I am an enthusiast in the financial market. I am creating this blog to track my own thoughts. On the other hand, I find many people lack of knowledge or have misunderstanding in investing and/or in the financial market. I hope this blog can help them learn more and get interested.
I am very pleased with my investment returns in the last five years, even in the storm of 2008-2009 financial crisis. I would like to share with you my knowledge and experience I learned from the graduate school and from the market. To be a successful investor/trader, fundamental knowledge and psychological discipline are of the essences.
The articles in this blog are divided into four categories:
1. Knowledge – Fundamental knowledge in economics, financial market, and investing
2. Emotion - Fundamental knowledge in psychological training
3. Eye-Catching News – My thoughts on market moving news
4. Other – Other stuffs I want to share with you
If you find my blog to be help of someone you know, you are welcome to invite them to join my blog.
I welcome comment, suggestion, discussion, question, feedback, or correction regarding the articles I posted.
Enjoy!!!
Wednesday, December 12, 2012
Sunday, August 21, 2011
The Market is Prone to Bounce - 8/21/2011
Back in May 2011, I shared my view to two of my friends that the US market would enter a turbulent period after it hit the 52 weeks high. My prediction was based on many clouds gathering at same time: high oil price (~$118/barrel), Greek crisis and its bailout debate, the US debt ceiling debate, the economy was losing momentum but the Fed still insisted to end the QE II. Moreover, the commodities mini crash at the beginning of May foretold me the storm ahead.
After almost three months of selloff (~17%), I now see the current storm may be passing and the sunshine may be ahead of us based on the following factors.
1. The oil price has dropped about 30% since then, which is equivalent to a mini tax cut to help the businesses and consumers.
2. Despite the debt rating downgrade by the S&P, the market disagreed with the decision by pushing the 10 years Treasury yield to the record low at around 2% from 3.3% in May. The low rate will definitely help the economy.
3. The debt ceiling debate was behind us. President Obama can now put his focus on rejuvenating the economy. He will outline his new plans and policies to help the job market and the economy after the Labor Day.
4. The Fed has been and will be very aggressive to fight the downturn. They first committed to keep the zero rate until the second half of 2013. Then, they hinted that they would do more to help the economy. New pro-growth action(s) is/are expected to be announced at the end of this month.
5. The fear index (VIX) has jumped to a historic high level (>40), which signals that the market may be about to reverse its course.
6. Companies are still making huge profits and amass mountains of cash. If the anticipated new pro-growth policy is enacted along with the expected Fed’s action, their profitability will continue.
7. European governments are believed to do whatever they can to contain their debt crisis, at least for the short-term.
The main risk is if the European and the US governments do not take any action, but it seems very unlikely given that they have done a lot to help the economy and the market since the financial crisis. It has no reason to forgo their prior efforts to let the world economy back to recession.
After almost three months of selloff (~17%), I now see the current storm may be passing and the sunshine may be ahead of us based on the following factors.
1. The oil price has dropped about 30% since then, which is equivalent to a mini tax cut to help the businesses and consumers.
2. Despite the debt rating downgrade by the S&P, the market disagreed with the decision by pushing the 10 years Treasury yield to the record low at around 2% from 3.3% in May. The low rate will definitely help the economy.
3. The debt ceiling debate was behind us. President Obama can now put his focus on rejuvenating the economy. He will outline his new plans and policies to help the job market and the economy after the Labor Day.
4. The Fed has been and will be very aggressive to fight the downturn. They first committed to keep the zero rate until the second half of 2013. Then, they hinted that they would do more to help the economy. New pro-growth action(s) is/are expected to be announced at the end of this month.
5. The fear index (VIX) has jumped to a historic high level (>40), which signals that the market may be about to reverse its course.
6. Companies are still making huge profits and amass mountains of cash. If the anticipated new pro-growth policy is enacted along with the expected Fed’s action, their profitability will continue.
7. European governments are believed to do whatever they can to contain their debt crisis, at least for the short-term.
The main risk is if the European and the US governments do not take any action, but it seems very unlikely given that they have done a lot to help the economy and the market since the financial crisis. It has no reason to forgo their prior efforts to let the world economy back to recession.
Thursday, May 27, 2010
Not to Love and Not to Hate!
