Is there an “optimal” portfolio?

As the investment theories developed to this point, there are quite a lot successful stories such as the Modern portfolio theory, capital asset pricing model (CAPM), diversification, Sharpe simplification etc. Investment institutions are even implementing them through various quantifications. There are certainly flip-flops, for example, LTCM in 1998.

This theory and its variance are very computation intensive. Even with Sharpe’s simplification that has improved run time compared to Markowitz’s original scheme, it still not a light set for most investors. That might be one of the reason the method is successful because less practioners. Also, dynamic nature of this method also increases computation load.

Consider there are only 50 stocks here for casual reading (the theory can handle real market), the question is to find an “optimal” portfolio through diversification? The optimality is based on maximum return and minimum variance. The later is also interpreted as risk. So given an expected return and individual stock performance, the theory can find out the covariance among them and use linear programming method to find a basket of portfolio. That is a lot of work before getting this basket. But once it is obtained, it is optimal because it finds a balance point between return, the expected one, and risk, the variance of return.

Assuming everyone investor uses this method, it is not surprised to see many of them would punch in similar expected return. Thus, these people would get the same basket of stocks (individual stock performance should be the same at the same time). So it is interesting to see this “optimal”, in a sense of math model, is actually not optimal in real life if everyone is using it.

It is not always desirable to have optimal portfolio, even it is controversial. Keynes preferred less diversification to more. Loeb once said, “Once confidence is obtained, diversification is not desirable”. “Diversification is an indication of don’t know what to do”. Obviously, this is sub-optimal portfolio management, but it is still typical. The biggest edge is that no one knows these sub-optimal ways.

This is an example that high intelligent and street smart are both important.

What would happen when oil is at $80?

Assuming oil price rises to $80 again and stay there for a long while, what can happen? There are some can be predicted or some business opportunties are looming.

Rising transportation costs. Transportation costs eat into overall revenue quickly as oil price rises. Long distance transportation loses its flavor to shorter ones. For example, China may loss its advantage on distance to Mexico even the advantages may still be in place. In more micro-economy point of view, companies would allocate corresponding resources for mailing and shipping systems. For example, bundle larger shipment by re-scheduling.

More remote communication infrastructure investment. Internet is certainly looking for second life on this score. The need of having close collaboration may well be imbedded into future internet technology developments. Consequently, communication infrastructure investment gets bigger. 3-D sensitive tools will become hot spots. When problem of having sensitive surrounding available, the face-to-face need is reduced.

More distributed work force. More people would select work remotely. That brings in questions of how to manage remote workers. Some disciplines are suitable but others aren’t. The difference is how employers balance among them. For example, make incentives to those who need to stay at home and come to work at the same time so that with the same budget employers can still maintain an efficient work force.

More at-home entertainment. Stay more at home and use the ones which have already paid in most households. Online entertainment business will be on the rise.
Office mall will be on the drop. It is obvious. One might catch the wind is short term rental office building with heavily armed internet gadgets.

What bad news can be?

As the Market rose 20% from the bottom in March, there seems good news coming all together: housing market showed surprising rise, unemployment seems stable, and Feb/Treasury bond together to fix the credit problem. Is the bad news finally deceased?

Some analysts said no much bad news can be. Some even speculated that one possible bad news is terrorist attack! Of course, they added, it is unlikely so that the uprise would continue.

Is that really so? In fact, as more people lost their job, data already showed what the impact is. Household income is reduce in Feb and savings in January was up. ABC news now presents ways to save money. Under this circumstances, how can spending be expansive? Speculative behaviours are proved to be violatile. For example, oil price rose and dropped at much wider range than a few weeks ago. It was up to about $55 and dropped to $51.

The next big news is the G20 global cooperation to the crisis. Even before the show, resentment was already looming. For example, Chinese, Russian, and EU started challenging the US dollar policy. These briefing would not harmonize the meeting. To expect the meeting would stymie right after the meeting seems too immature.

