SOS Portfolio Results

As noted in last Oct 2009, I have set up a hypothesis portfolio on inflationist and deflationist, after 14 months, portfolio inflationist performed much better than deflationist.

Inflationist gain 14% and Deflationist loss 17%.

So the Inflationist Camp is the winner for the last 14 months. It seems that since the portfolios were created, continuous QE was one of the reasons commodities prices has gone up, the only thing that slows is the housing. It appears that there is ASSET deflation but there is also a PRICE inflation in consumables (necessity not the luxury goods).

MyView

I believe both arguements have their merits, however, the actions by the mass is non rational, hence it is not easy to predict the directions. Consumer moods changes. For example, more people prefer to let the mortgage default and hence, use the extra money to purchase other items. I will continue to monitor and update every quarter.

SOS Real CPI discovered!

Look at those who keep their deposits in the bank, interest on deposits is near Zero. Bad for savers, especially those that above 50s.

The blue line indicates the REAL inflation, which is about 8% p.a. over the last 10 years, meaning, prices has doubled over the last 10 years.

SOS Want to Know Wall Stree Bonuses?

2009 has jumped over the $20 billion mark. What is installed for 2010? Perhaps that is the reason the financial sector contribute more than 30% of the GDP. So we should cut taxes for the rich to buy Gucci, Prada or Rolex?

SOS CPI truth unveiled!

What the USA CPI did not tell you!

Only an Ivy League academic could examine the following yearly price data and conclude, as Bernanke has, that inflation is well contained:

• Unleaded gas up 24%
• Heating Oil up 28%
• Corn up 50%
• Wheat up 48%
• Coffee up 56%
• Sugar up 27%
• Soybeans up 30%
• Beef up 26%
• Pork up 22%
• Cotton up 101%
• Copper up 33%
• Silver up 72%

What about education fee (State of Illionious increase its tuition fee by 42% as the state are facing problems), i.e. those subsidised by the state will be removed.

What about insurance?
What about medical?
What about electricity?
What about natural gas?
What about mortage rate?

It will be similar in a lot of other countries around the world. CPI is just not representative. CPI should be broken down to 3 categories according to age, between 18-32 (Gen Y), 35-45 (Gen X), 46-70 (Gen Z). It is also good to list down which item are "price controlled".

Each categories is effected by different consumption matrix. One group may be facing inflation, another group is facing mild deflation (those buying Property or luxury items)

So, how then to protect your hard earn income over the unannounced inflation?

SOS What is the QE effect?

What Next

• Interest near zero since crisis


• QE1 & QE2 - buy bond, indirect injection money into the market - go into speculation by banks - creating another bubble
  
• Crash of stock market may be deferred to mid 2011

Can market continue to rise? Based on statistic, 90% bullish and 10% bearish on US market.

I wonder what will happen when Euro drop significantly against US Dollar in the next few months?

I wonder what will happen if crude oil continue to go up to USD120 per barrel in the next few months?

The financial markets is simply a very big puzzle, comprising interest, currency, commodities, money supply & credits, GDP and last but not least, social mood. Hence, there is no expert is able to predict the market "accurately" over a long period of time. Mainly because, there is no definitive correlation between GDP, interest, commodities, currency nor credits AND stock market mainly because stock market behaviour cannot be determined "scientifically or logically". A word of cautious, actual DEMAND is lower than SUPPLY.

The rise in GOLD price is not due to FUNDAMENTAL, it relates more to social mood, which based on the perception of money printing craze.

But one factor is clear, when central banks print money via QEs, eventually the fiat currency will depreciate substantially against "real money", which is GOLD or SILVER. Perhaps one should allocate 10-20% of their portfolio in GOLD or SILVER for a long term investment, between 10 to 20 years, to finance one's child EDUCATION.

SOS what is the economic outlook in 2011

By Roubini

1. Global growth in 2011 looks marginally weaker than 2010, but the recovery continues and chances of a double dip in 2011 have significantly decreased.

2. The global economy emerged from the most severe recession and financial crisis of the post-war period but not without additional fiscal and monetary stimulus; plans to manage monetary exit strategies and fiscal sustainability remain uncertain at best.

3. Growth in the emerging world will cool from the above-potential rates of 2010. A large part of the advanced world continues to struggle with balance-sheet repair and debt crises.

SOS What effect CPI on fiat money

1992 the breakdown of spending was 15% food, 10% recreation, 25% housing, 5% apparel, 15% transportation, 10% medical care, 5% education and 15%

Let us analyse a little bit:

For Malaysia (for 2010)

Food prices - increases average 8-12%

Recreation - increases about 5%

Housing - 10-15%

Apparel - 0-2%

Transportation - 5-8%

Medical care - 10%

Education - 5%

Others

So technically speaking, we can conclude the average inflation in Malaysia is 8%-10% p.a.

As for USA it would be similar, other than the rest, the housing prices is dropping. Should we measure some major expenses of a family the following the the big ticket items:

1. House
2. Car
3. Education
4. Food
5. Entertainment & recreation
6. Insurance
7. Medical

Most will realise, once you have both car and house, your inflation profile change immediately, if you do not have a child, then your inflation is confine to FOOD, Entertainment, Medical and Insurance. You will then notice an increase, which is not really represented by the CPI.

MyView

Each individual or family have different set of INFLATION. Hence it is very much depends on lifestyle, his needs and necessities. Whatever the case may be, one will reaslise the unofficial INFLATION is always higher than the Official inflation which is reported. Hence, one will have to measure the inflation that applies, because, a guy who travels a lot, then his inflation is mainly, currency, food, travelling costs, air port tax, etc.