Never fall in love nor be hatred with a company’s stock. A stock is just a financial tool to help us achieve our investment goal, not our lover nor our enemy. People often make a mistake of sticking with a company’s stock for too long without periodically evaluating the underlying company’s fundamental strength, potential future stock price appreciation, and the economy condition. The infatuation is usually attributed to the fame of the company, satisfaction in the company’s products, past investment return with the company’s stock, or proud of being the company’s employee.
For instance, Citigroup was the biggest well known bank in the world before the financial crisis but it would have bankrupted if the government did not bail it out. Another example is Microsoft. Its products are omnipresent in every computer. Its stock made a lot of people a millionaire in 90s. Although the company still makes tons of money every year and it has billions dollars of cash equivalent securities in its account, its stock price has dropped more than 50% from 2000 to 2010. If I was a Microsoft investor, I would have been better off by selling the stock at the beginning of 2000 and put the proceeds into a bank saving account. The main problems of Microsoft were that the stock price was ahead of its fundamentals in 2000 and the company’s innovation was slowing down.
Conversely, hating a stock may make you miss a potential profit opportunity and it may be even worse if you are shorting it. Be neutral on a company’s stock; never love nor hate it. If you have a position in a stock, it is important to periodically evaluate the underlying company’s fundamental strength, potential future stock price appreciation, and the economy condition.
For instance, Citigroup was the biggest well known bank in the world before the financial crisis but it would have bankrupted if the government did not bail it out. Another example is Microsoft. Its products are omnipresent in every computer. Its stock made a lot of people a millionaire in 90s. Although the company still makes tons of money every year and it has billions dollars of cash equivalent securities in its account, its stock price has dropped more than 50% from 2000 to 2010. If I was a Microsoft investor, I would have been better off by selling the stock at the beginning of 2000 and put the proceeds into a bank saving account. The main problems of Microsoft were that the stock price was ahead of its fundamentals in 2000 and the company’s innovation was slowing down.
Conversely, hating a stock may make you miss a potential profit opportunity and it may be even worse if you are shorting it. Be neutral on a company’s stock; never love nor hate it. If you have a position in a stock, it is important to periodically evaluate the underlying company’s fundamental strength, potential future stock price appreciation, and the economy condition.
Wednesday, May 26, 2010
Dow Below 10000
News:
The Dow Jones industrial average slides to its first close below 10,000 in nearly four months. The European debt crisis, Koreans conflict, and potential China slowdown are the factors attributed to the recent market’s turbulence.
Thought:
After hitting numerous 52-weeks highs in the period of March to mid-April, the stock market has dropped more 10% that technically enters the “correction” territory. Now, the important question is whether it is a short-term correction or it is the start of a bigger slump. Based on the following analysis, the market seems like just experiencing a correction.
1. The US economy is still improving, especially for the employment and the consumption markets. Most of the American corporations reported blow-out earnings and revenues for the first quarter with very rosy outlook. In addition to that, the recent economic data are also very positive. Although the European woes will affect the export to the countries, the economic damage to the US is limited because US is not an export dependant country. The main engine of the economy here is consumption, which is accounted to about 70% of the national income. As the recent data suggest, the US is growing internally.
2. The European woes may help the US as a matter of fact. Fear of the debt crisis and the consequent economic fallout drive investors to put their money into the safe places. One of the safe places is American because it is a super power and its economy is growing. Recent data showed that countries such as China and Japan increased their holding in US Treasury. The recent turmoil also drives up the demand and prices of the US bonds, which in turn pushes down the interest rate. The 10 years US bond rate stands at 3.21% today that has dropped more that 0.6% in less than a month. The housing market will surely be a beneficial of it as well as the US government and the US companies. Additionally, the Federal Reserve will probably delay the interest rate hike in the uncertain time. The low rate will keep supporting the economy growth in the US.
3. The fear of global economy slowdown also depresses the raw material prices. For instance, the oil price has dropped more than $13 per barrel from the peak this year. Cheaper oil and cheaper materials will definitely help businesses and consumers.
In the opposite of the bright sides, there is a concern that the current debt crisis would depress business and consumer confidences. If banks stopped or made fewer loans and/or consumers stopped spending, it would spell a trouble for the US economy. However, given that the Fed and the central banks around the world had spent so much effort to flight the financial crisis in 2008-2009, the world economy had escaped another depression. They will not allow the world fall into the hole again and they are believed to put whatever efforts they can to keep the economies afloat. Two weeks ago, the European countries and the IMF swiftly put together a trillion dollars rescue package with a credit facility provided from the Fed. If the condition worsens, they will surely make other strong actions to help. On the other hand, the US banks are in much better situation today than two years ago after recapitalizing their balance sheets.
