Busted

The blow up of Bear Stearns reminds me that it doesn't matter how many years of spectacular results a firm may have, anything times zero is zero. You would still lose everything you invested in. And it is almost impossible to go bust unless leverage is used. It is very important that when investor leverage up, they are very clear that it would increase the chance of going bust significantly.

Stock pick: Berkshire Hathaway

There are a lot of uncertainty in the market right now. The economy's growth is slowed. It is difficult to find any attractive equity investments right now. So here is my stock pick of the day: Berkshire Hathaway (BRK-A). The main reason? Trust the world's best investor, especially in a bear market.

• BRK's investment portion make up only around 50% of market capitalization, making the stock less sensitive to general stock market volatility
• it tends to outperform the market by a wider margin during a down market than a bull market (beginning from 1965, every time the S&P 500 went down during a year, BRK outperformed the index by an average of 24.8%)
  
• it had $47 billion of cash in hand as of Sept 31st, 2007. The credit squeeze did not affect BRK at all.
• Warren Buffett can deploy those $47 billion more effectively during a down market

So there you have it. BRK's absolute return in the short run may be uncertain, but I am confident it will outperform the S&P 500 by a wide margin in the coming year or two.

Blame it on the rating agencies

S&P, Moody's and Fitch should stay in rating company's credit worthiness instead of rating all those structured vehicles because they don't have the competence to do so. There wouldn't be a credit problem right now if it wasn't for these rating agencies. How can something rated AAA lost all its value? If you don't know how to do something, don't do it because you are going to cost investors money! With the housing price keeps on dropping, I believe there will be more highly rated bonds performing worse than they should.

Also, how can Ambac and MBIA still able to retain their AAA rating? Only the most financially sound companies deserve those ratings. Even banks like TD don't have a triple A rating, so how can the bond insurers have it? I know the rating agencies are under a lot of pressure to not downgrade those two companies but if they want to regain their tarnished reputation, they need to make the right decision quickly.

Yen Advances as Moody's Prepares Rating Cuts on Subprime Losses

Dec. 3 (Bloomberg) -- The yen advanced from the lowest in two weeks against the dollar after Moody's Investors Service said it is preparing the biggest credit rating cuts since subprime mortgage defaults rocked financial markets.

The yen rose versus all of the 16 most-traded currencies as investors sold higher-yielding assets funded by loans from Japan, known as carry trades. The dollar fell against the euro on speculation a report will show slowing manufacturing growth, adding to pressure on the Federal Reserve to cut interest rates.

``The Moody's news over the weekend suggesting more writedowns prompted yen buying,'' said Sue Trinh, a currency strategist in Sydney at RBC Capital Markets, the second-most accurate exchange rate forecaster in Bloomberg News surveys. ``This is likely to continue for the next two months.''

The yen gained to 110.58 per dollar at 1:06 p.m. in Tokyo from 111.24 late in New York Nov. 30, the weakest since Nov. 16. Japan's currency traded at 162.10 per euro from 162.82. The dollar fell to $1.4659 per euro from $1.4633. The yen may rise to 110.50 per dollar and 162 per euro today, Trinh said.

The Australian and New Zealand dollars, favorites of the carry trade, fell the most against the yen. Australia's dollar dropped 1.2 percent to 97.23 yen, and New Zealand's dollar slipped 0.9 percent to 84.23. Moody's may lower ratings on $105 billion of debt sold by structured investment vehicles, the credit-rating company said in a statement Nov. 30.

The U.S. dollar traded at $2.0564 against the British pound from $2.0563 and was at 1.1278 versus the Swiss franc from 1.1318.

The yen also gained as Bank of Japan Governor Toshihiko Fukui said today the bank needs to be aware that keeping interest rates too low may make economic growth unsustainable and that he is still seeing volatility in the global financial markets.

Week Oct 1-5

The S&P 500 rose 2% to 1557.57 and set the record high on Friday. In less than a month, the market condition changed 180 degree. The labour department revised August payroll # from from the original -4,000 to +89,000. The revised stat shows that the credit crunch wasn't as severe as what many people thought. It hasn't spread to the general economy yet. It looks like the Fed now has much less evidence to justify another rate drop, which reinforce my view about his 50 bp drop for the rate. Let's hope that the Fed is not going to embarrass itself when the inflation goes out of hand.

Week Sept 17 - 21

S&P 500: 1525

Bernanke surprised Wall Street with his 0.5% drop in interest rate. It looks like there will be a new round of rate cutting going on. I believe this move is too short term focus and will cost the Americans in the longer run. The Fed is trying to bail out people who didn't deserve to own a house at the expense of everyone else. This rate cut will not only affect the US, but also other countries which currency is pegged to USD. Because it seems like every country outside the US is doing great, it puts a lot of inflation pressure for countries that are pegged to USD. Saudi Arabia, for the first time, didn't follow US and cut rate because it is having a great inflation pressure already. If anything they should raise the rate not lower it. Maybe Bernanke's intent is to depreciate USD to make it more competitive in world trade I don't know. But I think it is a bad move.

