Let's get the challenge before it's too late

How to cope with cost-put inflation and stagflation?

2008-04-25T13:30:00.000-07:00

Currently, the environment of cost-put inflation or stagflation has been seen clearly. Every people realize that the increase of food price and oil price affects the daily life. On the other hand, what is the action of the government when they face this peculiar situation?

The government tends to carry out the monetary policy in order to improve the output of the economy. Although this can facilitate the consumption demand and investment demand in the short-term, the decrease of the interest rate and the increase of the money supply exacerbate the increase of the price level. Economists always say that there is no free lunch. The output (or employment) is the kind of lunch that you need to pay (by inflation)!

The main crux of the cost-put inflation and the stagflation is the source of supply. For example, extreme natural environment such as bad weather and pollution curbs the productivity of the crops and the raw material. Slow-down of the technological progress in the production of raw materials or agricultural products is also the concern. The basic solution must be on the supply side such that the incentives should be given to the producers of the raw materials and agricultural products. The frequency to recycle the product should be increased. Nevertheless, this is not an easy process to ignite the supply again.

The market determines the temporary difficulty we currently face. This also produces the link of feedback (reflexivity) to the producers to research the production of agricultural products or various resources. Another swing can be produced through this process, i.e. from under-investment to over-investment and from over-consumption to under-consumption. This is the main logic proposed by Jim Rogers.

Figures as references

2008-03-13T17:27:00.000-07:00

Attached please find two figures, where I regard this to be utmost important. Aggregate market becomes volatile, while "relativity", trend and contrary during extreme moments always exist in the aggregate economy.

First figure is the time series for the equity index and the commodity index.

Second figure is various currencies against Japanese Yen.

In addition, it is vital to look at the volatility index, posted in my previous essay.

Demand and Supply

2008-02-20T12:44:00.000-08:00

Demand and supply may be the simplest jargon used in the economics and the application in finance and investment, but in reality, how many people can truly realize the implication of demand and supply (especially for the analysis through the Price-Quantity coordinate) acting in our economy and every market that we involve?

The above demonstration is a kind of usual mechanism of microeconomy. This is a kind of mismatch or time lag, appearing in both good, labor and financial market from microscopic point of view. Try to repeat the above mechanism to perceive what happens.

As for the macroeconomy, price belongs to the price level and quantity becomes the output level, while the demand and supply become aggregate demand and aggregate supply. It should not be that similar to the above demonstration, but the thought through this kind of coordinate should be indispensable. In turn, the final macroeconomic dynamics should be tractable.

Volatility and financial market

2008-02-12T17:55:00.000-08:00

Currently I am a bit busy on my work and moreover, there is not much special viewpoints that I cannot spend much time to write the essay. I have created a question mark on the Hong Kong economy in my last essay, but it is nothing special. To simplify this, it can be the mixture of Chinese and US economy with more weight on Chinese side. On the other hand, I would like to share some alternative points.

Attached please find two figures of the VIX, which is the implied volatility for the S&P 500 index options. The first one is in 1-year span, while the last one is in maximum time span (Source of figures: finance.yahoo.com).

The VIX has some indication, i.e. the fear index such that if it is high, the market is at the most terrific moment such that some investors rely on this index as contrarian indicator to trade. In terms of the shorter time span, we can see that there is a mere double top (or even triple top) developed in the VIX. One can feel confident to buy the US stock again, at least for the rebound.

What I want to emphasize is the second figure, where it has the significant implication on the stock market. It seems that when the VIX is high, the US stock market is at the moment from 3rd stage of bullish trend to 2nd stage of bearish trend. When the VIX is low, the US stock market is at the moment from 3rd stage of bearish trend to 2nd stage of bullish trend. Is there any explanation? It is not only the excessive fear, but also the enormous greed fuelling the second moment of the stock price.

Regarding the overseas financial market, many are arguing whether the decoupling exists or not*. Regardless of the validity of the decoupling of the economy or stock market, the volatility of the financial market, even among stocks, commodity and foreign exchange, should hardly be decoupled, as we have already observed in these years. If you are the writers of the options, notice this.

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* Personally, I do not agree that there is significant decoupling when there is international trade and with some additional notes that there should be time-lag for the decline, combining some points in view in 2008 I. Despite this, I am discreetly optimistic about Chinese economy in long-term.

View in 2008 I

2008-01-01T20:28:00.000-08:00

(Please notice the disclaimer before reading the analyses below. The window is one-year period and it can be subject to change if there are shocks or structural changes occurring in the period.)

Merry Christmas and Happy New Year! The skin of my blog has been changed to welcome the new year. First of all, I would like to carry out some macroeconomic analyses. Next I will continue to talk more about other thoughts related to economy and investment. One can apply the IS-LM and AS-AD to the analyses below such that one can get clearer picture, while I get the equation proposed by Kostolany for your concrete reference on the abstract economy.

- Macroeconomy in US

US is trivially going to the stagflation environment although the inflation is not significant now. Stagflation is not the usual phenomenon since it is triggered by the supply shock, such as oil and food. On the other hand, people's confidence on the credit market is another side to contribute to the decline. In the stagflation environment, even though there is inflation or even decreasing interest rate, this cannot induce money flowing to the capital such as stocks and corporate bonds because the cash flow of the company becomes more uncertain during the decline (One may refer to Mr Law's comments where he mentioned that the stock price may not increase during inflation or even negative interest rate). The Fed increases the money supply, but bears the risk that the people do not have confidence to carry out the credit market transaction and the inflation can be further increased.

In Kostolany's syntax, strong money (?) + weak confidence
=> Pro-weak environment
=> Needs some moment to recover.

- Macroeconomy in China

Growth still proceeds, but due to the changing economic environment, three aspects have to be considered.

- How is the structural inflation on the supply side?
- Can decoupling succeed, i.e. unaffected by US?
- What is the significance in the contractionary monetary policy announced in late 2007?

In Kostolany's syntax, weaker money + strong confidence (?)
=> Pro-weak environment
=> Needs some moment to decline. Note that growth still proceeds but the growth rate will be slower.

- Macroeconomy in Hong Kong

Hong Kong is the special location. There is increase in money base due to US expansionary monetary policy and linked exchange rate. However, Hong Kong is not the same as US to face severe threat in credit market, while mainland China is facing the above uncertainty. How can the investor do in order to survive in such kind of environment?

(Continue)

Notes on Dec 15, 2007

2007-12-15T00:08:00.000-08:00

- Reshuffling

Previously, I bought at two buy signals to welcome the new start of upward trend. Afterward, the trap took place and it was described as the usual phenomenon to boost the market through the decrease of interest rate. Eventually I sold two-third of my stocks bought through the two buy signals and determine to reshuffle the game, i.e. to find the buy signal again through the oscillating and the trend signals.

The game has become much harder to play after the announced contractionary monetary policy in China. Needless to say, US has been in our focus, but I feel that Chinese contractionary policy should be our real concern such that the dipping stocks are not mainly due to US's side. Despite my discreetly optimistic outlook for Chinese economy in next 10 years, I cannot rule out the 1994 style adjustment, or somewhat like the bear.

In this period, regarding the perspective in investment, I am concentrating on the readings in fundamental analysis during the spare time and travel. My specialization is mainly in macroeconomy and technical analysis instead of sophisticated fundamental analysis. I know that only the financial market or technical trend are not the good deal in analysis, and hopefully acquire the consistent investment philosophy through the synergy of different knowledge.

Notes on Dec 4, 2007

2007-12-04T02:05:00.000-08:00

- Technical analysis

The trend indicator starts turning well, whereas the traditional indicators such as MA rule has mostly revealed the turning point earlier. After the buy signal of the short-term oscillator, the buy signal from the trend indicator should prepare to take place soon. The HSI 23000 cannot be reached, but well, I just choose another point to directly put the final stake.

- Fundamental analysis (Valuation)

Currently I am fixing the system of the fundamental analysis based on my enrichment of new knowledge through reading. I manually check the value of the stocks (Of course, some artistic components in valuation have to be carried out and I try to be fair in the scenario too). I find that as of Nov 30, most of the stocks have the fair valuation, whereas some of them are over-valued such as the consumption-based stocks and those stocks related to the infrastructure. Finally I figure out one stock can truly retain higher margin of safety (I cannot even extract any margin of safety throughout the small caps since I grant them higher risk plus the factor like declining industry).

If I try to compare the price of the stocks two weeks ago, there exists significant number of stocks with margin of safety range from 8% to 12%*. The stocks such as shipping (dry bulk) can have margin of safety as high as 15%. Of course, the risk I set inside is according to the intuitive sense where the size of the company, their market, their economic strength, the financial strength, the cyclicality and other relevant matters are taken into consideration.

Throughout this practice, I can say that to reach 23000 for HSI is only the technical workplace. The arbitrage at this level is too tasty that it is impossible to reach, while the first short-term oscillator gave me at least the signal to compensate the curse of 23000. This can also complement the fundamental analysis to strengthen the buying decision.

- Review and update the fundamental analysis

I am open to accept the FA, TA, or even PA (psychological analysis) in stock investment. Currently, I feel that I should learn more on the FA to dig out more information. I have more confidence on the technical analysis and macro-analysis. As mentioned before, I decide to spend the spare time in this month on reading more books to strengthen my investment thought and valuation technique.

The concept in which the investors can buy stocks anytime regardless of the market relies on sophisticated fundamental analysis and firm spirit and belief. There is still the long way to go. I hope that I can coordinate the TA and the FA, and finally the PA in the investment philosophy. Thanks for some bloggers' advices and their supports.

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* (Added at 7:32 pm on Dec 4, 2007) I mentioned that it is hard to select the discounted stocks even though the adjustment has taken place on two weeks ago. This is based on alternative method, while the above result is due to my recent revision on another similar method. Overall, stocks with significant margin of safety are not that much comparing with the famous Aug 17, 2007. I can find more by using the revised method though.

The notes on Nov 24, 2007

2007-11-24T23:15:00.000-08:00

- Status

The first stake has been added when HSI was about 26900 as described in Notes on Nov 13 2007. Although the resilience afterward is strong after the buy, the short-term signal reveals the fact of the short-term. The trend continues to dip afterward. I decide the following strategy profile.

- Time-series perspective

If HSI is less than or equal to 23000 then I carry out the second buying action and I will buy one more stake when trend changes to positive; else I will only buy one stake when trend changes positive. Bull and bear will not be under consideration. Try to train oneself to perceive economic messages and aggregate sentiment through the permeable layer.

- Cross-section perspective

The previous essay about the stock picking concerns the potential value and growth stocks. Apart from my original built-in knowledge, currently I am researching the new way by revising the books written by some notable guru. If I choose to be conservative, I will buy the well-known stocks such as China Mobile (941), China Merchants Bank (3968), SHK Property (16), Swire Pacific A (19), and MTR (66) first. The rest of the value stock and growth stocks will be searched later.

- Current reading

I am revising One up on the Wall Street written by Peter Lynch, my favorite guru, and reading the Chinese version of Die Kunst über Geld nachzudenken, written by André Kostolany who aimed at the speculation and investment psychology. Hopefully, I would have time to directly approach the classical thoughts from Benjamin Graham and Philip Fisher. During the current volatile time, reading the books written by the guru can maintain the psychological stability to large extent.

- PEG paradox

I have written three essays about the rule of thumb and some thoughts of the PEG. All concern the long-term growth, although short-term growth can be viable if the growth is not too extreme. I hope that the people will not abuse the PEG to the short-run growth (one year realizable growth). For example, the realized growth equals 200%, thus it can be as high as PE equal to 200 in order to achieve PEG equal to 1. It is probably expensive even if PEG equals 0.5 or equivalently PE equals 100. This issue has been discussed widely throughout the blogs.

- PE and growth in the world-wide markets

Regarding the PE and growth for the world-wide market, we try to observe the followings.

US:
PE in 1982 (at the bottom) equals 8;
PE in 1987 (at the peak) equals 16 (Source: One Up on Wall Street by Peter Lynch, p. 172);

Average growth rate for the nominal GDP equals 7.6% from 1970 to 2000 (From here);
Standard deviation of the growth rate equals 2.86%.

Hong Kong (after 1987):
PE at the bottom equals 8 to 9 in 1990 and 1998;
PE at the Peak equals 28 in December 1999 (Reference: HSI);
Average growth rate for nominal GDP equals 13.8% from 1970 to 2000;
Standard deviation of the growth rate equals 10.79%.

China (international players, i.e. H or B-share):
PE at the bottom equals 6.45 in December 2001 (Reference: HSCEI);
PE at the peak equals ?;
Average growth rate for nominal GDP equals approximately 17 to 18%;
Standard deviation of the growth rate equals ? (it should be larger than 10%).

Can anyone try to figure out the unknown variables in China H or B-share market? Just treat it as the number game. Do not intend to put desperately because of some surprising results... Still, Hong Kong could withstand the strong bull in 2004 even though the PE was relatively high (equal to 21.73). In addition, we all know that this number is unbounded above, suspected to depend on the standard deviation of growth.

Underground money market

2007-11-19T22:47:00.000-08:00

Previously, the underground organization for money exchange was curbed in Shenzhen. It arouses the concern that the money from China to the financial market in Hong Kong will be stagnated. I try to perceive how the effect of the underground money market is.

- The underground money market as the transformer

To describe the function of the underground money exchange activities, it is better to use the electric current instead of the water flow. When we learned physics in secondary school, we once faced an electric device called transformer. Attached please find the figure depicting its function.

The transformer can successfully induce the current of the secondary winding through the electric source from the primary winding. Therefore, even if the center core is not conducted electricity, the current can be completed. The soft iron core is in between to concentrate the magnetic flux in order to maximize the power transfer.

In the underground money market, the money actually does not flow across the border. Nevertheless, the money is managed by the underground monetary organization, like the soft iron core. Firms in China want to invest in the financial market in Hong Kong, thus they transfer money to mainland's side of the underground organization, and receive money from the Hong Kong's side. On the other hand, the firms in Hong Kong want to invest large amount of money to projects (such as property or factories), thus they try to get the help from the underground money market by doing the same thing. In turn, the underground monetary organization can keep certain inventory of money, and there is money flowing in and out.

- My thoughts

In the past when China has stricter foreign exchange control on the flow of Renminbi (even between provinces), the underground money market is critical for the basic investment activities. In other words, this is actually the lubricant to create efficient economy even though foreign exchange control takes place.

The current crackdown should destroy the core of the underground money market (Remember Shenzhen is the main focus due to its strategic status) and increase the cost of the setup of the underground activities. Certain thoughts have to be recorded.

- Regarding the transformer, the core is removed thus the magnetic flux is weakened. The removal of the core and the relevant deterrence can reduce the economic activities between the regions as a kind of deadweight loss, i.e. efficiency loss.

- Most people concern the reduction of capital flow into the financial market in Hong Kong. However, the most serious thing is that the ordinary economic activities from foreign countries to mainland China is possibly disturbed, or otherwise the capital flow-in requires assessment. Therefore, I can say this is another resort to carry out the contractionary monetary policy in China. The benefit is to filter out the destructive capital flow and enable the money supply to be manageable.

- If the government curbed the underground money market, the institution can replace the underground monetary organization in order to compensate the efficiency loss owing to the loss of the lubricant. Can they revive the efficiency through the bureaucratic measures?

- If they don't do so, will the government try to construct another wave of macroeconomic adjustment? The recent news about the reduction of the loan amount for the banks implies that the government is no longer patient on the current overheated status. Let's say, suppose the government imposes the capital gain tax, the people will reduce their investment in A-share market and property market in China. Furthermore, they would find that they have difficulties to invest through the underground channel while the only way is to go through the QDII (Some mainland people say that the QDII is not managed well due to the inexperienced fund managers in Mainland). Is it the start of the trap conceived by the hunter?

The above thing is a kind of scenario analysis. One may argue that the overheated economy is solved unwisely through the monetary policy since the inflation is due to the supply side, i.e. the price of the oil and food. There is still room for the discussion on these issues.

Stock picking in Nov 2007

2007-11-18T02:53:00.000-08:00

Now that the market dips, although we don't know if it is the adjustment or the surprising bear, we still need to review the stocks in order to buy those with good quality and attractive (or reasonable) value. During the stock picking, I usually distinguish the value investment from the growth investment, as described in previous essay, value, growth investment and personality.

In the age of turbulence, we notice two divergent aspects.

- The stocks with stagnated growth cannot surge even if their PEs in the long-run are very small. Some examples are the small cap stocks, firms operating in textile industry, automobile industry and manufacturing industry.

- The stocks with great concepts can be granted the unbelievable high long-run PEs. They include the recent IPO Alibaba, the usual consumption-based stocks, and some of the stocks aiming at the resources. They indeed have the scale, though.

The cause of this kind of divergence is not solely due to the market mispricing. The monopoly aspects in terms of governmental supports, overwhelming brands, concentration on the upstream production, or the vertical integration help the build-up of the concepts. On the other hand, those stocks which cannot get these advantages, or even on the opposite side, can suffer seriously. These firms relying on the expensive raw materials and facing the fierce competition with the larger firms cannot produce strong and sustainable growth.

The polarization can be so severe that the maintenance of the stable earning is even not possible for the "lower-end" (low growth) such that the dividend may even decline. Regarding the "upper-end" (high growth), it seems that the critical points on the potential lower growth due to international pressure on currency (Renminbi), general increase in production price level and stricter export control are not emphasized, thus the negative surprise on the earning can be disastrous*.

Frankly speaking, both the value stocks and the growth stocks are difficult to be discovered nowadays. The usual phenomenon is, the cheaper the stock is, the more disproportionately worse earning it has; however, the more excellent the stock is, the more disproportionately expensive it is.

- My choices

Despite the difficulty mentioned above, young people should face appropriate challenges. I have an attempt to invest by means of value investment, capturing industrial cycle, or growth investment. The followings are my choices through the rough screening.

- Pro-value investing: a firm operating in express ways and having involvement in property market, a medium-size property firm in Hong Kong, China and Singapore.

- Capturing the cycle: two firms operating in shipping, a firm operating in computational devices.

- Pro-growth investing: a firm operating in machine tool.

- Between value and growth: a firm selling products in jewellery, some property firms in China, a resource firm based in China which operates in China, Australia and Central Asia.

Some of them are quoted by the famous blog-writers and reporters in the magazines, or have been discussed in the world-wide-web. A few of them are seldom discussed. Notice that I am used to be the stock-picker instead of scrutinizing the detailed financial statements. I will carry out in-depth researches when I am relatively free. Read the disclaimer whenever you trace my opinions.

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* (Added on Nov 19) Refer to the essay written by Mr. Cho published on Nov 1, 2007 at HKEJ.

The notes on Nov 13, 2007

2007-11-13T22:36:00.000-08:00

The HSI has fallen sharply around 14.8% from the highest point since late October. My technical indicator (a kind of oscillator) starts evolving the first buy signal, although the buy signal is created by the short-run (50-day window) indicator. It sheds light on some stocks, and I decided to enter the market again and bought certain quantity of stock today, while I will continue to buy as soon as further signal takes place.

- The recent consensus and discounted cash flow model

Now that the economy has been researched by lots of political leaders, economists, equity researchers, and the small players, in this busy period, I can hardly make more dynamic comments with limited information. I am used to having the discounted cash flow model in my mind to remember the possible dynamic.
Here I show you the example, r1 decreases due to the temporary trend of federal fund rate. Thus this enhances current value of stocks. CF1 may be increased owing to the depreciation of US dollar (or inflation). Thus, this further increases the current value of the stocks.

At the same moment, there is the hidden problem that r2 may increase owing to the restoration of the value of the US dollar in the expected future, or even the crash of the bond takes place as the governments of the other countries in general are not patient to hold the US treasury bonds. Furthermore, the lag negative effect on the export disturbs the profit of the firms (say CF2 in the model) in the future. Therefore, during next period (period 1), it will become apparent that the value of stock can drop dramatically, i.e. the reverse of the first period.

The mystery is that when the next period comes. According to Mr. Lam, the one year booming scenario is possible. Do people try to realize the next period? Noticing the abnormal economic phenomenon is crucial.

One can try to insert more exogenous shocks on the model. One can apply this to either the economy or the investment. Of course, for the pricing, the model needs to be rigorous that the rt requires the addition of risk premium.

Talking about the current dip, we should better do more homework by reviewing the list of target stocks before entering the market.

Autocorrelation, trend following and busyness

2007-11-04T14:00:00.000-08:00

- Autocorrelation and trend following

Previously I mentioned many technical aspects. Of course, that the technical analysis is only the observation of the price level and trend is not comprehensive enough. The sense of the economic environment and fundamental value is crucial to determine what it happens. Recently I am extremely busy, thus now it is hard to scrutinize the economy in detail. Some wisdom I achieved during the investment is, stock price has much more randomness, while the long-term economic variables do have significant autocorrelation (jargon in time-series statistics: something like correlated itself in time). In other words, to describe the economic variables, I would say things are used to getting better and better; conversely, things are used to getting worse and worse. It is quite often that structural change such as the policies from the Chinese government has to take place in order to reverse the inertial trend.

It is why Mr. Cho emphasizes on the trend following through the observation of the business cycle, the industrial cycle and even the price trend (refer to the prices in the long-term, or the property price which is more autocorrelated). It is hard to realize exactly how it works. People who pursue rigorous scientific justification find it is ridiculous or too trivial. From my point of view, the investment is just the combination of many subjects, including arts and science. Not only do we need to research, but also need to savor.

- Busyness is good

Mentioning that I am busy recently, I would like to talk more about busyness and investment behavior. Busyness in our own career or labor output is actually good for the medium or long-term investors like me, since I can observe the stock market less frequently and I am no longer bewildered by the chaotic pattern. Instead, the macro-picture becomes more crucial. The mistaken trading can disturb the investment morale and the confidence while busyness can preserve certain morale in the war of investment. Last but not least, we should do more sport to train our patience and discipline. Join the Hong Kong Marathon!

Glance at the extreme overbought situation - third round

2007-11-04T13:58:00.000-08:00

Last time when I mentioned it is the second round, the stock market does not dip for 600 points. Therefore, I need not change from possess to sell.

Again, here it comes to the third round, where the round trip is about to reach. From my technical trading system, the HSCE is more vulnerable. If HSCE falls more than 150 points on Monday, i.e. 19390.13, the sell signal takes place, and I would like to sell some of the Chinese enterprise stocks. As for the HSI, it seems it is relatively stronger, but will be undermined by HSCE soon as long as the HSI now has significant influence from the Chinese Enterprises.

Once I mentioned the current pattern is somewhat similar to late 2003, where structural change took place, thus I will treat this as the adjustment first. In the past, I would be too sensitive to determine that the bear trend comes. To be accurate, it is wise to follow the strategy of some experienced investors (such as Mr. Cho and Mr. Lam). After the adjustment, when there is buy signal in your own system (I believe everyone have the own trading and investment system), don't hesitate to buy as the probability to surge, either the resilience or the continuous upward trend, is larger.

The critical thing is that, if it is only the resilience of the bear trend, there is no longer any new high afterward. Usually those experienced traders regard that the dip has to be large enough (Mr. Lam: 20%) in order to change their belief on the bullish trend. Another consistent way is to use the weekly candlesticks, i.e. the more long-term framework to carry out the technical analysis.

Humble and conscious - to retrospect

2007-10-28T11:25:00.000-07:00

It is the overheated period whenever the wealth effect of the stock market has fueled nearly everyone's mind. How is your feeling? Do you feel that it is so marvelous to earn such a large amount of money easily? Congratulation!

By the way, if you have achieved that, it should be about the time to retrospect...

- First of all, did you notice some prerequisite before the investment in the financial assets?

Notice the health, as you may not do enough sport and care about the eating habit to maintain the healthy status. DO NOT look down on some minor health problems. Some of the health problems become prevailed recently because of the highly intensive business environment and in addition, the concentration on the "game".

Notice the education, as you may not be fully equipped yourselves with the two aspects in education. First, nowadays the hard skill like the information technology is indispensable. Do you equip yourselves with adequate knowledge in the information technology? The computer programming can let you carry out the job effectively. Second, the soft knowledge from the ancient wisdom and history is enlightening. Do you try to digest this and develop the sensible philosophy in living? Do you try to practice your language skills, communication skills, and coordination skills as the foundation?

Regarding the investment, do you learn any thoughts from the economics, politics and psychology? Do you read the publication from the investment guru to develop your own point of view? What do you respect, the statistics, your instinct, or the mixed? Do you try to lay out your own investment / trading system and procedure? Do you carry out certain backtests? Even if it may be impossible for you to accomplish all the above setup, do you try to consider your strength and weakness in investment? Actually they can work well for both the financial asset investment and the general practical issues.