The Korean conflict will probably not develop into a bigger issue because most of the countries are condemning the action of the North Korean to the South Korean warship. The North is not financially and military strong enough to stand against the whole world.
The potential China slowdown contributed by the government tightening efforts will not affect the US economy much. As a matter of fact, the Chinese economy will still expand at a rapid pace, but not at an overheating level.
The market volatility may continue for a while. But, in the long term prospective, some of the stock prices are at an attractive level. It should be a good time to start accumulating beaten high quality stocks.
The Dow Jones industrial average slides to its first close below 10,000 in nearly four months. The European debt crisis, Koreans conflict, and potential China slowdown are the factors attributed to the recent market’s turbulence.
Thought:
After hitting numerous 52-weeks highs in the period of March to mid-April, the stock market has dropped more 10% that technically enters the “correction” territory. Now, the important question is whether it is a short-term correction or it is the start of a bigger slump. Based on the following analysis, the market seems like just experiencing a correction.
1. The US economy is still improving, especially for the employment and the consumption markets. Most of the American corporations reported blow-out earnings and revenues for the first quarter with very rosy outlook. In addition to that, the recent economic data are also very positive. Although the European woes will affect the export to the countries, the economic damage to the US is limited because US is not an export dependant country. The main engine of the economy here is consumption, which is accounted to about 70% of the national income. As the recent data suggest, the US is growing internally.
2. The European woes may help the US as a matter of fact. Fear of the debt crisis and the consequent economic fallout drive investors to put their money into the safe places. One of the safe places is American because it is a super power and its economy is growing. Recent data showed that countries such as China and Japan increased their holding in US Treasury. The recent turmoil also drives up the demand and prices of the US bonds, which in turn pushes down the interest rate. The 10 years US bond rate stands at 3.21% today that has dropped more that 0.6% in less than a month. The housing market will surely be a beneficial of it as well as the US government and the US companies. Additionally, the Federal Reserve will probably delay the interest rate hike in the uncertain time. The low rate will keep supporting the economy growth in the US.
3. The fear of global economy slowdown also depresses the raw material prices. For instance, the oil price has dropped more than $13 per barrel from the peak this year. Cheaper oil and cheaper materials will definitely help businesses and consumers.
In the opposite of the bright sides, there is a concern that the current debt crisis would depress business and consumer confidences. If banks stopped or made fewer loans and/or consumers stopped spending, it would spell a trouble for the US economy. However, given that the Fed and the central banks around the world had spent so much effort to flight the financial crisis in 2008-2009, the world economy had escaped another depression. They will not allow the world fall into the hole again and they are believed to put whatever efforts they can to keep the economies afloat. Two weeks ago, the European countries and the IMF swiftly put together a trillion dollars rescue package with a credit facility provided from the Fed. If the condition worsens, they will surely make other strong actions to help. On the other hand, the US banks are in much better situation today than two years ago after recapitalizing their balance sheets.
The Korean conflict will probably not develop into a bigger issue because most of the countries are condemning the action of the North Korean to the South Korean warship. The North is not financially and military strong enough to stand against the whole world.
The potential China slowdown contributed by the government tightening efforts will not affect the US economy much. As a matter of fact, the Chinese economy will still expand at a rapid pace, but not at an overheating level.
The market volatility may continue for a while. But, in the long term prospective, some of the stock prices are at an attractive level. It should be a good time to start accumulating beaten high quality stocks.
Thursday, February 18, 2010
Fed Surprise Move
News:
The U.S. Federal Reserve made its first interest rate move since December 2008, hiking an emergency lending rate it charges banks from 0.5% to 0.75%, but insisted borrowing costs would not rise for consumers or companies.
Thought:
Everyone knew it was coming as the Fed hinted in the last policy meeting, but no one expected it happened so soon and in between meetings. The discount rate increase is just a symbolic move. It will not have significant effect because the borrowing facility is only for banks and is seldomly used recently as the financial market stabilized. However, by the action, the Fed sends out a clear signal that the economy is on firmer footing and it will raise the Fed fund rate not too far away to prevent inflation out of leash, although it said the opposite during the announcement.
