About Petrochina Co. Ltd.

Although I have approached to the IPOs for several times in previous years. Petrochina Co. Ltd. (H-share) can be regarded as my first investment since this is the one that I put sufficient stakes on this. When I bought Petrochina, it was just at the dip of the adjustment in June 2006. During the holding period, it is not spectacular as its related commodities, crude oil and natural gas, were dipping so much. Yet, it is nothworthy that it is the only Chinese stock in which Warren Buffet would like to invest in that. It can withstand the hardship of oil price decrease through the soar of H-share, good management track record, China's nurture, and power of vertical integration. Comparing with similar companies around the world, it should outperform the average of its industry in recent years.

This essay is about the facts and prospect of Petrochina, and it is just the appearance so that certain involved analysis and calculation are not included.

- Some basic facts for Petrochina

• Business involves the exploration of crude oil and natural gas, refinement, manufacture of petrochemical product, pipe connection.
• Its main shareholder is Chinese government through the Petrochina in China. It hasn't been listed and is expected to be listed Shanghai in current year.
• By geographical distribution, it involves many potential businesses in Central Asia and Africa. Yet, for Petrochina listed in Hong Kong, it mainly includes those more politically stable asset such that the international investors are confident to invest in that.
• It has the one of the most respectable international investor, Warren Buffett, as the shareholder.
• Petrochina can have stable sales and earning pattern, high ROE, and mildly high and stable dividend. It has high profit margin and certain vertical integration such that it is usual to be one of the candidates of value investment.

- Some comments as record and reference

• Considering the oil price which is its main source of revenue, we can see that the price of oil is usually volatile. It is hard to speculate the movement. Petrochina was initially mildly correlated to the price of the crude oil. For example, In recent years it was somewhat lucky for Petrochina to earn huge amount of profit since the oil price was ridiculously high. Actually its refinement section was deficit because of this. Another Chinese enterprise, Sinopec, suffered owing to the surge of crude oil price and price control mechanism enforced by Chinese government in previous years. Now the crude oil price lacks the bullish regime as before. Therefore, the momentum to strike for higher price is reduced.
• The natural gas should be controversial revenue for Petrochina since Chinese people will increase using the natural gas as the energy source in the near future.
• From my point of view, the reserve of crude oil has become the stake of negotiation in foreign affair. Therefore, it should be protected by the Chinese government. It can easily gain successful and profitable acquisition in other countries under the reputation of China.
• Looking at another perspective, can we regard it as a utility firm? From the pattern and dividend strategy, it is pretty similar to the ordinary utility firms now, yet it is still sensitive to the price of the crude oil. Moreover I suspect it is one of the tool to control the rise and fall of the H-share index.
• Since its investments and businesses are concentrated in the developing countries, foreign political risk may also affect its performance. The recent kipnapping in Nigeria and the incidence intending to force Buffett to withdraw the shareholder position of Petrochina is controversial.
• For the long term, there is extra cost on corporate social responsibility in sustainable development, as the petroleum industry contributes certain pollution to the society.
• As Tony Measor said, its very long term development based on crude oil business will be slowed down as soon as the crude oil is easy to be depleted.

From this appearance, I suspect it will develop to be a global utility firm for the conservative investors. In the development step of China, it may be the first one to enter the stable growing stage in the business model. I am still holding Petrochina as a source of confidence but I will sell them in the near future.

Stock Crash Feb 28, 2007

Dow Jones ends at 12216.24, down 416.02. The ignition is from Shanghai A-share ending at 2910.761, down 282.436. Obviously it is the abnormal pattern, and regarded as the achievement of modern feasible stock crash. That the crash spreads all over the world is rather surprising, even if I have certain thoughts about recession on US economy, since it's finally not brought from US itself first, but from China, which does not release any news but expectation takes place. Indeed China has built up the bubble. It needs to fall back according to the law of financial gravitational force. It is a bit sad that the stock crash takes place before my analysis on China's economy.

As analyzed before, US has its own problem. If it is so, now if I proceed my analysis, I would speculate that the bear market in US will be ignited soon. Moreover, it is brought by its futile economy. As for China, owing to the market sentiment and its prolonged bubble, it is inevitable to suffer in this incidence. The bear market in China should occur. Yet, one should need to consider how the economy in China is. Is the inflation rate turning to be too high, and how does the US worsened economy affect China through the international trade? It is still an ambiguous issue.