Week Sept 10-14

S&P 500: 1484.25 rose 2.1% this week

Investors aren't willing to put in big bets one way or another before the Feds meeting next Tuesday. The only thing worth mentioning is that CFC said that they have $12 billion line of credit from various sources lined up in case of emergency. That's a pretty good news as it shows that several investors/institutions believe that the housing crisis is not as bad as some people thought: they are still willing to invest when the terms are attractive. Let's see what Bernanke will do next Tuesday. My guess is the Fed rate will drop by 25 basis points.

Interesting article about how China can move the yuan:

Rising Euro Is What China Needs to Dump Dollar: Andy Mukherjee

By Andy Mukherjee

Sept. 14 (Bloomberg) -- Juxtapose China's latest trade statistics with a strengthening euro and you get a very real possibility of significantly quicker appreciation in the yuan against the U.S. dollar.

It isn't the 33 percent jump in the August trade surplus that leads one to that conclusion. That was hardly a surprise; analysts had expected a wider gap.

What was more interesting about the statistics this week was that they confirmed a geographical reshuffle in China's exports, away from the U.S. and toward the euro area.

And that shift may have an impact on how far the yuan is allowed to rise against the dollar.

The bloated trade surplus, by itself, may not be a strong enough reason to make China move. If the authorities had wanted to address that imbalance, which is causing a liquidity glut at home and fueling a bubble in the equity market, they would have done so much earlier.

They have deliberately chosen to live with all the consequences of an undervalued currency, including the threat of a full-blown trade spat with the U.S. So what has changed now?

For a start, inflation in China is looking ugly at 6.5 percent, the highest in almost 11 years.

To the extent a stronger yuan lowers the cost of imported commodities, especially for the ``three F's'' -- food, feed and fuel -- it might have a sobering impact on prices.

That isn't all.

With more Chinese goods now landing in the European Union than going to the U.S., the authorities will probably put a greater premium on retaining export competitiveness in Europe.

Exports to Europe

So if the European currency continues to rise against its U.S. counterpart, China can afford to let the yuan appreciate against the dollar. As long as the yuan manages to depreciate -- or even hold steady -- against the euro, the country's export engine won't stall.

For a second straight month in August, the EU trumped the U.S. as the biggest market for Chinese-made goods.

Strong consumption demand in the 13 euro-area economies -- not to mention the 10 percent slide in the yuan against the euro since mid-November 2005 -- has resulted in a 31 percent jump in China's exports to the EU so far this year.

That's almost double the pace at which Chinese shipments to the U.S. have grown in the first eight months of 2007.

This may have important consequences.

Dump the Dollar?

The dollar fell to a record low against the euro yesterday, as traders expected the U.S. Federal Reserve to cut interest rates in an effort to head off a recession caused by the subprime crisis.

China's motivation to keep the dollar propped up, by channeling its trade surpluses into U.S. government debt, is probably not as strong as it was even a year ago.

``As the most vocal group calling for yuan appreciation are the Americans, it suits China to have the euro go up,'' says Charles Dumas, a director at Lombard Street Research in London. ``The yuan can then be floated up gradually against the dollar while actually declining against the euro -- making Chinese goods more competitive in what is now both their largest and fastest-growing major market.''

The Chinese currency is selling for about 7.51 to the dollar. It has risen almost 6 percent against the U.S. currency in the past year while falling more than 3 percent against the euro, leaving the overall competitiveness of China's exports little changed.

Domestic Demand

Exports and investments are powering the Chinese economy, which expanded 11.9 percent from a year earlier in the second quarter, the fastest in 12 years.

Domestic consumer demand is tepid.

Once the official statistics on retail sales are stripped of the intermediate business expenditure masquerading as final consumer demand, the picture that emerges isn't very encouraging. ``Real'' retail sales grew 11.5 percent in July, their slowest pace of expansion since January, the World Bank said in a report this week.

China needs to pare the trade surplus to curb domestic liquidity and control inflation. It also must rebalance its economy and spur domestic consumption. Both these objectives will be well-served by a strengthening of the yuan against a basket of currencies. However, the authorities are unlikely to set about that task before the 2008 Summer Olympics are out of the way.

For now, all that one can reasonably speculate is that if the dollar goes down the tube against the euro, the yuan will probably not follow it.

Source: Bloomberg

Comment: While China wants to keep the economic growth by controlling the appreciation of yuan, they should realize that if they don't let yuan appreciate, inflation would only go up even more. That would only hurt the poor people even more. It is proven that an out-of-control inflation is a lot more dangerous for the economy than a slower-growth GDP.