snow day

It is another snowing day in New York and the market will be very quite. I sold My 200 BAC @ 16.6. The European situation does not bode very well for financial industry. But the cash reserve is strong in BAC. Will buy it back around 15.

correction underway

Greek debt issue did not go away and I do not see how it can be solved. There is a strong public opposition in Germany to bail out Greece. Japan and U.K.'s debt are alarming as well.

Corporation's balance sheets have been improving and high yield bonds may be a better investment than stocks and government bonds.

I will go to China for next week and will let you know my experience on how sustainable the growth will be. I may not blog regularly in next few weeks.

I will close out HXD @13.4

summary Feb 24, 2010

The market gets a rebound after Fed chief's testimony. The market is tired.

Closing value
Portfolio 1 (U$):111716 (started on Nov.1 with 110k)

Portfolio 2(C$):80463 (started on Nov. 1 with 80k)

The cause of bubble and Fed's responsibility

There are many reasons for the finacial bubbles we experienced in history. On the surface, they always involved greed and lax government regulations. But deep down, they were caused mostly by the mis-pricing of risks. When price of the risk is low, people will borrow to speculate, whether it is stock market, real estate or art. It creates bubbles. When risk is priced too high, then, economic activities slows down and recession would occur. Most of the time, the problem is the risk being priced too low.

Economists always look at credit spread to judge the price of risk. I think you have to look the level of the rates as well. A spread of 3% is different when the base is 1% or 5%. 4% interest rate will not discourage speculation while 8% may. Federal reserve does not admit it played a role in creating the housing bubble because they did not see much changes in the spread. However, the absolute level of interest rate was very low that speculations are everywhere. I truly believe, the current zero interest rate will create risk mispricing again.

real-estate bottom

Is there value in real estate market in U.S. (residential)? There are lots of noises, from government stimulus, FED subsidies on mortgage and foreclosure preventions. The market has been distorted. One most important measure, however, is the replacement cost. My sense the real estate value has fallen close or below replacement cost in lots of places, assuming labour cost, material cost and environment costs will stay relatively the same. Over long term, purchase a house right now in U.S. represents good value. I am not too sure about builders. Some of them may rebound but market can stay low for a while.

The market is having a down day today. I put an order in to close my HXD position @ 13.4 (bought at 12.98)

summary Feb 22, 2010

The market came down a bit. I will take profit on Bank of America if it goes above 16.5. Husky is changing CEO and I do expect it will spin off its Asia operation soon. It should add 3 dollars to its value.

Closing Value

Portfolio 1 (U$): 112062
Portfolio 2 (C$): 80667

not convinced

I am not convinced
1. there will be no inflation in U.S for next 2-5 years. CPI and Import prices all point to higher inflation. Unless FED to withdraw liquidity quickly, inflation will come sooner rather than later. There is a official report out of China today which estimates that China right now has a labour shortage about 2-5 million. It is going to push up labour cost at least 10%.
2. there will be smooth sailing for all the government borrowing. I can see some difficulties in U.S, U.K and Japan government bonds sales. Investor will demand a higher risk premium to compensate out of control deficit. At the end of day, the only way to repay all the debt is for central banks to print money to monetize the debt. There is no political will for government to either raise tax or cut spending.
3. there is a super bull market for commodity because all the BRIC growth and population growth. In my view, high price will push down demand and increase supply. The cyclical nature of the commodities is still there, albeit the price curve shift a bit upward.