As for sentiment, I have to learn how to calm down through this downside risk. For example, it is often not optimal to sell the shares just after the crash. Is it possible to wait for the powback. On the other hand, do one need to think of the quality of the stock at hand? For this question, under the regime of which sentiment returns to fundamental, it seems that the PEs for most of the stocks have been persistently too high. The downward adjustment must persist so that it still has a long way to go to pick up some truly value stock. I may say, if one need to buy stock during this crisis, those stocks with stable and high dividend yield should be considered.

I also suffer a lot through this crash, but I treat it as a lesson instead of stray. This is much more important to learn instead of avoidance.

* * *

By the way, Lord Che's generous advice does etch in my mind. If treating investment as the art, it is the elegant trade to follow Lord Che's advice.

Short-term trend as of Feb 26, 2007

From my point of view, the stock market will collapse imminently. The reason is noted below.

• Hong Kong dollar is suddenly depreciated against the US dollar today.
  
• Japanese Yen is appreciating.
  
• HSBC ignited the mortgage war. Apparently it is good for the property market, yet the property market has surged for nearly a month, where funds should have acquired lots of share. There is risk that this was just the signal to release the shares at their hands on Feb 23 and 24.
  
• The periodic pattern takes place as before. Technically speaking, the original uptrend has shown the exhaustion. Moreover, the most recent candlestick shows distinct downward fall.
  
• Probably, the actions done by HSBC are due to its recession in US. HSBC can hardly recover through the skepticism until the result announcement. This is the critical point to convert the downside trend of HSBC.
  
• US will release its economic data in the following days. I expect there will be downside surprise (as discussed in previous posts).
  

The final two points are the expectation on certain worse outcome. To excite the power of sell, it must be much worse outcome to cause the collapse. On the other hand, the penny stocks continue to enjoy the bullish regime. It should not be far away from the collapse after the funds and the large shareholders earn much in this quick vehicle. Finding a cushion "cigarbutt" will be more appropriate. One can try to observe the strength of the stock through the downtrend. Currently it seems the cigarbutt should have its business aim in China.

Analysis of Hong Kong's complicated stock market trend - Develop a blueprint

I remember in 1980s and 1990s, Hong Kong did not belong to China and at that time, China just started the economic reform and it was just a few years after the rebellion period. The firms in Hong Kong just began to enter China to do business and establish factories with thought of skepticism and adventure. The popular firms were engaged in the export and import business or service industry. Therefore, US and East Asia were always the most important trading partner of Hong Kong, which in turn induced certain influence to stock market in Hong Kong.

Nowadays, Hong Kong has returned to China. While the economic linkage has been strengthened through the political status and various programmes like CEPA and QDII, many firms have established business in China. We can be sure that the economy in China should have much more influence to Hong Kong than before. On the other hand, although China just enters the WTO, it only gradually opens the business and financial market towards the other parts of the world. Therefore, we can speculate that the recent unique influence from China to the Hong Kong stock market will continue until the China opens the financial market extensively towards the world. The influence would be actually even stronger if China could influence the world economy in the long-term future.

Because of this reason, I have certain thoughts on the Hong Kong stock market. Firstly, in terms of the comovement and volatility of the stock market, does Hong Kong stock market follow the trend of China instead of US (probably yes)? Does the volatility of Hong Kong stock market follow the characteristic of the immature financial market in China i.e. irrational speculation and easy formation of bubble, or insist on the characteristic of US owing to mature investors? I would like to do the intuitive measure and academic style of research on this.

Secondly, in term of the economic development, I would like to have certain thought on how the Hong Kong economy goes on in next few years under the interaction between Hong Kong, US and China. It is not the easy thing since there would be inaccurate prediction and lack of information. I have done certain speculation in US economy in this year. It will be fantastic if I can build up a reasonable trend for both Hong Kong economy and China economy. Ultimately it can have certain inference on the trend of the stock market.

Throughout these studies, hopefully there would be clearer points of view to invest in Hong Kong stock market. For example, do we need to fear the bubble formation within Hong Kong stock market, and do we need to scare the potential recession on China's macroeconomic policy and US's potential recession in the future.

Homework for value and growth investment

It is not new to see that some stocks like Mengniu, Prime Success and Parkson have soared in the stable trend. Today another star, Huiyuan, carried out the initial public offering. For most of them, the PEs have already attained 60 - 80. Is it truly worth investing in them at this moment? For a long period of time, I aspire to do a formal fundamental analysis research on the stocks. Here I would like to write a check list for the ordinary investment, and adopt the consumption-based stock as the background.