- After all, how to control the feeling of pride

After the success in the battle (the overwhelming success is the financial freedom), how to cope with your money? Will you go to the restaurant to order the extravagant meal, and you can only consume small amount of food? Therefore, do you realize the virtue of frugality? Have you tried to think of the utilization of the money? After earning much money, to what extent do you care? Economics indeed concerns the enhancement of private happiness to be beneficial for the society, but do you really believe that the absolute selfishness works? Instead, do you try to have compassion on the weak and the poor? The grandfather of Spider Man once quoted the proverb where the more ability you get, the more responsibility you should have.

Have you ever developed your own interest? Have you tried to develop the good relationship with your intimate family?

- To conclude

It is crucial that whether you accept the rationality of market or follow the irrationality to carry out noise trading, to keep humble and conscious is the fundamental base. How many people could really pursue that? Do remember that you need to cope with the war of the entire life, not to win a battle but lose the war.

Glance at the extreme overbought situation - second round

2007-10-23T00:03:00.000-07:00

(This article continues Glance at the extreme overbought situation - first round. The content below is mainly for information sharing purpose. As the guideline, it is important that one should also scrutinize your own ability and financial strength for decision. Read the disclaimer.)

My technical indicator has shown that the bounce situation has lasted for more than two weeks. The recent strength has been weakened substantially and it is apparent that the dip today is significant to see the change of trend. If the HSI and HSCE continue to dip for more than 600 points tomorrow, then the signal will finish my target round trip, i.e. a trip going from the start of the warning range to the end of the warning range.

- To sell

According to my previous action, I would like to sell some stocks for safety. My two kinds of methods to sell stocks are 1) Sell whenever it is higher in order to maintain reasonable stock-cash ratio; 2) Sell when the round trip stated above takes place. Before August, I used the first resort, while for the recent surge, I used the second one since the structural change is significant (This can also be shown in my indicator through some secondary signals.)

As for the other indicators, another set of long-run window (let's say 150-day and 250-day) indicator shows that the HSCE has reached the historical high since 1993. I also listened to an experienced commentator and entrepreneur where he mentioned the importance of money at this moment. The Australian dollar, New Zealand dollar, Canadian dollar, and EURO against the Japanese Yen start developing the round top such that the round trip pattern also occurs* (US dollar is too weak thus not applicable as the reference now).

- To possess

However, it is only the second round in my indicator. Will the stock market, especially when the Chinese side behave like the period from late 2003 to early 2004? In that period, my indicator could surge consecutively even if my indicator achieved the round trip, it still had the durability to perform another round trip. It is rare to happen. Remember that in 2003, the first round CEPA is a kind of structural change for both the economy and the stock market.

In addition, the Hong Kong dollar seems to be stronger recently. In the volatile trend developed owing to capital flow, the exchange rate between Hong Kong dollar and US dollar is relevant.

- Conditionally Change from possess to sell

Overall, should I change the strategy from possess to sell? If the above signal, i.e. dipping more than 600 points takes place and one possesses not enough money, as a kind of risk management, the flexible investors should even sell some (not all!) strong stocks in order to increase the amount of money.

Nevertheless, I have the optimistic belief on Chinese economy and impetus with discretion on policies and strategic relationship. It is inevitable that the market overshoots through the various speculative actions. If one thinks that it is really bulky to move the portfolio, just being the holder and noticing the bottom signal is more sensible and relevant.

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* Technically, the other currencies except US dollar cannot retain the strength as it breaks the support line of the upward trend against Japanese yen. As for Japan's side, even if its economy is not easy to revive, the inflation pressure due to the oil price is significant such that the pressure to increase the interest rate is great.

Application - China Com. Con.

2007-10-19T19:50:00.000-07:00

(Here I would like to show the application of the previous discussion on PEG, Payback period and growth on China Com. Con. (1800). Detailed analyses of this company are mostly omitted.)

- China Com. Con. (1800)

Adopting the consolidated forecast for 2007 to 2009 from an investment media and the price today, we calculate the following.

Year 0 is the year end of 2006, while year 1, year 2 and year 3 are the year ends of 2007, 2008 and 2009 respectively. The others are beyond 2009.

Currently the PEG level for the targeted market, i.e. the well-known Chinese enterprises, is approximately 2. We adopt 12-year payback period as the focus. The long-term growth rate, i.e. the annual growth rate of the EPS after year 3, is derived through the current price as of Oct 18, 2007, i.e. HK$23.50.* The result shows that it is 21.5%.

- Evaluation

1) Robustness of the forecast: The forecast can be relatively stable and not easy to be changed since the price information of its product is not the instant one. The opposite case is those stocks such as the stocks heavily affected by the commodity prices, HKEX, and insurance companies in China, since their performance can be observed instantly through the volatile daily prices or volumes of their products, such as commodity futures (for stocks producing commodities or using commodities as part of the cost-of-good-sold), A-share indices (for insurance companies), and transaction volume (for HKEX). Thus the forecast should be relatively robust.

2) Long-term annual growth rate = 21.5%: This long-term growth rate reflects the relatively optimistic growth of people's expectation on its business model, even if we map our analysis on PEG = 2 /payback period =12 years. As an industry fully supported by the development policy of Chinese government, this amount is still at the acceptable growth rate. In case that the market sentiment boosts it to the unstable level but its long-run growth rate is acceptable, I regard it as relatively stable only.

One should evaluate its details including its business model, ordinary financial performance (such as its low gross and operating profit margin), generation of cash flow, management and risk (such as the surge of the material price) before any actions. Besides, the trend in the whole market, industry, and policy movement should also be well scrutinized.

Notice disclaimer for the investment decision.

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* Instead of calculating its estimated value, I would like to calculate its long-term growth rate to see if it is reasonable or not under the given price and targeted payback period.

* * *

Please notice that I re-structure the labels of the essays such that it is neater.

PEG, payback period and growth

2007-10-14T17:16:00.000-07:00

Previously I wrote the essay about the intuition on PEG, in which the condition PEG = 1 for long-run growth can imply the payback period approximately equal to 7 to 8 years. The PEG in wikipedia also mentions that when PEG = 2, it becomes expensive. Here I provide the corresponding payback period for reference as shown in the graph below. We can see that the payback period is around 11 to 12 years when the long-run growth rate is at the reasonable range.

I would like to show some implications below.

- If payback period rule is treated as the standard

From above graph, under the reasonable range of growth, say from 10% to 20%, the investment should be attractive if the payback period is equal to 7 to 8, while the investment should be expensive if the payback period is equal to 11 to 12. If the payback period rule I state here is treated as the standard for all g, those stocks expected to have strong long-term growth rate can achieve relatively higher PEG such that maximum PEG can be even as high as 3 or 4!

- Easy to have high growth?

In reality, the payback period rule is not actually fixed, since those investments with strong long-term growth rate should be hardly sustainable comparing with the reasonable range of growth rate, i.e. those with strong growth may not have the same "durability" as those with the mild growth or low growth. Periodicity in the industry or unstable management may disturb the continuation of the strong growth (You may say that many of the growth stock may be prevailed fortunately only because of current policy and economic environment). Therefore, people are not willing to grant the standard payback period rule stated above towards these investments. Under the strong growth, the shorter payback period should be used.

Through the above graph, the loci of constant PEG decline as soon as g increases. This is a kind of coincidence that can be used to model the unsustainable risk of strong growth rate. Of course, occasionally some stocks have reputation by achieving sustainable long-term growth. They can have larger PEG on the average.

- Mixed senses

From my point of view, the above graph is the contour such that one can put the stocks on the contour according to their growth potential and risk and determine the range of PEG, thus the range of PE is also derived. The higher the certainty of the growth is, the higher the range of PEG can shift upward.

It seems to be easy, yet the long-run growth rate and the risk are difficult to be evaluated, so that some other justification has to be carried out. It is worthwhile to remember that artistic sense and scientific sense should cooperate to work out the investment decision.

(Updated at 1:03 am on Oct 15, 2007)

Value, growth investment and personality

2007-10-07T19:56:00.000-07:00

Fundamental analysis is a familiar term for most investors. It can actually involve two aspects, the value investment and the growth investment.

- Value investment

The value investors select the value stocks by comparing the NAV and the price. The NAV has to be the effective one such that the management and the asset can coordinate with each other in order to reflect the value of the asset. The stable track records through earning and dividend are the supports.

Usually, the sole consideration of value investment is the bottom-up approach, where the undervalued property is focused by the investors first. The margin of safety should be large enough to attract the value investors to invest in these stocks. Through the general observation, the effect of market-based pricing on the value stocks (pricing through market sentiment, but not the intrinsic value) is usually small owing to the poor popularity, such that there is less correlation with the market indices.

- Growth investment

The growth investors are eager to look into the prospect of some industries. As soon as they find out there is plenty room for some products or services to expand in the market, they will try to invest in the leaders or some stocks with good management team. In this case, the past dividend may be somewhat irrelevant as it is a kind of growing business. In most of the situation, the NAV is significantly less than the stock price. The expected earning or free cash flow generated by the business is the main focus.

The growth investment relies on the top-down approach to enhance the reliability. Through the general observation, these stocks can have significant effect from the market-based pricing.

In the later development, the growth investment can combine with value investment to make value comparison or judgment. The tool used for value judgment includes the PEG ratio and the discount cash flow (DCF) model.

- Different approaches require different personalities and abilities

Even if these two types of investors carry out the fundamental analysis, the personalities and abilities to participate in these approaches are somewhat different. The pure value investment described above suits the arbitrager, engineer or accountant by scrutinizing the accounts and the business operation and doing precise value judgment, which requires perseverance in information seeking. The pure growth investment approach described above suits the fashion designer or inventor, requiring much innovative imagination and prospective thoughts.

To run the business, these two approaches coexist such that companies with sustainable growth (winged steed) and bargain value are searched. Buffett originally used the value investment by considering the intrinsic value solely, while Munger joined Berkshire Hathaway and applied the growth investment component to the decision. Buffett now regards these approaches as being joined at a hip. As described by Mr Lam, the attitude required is the personality of capitalist.

Reference: Value investing and Growth investing (Wikipedia)

Feeling of slope

2007-10-06T01:04:00.000-07:00

(Here I provide a simple sense for our judgments on the current market status.)

I would like to share some discovery, in which the ordinary people may not observe this easily. Attached please find the HSI graph from 1969 to 2007, with the latest date on Oct 4, 2007.

With such a long time span, we can observe the whole picture of the stock history in Hong Kong. In this figure, it is shown that the massacre in 1973 and the crash in 1987 are "diminished". The remaining things that we can see are our etching reminiscence in 1997 and 2000.

As we all know that the nominal prices of stocks or indices are useless in investment, and they tend to rise exponentially according to the rate of return. To have the fair comparison, one needs to adjust the figure in the logarithmic scale in order to explore the real picture. It is shown as follow.

The picture now can reveal the larger impact of the massacre in 1973, and also shows the adjustment in 1982 due to depreciation of Hong Kong dollar. Furthermore, we can see clearly the stock crash in 1987. When we compare the previous crashes and bearish trend in 1997 and 2000 with the past crashes or bearish trends, they are not that sharp comparing with those in 1973, 1982 and 1987.

What I want to notify you here is the slopes of the bullish trends before the bearish trends or stock crashes, where I use the red dash lines to indicate. Do we find that the slopes in the previous trends are mostly steeper than the bullish trend that we currently face since 2003?* How should we position the crazy surge recently? The start or the end? There are indeed some reasons why those big players are urging people to reach the skyscraper...

Stock investment is somewhat the mixture of art and science. The above analysis requires you to utilize your artistic sense. Regarding the science sense, it has been revealed extensively through fundamental analysis, economic analysis and capital flow. After this, to participate or only appreciate depends on your risk appetite. I do not bear the responsibility for one's potential loss. Remember the signal provided in the previous essay.

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* (Added on Oct 7, 2007) The slope for the bullish trend from 1995 to 1997 is more gentle comparing with those indicated by the red dash lines. Remind to evaluate the history discreetly.

To argue whether it is the start or the end is exhausting. Notice the imminent change in our own system, i.e. the mix of fundamental and technical analysis, in order to determine the three classical ratings, i.e. buy, possess and sell signal. Currently my system is the same as before to possess, but the difference is that the bounce dynamic has taken place. Thus I wait for the forthcoming signals for further decision.

Glance at the extreme overbought situation - first round

2007-09-28T12:36:00.000-07:00

My technical indicator system shows that both HSI and HSCE have struck the extreme overbought location since Friday last week. However, the momentum is still strong such that despite the overbought situation, the bounce dynamic does not take place at all. From my point of view, it is the first step only. We need to notice the following.

- Refrain yourselves from purchasing stocks unless you have solid evidence to believe that the probability to surge is large.

- You can buy the IPOs, but need to refrain from margin after the recent IPOs such as SOHO and Aoyuan.

- Not purchasing stocks does not mean that selling stocks. DO NOT sell the growth stocks at this moment. It is optimal and aligns with the risk management standard to hold those growth stocks such as H-shares with good fundamental status and benefits from the prevailed policies. As for the asset resisting the erosion of inflation, it is better to hold the H-share property stocks although the early-expected policy is enforced on the property market.

- Most importantly, DO NOT put at this moment!

In conclusion, to possess strong stocks bought in early stage and throw away those with weak fundamental status is the optimal strategy. Previously I preferred selling stocks whenever it attains higher level, but the tricky thing is that we are now facing the potential negative real interest rate and political thrust on Hong Kong's stock market, which can lift up the reasonable market PE ratio. The value investment is somewhat exhausting.

I am still busy recently, but will also share the important signal as long as it takes place.

* * *

I just find that I typed oversold instead of overbought at the title. Sorry for my careless mistake. (Oct 1, 2007)

Long-term growth of net profit

2007-09-14T21:50:00.000-07:00

When we learn macroeconomics, it always mentions the economic growth, defined by rate of change of real GDP per capita. Real means that the measurement is in terms of the quantity, while per capita means that it has to be divided by the total number of the people. I initially decide to take this amount as the long-term growth of the net profit, yet the above jargons including real and per capita perplex me that it is not that simple.

In the ordinary world of finance, the cash flow or net profit are mostly the nominal amount and the real quantity (production quantity) is mentioned as the indicator of company ability to expand its profit. Therefore, the economic growth cannot be directly used as the proxy of long-term growth of net profit. Moreover, the population growth is rather irrelevant to the share of the profit. Instead, the number of shares issued is more relevant despite the fact that it can hardly be measured in terms of the macro-framework. Notice that it should not be similar to the growth rate of money supply which aims at catering enough transaction device for the growing economy.

In view of this, I try to obtain the economic data from IMF, and extract the GDP in current value measured in US dollar with a view to estimating the long-term growth of net profit for the firms. That is, to calculate growth rate of nominal GDP as proxy. There are two basic assumptions to support this.

1. The economy as a whole can be regarded as the national firm, where different firms belong to different departments, and even the labors, capital owners and government (public sectors) themselves belong to different departments. It is based on income approach of nominal GDP calculation.

2. Although it is the only national firm, it behaves like the price-taker that the price is determined through the competitive way. This is not the communist economy.

In turn, I would like to use this to calculate the reference long-term growth rate of net profit for the firms in China. Eight economies, Hong Kong, Ireland, Israel, Japan, Korea, Singapore, Taiwan and US, are considered. The first seven economies are the fast growing economy from 1970s to 1990s. Some of them have similar wisdom in doing business such as Japan, Israel, Hong Kong and Singapore. Some of them have similar culture such as Hong Kong, Singapore, Taiwan, Japan and Korea. As for US, it is considered as the benchmark to make comparison*.

The data is from year 1970 to 2000. The graph of the nominal GDP growth rate is shown as follow.

It comes to the following mean and standard deviation of the nominal GDP growth.

From the table, it shows that the East Asian tiger can achieve the growth rate at 14%. The growth rate of Ireland and Japan is about 11.5% and Israel achieves the growth rate at 10.5%. US, as the developed economy, achieves the growth rate at 7.6%. When we consider the volatility (standard deviation), the growth for the emerging economies is more volatile than that of the US. It can show the difference between the emerging economies and the developed economy.

- Implication

Most of the above Asian economies start to surge since early 1970s and end in early 1990s. It is uncertain if China can extend its strong growth for 20 years. If there is reason to stop the strong growth, it can be due to the bottleneck of the young population growth and technological productivity growth. God knows whether it seriously deters the strong growth! To be conservative and use history as reference, 20-year strong growth of net profit is the sensible indication.

From my point of view, we can use this proxy to estimate the long-term growth rate of the firms' net profit in China. But remember it is nominal GDP including people's wage, rent and income of public sectors such that we have to filter out the firm's income growth. In addition, there is still large disparity in China. Different industries have different profit margin and growth rate of the net profit. I believe that as strong inequality exists, the long-term growth rate of the net profit for the large firms should be greater.

In view of the above disparity, certain relaxations or restrictions, such as risk premium and comparative advantage, have to be made to assess the growth of the net profit. Data such as value-added of the industry, which can further facilitate the evaluation of the long-term growth rate, can be found through National Bureau of statistics of China. Prevailed policies can be found in the mass media and some Chinese official websites.

In last month, the growth rate of the value-added of the industry in China is 17.5%, declining a bit comparing with those in last two months. It can be the signal that the firms are a bit uncomfortable to grow. Nevertheless, it is still the enormous growth rate when we compare this with the above figures.

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* If it is possible, it should be perfect to obtain the nominal GDP of US from 1880s to 1930s. As I expect China should have similar background when comparing with that period of US.

(The implication is updated on Sep 15, 2007.)

Value stock?

2007-09-02T00:49:00.000-07:00

Now that the stock market does enter the exciting stage, it is more difficult to select the value stock. Remember that those good companies may not mean that they are the good investment targets as there is mispricing.

I am not those hardworking stock pickers using many financial statement analyses and tracing the operation status of the company. Nevertheless, I am used to having the data mining in order to select those seemingly value stocks.

Here I would like to share my simple list and you may assess whether it is truly worthwhile to invest. Remember some of them do not pass the top-down procedure. Is there any hidden reasons? Bad economy (abnormal market sentiment)? Bad industry? Bad management? Lack liquidity? Moreover, when you try to invest after certain researches in great detail, it is usually the case you need to overcome the destiny described by prospect theory.

Num Name Closing Price as of 31/8/2007

48 聯洲國際 2.18

135 中國（香港）石油 4.14

316 東方海外國際 84.45

359 海升果汁 1.24

408 葉氏化工集團 5

496 卡森國際 0.9

571 豐德麗控股 5

581 中國東方集團 3.93

629 悅達控股 3

641 立信工業 5.78

682 超大現代 6.01

687 泰昇集團 0.84

698 通達集團 0.5

710 精電 6.31

716 勝獅貨櫃 4.83

751 創維數碼 1

861 神州數碼 3.8

900 ＡＥＯＮ信貸財務 6.3

903 冠捷科技 4.89

938 民生國際 0.98

1098 路勁基建 14.16

1174 太平洋恩利 2.24

1192 泰山石化 0.61

1889 武夷藥業 1.28

2339 北泰 2.9

2342 京信通信 2.7

2866 中海集運 6.01

2868 首創置業 5.85

2877 神威藥業 5.16

2878 晶門科技 0.65

2889 中國特鋼 3.27

3322 永嘉集團 2.85

3336 巨騰國際 3.02

3355 先進半導體 0.62

3398 華鼎控股 2.15

I believe that there should be some value stocks above. Remember the above rationale and I haven't separated the abnormal profit out of the operation profit under the selection. It really needs some extra effort to further confirm them. I do not possess any of the above stocks. Notice the disclaimer for decision.

Prospect theory and some extension

2007-09-01T23:10:00.000-07:00

There are the following questions.

1. If you have two offers, they are,

1A) 1/2 chance to get $100, and 1/2 chance to receive nothing.

1B) Surely get $50.

What will you choose?

2. If again, there are two offers, they are,

2A) 1/2 chance to lose $100, and 1/2 chance to have no any loss.
2B) Surely lose $50.

Then what will you choose? Note that the expected values for the choices are the same.

This is actually the famous questions proposed by Kahnemann and Tversky (1979, they became the Nobel Laureates of economic science in 2002), where the set of this research is called as prospect theory(展望理論). It is found that the people will generally choose B for the first question, while the people will generally choose A in the second question. The reason for this kind of choice is owing to the following utility (value) structure (Graph adopted from Wikipedia)

This kind of utility structure is normally built in the human mind, and shown in the experiment. It can arouse an important implication in the stock investment. There are significant proportion of investors who are risk-averse when they have opportunity to obtain money as shown in the right part of the graph (concave part of the curve). This theory implies that the normal stock investors will do the frequently observable phenomena.

a) They will easily collect limited profit whenever profit appears.

b) They will not stop loss in a bid to get back the principal.

In the investment mind, this kind of mindset can vastly reduce the investment return since the price of good stock usually rises, while the price of bad stock usually falls.

- Another picture

In the game called Miljoenenjacht (Deal or No Deal, 一擲千金), there is frequent action that the banker is willing to offer high amount of money even if the banker knows that the money inside the box is small amount, while there should be chance that the candidate is willing to get that high amount of money. Why does the banker do this kind of dangerous action? This is because on another occasion involving the component of gamble. The candidates or participants are usually risk-loving. If using the graph to illustrate this, at the right part, the curve should be convex instead of concave.

This can also show some important implications in the financial market. In the warrant market and the banker stock market (mostly appearing among the penny stocks), the players are expected to be the risk-loving participants. Therefore, this satisfies this kind of situation and the issuers of warrants and the bankers can obtain much profit as soon as they acquire that the participants are risk-loving.

How can they reveal that the participants are risk-loving? Their product has already helped the bankers and warrant issuers to select this, but they also select those who are extremely smart in analysis and trade. Of course, the issuers of warrants and bankers have other means to secure their profit margin, as if the casino decides various mechanisms in order to secure their expected profit. The perception of risk-loving participants is just a way to further increase their profit by selling the securities at the higher price.

It is therefore crucial to know that what our value judgment are, and also know what kind of market (long-term, short-term, value/growth stock, banker stock, or warrant) we participate. Knowing the background of the controller of the game (the manager, the large shareholder, the issuer of warrants, or even back to basic - invisible hand of the market) is also indispensable.

The detail of this discussion is here:

- Prospect theory (Wikipedia)

Once Sky also provided some explanation and discussion on this.

* * *

I am recently busy on my research. Therefore, I cannot write many essays in the expected future. If I write down in the essay format, it will be the important points.

Importance of Top-down approach

2007-08-15T15:40:00.000-07:00

In many newspapers, the recommendations mainly directly cite lots of stocks which have price significantly lower than the NAV, or have some ultra abnormal profit through many financial tactics. It is a kind of elegant decision to buy the stocks. However, in view of the perspective of analysis and methodology, it can be the trap.

- The industry may decline such that the asset may not be utilized well in the anticipated future.

- The management may have tricky tactics which are detrimental to the small shareholders.

- The liquidity risk is more severe comparing with the conventional stocks such as blue chips and H-share.

Under this situation, small value investors may easily suffer from the apparent data. In view of this, the investors have to keep track of every record of the target companies regarding the business operation, the management philosophy, or even the mindset of the management unit.

Nevertheless, small investors can hardly escape from the "small" situation as they lack resources. To balance the trade-off in the miraculous value investment and the idiosyncratic risk, not only do we need to carry out certain diversification (around 5 stocks in a portfolio and certain amount of cash), but also have to carry out the research in top-down approach in order to find out the suitable stocks for investment.

Top-down approach is to select stocks through the sequence: Economy, Industry and Individual stocks. One has to select the best economy first, and then selects the industry with good prospect, and finally selects the stocks inside that industry having good growth potential and attractive value. From my point of view, sometimes certain risk management measures during the market operation have to be considered, such as to ensure that it has adequate liquidity.

People blindly seeking so-called value stocks without scrutinizing the economy and industry may stray from the rational decision and spoil the stocks with addicition. Eventually, it can be too late when one finds that they are trapped.

Anecdotes on Aug 4, 2007

2007-08-04T03:01:00.000-07:00

In this month, I will need to face an important task and meet the deadline. Although I have a few ideas in my mind, it will not be easy for me to write many essays in this month.