MEASURE IT TO YOUR OWN PROFILE. So, technically, Fiat Money is not a good store of money, especially when most central banks starts printing money. One should consider investment into perceived "REAL MONEY" which is precious metal (for long run like 10 - 30 years).

SOS CRB Index

CRB index is still 32% from its peak in 2008 of 475 points.
CRB index climbs from its low in March 2009 from 200 points to today Dec 17, 325 points, an increase of 62.5%.

So, the next important question, where is CRB index heading? UP or DOWN? Well, time will tell.

Perhaps we take a look of CRB index in Japanese Yen, at least we can see how well did Yen against CRB index since their stocks and property market tanked.

Well, perhaps next issue.

SOS Currency vs Gold

Most currency depreciated against gold since 2000. Does all these charts confirm that "fiat money" is not a good store of money. Is the best store of money be in "GOLD"?

What about CRB Index? Another Hard Asset to look at?

SOS Gold

As usual, the two school of thoughts:

Jim Rogers said:
I don’t know how you can call it a bubble. A bubble is when everyone and his mother owns gold. Today, most people still don’t own gold.

Warrent Buffett said:
Look, you could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

MyView:

Fact: over the last 10 years, physical supply exceeds the demand of gold

Fact: over the past 10 years, transaction of gold is 70% physical:30% financial (paper gold)

Fact: today transaction of gold is 70% financial (paper gold): 30% physical

Fact: Gold, on its own have no economic value, unlike a farmland, a property, an energy company, BUT in human civilisation, gold is perceived as REAL money

Fact: 1971, Presiden Nixon lifted gold as a reserve, fiat money is created. USD disposable income had dropped more than 95%.

Fact: all the gold's worth on the earth at the moment (USD1400 per oz) is about USD5.5 trillion, world GDP is about USD60 trillion.

Fact: it will not be fruitful to try to reconcile why physical gold price price goes up when supply exceed demand, it is the paper gold that is traded that is conducted between willing buyer and willing seller, no logic required.

Argument for Buying GOLD - most countries is printing fiat money, over a long run the disposable income for the currency per gold oz will drop. This is the conventional way how human view GOLD and FIAT MONEY.

So, best way to do a research one can consider is how much yen per gold oz in 1989 (peak of property and stocks) and how much yen per gold TODAY to prove whether it is a good idea to buy gold and hold long term (10-20 years)

Let's look at Japan
1980 - 200,000 (yen per oz of gold)
1985 - 90,000
2000 - 28,000
2010 - 100,000

The lesson is: keep your money stable, and taxes low. When Japan was on the gold standard in the 1950s and 1960s, and reduced taxes steadily, it was the growth wonder of the world.

Lets see what happen in Japan

The Tokyo government, aware of unsustainable asset valuations, embarked on a draconian series of steps to depress property prices throughout the 1990s.

This not only blew away the froth of unsustainable valuations, it also demolished the real, fundamental value of property. They began with a series of tax measures on January 1, 1990 – the first day of the bear market – which eliminated certain preferential capital gains tax treatments for property.

In 1992, the tax rate on short-term capital gains (under 2 years) on property was raised to 90%. Long-term gains were taxed at 60%. Additionally, a 0.3% national property tax was introduced (this was several multiples greater than existing property taxes), plus a City Planning Tax of 0.3%.

Then there was a Registration and License Tax of 5% of the sale value of a property...a Real Estate Acquisition Tax of 4%...an Office Tax of 0.25%...a Land Ownership Tax of 1.4%...a even the regular property tax, the Fixed Assets Tax, was effectively raised by several multiples.

From 1990 to 1996, Japanese property values imploded by as much as 70%. However, the revenues from this tax rose by 46%. You can do the math.

All of this resulted in epic levels of bad debts at banks. For some reason, the banks managed to get the blame for this, as if they were responsible for the unprecedented monetary deflation during the decade, or the tax assault on property owners. Banks wrote off and liquidated loans continuously during the decade. However, the economy was unable to improve due primarily to the hideous monetary deflation, so more bad debts kept piling up as one borrower after another reached the end of their resources. This gave the appearance that the banks "weren't doing anything about their bad debts." As fast as they bailed out their boat, new water was coming in.

In 2000, the government, still convinced that banks "weren't doing anything about their bad debts," undertook an extensive audit of bank assets on a loan-by-loan basis. They wanted to determine if there were any "hidden bad debts," borrowers that had effectively gone bust but were being carried as performing loans. Then, having dug all the skeletons out of the closet to their satisfaction, they mandated that the banks resolve all these bad debts over the course of the next few years. Banks were required to state their progress under this plan in their financial statements.

Thus, we can see with great precision what banks were up to. As of September 30, 2000, Sumitomo Mitsui Financial Group had "bankrupt and quasi-bankrupt assets" of ¥653 billion. These were the real bad loans – those that had defaulted. There were another ¥2,594 billion of "doubtful assets".

SOS Derivatives in 2007

By DK Matai

2007 (source, Bank of International Settlement)

1. Listed credit derivatives stood at USD 548 trillion;

2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

a. Interest Rate Derivatives at about USD 393+ trillion;

b. Credit Default Swaps at about USD 58+ trillion;

c. Foreign Exchange Derivatives at about USD 56+ trillion;

d. Commodity Derivatives at about USD 9 trillion;

e. Equity Linked Derivatives at about USD 8.5 trillion; and

f. Unallocated Derivatives at about USD 71+ trillion.