Even the US economy itself seems not cooperating the rally well. In Friday's CEO meeting with the President, James Dimon of JP Morgan indicated that March is "a bit rough". Given speculations that GS and BAC would start return TARP money, the reality may not look too rosy. Some returning TARP money while the other can't is probably not good news to the banking system. This is because the others who can't return the money would means they are "lagging behind" and the banking is still in obvious evidence of bad/good bank or healthy/sick bank paradigm. Will the good ones be dragged down again by the bad ones, just like Lehman? It should be very cautious to see this situation.

In all, the bad news is actually in the economy itself.

Hedging is an insurance

We've heard numerous cases that derivatives causes disastrous results: Baring's failure, Orange County's bankruptcy, CITIC Pacific currency loss, etc. Buffet called derivatives "massive destruction weapon". Is derivative evil? We use derivative as a hedge vehicle and it is a powerful tool if it is well understood.

Hedging philosophy is, in a rarely expressed way, equivalent to insurance, in which risk is shared by other parties. Many investors either don't hedge or don't know how hedging works or find more efficient hedging vehicles.

In a simple way, when an asset holder long a position, let's call the position the underlying, the holder would automatically give expectation that the underlying would go up. However, what if the expectation is wrong? The most obvious way is to short a mirror or hedge to the underlying. The mirror can be all sorts of derivatives: futures, swaps, options, etc. Then, the long and short move in the same velocity and opposite direction so that they can cancel out each other. Apparently, hedging cost will incur along the thinking. In other words, there will be no profit and loss (P&L) out of the underlying and the hedging. That is not the purpose of the trade, which intended to make profit.

Nothing went wrong in this senario. In short, we share our expectation (price goes up in the above case) with others who bet price would drop. Same as the underlying, there must be someone out there wants to take the other side risk. When price does go up, the holder was right and can unwind the hedging position by either cancel it and extend it to a higher price level. On the contrary, if price drops, he can do similar things to exit all position such that the hedging gain can offset the underlying loss.

Obviously, no one gained anything from the underlying except the holder himself lost over his expectation but someone on the hedging side did take losss. This is an important point: the underlying may or may not take loss depending on what vehicle is used but the hedging for sure has winner and loser. Thus, we can image hedging as an insurance shared by the two participants.

We would like to reduce hedging cost as much as possible. This can be done when the hedging has leverage power. That is, $1 hedge can cover $10, for example, the underlying. That is why most derivatives provide margin power. Otherwise, they would be less attractive.

Uptick rule is considered by SEC, again

Reuters reports that The Securities and Exchange Commission said it will meet on April 8 to consider whether to propose “short sale price test rules,” which could include reinstating the so-called “uptick rule”. The S.E.C. issued a brief agenda for the meeting, but did not provide details on what it might propose. An agency spokesman said later on Friday the commission will consider whether to propose reinstating the uptick rule or a different price test.

In late July and early August, short sellers had to show they had pre-borrowed stock before making short trades in 19 financial stocks for 30 days. A temporary ban on short-selling in hundreds of companies followed, but expired in October. The ban of short selling sent the Market up temporily. But after that, the DOW touched 7500 in November.

Many experts judged the measures ineffective. Then-S.E.C. Chairman Christopher Cox later said he had some regrets over the emergency measures. At the time there were calls for reinstating the uptick rule.

Mr. Cox’s successor, Mary Schapiro, said earlier this week that the agency aimed to issue a proposal in April to restore the uptick rule. She also said the SEC will look at other ways to address short-selling in the stock market. But the S.E.C. said any proposal would likely be subject to a public comment period. That could mean a final rule is months away, Reuters said.

So it is not that fast to have an uptick rule. It looks like the Obama administration really does everything to stimulate the market.

How to stop AIG's bonus?

AIG’s outrageous (many many outrageous from everywhere) bonus ignites government’s swift responses as well as denounce from the public. The government tries to stop the bonus and get a list of the receivers. Although Summers said that it is difficult to stop the legal contracts that had been signed at the beginning of 2008, it is still possible to claw it back.

It is well known that the Wall Street firms offer lucrative contracts that guarantee key employees’ benefit regardless of their performance (even they’re fired), their company’s performance (even bankrupt), and overall economical conditions (even it were in the Great Depression). These highly paid employees are so called talents to the firm, who brought in businesses and might bring their firms to the brink of cliff. But the contracts are legal, following well whatever the laws say and well protected.

