HAPPY NEW YEAR

WISH ALL MY BLOG READERS A PROSPEROUS, HEALTHY, AND HAPPY 2009!

I will return to the blog on January 4, 2009.

CASH IS KING!

中國應否建立航母艦隊？ (from HKEJ)

http://www.hkej.com/template/forum/php/forum_details.php?blog_posts_id=7305#msg_86042

克勞茨維茲說過：戰爭是政治的延續。

這不只是資金問題，而是綜合國策的問題。說到底，中國現時是要做全球的大阿哥，區域大阿哥，區域裡其中一個有決定性影響力的國家，還是純粹自保的國家。

對於現時的中國，自保基本已不是問題。其縱合實力已經肯定是站在"區域裡其中一個有決定性影響力的國家"，並向著"區域大阿哥"邁進。但是要做全球的大阿哥，時機還遠遠未到。因此維護全球秩序和安全這等重擔，還是讓給老美好了。老俄經常想與老美爭，那就更正中下懷：看風使里；利用兩者矛盾，要求爭大環球影響力是虛，鎖緊地區性影響力為實。

這就要求中國的武力要同時能做到域投射和對世界警察(老美)及世界流氓(老俄+伊期蘭)在中國投射區內的反制能力。簡單點說，兩條腿走路。但是其中以反制力為主為實，投射力則是"站在反制力的肩上"；蓋因現時中國還是不宜和上述力量硬碰。只要能減弱他們的在區域內的投射力，"西瓜靠大邊"再加上"山高皇帝遠"，自然能增長中國的投射力。只需要在此基礎上稍稍加點發展於投射力兵種上，自然可以四兩撥千斤地達到目的。

導彈和潛艇主要用作區域反制(和勢力均衡)之用，而航母最重要的功能是權力投射和保護商道。因此，中國以導彈和潛艇為主，加上一定的陸基航空力量作為其區域反制的主要手段，並將這些武器系統(的次級品)的概念作為一個第三國反制思維"出口"，一方面增加收入，另一方面拆美國牆角甚至作為暗戰時交易的籌碼，以鎖緊區域影響力。同時中國慢速發展航母羣，以此作宣傳和熀子，並吸收海權國家維護商道和投射的經驗，與反制力結合，以進一步加強區域投射力，達到成為區域龍頭的目標。 12月19日 10:47

......策略之用有虛有實方能靈活。再者，中國的發展已經從陸地開展到海上去。中國的海域資源豐富，但是以往中國因實力和觀念所限基本上等於放棄海域。隨著中國的高速增長，海域的資源，商道的保護都變得重要。導彈和潛艇可以在戰時打擊對手，但是在和平時宣示主權和投射影響力卻是無力的。在這種低度衝突的環境下，數支實際上經常遊弋的護航艦隊再加上一支航母羣的支援是可以起到作用的。這不單止對對方的艦隊，甚至對私掠船亦可以有震懾作用。 12月19日 11:48

About Newcrest, the Gold Mining Company...

Chan David Brother Law, sorry that maybe I cause you lose money on your put bet. Wish that you remembered to limit your bet.

One thing, I have just read Newcrest in more details. Although it claimed that it has cleared its hedgebook, it still has a gold put contract in effect delivering 500,000 ounces/year for 4.5 year with strike at AUD800/ounce. In a sense it protects its downside risk. But with its huge gold reserve (about 55m ounce) and a large capacity (2m ounce/year for now), its remaining stock of gold will still be affected by the fluctuation of gold price. By such observation, and that gold price will drop back due to the strong performance on bond market as well as Newcrest's price has hit recent high, brother Law may still hold for a while (maybe to next year) if the price of your contract has not dropped below your stop-loss point. 12月19日 14:13

Chan David Lets play some fantasy again, Brother Law.

Some financial data of Newcrest:ROE = 6.481%
P/E at current price = 102
Financial Leverage = approx. 1.5

Now first method to play with.

Given that ROE is 6.481%, if we assume compound interest growth (all ROE re-invested), then it will take about 11 years to break-even the initial invesmtent (double the value of the initial investment). Meanwhile, the actual P/E is 102. For the current market price to be rationalized, the EPS must grow by 102/11 = 9.27 times. Now as it has a financial leverage of 1.5, the actual increase on profit is 9.27/1.5 = 6.18 times. Assume a back-to-back rise between earnings and gold price, it means gold price has to grow by 6.18 times from its current settlement price 975AUD/ounce to 6027AUD/ounce (or 670USD/ounce to 4143USD/ounce) . Even if we assume that it grows steadily in another 11 years (break-even period of the company's investment), it still means a consecutive 11 years growth compounded at 18% annually. Can it be real?