Let us think about the invisible USD 1.144 quadrillion equation with black swan variables -- ie, 1,144 trillion dollars in terms of outstanding derivatives, global Gross Domestic Product (GDP), real estate, world stock and bond markets coupled with unknown unknowns or "Black Swans". What would be the relative positioning of USD 1.144 quadrillion for outstanding derivatives, ie, what is their scale:

1. The entire GDP of the US is about USD 14 trillion.

2. The entire US money supply is also about USD 15 trillion.

3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.

4. The real estate of the entire world is valued at about USD 75 trillion.

5. The world stock and bond markets are valued at about USD 100 trillion.

6. The big banks alone own about USD 140 trillion in derivatives.

7. Bear Stearns had USD 13+ trillion in derivatives and went bankrupt in March. Freddie Mac, Fannie Mae, Lehman Brothers and AIG have all 'collapsed' because of complex securities and derivatives exposures in September.

8. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.

SOS Wikileaks

USD12.3trillion leaks, Fed

As the Wikileaks cables revealed, General Kayani, head of the Pakistani military, threatened to depose the Pakistani government in a coup in March of 2009, and he discussed this in meetings with the U.S. Ambassador to Pakistan, Anne Patterson. The cables revealed that the Pakistani Army Chief disliked the civilian government, but that they disliked the opposition even more, which was rallying people in the streets.[31] This reveals the intimate nature the U.S. has with the Pakistani military, as it always has. The U.S. did not support this proposal, as it currently favours a weak civilian government, and therefore a strong military dictatorship is not in America’s (or India’s) interest. Thus, there was no coup. Hence, Wikileaks can be used to further inform and vindicate analysis of Pakistan. For those who have been speaking about the destabilization of Pakistan for years, and there have been many, Wikileaks provides more resources to a critical analysis, and suddenly more people around the world might be interested in new ideas and perspectives, as Wikileaks has challenged so many of their previously held beliefs.

The list of examples surfacing from the Wikileaks cables is endless in the amount of additional information it can add in the alternative media’s dissemination of information and analysis. These were but a few examples among many. Make no mistake, this is an opportunity for the spread of truth, not a distraction from it. Treat it accordingly.

SOS Debate on Deflationary vs Inflationary Depression

If you notice, there is no argument about whether there is a depression. The debate is more of a deflationary or inflationary depression.

Google Youtube and key in debate Peter Schiff vs Robert Prechter

Peter Schiff arguments:

• government will continue to print money when bank fails


• government will continue to stimulate the economy as long as they can


• in the long run, interest rate will shoot up the roof and gold price will explode


• economy will goes into inflationary depression (high unemployment) and US currency will become worthless in the long run

Robert Prechter arguments

• there is about USD55 trillion toxic assets (CDO, CLO, MBS, ABS, CDS) or bad IOUs in the banks


• bank credit grows since 1930s to 2008, and will contracts over many years down the road


• it will come to a stage due to debt implosion, the government is unable to bailout so many banks that it will let the banks fail and depositors money will end up in smoke


• government is unable to stop the huge credit implosion


• bad IOU holders money will go up in smoke, and interest will remain low


• economy will go into a deflationary depression, and due to the implosion of huge amount of debt, not only USA but the world, there will be shortage of US dollars in circulation couple with less new credit issued, hence US dollar will eventually appreciate (although majority is of the view that US will continue to do what they are doing (QE), and debase the currency)

MyView

• Is important to understand the mechanics of the world biggest economy, because, our wealth is determined by the policy maker of the world, principally the central banks.


• Do not forget, it is not only USA is printing the money, the entire world is also printing money for the past few decades, take a look at their own currency against GOLD, or against CRB index.


• Also remember, the economy does not function like physics, it does not goes in a linear way, i.e. we cannot predict the effects base on the cause, it is more "art" or influence by "social behavior" that is not normally measured by conventional key performance indicators.


• It may goes one way for a while, and another way for a while, but in the long run, everyones agree, ultimately, the holder of toxic debts will lose their pants (ie many banks will fail) but temporarily prolong from the reflation actions (QEs).


• There is no straight forward answers for these financial crisis, but the well known fact is many will suffer for it, be it the Main Street or the Wall Street.


• The few that got away is the legalized "Madoff" bankers with multi millions of bonuses at the expense of the mass taxpayers i.e. the incompetent is rewarded, the corrupt elites got away


• So, what is the long run view, say if you can predict JAPAN in the 1989? If that is the case, one should avoid PROPERTY, STOCKS, CRB, when the entire world is CONTRACTING.


• Can gold become the next currency? At the moment, there is about USD5 trillion worth of gold vs the world output of USD60 trillion. Can gold replace the current USD currency? It will need to be USD13,000 per oz.


• Say what we like, over the long run, the two biggest economies, i.e. USA and Europe will contract.

SOS Gary Shilling

Gary Shilling's new book, Age of Deleveraging

Quite similar to his 2010 predictions, for long term ( I believe he is talking about 5-15 years):

BUY

1. Treasurys (30 years) and other high quality bonds (NYSE: EDV)
   
2. Income-producing securities (PUI)
   
3. Food and other consumer staples (PSL)


4. Small luxuries (7-eleven) (RCD)
   
5. The US Dollar (UUP)
   
6. investment adviser and financial planners (PFI)
   
7. Factory-built housing and rental apartments (REZ)
   
8. Health care (FXH)
   
9. Productivity enhancers (SMH)
   
10. North American energy

For the buy items, I like 2,3,4 & 8

AVOID

1. Big ticket consumers purchases
   
2. credit card and other consumer lending
   
3. conventional home builders and suppliers


4. antiques, art, and other tangibles
   
5. bank and similar financial institutions
   
6. Junk securities


7. Low and old tech capital equipment
   
8. commercial real estate
   
9. commodities
   
10. Developing country stocks and bonds
    
11. Japan - a slow train wreck
    
12. Failing companies - In an era of slow growth and deflation, the combination of below-average revenue growth, high fixed income, and big debts can be deadly for a company. Avoid investing in flailing companies, since miraculous recovery is a less likely proposition.

