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.