Currently the market indeed pursued the further adjustment, but does it mean that the adjustment has probably finished? We cannot say so since the US subprime loan crisis and the turmoil of the US property market do not provide a clear picture towards the investors. Most seriously, these have linked to the large investors such as hedge funds and private equity funds such that chain effect is ignited and spread with the help of Japanese Yen. Regarding the international market, these large investors can contribute volatility and uncertainty to the international financial market.

Can Hong Kong escape from the attacks from the fluctuating capital flow during the period that Chinese government carries out strengthened QDII program? Hard to predict. This is the new age, in which China and western countries led by US are playing tug-of-war in Hong Kong financial market.

I just glance at my previous articles and find that I have written some aspects regarding the US economy and related international economy. You may take a look to get some inspiration!

- The US economy and worsened credit rating

(Feb 18, 2007)

- Updated comments on US and Chinese economy

(Apr 17, 2007)

- Economy and stock market updated I

(Jun 26, 2007)

Recent Anecdotes - Crash and Egana

2007-07-29T01:24:00.000-07:00

- Crash on July 27

After my risk-averse prediction on last week, the stock market still soared a bit and attained a new high. On July 26, the announcement of further release of QDII did not facilitate the market to grasp more credit, which was only worth about 120 to 170 points. In the afternoon, it turned upside down without any reasons (one may contend it was due to NIKKEI's plunge in the afternoon, but there was still no any reason for NIKKEI to plunge). This became an even sharper signal that the large player seemed to become more risk-averse and prepare the battle for the next day.

Eventually, the crash took place on July 26 in the US stock market. At that moment, the stock constituted approximately 40% of my portfolio after my gradual selling tactic. I felt content at that moment because the bull can take the rest to step further. On July 27, I decided to watch the development without any purchase until there was significant oversold position owing to fear, indicated by technical indicators, financial ratios and economic messages. If there is significant adjustment, I am optimistic towards the economic development and the trend of the stock market in Hong Kong with discretion. From my point of view, it is somewhat the new age, where China and International economic development have significant weight on the trend.

Recently I just tried to meditate on the test of the change from the bull to the bear. I hope that there can be chance to experience this through the quake.

- Daydream about Egana

Another critical event is the independent crash of Egana. Initially, an executive director was charged by the ICAC for involvement of the purported investment of Grand Field and Upbest. Before the announcement, price of Egana has already started its quake and plunge and the reason was not known. According to this announcement, Egana does not involve in this charge and only the executive director involves in this. It seems it can be "safe" to come back to Egana as the operation activities are not disturbed.

Meanwhile, an article from webb-site.com (By David Webb) indicated the fatal attack on Egana as he questioned the accounting policies and some unusual practices of Egana. He even said that this situation resembles the incidence of Ocean Grand Hldg Ltd. This triggered the desperate sell-off on Friday, accompanying the stock crash of the overall market.

What is more, the development seems not to be the current matters, but also a long history. To be frank, a young investor should hardly realize this. Once I felt that Egana's products are attractive and its recent record is healthy according to the account. It was one of my target, and even the target of the institutional investors. After this event, we can recognize that the perplexing accounting techniques can lead to the fatal ending.

Investors have to file this as the documentary event since it is the potential failure of the fundamental issues, i.e. the credibility of the accounts and information. As a young investor, we still need to learn and evaluate from more unusual experience.

Paper Trade Evaluation

2007-07-24T20:22:00.000-07:00

The latest paper trade is shown below.

The target B is Chuan He (281). Here I would like to end this series of paper trade.

The reason is as follows.

a My buying strategy is easy to set and to be passive, yet my selling strategy is not as efficient as what I expected before. Buying mainly involves the stock picking process where data mining is the crucial point, while selling involves the continuous observation on the price movement of the purchased stocks. This mechanism is somehow different and strongly requires knowledge of shape and signals instead of data mining of various stocks. If I need to glance at various technical indicators in order to assist my selling decision, it is not my objective since I want to be passive. I still haven't devised an efficient passive way to exit. Here I just experience the asymmetry of the stock trading between buy and sell, and it is the point why stock trading can develop to be state-of-art.

a In general, the probability to surge is higher than the probability to dip. In terms of the strategy, this can also create a kind of asymmetry between buy and sell.

Eventually, I find that the accuracy and efficiency may not overcome my overall effort. I had better stop the paper trade. Currently, I prefer having the practice on the medium-term or long-term investment. Perhaps, this is more suitable to me.

Intuition on PEG ratio

2007-07-23T00:29:00.000-07:00

(This essay has been written since May, but I cannot justify some of the logic and stop for a while. Now that it becomes a hot topic to discuss the PEG, I would like to release this and have an open discussion, hopefully.)

In the growth investment, the investors will not only focus on the PE ratio to make the decision on their investment. Instead, one would like to use the PEG ratio (Price-Earning-Growth ratio) as an indicator. The advantage is to value the trade-off between the value and growth of the equity. Recently, the new book edited by Mr. Lam emphasizes much on the PEG and PEVG (for insurance companies). Reference of PEG ratio in wikipedia is here and for investopedia, is here. The conventional rule of thumb, PEG = 1, is used to determine if the stock is worth buying.

The analysis below has some assumptions which cannot ensure the complete scientific justification. Nevertheless, this kind of analysis is to align with some common sense developed by small investors without much financial knowledge. I use the payback period as the indicator as I was inspired by my father who frequently uses this to evaluate the performance of investment.

- Investment by sole proprietorship

Suppose we are the sole proprietorship and invest in a small business, or buy a housing property, so that we need to pay the lump sum amount in the beginning. Let g% be the earning (for simplicity, we use earning instead of cash flow) growth of this investment. In the first year, we get 1 dollar of earning, in the second year we get 1exp(g%) dollar of earning, and in the nth year, we get 1exp(ng%) dollar of earning. If all g are zero, then the stock can only get 1 dollar earning per year.

Now according to the rule of thumb that PEG = 1 is the threshold to make the investment have reasonable value, if the growth rate is g%, the PE will be g. Since the previous earning is equal to 1 at start, the price of this investment, which is the initial lump sum payment, is therefore equal to g. Here I would like to calculate the payback period with different value of g.

The value of payback period is described in the following graph.

It is found that when the growth rate is approximately above 10%*, given the initial investment outlay is equal to $g with initial earning equal to $1 and growth rate equal to g%, this investment will pay back the total principal through the sum of earning per year after approximately 7 to 8.5 years, indicated by the locus. If initial investment is smaller than g with g% growth rate, the payback period is below the locus (Yellow region). Otherwise, the payback period is above the locus (Grey region). Note that I use g smaller than 50. It is hard to imagine that a company can achieve extremely high growth rate in the long-run.

How can we interpret the payback period in this case? We consider the scenario by ignoring the reinvestment from the earning, if we simply sum up the value earned during 7 or 8.5 years and assume the value of the business or the housing property is the same, we will double the amount of our asset. Therefore, by rule of 72, this intuitive return can range from 8.5% to 10.2%. Hopefully, this intuitive return could be conservative when we consider the assumptions of no reinvestment and unchanged asset value.

- Extension

From the above imagination, it can be a kind of loose argument in order to support why we are used to adopting PEG = 1 to determine whether it is worthwhile to invest in the business. Of course, the assumption stated above, including the sole proprietorship and some informal justification in finance, can be criticized. In the stock investment, the dividend policy and the method of financing (debt and equity) do matter.

What we can also notice is that there should also be risk premium putting on each investment such that is it so easy to obtain stable g throughout the investment period? In this sense, the PEG ratio should be even smaller in order to ensure the safety margin. The more reputable and reliable the company is, the higher the acceptable PEG ratio we use.

Since this essay may lack scientific support on some of the issues, I encourage that there can be some comments on this issues if one can be competent in analyzing this. I may also write some further comments or amendment once I find some breakthrough. Thanks!

(Updated on Jul 24, 2007 as indicated by blue sentences and new graph)

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* As explained by PEG ratio in Wikipedia, PEG is not useful when the growth rate is too small. From the above graph, it also shows the steeper locus and lower level of payback period when g is too small, indicating that the PEG at this region may be unreliable for investment decision.

Observation updated on Jul 18, 2007

2007-07-18T19:15:00.000-07:00

I just came back to Hong Kong on Jul 14, 2007 and have taken rest for a few days. It is quite surprise that the stock market continued to make certain breakthrough, and luckily, I did not change my portfolio during my leave. Same as before, you and I may have sufficient reasons to agree that the stock market starts to derail from the reasonable value, but the irrational sense developed by the players (or probably rational since the big players expect that each player's decision is to buy) can still support the stock market at the higher level.

It is somehow a bit late to release the essay when I type this here. Anyway, I have already mentioned in the newsgroup. I would just write down some brief points as reference. These are detrimental factors and observations affecting the Hong Kong stock market in the short term.

- Factors which can trigger imminent dip

a Needless to say, China remains too hot. It is not in the stock market, but in the economy itself now. Government will release the latest economic progress, and the market participants can expect that the government will act certain policies in an attempt to stabilize the economy. This is the most direct and intuitive observation.

a Japanese Yen remains stable around 121 and 122 against US dollar. It seems there is still the tug-of-war, but the expectation of interest rate increase in August may be the threat. If it does not reflect in August, then it will certainly reflect in late July so as to first come, first serve.

a The oil price steps to the higher stage, yet Petrochina is hard to pursue higher. It reflects that the oil company also has hard situation to earn more money under such high oil price level. If they cannot earn money, one may imagine that the other firms are even harder to earn more money as the efficiency reduces and general cost increases.

- Observations which can be the signal for the imminent dip

a Two prominent commentators have made the comments that the stock market has to dip for a while soon.

a My technical indicators composed by 150-day and 250-day windows start indicating that the main indices such as HSI and HSCE enter the dangerous range. It is rare to enter this range.

a Yesterday (Jul 17, 2007), I observed some brothers, which are the penny stocks or small cap stocks controlled by the bankers, wanted to surge again.

a Manulife (945), a traditional good shelter where it performs well during the adjustment has increased its turnover during Friday last week, and it keeps it rising momentum as well. Thanks for Cory's notice.

- Conclusion

Are these enough to pursue the adjustment? I don't know, but if I know these kinds of unfavorable situations, I would rather sell some of the stocks and remain my cash-equity ratio stable. If the market can still pursue an even higher level within two weeks, I would like to sell even more stocks as the risk to adjust will be much prominent. This is actually consistent to my belief in the passive strategy, where I will sell the weaker portion and retain the stronger portion, and try to keep the cash-equity ratio to be stable.

All I mentioned above are related to the short-term. We all need to bear the risk that we may miss the chance to capture the targets during the adjustment. Let's see.

* * *

- Updated on Jul 19, 2007 (0:32)

By the way, as a Hong Kong investor, we need to know the renowned Ding Hai (Adam Cheng) Effect. We all know that today a new series of program is aired in ATV.

- Ding Hai Effect (Wikipedia)

- ATV new series with Adam

In addition, US stock market suffers now owing to the speech of Bernanke, saying that the property market and the relevant subprime loan crisis may still have prolonged effect on US economy. It is expected and you may have a look at my essay on stock market and economy updated regarding the international economy.

The analysis of Property market (with emphasis on China)

2007-07-07T12:22:00.000-07:00

Previously I shared my point of view about the economy and policy of China. There is more detailed note concerning Chinese housing property market. I would like to elaborate more about the Chinese property market since I recently gather some opinions and ideas.

- Demand and supply of durable good

It is according to the commentator in RTHK. According to my previous knowledge, demand of housing property consists of the normal demand and speculative demand. Here I would like to consider the normal demand, which is due to the practical use i.e. for leasing or living. Housing property is the durable good. Therefore, people utilize the good in the long-term. When people have already possessed this, they will not easily change hand.

In 1997, the normal demand of the housing property was attributed to the local people mainly. The commentator in RTHK mentioned that there was the case in which the normal demand became saturated during 1997, since significant amount of people had owned housing property. Therefore, there was contraction from the demand side causing the price slide. The positive supply shock carried by the government policy, conspicuous proportion of speculative demand and Asian financial crisis exacerbated the price slide towards the disaster.

In view of China, there are still significant amount of risk-averse people who desire to buy the housing property for a living or long-term investment (short-term speculation is not economical for this group in China owing to the penalty duties). Therefore, the demand side has significant support for the normal housing. In addition, many Hong Kong people have gone back to China to inject their capital into the high-class housing property for the sake of long-term investment or living (especially in Guangdong). The demand side of this kind of property is also well-supported. With the rigid supply side, the prices of property housing and related stocks in China are optimistic to surge.

On the other hand, how is the situation in Hong Kong now? Using the similar analysis, the problem of demand contraction occurs among the low-class or old properties, causing polarization of housing prices.

- Policy on different type of property in China

Regarding the policies enforced on the Chinese property market, there can be some difference between the housing property and commercial property. The housing property is the main concern of Chinese government because it affects the living standard of people, while commercial property is not. Therefore, investing in Chinese housing property is different from the commercial property in China. In terms of prospect, it still depends on the demand side as the firm support.

- Decline of A-share market, continuing surge of property market

Recently the A-share market slides, but the smart money has switched from A-share market to property market. For the QDII, it is only one of the exits for this capital flow, and most often the ordinary people may not invest in the QDII. The speculative demand of housing property can still revive through this kind of substitution.

Chinese people have already acquired the concept that whenever we die, one should stay under our eaves. This illustrates that the capital flow usually has certain weight concentrating on housing property. When the other investment or speculative vehicles are not stable, the people would rather inject capital back into the housing property. This phenomenon was also found such that in Hong Kong, even if the return of the housing property stock is higher than the housing property, the people would rather purchase the housing property for a kind of security.

- Others

Finally I just also want to mention that the policy dealing with the housing property is rather different which depends on region in China. It is rather sensible to observe the working practice and style of the Chinese officers in order to assess the political risk. Observing the political practice can also shed the light on the prospect of the cities, thus evaluate how the future demand will be.

* * *

For the paper trade (Jul 6, 2007), I decided to sell Target A (It is actually Beijing Development (154)) at $4.62 and Target C (It is actually Hang An Group (1044)) at $26.55. Starting from last year, I myself have already thought that to sell the stocks is difficult than to buy the stocks.

Target A did not have the impetus and has touched my reference stop-loss level for a few times. Therefore, I decided to sell this. Concerning target C, I perceived that the momentum was weakened two days ago and further weakened yesterday. Therefore I decided to lock the current profit and try to explore other opportunities.

I will go to Singapore on next week, and stop writing for one week.

I have written a short note about the recent stock market update in Hong Kong and China. It also involves an idea of A-share future to be released in the future (proposed by a weblog writer). You may have a look.

Attended the investment sharing II

2007-07-06T02:23:00.000-07:00

(This is the continuation of Attended the investment sharing I)

After his comments on his stocks and some of his thoughts on the value investment, time was running fast, and it came to the Q & A section. Here most of the people concern the number or industry whether it is worth investing. I would like to post a few topic concerned.

- Water resource and environmental protection

He mentioned that the stock related to the water resource and environmental protection is expensive such that we would be late to invest in this kind of concept now. According to my mainland friend, the industry related to water is important for China, but it should be the stable industry with slower pace. One can imagine how the utility firms work. Why do these firms grow in such kind of impulsive manner?

Apart from the suddenly welcoming concept, those firms aiming at the water resource and environmental protection should have some financial tactics to strengthen their business initially such as injecting capital into these companies through the higher hierarchy. This higher hierarchy can be direct or indirect subsidiaries of Chinese government, and then they can carry out merger and acquisition to enlarge its size. This is why short-term shock is more prevalent rather than the long-term growth. In this case, extremely high PE reflects that it may be too optimistic.

- Worthwhile to invest in Citic Pacific?

He thought that Citic Pacific still has the reasonable pricing such that it is still a good choice. From my point of view, Chinese conglomerates cannot do well in many years ago as they have over-diversified their business. Now, the management is relatively mature after their listing experience and immersion in Hong Kong. Citic Pacific is particularly one of the representatives of the Chinese conglomerate with truly experienced management.

In addition, its business in steel and airline industry can be benefited through the Chinese economic growth through the increase number of building or fixed asset built, and more utilization in airline in the expected future through the Beijing Olympic game and various activities organized in Shanghai and Guangzhou.

- Need to Sell PetroChina at the current level?

I forget what his decision on buying or selling PetroChina was. Personally speaking, although I feel that its style will be somewhat similar to the utility stock in the long-run, the increasing price (not real price) of crude oil and its congenital stability are really enticing such that PetroChina can rise steadily.

One impressive thing is that he also mentioned that recently the crude oil price (he suggests people to look at the Brent oil due to the quality) rises abnormally. It is really not easy to figure out why it comes to this situation in the short term. Perhaps there are really some covert political events in the near term. Interestingly, after his talks, the terrorist attacks in the airports of UK became the focus.

- Other anecdotes

He did not answer the stocks to which he is not familiar. It is normal that even the professional investors have to carry out division of labor in order to analyze different industries and companies. Commentators should hardly suggest the trend of different stocks every day. An investor asked about a "legendary" stock which has explosively surged by three months due to switching business to the resource industry. Everyone immediately laughed and I expect that mostly the people can know how the word "dangerous" is pronounced.

There were more questions regarding the numbers and the prospect of some industry and some of them are indirectly borrowed to write my previous writing concerning Chinese economy. Although once I bought his recommended stocks and trapped because of my greed, I would really thank for his advice and inspiration in method and concept on investment. Currently I really do not have much time to carry out deeper aspect of value investment. I hope that I can have some researches on this soon.

* * *

I will go to Singapore on next week to have some firm visits, including Singapore Monetary Authority and GIC. Just hope that I can assess the prospect of Singapore after this trip.

Currently my short-term portfolio does not have any amendment, since I am too busy few days ago, where I missed the best time to sell one of the stocks. It is the case that when we try to have short-term trading, we need to ensure that we have plenty amount of time.

Paper Trade Updated (Jul 3, 2007)

2007-07-04T00:44:00.000-07:00

Here I would like to update my paper trade. The commission cost should be 0.125% of the principal instead of 0.0125% of the principal. The original calculation is still correct.

I just quote the mission of this portfolio as short-term greedy man, as this portfolio intends to grasp the profit earlier. It is to get back some capital earlier and test some buying strategy and selling strategy. The objective is to passively carry out short-term trade without much care.

Today Target B rebounds and it shows that the stop-loss mechanism can only be the reference. Sometimes, it is better to have some timing on the stop-loss zone. It depends on the feeling of the support. It is still required some experience for me to utilize the techniques of the stop-loss mechanism.

Economy and stock market updated III

2007-07-01T20:54:00.000-07:00

- Economy and policies stipulated by Chinese government

China has now entered the stage of strong growth but also strong expected inflation. In view of the stage I proposed in the economic development, China aims at the technology and environmental protection. Although China has stepped into the market economy, China concerns the gradual progress and the series of plan or policy to maintain the healthy development.

I do not write much about the prediction on the economy of China in this essay as it has reached the understandable platform. Everyone have been exposed to the discussion about the destiny of the Chinese economy, in which I used to write before. Instead, knowing that China still concerns the policies, I would like to analyze in another angle, i.e. the political framework on the current market environment. This is helpful to select the favorable sectors in China. Currently, China has the following notable policies that we need to remind ourselves.

a China seriously measures the efficiency of the production scheme such that those projects causing high pollution or high expense in energy are forbidden or fined. More projects on the renewable energy are researched and in progress.

a China concerns the income difference between the rural citizen and the urban citizen, and establishes new zones to test some of the policies. Thus, the infrastructure sectors concentrating in the western regions may be benefited.

a China also concerns the price in the housing market such that it is widely observed by the government. Some of the previous policies are failure as it just prohibits the speculation environment and administrative policies. The shortage of cheap building for the poor was not resolved. In the long run, only the public estates can solve this problem, since the poor cannot afford to buy the expensive flats and concerns the living instead of the speculation. The public estates have been confirmed to be built. However, the private interest of the developers and local government are usually opposite to the public interest considered by the central government. Therefore, there is conspicuous resistance on this development.

a China aims at switching the production sectors from the low-skilled one to the high value-added products. The low-skilled goods are outsourced to the other countries from China, while the high value-added end products are outsourced to China from other developed countries. In view of this environment, the low-skilled sectors are vulnerable in this growing economy.

a In addition, the consumption demand has to be boosted so as to reduce the reliance of export-oriented sectors to support the economic growth. The reduction on the export subsidy and increase of export tax of some manufacturing products show that China is either lobbying the US that China is willing to decrease the current deficit in US, or structuring the economy to release the consumption demand within China so as to stabilize the economic growth for fear that the potential global recession will seriously hurt Chinese ambition in the next ten or twenty years.

a Currently, the consumption demand is the sharpest among the rich people in the east coast of China. However, in terms of this industry, it is somehow complicated as the competition edge of each firm is still ambiguous. Until now, according to the research from McKinsey, the consumers in China can easily change their preference on the brand. There are only a few firms achieving the respectable brands in China. Investing in this sector is somewhat risky.

a For the natural resources, to protect the current good economic dynamic in China, energy production is well-protected that China encourages the import of energy sources. Water preservation is also an important issue in China. Together with the soar of the other BRIC members, it is more competitive to obtain the natural resource than before. It is hard to say whether real price of energy will truly increase in the long-term as the efficiency and scarcity are competing. Because of this, the energy resources, efficient use of energy, and high technology to discover, preserve and reuse the energy are always controversial now in China.

Hope that these are useful to evaluate the micro-picture of Chinese economy.

Economy and stock market updated II

2007-07-01T20:48:00.000-07:00

The previous part carries some analyses on the US economy and the status of the Japanese Yen. In addition, regarding the long-run economic status for US, I also compile some comments from the other commentators as the reference and combine my previous thought on the US economy. You may look at the first part to see the updated note.

Here I would like to talk about the stock market in China and Hong Kong. Actually there have been many commentators proposing their ideas on these. Therefore, I would like to select some of the comments that I agree most. Regarding the Chinese economy and prevailed policy, I will discuss this in the next part.

- Stock market in China

I agree that the comments from the RTHK commentators get the sharpest message about further development of the Chinese stock market. The recent policies are intensively implemented directly on the stock market so as to get rid of the overheating and irrational response of the small investors. Eventually, large investors including the foreign firms and the mainland investment funds cannot tolerate the frequent policies. As the QDII is just relaxed, they will invest in Hong Kong stock market as a means to invest in China. If the A-share index rises, probably it is only the small investors purchasing the stocks. Therefore, it cannot maintain A-share's impetus and is hard to pursue another new high.

- Stock market in Hong Kong

Does it mean that the Hong Kong stock market must be directly benefited through the QDII? If we look at the PE ratio of the HSI, we will see that it is around 18. According to Mr. Cho's comments, he believes that the defense power is still strong as soon as it is below 18. However, the PE of H-share index has exceeded 21. We can imagine the H-share may be the same as Hong Kong stock market in 1980s which is just in the developing stage. Previously the analysts said that the PE level is reasonable. Now as an open and international market*, is it still at the reasonable range? When we look at the IPOs released in May and June, can we see a phenomenon that the pricing has become unacceptable in which the PE ratios of some stocks are unreasonably as high as 40 or 50?

- Conclusion

As I am not quite optimistic about the US stock market, current status of Japanese Yen and the economy in the near term, with such a high valuation in both China and Hong Kong, should there be significant downward force to prohibit the stock indices from surging? This is only my subjective feeling. Hopefully, it is possible to develop a horizontal channel and freeze the price indices in this range, according to what a sophisticated stock trader said.

In next part, I will discuss about Chinese economy and some development policies stipulated by the Chinese government.

(Continue)

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* Short Note about the stock market in Hong Kong and China (edited on July 7)

A-share market reaches high PE mainly due to lack of supply but huge amount of demand. This does not happen in Hong Kong. Thus, it is usually the case that PE in Hong Kong is difficult to reach 30 and also rare to reach 25. For stock market in China, I would like to elaborate more that recently the decrease level of Chinese A-share market is just the reflection that the supply of investment vehicle has been increased (or expected to be further increased), such that the reasonable PE has to be lowered.

There are also some people mentioning that the A-share future will be released as soon as the level is lowered. This may be another means to attract some of the international investors to come back to China. In that case, the stock market will be more volatile to align with the international market standard. Meanwhile, this can be advantageous regarding the trend of the A-share indices with more international capital flow.