SOS should we buy and hold stocks?

World GDP is about USD60 trillions

World derivatives is about USD600 trillions

Daily world trade is about USD4 trillions

Fiat money created over the last 10 years via derivatives is about USD500 trillions.

What will happen when 10% of the derivatives turns bad?

Some of the questions we need to ask ourselves.

1. Is the zero interest effective?
2. Is the first bailout effective?
3. Why the second bailout?
4. Any action to resolve the Derivatives problems?
5. Is the problem cause merely by sub prime? or is it Derivatives created via sub prime?
6. Why is the world stock market still so volatile?
7. Should one enter the market at this stage?

MyView

In a long run, it is not going to be pretty. One needs to protect our hard earned wealth. How? High cash flow stocks and high dividend stocks may be a good protection. A small portion in precious metal is not a bad idea. Shorting the markets is risky.

SOS Thanks Giving & secrets of the rich

Do you have your health? Be thankful. Do you have people in your life who will stick with you through thick and thin? Be thankful. Do you have enough food to eat? Be thankful.

And if there's one pasture our eyes glance toward perhaps more than others -- it's the rich person's pasture. "If I were only rich, then I'd be happy." But would you?

A STORY from BRITIAN

British magazine mogul Felix Dennis published a book some months ago titled, "How to Get Rich." And he does indeed write about how one might get rich. But he also describes the downside:

"Happiness? Do not make me laugh. The rich are not happy. I have yet to meet a single really rich happy man or woman -- and I have met many rich people. The demands from others to share their wealth become so tiresome, and so insistent, they nearly always decide they must insulate themselves. Insulation breeds paranoia and arrogance. And loneliness. And rage that you have only so many years left to enjoy rolling in the sand you have piled up.

"The only people the self-made rich can trust are those who knew them before they became wealthy. For many newly rich people, the world becomes a smaller, less generous and darker place. It sounds ridiculous, doesn't it? Ridiculous and gloomy.

"But then, you are to consider that I have been very poor and I am now very rich. I am an optimist by nature. And I have the ability to write poetry and create the forest I am busy planting. Am I happy? No. Or, at least, only occasionally, when I am walking in the woods alone, or deeply ensconced in composing a difficult piece of verse, or sitting quietly with old friends over a bottle of wine. Or feeding a stray cat.

"I could do all those things without wealth. So why do I not give it all away?

"Because I worked too hard for it. Because I am tainted by it. Because I am afraid to. All those reasons and more. Perhaps, if I am lucky enough to become old, I will accumulate something else: the courage to give it all away before I die. That would be a good thing, I think."

MyView

What did Napolean Hill said?

In a recorded speech (Napolean Hill) in the 1950s, he said the saddest thing about his research was to discover that not one of those wealthy people came close to having peace of mind.

What did Dennis said (above)?

It seems that rich comes with a lot other things but almost certain, it does not comes with peace of mind.

Rich is relative, most would refer to financial, what about rich in health, rich in good relationship, rich in intellectual, rich in kindness, rich in compassion, rich in tolerance.

Well, in short just be thankful of what we have. Be happy, not because we are not rich (financially), but because it is a state of mind. Of course it is not a sin to be rich, it could be predestined.

SOS Market Capitalisation of Bursa

Market Cap of Bursa

March 2009 RM662 bil

Nov 2010, 22 RM1,200 bil

GDP of Malaysia

2009 RM679bil

2010 Estimate RM760 bil

GDP 3Q 2010 is RM195 bil, 5.3% growth from Q2.

Market cap is a perceived value - subject to social mood, but influenced by liquidity, government policy, unemployment rate, talent migration

GDP is the "real" value - measurement of production of each sector

Market cap is like the share price of a listed company while GDP is the Financial Statements of a company.

MyView

Hence, market cap does not measure exactly the health of an economy. Far from it. It is just an indication of the social mood at certain time.

SOS Coupled or Decoupled?

The never ending debates on:

1. Coupled or Decoupled economy
2. Inflation or deflation
3. Protections or Liberalization
4. Boom or Bust
5. Hot Money or FDI
6. Peak Oil or Non Peak Oil
7. Can Fed QE solve the problems?
   

It may be worthwhile to research on the said topics above. Whatever it is, there is no simple answer, like the world is either black or white or right or wrong.

It is much more complicated than anyone can guess, is China's figures sustainable?

MyView

One must do an indepth research before we are closer to the truth. Intelligent research is required.
Do you know China print more money than the USA?

SOS Double Top?

Double top just formed. Cautious.

SOS Zig Zag

The stock markets are in for a zig and zag mood.

One day up, one day down 1-2%. Very volatile in fact.

One day implosion of bad debt, one day quantative easing.

One day Bernanke, one day Ireland.

One day China, One day Australia.

Why?

Because, most investors invest based on NEWS. The funny thing about NEWS is we can see it from both sides. Analyst will recommend their stocks based on their fancy, sometimes they use PE, sometimes EBITDA and sometimes industry averages, and sometimes on NEWS and THEMES. They can support their analysis whichever way they like, and whichever way it is, it is not wrong.

It is nothing more than intelligent GUESSES.

MyView

How do we improve our GUESSES?

If we look in the mirror as shown in the cartoon, you will see how pretty you are. The real fact is that you are "UGLY". But why does the market prices does not reflect it? It is based on investors perception, majority study the same economics, hence, have the similar perception.

