risk free assets

Most governments' bond in developed countries were considered risk free assets. No more. Right now, only Germany, U.S. Canada, Aussie Japan and U.K's bond are considered risk free. However, you still face currency devaluation among these countries because of potential money printing. That's probably the most important reason why gold is up so much.

The dry out of funding to European countries ex Germany has made the financial market very volatile. The valuation matrix is confused because the risk-free rates are changing rapidly. If you can buy government Italy bond at over 7%, how much you will demand to own Italy corporation bonds? The required return on equity will be at least 12%. That's the challenge the market faces.

ECB and European debt solution

The market seems believing that there is a simple solution to the European debt problem and blaming that politicians for not acting. I question that wisdom. To me there is no valid solution short term but through long hard cuts on social warefare.

One easy solution which everyone from Obama to Sarkosy to Cameron and Putin (except Germans) believe is for ECB to be the lender of last resort. The problems with this solution are two folds. 1. First, fundamental fairness. Who is going to decide buy which country's debt. Why help Italy not Spain? At the end of day, buying debt is a subsidy to the country. Second, ECB buying will incentivize politician to increase deficits. It is much easier to get elected by promising more warefare and tax cuts than cutting spending and higher taxes.

China's impact on steel and Base metal

The debate whether there is a soft or hard landing in China is raging on. But one thing is clear, the investment led expansion is slowing down. The two major engines for investments led growth are high speed rail and real estate. Both of them slowed recently. Real estate sales in major cities are down from 30 to 50%. The safety issues and short of capital has slowed high speed railway construction. According to official figures, 70% of the projects have stooped. The impact on base metal are negative. The impact on steel is the biggest, which extends to iron ore and coking coals.

Apple again

On July 20th, I cautioned that Apple need new Blockbuster product every two or three years to maintain the growth rate. It is very unlikely. In long term I am not too keen on Apply. However, in short term, if the stock trades below 365, the stock should be bought for a trade.

I have been bullish on Intel over 2 years. The stock is approaching $25. I will either sell a covered call @25 or sell the stock.

The market is full of hope about Europe. I will be skeptical about it. If ECB can do what FED is doing (printing 2 trillion), all the problem will be gone in short term. But Germany is not going to allow this to happen and I applaud its decision.

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.