First, talk about the macro-behavior,

a How about the income growth? China attains the GDP growth roughly around 10% per year. It is indeed an alluring number to attract the investors for the great prospect.

a As for the consumption, marginal propensity to consume is traditionally lower even though the people want to direct their saving towards the stock market, yet it may be the case that marginal propensity to consume increases when the income increases as the enactment of nouveau riche. This is particularly salient in the large cities in Eastern China.

a As for the macroeconomic policy, if the increase in inflation induces the central bank to raise the interest rate, it is still detrimental to the consumption. Yet the characteristic of consumption i.e. consumption smoothing, is prevailed such that the impact on the consumption-based industry should be minimized.

After accounting for the macro-behavior, we can assess the micro-behavior, which is not my usual focus as it requires individual researches. I just leave the questions below. There would be additional questions.

a How is the level of the monopoly for these companies in China? The consumption goods are naturally competitive. Therefore, the success of the sales hinges on the brand name and matching the preference of the various kinds of consumer. Can they achieve this (Good example: Fairwood holdings, Esprit and Mengniu)?

a How is the cost control in supply? Is this heavily affected by the recent surge of prices in agricultural product, crude oil, and rent of the property if they are the shopping malls? For the machinery production, is there any technological improvement to enhance the efficiency? How is the quality of the inventory control for the companies? Is there the risk that the supply side is too concentrated on one or two firms.

a Recently the sustainable development and environmental protection has been the hot issue so that companies need certain measure on this. Therefore, how do these companies involve in this issue? What is the extra cost and contingent liability of the companies (Example from other industry: PetroChina and Sinopec)?

a Is there any cyclical consumption behavior, supply and cost? In some industries such as oil and agricultural product, the cyclical property really needs to be taken into account. Is the company doing the risk management (hedging) on the cyclical component (Good example: Cathay Pacific)?

a What is the objective of the management? Is the business model and prospect becoming complicated? Do they become too conservative to pursue the local business? Or are they too aggressive to take on the merge and acquisition, which in turn forces the companies at risk (Example from other industry: Lenovo Group and TCL)? Do the managers have good track record to share the benefits with the small shareholders?

a If they involve the oversea business, how are their management in the sales in overseas and the currency exchange rate? Are there any important foreign controls like quota and tariff heavily affecting their business (Example: Top Form International Ltd.)?

After the economic analysis on the sustainable growth, the value is still the focus.

a For the PE, Note that they are not the Chinese Enterprise. The support from the government is somewhat indirect. But on the other hand, they get less disturbance from the Chinese government (as discussed in the macro-behavior). Thus, they seem to have higher PE as a cushion. However, according to Peter Lynch's principle on PEG (Price-earning-growth ratio, one kind of the measure in trade-off of PE and growth), can it be consistent to the value investment? From my point of view, it is expensive since normally 60% growth is hard to be achieved.

To make a fancy end of the analysis, technical analysis can be the dessert (Only the dessert, but not the main dish).

If one is lazy, the above things can be partially revealed through the past records of the cash flow, sales, net income, and various ratios. To boost the confidence of the analysis, one can get the information on the capital structure to see if there is strong support from the investment fund. Yet, to obtain accurate results and explore state-of-the-art investment, it is indispensable to notice most of the above points.

Update news and thought on US economy

Regarding the US economy, let me use some brief sentences to conclude them for the future reference.

- US economy should be theoretically eroded by its weakening housing market and higher default risk.

- From the Money Time on Feb 5, it seems that the pattern in California is better than expect. Moreover, the latest financial results for the semi-conductor industry is more encouraging. I don't know if this can be the small shelter in the US economy, or it can solely remedy the overall situation.

- The imminent soar of oil price is the external shock. Will Bush administration let it be? He has to decide the tradeoff between the war and the US economy, although he will no longer be the president soon.

- The unexpected increase in the CPI is indeed pretty surprising beforehand. Yet, trying to combine all possible points, i.e. Chinese import inflation, decline in productivity due to less capital stock, one may guess all the operation should be in progress.

The above points may be over-simplified as I may not compile enough information and fully understand the real picture behind. My belief and logic is that, the butterfly effect can spread out towards the other parts of the world to achieve an equilibrium. It is the beauty and the complexity of the economic forecast.

* * *
Buying the value or growth stock may be a good shelter on the gambling market. Now I possess the secret bird and notice the small Esprit. Later I will also focus on the great renter. It is my objective to construct a charming portfolio.