SOS Age of Deleveraging

Gary Shillings' new book, the age of deleveraging

Here is the glimse:

1.U.S. consumers will shift from a 25year borrowing-and-spending binge to a saving spree. This will spread abroad as American consumers curtail the imports of the goods and services many foreign nations depend on for economic growth.

2. Financial deleveraging will reverse the trend that financed much global growth in recent years.

3. Increased government regulation and involvement in major economies will stifle innovation and reduce efficiency.

4. Low commodity prices will limit spending by commodity-producing lands.

5. Developed countries are moving toward fiscal restraint.

6. Rising protectionism will slow, even eliminate global growth.

7. The housing market will be weak due to excess inventories and loss of investment appeal.

8. Deflation will curtail spending as buyers anticipate lower prices.

9. State and local governments will contract.

MyView

Gary Shillings is one of the great investors for the past decades.

Here is his investment themes in the long run:

Gary discusses 12 investment areas to sell or avoid in the long run.

Included are expensive consumer discretionary purchases like motor vehicles, appliances, airline trips and ocean cruises. These will be hurt by consumers' zeal to save and by the self-feeding downward spiral of deflationary expectations. The latter has locked automakers into profit-killing rebates. Similarly, credit card and other consumer lenders will suffer from the household shift from borrowing to debt retirement. Conventional homebuilders and their suppliers will be pressured as more than 2 million excess house inventories drive prices down another 20%.

The 10 investment sectors he favors include Treasury bonds. Back in the early 1980s, when the 30-year Treasury yielded 15.25%, he said we were entering "the bond rally of a lifetime.” He believes that rally is still intact as 30-year yields head for 3% and 10-year yields for 2% amidst slow economic growth, deflation and Treasurys’ global appeal as safe havens.

Dr. Shilling also likes securities with high, reliable and growing cash returns such as stocks that pay significant dividends.As households increasingly separate their abodes from their investments, they’ll favor small single-family houses, especially the cost-effective homes built in factories. Rental apartments will also be attractive as younger couples stay in them until their children are old enough to need single-family houses, and empty-nesters will prefer rentals to condos when they sell their suburban money pits.

Our nation has decided to reduce its dependence on unreliable foreign energy sources, so he likes conventional North American energy suppliers such as coal, nuclear, natural gas, oil sands and related industries, but no government subsidy-dependent renewal energy such as ethanol, wind, solar and geothermal.

I believe some of the following sectors worth watching is:

1. High dividend yield stocks
2. Continuous high demand in emerging market such as Water, Health, Food

Let us look back his investment theme for 2010 below:

The good news: Six buys for 2010
Buy treasury bonds.
Buy income-producing securities.
Buy consumer staples and foods.
Buy 'small luxuries.'
Buy the U. S. dollar.
Buy eurodollar futures.

Now the bad news: 11 sells for 2010
Sell U.S. stocks in general.
Sell home-builder and selected related stocks.
Sell big-ticket consumer discretionary equities.
Sell banks & other financial institutions.
Sell consumer lenders' stocks.
Sell many low- and old-tech capital-equipment producers.
If you plan to sell a home or investment house, do so yesterday.
Sell junk bonds.
Sell commercial real estate.
Sell most commodities.
Sell developing company stocks and bonds.

I believe some of his 2010 predictions is too early, such as commodities. Only time will tell, still one and a half month to go.

SOS QE Japan vs USA

1. 2001-2006 Japan turn on QE, it did not lead to liquidity in the country but just boosted the carry trade.
2. Today, USA is doing the same, it only boost carry trade to higher yielding assets elsewhere.
3. Japan to Sept 2010 flow of USD46bil from developed to emerging markets (2009: USD9bil only)
4. Property Bubble? Household debt to total income Australia (159%) UK peaked 174% but now 160%, USA peak at 138%, now 128%.
   
5. Policy responses to QE:
   1. allow currency to appreciate (export may suffer). 2. keep exchange rate more or less fixed and let the money flow in and try to sterilise the consequence, like China is doing (raises reserve or issues sterilisation bills to mop up US liquidity). 3. some kind of tax or capital control like Thailand and Brazil
   
6. the lesson from the crisis is LEVERAGE.

MyView

QE will boost carry trade. 2001 to 2006, Japan did it, 2009-2010 USA is doing it. Yen peaked in 1998 at Y146, Nov 2010 is about Y80 per US dollar (but in between it zig zag). Japan bubble peaked in 1989, until today, the market still in "doldrums". What will happen to US dollar?

SOS KLCI

Maybank

Standard&Poor

CLSA

All three research house is bullish on KLCI for 2011.

Of course they cater for institutional fund managers, not retailer, hence their selection is on big cap stocks.

Some of their picks are:

Sime Darby

Maybank

IJM

KL Kepong

Kossan

While technical says, the next retracement is 1260, 1350, 1440 and the next resistance is 1630, 1720, 1810

In short fundamental analysts and technical analyst point to a positive KLCI next year.

However, Marc Faber points out that it is better to put your cash in stocks than keeping it with the banks, using the Mexico stock example. He believes that the world economy can goes into inflationary depression instead of just deflation.

MyView

USA most likely will end up like Japan with a major twist, i.e., inflation pressure on certain "consumables" such as food, transport, etc. Whichever way it turns out, market will be very volatile, arising from QE, implosion of debt, and sustainable growth.

SOS Too Big to Fail

Facts:

Notional derivatives value held by commercial banks in USA is about USD223 TRILLION.

95% of the derivatives is held by 5 banks:

1. JP Morgan USD 75 trillion


2. Bank of America USD45 trillion


3. Citibank USD44 trillion


4. Goldman Sachs USD41 trillion


5. HSBC USD6 trillion

Why Bernanke keeping the interest rate low?

