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  • What causes the market advance today.

    Today we have a good day for the market (if you are long).  However, the market advanced without apparent reason.  Some attribute the market advance to Bernanke testimony.  But how can a person's Congressional testimony can move the market so much?  Commentators have to say something to justify market action.  To me, portfolio managers were buying and adjusting their portfolios because the end of the second quarter for reporting to their clients.  So, I am not surprised to see some volatility for the next few days.  What's next?  The market will turn its focus to Q2 earnings.  The market has been expecting some recovery.  Thus, if the Q2 earnings are disappointed, we will some big sell-off.  However, if the earnings are better than expected, the market will celebrate by bidding up stocks.  So, Q2 earnings are critical for the near term movements.  I don't expect Q2 earnings are as good as expected.  FedEx announced that their business expectation is down and the business is not recovery.  Also, Nike did not have good earnings and guidance as well.  I still don't think consumers are spending.  Banks may have good earnings again due to the changes of reporting accounting rule.  Now, banks can write down their assets in a lesser extent so their earnings will be good.  But again, good earnings are expected.  My suggestion is to watch out for disappointed Q2 earnings.  If the earnings are not good, you can short the market.  If the earnings are as good as expected AND provide raise earning guidance, then you can long.  Without earning guidance, companies are not confidence about recovery.

    Tags: market, earnings
    Jun 25 5:21 PM | Link | Comment!
  • Is the market going to retest the March low?

    Today's market performance can be argued for half-full or half-empty.  If you are a bull, you would argue that the market did not slide further and no follow up on selling.  Sideway is good and is a healthy sign for resurging.  For a bear, the market cannot reverse the market after a big drop. There are no bargain hunters out there.  So, there would be more downside.  I am in the bear camp.

    The market advanced based on possible economic recovery.  I believe the market is too optimistic.  The unemployment continues to climb and consumers use extra cash, if any, to pay down debt.  House sales keep going down.  I deeply believe the housing market is worst than what the data shows.  Most house sellers pull their houses out of the market since the prices are too low.  They simply refuse to accept the fact that the house prices have declined.  So, there are a lot more potential houses for sale.  Without housing returns to the better, US economy cannot be recovered.  There is one big issue on my mind: what happen to the purchase of banks' toxic assets?  I have not heard about how the Treasury is going to buy the toxic assets.  It seems this issue disappears.  If these toxic assets are still in the bank and unemployment reaches 10% as expected, will the banks face another round of big write-down.    Of course, some may argue that banks are in good shape because they are able to raise sufficient capital.  Remember the capital needed is based on stress test using unemployment rate of less than 10%.  If the unemployment reaches 10%, I wonder whether the recent capital raising is sufficient to cover another write-down of their assets.  Another bull argument is the widen yield curve.  Banks can make significant profits with the current yield curve so they can earn their way out of the toxic problem.  But as I understand, banks are still cutting off their clients' credit limit and not really loaning money.  Banks have to loan before they can earn on the long end and borrow on the short end of the yield curve.  Of course, banks' earnings have been helped by the new accounting rule that they can value their toxic assets using their own method.  But reality will prevail sooner or later.  Without financial stocks participating in the upside, the market advancement is limited.  I believe the Q2 earnings will be somewhat disappointed and the market may head down again.

    Jun 23 8:08 PM | Link | Comment!
  • The future of US dollar.

    China has made it clear that the continuous of the weakness in the US dollar is not acceptable to the China government.  China has a total of $2 trillion in reserves with more than $1 trillion in US dollar and holds about 10% of US publicly held debt.  Therefore, China is very concern about the US dollar value continues to slide.  China needs to deal with the dollar situation very carefully. 

    More immediate action is China wants to the International Monetary Fund (NYSE:IMF) to issue “special drawing rights” (NYSE:SDR), a quasi-currency.  SDR is valued based on a basket of major currencies.  China and Russia have pushed to use the SDR, which can gives China and other emerging countries a way to diversify their reserves out of the US dollar.  Currently, IMF needs funding to deal with the global financial crisis.  Japan already loaned $100 billion to IMF, but the IMF needs about $500 billion resources.  However, Brazil, Russia, India and China (BRIC) have made it clear that they want to contribute to the IMF but in the form of bonds issued by the IMF denominated in SDR.  In other words, BRIC will not loan money to the IMF in US dollar but will buy SDR bond, which is based on a basket of currencies.  This is an excellent way for BRIC to diversify their US dollar holding, in addition to buying natural resources.  A couple of weeks ago, BRIC has hold their first summit meeting dealing with this precise US dollar issue.  Both Russia and India have mentioned they would buy about $10 billion bond each.  The IMF has not issued such SDR bond before but it has been working on this proposal for a few months now. 

    Many commentators believe the SDR will not be successful because it is too complicated to decide what currencies and how much to be include in the SDR.  Some claim that there is nothing out there better than US dollar and it cannot be replaced.  These commentators are confident that the US dollar will not be replaced by SDR.  Some commentators believe China tough talk on the US dollar is only a game and a threat will not be carried through.  China simply holds too much US dollar and China cannot afford for the US dollar continues to decline.  Furthermore, China needs to keep US dollar at its high level so it can continue to export to US consumers.  No doubt China is an export-oriented country, but it is taking serious steps to promote domestic economy.  In fact, China consumers have been spending but just not buying US products.  Nevertheless, the local economy is still doing great.  As the China domestic economy continues to grow, it will continue to find ways to diversify the US dollar holding. The diversification process away from the US dollar has to be carefully implemented without causing the collapse of the dollar.  This is why China is gradually and slowly open up the capital market for RMB.  Now, foreign firms can issue bonds in RMB for China expansion.  In addition, China starts to settle trade with its neighboring countries using RMB as well.  This actually is more dangerous that people think.  Because the changes are so slow and gradual, most people will not pay too much attention.  As investors, we should monitor these changes more closely and invest accordingly. 

    Bottom line: As BRIC continue to diversify their US dollar reserves, their actions will put pressure on the dollar value.  Thus, US dollar will continue to be weak for a while. 

    Investment strategies: buy China stock that benefits from domestic economic growth (means small companies instead of multinationals).  Invest in foreign currencies, like Australian dollar, and even buy BRIC, and natural resources, especially gold and oil.


    Jun 19 2:21 PM | Link | Comment!
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