Lets take another scenario. This time we do not use the reverse of ROE to compute the "reasonable PE". By practice usually a gold mine will have 30-50 years right of mining, and the half-life (usually the break-even period) is around 18-20th year. Now lets take 20 as the reasonable P/E and believe that a lost of value of USD will be 5%/year and an appreciation of gold value will be 15%/year, together a total of appreciation of value of 20%/year. Now by usual practise we made a five year forecast to calculate the value of earnings. By 5 year, the future value is 2.49 times of the current value.



Assume we all believe such bull market and has already rushed to the market to buy the stocks and drive it high. At most the reasonable price (at par to the future value) is 20x2.49 = 49.78 times of P/E. Now its P/E 102 times.From the above estimation, plus that actually the bond market is still strong and the confidence on fiat money has not completely lost yet, the current price of Newcrest is more like a rebound after over-sold. Combining with the technical analysis, an adjustment has a great chance to come.Just my 2 cents...my wild thought... 12月19日 15:48

My Answers to about the Oil Price Drop to 38USD in HKEJ forum

For details, please refer to the following link:

http://www.hkej.com/template/forum/php/forum_details.php?blog_posts_id=7284

Chan David Lets set aside the speculators influence on the oil price first. How about the actual users like power plants, vehicles, and air and sea freight?While at the earlier half of 2008 the transportation related companies still madly hedge their price risk by building up long position, the tsunami and the dim future has not only largely damaged their hedging (as they bought expensive oil) but also deeply affected their demand on the future. Combined together, the actual users have no interest on buying oil at all - afterall, they might have already stored a huge pile of expensive oil that may not be used immediately. Although with modern storage technique oil is not perishable in the short-term, the storage still takes fee as well as physical space. With no more spaces available and the expected huge reduction on usage, plus a tight cash flow, they may even want to sell their oil if possible even at a substantial realized loss. Therefore, it is not surprising that the oil futures has dropped like mad despite the "efforts" done by OPEC. 12月19日 12:05


Chan David Lady 海靈心: I am afraid you overlook the factor due to expectation. Oil demand and supply, as well as economic cycle, are not 100% overlap. Before the hard-core really hits the market, the demand on oil was so insatible that the supply could not match (be it physical or peculinar) and drove the future price up. Those companies would really like to buy future oil instead of spot; otherwise, 1 month later the spot price at that time would even be higher than the exercise price of the future contract. Put it in this way, either you buy the oil at future market at premium, or you can't even buy the oil at that time, and your aircraft will be a sitting duck.Now, holding a lot of oil inventory at hand, and a bad future on the business, all they can do is to sell the cheap oil, if possible, in order to get cash, or their abilities to pay back debt will be greatly affected...so much so, it may even affect their abilities to deal with operating expenses. 12月19日 12:38

My Answers to VicktorCapitalist post about Gold

Please refer to the following post in HKEJ forum:

http://www.hkej.com/template/forum/php/forum_details.php?blog_posts_id=7250

My parts:

Chan David One thing I do not agree is about the linkage between other commodities and gold. Each commodity has one's own characteristics, market structures, and cycle. They are not necessary directly related to the conjugate part of the gold-USD relationship. For example, iron ore market is basically an oligopoly, and its price can be manipulated/controlled by the mutual agreement among CVRD, Rio Tintio and BHP Billiton. And due to the vast amount for transportation by bulk ships, these big 3 also exert significant influence on freight price (and hence BDI). Yet, whether or not these 3 companies will simply be affected by a gold rush is subject to further queries. 12月18日 13:49

Chan David Another part that is subjected to further discussion is about the collapse of US treasuries. As pointed out by Mr. Lin in his HKEJ column today, US gov't and FED are the biggest buyers/holders of US treasuries. Since they are also the sole suppliers in the primary market, they have certain controls over the demand and supplies and hence the price of US treasuries. Unless USA is no longer the hegemony but a lame duck with its scale of economy downsized more than 1/2, it is hard to find a competitor of equivalent strength and importance. Setting aside the fluctuation, even at big scale, of USD price, USD is still the ultimate currency. Other countries/investors bet not just on the inflation rate of USD but also on the strength (and hence abilities to honor the contracts) of USA. Up till now a substitute with USA's size and power has still not emerged. Thus, inflation or not is not the only factor, or not even the most important factor that affects USD's value. 12月18日 14:04