Guess how much out of the derivatives is related to interest rates?

Try USD188 trillion.

What if 2% of this money is at risk and 10% of the 2% goes wrong, the entire equity of the 5 banks above will be wipe out.

2% of USD188 trillion is USD3.7 trillion and 10% is USD0.37 trillion or USD370 billion.

So, you may ask again, why Bernanke keep the interest so low? Not for the housing price, it is to prevent the implosion of the derivatives.

MyView

Doubtful he can do it by QE1 or QE2, it may slow down the crash in a year or two. The original problem is not resolves, DERIVATIVES.

SOS Bull or Bear

The question is, will USA become like Japan in 1989.

Similarity:

1. Japan property bubble driven up by lax credits and innovations in property lendings




2. Share market bubble driven up by credits

Differentiations:

1. USA property bubble also driven up by lax credits + derivatives




2. Share market peaked in 2007, but not a crazy PEs but dividend yields perspective, USA is at historical low




3. USA derivatives is huge, few times bigger than their GDP




4. USA is the international currency, Japan is not

MyView

I believe USA will be like Japan, deflate first, then hyperinflate, or both happening at the same time, credit driven assets will deflate, consumable will inflates or hyperinflate.

SOS US Dollar

Will the US Dollar rebound? A trillion dollar question.

"Then a November 7 Financial Post piece titled "The Gold Standard and the Doomed US Dollar" surmised that unless the buck realigns itself to bullion, the US currency will collapse like a house of flimsy paper cards. "

Let us see whether this news is true or not over the next 6 months. Why not look back for the past one or two years.

Here, the following news items from last year (2009) say plenty:

• “The US Dollar’s reign as the world’s reserve currency is about to come to an abrupt end.” (July 2009, Daily Times)
• “Financial experts say there’s no end in sight to the slide. The traders we talk to have a grim outlook on the US dollar’s future overseas.” (July 2009, Hartford Courant)

• "Beware The Falling $US" (2009, Forbes)
• "It's looking like the line of least resistance [is] for further dollar weakness against the majors." (2009, MarketWatch)

YET -- on November 26, 2009, the dollar hit bottom and took off in a powerful, seven-month rally to star-gazing heights in early June, 2010.

MyView

It seems that market is like a rubber band, when it is stretch to the maximum, it will rebound back. If the chart can be use as a tool to "forecast" , there is a good chance the US dollar "may" rebound over the next 6 months. Let us monitor this chart over the next few months.

SOS World Trade Per Day

Total world trade per day is about USD4 trillion.

Imagine how much does a bank earned? Every transaction in USD, if converted, will be charged by the financial institution of conversion gain. Imagine, if on average 0.01% is charged on USD4 trillion, USD40 million is made by some banks each day.

Say, if we trade 250 days a year, the amount made by a bank is about USD10 billion a year. The bank absolutely does not add value in an economic send, no additional service or goods produced.

Does the financial institution actually add much value to the industry? Not much actually. They are intermediatries which keeps the depositors money at low interest and using Fractional Reserve Basis to lend out at 10 times its deposit and at interest rate normally double to triple the deposit rates.

Hundred years ago in China when financial intitutions do not exist, the Chinese use a rotation schemes among one another to raise money for whatever reasons. Each one benefits when the other chip in their their shares and the lender will pay a certain interest into the group.

MyView

Commercial banks gets its capital from taxpayers. Using the Fractional Reserve system, it raise 10 times the taxpayers money and lend to corporations (which is also own by taxpayers). A major assumption is a commercial bank is that when there is a bank run, there is FDIC (insurance) and cetral bank (lender of last resort) to "bailout the banks". In return, if there is not enough funds in FDIC, the congressmen will go to the government to get more money, which in return obtained from tax payers.

The only people gain in this banking system is the Executive bankers who will go all out to take risks at the expense of the taxpayers, knowing the government would not let the banking system to fail.

SOS Insider Selling Vs Buying

NYSE, Since Sept 14 to Nov 1,

Total Insider Selling 6.8bil shares
Total Insider Buying 0.6bil shares

Insider refer to executives of the companies.

MyView

Why are insider selling so much higher than the buyers? Do they know more than the common market players? Surely the institutional people knows about this figures?

Why is the Main Street deteriorating and the Wall Street is improving?

Who is buying or selling in the current NYSE market, and although the DJIA went up, why is the volume shrinking?

What is the economic fundamental tell us?

What's Next?

SOS QE2

First we need to take a look at QE1 and what happened.

From Sept 2008 to June 2010

• Fed balance sheet increased USD2.4 trillion
• Out of which USD1.4 trillion from "mortgage assets" purchase
• And the balance USD1.0 trillion from increase in "excess reserve"
• in the same period, bank credit contracted USD296 billion, after 63 years of bank credit expansion up to Sept 2008
• Fed has USD918 trillion of assets (mainly Treasurys), today, it is less than 50%, first time in history

MyView

Will QE2 be a success?

SOS Malaysia Brain Drain - a stale subject

STORY #1

Push factors
written by Wil ,

February 25, 2010
I am a member of the Malaysian disapora currently working for the Australian government in a senior position, having been educated in Australia with a bachelors and two masters degrees. Yes, an outdated education system, untendable crime rates, racial discrimination in all levels of society and the increasingly bigoted government are all factors why I've chosen not to return to Malaysia. Notice I did not mention money, standard of living (healthcare, housing affordability) etc. Neither am I talking about the opportunities Australia offers compared to Malaysia. This is simply because the PUSH factors from Malaysia are primary reason for the brain/people drain, not the PULL factors from other countries. I am close to giving up hope on the land of my birth.