Stock-picking on property stock

Many have said that the property market in China should have vast potential because of various reasons, including the appreciation of Renminbi, the wealth alleviation by the people, exploitation of new cities, etc. The channel to experience such kind of surge is to buy the property stocks in China. Thus, many have contended in the next ten years, it can be quite sure that the price of these stocks should grow steadily under the macroeconomic control. Notice that the macroeconomic policy has shocked many people, so that it creates large fluctuation on the price movement. Moreover, the fundamentals of these stocks are sometimes too aggressive so that one may bear much business risk and financial risk.

On the other side, Hong Kong's property market seems to recover, but it is partitioned by the quality, i.e. the luxurious one or the ordinary one. Many people believed that Hong Kong's property market will gain back the vitality again in the pig year, since the wealth and capital flow can force the price of the property and turnover to increase. Currently, the stock prices for the Hong Kong property firms rise mainly according to this reason.

However, the thing cannot be that simple. One focuses on the local company because of the local market. The more conspicuous thing is, some property firms in Hong Kong have instilled much capital into China for property development and leasing. Actually there are potentially many overwhelming advantages to invest in such kind of stocks. Hong Kong people are sophisticated and renowned in property development and management. They may possibly get more allowance to develop certain projects in China. Accompanying the potential of the property market in China, these companies can get much strength and competitive advantage.

I appreciate those firms commiting to leasing business since this aligns with the strategy and development of China in consumption-based industry. Currently the value for these stocks is too expensive. It is reasonable to purchase the share of this category during the adjustment period as buying a bundle of prospect in property and consumption good markets in China.

The US economy and worsened credit rating

After hearing professor's comment, I have certain thoughts on the US economy. Now someone contend that the housing market in US is similar to the housing market in Hong Kong after 1997, or it is slightly milder than that in Hong Kong. The price level of the housing market starts decreasing and the overall quantity supply and demand also decreases, according to the recent announcement of the establishment and sales of house. I would like to ask the question whether it can create economic decline.

Many say that US people have relatively low or even negative saving rate. Borrowing is prevailed in US so that the people have much overdraft. To trace the latest trend of the development, I would like to start analyzing the heavy deficit generated by the mortgage firms and subprime loan firms in recent months, and then I will speculate the possibility of the future development.

Under high credit risk level among the people, the mortgage and subprime loan firms remained to borrow the loan indifferently and extensively towards the consumers. Eventually, the bad credit performance directly affected the profit of the financial companies. There is possible lag effect since the bad debt has to be realized afterward. Therefore, there are two consequences. The first one is that this creates inflation since people can easily get liquidity. Second one is the lag effect which weakens the strength of the financial intermediary.

Initially the economy in 2006 has good prospect but it is fueled with inflation such that there is the possibility to push up the nominal interest rate. Afterward, all the things have to be corrected since financial intermediaries get certain problems and there is possible excess investment through high liquidity. Thus, the economy declines as a whole. The recent announcement of the deficit from various financial companies is just reflecting the lag detrimental effect.

After this detrimental outcome, extensively high borrowing level forces the US mortgage firms to contract its credit lending. Therefore, the demand of the housing and capital good should be dropped as number of people having bad credit record increases. In general, loan becomes expensive regardless of the FED fund rate since the credit measure is stricter than before.

The overall impact is to further reduce the demand of the housing property and capital goods and leads to decrease in production price level. If the people are willing to hold the house for living, then the decrease in price cannot cause much adverse wealth effect. The uncertain thing is that the decrease in price may excite the people to sell their house, which in turn creates the possible adverse wealth effect. Notice that professor's advice indicates that the decrease in wealth and the decline in economy should have less causal relationship.

On the conventional side, there should be the case that the aggregate demand in consumption and investment goods may be disturbed owing to the contraction of the above market. On some occasion, this may affect the aggregate supply which affects the productivity. This may create potential stagflation since the houses and capital goods accumulated in the economy reduces, which can be the sign for the economy to be less productive*. Either the conventional thought or the productivity aspect** concludes the decline of the US economy, but it does not indicate the certain trend for the inflation. Now the central bank needs more time to confirm the status.

More uncertain international economical disturbance, such as the recent appreciation of Renminbi bringing the import inflation, may be seen so that the agents can hardly remedy the situation. Moreover, US's low saving rate is hazardous in the long-run as the exogenous nature of higher default risk cannot be cured easily. This can be seen as the long-run depreciation of the US dollar.

* * *

* I also think of another possibility that the decrease amount of house and capital good may be good to adjust the excess demand generated by the previous extensive lending period. Thus, the productivity remains stable or even increasing after this adjustment. If only the aggregate demand is narrowed with stable productivity, it still has certain negative effect on US economic growth and decrease of inflation rate. This leads to conventional suggestion to decrease the nominal interest rate. But it can hardly escape from the international disturbance and the long-run turmoil described in the last paragraph.