Attended the investment sharing I

2007-06-30T23:18:00.000-07:00

Today I attended an investment sharing section by a renowned editor in the HKET, where his strength is related to the international relations and some political environment. In terms of investment, he is a practitioner in Graham's style of value investment. He also successfully met Jim Rogers to exchange their point of view in the value investment. His strength is to select some cigarbutt, a word I firstly learned from his article, and grasp the profit through low risk but high return. Of course, to accomplish this, one needs to do lots of homework, absorb much knowledge in many aspects and improve one's psychological stability. Probably, he established the friend's club to firmly secure the above criteria.

During the section, he also distributed 5 previous articles which may be the trend that he thinks it is the most important in his mindset (I guess, and he hasn't mentioned much on these four articles). These articles are relevant to his recently recommended stocks. These articles include the prospect of Vietnam (2 articles), prospect of airline industry in China with comments from Jim Rogers, the crisis of Hong Kong regarding the tourism, and the competitive advantage of Macau. Afterward, many people went to the stage and obtain his signature before the start of his sharing.

In the sharing, it was the time to describe his past recommended stocks and concern their actual valuation. Luks is no longer the cigarbutt. One can buy this but better set the stop loss mechanism, while he has attended the shareholder meeting of Keck Seng investment and gets some insights on the company strategy. Previously he just commented that this company does not intend to add value on the shareholder despite the presence of huge NAV.

Ebon, his recommendation in last year, is still a healthy stock. He just remembered that his recommendation included the assessment of a lawsuit against the ICAC. Finally the ICAC was condemned by the judge because of the unreasonable accusation during the economic recession. Ebon is now gaining much business from many renowned property development firms to design and manufacture the tubs and the kitchen. Although he doesn't regard it as the cigarbutt now, it is still a healthy growth stock with good valuation.

As a value investor with Graham's style, he believes that Hong Kong stock market is not efficient at all. Therefore, he mostly emphasizes on the importance of the NAV as a means to discover the cigarbutt. Usually he considers when the asset can be sold out, how is it actual value? If the stock price is much less than his estimated NAV, which may not be the NAV directly calculated from the financial statement, one can say that stock can be his cigarbutt. Although the NAV is the crux to select the cigarbutt, it is not always easy to buy stocks with stable financial action. Some of them have strange management, which have strange or incredible tactics, thus seriously distort the value of the stocks.

Through my observation on his style, to accurately discover the cigarbutt, we need to do homework on the financial statement and news related to the industrial trend, and even have to go to observe their business activities so that the value investors can get reliable and latest information. Some kind of common sense and imagination are also indispensable to speculate the future actions of the management. Moreover, there is also an important concept that a good company does not equal a good stock, since the valuation is the crux to select the stocks with best performance in return.

Next part I will mention the anecdotes in the Q & A section.

(Continue)

The cycle of the economic development

2007-06-30T04:58:00.000-07:00

Once I have posted the photographs which were taken in Europe. Precisely speaking, these two photos were taken in Denmark when I went to the student exchange program. What Denmark impresses me is, people in Denmark are rich in many aspects. Their preservation in the environment is well-done. Although their economy is basically competitive, their economy relies much on the government's intervention through high tax rate and high subsidy on people's education and medical system. It is well-known that the GDP per capita for Nordic countries is one of the highest and the life-expectancy of Nordic countries is also one of the longest among the countries in the world.

Through this experience, it enables me to have some thoughts on how the countries can evolve through the long run economic growth. This is somewhat like the simulation through my creativity. After this, it would be convenient to draw some implication on the future pattern of China, Hong Kong, ASEAN, and other countries.

- General methods to succeed

The countries get rich since there is the reason of good economic system, low cost or plenty resources (involving the concept of the international trade) or high technological development, such that there can be much more capital invested in the countries to enhance the economic growth*. China since 1979 and Vietnam since 1990s can soar dramatically since its economic system is conspicuously improved. Moreover, their costs in wage and different capitals are still much lower than the world standard. England during the industrial revolution and US during the 1980s are the example of technological improvement.

- From rigid economic system to gain from trade

This is the result of the transition economies such as Russia, China and Eastern Europe, where their original political system is based on the communism, so that there is even no market at all within the countries or between the countries. If there is no any trade, the allocation of the resources will not be efficient despite the presence of equality among different groups of people.

For some of the countries in the Western Europe, they haven't faced this aspect and they have already established good trading environment since the middle age. However, in China, the development in trade was not as swift as what we imagine. As we can see, since Ming dynasty, there had been various rules to ban the people not to have any conquest on the lands and establish trades with the other parts of the world.

- From gain from trade to technological improvement

Even though most of the countries foster the competitive economic system to encourage trade, gain from trade owing to plenty resources or low cost cannot ensure that the growth has enough quality, as this kind of growth may be only imply the growth in the aggregate amount of production but not every people can get improved (or even declined) in terms of income. For example, the low skill workers who are originally employed by the firms become unemployed since their jobs are outsourced to the other countries which have lower cost in the unskilled segments. Therefore, gain from trade is not really the good resort in terms of the social welfare perspective. In the light of this, the technological improvement is a must to make progress in the economic growth so that every people in the economy can improve their income.

- From technological improvement to environmental protection

During the technological progress, there is another serious matter which can deteriorate the quality of growth, where the standard of living may not be improved due to the over-exploitation of the capital and the creation of the negative externality. One of the examples is the pollution. People may live in the environment which is harmful to the health. Moreover, the growth may not be sustainable anymore since the people have overused the capital thus the productivity may actually decline. When the people are aware of this, they may seek certain policy to protect the interest through the environmental protection.

- From technological improvement to education

It is common that the technological improvement is applied to the efficiency of the machine devised by the inventors. However, can't we try to improve the mind of people through the comprehensive education scheme? This is a prospective aspect to teach the young people how to invent better machine, better strategy in business, or better system. In terms of the economics, this is accumulation of the capital thus lead to the larger rate of economic growth**.

- From education to a new age - changing assessment means of living standard

When people can realize how the importance of trade, technological improvement and education, the economy has already entered the stable stage where significant group of people need not worry their source of income. Still, income inequality is still persistent to exist due to the nature of heterogeneity in the economy. The rich at this moment can revalue the measurement of living standard. It is not only the economic growth measured by income or GDP per capita, but the resentment and the pity of the poor may also discomfort the rich.

Therefore, the culture of donation arises and narrows the wage gap, thus further improve the quality of growth. This step can either be facilitated by the rich, or designed by the government. However, it is always better to be designed by the rich or the well-educated people who are involved in the decision.

- Conclusion

From the above description, do you know what stage we are located now? Denmark and its Nordic partners should have reached the final stage. Hong Kong should start to establish the better environmental protection, but I don't think that the education is the well-designed one. For China, it starts entering the technological improvement to certain extent. It is funny that China also wants to adjust its poor environment due to over-exploitation of different capital. This can be seen through the vast inequality in China.

When the inequality is large, it seems that the mixture of the above stages become common. This leads to complex management, governance and development. From my point of view, sometimes the success of the economic growth is due to the nature of the countries (such as size and natural resource), and sometimes, it is due to the fortune (such as US which is excluded from the WWI).

----------

* The points here are the crucial concepts used in the exogenous growth theory in macroeconomics.

** The point, human capital accumulation, is the focus in the endogenous growth theory in macroeconomics. For the environmental protection and inequality, they can be the growth theory with application of externality in the production function.

Paper Trade (Jun 29, 2007)

2007-06-29T16:44:00.000-07:00

Here I would like to update the status of my paper trade.

From this experience, it seems that this is really a valuable opportunity to buy a value and growth stock when it achieves some contrarian criterion. Target C should probably be allowed to evolve to become the long-term stock. But anyway, considering this portfolio, I pursue a special strategy, so that I will not consider any long-term investment. I will find some way to sell the seemingly expensive stocks.

As for the small cap stocks or the penny stocks, it seems it still follows the macro-trend that they can hardly surge when the capital is flowing to the blue-chips, red-chips, H-share, or other large cap stocks.

Now Target B has reached the reference stop loss level. I need to wait for one more day in order to see if it is reasonable to stop loss, since it seems to develop some support at HK$0.53. For target A, it suddenly surged at the closing. I don't know if it can rise higher than HK$4.8. Anyway, since its status is still lose and it seems the dawn came today, I will just let it stay here unless it is near my reference stop-loss level.

Economy and stock market updated I

2007-06-26T21:21:00.000-07:00

Here I would like to update some details with regard to the current economy and financial market. First, I would like to record down the US and Japanese side. The interpretation at this part is more relevant to the financial markets in the developed countries. For the financial markets in China and Hong Kong, I will drop down the points in next part.

a I am not optimistic towards the US economy. Trivially, the property market starts having the momentum to push down the price of the turnover. The market seems to react in the weird way that the possible reduction of the interest rate is favorable to the US stock market. The US economy is currently driven by the merger and acquisition and its robust technological sector.

a Moreover, I perceive that the weather in this year is quite abnormal such that this may have possibility to create some unanticipated supply shocks, as shown through the increasing commodity price (The commodity price is also driven by the demand of BRICs) and the already excited import inflation from China and East Asia. Yesterday, the sudden decline of the Dow Jones Index was just the realization on this for fear that this may convert the tendency of decreasing interest rate to increase. This also affects the yield curve in which the long-term interest rate increases significantly.

a Regarding the Japanese Yen, it has already depreciated to the local minimum value while the resistance seems to form at 124. This is also supported by the expectation that the interest rate in Japan may be lifted in mid-August. Not only the Japanese economy may become better to remedy the deflation cycle, but also the global inflation through the commodity shock and weather shock may further increase the risk of the inflation. Needless to say, the stop-loss mechanism of the carry trade may work through the possible appreciation of the Japanese Yen.

We should note that the decrease in the interest rate is the mirage pretending to have good prospect for the stock markets. However, the reason behind this is only due to the weak substitution effect on the value of the cash. In fact, the aggregate economy and the international economy are much more controversial to the open financial market. This point has been shown through the empirical evidence, and also mentioned frequently by Mr Cho.

(Continue)

* * *

- Additional Notes updated on Jul 1, 2007

Regarding the long-term US economy, there is still two opposite forces needed to be discussed. From Wan Sze Zit's commentary, it is an argument on two prevailed concepts, the end of US economy owing to its large twins deficit, versus the contribution of the dark matter, i.e. the intangible asset such as CocaCola, Yahoo, Google, Disney, etc. and the power of the globalization and outsourcing of business.

It is difficult to assess which side is more prevailed. I think the current data shows the short-term worrisome environment, but for the long-term, it is still the uncertainty. The following two commentaries from Wan Sze Zit's blog could help.

- Articles on Jun 8, 2007 (related to Edward Prescott's conference in macroeconomics) and Jun 11, 2007 (Application of Prescott's theory on US economy)

- Previously I also wrote some comments on US economy on April, with the support comments from Mr. Lam through his comments in RTHK. This reveals the optimistic side of the US economy.

Paper Trade updated (Jun 26, 2007)

2007-06-26T16:50:00.000-07:00

Today I have bought the target C at HK$25.55.

As for my real portfolio, I also sold some of the stocks. One of the stock is originally not my focus as the reasonable value stocks. However, once I have bought its IPO and it had the recommendation to have good prospect in the 2nd quarter. I kept this and wait for a slight surge. Today I feel that it mostly finished its mission. Moreover, according to its fundamental status, the profit margin and the return on equity are only fair. Therefore I decide to sell this to look for the other opportunities.

As for another stock, I sold half of the total amount belonging to the speculative proportion since it starts reaching the oversold region. I also feel that it is not optimistic to breakthrough the resistance. It is more sensible to grab some of the profit, though finally at the close, it is slightly higher than my closing price. Anyway, at this level, I feel content for this trade.

The remaining portion in my portfolio is mostly the long-term portfolio. I will follow Mr. Cho's strategy.

Currently I have to deal with the affairs regarding the Singapore trip. I have to fix the portfolio later. Now I intend to buy some of the IPOs as the probability to win is much larger. I will write more comments on the economy later if I have time. To conclude this, I do not feel comfortable about the economy.

Paper Trade Updated (Jun 25, 2007)

2007-06-26T02:03:00.000-07:00

Today my paper trade includes the following stocks, as explained in the previous essay.

Tomorrow I will also include one more stock, i.e. let me say Target C. Target C is actually a strong growth stock. Once its growth rate is stronger than the China Life Insurance (2628). These two stocks are at the similar price since 2004 so that their return, or growth rate is comparable! Target C is one of the representative of the consumption-based industry in China. I may say that the price for this stock is still reasonable and it can be at the good buy position.

This portfolio is the testing portfolio, as described as the paper trade, so that I HAVEN'T bought these stocks in reality. The purpose to establish this portfolio is to familiarize myself with my thought on the short-term trading and the short-term dynamic of the stock price. I don't care much on the final result. Most importantly I want to do some evaluation and hopefully some fine tuning can be made.

Paper Trade (for Jun 25, 2007)

2007-06-24T00:21:00.000-07:00

On Jun 25 (Monday), I will carry out the paper trade for the short-term trading strategy as the experiment.

Target A: (a red chip)

Target B: (an enterprise situated in Shanghai)

Stop loss is set to be 5% of the principal. The amount contributed to this strategy is HK$100,000, which may not be fully utilized.

Target A is only selling its concept related to the expanding consumption in China. With the unreasonably high PE, it is not for investment at all. Target B has the concept in Chinese property (in Shanghai for the luxurious housing and some offices) and it has been achieving low PE and PB ratio since it is just the relatively smaller cap. It also has the value investment angle.

I am not used to recommending people to buy any stocks. For the privacy purpose and some responsibility, I will not disclose the name of the stocks unless you ask me privately.

Busy days again - Devise passive strategies

2007-06-23T04:34:00.000-07:00

Perhaps I have to concentrate on my recent works. In July, I will take part in some activities in Singapore, and starting from August, I will study and research hard in order to finish my recent academic studies.

As for the stocks, I am now learning to put it aside. Some passive strategies have to be developed. Here I want to cite two important utilities in investment and speculation.

a For the sake of savoring the benefit of long-term investment, I mainly follow the paradigm cited by Mr. Cho, to cut loss in the appropriate level (say 10% or 15% of the principal) and let it run whenever it goes ahead.

a In order to coordinate the trading rule with the above concept, I have to carry out some training on the contrarian trading strategy.

I intend to divide my portfolio into the long-term and the short-term. I should do this earlier! The stocks chosen for the long-term is based on the fundamental analysis and the above rules. Through the diagnosis of the fundamental analysis, the chance that the stocks in this group dip is probably lesser.

As for the short-term investment and speculation, it is just the rest of my money. I will use this to carry out contrarian investment or speculation. The mechanism here is also based on Mr. Cho's comment on stop loss, yet I do not follow much fundamental analysis and just buy the stock because of the oversold status. As for the selling, I will use the overbought signal. Since this group aims at the short-term benefit, I would like to adopt a stricter contrarian strategy which cannot be found in the conventional technical analysis. It will be my new experiment to test a simple trading rule.

For the long-run, it is trivially passive, while I hope the short-term investment or speculation is more passive than what I expect. Hope it works and minimizes the interruption on my daily works.

Does bad weather matter?

2007-06-12T23:35:00.000-07:00

Does anyone believe that this year the weather is somewhat strange?

Firstly, the winter seemed to come a bit late in US and Europe such that the snow finally fell in January and February. Secondly, the tropical cyclone attacking the gulf is also rarely seen by the Arabian. Thirdly, there is thunderstorm spreading across the southern part of China, which is all of the sudden and never seen before. This has caused unprecedented loss towards the villagers in southern provinces.

Someone said that the weather in US will turn bad in July, August or September as some people may forecast that there will be, again, large hurricanes attacking the southern coast of US. Of course, it had better have some evidence to show me about this forecast.

On noting these issues, one can also switch to the investment aspect. To deal with such kind of natural disaster, what kind of investment vehicle can we choose so as to maximize the return?

I just wonder about a guest commentator in RTHK speculating the price of the gold to strike a local high point in July or August without mentioning any reason. Did he refer to the foreseeable bad weather?

In view of this, those stocks related to gold, oil, water, infrastructure are worth investing. Of course, it is only just for the short-term. For the other stocks, perhaps one has to scrutinize the portfolio during July and August for fear that the stagflation environment would be developed again during that period.

(Here I post the link of my past essay about the commodities in the short-run and medium-run, written on March 19, as reference.)

Warlords - Style in Chinese Enterprises

2007-06-05T23:55:00.000-07:00

Recently if you have listened the investment program in RTHK 1, you will notice that Mr. Shek emphasizes on a new concept called warlords (Original Cantonese is 山頭主義), since the Door enterprises (窗口公司) located in certain provinces or cities, i.e. the warlords, have their power through the relationship to expand their businesses by injecting assets in these enterprises. Moreover, money and resources from the entrepreneurs around these regions will select their respective stocks as target, thus the stock prices of them will be probably boosted.

Although the above idea is conceivable, there is also another downside risk that some of these enterprises may be risky due to the political relationship and the traditional corporate governance. These are not only limited to the door enterprises controlled by the regional governments, but also for the other enterprises in particular provinces.

I just asked some of my friends from Mainland China to analyze the situation. From their views, they think that the enterprises in Guangdong province and Zhejiang province are more likely to be wise and stable in their businesses and corporate governance, while Shanghai enterprises may be risky in both the corporate governance and the political relationship.

Regarding Zhejiang, they said that the business environment has already been very different from the other parts of China since many decades ago. They think that their business activities and the consumption ability are the best within China. In view of political relationship between Shanghai and central government, the continuous crackdown on Shanghai real estate market and some officials has been a signal that the central government does not agree the status in Shanghai for long period of time.

This idea closely matches my father's idea, where my father mentions that the enterprises in Guangdong are stable and need discretion on plan, and the enterprises in Shanghai are risky in corporate governance. The enterprises in Fujian are aggressive but risky in corporate governance, but he left no comments on enterprises in Zhejiang.

Investing in Chinese stocks, we have to notice many characteristics in the economic structure and the politics. Besides, this also includes the above traditional characteristics of the warlords. I would also like to hear some comments on Beijing, Jiangsu, and also other provinces.

Review before the QDII regime

2007-06-01T01:52:00.000-07:00

Recently Chinese government announced that the QDII will be relaxed as a means to alleviate the excess liquidity and reduce the size of stock market bubble developed in China. It is certainly good news for the Hong Kong people.

My portfolio does not do well in the first half of this year, as I do not have much experience to deal with the volatile period. I have several times losing the patience to hold some excellent stocks because of the cunning fluctuation, even if this warning has been told by some analysts. Although some stocks are regarded as the value stocks, they cannot easily get on the surge of the market.

- For example, one is stable and has certain scale, but it is not renowned and does not have much motivation to expand its business through the new regime. This potential is diminished but it still stays at the same PE.

- One certainly has the scale, but from my point of view, it can be hurt easily through the increase of interest rate.

- Except the recent Belle, I kept the IPOs so as to savor the future growth. However, the market does not recognize their track records, and their incredibly expensive pricing is finally not accepted by most investors, so that after the fantastic growth in December last year, there is no more encouraging growth.

- My recent small cap stocks are worthwhile to buy since they have conspicuously less PE, yet their scale of production is not large, and the propelling force of their revenue is largely attributed to the expansion of internal demand of Chinese people, while the brand may not have strong effect to sustain its growth. The fortunate thing is that they sell products mostly instead of paying rental fee towards the owner of the shops. Although their values are lower from my original point of view, it is still a reasonable way to grant the risk premium on the variation of their growth. This underlying risk premium is the barrier affecting their growth in terms of the rate of return and mostly, the variability of return. Prime Success is the recent example.

- Finally, nearly all of them do not achieve the direct advantage through the characteristic points of Chinese economic growth.

Recently I realize some of the critical points in stock-picking, and would like to change the structure of my portfolio in this period of time. To embrace the QDII regime, I have to buy the value stocks or growth stocks with economy of scale, direct advantage through Chinese economic growth. The stock picking mechanism I used before is still useful, but it needs above strengths to support. For those without the above strengths, they should be chosen with smaller proportion, and selected in the later segment of the queue.

Another crucial thing is, to assess the economic situation is not difficult, and to assess whether the stock is good is not difficult though not easy as well, but from my point of view, to maintain the psychological stability is the acute point for me. The psychological aspect is actually the most crucial points to determine the success of investment. I still need more time to experience the world of investment.

Some thoughts on May 25

2007-05-25T01:47:00.000-07:00

After reading Mr. Cho's article, I realized that the people in Shanghai have used their profit in the stock market to buy the flats in Shanghai. Originally, the housing market in Shanghai was suppressed seriously, so that the housing price was hardly found to have unanimous growth rate. Recently, the turnover and the price for the houses in Shanghai have started rising since April, and the rate became more conspicuous in May. He also mentioned that the agency also accepted the foreign currency such that some restrictions have been lifted.

On the other side, in Beijing, the people are somewhat different. They prefer selling their houses in order to instill their capital into the hottest stock market. Some of them may even borrow money by using the houses as the bilateral. The people still prefer adopting the valuable goods as the bilateral in a bid to grasp profit in the bullish Chinese stock market.

Here I postulate a serious point. The Shanghai people are traditionally smarter in the financial activities since Shanghai is traditionally the financial center in China. People in Shanghai have been exposed to the fluctuating stock market, commodity markets for so many years, whereas people in Beijing are more relaxed and concern in the politics, culture and academic activities. My wild guess is, the stronger side who controls the capital has passed their stock certificates to the weaker side, which does not have much information and reasoning in the investment activities.

Can this become an important and directly related contrarian point to sell the stocks before the bearish trend comes? Excluding the above news, I found that there have already been two news regarded as the contrarian points. One is, the CEO of the Chinese spirit Maotai has been caught to forge the financial statements. Another is, Yang Baiman, who is a legendary and respectable investor in China, alleged that he has sold all the stocks for fear that the bubble is now unsustainable.

* * *

One more hint...

It is somewhat hard to guess. I stayed in this city for nearly ten months two years ago. It's old but nice!

Implication of time series II

2007-05-24T12:44:00.000-07:00

The data I use is the MSCI Hong Kong index, Standard & Poor 500 index and the Shanghai A-share stock index. The period I use is from Jan 1992 to April 2007, where I adopt the weekly return data since the daily return data consists of much noise.

The models for Hong Kong and US are fitted by the maximum likelihood estimators and for China, it is fitted by the least square estimators, since later I found that there is no any GARCH effect. For the maximum likelihood estimation, the distribution I used is the t distribution (standarized) instead of the normal distribution since the t distribution is suitable to describe the shape of the return and error terms. The models are illustrated as follows*.

From this, rhk indicates the return of the Hong Kong index; rus indicates the return of the US index; rsh indicates the return of the China index. epsilon is the error terms. sigma is the standard deviation (volatility) of the errors. One may think that the stock index returns are generated from the process above with the errors specified by the t distribution.

There are some important implications from the above models. Here I would like to describe the characteristics of different return series.

- Hong Kong's one does not depend on any past information of either the returns or the error terms, while US depends on the past returns. It is somehow surprising that it is much harder to predict the future return for Hong Kong stock index, as one may think that US stock market should be more efficient. As for China, it is as expected that China stock market is easy to be predicted since it is significantly dependent of the past returns and the error terms.

- Both Hong Kong and US stock markets do have the GARCH effect such that another equation to estimate the dependency of the volatility can be well-fitted. However, for Chinese one, it was found that fitting the GARCH effect inside Chinese model is not effective such that we had better ignore the GARCH effect for the Shanghai A-share stock market.

The GARCH effect indicates the volatility clustering, where the stock price or index fluctuates a lot in a "grouped" period. This cannot be found in the Shanghai A-share index. The possible reason is

- China stock index does not have any short selling mechanism and stock index future, which may feedback the stock index through the dynamic hedging, stop-loss to create large fluctuation.

- China stock index has the characteristic that the surge and dip are limited in the intra-day trade, i.e. 10% upper bound and lower bound.

From the time series, this scientifically illustrates how the Chinese stock index is different from the other stock indices. I just wonder the above reasons are the cause of this crucial difference. Will there be any structural change if the Chinese stock market allows the stock futures trading?

--------

* The above models are estimated through the EView, the econometric software.

Errata: epsilon_t/sigma_t^2 ~t(.) should be replaced by epsilon_t / sigma_t~t(.).

Implication of time series I

2007-05-23T20:15:00.000-07:00

(In this topic, the concepts are rather complicated and abstract and it is better that you have acquired some basic concept in statistics and mathematics. I will not use much mathematics, though.)