STORY #2

When Bibi worked in an electronics factory in north Perak, little did she foresee marrying her expatriate quality control engineer. After his conversion to Islam and their subsequent marriage, he attempted unsuccessfully to gain permanent residence. He claims to have spent a small fortune on lawyers, on 'proof' and photographs for the application process, and several trips to the immigration offices to be 'verified'. He claims that one low ranking government official even offered him a birth certificate for RM60,000, as a pre-cursor to a 'red' identity card, which would help facilitate the PR status. When Bibi's husband's work permit expired, he attempted to form a trading company. He travelled to the border every few months to renew his immigration-social visit pass, while he explored this avenue. He was ineligible for a sole proprietorship and although he could form a limited company with 51 percent bumiputra ownership, he found that for one reason or another, it was not viable. Local partners wanted maximum profits for little or no work. A Caucasian, he was seen as a cash cow, he says. In addition, the Perak town they lived in was very provincial. Had he lived in Kuala Lumpur or Penang, he could be anonymous, like the expatriates married to Malay women in these cities. As an expat convert in his local town, the Malays expected him to uphold Malay values and scrutinized his every move, right down to his religious obligations. He was disillusioned with living in a goldfish bowl and both he and Bibi left for Europe.

STORY #3

When Ida graduated from Australia with a chemical engineering degree, she worked in a chemical plant in Selangor. Her friendship with a chemist blossomed into love, with talk of marriage. There was one problem - Anthony was a Catholic. He dutifully presented himself at the mosque for agama lessons in preparation for his conversion. The imam never appeared for their pre-arranged appointments. Frustrated with being let down repeatedly, he stopped going. His lucky break came when he was offered a job in a neighboring country. Ida joined him. She was free from parental and family pressures, he from the religious zealots. They married. He retained his faith, she remained a Muslim. They started a family and have since emigrated to New Zealand. Recently, she embraced Catholicism.


STORY #4

Yes, I Have Leftwritten by Gone Malaysian , February 19, 2010

Yes, I am also one of those who left. I had no choice. I had the grades but the quote didnt allow me to pursue my studies locally. So I had to beg for a bank loan and pursue my studies. To Mamakthir, you can have whatever meager stuff the government throws out to you. To Loyal Citizen, only low class citizens, who cant do much because their poor, stay behind. The high class, rich people all have PR in other countries so that when things go bad in Malaysia, they can just fly their family to safety. But the low class people like you, will stay and suffer.

SOME STATISTICS

According to a recent parliamentary report, 140,000 left the country, probably for good, in 2007. Between March 2008 and August 2009, that figure more than doubled to 305,000 as talented people pulled up stakes, apparently disillusioned by rising crime, a tainted judiciary, human rights abuses, an outmoded education system and other concerns.

MyView

From the 4 stories told above, what can we say more. That is only the tip of the iceberg. I believe, the brain drain will escalate in the future if nothing is done on the problems (as expressed in the 4 stories above).

I believe the mass Malaysians, who pays their due deserve a better government, don't you think so? On top of that, there is certain criterion that 30% Bumi must be present at all level of company (broking firms) and all Government Linked Companies must have a Bumi CEOs [not an effective way to do business]. I do appreciate if someone can enlighten me on this subject, what other countries on earth have such a practice, where there is discriminations among their Malaysians who happens to be in different races.

SOS ETP, NEM, NEP

ETP - Enough Talk Please

NEM - Not Enough Man

NEP - Never Ending Politicking

Well, if we do a study or research on our neighbour coutries or previously known as 5 Tigers, South Korea, Taiwan, Hong Kong, Singapore and Malaysia (40 yrs ago), you will realise, Malaysia is the only country that turns into a kitten.

Well, almost most of them start from the same starting line, i.e. same level of GDP, today, we rank #5 among the 5 tigers. #1 has a GDP per capita of USD37,000 and #4 is USD17,000 and guess what what are we in USD8,000 per capita.

Hmmm, the writing is on the wall, we have to ask these few questions:

• Are we not as smart


• Are we not as hardworking


• Are we not rich in resources


• Are we at the less strategic place


• Are we not attracting talents

Wonder if we have done a study to find out why so many Malaysian migrates to other country, I think the answer is quite clear, we are just living in denials. Coming up with ETP, NEAC, NEM, MACC, you name it, will not solve the problems. If it is so simple, a company may have easily successful when coming up with slogans.

We have to ask ourselves, with these "projects"

• Will we be SMARTER


• Will the people be more hardworking


• Will our resources deplete further


• will will lose our strategic location


• will we attract talents or prevent migration

MyView

Let us look at ourselves before we make any comparison with our neighbour countries.

Common sense will tell us that why so many skilled Malaysian do not stay, because:

• It does not provide "sufficient opportunity"


• It education standard is "not high"


• Its judicial is "what money can buy"


• Its safety and security is "inadequate"


• Its major policies do not provide "meritocracy"

Are we taken for a ride by our existing Government? Do we deserve a lot more than the existing Government can provide? How many times has the Government proven to set policy based on meritocracy?

We have MAS, look as SIA

We have MU (Malaysia University) and Singapore has SU (Singapore University) look at their ranking now.

We have MSC and it is a failure

We have Proton, Korea has Hyundai

The list will go on and on. What are we MISSING here? Has our government with ALL its intelligents not able to KNOW the PROBLEM, if not, what is the SOLUTION?

SOS Fact or Myths

On one SIDE............