** More factors may affect the productivity including the oil price. Thus, given the other things stable, this arrives the above result. Oil price is deemed to be stable as a rational expectation.

Some contemplation on the causal relationship between wealth effect and real economy

Two days ago I found the professor for his advice in the research. He is one of the economists contributing to the econometric model in Hong Kong and China. He asked me about whom topic I should follow with and I decided to do topic related to the interaction of wealth effect, consumption or some other macroeconomic variable, where the wealth effect can be indicated by the market value of the property and equity. All of the sudden, he immediately refused my idea.

He told me some issues concerning the economic flow i.e. cause and consequence among the variables. First, the macroeconomic real variables are not heavily affected by the wealth effect created by property market in Hong Kong. To be concise, Hong Kong's economy is the same as that of the other countries, so that the economy should be cohesive with the real output such as the service industry and manufacturing industry.

Second, In terms of the source of the financial crisis in 1997, the collapse of the wealth effect from the stock market and property market is not naturally exogenous. The collapse of financial market, property market and real economy are attributed to the shock from the action of international speculators in Thailand and the rest of East Asia, who devastates the economy by either devaluing the currency or leveraging the interest rate. In turn, it creates a heavy shock in aggregate demand in all aspect, including the consumption, fixed asset investment, property investment and equity investment. Finally it leads to decrease in wage and high unemployment.

In conclusion, wealth effect and real economic variable should be affected by the third agent who creates such kind of shock. We can say that both of the real variables and the wealth are the victims, while the causal relationship in between is limited or indirect. I am pleased that the professor can correct my initial thought in which the financial market is valued too much to the economy, and he advises me to do topics related to the inference and simulation in econometric time series analysis. I am still deciding whether I should involve in his proposed topic.

As a lighthouse II

- China Gas Holdings Ltd.

It is a stock introduced by the articles from the newspaper, and it is the first stock that I have ever spent time to assess its profitability after the recommendation. I bought this stock in October last year after several assessments in its prospect, value and technical indicators.

As indicated by the name of the company, its business model is related to gas selling in many cities of China. To be concise, it involves the pipe connection and direct sell of liquid petroleum gas towards several cities in China. Those cities are smaller cities scattered mainly in the Northern part of China. The provinces involves densely populated provinces like Hebei, Henan, Shandong, Hubei and Jiangsu. A year ago, it developed its business in Liaoning located in Northeastern region with larger cities like Dalian and Fushun. Recently, it had several acquisitions to expand its business, including the new branches in Chongqing and Qingdao.

According to the statistics, the number of gas user in China is less than the average of the world. As China will gradually align with the world standard through the strong economic growth and open economy, it is possible that the market for this industry has much potential in long term prospect. China Gas Holdings is actively involving in the acquisition activities in order to grasp the upper sector (Exploitation of the gas) which has higher profit margin. It also got the permission to export and import gas towards foreign countries. All of these show its aggressiveness to expand its business.

Most importantly, it has the concrete support from the equity shareholders, the creditors and the management. The shareholders involve the Chinese government's representation and Sinopec. There are also some strategic shareholders including the oil companies in Oman and India. Mackenzie is the main investment fund which invests in this company with over 5% of the share. In September, there has been news confirming that the Asian Development Bank also has a stake of creditors on this company, as it concerns the technology growth and environment in developing countries in Asia so that its decision has gone through discreet measures. For the management, the CEO of the company purchased much shares at the relatively high price. It is a signal that the management has much confidence to successfully manage the company.

However, I sold this stock after a technical trading pattern occurs. The pattern, the top head-and-shoulder, is often a signal indicating that the trend will turn down. At the same time, the market trend seems to turn upside-down as this was just after the instant crash of the H-share. The overall environment was fueled with uncertainty. Later, the market became stable again and its stock price began to surge even if the volatility of the stock market has increased vastly. It reveals the fact that a company with strength should overcome most external shocks owing to capital flow.

In view of its reasonable value, note that currently the market gets overheating in the penny stocks. It is possible that this shock may contribute certain amount of bubble to this company. At this moment, it is not recommended to pick this stock. At least, one has to pick this when the price series consolidates on a level for sometime. I also found that it is also a market sensitive stock before its recent surge, as I held that for a period. Therefore, it is also noteworthy that the market fluctuation may also produce some impact spillover on this. Even though I say that, I think the price of this stock can hardly fall back to my selling price...

