peak earning

The PE ration looks very reasonable on S&P 500 but the problem is that the earning is probably at or close to peak. Given the fact that PPI is much higher than CPI, profit margins are getting squeezed. Federal Reserve is being cornered as well. High inflation and slow growth will be here to stay. Government's stimulus and bailouts around world are near end because of voters anger. I expect the market to go down around 7%.

The market is going lower

The Canadian market has held up really well and given the troubles we are facing, I would expect it will go down 5% quickly. The problems the market is facing are
1. High inflation will limit the options of central banks. Emerging market will slow down to limit the inflation
2. Uncertainty in Japan on the nuclear issue is a short term concern, my sense is the worst case is not likely.
3. Middle East troubles are getting worse and no good solution is on sight. It will keep oil price high.
4. No stimulus from U.S. government and the Fed can not do a QE3 given the high inflation
5. The profit margin is being squeezed given the high PPI and relative flat CPI.

tsunami and earthquake in Japan

The earthquake and tsunami in Japan has caused confusion in the market. The rebuilding will boost short term economic activities in Japan but the fiscal situation in Japan is terrible. It may cause the rating of Japanese bond to drop.

Microsoft

Microsoft is trading less than 10 P/E multiples and it has net cash about 35 billion. The company has a 75% gross profit margin and grow around 10%. The Nokia deal should provide some positive earning boost in 2012. Microsoft never had any success in mobile and Nokia has about 40% of mobile market share. Even if Nokia's market share drop to 20%, that's still a big plus for Microsoft. Microsoft should trade around 32. I would buy it around 27.

Higher food inflation

One of the unintended consequences for printing money is higher food prices across the globe. It is especially tough on emerging market and poor countries. The uprising in Egypt and other parts of the Arab world is a warning for China and India. I suspect fighting inflation will be the priority for Chinese and Indian Government. The tightening of credits and interest rate will be more than market expected. It will finally break the uptrend for commodities this year (as long as Federal Reserve is not doing QE 3). The out-performance of Canadian and Aussie market will not be repeated this year.

Egypt situation

The market seems happy with the situation in Egypt. It assumes the end of Mubarak is near and it will be peaceful. The disruption will be insignificant. I do not agree with this assessment.
First, there will clashes between protesters and pro-government forces. There are many interested groups benefited from the current government and they will no go quietly.
Second, even a power change at the top is not going to cure the inflation, poverty and corruptions. Just look at Pakistan, the change of government did not do much good for its people.
Third, the oppositions are not well organized and the fighting for power will be ugly as soon as they lose their common enemy.

I will be very cautious right now. The market is due for a correction.

back from China

I was away in China for a couple of weeks. Some of my observations>

1. Inflation is running high and people are anxious
2. No one believe the prices of real estate will ever drop which gives me some doubts
3. The construction of high speed rail is enormous in terms of both the mileage and speed.
4. urbanization is fast. Plenty of jobs in the cities.
5. Wage is on the rise for low skill workers.