So what can we do to stop the AIG bonus? Just brainstorming here.

1. The receivers voluntarily refuse receiving the bonus. They will grilled and followed after the list releases. Thus, the idea case is to admit they wouldn’t accept that.
2. If the bonus is still out of the door under this tide (bravely), then AIG should would revise their future contracts and reduce their current pay so that the bonus is offset. This is just a damage control.
3. The last resort, the receivers should leave and let new contracts in place so that such “outrageous” contract should continue, particularly for whom received taxpayers’ money.

So, what is Buffet's favorite, preferred stock?

Buffet invested in Goldam Sach and GE with preferred stocks. But are preferred stocks?

Preferred stock tends to blur the boundary between equity and debt. In essence, preferred stock issuers are in situations of debt issues. Thus, equity is simply a facade. More important, there are taxing issues related to perferred stocks, which in some cases can create tax-deductible preferred (note that interests can be deducted but dividends can't). According to Financial Accounting Standard (FAS), preferred stocks are treated as debt. They are recorded on the balance sheet at the initial value of the net proceeds, and financial costs are accrued.

There are the following types of preferred stocks, the key differentiator is interest rate and resulting products:

Floating rate preferred stock
Convertible exchangeable preferred stock --- convert to equity, exchange to debt
Mandatory convertible preferred stock
Preferred stock issued by vehicles that invest in debt
Preferred stocks convertible to stock of another company
step-up/step-down preference shares
Catastophe preferred put structures.

We don't know how exactly the contract is constructed. We guess that may be "convertible preferred shares" or one kind of debt investment called "preferred purchase unit".

Convertible preferred shares are used in start-up or corporation reconstructions, where investors wish to have extra risk protection but also will enjoy stock price rising if the company goes well. On the issuers side, it is often used to strengthen their balance sheets without diluting existing equity shareholders. At conversion, preferred stocks could receive a conversion premium over a predefined common stock price. Stock dividend is still entitled before conversion. The type share is also called "depository shares". It will be callable at a predefined mature date.

Preferred purchase units are one kind of monthly income preferred shares (MIPS). A contract requires the debt holder to buy cumulative preferred stock issue on a date. In addition to a coupon on the debt, a holder can also receive income equivalent to x% of the purchase price. That brings in an aggregate coupon rate. The drawback is that this stock is subordinated to all senior debt of the issuer, but it may vary with contracts.

After understanding these, hmm..., not a bad deal at all for Buffet.

Obama's climate policy and climate investment

President Obama is making moves to stray away from President Bush's climate policy. First, he signed measures to encourage more feul efficient vehicles and vowed to fight with global warming. In consequence, Secretary of State Hillary Clinton sent an envoy, Todd Stern, who has experience in Kyoto Protocol, for climate change.

President Bush refused to sign the Kyoto Protocol, claiming it would slow down the US economy.

One of the climate change issues is the carbon emission. Even lacking support the US government, EU and Asian countries had started a fast growing commodity market centered in London. The commodity is carbon emission. Goldman Sach, Morgan Stanley, and now the defunct Merill all had involved in this investment. They are trading carbon emission quota among countries such as India and China, who can supply carbon credit. Then these investment banks sell the credit to developed countries so that they can emit more. The original goal was to limit carbon emission level. However, from the way how it works, it seems there is no machenism preventing emission level. The Kyoto Protocol is one the trading systems that can commercialize the carbon trade.

With the US government new climate policy in sight, it is reasonable to expect the carbon credit market pie will enlarge. But we should see there are changes on the way to better address the emission problem.

Traders buy and sell carbon and devises investment projects that generate credits for companies who need them. Others try to manage the costs of emissions from coal or natural gas plants now and in the future, when the cost of emitting could rise sharply. It is estimated that every year there are 38 billion metric tons of carbon dioxide is generated.

Carbon credits can be traded in Chicago Climate Exchange. Compared to national tradings, smaller sellers like farmers can also participate. For example, farmers who can store carbon in the soil through a number of conservation production practices can earn additional revenue through carbon trading. There are carbon meetings to determine how much the credit is. Landowners who have idle land can benefit from such model in the future.

