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….”

China Cuts Banks' Ability to Lend – Part III

News:

Several state-run Chinese banks have ordered some branches to suspend new lending for the rest of this month, suggesting a coordinated effort by Beijing to manage state banks' torrid lending in the year's first few weeks.

Thought:

Another move by the Chinese government this week, which brings unease to the markets around the world. In the past week, the markets were also shocked by President Obama’s proposed new restrictions on large banks and by the doubt of Fed Chairman Ben Bernanke’s second-term confirmation (which will pass for sure, I think). On the economy side, three mega-size companies recently announced huge layoff; 12000 from Verizon, 11200 from Wal-Mart, and 1000 from Home Depot, although the last two companies said the layoffs are not due to the economic reason. The economy and the market are facing tremendous domestic and international pressure and they are heading to a wrong way for the time being after nine months of rebound. The US stock market has dropped more than 5% in just one week after my last post and the damage has yet done. Nevertheless, again, the current correction is anticipated to have a short live only.

China Cuts Banks' Ability to Lend – Part II

News:
A top Chinese banking regulator said Wednesday that China will tighten its monitoring of banks as it tries to prevent speculative bubbles in areas like real estate. Another report said the China Banking Regulatory Commission asked several banks to stop issuing loans. While the CBRC's chairman denied that he had asked banks to stop lending, Bank of China, one of the country's big banks, said it was taking steps to rein in loans. It would be the latest effort by China to restrict runaway lending and cool that country's overheated growth.

Thought:
The Chinese latest move was predicted in my 1/12/2010 article, China Cuts Banks' Ability to Lend, but the urgency of the action is a surprise. It shows that the government is very serious in slowing down the overheating economy. Today, investors pay more attention to the impact of the news and hand the stock market the worst day of a year (off 1.1%). At the same time, the currencies and the prices of the natural resources mentioned in the last articles are hurt as well.

Besides the move, the bull market shows tiredness recently as the share prices of the big firms (such as Intel and IBM) dropped right after they reported blowout fourth quarter earnings with optimistic forecasts. Moreover, Europe refused to bail out Greece, in which will bring more anxiety to the market. Overall, there is a high possibility of a near-term correction. Around ten percent of fallout from the high is anticipated.

Google vs. China

News:
Google suspects Chinese government hacking its website and vows to leave the Chinese market to stand with its principles: freedom of speech and freedom of press, if China doesn’t loosen its control.

Thought:
Chinese government seems like not going to back off. If Google leaves the world’s biggest internet market, its long-term earning potential will be greatly hurt; besides the direct impact on its search business, its nascent mobile phone and other businesses may be affected as well. Thus, it is interesting to see if Google will really take the action without compromise. The Chinese rivals will be benefited and happy with the Google’s departure. The stock of the largest internet company in China, Baidu (with 58% of market share), has shot up ~$80 (20%) in just two days after the news broke out. However, without Google, the internet development in China will not be as good.

The Absolute Best Time to Buy/Sell

When everyone talks about and recklessly buys the same class of asset, it is signs of bubbling and the peak of the asset price. For instance, housing was a super hot topic few years ago. All medias; newspapers, magazines, TVs, had uncountable coverage on it. You might be also aware that people in different age groups discussed about housing in parks, restaurants, and supermarkets. I heard about two people physically fighting for the right to buy a $500K+ house in Glendale, CA. It sounded crazy!!! The history proved that was the best time to sell if you owned one for investment, or not the right time to buy. History repeated itself as the phenomenon of the housing bubble was identical to the internet stock bubble in 2000.

On the other hand, when everyone is afraid of touching a class of asset, it is a sign of the asset price’s nadir. In March 2009, the stock market fear index, VOLATILITY S&P 500 (^VIX), stayed at a historic height and stock mutual funds had experienced a substantial amount of net outflow for several months. It implied that people were desperate to sell at any price. The history proved that was the best time to buy, or not the right time to sell. History repeated itself as Hong Kong’s billionaire, Ka-Shing Li, started buying properties to build his fortune in 60’s when Hong Kong was in riot and the future was in doubt.

Pay attention on what people and media talk about. If it seems too extreme and irrational, do the opposite of what they do. It may also go against your inner mind, but it will save you huge amount of money or make you handsome return if you can take this psychological discipline. Remember, history had happened and will repeat itself. This strategy always works!!! Be prepared not to make a costly mistake.

China Cuts Banks' Ability to Lend

News:
The Chinese government once again surprises the market by increasing bank’s reserve requirement ratio to curb the overheating economy, after last week’s surprise increase in the bond yield on one-year bills.

Implication:
Theses actions reflect that the Chinese economy is overheating and show the government’s determination to fight against the growing inflation. Unless the economy slows down itself soon, the government will make further steps to contain the growth/inflation as they did before the 2008-2009 financial crisis. In either case, the Chinese economy will slow down in the near future. Given that the Chinese economy is the third largest and is the main pillar to support the world economies during the recession last year, the slowdown will depress the energy (oil, coal) and material prices (steel, copper, gold…etc), which will hurt the resources denominated currencies such as Australian Dollar, Canadian Dollar, and New Zealand Dollar…etc. Moreover, due to the stock markets non-stop rising from the bottom since March 2009, the long-overdue correction will also be triggered soon by the slowdown. However, the correction is predicted to have a short life only.

Why Must You Invest?

When people are asked why they invest, the majority would say “try to make money”. This is a typical and a very true answer. We all try to make money by investing. However, on the other hand, a more important and compelling reason is: Investing is to protect the value of our money.

It sounds very awkward; we invest because we need to protect our money? Yes, we need to invest to protect our money. In today’s world, I believe most of the people have heard about the word “inflation”. What does inflation mean? It basically means price increases in products and services. Almost all of the countries around the world have inflation each year, except Japan where has experienced deflation (opposite of an inflation) in the last 15-20 years. Some countries have higher rate of inflation, whereas others have lower rates. In US, the average inflation rate is about 3% per year, which is considered mild.

Now, what does inflation mean to you? Let say you have $10 today and the gas price is $2/gallon. Your $10 bill can buy you 5 gallons of gas. Next year, assuming the inflation rate is 3%, the gas price will be $2.06, and you can only buy 4.85 gallons of gas. Another year of 3% inflation will increase the gas price to $2.12/gallon. Your $10 today can only buy you 4.71 gallons of gas two years later. It doesn’t seem a lot of money, right? Why bother? But, if you have a larger amount of money, the impact will be more obvious. For instance, $100K can buy you $97K of today’s goods next year, and $94K two years later. In other word, your $100K will loose $6K buying power in just two years and the value will keep decreasing every year afterward.

In the above examples, we can clearly see that inflation is the fearful enemy of our money. It makes our money less value and erodes our buying power years after years. For this reason, we must invest our money. The minimum goal of investing should be having a return that at least matches the rate of inflation in order to preserve our buying power. You may wonder how and what you should invest in to keep your money’s power level. Fortunately, in today’s financial world, there are many different tools to help us fight against inflation. They will be discussed in the next articles.