* * *

Today I just glanced at the price of Guangzhou Shipyard, which really exhibited the same pattern of China Life Insurance during the New Year. The reason of the fall at this time is that the capital injection from the head company may be stalled, although it is only from an indirect comment of an analyst in mainland China. From this and the event of China Life Insurance in January, you can see how futile the price is when it is at the top edge of the knife. It is mostly true that crazy surge leads to a crazy end.

As a lighthouse I

Once I bought several stocks which can be regarded as value stocks and growth stocks, but I threw them away because of impatience, testing, or some irrelevant matters. I would like to share these bad experiences to be the reference for myself or the ambitious investors.

- Greatwall Motor

Reason to buy: This is an IPO stock bought in 2003. When it released, its price increased a bit for a few weeks, and then it dropped sharply as the prospect of automobile turned gloomy thanks to series of macroeconomic policy adjustment. Until the summer of 2006, I still regarded it as an inferior stock in my portfolio.

Reason to sell: Until the summer of 2006, my account became active and I started using the e-trade in my equity account. As it provided me some bad impression and it was only small amount drawn from the IPO. I decided to sell it. The immediate initiative was that the price suddenly soared to $5.8 such that I regarded it as overbought position. I decisively sold this and reduced the loss (It still could not reach the price during the IPO).

Culmination: Actually once the stock reached $5.8, it was just the begin to ignite its power. The environment of the car industry has been improved during the fall 2006. Greatwall Motor, aiming at the market of the land rover, was actually successful to expand its business in Russia, Eastern Europe and Middle East. It has the potential to explore its market in Africa in the current era under strengthened Sino-African relationship. When you notice its webpage, you can notice that its ambition does not solely aim at the equity investors, but also provide transparent information of their products to the buyers, which indicates its successful marketing strategy.

Recent trend: It has successfully reached $10 and has much stronger momentum to strike for higher price under the boost from the institutional investors, owing to the wealth effect and sufficient demand in China, countries in Arabia and some parts of Africa. Note that recently it started to release the main-stream automobiles. It will be a challenging matter if it faces much fierce competition internally. The Renminbi has increased its speed of appreciation, which may also affect the export of its products. Usually the expansion and instilling the new product in the market may be critical to the growth trend. Therefore, there has been dispute for its growth, or one needs to remind themselves that there exists such risk premium.

For the value, comparing the PE ratio with the other companies at the same industry, you can find that it has mildly higher present PE ratio. We need to assess its growth rate to see if it is compatible with the expected PE ratio. From technical analysis, clearly this stock has reached a relatively overbought position. It is risky to buy it at this moment.

From asymmetric market movement to the economy - Long-term Analysis

Guangzhou Shipyard reaches $26.7, once it reached $27 and even more! Now it has PE around 100.

It seems that now it is the world for the small listed companies. The indexed stocks are over-exploited by the funds. Notably, a dressed Chinese idiom, "匯豐獨憔悴" (Only HSBC is still depressed), is the best to describe the current situation. It actually makes much illusion in which the market base is a bit week.

The economy is, to be frank, "too" good. Somehow it is hard to pursue any adjustment, especially when the economy remains stable, i.e. US luckily does nothing in the interest rate, with mild inflation, and surprisingly there is productivity improvement. Interestingly, Chinese stock market lacks momentum after Hong Kong's H-share set up a good example! This is the best moment that people can calm down a bit and Chinese government can stop intervening. Although it will revive soon in this immature market, at least it gives some chances to extend the growth and maintain the enforceability of the policy in the long-term future.

By the way, some serious points have been noted that, the Chinese central bank has announced the unprecedented high expected inflation since 1999 and that the amount of fixed asset investment may rebound. According to my memory, China would advocate the active policy to control the potential chaos. It is not the direct intervention on the stock market, but on the macroeconomy. It should be much more controversial and we should be vigilant to the data of fixed asset investment and inflation rate released in each month.

The US economy has the potential weakness from its high blood pressure (first seen from Mr Cho's article) that the economy has its notorious characteristics on low level of saving. It is now just the tug-of-war of productivity and consumption. Together with the Chinese over-heating, it can be devastating if all these things cannot be controlled well. The chain and multiple effects can lead to prolonged decline and ruin the global stock market.

Indeed, from the previous experience such as the bearish market starting from 1997, the catalysts, which is the short-term market risk including the crude oil price, Japanese currency and over-speculation, are needed to let the economy explode. Yet through many years of experience, I hope that the governments are wise that they can provide the best environment, the best fundamental infrastructure and appropriate policies to prevent perverting the economy. Carrying out these is much more prudent than barking towards the hyperactive investors.