About BoA's CEO talk

Ken Lewis, the CEO of Bank of America, commented on his company's 2009 performance. This is what he said, "Bank of America should generate more than $100 billion in revenue this year, and close to $50 billion in pre-tax, pre-provision earnings". This comment helped to provide the best performance since last November.

On the other hand, Mr. Lewis's was challenged by a major BoA share holder, Finger Interests Ltd, who urged to unseat Mr. Lewis to be the Chairman of the board. Key accuses from www.bacProxyVote.com are

- The price paid for Merrill Lynch was a 60% premium over its last closing price, a premium that was unnecessary. In connection with the merger, Bank of America agreed to issue 1.4 billion new shares, which even before the unexpected losses was dilutive to earnings per share for Bank of America common stockholders.

- Despite threatening to renegotiate or terminate the merger, BAC's CEO instead agreed to issue an additional $24 billion of preferred stock at a coupon of 8% to the government for capital and debt guarantees. The preferred dividend is payable is in after-tax dollars, and commits Bank of America to over $1.6 billion in annual payments. The government capital injections are senior to BAC common shareholders, and will therefore further dilute common shareholder earnings.

Combining these numbers, what can we (fore)tell how BoA is doing? Here is how they did in the past three years:


2008 2007 2006
Revenue ($ mil.) 124,132.0 124,321.0 117,017.0
Gross Profit ($ mil.) 108,882.0 106,228.0 102,537.0
Operating Income ($ mil.) 29,502.0 55,702.0 61,487.0
Total Net Income ($ mil.) 4,008.0 14,982.0 21,133.0
Diluted EPS (Net Income) 0.55 3.30 4.59
Gross Profit Margin 87.7% 85.4% 87.6%

BoA's gross profit margin is quite stable excluding Merill's book in the past 3 years. Revenue $100B in 2009 means about 20% down from 2008 with Merill is already on BoA's book. Merill's 2008 Revenue is $54B with gross profit of $52B and operating income $-12.5B. Both of them have very high gross profit margin. So Mr. Lewis's prediction of 50% gross profit margin seems solid. And $100B revenue is tractable too since BoA's own gross can already surpassed it easily.

The key question is how the diluted EPS do? Given the government's stake in BoA, the diluted EPS is expected further dropped from $0.55/share in 2008(the dividend to the government is after tax money, according to the site).

Go find dictator-like investments, not democratic ones

It is certainly arguable to have such a title. Dictator-like investments? What does that mean? This comes from some fund managers who are strong proponents to ETF's.

Policies made by dictators are the most efficiently applied ones. When the dictators are "good" and "smart" ones, e.g., kings and emperors, in history, actually can facilitate their powers efficiently. In a sense, all CEO's are dictators in modern corporations. On the other hand, democratic governments usually can utilize collective intelligence and wisdom to find right paths. It is less efficient but more reliable and compounding more brainpower while dictators rely mainly on their own.

One analogy example is how the stimulus plan has been voted in the US. It had to go over the Senate, the House, and the White house. Everyone in every institute has their own stand. It is certainly a typical democratic system, even everyone agreed that the bill should be passed quickly. It finally passed with uncertainty and doubts. On the contrary, the Chinese stimulus plan was announced and in place in almost no time. This doesn't imply the Chinese government is a dicator government but you get the idea. It is much efficient the US counterpart. In terms of results, the same, no one can predict their success. So one wins time and the other lose a chance. Dictatorship does good here.

When coming to investments, our philosophy is quite similar: we want to find investments like good dictators that can make good returns instead of investing democratic-like ETF's. ETF's are consist of a basket of equities. Among them there are strong and relative weak ones. Only the strong ones contribute nicely. Instead of collecting all in a batch, we intend to be more concentrated so more efficient. Diversification can still be done at individual investment level.

Many might have come to the same conclusion. For them, it is a question of how to pick the right ones? That comes to the dictator vs. democracy metaphor at the beginning. Go find the dictator (the management) can manage well. It is really about people who run the company, not what the company itself.

That explains the title.