I would like to discuss a well-known tool in econometrics and finance, which is rarely mentioned and noticed by the ordinary investors in the public. This is called the time series model. These models were developed by Box and Jenkins. The objective is to model the data such as stock price, GDP or price level measured in different time in order to describe the characteristics of the data and then forecast the future trend. I will discuss about the time domain approach which is frequently applied to the finance.

In the time domain approach, firstly the stock price has to be transformed into return. Afterward, the correlations between the return today and the return in n days ago are calculated. Box and Jenkins found that there is a set of model called ARMA model used to fit the return series. AR means that the stock return series depends on the current and lags of the return, while MA means the stock return depends on the current and lags of the errors.

If the stock return is fitted (by either least square regression or maximum likelihood) and does not consist of AR coefficients and the MA coefficients, then it is possibly running in the random walk, which is the idealistic case satisfied the weak form of efficient market hypothesis. Otherwise, the stock return can be forecasted by using the past returns.

The above ARMA model assumes that the volatility of the return is constant throughout the time, which is not reasonable enough. As we can see, sharp drop usually accompanies sharp rise or further sharp drop, where future direction may be inconclusive. Engle (1982) and Bollerslev (1986) developed another important model called GARCH model. The objective of this model is used to model the volatility of the financial time series such that G indicates that the volatility depends on the volatility in the previous periods, while ARCH indicates the volatility depends on the previous square terms of errors.

The ARMA model and the GARCH model can be joined together to model the stock return series. After fitting the stock price series, it comes to some intuition about the characteristics of different markets. In next part, I will post some examples in Hong Kong, US and China stock indices.

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Reference:

Box, G.E.P.; Jenkins, G.M.; and Reinsel, G.C. (1994) Time Series Analysis: Forecasting and Control. N.J.: Prentice-Hall International, Inc., 3rd ed.

Enders, Walter (2004). Applied Econometric Time Series. N.Y.: John Wiley & Sons, Inc., 2nd edition.

Wikipedia: Time Series, ARMA model, GARCH model

Relax man~

2007-05-23T13:54:00.000-07:00

Recently I usually see one characteristic, where most people would regard that 10% rate of increase in profit is not attractive at all. All are aiming at 20%, 50% or even 100% return so that these should be the most probable return. In China, amid the frenzy bullish moment, the people dare not to talk about their return when they only grasp 100% return. They can only be content if their return is 400% or 500% of their principal.

I myself do not fully aim at the marvelous return. Instead, I maintain myself to get the happiness through the hardship in seeking the value or growth stocks in different periods. Unlike speculation on some surprising stocks, the imminent return is not the most critical matter. I just train myself as a lubricant to improve the market efficiency. I do not need to be worried and nervous about the possibly high volatility generated by the ST stocks. Having the experience in January and February, I hope that my sentiment can be further improved in the next turnaround period.

Yesterday when I had the jogging, I could find that people talked about stocks. Everywhere are about stocks, where people are skeptical about the economy, but frenzy about the small cap or penny stocks.

* * *

To relax, I just share some photographs. This is the one I love.

Do you know where it is?

Anecdotes on May 22, 2007

2007-05-22T23:49:00.000-07:00

Finally I finished most of the tasks in this term. In this tough period, I can hardly execute trades and notice the stock market trend. I need sometime to revise the materials and news and until now, I haven't finished yet. In the early period of May, there are mixed but volatile sentiments in the market. Therefore, the market consists of much uncertainty.

- Revision

Firstly, PetroChina discovered the greatest oil field in which they have ever found since 1960s. In turn, it dramatically changes the destiny of PetroChina and the oil reserve in China. PetroChina surged for approximately 13% within a day.

Secondly, the QDII, which has been discussed for certain weeks ago, was clearly announced to allow more capital from China to invest in the stock markets in foreign countries, thus Hong Kong is most probably benefited by this news. The result is that the market seems to over-react as the degree of surging is conspicuously slowed down after the nearly 600 points increase in HSI.

Thirdly, on Friday after the markets closed, the new style of monetary policy is carried out where three policies including the exchange rate policy enable the government to reduce the liquidity flooding to the overheating economy and the current account surplus between US and China. Today China just announced another fiscal policy to impose the export tax in order to dampen the current account surplus further. It resulted in a sharp drop in A-share and sharp rebound yesterday, and the disparity in A-share (still increased) and B-share (decreased sharply with high volatility) today. The Hong Kong investors felt it is worrisome, thus the HSI and HSCE dropped gradually.

Fourthly, yesterday Kuwait determined to revalue its currency by converting its fixed exchange rate regime to the mixed rate (a basket of currency) regime. This creates the potential risk that US dollar would be further depreciated since other Arab nations will follow Kuwait's decision as they feel that the inflation is costly to their countries. The instability of US dollar is crucial for many locations including Hong Kong.

- My views

If I solely use the simple technical analysis for HSI and HSCE, I can merely see the signal which indicates that the market is overbought by using the MACD. There is only slight divergence for the RSI. Although the index has broken through the Bollinger channel, it does not create the conspicuous sharp drop afterward. From my point of view, the volatility level created by the QDII news has been dissipated and is not strong enough to create the sharp drop.

Hong Kong is at the embarrassing situation where PE is appropriate but the neighbor is over-excited. People in China are not sensitive in the interest rate policy and continue to speculate. The interaction has gone to the inflation and now it is the war of negative real interest rate we Hong Kong people have faced in early 1990s. In view of the attitude of the Chinese government and its characteristic hierarchy and expectation, the surging rate of the stock market can be slowed down only if the lagged effect is shown later by the monetary and various policies.

Having read Peter Tsang's advice in his commentary, I realized that I nearly forget the effect of the Japanese Yen in the financial market. The position of the Japanese Yen becomes an unanticipated shock to the current conflict on the destiny of Chinese and Hong Kong stock markets through the worldwide liquidity fluctuation.

Most importantly, the current situation of the world economy has slowly affected our daily life, as we can see that the imported inflation from China is so salient. Under this situation, I have to be allured to buy some assets. As I feel uncomfortable on the inflation and the depreciation of the Hong Kong dollar, I can only carry out the portfolio handling action to buy more assets (currently, stocks) to hedge my overall portfolio. However, the law of tub enlightens me to buy the (hopefully) non-index value stocks as a means to contribute to the market efficiency. Moreover, I would like to escape from the index shocks and their relatively high value status. Now this is also a kind of training on my stock picking technique.

* * *

I also get one lot of Belle. I hope I can write my point on the short-run position of this stock. Currently I prefer selling this soon.

Recent anecdotes (May 6, 2007)

2007-05-06T11:16:00.000-07:00

- My stuffs

I don't know how many times I have said that I will be busy in April and May. In April, I miraculously wrote such amount of essays. It seems that it would be a bit hard to write more in May, since there will be lots of deadline coming soon.

Recently, with regard to the works related to the stock market research, I have done the following things.

a Interrelationship of stock markets between Hong Kong, China and US;

a Revise my technical analysis techniques;

a Devise some efficient simulation and bootstrapping techniques. I just finish the most critical step, but it is still at the starting point.

In the coming future, possibly I have to follow up the above things. Moreover, I will need to focus on trading rule evaluation in Japanese stock market. As for the stock-picking technology, I still get difficulties to revise the old techniques well. I am still thinking if it is the case that simple is the best.

By the way, they are not the main stuffs in my works. I hope that there will be conspicuous progress.

- The market

Since I am a bit busy and hard to have spare time to do further analyses, I had better write some market sentiment for the evaluation.

Everyone in the market turns to be bearish in May, but my mum thinks that May seems not to be bad. She is proud of her victory in several trades in April. My father once met a friend who earned five times of the investment amount in the A-share market and intended to persuade my father to enter the A-share market. Well, my father is always risk-averse such that he can hardly be enticed. My friend from mainland started trading the A-share equity since January this year. Most importantly, he gradually focuses on the monitor to keep track of the stock market trend and the internet radio channel. Recently he feels bearish on the A-share market, but he said that mostly the people in China are absolutely bullish.

So, can you figure out what will happen next?

- Notice: This is just an advice to risk-loving investors

Actually many have mentioned this recently. If one really wants to find the stocks having more potential to surge now, one has to try the "cigarbutt" with low PE, with stock price much lower than the NAV. Of course, at least you should know that they have stable track records in earning and a reasonable business model. Moreover, they are just between the annual result announcement and interim result announcement so as to get rid of the excited moment. Also remember to look at the trend to see if it is an "easy-going friend". On the other hand, remember that there is law of tub (in Chinese).

A conclusion for April 2007

2007-04-30T10:46:00.000-07:00

- A summary and my persistence

Finally April comes to the end, and we find that April is not as disappointing as those records shown before. Although Hong Kong's HSI and HSCE cannot strike for a new high, the stock indices in most countries continue to show its bullish strength. At the end of April, Shanghai A-share even successfully reaches 4000 points after the announcement of increasing reserve ratio. We all notice that Chinese investors seem to ignore the effect of the monetary policy or various policies.

As for my prediction, it seems that the sharp plunge "succeeds" if one merely matches the only sharp drop to check my prediction performance. How is my comment recently? I think that it is no use talking much now. What I do is the same as before. A-share is technically unstable but relatively bullish in the long term. You may check my comments or reasoning written in this month. Since Hong Kong's short-term trend is now susceptible to trend in Chinese stock market, it is somehow embarrassing to reach such an inconclusive level, in which PE is acceptable, but the sentiment (in China) is not acceptable.

- Sentiment

Considering my sentiment, recently I improve my habit not to glance at the stock price frequently and keep myself from watching the stock price more than once. It is probably due to the busy workloads in April, constraining me not to focus on the instant prices, thus I did not do frequent trades even if I noticed that there may be change in trend. To certain extent, my mindset is to do buy-and-hold strategy, as I have faced the punishment of seemingly well-done trades from January to March. Moreover, it is valuable to improve my investment principle in two complementary aspects - 1. violate the normal sentiment and 2. believe the facts and the comprehensive logical derivation.

- Why do I use English?

There are some people asking me why I insist on using English to write the blog. The reason is, on the one hand, I believe English is the truly useful language in an international city. Practicing English is necessary to maintain the competitiveness, especially for a student or junior level worker. On the other hand, if I write my blog in Chinese and talk about things related to the investment, it may be attractive, but it violates some principle in seclusion and I don't intend to provide public good or externality. Writing in English is a way to lever the cost of reading, which can balance the trade-off in recording the practices, seeking advices, and spread of externality and public good. Furthermore, currently I have a few foreign friends. Although I haven't disclosed my blog site to them, it is possible to let them read my comments conveniently in the future, thus English should be the prevailed medium.

Finally, I actually don't care if my points will be focused by other people. Conversely, I am afraid if my points are focused by other. What I emphasize here is to record my thoughts and logics so as to be convenient in managing the analyses continuously and systematically.

Bubble economy revisit V

2007-04-28T14:25:00.000-07:00

I have posted the red asterisk (*) to indicate that there is important additional comments on some issues. The first issue is regarding the Japanese asset price bubble. It should not be triggered by any bank run. The second one is the comments augmented in bubble economy revisit IV, which asks the question about China's situation. In order to enhance the cohesion of the content, I do not open a new essay to further discuss this. You may go back to have a check.

- Bubble economy II
- Bubble economy IV

In conclusion, the bubble is formed by the following pattern*.

1. Extreme unconventional behavior in the economy

a Leads to self-fulfilling prophecy (i.e. expectation driven economy) - Part I

a Economy or asset market performs well because of the self-fulfilling prophecy - Part I

(expectation to have much wealth in the future, or some people buy one's asset).

2. Foundation of economic recession

a. Loose money supply control/loose credit approval/flood of liquidity - Part II

b. To some extent, the widespread of the derivative's trade enlarges fluctuation - Part III

c. Shirking labors and idle capitals during the speculative and frenzy environment (more abstract) - Part II

a Strengthen the potential severity of the asset bubble, and jeopardize the economic growth. - Part II

3. Some ignition or stimulation such as

a. Bank run - Part II

b. Capital flight - Part II

c. Evacuation of the speculative funds - Part III

(With large scale trades in derivatives/Leverage products)

d. Disappointing result announcement (Series of results) - Part IV

a Trigger the sell-off and collapse in the asset market through the self-fulfilling prophecy

(expectation to be poorer in the future, or dare not buy the other's assets).

Usually, thanks to the self-fulfilling prophecy, we can observe that before the burst of the bubble, there is high inflation, while after the burst, there will be deflation. After people's action caused by the self-fulfilling prophecy, the economy may have chance to switch back to normal by restructuring in either preference, knowledge or policies. The new wave of theme, challenge and discovery (such as boom of internet) will then come to the economy to create another regime of self-fulfilling prophecy. This creates different cycles of economic bubbles with various periods.

----------

* Currently there are a few "feedbacks" on the points to compensate some weakness in the logic, causing much inconvenience in reading. This conclusion is similar to my previous parts of the analysis although there is some confusion on the categories. Currently I feel comfortable to have such a conclusion. I hope that it is possible to reorganize this series in the future.

Bubble economy revisit IV

2007-04-25T19:07:00.000-07:00

- Consecutive disappointing result announcements

for the "conceptual" industries during the bubble

This kind of ignition is very common in different stock markets in all over the world. The recent representatives are the Hong Kong red-chip bubble in 1997, and the worldwide dotcom bubble in 2000. The time for the ignition is around the result annoucements for the "conceptual firms", in which they usually have unsustainably high PE ratio. From my point of view, the burst should be attributed to the cluster of several announcements on the failure of their businesses, either unexpected low profit or deficit, or incredibly high debts and detrimental policies on the shareholders.

Obviously, this kind of ignition aligns with the law of causality. The firms have its price increase owing to its concept on a new business. It gradually turns into the scenario that is high PE and PB ratio. In another word, they heavily derail from the fundamental quality. Usually, the companies only own the concepts without the concrete business models. Their "easy" fund cannot add value on the companies while the stock prices are frenzily high during the bubble period through the self-fulfilling prophecy. During the result announcements, all adverse consequences appear around that time and eventually force the sell-off.

As for the severity of the burst, it depends on the scale of the bubble since the enlargement of the bubble implies more disparity between the fact and the expectation. It also depends on whether the frenzy investment has widespread throughout the people, or heavily equipped with leverage products mentioned in the previous points, as the small amount of people and the lack of the leverage product cannot create severe wealth decline. Accompanying these factors, this can create the destruction that we can see during the red-chip bubble and Dotcom bubble.

Comparing with the bank run, currency attack, and evacuation of the speculative funds, I would say that this kind of ignition is rather less instantly destructive. If there is solely this factor acting on the bubble without the leverage investment or lending, this may only lead to sharp drop on that "conceptual" sector without conspicuous adjustment on the whole market. In turn, it may only lead to slow decay, or continuing pattern on the whole market trend. This comes to another point that interaction among the ignition factors is controversial.

One may ask that in the case like China, where recently there are heavy controls on the capital flow in the asset markets, it can succeed to alleviate the pressure on the bubble with the assistance of the macroeconomic policy. Given that every measure and control are perfect, does it imply that it is possible to maintain the bubble at the significant height? The answer is no*.

(Continue)

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* Added on Apr 28, 2007: Why is it no? From my point of view, if it is truly successful to strictly control the credit and money supply in the economy. The economy will adjust through the higher interest rate (or higher stricter credit approval) and dampen the consumption and investment, and affect the corporate profit even though the wealth effect is initially strong. I believe that there should be trade-off that the monetary policy should not be compatible to the bubble economy. The conspicuousness of this trade-off depends on the time-lag of the monetary policy, the strength of the monetary policy and the change of the expectation on the people (similar to the policy failure).

As for China, to my knowledge, in addition to the congenital nature of the time-lag, I think that the overall strength of the monetary policy in China is not strong enough. Moreover, the people are generally not sensitive to the monetary policy so that they continue to believe the expectation of the castle on the heaven. Jointly speaking, the monetary policy seems not to have the coordination between the government and the people. Firstly, the people originally own excess amount of cash. Secondly, even though China has already calibrated the interest rate and the reserve ratio, the bank or lower hierarchy still continues to endorse the loans through the bilateral agreement (properties) so as to create the excess liquidity.

I hope that China can successfully control its liquidity through reasonable coordination, expectation and information flow, thus the smaller the bubble is, the lesser the severity of the burst is.

Bubble economy revisit III

2007-04-25T17:44:00.000-07:00

- Setback of various speculative funds - currency and derivatives

To certain extent, this kind of ignition is similar to the bank run, yet the focus and the responsibility are on the fund managers. For example, the recent carry trade in Japanese Yen enabled the investors to borrow large amount of fund and invest in various financial products in everywhere. As for the hedge fund, they may be attracted to the bullish stock market and try to invest in the derivatives so as to lever their returns on their portfolio.

To earn the segment of profit in the overheating market is easy, so is to lose in this overheated market. Once, there is slight fluctuation caused by some miscellaneous exogenous shocks. This will cause the stop-loss mechanism so that the funds will desperately reduce their open interest in their derivatives. The patterns similar to the stock crash in 1987 may happen. As nowadays there are lots of hedge funds and private equity funds looking for opportunity in the worldwide financial market, this kind of shocks can be globalized as soon as the financial markets are open enough.

In terms of the power of the devastation, according to the historical record, it is strong in the short term as an impulse, for example, stock crash in 1987 and recent pseudo stock crash on Feb 27, 2007, yet the response on the stock market may not be that long-term, as soon as there is no further bad news accompanying this shocks. Some people contend that there could be strong devastating effect on the global economy when the Long Term Capital Management, a renowned hedge fund found in 1994, suffered seriously during the time when Russian Bond was default. Fortunately, the US government (the FED) organized its business by establishing various agreements on its debt restructuring so that the crisis of a severe economic decline is eliminated.

- Discussion on Bank run and speculative funds

One may ask why the bank run is much more serious than the ignition I mentioned above as the banks and the above financial institutions are actually similar, i.e. making the leverage on their investment. The above analysis is based on the historical background that we can observe. I think that it depends on whether the financial institutions have huge number of stakeholders. The bank is crucial to all different kinds of investors.

Once, when the bank has the problem, this easily creates the chain effect to the whole economy. As for the hedge funds or various investment funds, in the past, it served the specific segment of customers who were risk-loving. Even if normal customers involved in the hedge fund, this should not seriously affect their whole portfolio, thus the devastation may be smaller in the past. However, the trend of the financial market changes sharply from the traditional banks to the financial innovations. It can create the uncertainty for the future shocks.

From the above analyses, these arouse some additional points for bank run and speculative funds as follows.

- After the previous stock crashes and several economic recession, we recognize that the risk management concept is particular important nowadays. When the financial institutions did well in the risk management practices, basically they can reduce the severe chain effect on the economy.

- Although the original purpose of financial innovations on the derivative products is to create the useful tools in financial risk management, they can be the dangerous weapons to cause drastic decline in the economy if they are widely used in the whole economy.

- International diversification can mitigate the risk of failure of the financial institutions in the local if the bank run or serious failures of funds occur. In turn, this can reduce the chance of sharp economic decline in the local. Nevertheless, the weakness of this company may also affect the economy of the foreign countries through the international trade and finance. Thus, there is something called as risk-sharing happening in the international coordination.

I am optimistic on the development of the financial market such that the global economic recession should not happen so easily, since the general risk management techniques are developed to be more and more sophisticated while the international diversification proceeds well. From now on, the volatility should be the main concern.

(Continue)

Bubble economy revisit II

2007-04-22T17:06:00.000-07:00

In the previous part, I mentioned the importance of self-fulfilling prophecy and foundation of economic recession. Here I would like to state some ignition which are usually the sudden causes (except the discovery of hyperinflation) turning the economy upside down.

Note that these ignition are mostly the layout by the foundation of the economic recession. A concrete and simplified example is that the people are lazy or frenzy in speculation through the expectation on the surge of asset price (self-fulfilling prophecy) and become lazy to work and improve themselves (foundation of economic recession). A small incidence, let's say, some "illness" due to lack of exercise, causes them to get back the money to see the doctors, which in turn devastates the economy.

Sometimes, these sudden ignition may be attributed to some exogenous shocks, such as shocks on resource price and disease. However, these causes are somehow the random shocks without the previous endogenous reasons to create them. Here I would emphasize on those ignition from the foundation of the economic recession.

- Bank run and capital flight - a usual example

This must be one of the classical example on the fall of an overheated economy. The formation of this kind of failure is because the bad debts among the financial institutions are unsustainable or there are too many loans with low quality. Usually, during the peak of the bull market, the banks are less vigilant in the approval of loans so as to enlarge their businesses*. The frenzy bullish market is sometimes regarded as the example of prisoner dilemma, while the loose approval of loans is also another inevitable phenomenon owing to the prisoner dilemma when the economy lacks supervision to the financial institutions.

The microscopic example is the bank run while it may affect the other banks or other industries also. The bank run indicates that the financial institution starts to suffer the problem in credit. Amid the frenzy regime, this makes people become anxious and creates the domino effect to push down the bull market. Once, this happened in Hong Kong in 1960s and Japan in early 1990s*. This incidence ended the frenzy Japanese bullish asset market formed in late 1980s. It nearly occurs recently in US in this year, yet the rational stock participants in US (less chance to have the self-fulfilling prophecy), the strength of other industries and the seclusion of the bad debt deter the domino effect from pushing down the economy further*.

If the government and the central banks also heavily assist these banks to approve the loans with low quality together with weakened foreign reserve, it will be easy to have financial crisis where the international speculators will attack the currency of that countries so that there will be so-called the capital flight. Once, this happened in many developing countries such as Thailand and South American countries in 1990s.

Whenever the financial crisis or bank run take place, the banks or central banks need to raise their interest rate so as to attract the capital back to the circulation, or prevent the further attacks by the short seller, or increase the risk premium of the credit. For the fixed exchange rate regime, the effect will be more severe since it has to raise its interest rate much more in order to maintain its currency. For the floating or mixed exchange rate regimes, the country has the choice not to increase the interest rate, while conspicuous depreciation will take place. Consequently, to different extent, this leads to lower consumption and investment and thus hurts the corporate profit and the employment status of the whole economy. Therefore, the bear market will take place after this.

As for the duration, the experience shows that floating exchange rate regime has shorter duration on economic recession since depreciation facilitates its export. It also depends on the structure of the economy itself. This kind of ignition is common in the developing countries when their currencies and system is not well-supported. The effect on the economy is also large, especially for those economies with open financial accounts.

(Continue)

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* Currently the objective economic data show that US economy is still healthy, yet discreet measures are still needed to assess whether it succeeds to get rid of the turmoil of the crisis of the subprime mortgage loan.

* Added on Apr 28, 2007 - Errata: I just confirm that in early 1990s, Japan did not have any conspicuous bank run, even though the quality of the loans was deteriorated after the real estate price bubble. Japanese asset price bubble burst is triggered by the lack of competitiveness for the companies during the Japanese Yen appreciation, with the over-expansion on the credit. After checking the information, I find that bubble attributed to the bank run is rather rare nowadays. The true bubble bursts triggered by the bank run include the Tulip manias in 1630s, South Sea bubble in 1710s, French Mississippi Company in 1710s, post Napoleonic recession in 1815-1830, and the Great Depression in 1930s.

Nevertheless, I should also emphasize that before the bank run and capital flight, it is mostly the loose credit, or the expansion of the liquidity and money supply, together with the derivatives and different speculative activities discussed in part III, to catalyze the burst of the economic bubble (you may regard this as the foundation for the economic recession). Nowadays, most of the bubble are triggered by the disappointment on the business performance, thus after this discovery, people follows the self-fulfilling prophecy to execute the series of sell-off in both the stock market or real estate market (See part IV).

Bubble economy revisit I

2007-04-21T15:20:00.000-07:00

(This essay is my thought on an economic phenomenon - bubble economy. It is not necessarily specific to China only. However, I hope it can give us insight on Chinese situation.)

In the final stage of the bull market, it frequently has the news concerning whether the stock market has reached the bubble. After the bubble burst, it would reach the bear market. In my previous essays such as Asset market in China II and IV, it has covered the possibility of the change in trend in terms of economic situation and self-fulfilling prophecy. Consequently, depending on the severity, it can be the adjustment of the upward trend or the bear market trend.

Studying the fall of the stock market bubble in 1970s, 1980s and 1990s, we can often see that self-fulfilling prophecy would come together with the economic structural change. For example, in 1970s, Hong Kong stock market reached the bubble situation and bursted because of the incidence on fake stock certificate and the controversial oil price shock in 1970s. On the other hand, in 1980s, Japanese asset price bubble bursted because of the failure of the banking system. At the same moment, the economy in US had a short period of recession, yet it was not that prominent. Thinking of the true causal relationship between these, I would feel a bit complicated. Nevertheless, I have the following thoughts on the formation of recession through the collapse of a bubble*.

