April's talk on Chinese economy (All rights reserved)

It’s been two days in Shanghai. I visited Renmin Square, Nanjing Road, and the Bund Center in Shanghai and West Lake in Hang Zhou. So far, I have chatted with cab drivers, shopping center salespeople, and shoppers and gathered some really interesting facts.

1.       1. Real Estate:
Both cities’ real estates are booming. The housing prices in city centers are around 40,000 to 50,000 RMB per square meter, which is equivalent to 670 to 835 USD per square foot (40,000/6.65/9 to 7,500/6.65/9). That is, a 900 square foot co-op in any skyrocket apartment building is around 603,000 to 750,000 USD. Notice it is co-op, not condo or house. This sounds ridiculous to me because the median income is around 120,000 to 150,000 RMB, which is about 25,000 USD. That being said, a typical resident needs to work 28 years for an apartment (700,000/25,000). Housing prices half an hour away from the city centers are about 3/4^th as much, which does not make a huge difference. What is more disappointing is that most people who are purchasing houses are taking loan size of 50-70% at an interest rate higher than Chinese inflation rate of 5.9% as reported by Chinese government. This allows the 70% mortgage financed homeowners to be underwater if housing prices decline by less than 25% depending on their credit. Although the government has imposed 50% minimum for house financing last month, some house buyers are taking private loans from relatives and friends to pay the down payment. Therefore, the government’s action to slowdown economic growth might not be as effective as it seems.
2.       2. Level of consumer spending:
It comes as a shock to me how much more expensive the same items are in China than in U.S. and how many people are buying these items just because they are branded. For example, Zara was surprisingly popular in both cities. Jeans, long-sleeve sweatshirts, and sweaters made of cotton and polyesters are selling at 299 RMB or 45 USD, compared to similar items selling at around 25 to 35 USD in Boston and New York City.  Moreover, a pair of typical* Nine West boots is selling at around 2200 RMB or 340 USD; a typical Coach purse is selling at 4500 RMB or 670 USD; Lamcome lip gross at 350 RMB or 53 USD; a Vero Moda leather jacket is selling for 2300 RMB or 345 USD.
These prices partially reflect Chinese taxation on “imported goods” that all have prints “made in China,” and partially reflect the level of consumer spending. On the other hand, in Shanghai, every two out of ten girls have a pair of Ugg boots on, every one out of fifteen girls have a Louis Vuitton purse, and every seven out of ten girls have branded purses, shoes, or coats.
Louis Vuitton and Gucci salespeople claim that daily sales volumes are “very impressive.” Some stores claim that the brands they are carrying are U.S based brands, such as E-Land and Plory, which are unheard of in U.S, but the items are just as dear.
It’s apparent that Chinese shopping pattern is similar to that of South Korea, pursuing brands blindly just for the sake of competing with friends to see who has got the most popular item.
3.       3. Where is the wealth from?
A lot of shoppers are feeling wealthy because of the booming real estate which brought them immediately realized wealth when the real estate developers generously compensate old house owners for kicking them out of their old homes and building taller buildings at the same spots. Some shoppers are feeling wealthy because they are upstarts, who used to earn fixed salaries working as government officers for running state-owned businesses, and suddenly became wealthy when these businesses are privatized and they became the business owners by using the assets of the businesses to take loans and leverage buyout the businesses. Since the businesses are originally state-owned, a lot of them are monopolies or local monopolies. Therefore, the profitability and economics of scale is unquestionable. In other words, the business owners’ wealth all came so easily that they wouldn’t feel as hurt when the wealth fades away as they are buying Omega watches for their secretaries and secondary significant others.

*”Typical” means median.

Boarding Now!

I'm boarding now to go to San Francisco, transferring to another flight to go to Shanghai. International check-in took me a total of three hours from 4am to 7am, allowing me to finish four interviews of Jack Schwager's in the New Market Wizards. And now, I finally got a chance to sit down and write something before my flight leaves at 7:40am.

I have left a message in my phone telling my traveling schedule. Hopefully, that'll help people who are trying to reach me.

One more note before we get to market updates. MY ADVISOR IS VERY PLEASED WITH MY IDEAS IN MY STATISTICS RESEARCH!!! That made my day yesterday, but I had been smiling oddly since my meeting with him yesterday at noon, which was probably too much.