Facts about Daylight Saving Time

The daylight saving time begins at 2:00am on the second Sunday in March and changes back to standard time on the first Sunday in November. That means, in spring, clock jumps from 1:59am to 3:00am and falls back from 1:59am to 1:00am. So we miss one hour and gain one hour, respectively. One funny thing is that no one was born at 2:00am on the second Sunday in March in the US.

Some interesting facts about the daylight saving time.

1. EU also has daylight saving time, which begins and ends at 1:00am GMT in the last Sunday in March and the last Sunday in October. All time zones in EU change at the same moment.

2. Daylight saving time has unintended health consequences because physical clock movement interfere with the body's internal clock, so called circadian rhythm uses daylight to stay in tune with environment. Our body clock remains unadjusted. Studies found that in spring, the body clock is more in tuned with the physical clock. Such clock changes can cause restlessness and sleep disruption.

3. Not all US states observe daylight saving time. Hawaii, American Samoa, Guam, Puerto Rico, the Virgin Islands, the Commonwealth of Northern Mariana Islands, and Arizona don't have daylight saving time. The Navajo Nation participates in the Daylight Saving Time policy, even in Arizona, due to its large size and location in three states.

4. To keep to their published timetables, trains cannot leave a station before the scheduled time. So, when the clocks fall back one hour in October, all Amtrak trains in the U.S. that are running on time stop at 2:00 a.m. and wait one hour before resuming. Overnight passengers are often surprised to find their train at a dead stop and their travel time an hour longer than expected. At the spring Daylight Saving Time change, trains instantaneously become an hour behind schedule at 2:00 a.m., but they just keep going and do their best to make up the time.

5. An formal reason of having daylight saving time is to save energy. Reports in 1975 by the Department of Transportation showed that there was about 1% electricity reduction after using DST. But surveys said people like it for other reasons. Mainly, it is because they like to have longer evening and can do more.

6. Efficiency of DST has been debated for a long time to see how clock shifting can actually save energy. People behavioral pattern would also change along with DST. Some studies found that DST actually causes more electricity in 2005.

7. The idea of daylight saving was first conceived by Benjamin Franklin during his sojourn as an American delegate in Paris in 1784, in an essay, "An Economical Project".

8. Daylight Saving Time has been used in the U.S. and in many European countries since World War I. At that time, in an effort to conserve fuel needed to produce electric power, Germany and Austria took time by the forelock, and began saving daylight at 11:00 p.m. on April 30, 1916, by advancing the hands of the clock one hour until the following October. Other countries immediately adopted this 1916 action: Belgium, Denmark, France, Italy, Luxembourg, Netherlands, Norway, Portugal, Sweden, Turkey, and Tasmania. Nova Scotia and Manitoba adopted it as well, with Britain following suit three weeks later, on May 21, 1916. In 1917, Australia and Newfoundland began saving daylight.

9. The US had an inconsistent adoption of DST. In 1960s, there was no law stating clearly when to change the clocks. The law was not passed until 1986.

10. Equatorial and tropical countries (lower latitudes) generally do not observe Daylight Saving Time. Since the daylight hours are similar during every season, there is no advantage to moving clocks forward during the summer. China had observed summer Daylight Saving Time from 1986 through 1991; they do not observe DST now.

It is just a regular hearing

A House Financial Services subcomittee has a March 12 hearing on mark-to-market rules. This news has been welcome and may have too high expectations on the Market movement. Yes, indeed if it were passed, all banks would immediately enrich or inflate themselves. All companies are required by the SEC to file their values by "mark", which means the assets on its books based on the price if they were sold today. This is the mark-to-market rule.

The practice of mark-to-market spread to big banks and companies in 1980s. And in 1990s the rule had caused accounting scandals. Enron is the representative case. Mark-to-market is also used by IRS for taxation purpose.

In this downturn, mark-to-market has been accuse of the main cause because many companies' asset has vanished quickly on their balance sheets. Out of them, the mortgage back assets became a hot water bed. So their mark-to-market value turns into fire sales if they were sold today. Citigroup is the representative out of this case.