Regarding the collapse of the bubble, it is worthwhile to notice that when the economy reaches the distorted situation, such as strong externality on capital or labor (If I invest in the capital or work, it equals that the others have already invested in that capital or worked, thus the thrust on capital investment and labor work is failed), or extreme labor's wealth effect (labors are lazy to work regardless of the incentives), these foster both the force of the expectation, i.e. self-fulfilling prophecy, and the foundation of economic recession at the same time.

Under this situation, I would say that self-fulfilling prophecy will switch the economy to the unstable and uncontrollable state, and then there is "activation energy", or called as ignition from the foundation of the economic recession so as to cause the remarkable decline. It resembles an example that a guy was so hungry that he put the egg inside the microwave oven for convenience, without noticing that the egg turns to the unstable state after cooking in this way. Even a mild touch on this cooked egg by that hungry guy will ignite the "egg explosion" and finally hurt himself.

What is the possible activation energy in order to burst the bubble?

(Continue)

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*It is not always the case that the bubble comes before the recession. For example, the wrong-doing (e.g. heavy debt) of an immature government (e.g. Mexico in 1994 and Argentina in 2001) can lead to failure of the economy without the formation of asset or economic bubble.

Displacement and velocity

2007-04-18T23:45:00.000-07:00

(I just finish one more essay for the people with science or mathematics background before my presentation takes place on Friday. To certain extent, the natural science can be applied to the investment or trading through some concrete images.)

I remember when I absorbed the knowledge regarding physics and mathematics, it considers the displacement and velocity frequently whenever it is related to mechanics. Here, involved in the stock market, I feel that these two concepts are still very crucial. From my own point of view, the price level can be regarded as the displacement, while the rate of change of the price can be regarded as the velocity. Here I would like to elaborate more about these concepts in the trading and investment practices.

- Displacement (level) is important to the value investment

To be a value investor, one should acknowledge that they should buy something cheap. Therefore, lower price level should be particularly important for this group of investors. They can invest regardless of any momentum or impetus. When they think that it is overvalued, it is the time to sell the stocks. All the concepts are just to assess the displacement (price level/PE level). Therefore, if one is used to making value investment, he or she does not use any technical analysis as the tools. In the most traditional aspect originated from Graham, he or she will use the PE ratio only to evaluate whether the stock is cheap or not.

- Velocity (rate of change/momentum/technical analysis) is used in short-term trading

On the other extreme, the short-term traders would rather choose the velocity. By assessing the potential momentum in the future through the price series and turnover, they can get the signal whether the stock price will have the big jump. Here, they will not regard the price level. Instead, they are based on the impetus and grasp the profit during the strengthened momentum. They think that the price level and PE ratio let you miss the chance of surge.

- Conclusion

These two kinds of concepts can be mixed together. For example, the growth investment proposed by Peter Lynch is a kind of mixture of these through the PEG ratio. Yet, the investors or traders should know what they are doing. Most frequently, most traders will buy a stock because of its strengthened impetus, but they set a ridiculously high price as target price. If fundamentally, their stocks are not performed well and the momentum loses after the trend of the speculation, they will suffer severe loss. Therefore, to realize whether you are aiming at the velocity or displacement, or how they are mixed is a controversial rule for the ordinary investors or traders. It aligns with Mr. Luk's thought on my speculator's mindset and my investor's mindset.

Updated comments on US and Chinese economy on Apr 17, 2007

2007-04-18T01:24:00.000-07:00

Recently I am too busy to follow up several presentations and reports. Originally I would like to devise a conclusion for my previous analyses in Chinese economy and asset market with certain pictures or graphs to provide some concrete supports. Moreover, I have already designed certain topics for the future use. But eventually, I could not spend much time to type lots of analyses here. I expect that under the current busy status, I would mostly express my views or describe the views on the others by using the format of notes or anecdotes. Here, I update my previous comments on both the Chinese and US stock market and economy.

- Regarding the current status of Chinese side

Currently I would not amend my previous speculation on Chinese economy and stock market in both the short-term and the long-term. For the fundamental economy, its base is fine except that asset-value-driven market makes it unstable and unhealthy. Forced by the potential government's policy on developments and seasonal adjustment after the result announcements, the short-term adjustment should come.

However, discounting the effect of the expectation on Chinese government policy, we can see that the adjustment may be smaller than what we expect. Furthermore, provided that other things are constant, the duration for the adjustment may be shorter as if we have seen in March, since nearly all people reflect their preference on the future direction.

Currently, I just wait for one or two weeks to see whether my speculation before is correct.

- Regarding US's economy

This is an external factor affecting the world economy. I would say that it is better than what I expected in February. My bear mindset in US economy is also diminished. Current data shows that US's consumption can keep persistent growth. The demand side does not drop (and even rise) even if the potential restriction on lending by the financial institutions may reduce consumption and investment. The supply side or productivity does not drop that much (and even increase). Perhaps the proportion contributed by the IT industries, and then the general industries except financial institutions can generate the strong growth. This successfully deters the widespread of the subprime loan crisis.

Despite this, the interest rate will still be an uncertain issue. Stability of US interest rate is the main concern. Moreover, the time lag of the effect of the subprime loan may not come at this moment. Therefore, further discretion should be made when we assess US's economy. Currently US stock market performs well by the thrust from merger and acquisition and its outperforming economic data as discussed above.

- Chinese economy affected by the US economy

Will China be much better-off through the current status of US economy? From my point of view, Chinese economy depends crucially on the exchange rate and quantity of export to the US. When the US dollar against RMB, affected by the expected US's interest rate, keeps low, it can slowly dampen the Chinese export sectors (especially on the industries without comparative advantage). Yet, Chinese expansion on the local demand will be dominant in the next few years through the local wealth effect and development policies, thus the growth of the Chinese economy should be sustainable and less dependent of the US's economy than before.

There are too many exogenous shocks and variables, including the oil price and the conflict in international trade, affecting any verbal forecast. Yet, I will still set the medium and long term direction based on the above ideas.

* * *

Further comments from Mr. Lam in e-channel finance (not official translation) at RTHK:

1) US economy does not have any problems regarding the subprime mortgage loan with the reason similar to mine described above.

2) Chinese stock market does not have problems, since it has plunged seriously before so that it is normal to have a conspicuous technical surge. Furthermore, the Chinese leaders have acquired much techniques in controlling the economy by realizing the history in US in 1930s, Hong Kong in 1970s and Japan in 1990s.

3) US economy can even be more stable since the other parts of the world can stabilize its economy through world trade and foreign direct investment.

I think his opinion is fruitful to compensate and support my thought on the economy.

Anecdotes on Apr 11, 2007

2007-04-10T20:11:00.000-07:00

I just record today's news here.

- Central government intends to release the recently first macroeconomic policy on the development in order to crackdown those parts of the industries which consist of high content in fixed asset investment but low output level. This is firstly scheduled in the aluminum industry. As I noticed, it mentions that more conferences will be held on next week so as to interpret the further policies (read from finance.qq.com).

- A few days ago, there has been news concerning the date of release of the future in the A-share stock market.

Most monetary policies, including the open market operation and reserve rate, have time lag in order to see the improvement of the overheating problem. Now that the data continues to show that the lending and CPI surge impulsively, while the fixed asset investment may have the potential to dash again. Needless to say, the stock market in China has surged memorylessly. As mentioned by Tao Dong from Credit Suisse in the interview by Money Times, he expects that the macroeconomic policy may carry out in second quarter.

Central government tends to change its style from the passive to the active action. Perhaps this action is the forward-looking measure. Somehow, it is faster than what many have expected.

Finally, the A-share stock market has been overheated so that I guess it should be vulnerable to response the detrimental news. The above two news may be the cause to end the impulsive surge recently. I have updated my own technical index that Shanghai A-share has nearly reached the previous high in terms of difference between the stock index and 250-day MA. As for another oscillator, it has been very close to the threshold level I frequently mentioned before. Although the impetus mentioned before is still present, it is not sensible to buy any stocks now to balance the trade-off of return and risk. Let's observe this carefully. Buying IPO is usually the most preferable alternative under the current situation.

Anecdotes on Apr 9, 2007

2007-04-10T15:15:00.000-07:00

Originally I decided to buy stocks in April. Finally I purchased two stocks in small amount. I don't want to rush in the market as I feel risk-averse in my psychological sense. Recently I realize that the truly busy period is in April and May. Let me try to allocate the time well in order to finish both side of works.

Regarding the Shanghai A-share, the assistance of my technical analysis shows me that there are only a few steps to reach the threshold level. So far, the Shanghai A-share did "well". I guess that there are also one or two weeks that Shanghai A-share will dash upward impulsively. After this, I guess there would be a sharp drop, but now it is still uncertain whether this adjustment will be longer than that in January. One hint we can see is that the potential index future market may matter (in terms of volatility and level of adjustment).

Both the fiscal policy and monetary policy become futile at this moment. It is deemed to be the policy failure and irregular nature in the economy (such as strange preference and externality) of China. Yet, unless US has adverse shock, I am confident that adjustment in the form of sharp drop or even stock crash, instead of bear market, will take place afterward. In a mature market, recession accompanies bear market. In China, the convergence of bear market and recession is in progress owing to many arrangements to liberalize Chinese financial market in the expected future, thus the chance to have the bear market like the one in early 2000s is little*.

From my point of view, technical analysis is pseudo-science, which is somewhat paradoxical in forecasting. It is not healthy to totally rely on it. In this period, with its assistance, I would aim at controlling the proportion of cash and stock so as to balance the return and risk. The practice and application of objectivity and independence are crucial.

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* The risk of recession in China is smaller as analyzed in the characteristics under Asset market in China - perspective in April. This paragraph is an additional point for the alignment of the stock market and the economy of China.

Asset market in China - perspective in April V

2007-04-08T02:49:00.000-07:00

- Characteristic 6: Path to modern asset market

This is the final characteristic I want to share. It is not about the direction or periodicity of the Chinese stock prices, while it is about the change in the volatility. Don't look down on the volatility, since it can reflect the strength and the stage of a financial market.

Regardless of the past, I expect the volatility for the Chinese stock market will consist of generally three stages. The first stage as we can notice is the age with upward bias since there is liquidity thrust putting the price of the asset to be higher. One characteristic is that high autocorrelation should be the representation of the Chinese stock market in this stage. Volatility is, however, relatively stable thanks to the government intervention in both the macroeconomy and the stock market.

The second stage is the volatile age due to the derivative markets. From my point of view, this kind of situation may be persistent for 5-10 years before the establishment of a comprehensive financial market in China. In this age, this resembles the stock market in Hong Kong in the period from 1987 to 1998. Government would prefer using a good system instead of intervention so as to control the stability of the stock market. The derivatives and other financial products (thanks to the inventions of them in 20th century!) can become an endogenous force to control the biased level of the stock market. Nevertheless, the people who lack information and practice would contribute large fluctuation to the stock market.

The third stage is the unpredictable age, which resembles Hong Kong or New York one. In this era, the market will be more transparent and the information flow is more efficient. The financial market in this age is much more open and the people are more educated in investment and wealth management. This tends to be a more efficient market (Of course, even in Hong Kong and US, the argument on EMH still exists so that we cannot easily agree that EMH will achieve). After achieving this, Chinese stock market will have already been the world class.

My naive thought is, history would repeat itself in different countries although the technology is more advanced. This is thanks to human's sticky animal spirit and learning cycle. Perhaps the advanced technology would assist the evolution to become faster, yet the openness of the capital market also has to be faster in order to enable the capital market to evolve faster.

(Continue, Next part is the conclusion)

Asset market in China - perspective in April IV

2007-04-07T23:20:00.000-07:00

- Characteristic 5: Adjustment or recession through the self-fulfilling prophecy, with continuation of growth

In this part, I would like to talk about how the chance of self-fulfilling prophecy would lead to adjustment or even recession for the Chinese economy. The nature of this is different from the decline of the business cycle as discussed in characteristic 2 and 3. It is because the self-fulfilling prophecy is somehow so-called as a cause of adjustment by some anxious expectation, even if the foundation of the economy is good at that moment. In the economic literatures, usually the cause of the self-fulfilling prophecy (indeterminacy) is owing to externality, imperfect market structure, inequality or unusual congenital preference.

Putting the literatures in the application, what cause of the self-fulfilling prophecy could we find so as to excite the market, or even ruin the market?

As mentioned in Trend of Chinese stock market II and Market swallowed katamine, I would like to emphasize on the seemingly useless policy in the long-run. This indicates that the people can no longer match the government's policy and follow the frenzy speculation. This may be the start to enable the economy to reach the overheated and unstable stage, where people have the alternative preference to imitate the other to consume and invest.

- Recall Japan's recession through asset price bubble

The economy will become unhealthy as soon as the people are more willing to buy or invest by using the expectation on others as proxy. Some irrelevant news not related to the economic nature can overthrow the frenzy economic environment through the stock market first, and then if the domino effect is strong enough, it can spread to the property market and good market through the wealth effect. Finally the most serious scenario is going to the labor market (unemployment and reduction of wage). If all the steps are done, then the economy is surely innocent to suffer in the recession.

It seems that the devastating consequence is exaggerated. Yet, it was almost the case for Japan in early 1990s, where under no financial attacks and capital flights, the economy of Japan turned into the down trend in the rest of 1990s. As for China, how is its possibility to develop such kind of scenario?

The capital market of China are still close so that there are still lots of discreet measures to allow the foreign capital investing in China. Moreover, the QFII only consists of a relatively small proportion of the overall security investment in China. It is difficult to have shocks on the economy owing to the evacuation of the foreign capital. Therefore, the probability to have the recession similar to Japan should be smaller*. How about the recession similar to Thailand in 1997 under the capital flight? It is even smaller as the foreign reserve in China is much larger than that of many developing countries in 1997. In conclusion, all of these make sure that China can have less chance to be involved in the turmoil of recession due to the self-fulfilling prophecy.

- What is the gun powder then?

From my point of view, the salient adjustment would take place under the self-fulfilling prophecy until the amount of gun powder is enough. What is the gun powder? It should be the number of small equity holders in China. In terms of investment knowledge, they are mostly used to adopting herd instinct. Concretely speaking, the truly frenzy moment accompanies certain characteristics as if most people no longer get the sources that China has strong economic growth through the news and analysis, but from the rumors or discussions. More crucial phenomena, such as over-crowded banks, flood of shirking labors due to speculation, over-optimistic and emotional slogans or titles posted in the articles, need to be scrutinized carefully.

As soon as the penetration of equity holders in China enhances the effect of wealth, there may be some chance that the economy will also be affected severely. Therefore, either going to adjustment or suffering in recession hinges on Chinese government by attempting to crack-down the frenzy speculation by various aspects. One has to notice every actions and progress (successful or failed) on the policies on the stock market.

(Continue)

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* Chinese economy is also having the reputation to have much stronger growth than others in the world even if there is some potential decline. The effect of self-fulfilling prophecy can also be diluted through this good image. You may refer to Asset market in China - perspective in April I.

Errata and appendix: Tsang's Channel

2007-04-05T23:12:00.000-07:00

(latest edited at 11:26pm on April 5)

After writing the essay below, I originally feel that there should not have many problems regarding the Tsang's Channel. However, after the dinner, I find certain points needed to be clarified.

Having read some documents in the website and refreshed my statistical knowledge, I realize that I did the wrong things about the band of UU, U, D, and DD (UU: 2 standard deviations from the regression line, U: 1 standard deviation from the regression line, D or DD: below the regression with corresponding number of deviations). They should be re-drawn in the following figure. Sorry about that.

On the other hand, I also discover the discrepancy for the nature of the Tsang's channel in practice. For example, I cut the observation after 2261 away from the complete dataset. In the original figure, observation 2260 is above U. The linear regression line for the Tsang's channel will be different as follow.

Comparing with the original one, you can find that the log-price level is below the line U. Therefore, when one did the Tsang's channel before, the people will not think that at the observation 2260, it is at the high level. Hence, some inconsistent result may appear.

After realizing this, I would like to think that figuring out the duration above some deviations may not be robust. That is, "about 50 days above 1 standard deviation from the regression line (U)" is not robust. Under the new bands, this statement is no longer valid, but the implication that the method is not robust to determine the duration above certain standard deviations from the regression line is still valid. This is what I also want to clarify.

Next, although it lacks certain robustness, the signal in which the log-price level is significantly above the line U is still a warning signal, indicating the price level currently is too overbought. To my understanding, under such a long original dataset, if the regression on the long data series leads to such kind of apparent breakthrough, it has been a very serious moment. Probably, it has matched many sophisticated investors' mind. After the above adjustment, this is still an evidence to support that even if the trend is currently bullish, the tough adjustment is technically near when its momentum continues to pursue the higher level.

By the way, to eradicate the weakness of the Tsang's channel, certain measures can be used.

- By using an even longer time series.
- By repeatedly doing the regression process on the time-series, and recording the UU, U, central line, D, DD at each latest observations to form the reasonable picture.

- By using some modified oscillating tools from moving average indicators.

Regarding the second point, this is my recommendation not to disturb the objective of Tsang's channel, yet to run lots of regression requires some programming cost. Therefore, I would like to delay the works and research this later.

Speculation of the imminent trend - April II

2007-04-05T19:18:00.000-07:00

- Possibly face the turnaround

Despite the presence of the good trend, we can still see the already existing phenomena will be a bomb for the current trend.

- General technical analysis

Trivially, talking about the RSI, we can see that if this reaches about 80, the overbought signal will be present so that one has to be conscious on the movement of the price level. If my long-run oscillating indices also reach the threshold, it is particularly dangerous. Currently, the index is not at the risky level, but for the Shanghai A-share stock index, it will be faster to reach the threshold. In terms of the MAs analysis, it is not a good indicator to discover the top, but looking at the difference between the price level and the moving indicators is also valuable.

By using the Tsang's Channel (Spelling mistake may be present), there is also another indication that the Shanghai A-share index has reached the dangerous range as shown in the graph below.

According to the graph above, it is rare to have a log-price series be higher than the U line. Usually it is possible that the log-price series can be over U for more than 50 trading days (assume that 25-day is up and 25-day is down). Now it may be only the start. As entering this range means that the price series is already unstable, it is risky that the turnaround will occur in the following weeks, or within April.

My friends just told me some coincident things on the number 0.618. Based on his discovery, the Shanghai Composite index should have a top at the level of about 3500. I would like to extract the real data to confirm this, or want to ask him again once more.

- Notice the result announcements in Hong Kong and US

It is worth noticing that there will be several result announcements of the H-share stocks in Hong Kong in the coming weeks. They include China Life Insurance and China Construction Bank. After the result announcements, the power to boost the stock indices level would be diminished. Moreover, the financial calendar of US is also noteworthy since the macroeconomic data in February just consist of mixed aspect. The general trend of the economic data may be positively autocorrelated that data in February is a turnaround, such that in March, the performance of macroeconomic data will be deteriorated.

- Other phenomena and conclusion

Besides, the trading data is also controversial. The recent report from Merrill Lynch indicates that lots of Hedge fund have to stop their loss in the short position. Therefore, this boosts the Dow-Jones index to rise. This kind of phenomenon resembles those happening in the Hong Kong stock index in December 2006, where people are afraid of the put position owing to frenzy bullish trend.

Furthermore, the IPO activities are turning to be hot soon, since there will be three renowned stocks listed in the Hong Kong stock exchange soon. This will strongly boost the impetus of the speculation. This kind of frenzy party accompanies both crazy return and crazy plunge. I hope this will happen together in April.

(For the next essay, I will continue to write the essay about the asset market in China.)

* * *

Risk: I find that on April 5, US will announce the non-farm payroll, unemployment rate and much more data in the evening of Hong Kong time. If the ignition of the fall is due to the poor US economic data, there would be the case that the stock index in US will collapse prior to my expected time to collapse.

Speculation of the imminent trend - April I

2007-04-05T17:16:00.000-07:00

(This is a topic related to technical analysis, which is not related to the previous series discussing about the asset market in China.)

Previously I mentioned that the stock market will have some similar patterns as if year 1994, 1997, 2000, and 2004, on which there would be plunge in March, April and it would start to be resilient in May. This analysis was finally proved to be correct only in March. However, in the current stage, it seems that certain kind of adjustment has to be made so as to update the previous prediction. It is because the impetus or trend is hard to be resisted, yet I would like to draw some clues to indicate possible situation that the market would turn upside down.

In the first part, I will adopt some technical analysis to indicate the possible strength present in the stock market. In the second part, I will speculate the points and possible scenario so that the sentiment will face the turnaround. I will also state the historical scenario as a reference.

- Strength to support the trend

RSI, a conventional oscillating indicator, shows that both the HSI and HSCE (Hang Seng Chinese Enterprise Index) are approximately 61 and 65 respectively. In terms of the shape, it is represented as an upward trend. At the level between 50 and 70 with upward trend, it is a bullish signal.

As for the 50-day moving average (MA), it shows that both indices have successfully stroke a breakthrough such that the index level of HSI has surpassed the 50-day MA, while HSCE has surpassed the 50-day MA a few days ago. The more bullish signal, which is the 10-day MA surpassing the 50-day MA, will be formed soon. Usually, the 50-day MA is a more insightful indicator than 100-day, 150-day and 250-day MA to indicate the critical trend, while it is not so exhausting when comparing with the MA in shorter windows. Using these indicators, we can see that there will be a secured upward trend.

If one is still not confident enough, one may also look at the rate of return on April 4 (Wednesday). It indicates that many Chinese enterprises have pursued a breakthrough, where they can rise for about 4 to 10% within the trading day. Notice that the turnover is also heavy enough to boost one's confidence of the continuing upward trend.

The risk of this analysis is that there is the Easter holiday present so that the sudden fluctuation of the Chinese stock market will be a shock towards the above prediction.

I also own a self-devised oscillating indicator. The indication shows that both the Shanghai A-share index and Hong Kong's indices do not reach the reasonable peak under the current impetus, provided that no irrelevant shocks are present. However, the reasonable peak is near. I will discuss this in next part, talking about the possible turnaround.

(Continue in the 2nd part of the same title)

Asset market in China - perspective in April III

2007-04-04T21:43:00.000-07:00

- Characteristic 4: Shift of sector

Previously in characteristic 2, I mentioned that the monetary policy may produce controversial adjustment for the stock market. Here talking about the fiscal policy and the blueprint of the development, I would say that they are much more controversial for the micro-structure of the stock market concerning the transfer of wealth across different assets in different background. The fiscal policy and the blueprint of development aim at fostering the gradually open economy and granting assistance and allowance towards the industries which are beneficial to the sustainable development in China. From my point of view, these include various aspects discussed below.

In terms of the merger and acquisition, China encourages the companies to carry out merger and acquisition to gain enough knowledge in corporate management and explore the foreign markets. This kind of financial activities are particularly important for the resource industries since this also provides another resource ore for exploration. However, for the real estate and some manufacturing industries, Chinese government will not permit the foreign enterprises to set up the joint organizations with the foreign firms since this may exacerbate the overheated speculative asset markets and suppress the progress of environmental protection.

In terms of the technology and sustainable development, Chinese government has already granted much tax allowance to encourage the self-development in high-tech industries. Apart from this policy, when we analyze the natural market force through the international trade, it has been found that the wage and rent in China have been increased a lot such that many low-tech industries cannot afford to stay in China. Gradually, Chinese high-tech manufacturing industries will be prosperous and competitive as if Korea and Japan produce more high-tech products. Therefore, when one wants to invest in China, they need to follow such kind of trend. As for the sustainable development, obviously, many announcements to close smaller firms have been in progress. The larger firms will be protected since they have economy of scale and afford to spend money on the environmental protection facilities.

Besides this, one can also find that the current account surplus also affects the decision on the taxation, since the heavy load in current account surplus is redundant for the Chinese economy. It may be even detrimental to the world-wide economy. Therefore, those export firms need to sacrifice themselves by having less export tax allowance, or even accepting the export tax.

Chinese government also concerns the fairly equal opportunity to develop in each area. Therefore, the complex income taxation system has been unified to be 25% recently so as to enhance the productivity in the under-developed regions. The simplified taxation system for the entrepreneurs is also a means to provide a transparent system with a view to fostering better standard in fiscal policy.