* * *
- Comment on Feb 10

The oil price temporarily has high momentum to strike a breakthrough at US$60 per barrel, while the direction of Japanese Currency will become clear following this weekend. It is important to scrutinize how these potential shocks may deeply affect the future trend of the market. The lag indication of HSBC's warning to increase provisional bad debt creates uncertain investment environment. Therefore, I still prevent myself investing in those interest rate-sensitive stocks at this moment. Moreover, speculation mind is still dominating my investment mind.

By the way, I observed the price index series chart for different markets. I found that the one for Hong Kong seems to be more volatile but lacks serial correlation. These are the characteristics for Hong Kong stock market. At the peak, the volatility must be enlarged and the serial correlation becomes complicated (Hong Kong's market structure can be regarded as the mixture of international market and mainland China market, creating complicated stock price movement.) I just wonder whether I should pursue long-term, or short-term investment (speculation). This dilemma has been entangled in my mind for quite a long time.

Review of the stock price pattern in Spring

You may observe the pattern that before the lunar new year holiday, the price index will usually soar. While after this holiday, the price index will lose the momentum and decline slowly in March and April. Coincidently, there is financial result announcent for the listed companies in March, so that it is sensible that many investors will sell their stocks as a wisdom that one should grasp profit during the good time (result announcent).

Here, I display several years which have similar background to the current year. Those years include 1994, 1997, 2000, and 2004. During the Spring, there are several tops formed by the over-optimisitc speculation environment. For example, in early 1997, 2000, the stock market was bullish as everyone confirmed it was bullish (that is!) In early 2004, everyone were sure that the economy are resillient from the period of SARS and became so optimistic.

- Year 1994

The cause of this adjustment was mainly due to sudden increase of FED Discount rate, causing evacuation of foreign capital.

- Year 1997

Before July of 1997, even though the market was at the most optimistic regime, it also faced a mild adjustment during March and April. Later on, the market participants did speculate as much as possible to reach the peak before Hong Kong returned to China.

- Year 2000

The adjustment is a bit late comparing with the other three. This adjustment is the early series of collapse of the dotcom's bubble, i.e. the start of the bear trend from 2000 to 2003. During this adjustment, the stocks with technical concept exposed its weakness in their business models and financial structure.

- Year 2004

The cause is, China enforced the macroeconomic adjustment in order to cool down the overheating asset market. Moreover, the PE ratio had reached a relatively high level over a short period of time. Before the bust, IPO of China Life Insurance released.

- Year 2007

I don't know if it is just a coincidence or it is the law of business cycle. It seems that in recent years, we can regard 2007 as a year which should reach the peak through the stock market trend prediction. Indeed, the stock markets in Hong Kong and most importantly, China have reached the top, where everyone in these markets totally agree that we are at the bullish regime. Yet, with high loan-to-value ratio and PE ratio in mainland China stock market, the Chinese investors resemble those Hong Kong investors in 1997. That is without the vigilant mind and risk management concept. This kind of situation is surely unhealthy regardless of openness of the stock market. The Chinese authority knows this, and the Hong Kong investors know this too.

At the top, few pieces of information that I could perceive is the high volatility and an ambiguous cycle presented above. It is not wise to invest in the popular stocks at this moment.

Patterns needed discreet measures (As of Feb 3, 2007)

Exchange rate between Japanese Yen and US dollar is rallying. US has determination to increase interest rate in some points in the future, which favors its appreciation, while Japanese Yen is suggested to appreciate mildly in order to stabilize the world economy, since now it is at relatively low level.

For the capital movement, Hong Kong dollar depreciates a bit so that it is uncertain if the speculative fund again tries to evacuate. On the other hand, value of Renminbi recently appreciates a lot. As there is foreign capital control in China's exchange rate market, it is hard to determine why the appreciation path accelerates. Most probably, as suggested by some Chinese schoolmates, it can be beyond any economic reasoning.

Oil price has rebounded for a week after the announcement that US wants to increase its capacity in the storage and OPEC promises to reduce the supply. The unexpected freezing temperature in January has also induced a temporary positive shock on the oil price. In addition, there is also labor strike in Nigeria, which further strengthens the oil price. Yet, all the shocks here are similar to those happening in April last year. It seems that these shocks are hard to be persistent.

The above news and data are the main international indicators affecting the fluctuation of the stock market. From my point of view, the HK-US exchange rate is ultra-short-term indicator. The determination of Japan-US exchange rate and oil price is the short-term indicator.