Now, quick recap on market update >>>
So Moody's is still signaling that it is considering cutting Portugal's rating, but the market appears to be tired of the European debt problems, so I don't see anything disastrous happening.
The ten-year yield is down but the market is up, which shows a mixed feeling toward the end of the year. We might see some side-way walks, but in the ten years before 2011, I'm net optimistic, more because of how crammed and crowded the department stores are both in New York City and Boston.

Just a side note, my portfolio has been doing well, with HIG, GS, and CSCO climbing up with the market.

Weird Weird Weird

Rising mortgage rates somehow is coupling with higher home sales nowadays, possibly as a result of declining home prices for the quarter ending in September. Seeing poor underwater homeowners, the sympathetic Freddie Mac again asks the government to forgive the debt. I can totally imagine Obama to be in headache, because on one hand, by lowering rates to allow refinance he has already pumped billions of dollars to U.S citizens, and on the other hand, this hole in which he's pumping money in just doesn't seem to have an end. I guess he finally realized it is endless so is currently switching his focus to job creation, which is definitely wiser. An ancient Chinese philosopher has once said, "fulfill the urgent needs; not save the poor." The wisdom lays in the fact that regardless how much you are giving to a street beggar, he won't stop begging because you gave him money, and by giving him money, you only make him want to beg more, which is an endless hole to fill in with your money.

Just out of curiosity, I ran an regression of GDP on housing, not adjusting for omitted variable bias or what not that you usually find in an Econometrics textbook from 1991 to 2009. I found that the beta is approximately 0.72, which scared the crap out of me. That is just saying that it is probably that 72% wealth is built in the housing properties in U.S. That's just too damn high.

Taxes, Treasuries, and the Equity Market

A couple things happened in the past two days.

Obama has agreed (not signed yet though) to the proposal that as a compromise between Republican and Democrat, we would leave the Bush Tax Cuts in place for EVERYONE and extending the payments of unemployment benefits.  In addition, it looks like the proposal puts the estate tax rate at 35% with $5 million exclusion, as well as a provision for a 2% reduction in social security taxes. So now, both parties are happy and content but it is apparent both are kicking the iron down the road for the other to solve budget deficit problem. Instead of keeping both parties achieving “success” in the deal, if both have agreed to step backward to lift the tax cuts and cease extending unemployment benefits, it might be a much better world later.

On the flip side, the 10-year Treasury smashed above 3% pushing high the 10-year mortgage rates, allowing the underwater home owners to scuba dive a little further. As we know, it is rather difficult for equity market to rally with the yields, so we have to see how the s&p reacts in the days to come.

The Silver

The video I'm sharing will communicate itself about the currency manipulation.

http://www.youtube.com/watch?v=Gl47z2g2EvI&feature=player_embedded

Market Updates

North Korea attacked South Korea today, killing one soldier and injuring 14. I’m sure the trading floor is full of the frenzy of salesman/woman talking to his/her clients on phone about how the market sentiment would be low as a result of the political unstability in Korea, and it might be a good time to take a ride on Treasury or gold with the money the institutional investors have after dumping their euros yesterday.

Shanghai Composite, Shenzhen Composite, and Hand Seng seem to not care nearly as much about what is going on with the attacks happening on the peninsula. U.S market players usually say the Asia market players are not as sophisticated, which might just be a euphemism in saying that the Asian sales people are not as good at luring their clients into thinking the way they are thinking and the market is not as predictable. Well, at least the market did sink a little when the Chinese government requires LTV ratio to max out at 50% last week.

In my personal portfolio, outlooks are not completely optimistic given that my exposure in the financial industry is unhedged and Irish problem remains unsolved. But I dumped all my NYT shares today at $9.10 per share, after a 6% surge in gain with the unusual volume. Now, I have an outstanding limit order on UBS at $15.5 per share, just to lower my basis in exposure to financial services. And who knows if that wouldn't be a good thing?