Finally, there are also some unperceivable noises of the crack-down and the supports which are specific for some industries. This requires close attention on the Chinese politics.

(Continue)

Asset market in China - perspective in April II

2007-04-03T02:00:00.000-07:00

- Characteristic 2: Adjustment through alternative policies, with continuation of growth

After considering the long-term economic growth, one of the possible causes of the adjustment is mostly attributed to the policies including monetary policy, fiscal policy and development blueprint in China.

For the monetary policy, China is actively involved in the role to stabilize three economic variables, price level, fixed asset investment, and current account surplus against US. Originally, the interest rate policy can lead to conspicuous shocks towards the financial market in China so that it is useful as a stabilizer. However, as Renminbi became more flexible since July last year, the interest rate policy became weaker in controlling the overheating in economy. People are willing to invest in Renminbi's asset which further boosts the asset price bubble. Therefore, the recent announcement by Wu Xiaoling, the vice-chairman of PBC, proposed active and prudent monetary policy by using the reserve ratio for lending authority and open market operation.

From my point of view, it should be a new means to curb the overheating economy, which is challenging but implying that Chinese monetary policy would be more sophisticated to smooth the business cycle. Moreover, until recently, the open market operation is not the main tool in monetary policy. The larger the scale of open market operation is, the chance to develop the bond market is also larger. All these messages seem to be good for economy of China.

Regarding the fiscal policy and the blueprint of development, its concern seems to focus on the re-distribution of wealth to assist certain sectors. I delay the discussion about these until it comes to the characteristic about the shift of the sectors.

- Characteristic 3: General recession pattern and its time-lag (inspired by Mr Cho's article)

This is adopted by a short message from Mr. Cho's article written on Mar 28, 2007. It mentioned that an analyst believed cycle of the Chinese stock market would have time lag when it is compared with most of the stock markets in developed countries. I would like to elaborate more about this.

Now that the US asset price decline is salient to the investors, the stock market in US will decline at the same time as an example of efficient financial market. This also signals the other mature financial market around the world, which are also susceptible to the risk of recession in US. In UK, its housing market bubble may be even triggered by the recession in US.

However, in China, its financial market is relatively close that the people may regard the outside detrimental factors to be irrelevant. Moreover, Chinese investors are so optimistic about the Chinese economy. Recently many Chinese investors are thought to be the example of herds without investment knowledge at all. All of these phenomena enable me to see that the decision mechanism for the Chinese investors should also possess the time lag.

Probably, more adverse information is needed to overthrow the bullish regime in China. This kind of adverse information involves conspicuous reduction in export due to possible recession in US. The recent news regarding the countervailing duties is not striking enough to show the potential crises on the Chinese export sector towards the Chinese investors. After consecutive bad news imposing on the firms, the Chinese investors start to realize their situation affected by the foreign economy and finally leads to the bearish regime.

(Continue)

Stocks recommended by HKET in 2nd quarter

2007-04-02T05:14:00.000-07:00

Name (Code) Buy Sell Stop-loss Incl.
三林 (3938) 2.75 4 2.4 No
雅居樂 (3383) 7.5 8.8 6.8 No
湖南有色 (2626) 5 6 4.3 No
中通 (552) 5.2 6.5 4.4 No
香港中旅 (308) 3.5 4.5 3 No
亞洲金融 (662) 3.8 4.5/5 3.1 No
建行 (939) 4.45 5 4 Yes
中國建築 (3311) 5.5 7 5 No
中交建 (1800) 9.3 10.0/11.0 8.4 No
天津港 (3382) 3.15 3.6/4.0 2.7 No

This portfolio is constructed by HKET in 2nd quarter. When the market lacks direction, this portfolio became the choice for the lazy investors or anxious investors.

One could also find that this portfolio conveys some information about the price level of the market. Most of these stocks have much lower purchasing price level than the current price. As we saw today, only China Construction Bank (939), China Communications Serives (552) and Asia Financial Holding (662) have reached the target price. Moreover, only China Construction Bank could be exactly collected in my system. Therefore, I guess that this time HKET wanted to be cautious to prevent the scenario in the 1st quarter.

For Asia Financial Holding, I suspect if this kind of price-setting would be too aggressive, since technically speaking, its momentum seems to be reduced although indeed it has been ignored for such a long period.

Disclaimer: I do not bear any responsibility and liability for my comment and these recommendation if you lose by adopting my opinion.

Asset market in China - perspective in April I

2007-04-01T05:28:00.000-07:00

After the previous analysis and quotation of the facts, I would like to have some analysis on the future trends of Chinese stock market. It is noteworthy that speculation on the clear trends is usually similar to the pseudo-science. If I make the analysis in the strictest logic, distinct conclusion would probably not arrive. Here I would like to share my thoughts, so that different scenario, including contradictory pairs, will come out. As for the probability, it is still implicit. Therefore, overall the prediction would have wide range of possibility. For the speculation of trend, which is of the interest of main group of investors, I would like to draw this after this analysis.

I will state my scenario from long-run aspect to short-run aspect, and from macro-aspect to micro-aspect.

- Characteristic 1: Strong economic growth relative to other nations in the long-run

From my point of view, it should be the ground that Chinese economy basically should have sustainable growth rate above 7-8% in the near future. The reason is owing to the expectation of improved infrastructure in the future, newly developed law for the property right, investment in education, continuation of international trade in the skilled sector, and the sophisticated stabilization policy adjustment in the future. One may regard this as the ordinary growth resembles those happened in Asian tiger.

However, as a country with complex background, there is still challenge on the continuation of growth in the long-term. On the one hand, the one-child policy has led to the polarization of hierarchy in which the older generation may have spoiled the young since the young becomes precious in their mindset. Moreover, the young may not afford to pay the pension for the old since the number of the elderly will increase.

On the other hand, the problem of income inequality also entangles Chinese economic growth. Due to evolution from low-skilled to high-skilled industries, the flow of income becomes conspicuous which may make those people suffer discontent. Another critical problem is the corrupted government official still having power to some extent. Government should have noticed this so that the crack-down on these acute issues are still in progress. When one tries to invest in China, they should also notice the shortcomings and potential risk in the Chinese political, business or geographical culture.

If the growth could resemble the economy like Hong Kong, Korea and Singapore, together with the time of which the elderly would cluster in the future, I would speculate that the growth would be sustainable until year 2018 to 2022, i.e. there would be approximately ten years for the growth, given that no disastrous events occur.

(Continue)

Discussion on Renminbi and its related issues II - Diagnosis of Chinese asset price level

2007-03-28T01:21:00.000-07:00

This is the continuation of my previous studies on the Chinese economy and Chinese stock market. Before the further analysis, I would like to repeat some conclusions from previous study for reference.

- In Trend of the Chinese Stock II and Market swallows Katamine, I conclude that policy intervention will lead to change of expectation causing harder control.

- In Trend of the Chinese Stock III, I intend to argue that Chinese companies do not surely win.

In the series of Trend of the Chinese Stock, I finally conclude that the Chinese bubble is not far away from our imagination. Yet, recent continue surge ignited by the increase of interest rate and the appreciation of Renminbi lets me re-assess my previous logic. That is to evaluate carefully on what level of impetus for the Chinese stock market is.

Besides, I would like to post links concerning the Japanese asset price bubble and Japanese Yen in 1980s for your reference.

- Japanese asset price bubble in 1980s (Wikipedia)
- Japanese Yen (Wikipedia)

In order to reflect the current situation in China, some editorials used to adopt that as an example of over-heating and frenzy speculation on the asset markets (stock and real-estate). Chinese government should be familiar to this dreadful history. Regarding the potential stronger appreciation of Renminbi, on the one hand, how can it develop the potential asset bubble in China stock market (or Hong Kong stock market)? On the other hand, how would the Chinese government combat the bubble formation?

- Adopting Japanese asset price bubble to construct scenario

If using the Japanese scenario as the template without Chinese characteristics and policies, we can speculate that even if China increases the nominal interest rate, the market anticipates the appreciation of the currency value, and then the asset value. This becomes a die-hard cycle under the negative real interest rate. The people would be willing to take margin in order to enlarge the size of their asset. The banks would adopt looser credit policy.

Finally, this attains a highly unstable state, where self-fulfilling prophecy will prevail (for example, intolerable high inflation, a sudden bank run, or some irrelevant economic shocks) to turn the asset price bubble upside down, and finally affect the economy through the failure of banking industry, and spread to other sectors. The price level, including the currency value would then decrease.

- Different case in China

In terms of the background and people's sentiment, China does have the similarity when comparing with that of Japan in late 1980s. However, there are some differences.

China is a relatively close in the financial market such that on the one hand, people are not capable of investing in the foreign countries easily. On the other hand, the foreign capital instilled into China is not as large as the ordinary open financial market. Therefore, the recent surge of Chinese stock market is mostly due to the flooding of liquidity from the Chinese investors or speculators themselves.
In term of Chinese fundamental economy, despite my old essay concerning the slower growth, its overall growth rate is still much higher than that in Japan in late 1980s. Therefore, one may contend that the current situation is not so serious.

What kind of possible scenario can we see in the future?

(Continue, with different essay title)

A wily hare has three burrows - Some wisdom in investment

2007-03-27T05:33:00.000-07:00

Recently I just observed someone discussing about his anxiety on the failure of US dollar and global economy in the future. In view of this, he wanted to choose some other assets to evacuate. This lets me brainstorm some ideas on the investment strategy. This is, according to a Chinese idiom - A wily hare has three burrows (狡兔三窟) , to explore where the wily hare is. What is the meaning of wily hare?

- Time lag of bullish moment for different assets

The wily hare can be regarded as the "bullish moment" in the economy. Intuitively, even in the good economy, the bullish moment may not totally arrive at all parts, all industries, or all assets in the world. Sometimes, some assets cannot enjoy the benefit of general good economy under the main cycle. However, when the good economy reaches the saturated situation, the good prospect disappears in most parts of the world but starts at the other parts, other industries, or other assets.

That's related to another important wisdom - In the bearish regime, there are still the cases that some stocks or assets have good prospect. From my point of view, excluding the cash at hand (too defensive, unless the rare case in 1930s), short-selling or put (Trivial, but it is too risky and they involve complex techniques), we can try to discover the other bullish markets.

- In terms of location

If US economy declines, which locations should we invest? Chinese economy and its stock market are rather close. Is it a good means to invest in Chinese market as a shelter? Notice that the PE ratio for this market is already very high. People investing in this market have entered the stage of expected asset appreciation.

As for Korean market, it also has the reputation in the technological development among the emerging market, but its PE is lower comparing with the other places. Notice that it is more open comparing with the Chinese market. How is the trade-off between them?

- In terms of industry

Some people contend that nowadays the stock market does not have the unilateral trend since the performance in different industries matters. In US, the stocks in the financial sector and property sector plummet, but the stocks with information technology as background surges without being undermined by the market sentiment.

Looking ahead, we can see that Chinese stock market is rather driven by the asset appreciation so that most of stocks in financial or property industries will surge. If we take up the precautionary measure for the sake of the potential bubble burst, is it sensible to invest in those industries related to the engineering and infrastructure so as to mitigate those risks? If the value of these stocks are still not appropriate, can we find those industries with low PE ratio in order to enhance the defense power?

- In terms of type of asset

In the past, when the people are not confident of the economy and the money in the market (due to high inflation), people will rather hold gold to preserve the value. In the modern age, if the recession occurs, which asset will become dominant? Will the commodities like copper, iron and aluminum surge owing to the increase of infrastructural development in the recession? How would be the soft commodities like ethanol or corn since the stock market may be disturbed by some of the shocks in the commodities market?

People seldom mention the foreign currency, as it fluctuates in the seasonal and mean reverting pattern. Therefore, it can mostly have the speculative purpose instead of bullish or bearish perspective in the normal circumstance (floating exchange rate). Foreign currency can only be the short-term shelter under the bearish regime in the stock market.

- Conclusion

To switch into another burrow is a traditional wisdom in investment. Regarding the industry, someone may be afraid that the whole stock market around the world or industries will be devastated by the shocks. Therefore, instead of the stocks, other assets can be the choice for the switch.

Ideally speaking, to be more aggressive, we can invest in the locations, industries, or assets which are away from the focus when we see that people become over-optimistic towards some stocks in certain locations or industries. Of course, we still need further analysis to explain such kind of move. The final profitability still depends on the experience or psychological aspect of the individual.

Diversification and complement

2007-03-25T07:26:00.000-07:00

There are two concepts which are very important in finance, economics and investment. They are diversification and complement.

For the diversification, it is more frequent to occur in finance and microeconomics (as a part of uncertainty). It is a kind of risk management not to let the whole portfolio or business ruined by certain unfavorable conditions. Although the probability to get ultimately high return is reduced, the chance to get rid of the effect of the shocks owing to failure of its business or industry is higher. For the complement, it is rather synonymous in economics. The counterpart of complement is the substitutes. A complement of a good, says good A, can have large amount of demand if good A has increasing demand.

I would like to share my thought on these two terms, and apply these basic ideas to stock-picking practice. Note that realization of these practices is rather long-term. Under the market risk spreading throughout the world, those firms equipping with these weapons still cannot escape from the risk, but at least they are one of the pillar to withstand the adverse market condition and stand for the symbol of confidence.

- Diversification

The diversification can be enacted by the stocks like the conglomerates. However, from my point of view, some conglomerates may sometimes lack targets for its development. This can be seen through the objective of the management, where some management change the objectives frequently, and finally do not capture any market share. This is somehow the misuse of diversification.

Therefore, my view in diversification will be on the vertical integration of a firm. The vertical integration of the firms means that the firms can manufacture both the raw materials and the end product. In this kind of framework, the firms can possibly reduce its risk of exposure in price fluctuation in raw materials.

Theoretically, diversification has some slight difference with another concept called hedging. Hedging in the price fluctuation, including exchange rate fluctuation, can succeed with the assistance of the derivatives like the future and option. Different from diversification, this involves the financial derivatives instead of alternative products.

Firms being the example of diversification include Petrochina Co. Ltd. and China Shenhua Energy Co. Ltd.. I appreciate their diversification through the vertical integration so as to reduce the fluctuation of income. In terms of hedging, Cathay Pacific is well-done in its hedging tactics for the oil price.

- Complement

The complement can be enacted by the following example. The automobile market in China becomes larger because of the following reason. They include the larger consumption power of people in China. China evolves to be an automobile manufacturing center in the near future since China starts to achieve economy of scale and technological progress, together with important cost advantage comparing with its neighbor. Apparently, Automobile market is quite prominent and firms conducting automobile manufacturing should have good prospect.

Yet, not all the automobile firms can gain good prospect owing to certain competition and energy requirement from the central government. Moreover, within the family of automobile, there have internal competition and segmented market. Therefore, the risk level of each firms are different and some firms which cannot achieve the advantages would have substantial risk.

Putting the automobile market aside, could we see that in another market, tire market, will become the complement of automobile since all automobiles need tire. If you are afraid that the tire market is too competitive, the market for the highway can also become the complement of the automobile. It has higher profit margin and stable income.

- Conclusion

The above ideas are just some intuitive examples to illustrate how the concepts of diversification and complement work. My idea is, diversification reduces the weakness and risk, while complement enhances the opportunity and strength.

To truly realize the power of these weapons, you can just emphasize on the duration of the investment and the overall market environment. Moreover, other factors have to interact with these tools in order to enhance the probability of success in investment.

Busy soon...

2007-03-22T19:30:00.000-07:00

Yesterday I decided to sell two more stocks since firstly, I think that the odd to pursue further in this stage is little (by use of the technical analysis). Even if it succeeds, the volatility will exceed the gain. As a risk-averse person, I cannot afford that. Secondly, currently I am busy on my works so that I don't want to be cursed by the stocks. Currently I have 85% of cash. The rest consists of two stocks. One was bought from the IPO many years ago, while another was bought for the long-term investment.

Therefore, now I firstly experience the period of 85% cash since June 2006. In April (or May), I would return back for shopping in the equity market. Some targets are defined now.

1. Appr. 20% of the cash is for growth stocks.
2. Appr. 30% of the cash is for stocks with high yield.
3. The rest will remain the cash, or switch them to the Renminbi if it's possible.

The market for commodities like crude oil and conventional metals

2007-03-19T06:58:00.000-07:00

Yesterday I focused on an essay on the Renminbi and its related issues. When I started writing the second part regarding the asset price bubble, I found that it requires certain organization in the logics and information. I think that it cannot release in the short period of time. Anyway, some apparent result is, the appreciation in Renminbi can bring lucrative opportunity for the China Enterprise stock, but they would probably go out for hiking. (Discuss this again when I organize that well. Welcome to comment.)

By the way, noticing some people discussing about the price of the resources, I suddenly think of some ideas concerning the price of the commodities in the short to medium term. Here I would share with you about my ideas concerning the commodities such as crude oil and conventional metals.

- The political status (Concerning the crude oil): Recently the case in Iraq has been eased gradually. It is possible that the price of the crude oil will be decreased as soon as Iraq needs to pay the reconstruction fee through selling their oil deposit, according to recent meeting among the stakeholders. Once I also read an article saying that the cost to extract oil from the ground of Iraq is pretty cheap where outdated technologies are enough to carry out oil drilling.

You may refer to the article of Mr. Lam from Hong Kong Economic Journal (Mar 7, 2007) as reference.

Moreover, the current situation in the six parties talk shows that the tension between North Korea and US can be eased. Therefore, the situation brings a stable message towards the speculators.

- Possible contraction in US: US is possibly under the slower growth rate in this year. Therefore, it may bring down the demand of the crude oil and the conventional metals. Especially, when the growth of newly established houses is reduced, possibly it provides signal that the price of these commodities may be turned down.

- Possible contraction of liquidity: Japan is struggling to go out of the liquidity trap so that the interest rate starts to increase. This may stop the vigorous overspread of the liquidity to different kind of asset, including the crude oil and metals. Therefore, unlike past few years, we can see that the price for the resources can hardly increase.

- Weather (Concerning the crude oil): The temperature seems to be hotter than before. Moreover, entering the summer, it is possible that the demand of the crude oil would be reduced.

- Substitutes (Concerning the crude oil): The crude oil now has the main substitute like alcohol. In the very long run (notice it is very long-run), the price of the crude oil may be reduced since there is compatible competitors. Yet, in the short-run or medium term, it seems that the cost to produce alcohol in scale is much higher as it needs special equipments and technologies. Therefore, the threat from the substitute is mitigated.

You may refer to the article of Mr. Cho from Hong Kong Economic Journal (Feb 10, 2007) as reference.

- Emerging market: It is indeed true that under the rapid expanding economies in China and India, the demand of raw materials such as crude oil and metals should increase a lot. Yet, it is not overwhelmingly optimistic that these economies can support the demand of these raw materials*. Let's see that China now concerns the negative externality of the manufacturing product such that it should bring less pollution to the environment. This may lever the production cost of many manufacturing products and reduce the demand of the raw materials.

- Conclusion

After the above analysis, I feel that the price of most raw materials will remain stable. I would say that the probability to have the bullish pattern developed in the past few years is small. For some of the commodity which is rare for some important manufacturing products, there is still hope that the price will increase, yet it is due to the lack of supply.

--------

* The idea of decreasing demand of different kinds of metal has been discussed in Mr. Cho's article of HKEJ on Mar 14, 2007, where it mentions that the actual demand of the metal may be declined through the high price developed in past few years. He mentioned that the metals' supply now has the pattern of over-production.

* * *

Today Petrochina Co. Ltd. released its financial performance. It is somewhat disappointing. it seems that the decrease in oil price cannot ease its cost of production in petroleum products. Together with the decrease sales of crude oil, it leads to much slower growth. Once it was my beloved stock because of its good management. Now it really needs to face the challenge under the consolidating regime.

Essay related:
About Petrochina Co. Ltd.

Discussion on Renminbi and its related issues I

2007-03-17T20:19:00.000-07:00

On March 17, 2007, The People's Bank of China (PBC, central bank of China) announced that both the lending and borrowing interest rate will be raised by 0.27%, effective on March 18, 2007.

Yesterday when I read the discussion in the forum, I found a simple but challenging question concerning the action done by the People's Bank of China. The question is, if the interest rate of Renminbi (Currency of People's Republic of China) increases, will it force the currency to appreciate in a much larger rate (faster pace)? Apparently, the answer is yes, yet it arouses some concern on Chinese economy. In view of the above question, I would like to have some simulation on this.

- How is PRC's concern?

If the increase in interest rate forces the appreciation in Renminbi, I can think of two aspects.

Current account revenue will be dampened owing to ordinary price increase.
Capital account will be increased owing to appreciation attracting foreigners to buy Chinese asset.

Since there is still foreign capital control on the capital account, the second effect will be limited. This can overall lead to reduction of the inflow of foreign reserve like US dollar. The curse in our mind is, if Renminbi appreciates i.e. US currency depreciates, it will decrease the value of the foreign reserve. Moreover, the appreciation together with the US weakened economy may hinder the growth of the export industry in China. Are these things inconsistent to the policy of the Chinese economic development?

There is the fact that Chinese government conceded the vast amount of foreign reserve cannot be the optimal means to utilize the resource. It recently decided to establish the foreign reserve management company, similar to Singapore's Tamasek, to manage the foreign currency actively. From this point, it has some implication that Chinese government concerns more on the utilization purpose of the foreign reserve. Therefore, it favors the appreciation.

On the other hand, Chinese government recently also announced the rebate of the export tax will be reduced or even cancelled. This is also the thought so as to reduce the current account revenue between China and some developed countries like US. From my point of view, it was firstly to comply with some WTO standards required before. Secondly, it was also a means to maintain the depreciation pace of US dollar stably. The dampen US current deficit can be a signal to relieve the curse on US dollar depreciation against the currency of main economy in the world. The rapid depreciation of US dollar will be the disaster to ignite the ruthless Japanese Yen carry-trade.

After above considerations, it has the following considerations. Firstly, it seems that the above ideas are really detrimental to the export firms, together with the potential decline of US economic growth. That's why I do not encourage the investment in export sector unless the company has comprehensive hedging tactics and marketing strategies. Secondly, the Japanese asset bubble in late 1980s is etched in my mind. This is caused by the sharp appreciation of Japanese Yen in 1980s. How will Chinese economy become? I will continue to analyze that.

(Continue)

* * *

I remember few years ago, when I attended a public seminar concerning the appreciation of Renminbi, a researcher of an investment bank said that the appreciation on the Renminbi would also exacerbate the income inequality in China since the poor who export the agricultural product would lose the competitiveness through the appreciation. Now that the Chinese government uses other resorts such as abolishment of taxation on agricultural product, I think that there must be protection on the basic production side.

Time Lag of news - New age, New tactics

2007-03-16T01:21:00.000-07:00

Stock market is not only a volatile place for the stock price, but also for the news and methodology of trading, as there are usually innovations. The techniques that we learned before may not be easy to be applied to the current stock market. I just read two articles from Mr. Cho and Prof. Tsang. These two articles reveal some observations that we have to be prudent with flexibility instead of following the old rules.

For Mr. Cho's article, it mentions that the stock market has lost its predictability in real economy. Originally, before 1980s, the stock price was an effective leading indicator to the real economy so that when the stock index falls, it implies the macroeconomy will be deteriorated soon.

However, in 1987, the stock crash was a wrong alarm to the economy such that the economy maintained its strong growing status. As for 1997, Hong Kong stock market got something strange as the financial crisis (real economic shock) had started earlier than the downturn of stock market. Moreover, in 2000, the HSI seemed to go in an opposite way against the real economy. Finally it was found that HSI was even lagged behind most of the indices like US and Japan's indices.

As for Prof. Tsang's article, it mentions the new tactics occur in the recent market environment. The past wisdom told us that we could see how the HSI future implies the market movement of the stock price. In the adjustment regime, the speculator would determinedly short-sell the HSI future so that the open interest of HSI increased. Recently under this regime, the open interest reduced since more thoughts or precautions are instilled into the speculator's mind.

He also mentions in US, the news detrimental to the economy is released earlier. But the speculators may artificially pretend that they haven't heard the news since they didn't have the short position. As soon as they gained enough short position, they would produce certain rumours and reproduce the news so that it strengthened their short position. It's somewhat similar to the case of a big drop where the news from a renowned researcher of an investment bank was reproduced, even if that message has been released a week before the big drop.