Banks argue that they are actually running profitable and shouldn't be judged by the mark-to-market value since they are not in danger of selling themself now. But the existence of the rule is more than evaluate a company's value. It gives an insight about the company's health. Without it, banks and companies can easily inflate themself by arbitrary multipliers. We need more regulations rather than relaxation after careless housing bubbles. So it is just a pose rather than any solid action. Even Rep. Paul Kanjorski said this, "Illiquid markets have resulted in great difficulty in valuing sizable assets. Some have therefore complained about fair value accounting and sought to eliminate it. While companies need stability, investors still need accurate information. We therefore cannot allow for fantasy accounting that wishes away bad assets by merely concealing them.”

So don't expect too much. If there is a rally, that is a sucker's rally.

Energy policy: US vs. China

The Obama administration (more or less including the Bush administration) proposed renewable energy policy in the stimulus plan. The goal is to open a new market and generate more jobs. An implicit target is to reduce oil dependency. This was even apprant in the Bush administration's thinking.

On the other hand, the Chinese government is pushing another round of oil policy around the world. The leaders toured major oil producers aroun the globe in the beginning of 2009: Latin American, Saudi Arabia, Africa, and a supply agreement signed with the Russian government. New oil reservation tank projects were also announced so that the goal is to have 90-day reservation, which is qualified for OECD (Organisation for Economic Co-operation and Development countries). There aren't too many countries in the world can claim they are OECD.
At the end of the article there is a list according to www.oecd.org for completeness.

Thus, the Chinese government will actually increase their dependency on oil while the US government tries to reduce it. That is a long way to overhaul the oil dependency in the US even after years of R&D. At the same time, the Chinese policy will have more direct impact on the oil price when they're building up reservations. No one builds reservation at $140/barrel but obviously at much lower price. They have announced that they had accumulated oil at lower price but they apprantly need more from oil producers' tour.

Based on all these, we can say now the oil price has bottom and start upward.

OECD country list:
AUSTRALIA: 7 June 1971
AUSTRIA: 29 September 1961
BELGIUM: 13 September 1961
CANADA: 10 April 1961
CZECH REPUBLIC: 21 December 1995
DENMARK: 30 May 1961
FINLAND: 28 January 1969
FRANCE: 7 August 1961
GERMANY: 27 September 1961
GREECE: 27 September 1961
HUNGARY: 7 May 1996
ICELAND: 5 June 1961
IRELAND: 17 August 1961
ITALY: 29 March 1962
JAPAN: 28 April 1964
KOREA: 12 December 1996
LUXEMBOURG: 7 December 1961
MEXICO: 18 May 1994
NETHERLANDS: 13 November 1961
NEW ZEALAND: 29 May 1973
NORWAY: 4 July 1961
POLAND: 22 November 1996
PORTUGAL: 4 August 1961
SLOVAK REPUBLIC: 14 December 2000
SPAIN: 3 August 1961
SWEDEN: 28 September 1961
SWITZERLAND: 28 September 1961
TURKEY: 2 August 1961
UNITED KINGDOM: 2 May 1961
UNITED STATES: 12 April 1961

Nearing bottom, but not out

Some economical data shows the bottom is nearing.

1. The Jan 2009 consumer credit showed the first (meager) rise of 0.8% compared to previous month. This data has been down 3 months in a row by large margin, about -3.2% each month.

2. China's manufacturing index rose too.

3. After unemployment rate hits 8.1%, the room to have more layoffs has become harder.

4. On the market side, short sellers began short coverage 'cause short risk becomes greater as the market indexes surpassed 26-year lows. Remember shorts are dangerous even the markets are side-running.

5. Leading economical bodies, for example, the Silicon Valley region, have been experiencing large scale layoffs that brought a sluggish growth and outflux to other less expensive areas. Such outflow further slows downtrend momentum.

But the bottom would last long even it were hitting it now. Less spending and long-lasting stimulus plan as well as shaky banking system all take times to re-start the economy again. The Great Depression took 5 years (1929-1934) to somehow recovered. This ongoing one has already taken 2 years (starting from the end of 2007), it may take another 2 years to back to track. I don't expect this would last longer that the Great Depression because we have learned lessons from it and the much larger scale forces the world to react together.