Chan David Brother 肥嘉: Rally is different from a continuous trend. The current rally can be of short-term technical rebound. At least, from the actions taken by mining companies as well as the performance on bulk freight, the return of ore-related commodities is nowhere near. 12月18日 14:24

Chan David Brother 肥嘉: as I said already: At least, from the actions taken by mining companies as well as the performance on bulk freight, the return of ore-related commodities is nowhere near. 12月18日 14:48


Chan David Brother Law: from the way the money move, particularly treasuries of OECD countries all have their yields dropping, the investors for the moment still choose fiat money as the currencies rather than gold. Gold may act as a security in their portfolio. If that is the case, gold price may fluctuate only at a narrow trend. 12月18日 21:46

Another Bubble?

I have the feeling that FED is trying to create the bond market bubble to re-inflate the market. They wish that bond market and government spending can temporarily take over the role of equity market and bank loans respectively. Meanwhile, FED will deal banks with carrot and stick: "easy money" through buying assets and discount window is the carrot; tightened regulations is the stick. With money flooding, banks can survive under the current accounting principles and the banking regulations. Yet, without viable projects and bright expectations, in addition to the competition from the government, banks are reluctant to lend money. Afterall, if government takes this role, why do banks bother to risk of their own money at a highly uncertain market? Such attitude will dampen the recovery speed.

Back to the topic: bond market bubble. Can it be the savior? I am afraid not. Bond market will only alienate the recovery, not enhance it.

Now lets assume that FED measures work and bond market is hotter than the equity market. With insufficient participants in the equity market, it is no longer efficient and delivers no clear estimation through stock prices.

The way bond works, from an investor point of view, is a bet on the company's survival, not development. Bond price comes from the discounted cash flow of the principal plus the coupons. The only "derivative value" of bond is the coupons. Since coupon's nominal value is fixed, it does not relate to company's performance. It can only tell you the company has the ability to repay the debt but reflect nothing on its potential.

The present value of the coupon is only the nominal value divided by the current cost of capital. At the normal "healthy inflation" period, the maximum present value of the coupon is only at par when the market is estimated as risk-free. The higher the risk, the higher is the discount rate and the lower is the coupon present value. While in free market, the cost of capital is "negotiated at the best knowledge"; the benchmark, FED target rate, is manipulated as a tool for controlling economy. During a economic downturn, the risk is high and hence the cost of capital is high. But in order to "stimulate" the economy, FED moves the target rate low, at the expenses of tax-payer. On the other hand, during the economic boom, the risk is low and hence the cost of capital is low. But in order to "cool down" the economy to prevent inflation, FED moves the target rate high, at the expenses of debt-payer. The resulting effect is that while the actual risk of bankrupcy of company is high, the coupon has a higher value due to a lower FED rate for stimulation, and vice versa. In other words, investors are paid a lower risk-adjusted rate of return during a riskier period, and a higher risk-adjusted rate of return during a safer period. If we alter the view to corporate, the worser the corporate and the riskier the period, the higher is the present value of their coupons, and vice versa. All in all, it encourages riskier companies to issue bonds at riskier period and investors to buy riskier bonds at riskier period. What would happen when one day those companies really bankrupt?

75pts Cut - Cocaine or Placebo?

FED made the historical cut last night and drove DJI, S&P500, and NASDAQ up by 4.20%, 5.14% and 5.41% respectively.

Nevertheless, anyone who had paid attention on the T-bill yields and FED funds rate for the recent 3 weeks would not be surprised by the cut for the de-facto FED rate had been between 0.12% and the lowest -0.012%.

LIBOR have also been driven down to 88pts (3month) and 185pts (6month) respectively. 3month T-bill yield rate is 6pts. TED hence has narrowed down to 2-digit: a difference of 82pts.

Long-term finance rates have dropped but the risk premium has remained outstanding by far: 516pts (5 year) and 592pts (10 year) respectively. It echoes by the corporate bond market in which investment grade and junk grade bond yield rate are 7.22% and 22.49% respectively. Comparing with the figures with last month, the 75pts cut have not exerted the same effects on corporate bond markets. It means the worries on the survival of corporates have not passed yet.Such lack of confidence on corporate survival, convoluted with the competition by treasuries markets, makes the last night rally as prescribing a dying patient cocaine as placebo. Had the economic conditions not changed and FED continued to supply money through manipulating bond price expectation, the stock market eventually will subject to a big adjustment after the rally.