Therefore, from this experience, we should be independent to think of the perspective of the economy. Recent news about the increase in PPI did not force US market to drop (noticing that if the situation exacerbates, the worst outcome can tend to the stagflation, which is the most acute problem in macroeconomic policy issue), while recent precautionary messages from the central bank of China and prime minister Wen Jiabao do not produce permanent effect in the drop of Hong Kong and Shanghai stock index. Can we trace what the big players are thinking?

* * *

Luk sir has just written another article regarding the attitude in investment for the young people, which is the part III continuing the previous two.

- Third Part

Short notes (Mar, 14, 2007)

2007-03-14T05:01:00.000-07:00

This is my brief record. I advise people not to follow that much.

- Equity market environment

Global market: Slight bearish except that it sheds little bit light on some industries in China;
Industries with the best prospect: Airport and support for airline, Infrastructure, Construction, rare metals (for other industries as raw materials);
Industries with good prospect: Airline, Banking and Finance (China: With good vitality and innovation; Hong Kong: Ambitious aim at Chinese market), Property (Large firms or based in Hong Kong with significant proportion in China), Consumption (China: Depends on the concentration and elasticity of demand of goods or service), Consumption (Europe: Luxurious goods), Coal mining;
Technical status (AI): -5, -4, -3, -2, -1, 0, 1, 2, 3, 4, 5;
Technical status (AII): -5, -4, -3, -2, -1, 0, 1, 2, 3, 4, 5;
Technical status (BI): -5, -4, -3, -2, -1, 0, 1, 2, 3, 4, 5;
Technical status (BII): -5, -4, -3, -2, -1, 0, 1, 2, 3, 4, 5;
Aggregate sentiment: -5, -4, -3, -2, -1, 0, 1, 2, 3, 4, 5.

- Retrospect Indicator

My sentiment: -5, -4, -3, -2, -1, 0, 1, 2, 3, 4, 5;
Independence: -3, -2, -1, 0, 1, 2, 3;
Rationality: -3, -2, -1, 0, 1, 2, 3;
Long-term mindset: -3, -2, -1, 0, 1, 2, 3;
Discipline: -3, -2, -1, 0, 1, 2, 3;
Cash vs asset management: 70% Cash.

- Report (Written on Mar 15, 2007)

On March 14, I would like to make a trade for China Airline, yet I eventually gave up this trade. To support this trade, the reason is due to the long-term prospect in airline industry and its short-term advance in net income owing to decrease in oil price. Its management team is good to my knowledge. Moreover, there is much space to have strategic development with other members, such as Cathay Pacific, in the industry. In terms of bid-ask trading, coincidently I saw that there is strong buyers like investment bankers willing to purchase this in large amount. This kind of situation is rare, which boosts my instant confidence to buy this stock.

However, I rejected this opportunity because I believe the market environment is deteriorating and it should be just a pullback, despite its strength yesterday. Now the situation is mainly for the short-term traders, whereas I am not always sensitive to the volatile environment. In term of pricing, it is reasonable, but it does not match a normal aggregate sentiment. Therefore, this implies certain discount is needed to convince me that it is a good buy. Moreover, This stock was not in my observation list, while I could pick it out because of coincident search under my memory. I will not take action under no preparation.

This stock was one of the three H-share which remained to surge yesterday. It continued to surge today. I believed it has a bright future, yet it needs a good market environment to support.

Long-term versus Short-term - Talking about strategy

2007-03-14T03:53:00.000-07:00

In the almanac of investment, we can see that there are two approaches which have been pronounced for a hundred years since Dow Jones Index was established. These are named as the fundamental analysis and technical analysis. Actually, two similar philosophical aspects align with these two approaches. They are long-term investment and short-term investment.

Long-term investment is sometimes labelled as value investment (actually it is not correct) as it concerns the analysis in the financial statements, while short-term investment is just the speculation which relies on the skills in technical analysis and psychological control. Two sides of people often contend that their opponents cannot earn much comparing with their own. They usually focus on the representative guru as a means to prove their own success. For fundamental analysis, Warren Buffett, Peter Lynch, John Templeton are usually quoted as the confidence of long-term investment, whereas George Soros and André Kostolany are mostly regarded as the sophisticated speculators in history of finance.

- I think it depends

From my point of view, I think that it seems that it resembles the paradox - the blinds would argue what an elephant looks like. Therefore, one should notice that different people have kind of preference and needs. Moreover, different time may have different strategy. The whole philosophy cannot be adopted to all the people and all period of time.

For example, age does matter in deciding one's strategy. The amount of capital one owns may also matter. Personality and the sentiment at a sudden moment are also another concern. In addition, thanks to the generally inefficient market, some important aggregate characteristics are the important signal for whether we should adopt the long-term investment or short-term investment (speculation). Therefore, it leads to diversified strategies.

- My belief

As for me, I am used to making certain top-to-buttom analysis so as to examine the proportion of long-term and short-term investment in my mind. At first, I will look into the growth potential of the aggregate economy since the growth rate of the economy governs the long-term investment environment, yet if technically speaking, the market is subject to the frenzy moment (scaring moment), then I will combine my own sentiment to evaluate the possibility of sell (buy), where my greed (fear) to pursue higher peak (lower dip) becomes the sell (buy) signal.

The stocks that I choose mainly have good track record in its financial statements. The procedure relies on the tools like data-mining. Regarding the prospect of the chosen stocks, I will examine those with economic advantages supporting its growth. I am not a sophisticated observer in financial statements and records. Therefore, I prefer economic reasoning to perform forecasting.

You may say, it is little bit like a cheap talk as implementation would be difficult. It finally depends on one's confidence (i.e. the above paragraph is one of my tactic). If I feel ambiguous on the macroeconomic environement and I feel entangled, I would simply prefer the asset management approach i.e. the proportion of cash and portfolio is well-scrutinized without any stakes or feel of "gambling" at the height. Therefore, the market value hopefully can be smoothed.

* * *

Two articles from Luk sir advise us how we should equip ourselves with proper attitude in investment and living. I strongly recommend.

First part and second part.

Trend of Chinese Stock Market III

2007-03-12T05:41:00.000-07:00

- More competitive future

Besides the macroeconomic thought, one also needs to notice that year 2007 is a critical year for the fundamental strengths and growth potential of many firms in China. In 2006, the firms in China can perform well through the economic growth. However, since China has to open the market towards the foreign firms in 2007 according to the entry of WTO. This has the possibility to develop fierce competition. Moreover, Renminbi keeps on appreciating so that certain industries will lack competitiveness in export.

Some of the industries such as the consumption-based industry may face challenge from the foreign competitors although consumption ability of mainland Chinese increase. Besides, some of the industries like banking may face some uncertain pressure through the entry of international financial firms. One has to notice that the information technology and the efficiency of the banking service in China may not comply with the international standard. If elasticity of Chinese people on demand of banking service is large, people will rather choose other banks to try the new service, this can be detrimental to the profit margin of the local banks.

China also advocates the corporate social responsibility in order to align with the world's standard. Some of the industries such as petrochemical industries and electricity need to spend extra cost on the environmental protection. Despite this, it does not totally bring the worse news to the industries since merger and acquisition will become a means to relocate the resource and develop the economy of scale. Industries related to infrastructure and some raw materials are the least affected area as they provide a way to improve the productivity and comply with long-term Chinese economic development (supply side, which is beneficial to the aggregate production level).

- Current status

The current situation in China seems to be ignored as the focus now is switched to the international financial issues such as the carry-trade of Japanese Yen, and the delinquent subprime loan and weakened economy in US. Recently Hong Kong Economic Times published news about the over-crowded banks and overwhelming number of registration of financial products in China, revealing the rise of probability of the crisis on Chinese stock bubble. Perhaps I am a bit sensitive and worried by the figures, but I always believe that there is the law of financial gravity that Keynes' castle in the heaven will collapse. This is a natural law after the frenzy speculation.

As a result, we should notice the bombs around us. The first bomb is the deteriorated US economy. The second bomb is the abnormal side-effect of liquidity trap of Japanese economy. The third is the potential failure of Chinese stock market bubble. As the number of bombs increases comparing with last year, conservative asset management becomes the crux to pursue breakthrough in the financial market. It is somehow difficult to predict the very short-term trend as the volatility has been enlarged.

Finally, try to work hard on our own jobs, as this is the way to secure our investment return, either directly by real output, or indirectly by stock's wealth (firm's profit).

* * *

Just think of a possible scenario for Chinese stock bubble. We know that the accounting facilities for the equity trading heavily rely on the information technology. In China, the increasing number of transaction may also lever the operational risk similar to the case of NYSE on Feb 27, 2007. Interestingly, I heard that the Chinese securities do not have the paper form i.e. the certification. Instead, they will use the computer to record them (Need to confirm).

* * *

Regarding China's economic development and new tax policy, I agree some additional points mentioned by Mr Cho at Hong Kong Economic Journal on Mar 13, 2007. Despite the overheating stock market, the optimal way is to notice the investment in certain industries (described above) and manage the proportion of cash and equities well in current year.

Trend of Chinese Stock Market II

2007-03-11T23:41:00.000-07:00

It may be hardly convincing by solely using the contrarian's aspect to say that there is crisis in Chinese stock market. Here I would like to think of the macroeconomic aspect and fundamental aspect in order to illustrate how the potential crisis would become.

- Philips curve - Failure of Policy

If one has studied the macroeconomics, you should remember a story about the relationship between the unemployment level and the inflation called Philips curve. It mentions that the relationship implies that the government can carry out policies by targeting the inflation rate in order to control the unemployment level. However, this is proved to be failure once the people have certain rational expectation on government's policy. In turn, the Philips curve shifts to a new one because of the change of expectation. Eventually, the policy becomes futile to cope with the problem.

This intuition can be applied to the Chinese stock market and government policies. Although China once decides to let the stock exchange be controlled by the market's invisible hand, Chinese authority still concerns the administrative controls on the bubble. It is just similar to the government's control on macroeconomic variables, like the Philips curve. The people will generally follow the dynamic of what the government will do, so that the people can gain as best as possible under government's control. It seems that the stock index is well-done to keep on a narrow range of fluctuation. However, those people perceiving this controlled dynamics will earn much money through this mechanics, and this attracts more people without investment knowledge to follow the seemingly arbitrage opportunity.

To the worst extent, the speculation will widespread throughout the public. On the demand side, the people will gain much wealth through the "paper value". In turn, this increases the aggregate consumption and investment. Therefore it increases the chance of inflation. On the supply side, the over-heating due to speculation may imply the lower-productivity of labor (it may be abstract), and moreover, the potential rise of excess investment will jeopardize the quality of economic growth.

Regarding the inequality within China, the rapid surge and fluctuation of the stock market is also detrimental to the objective of the central government since those people living in rural region cannot enjoy this wealth effect owing to poor technology and lack of entry capital. Consequently, all of the above notions will force the Chinese government to provide macroeconomic adjustment in order to curb the inflation, the overheated investment activities and the inequality enlargement. Consequently, it can destroy the bubble regime and the bubble is no longer persistent. The implication is that the government cannot be so easy to design a simple relationship without considering some side-effect through the expectation of ordinary people.

I have provided some relevant analysis in an article (Market swallowed the katamine (except our dread-stricken grandfather)) before. This topic is closely related to the application of game theoretical thought. Regarding the macroeconomics, the above scenario is one of the general results of political macroeconomics, where promise of government over periods of time is easy to be violated.

(Continue)

Trend of Chinese Stock Market I

2007-03-10T20:14:00.000-08:00

Chinese stock market is a bit complicated to carry out the analysis since its capital market is controlled by the government. Despite the outperforming economy of China, the short-term trend of the stock market is still under the risk of collapse. It is not because of the Japanese Yen or US possible recession, but the recent hot topic on the bubble of Chinese stock market. It seems that this hot bubble has become the rotten bread, in which fewer people have concerned this issue in this month.

Fundamental status of the Chinese economy is indeed outperforming the world-wide market where companies in China indeed earn a lot of money through the benefit of recent economic growth. Someone said that the PE ratio of A-share stock market is still reasonable. Even though it cannot strike a new peak, it can sustain in the current high level.

Originally, the people who insist on this proposition are those researchers in mainland China. Later, some of the guru, including J. Rogers (He refused this statement first, and then accepted that Chinese stock market is still healthy) and recently G. Soros, who mentioned that Chinese economy would be "kept on an even keel"*, support that Chinese stock market will still be healthy in the coming year.

To my knowledge, it somehow leads to some thought of contrarian's aspect. Are the people too optimistic on the Chinese stock market? As for the guru, do they possess some interest so that they need to comment reluctantly?

(Continue)

------

* From Article in Yahoo! finance Singapore - Soros blames yen carry trade for market turmoil-FT (An interview from Financial Times)

... Soros also said he thought the Chinese market would be kept "on an even keel" at least until after the Beijing Olympics next year. His comments were published in the newspaper on Friday. ... On China, noting that recent market events began there, Soros said the Chinese market had been rising at an unsustainable rate and the authorities had wanted to slow it down. "But, on the other hand, they don't want it to fall out of bed either so I think that you've had that sort of initial impulse and I think the Chinese market will be kept on an even keel, certainly until after the Olympics."

Trend of the stock markets in the open and developed economies - Mar 10, 2007

2007-03-10T04:06:00.000-08:00

In some previous posts, I have pinpointed that the weakness of US economy would ignite the collapse of the stock market and have possibility to turn it from bull to bear. Having some reviews, we can see that Japanese currency is a kind of weapon on this issue such that when the US economy is weakened with uncertain trend in interest rate, the Japanese Yen will appreciate against the US dollar (In the other word, dollar depreciates), in which the various funds from all over the world will swiftly demand the Yen to return the loan originally used in the carry trade.

- Unstable US economy and spillover of liquidity

If there are more detrimental news on US economy, especially on the subprime loan, releasing out, the recent appreciation of the Japanese Yen will continue. When the exchange rate approaches to 114, there may be dangerous stop-loss trading mechanism which further deteriorates the global stock market.

Commentators always say that Japan usually has the cheapest loan in the international financial market since it has the lowest interest rate. What is the reason behind? From various analysts' comments, the cause of the abnormal development is due to the recession from 2000 to 2002 in the worldwide economy. In that period, US, Japan, and Hong Kong have suffered in recession, where the increase in liquidity, i.e. decrease of interest rate, is sufficient to support the economy and the stock market.

Most of the Asian-pacific economy have been recovered since 2003. As for Japan, its painful ten-year recession has not been recovered until last year, so that the interest rate is still low for Japan. Moreover, its prolonged recession has created the so-called liquidity trap. This creates the abnormal structure we can observe nowadays i.e. the interest rate differential. The extra liquidity provided by Japan has been flooded among the nations because of its alluring low interest rate.

The abnormal structure makes the reversal pattern become more vigorous. Thus when we consider the global open economy, we have the following update.

- The US economy should be possibly deteriorated in the future few months as discussed in the previous post. For the intensity, the concern is how the seclusion of the subprime mortgage market and housing market is, so that the other industries are not affected by this severely.

- The risk level for the fundamental economy has been leveraged in recent months since the Japanese currency has been in a relatively low level. Someone contend that the short-term adjustment trend has been finished, yet it is not certain if the volatility increases in the near future, as the international funds continue the same dynamic of carry-trade among the open economies. One should know that the interest rate of Japanese Yen is still very low.

- How is the adjustment speed? Fortunately US flexible exchange rate can be adjusted at the current period. Therefore, we can see the latest release of current deficit reduce. I think that US economy may have medium-term recovery through this mechanism, given that there is no more military expense on Iraq, Iran or North Korea. How long is the stagnated period or the recession? Someone suggest it may go to the period before the US presidental election, i.e. early 2008 so that the expectation among people would be changed.

If we want to invest in the global market including US, Japan or even Europe*, either the short-term game or the long-term game will not be easy. Therefore, mostly we would like to see the prospect of the emerging market, especially China. Of course, it is risky, but its reward is more proportional than what I mentioned above. I would like to comment the Chinese economy and stock market later.

--------

* Europe currently has relatively good economy under the government's policy on flexible labor market, yet as the US economy is still the engine for the world, it still brings some uncertainties to the Europe's economy. Notice that the economic growth rate in these developed economy has been slowed down.

Inefficient market as an emergency exit

2007-03-07T01:18:00.000-08:00

There are some circumstances where an investor can acquire short period of time to sell his stock before the sudden collapse. Today, I also discovered this kind of opportunity for the traders to sell his stocks within 10 minutes. To use some economic jargons, it is an example of asymmetric information, which destroys the assumption stated by the efficient market hypothesis. It is supposed that most people with major in economics and finance know this hypothesis, and mostly, they can realize that there should be some discrepancies with the reality as the EMH does not work well in the actual financial market.

The representatives hardly obtaining the latest information are labeled as herd, who are also used to following other people's action as a feasible resort in investment and speculation. That's why the noise traders, knowing the techniques to dig out the patterns, can exploit the rent (extra profit) from the herds.

Here I would like to share my previous experience and today's observation.

- Penny's "shock" after the result announcement

Once I bought Hong Kong Economic Time, a penny stock, in last year. Originally I treated it as the investment since its business is observable and its financial performance is steady throughout the years. This firm can align with the development trend of Hong Kong as a financial center. The only uncertain thing is, its industry is over-competitive as entrants can easily grab the market share (e.g. the free newspaper distributed in the MTR and the estates). At that time, I felt that it has some characteristic financial products and advertising business which can quarantine itself from the fierce competition.

I bought this stock after the final result of 2005, and then possessed this stock until the interim result of 2006. In the afternoon, the company announced the result in the HKEX, while the other mass media, including various financial websites still did not release the news. I found that the EPS of the company declined comparing with the same period of 2005. Feeling a bit disappointed, I would like to release the stock in the afternoon trading section.

At that moment, there were still number of buyers from the small scale financial firms waiting for the purchase. The price did not change a lot. I immediately sold the stock within 10 minutes after the opening of the trading section. Afterward, the stock price collapsed for 9%.

I agree that there should be certain luck, but it is vital that there exists the herds who cannot perceive the information at once.

- Today's emergency exit

Today it seems that the stock price rebounded with sufficient momentum, yet when we look up the exchange rate of Hong Kong dollar against US dollar and the HIBOR rate (announced in the news in noon), it shows the pattern that there was capital flow from Hong Kong dollar to the US dollar. As for Japanese yen, it shows sudden appreciation in the afternoon. After this observation, I got the signal that there may be reversal pattern in the afternoon, and told my mother to sell some of her stocks. In the first 10 minutes, there was still enough time to evacuate.

This experience told me that the time-lag was still persistent after the signal releases. To find the reason why there is still opportunity to evacuate in this age, I speculate that the herds again show its powerful instinct to follow the popular commentators to purchase stocks. Moreover, in terms of knowledge, the reason to produce the reversal pattern is somewhat difficult to be interpreted. The herds are used to having less education in economics and investment.

From my experience, this kind of inefficiency is more significant in the intra-day trade as information needs certain time to be analyzed. To conclude, I would like to say, everyone in the stock market are participating in the information race. Not only do we need to work hard to seek for hidden information, but we still need to research and adapt to the latest information technology in order to enhance the speed and expand the information set. Try not to be the herds!

- The cruelty is, we need prey to survive

As I said investment and speculation are somwhat like a race, we need to know that unless you want to join with some agents in order to maximize the information processing efficiency through the comparative advantage, we need to combat some other opponents. It is cruel, but this is what market forces agents to do, to survive. Most commonly, we need to figure out the herds as prey. How can we focus on the herds in the population? Just leave this in the future essay.

An example of why a country gets poor

2007-03-05T06:59:00.000-08:00

Today the stock market vomitted again, as HSI had a distinct drop by 777 to 18664.88. It has matched most people's expectation. Originally I decide to write an essay concerning the stock-picking by noticing some intuitive characteristics. However, I suddenly noticed somewhat funny but miserable news. Let me post the link and a brief outline.

http://news.bbc.co.uk/2/hi/africa/6390319.stm

Gambia's UN envoy 'is expelled' Gambia is reported to have expelled a UN envoy after comments she made about the president's HIV/Aids cure claims.

Yahya Jammeh said his herbal medicine, taken orally and applied to the skin, cures the disease in three days.

Fadzai Gwaradzimba warned that this treatment could encourage people to engage in risky behaviour, believing that they were cured of the disease.

The United Nations could not confirm she had been expelled, but says it backs her comments over Mr Jammeh's claims.

Gambia's Daily Observer newspaper said Ms Gwaradzimba "has been given her marching orders because of irresponsible behaviour".

This is why a country is getting poor by repeating its mistake. Most of the African countries were granted with capital to develop its infrastructure and education. This kind of grant can be waived as soon as this is deemed to have improvement. Yet, the countries still have far way to go. Not to mention the infrastructure, the education level of the people is rather low that it is impossible to carry out effective policy to alleviate the poverty. After equipping the infrastructure and assistance of human capital from foreign aid, the corrupting government and practices make the sustainable development become vulnerable.

China originally resembled the African countries in 1970s. After series of economic reform by Deng Xiaoping in 1980s and 1990s, it enacts the first successful transition of economy from the poor to the prospect. The recent meeting of People's Congress reveals that the economic growth is not the most important concern. However, several fundamental measures in education, environment protection and property right have to be carried out intensively. These show the further transition of Chinese society and economy from the speedy path to the sustainable path.

If the world is perfectly economical in thinking, the solution is, to treat the outrageous irresponsibility as bankruptcy and carry out takeover action. Nevertheless, it is certainly the prejudice and lack of humanity.

Mixed Anecdotes on Mar 2

2007-03-02T02:49:00.000-08:00

- Sell substantial amount of shares

There is already two consecutive days that the stock price declined. Yesterday the Dow still cannot make a beautiful outlook. As I have the belief on the revealed worsened US economy, I decided to sell substantial amount of share and hold more cash. In the morning, I sold the stocks equal to 25% of my portfolio (including my cash, which initially accounts for 40%). Fortunately as expected, the plowback really happened today and the early morning became the emergency door for my evacuation.

In the afternoon, the situation was exacerbated. The plowback no longer appeared. The more drastic and dreadful incidence occurred since the penny stocks started to collapse in the whole afternoon. Luckily, I did not follow some people in some forums or newsgroups before. That's really important to remember the investment and speculation principles proposed by some experienced businessman written in the blog (I have posted the relevant links). Moreover, some important knowledge is etched in my mind.

Try to distinguish investment from the speculation.
Plowback is important as cut-loss. Do not deal with patients in the psychiatric hospital.
I acquire certain philosophy throughout January and February. Greed eventually leads to loss. If I feel the sin because of greed and pride, it is the time to sell stocks to realize the profit. If one grasps that kind of content, then one should probably grasp most wealth objectively.

- Greenspan and Jim Rogers

Please notice that Greenspan has once warned that US economy has entered the recession and ridiculously he refuted his previous opinion and supported that US is still "OK". His action gave people a kind impression, to prevent himself from the scapegoat (as suggested by a member in the forum). From my point of view, his action may cause self-fulfilling prophecy, which is much more disastrous than his original expectation. Thus, he decided to re-explain his calm message.

On the other hand, Jim Rogers, another investment guru, warned that China has developed the unhealthy bubble in the A-share market. Once he also changed his opinion that Chinese stock market was still "OK". Did one still remember these anecdotes? From the Hong Kong Economic Times, it mentioned that Rogers was also vigilant on the US economy. He also said that US economy may enter the recession. As an investment guru with university major in history, one should not have any contempt for his vital opinion.

- Slowed down information technology and network system

You may notice that the trades in recent weeks were a bit slow. Someone said that some investment companies did not allow the customers to trade the warrants. Luckily, it confirmed that it was just the rumor. Anyway, regarding the collapse of US stock market on Feb 28, we have to notice that the operation risk through the information technology should not be ignored. We were still exposed to this kind of risk. If we were not doing well in this kind of risk management, it is potentially the bomb for the global economy under the anxiety and the self-fulfilling prophecy, comparable to the Y2k advocated before year 2000.

- Still a long way to go...

Just observe from a newsgroup that there is significant number of people contending to hold the penny stocks. Until now, they still cannot realize what exactly the era has been changed. This may provide certain signals that the downward trend is not so easy to end. Moreover, this also reflects certain philosophy in trading and investment. Don't penetrate into the group. Otherwise there may be severe peer influence. To learn how to escape from the excitement and peer is one of the main key to succeed.

About Petrochina Co. Ltd.

2007-02-28T18:47:00.000-08:00

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

2007-02-27T14:42:00.000-08:00

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

2007-02-26T08:28:00.000-08:00

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

2007-02-25T22:32:00.000-08:00

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.