Where is the money for EU bank bailout

The market is very excited about the prospect that EU will stabilize the banking system in Europe. Eventually they do not have a choice. However, the question is where the money would come from. Most European countries. credit rating have been downgraded, except Germany and France (plus a few Scandinavia countries). France is in no position to inject large sum of money without jeopardizing its own credit rating. So at the end of day, Germany is going to put up the money, whether it is a guarantee and leveraging. In order to satisfy its voters, Merkel will demand harsh conditions for the bailout. I won't be surprised to see some banks in Europe to lose big in their equity. Non-secure creditors may also have some risks. I have some doubts on orderly restructure of Greek debt.

The price for the german vote

Germany has voted overwhelmingly to support the expansion of ESFS. The market will soon realize that the promises that Merkel made to her coalition were not market friendly. ESFS will not be levered up easily as U.S envisioned. The market has further downside to go.

When to buy gold

Gold has been down for a few days and it has corrected about 15%. I would not be surprised that gold down another $200-400 to 1200-1400. The Fed is under pressure not to do QE3. Germany is fiercely oppose any QE for European Central Bank. All these have create downward pressure to gold prices. But overall, paper currency has lost trust around the world and gold will find a bottom soon.

The market is very volatile over last month and influenced by every rumor and news from Europe. My feeling is the volatility will die down a bit and overall, the market is still in a downward trend. QQQ is relative expensive and energy is over sold.

The likehood of QE3 and its potential impact

The Fed is inching closer to QE3 and I will put the probability higher than 50%. It may boost assets prices in short term but will have a longer term negative impact on U.S. economy. Commodity prices will soar and U.S. dollar will depreciate. The higher import price couple with high food and energy prices will offset any positives the QE may bring. It will also make emerging market policy makers life miserable. All emerging markets have to tighten again to combat inflation. If you want to take advantage to invest in stock market, keep you time horizon short. I will buy real estate as a hedging of inflation.

Googel did not overpay for MOT

Many analysts came out and complained that Google overpaid Motorola Mobile. Their logic is flawed. Some simple analyses.

Google is paying 12.5 billion dollars. Motorola has over 3 billion in cash with no debt. By the deal closing time, the cash will be around 3.5 billion. So Google is basically paying 9 billion. MOT is generating 450 million free cash flow a year. Given a 10 multiple, it is worth 4.5 billion. Notel's patent portfolio was sold for 4.5 billion. It is reasonable that Google pay 4.5 billion for MOT's patent portfolio. In addition, Google gets 5 billion dollar goodwill which can be write off gradually. The tax benefit over long term will be at least 1 billion.

The second complain is the combination will impede the growth of Android. It is pure nonsense. If Android is the best platform out there, then HTC, Samsung and others will continue to use it.

buy list

The market is down sharply and I would get ready a buy list to gradually get into the market.
The following is my first list

In U.S.
MSFT (buy around 24.7)
INTC (19.5)
AAPL (360)
IGR (6.5)

In Canada
SU (31)
TCK.B (39)
BPO (15)
RY (47)

Is the market correction over?

The market is down over 4% today and 9% in a week. I have expected the market to correct for some time. The correction creates some positives for the economy. First, the lower oil and other commodity prices which will be good for inflation. The high inflation around the world is the major culprit cause the slowdown. Second, Europe has been pushed to the corner so a solution will finally come in a form to require more sacrifices from Germany but more power to Germany as well. Third, if the economy can recover, it will be on its own without the help of fiscal and monetary easing which is much more healthy than artificial pop up by QE.

The worst thing can happen is The Fed will come in again and do a QE3 which will inflate everything. If that happens, be afraid.