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.

potential debt ceiling deal

The potential deal looks like 4 trillion dollar cuts in 10 years, which means average 400 billion out of the economy every year (2-3% of GDP). Of course, the debt deal may bring some certainty to the market and induce some corporate investments (one trillion? at most). It definitely will slow GDP by at least 1% a year. I do not see the positive for stock market.

Apple

The earning and cash flow is incredible at Apple and given its growth rate, the stock is very reasonable priced. Most analysts have a 450 or higher price target on APPL. The only thing I will be cautious is new product line. Over last five years, APPL has brought two new products (Iphone and Ipad) to the market and generate 100% growth every year. If Apple does not have new blockbuster product come on line, the growth will slow and competition will intensify.

The worst option

Benarke testified that the Fed is ready for extra stimulus. This is the worst possible option. The mere mention of possible QE3 has get market excited but it also pushed the oil up by 2 dollars and Gold another 20 dollars. The speculation in raw materia will push them mush higher and the inflation will not moderate as expected by the Fed. That's enough to get the Fed out of any further stimulus. So it will be high inflation and no QE3 at the end.