Some random things: Ireland, Traders@MIT, and Horseback Riding

Over the weekend, Ireland approached EU/IMF for a bailout, leaving European market slipping and erasing last Friday’s gain for U.S., especially for the financial industry, including the GS shares I have in my Roth IRA. This is the second episode in recent history for a Eurozone country to seek aid; Greece is the predecessor, also triggering downgrading of the sovereign bond and the creditworthiness of European countries last year. Of course aid would arrive just as it was for Greece, preventing possible outcry that might hold off the value of Euros, but the Irish government is rather reluctant to let go control of its monetary and fiscal policies, especially its 12.5% corporate tax rate, which gives Ireland a leg up over its neighbors in terms of luring economic activities. It makes me wonder who is going bailout us when the treasury is insolvent. It’s almost universally agreed that our deficit will be 5x to 7x of GDP by 50 years later with the ubiquitous exponential projections. It wouldn’t be too bold to say that we are “too big not to fail” in a sense that no one would be able to provide enough assistance to us to actually bail us out. But if we failed, what would happen to the worldwide economy given that the measures of currencies and credits of other countries and corporate entities would be in a disaster because there is nothing else to be compared to?  To me, it seems like we are running on a crazy Ponzi Scheme in which we know we are going to fail sooner or later anyways that worsening it a little bit more by cutting taxes wouldn’t be too bad after all. However, although the congress has reached historical high in Republican ratio, it is unlikely that they will revert back to the Bush tax cuts.

Fortunately, the depressing market didn’t alter my personal life much. I had a great time this weekend winning one of the cases in the Traders@MIT competition and going on a trail for horseback riding in Randolph, MA.

Tong tagged John and me as “the couple team” when we applied as a team to Traders@MIT Intercollegiate Trading Competition over a month ago, quite embarrassing. We built models and discussed all possibilities we could think of for preparation, but almost all trading activities were momentum-driven since the stock prices were sliding down to South Pole after news “economic statistics are higher than expected” was displayed. But we got rank 1 for the CDS case because this is the only case involves value and by pricing everything correctly, we were paid what we had expected. I guess we are just better at valuing the securities than getting onto the rise and getting off of the correction before everyone else does. I am also very happy because it proves that we are really compatible when we work with each other, especially during the Sales&Traders case where I was in charge of doing the technical analysis to prop trade the stocks and John was in charge of working out favorable institutional orders. We each got $25 Amazon gift card as reward for the CDS case, and I made the executive decision to buy a pair of matching squash racquets for us by paying a little extra. Amazon’s two-day free shipping will again please me by delivering them here on Tuesday! I’m super excited!

Naisi and I went on horseback riding on Sunday in Randolgh, a little over 20-min drive from Cambridge. We were going to take a half-an-hour lesson then exercise on the trail but it was too late to do that when we got there, so the lady just made decision for us to go on the trail only. I was a little confused at the beginning, but it was fun overall. My buddy is named Be; she was kind of lazy when we were on the trail, stopped moving every now and then. I got a little mad at her so kicked her hard to move forward because I wanted to take picture for Naisi. But I think she is good looking, so I won’t pick on her too much...Not that I am superficial, but I just find it hard to pick on beautiful creatures.

PS:
A friend has asked what is the QE2 video that the GS panelists were talking about and why is it such a bid deal to GS in particular. I'm sharing a video here and I'm sure you'll understand.
http://club.ino.com/trading/2010/11/laugh-or-cry-watch-this-qe2-video-and-tell-us-which/

First Correction Since September Soar

If Naisi didn't bring it up today, I probably would have forgotten about my blog. I guess I'm still more or less ADD...

I want to talk about market today since it's the first time the market goes through correction since the September soar. It came as a surprise to me this morning when I picked up the Journal as the market was down .7% before the open bell, and U.S failing to negotiate export terms with South Korea was on the front page. Although it is a bad news for the U.S economy, especially if Obama's known for having increasing exports on top of his agenda, the sudden drop still feels like an overreaction as if Mr.Market has finally found an excuse to head south since September. The Journal leads the front-page news to A9, where an article on IMF was inserted. And of course, it talked about the same thing that it has talked about for the past month--how the world economy should not solely depend on the U.S consumption and other countries in G-20 such as Germany and China should increase their consumption levels such that they don't export as much. However, it seemed like the Journal completely forgot about how the leadership in U.S usually tells us to "spend our way out of the recession" while the Red across the Pacific Ocean drives 1.3 billion people to save big time due to the lack of social net of medicare and social security. It must be quite cool to write news articles since you really don't have to draw any conclusions and it's up for the readers to interpret what you wrote and act on their interpretation. Basically, my point is as a newspaper reporter, you're not liable as long as you can prove you're only keeping an journal of what has happened.

Portsmouth, NH

It has been exactly two weeks since I last wrote a post. It seems like keeping this weekly habit would take a little time to develop.