Appreciation of Renminbi is noteworthy as a proxy of the economy of China in the medium run.
Also note that Hong Kong's stock market is now at the state of plateau. People become much more sensitive to the stock price movement. Instead of having a conspicuous collapse, Hong Kong's stock market has higher volatility and turnover than before. Both of them are pretty similar to that in 1997.

Market swallowed the katamine (except our dread-stricken grandfather)

There is a bit luck today. I lack confidence in my analysis. Now when I scrutinize, I think that point 1 and point 2 are subjective argument, depending on your exposure in the market. I am confident to use point 3 and point 4, which have been a contrarian indicator and capital flow indicator (used mainly in bull market driven by speculative capital flow) respectively. As for point 5, I think that I analyze in a wrong way. I should also consider the impact that Japanese currency has high probability to appreciate due to the pressure from US FED's announcement and the pressure from G8. Anyway, it is still a good experience.

It still needs challenge on my thought of the collapse of the bubble, or the upward trend. Collapse would be due to a bit overheating economy due to countries' growth and imported inflation from Emerging market like China. Most seriously, Chinese government carries out the most ruthless measure to curb the frenzy speculation in Chinese stock market. Note that the latter one is a very conventioanal point used in these days.

- Thought of Chinese macroeconomic policy

In terms of the macroeconomic policies carried out by Chinese government, I have some points of view. China ridiculously announces lots of seemingly tight rule to control the stock market, in order to stabilize the pattern on the top of the bubble. To interpret that analytically, it is a game that is pareto-best in which speculators and Chinese government always get most benefit when former doesn't control and latter doesn't speculate (i.e. invest rationally through the present value). However, the latter can gain immediate benefit if the latter speculates, thus Chinese government has to use policy control in order to minimize the welfare loss owing to speculation. It is the case similar to the well-known prisoner dilemma.

Most troublesome is, Chinese government's policy may be sometimes inconclusive or incredible due to ordinary announcement, without series of plan to enhance the credibility. In the long run, when people realize this kind of pattern or behavior. The policy tool loses its function and it comes to the worst outcome. At that stage, people adapt to that and may even violate the rational action (to evacuate from the market during the infavorable policy). China may need much harsher policy control in order to cool down such kind of speculative environment. This is the costly alternative.

Indeed what is Chinese government thinking? To cool down the market or spoil the market?

Some updated comment on the stock market trend

Hong Kong dollar appreciates while HSI lacks momentum. It seems that the big players may have acquired the confidence to instill capital into our market.

Some worrying thing is, Japanese currency seems hard to depreciate anymore. Perhaps after the US Central Bank meeting, the uncertainty will be resolved. Japanese Yen now suffers high volatility. It is still controversial to affect the stock market in these days.

Now the market lacks ideas to produce any thrust, but I speculate that the stocks related to infrastructure will certainly become the main concept of the next top if the top can really form. The reason can be attributed to the eleventh 5-year plan, emphasizing on the infrastructure. The buying concept is, it is supported by the government without the uncertainty affected by US economy and material prices.

- Look at Guangzhou Shipyard Intl. Ltd. It has built up high momentum although the PE ratio has been so high. The revenue and profit has been doubled owing to large amount of contracts. The small players will soon notice this and grasp the last steps.

- Another is Anhui Conch Cement Company, which has PE equal to 89. Indeed its record in 2005 is worsened. Yet recently the announcement shows that it gains the benefit from China in construction. Moreover, recent announcement shows that its profit is expected to be doubled. In term of prospect, it is attractive and easy to create positive image. Now its price is fluctuating at the narrow range.

More can be discovered, such as the China Communications Construction Company Ltd.(CCCC) and other companies related to the communication infrastructures. This can be used to build the concept. Of course, one can see that they have been exploited during December 2006. Here, I only think of balancing risk from the macroeconomic environment and material prices. The turnover for this stock still is lagged behind the conventional stocks (except those recent listing companies). We still need to notice that there can still be surprises to ordinary stocks. Moreover, it is just buying the prospect according to trend, not value investing.

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Edited on Jan 31 before the sudden crash caused by the grandfather. Guangzhou Shipyard collapsed sharply by 5%, while Anhui Conch need not suffer a lot. On Feb 1, Guangzhou Shipyard jumped back to its original point, while Anhui Conch still remained normal. I lacked confidence for a moment as the grandfather policy may be so decisive to disturb the current bubble. My trading of CCCC reflected my loss...

If there is really the uncertainty that the granfather carries out certain great policy, I may say, you let this article be your reference only. Don't overtrade.