Follow where money goes

The Obama adminstration is pushing a huge flow of cash to some previously less shining spots, such as the Department of Forest. The new influx, however, creates troubles for management because they have not (fore)seen such influx and prepare well on spending. As President Obama said, the stimulus plan is about spending, if not, what do you think what it is (he said this in a mocking way). What businesses need to do is to catch these money and amplify it.

The stimulus plan has two big categories: tax reduction and new project spendings. There is not much to be explored in tax reduction for business, which includes unemployment tax benefit. On the other hand, new project spendings are quite attractive. Here is a breakdown:

Energy, including $32 billion to transform the U.S. energy grid to make it more efficient; $16 billion to repair public housing and make it more energy efficient; and $6 billion to weatherize low-income homes;
Science and technology, including $10 billion for new scientific facilities and $6 billion to improve broadband Internet access in rural areas;
Infrastructure, including $30 billion for highways; $31 billion to modernize federal buildings and other public infrastructure; $19 billion for clean water, flood control, and other environmental investments; and $10 billion to improve public transit and rail infrastructure;
Education, including $41 billion for local school districts, $79 billion in outlays to states to prevent educational service cutbacks; $15.6 billion to broaden the federal Pell Grant program, which gives need-based grants to fund education; and $6 billion to modernize higher education programs;
Health care, including $87 billion for Medicaid; $20 billion to improve health information technology; and around $4 billion to improve preventative care.

What governmental departments will be in heading roles? DOE, FCC, DOT, and education as well as health care division. These goverment contracts are not ignored in such a hard time that every business leader try to secure any meaningful incomings.

It is really silly to bypass these given opportunities, particular for those who reject changes but still claim they are not blind folded. It is not rare though to see these people around.

HSBC: what would happen in Asia?

HSBC Holding announced that they would seek $17 share issuance and stop loan and mortgage applications in the US. It was widely speculated that HSBC would seek more capital but the removal of loan and mortgage is somehow a surprise.



HSBC started in Hongkong and made handsome profit during the late 90s and early 00s in this area even though they were not as profitable in other regions as in Asia, largely due to China's explosive growth. Rough competitiveness alslo plays an important role when gaming in other more advanced markets, e.g., US and EU. So the roadmap of HSBC is use Asian's gain to offset other losses.



In all, they can proudly claim that they don't need goverment capital in 2008-2009 financial crisis. But this time, HSBC seems miss this play by a wide margin because US's loss took a big toll in their overall performance while Asian is really slowing down in exporting goods. When there is no immediate help from the Asian market, HSBC suffers as their peers.



So what can we digest out of HSBC's move? Two folds, I think. First, Asia is really in trouble while the growth is losing steam. Such slow down can't be immediately return to norm due to slowed export. If HSBC suffers, how about others with heavy US and EU investments? There is only one answer, down. These firms should be avoided. Second, those banks and financial firms without US/EU investments are supposed to sustain less damage, although they're slowed down. Headwind is for all and it is much better than something dragging your down further. These firms can be still very valuable investments.

Buffet is an investor, not a trader

Buffet's annual letter was out yesterday. All kinds of bad news and mistakes you had made in the past year. The letter is widely interpreted as an excuse for bad performance last year because the most prominent investor also had the worst one in his 44-year span. In the mean while, the Buffet auro is also dimmed a bit 'cause his portfolio is not bullet-proof either. Many traders, fund managers, and institutional investors presenting online or iTune commented that Buffet's picks are not all that impressive.

Is that so?

Buffet's power investment ways are margin of safety, find good businesses to invest, and compound of return. Even he admitted that he had done dumb things, these principles are still in place.

For margin of safety, all investments in 2008 are preferred stocks or allow him to retreat if not going well. At the same time, he regards GE, GS, WFC, JNJ and the like are good businesses because they can compound returns so that he can buy more. This makes perfect sense along his thinking. Put it in another way, if a real estate owner can consistently find tenants to lease his house with good rents so that he can have decent income flow out of it. Does he care how much his house cost? Remember that he is not going to sell the house but interested in the fixed income generated out of it. If he has tons of houses so that the income flow is significant, he just loves the way he feels comfortable for some 40 years.

The traders alike just don't have the view Buffet has on investment because of the capital disparity and understanding of investment.