing to accept the deficit cutting measures. They are going to be painful.

The UK new coalition government is not stable. Cameron can not compromise too much.

Chinese economy will slow down (but not crash down). The property market has shown signs of cracking. The stock market in China has corrected more than 20% which is a good indicator.

European ease

Just as I expected, EU is doing QE big time. It starts to buy governments' bonds and transfer the risk of PIIGS to whole Europe. Germany, over long term, is a victim. It seems the governments all around world will not tolerate any pains necessary to control the deficits. The market, whether it is bond market or stock market, is being distorted by the government actions. In short term, it is going to pop up the market. But over long run, it is going to create lots of problems. If printing money can solve all problems, then, life is so much easier.

the target for the stocks I bought last week (INTC and HSE) are: 23.5 for INTC and 29.50 for HSE.

The market is panicking

The uncertainty in Europe is reaching climax today. The day of EU central bank intervene in the market is approaching. My expectation is early next week. The market was overvalued as I suggested many times. However, some stocks presented opportunities today. I bought back 200 INTC @ 20.50 (sold @22.50 a month ago) and 200 HSE @ 26.75 (sold @30.50 3 weeks ago). I also closed my HXD @ 12.45.

I will be interested in buying POT @ 95 (U$) and TCK.B @32 (C$).

The positives of Greek problem

I have wrote many pieces of the negatives of Greek and Equropean problems. The market is start to reflect these problems. But there are some positives for North American market:
1. keep interest rate low.
2. keep commodity price low
3. capital inflow to safe heaven

I will put an order in for buying HSE @27 (C$) and 200 INTC @21.75

European's options are limited.

The bailout of Greece did not prevent the speculation on other PIIGS. The risks are spreading. As I discussed last week. The only option will be QE (quantitative easing). Central banks will start to buy governments' bond. This will sure anger Germany and induce high inflation.

the profit margin is peaking

The profit margin expansion story is over. PPI is going up quickly but CPI is not which means the profit is being squeezed. Labour cost is at the bottom and start to pick up as well. Interest rate will move up regardless fed's action. All these suggest the P/E expansion is over. If the market wants to go up, the earning has to go up another 10% next year. It is possible but unlikely.

The ompact of oil spill could be bigger

The impact of oil spill is devastating to the environment but people are underestimating the economic impact. The cost to clean up could add up to 5 billion dollars.The impact on travel and fishing industries could be another 5 billion dollars. The shut down on several nearby off shore drills and the impact on oil shipping route will increase crude price by 2-5 dollars which will cost economy in U.S. another 50 billion dollars/year. If BP can not handle it or its insurance is not adequate, then it will have huge impact on U.K economy. BP has over 8 billion dollars in cash and 34 billion in debt. Its ability to generate 27 billion dollar cash flow is in jeopardy right now. I will not be surprised that its bond rating will be cut. Some hedge funds and banks will be hurt by all these.

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.

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.

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.