ｌｏｗ ｉｎｔｅｒｅｓｔ ｒａｔｅｓ ｔｈｒｅａｔｅｎｓ ｉｎｓｕｒａｎｃｅ ｃｏｍｐａｎｉｅｓ

Ｔｈｅ　ｕｌｔｒａ　ｌｏｗ　ｉｎｔｅｒｅｓｔ　ｒａｔｅｓ　ｉｎ　ｄｅｖｅｌｏｐｅｄ　ｃｏｕｎｔｒｉｅｓ　ｈａｖｅ　ｃａｕｓｅｄ　ｐａｉｎ　ｆｏｒ　ｉｎｓｕｒａｎｃｅ　ｃｏｍｐａｎｉｅｓ，　ｅｓｐｅｃｉａｌｌｙ　ｌｉｆｅ　ｉｎｓｕｒａｎｃｅ　ｃｏｍｐａｎｉｅｓ．　Ｍｏｓｔ　ｌｉｆｅ　ｉｎｓｕｒａｎｃｅ　ｃｏｍｐａｎｉｅｓ　ｈａｖｅ　ｔｏ　ｉｎｖｅｓｔ　ａｎｄ　ｒｅｉｎｖｅｓｔ　ｔｈｅ　ｐｒｅｍｉｕｍｓ　ｉｎ　ｌｏｎｇ　ｔｅｒｍ　ｇｏｖｅｒｎｍｅｎｔ　ｂｏｎｄｓ．　Ｔｈｅ　ｌｏｗ　ｉｎｔｅｒｅｓｔ　ｒａｔｅ　ｗｉｌｌ　ｆｏｒｃｅ　ｔｈｅｍ　ｅｉｔｈｅｒ　ｉｎｃｒｅａｓｅ　ｐｒｅｍｉｕｍ　ｏｒ　ｇｅｔ　ｉｎｔｏ　ｒｉｓｋｉｅｒ　ｉｎｖｅｓｔｍｅｎｔｓ．　Ｎｏｎｅ　ｏｆ　ｔｈｅｍ　ａｒｅ　ａｔｔｒａｃｔｉｖｅ　ｏｐｔｉｏｎｓ．　Ｔｈｅ　ｄｏｗｎｔｕｒｎ　ｉｎ　ｓｔｏｃｋ　ｍａｒｋｅｔ　ｗｉｌｌ　ａｌｓｏ　ｈａｖｅ　ｉｍｐａｃｔ　ｏｎ　ｖａｒｉａｂｌｅ－ｇｕａｒａｎｔｅｅｄ　ｐｒｏｄｕｃｔｓ．　

toronto stock exchange

The battle for control of TSX has intensified but the stockholders are more confused than ever. The stock drooped one dollar today and the vote is June 30th. My guess is that London Stock Exchange will increase its offer closer to 48 and give little time for Maple to react. If London Stock Exchange keep the current offering price, there is less likely it will get the vote. I will buy X @around 43.30 in Toronto today and get our around 47

supply disruption vs. demand surge

The high commodity prices have caused inflation around the world. The slowing demand induced by high interest rate in China and other emerging market have somewhat the muted impact on overall commodity prices. The reason is simply, we have supply disruptions. First, OPEC refused to increase output yesterday (you have to question if they have the ability to increase the supply), Second, the weather has played a major role to disrupt agriculture products. Third, the political and military difficulty in Africa and middle east have made investments in mining in those countries less desirable. All these increase the prices of commodities. I am afraid we are in a high inflation and low growth period and The Fed can do little about it.

QE3, nokia and msft

The economic data are very downbeat and the market is speculating that Fed is going to do a QE3. My take is QE3 won't happen. The cost is much higher than benefit for another round of QE. The inflation would fly higher and average American will suffer. Emerging market will have to tight more and Fed's reputation will suffer greatly.

There is rumor that MSFT will buy Nokia's wireless business. It would be good for MSFT if it happens. Nokia still has the biggest market share in emerging market. If window platform can takeoff, then the merge will be good for both companies.

Market misconception

The market collectively believes
1. The Fed will be there again when economy slows. QE can be done indefinitely. This is not true. The cost (higher inflation) will be much higher than benefits for more QE.
2. Chinese RMB is way undervalued. In fact, on PPP basis, the undervaluation is small. A big Mac meal cost about $3.8 (25 RMB) n China. Most clothing are more expensive in China. If RMB float freely, a 5-10% appreciation is more likely than 20-30% as market expected.
3. Inflation will be contained because of wage constrain. Over last 20 years, the global trade is the most important factor to slow inflation . But it is changing rapidly because of cost in China and other EM market are rising rapidly and cost of shipping is rising as well. The imported inflation Will be felt by average consumer whether t s represented by CPI or not.
4. The higher corporate profits are due to good management. This is far from true. a big part of the profits are coming from lower dollar, higher commodity price and lower financing costs.

Will Greece restructure its debt?

The Greece debt problem is getting all the attention again. The argument for restructuring is getting louder. There are both positives and negatives on restructure. The negatives are obvious. They will hit financial market hard and it may spread to other PIIGS countries. The positive is that
Greek people will get some relief and introduce some risks to bond holders (they are having free lunch for too long).

The reality is EU will delay this decision as much as it could. Do not expect any new bailout package or restructure any time soon. My guess is some decisions will be forced upon at the end of this year.

The market is ahead of itself right now.

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%.