The move may initially affect the market negatively. But, for long term, the market will ascent for the years to come as suggested by history. Interest rate increases after recession when inflation is still moderate is a proof of growing economy. The US Dollar, especially the Dollar and Yen pair, will also be benefited by the future rate hikes.
On the other hand, company M&A activities have picked up pace in the last few weeks to reflect greater confidence in the economy.
The U.S. Federal Reserve made its first interest rate move since December 2008, hiking an emergency lending rate it charges banks from 0.5% to 0.75%, but insisted borrowing costs would not rise for consumers or companies.
Thought:
Everyone knew it was coming as the Fed hinted in the last policy meeting, but no one expected it happened so soon and in between meetings. The discount rate increase is just a symbolic move. It will not have significant effect because the borrowing facility is only for banks and is seldomly used recently as the financial market stabilized. However, by the action, the Fed sends out a clear signal that the economy is on firmer footing and it will raise the Fed fund rate not too far away to prevent inflation out of leash, although it said the opposite during the announcement.
The move may initially affect the market negatively. But, for long term, the market will ascent for the years to come as suggested by history. Interest rate increases after recession when inflation is still moderate is a proof of growing economy. The US Dollar, especially the Dollar and Yen pair, will also be benefited by the future rate hikes.
On the other hand, company M&A activities have picked up pace in the last few weeks to reflect greater confidence in the economy.
Saturday, February 13, 2010
China Cuts Banks' Ability to Lend – Part IV
News:
China said it will raise the reserve-requirement ratio for banks by half a percentage point from Feb. 25, the second increase this year. That will make it standard for major banks to keep 16.5% of their deposits on reserve
Thought:
China did it again; the second reserve-requirement tightening in a month. The move once again surprises the market because of the timing of the action. To act right before the Chinese New Year and right after the moderate inflation data released two days ago, China is sending a very strong and clear signal that they concern about the overheating economy: near one-fifth of this year’s loan target (7.5 trillion Yuan /$1.098 trillion) have been made in just one month, the property prices appreciated nine percent over last year in January. More tightening measure is surely expected to come.
In addition to the China concern, Greece’s debt crisis has had full-blown effect to the market. The debt problem not only exists in Greece, it also happens to larger Euro-zone countries: Spain and Portugal. Although German and France vow to assist Greece and are expected to do the same thing to their member countries when needed, it will unavoidably bring volatility to the market.
Asides from the recent negative developments, there are some positive news in US. The outlook of the employment is improving; despite jobs are still being cut, the unemployment rate has dropped, the hiring of temporary workers is accelerating, and work hours is lengthening, which are the precursor of the eventual job recovery. Second, the Federal Reserve recently outlined the plans to drain capital from the system in the future, which reflects that the government is seeing the economy continue to grow down the road. Third, most of the companies reported growth in profit and revenue for the fourth quarter of 2009, some even hardly beat the expectations with rosy outlook. Since US is still the super power by far, its recovery has a lot more weights than other factors.
The market is in the midst of correction. At one point last Friday (Feb 5, 2010), the market dropped near 10% from the high (Dow: 9822, S&P 500: 1044). The correction may not be too far away from the end. Once the dust is settled down, the market will resume its climb to a new high. Now is probably a good time to prepare snapping up bargain assets.
On the other related topic, interesting enough, China is focusing on using bank reserve-requirement ratio as a tool to fight against overheating economy, which tool was rarely used by the US in the last two decades. The reason of the choice may be trying not to jack up the interest rate to not increase the pressure on Yuan appreciation. Strong Yuan would hurt China export in which the Chinese economy mainly depends on. Meanwhile, the government seems like only concerning and targeting the domestic speculation in assets such as housing. More research and understanding on the structures of Chinese economy and its financial market need to be done as any move by China will greatly affect the whole world as it grows stronger.
Thursday, January 28, 2010
The Articles I like
January 27, 2010
“Is It Here Yet? A Few Unnerving Developments Point to a Correction” by James D. Steward on The Wall Street Journal
“One of the fundamental conundrums of investing is that we may be absolutely correct about something and yet unable to profit. Making money on an insight requires two conditions: the information cannot already be priced into the market, and other investors who do not already share that information must come around to our point of view.
There are times when the conventional wisdom about something may well be correct. If the conventional wisdom is already reflected in market prices, then profit opportunities are slim to nonexistent….”
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