Right now, it seems like a very similar scenario is unfolding on the financial "battlefield." On the one side, those "writing the code" of public perception are yelling "CHARGE!" into equities. See news items below for confirmation:

• "US Stocks Long-Term Slump Near End... Stocks may stay in a tight range for several more years as they near the end of a bearish era." (Bloomberg)
• "Billionaire Lambasts Dour Sentiment, Eyes Bull Market. Sentiment may be sour but a bull market in US stocks that roared in September has more upside." (Reuters)
• "Warren Buffett: Forget Gold, Buy Stocks" (Tycoon Report)
• "Cramer's Mad Money: The Market Is Cheap, Cheap, Cheap. The predictions of the bears... are looking more and more ridiculous and untrue by the day." (CNBC)

On the other SIDE ..............

says investors have been "voting with their feet," pulling their money out of US equities for 24 straight weeks. In the past week alone they withdrew $623 million from US stock funds, and invested $1.45 billion in overseas equity funds instead.

As for why, the article covers the gamut of reasonable suggestions: The slew of confidence-denting scandals and fraud, two stock market crashes in the last ten years, and the fact that insider selling just reached a "breathtakingly bearish ratio of 1169:1, i.e. insiders are selling 1,169 shares for every one that they're buying."

One thing doesn't add up though: If investors are so rattled by the instability of US stocks, then how do they rationalize swapping the one for the way-more-unstable sectors of foreign markets and high-yield debt?


MyView

Facts:

1. Net outflow for 24 straight weeks in US equities;
2. in past week, USD634 mil withdrew from US equities and USD1.45 bil invested in overseas equities; and
   
3. Selling ratio of 1169:1, insider is selling 1,169 shares for every one on buying

It seems that the fact of more insider sellers than buyers as shown by the fact does not correlate with the continuous increase in the US equities, so is the net withdrawals from 24 straight weeks in the US equities.

Reality:

1. US equities moves up despite the facts mentioned above (on a thinner volume, of course)

Anology:

1. This situation is not new, when explained that it was proven that earnings improvements does not has much impact on the direction of the stock markets because the stock market's trend is influence by "cumulative emotions of investors";
2. Sooner or later the fact will catch up with the "
   

SOS Capacity Utilization

MV = PQ
Money Supply & Credit x Velocity = Price x Quantity Demand

Quantity Demand will determine the utilisation rate. If the utilisation rate drop, it indicates demand is slowing, which is shown by CPI. When CPI drop, utilisation rate normally drop as well.

When there is high unemployment rate, people is losing confident of the economy and due to the confidence level is low, the velocity of money will slow down, i.e. bringing the price down, which equates to deflation.

MyView

Another tool measure whether the economy is going into deflation is the utilisation rate. If it drop, CPI will drop as well.

SOS New Discovery of USA statistics

The manifestation of a deleveraging economy is as follows:-

1. Debt destruction
2. Bankruptcy
3. banking credit contraction

Fed total assets
2007/8 is USD0.4 trillion
2010 is USD2.4 trillion (after buying up few trillions of toxic IOUs)

USA debt to GDP
1930 to 1970 = 170% of GDP
1975 to 2010 = 380% of GDP (expansion of debt)


World market debt is about USD52 trillion
World GDP is about USD60 trillion (equivalent to "world revenue")
World derivatives not disclosed in the bank's book about USD600-800 trillion.

MyView

Based on the said statistics, it is like, a company (world) revenue is about USD60 trillion, with a debt on sales of USD52 trillion or 86% of total sale of the company. On top of that, the company has about USD600 trillion worth of derivatives (i.e. 10 times of its total sales not disclosed in the books)

What will happen to a company with a debt of USD52 trillion over a sale of USD60 trillion, it means a lot of sale are debt created, not collected yet or unable to recover. If we do a debtor turnover it is about 316 days, which indicates an unhealthy debtors turnover, i.e. may be lots of debts not collectable.

As for derivatives, it is mainly created by the financial institutions like CDOs, CDS, MDS, CLOs, Forex, which does not actually contributes to the real economy of product and services, it is a product of its own for the financial systems (Ponzi Scheme) or better know as weapons of mass destruction.

Hence, we can expect 2 implosions, one the USD52 trillion market debt and two, the derivatives.

The long term consequences that is clear is the deleveraging (like Japan), clearing all the toxic "loans" or "debts" which will take many years. (Japan took 20 yrs and still on going). The property and stocks in Japan deflated substantially from 70 to 90% todate.

The question now is what will happen to USA, which has similar characteristics of over gearing (creating property bubble)? Is it an isolated case, no impact to the world? Think again.

SOS Update of Portfolio

Time flies. It has been a year since the portfolio of Inflationist and Deflationist were set up about last Oct 2009.

This is what I have discovered to-date result:

Inflationist is up 10%
Deflationist is down 10%.

Of course in between, i have discovered occassionally deflationist performed better and vice versa, however, as at today, 22 Oct 2010, Inflationist outperformed Deflationist.

MyView

From my observation, the market goes up and down like yo-yo over the last one year, very uncertain, one minute you have PIIGS drowning, another minute you have QE2. So, the short term trend is hard to see at the moment. However, one thing for sure, unemployment did not subsides in US for the last 2 year. Excess houses in the market remains. No new regulation on Derivatives. CPI is pretty tame, hardly any inflation.

In conclusion, the jury is out there, but ROUND 1 is won by Inflationist. It always depend where your starting points, if i start at the peak DJIA13,000 in 2007, now it is only 11,400 and dropped 12%, and if you start in the peak of 2000 at about 14,000, you have loss actually 19%. But if you start at March 2009 at 6500, you have gain about 75%. In gold terms, it is UP about 30%. (gold went up from USD1000 per oz to USD1350 per oz)

In short, it always depends on your starting line.