Over the Columbus weekend, I went on my first anniversary vacation with John to Portsmouth, New Hampshire. The town is really pretty, carpeted with tinted leaves that were warming the townspeople in the chilly weather of early October, which left me an impression of that similar to Guilin, in which a sense of calmness was pleasantly conveyed through the peculiar slow pace of life.

The average age of shoppers in Kittery Outlet in its neighbor town is probably in the 60s, sharply differentiates the town from Boston, where the young and the motivated strive. The leisure of living in such an environment is not popularly sought for by the young because the excitement of changes is more attractive to them than the beauty of the ordinary, which is only appreciated when the young are jaded by the excitements.

I’d love to visit places alike every once in a while when I need pauses to reflect what I have accomplished and check what changes are needed on my long-term to-do list. It serves as a mirror for me to recognize myself and recognize my goals.

My New Agenda

Today is China’s 60^th Anniversary Celebration. If I were in China, I would have been enjoying the seven-day vacation. Chinese vacations are always longer than the U.S vacations, except for the summer, in which an almost four-month vacation is mostly used to gain internship experiences. What a difference!

I added two other weekly to-do’s in my agenda besides keeping up with this blog: reading at least one book outside of class and going to the weekly comp (seminars on investing taught by Barclays Wealth M.D. Preston McSwain) for Smart Women Securities at Harvard. However, these two commitments take longer than I thought, mainly because of I can’t read that fast and the commune is quite a pain given that I’m not a big fan of bus rides.

I finally finished reading Seth Klarman’s “Margin of Safety.” The GurusFocus did not exaggerate; it really is a masterpiece, making sense of value investing in the most basic terms. No wonder Amazon sells in the $800 bracket. I don’t want to summarize the main points as other readers have done, but I do want to point out one thing; that is from the way he addresses different issues in the book, he also seems to be a great salesman, something extremely important but some fund managers lack. He makes fine distinction between his beliefs and disbeliefs in different investing strategies, but still leaves space for his disbeliefs to turn around. Such open-mindedness is quite important, at least to me, because what have happened does not decide what will happen, thus any beliefs might be turned against by time, the ultimate determinant.

Waiting

 

It was early in the morning, some raindrops softly landed on the already wet concrete doorsteps, creating cute little water flowers that no one would care about. But some other raindrops were even more pathetic, joining their companions on the edge of roof, dripping down in a crowd amongst their laughter, not knowing that there would be a hard hit once alighted. There I was, walking out and secretly joking about their stupidity.

Perhaps because the rain had set the tone of the day heavy, people on the street all seemed to have locked their eyebrows, especially those who were waiting for the shuttle to come. Their gaze into the direction in which the shuttle would eventually appear had betrayed them and revealed their impatience. Cars continued crushing those innocent water flowers on the floor while speeding by, then got abruptly put on brake in front of the red light of the crossroad. After that, it was the same impatient look on the drivers’ faces. And the same impatient look might just stay with them the whole day, or their whole lifetime because of the amount of time they would spend wasting.

It is scary how much time people spend on waiting everyday for everything. After people wake up in the morning, they might have to wait for their family to use the bathroom. After they are ready for work, they wait for the right timing to pull their cars onto the main street, and wait for the red lights along their way till they arrive at the parking lot. Then, they wait in line to park their cars and wait to get to their destinations.

After they get into buildings, they wait for elevators, wait for other people to press different buttons for different floors, and wait for people to get on and off. People wait for each other in meetings, in gatherings, and in daily lunch-togethers. People wait to get into cafeterias, wait to pick out their foods, and then wait to pay. People spend a scary amount of time waiting but they never noticed how much time it really would be if the waiting time is aggregated throughout the day, aggregated throughout their lifetime, and how scary the number would be if everyone’s waiting time is added.

If I have the magic to reduce the waiting time for everyone, I might as well get a special Nobel for it…

First blog post in English

It's been a long time since I last wrote anything for my own or for those who bothered to squeeze out some time to read my old blog in Chinese. Undeniably, MIT has more or less turned me into a problem solver (or okay, I know, a nerd, and you’re probably totally right about it) who likes to solve problems, from simple brain teasers to stupid math model that portrays gossip target Mr.A's affection to gossip target Ms.B. It requires a completely different set of mentality to really enjoy the process of working out a problem, to appreciate the challenge imposed by such a problem, and to be looking forward to similar excitement that one can get via solving another problem. In sum, what I have learned from MIT is not how to solve a problem, but rather, how to realize a problem by quantifying it, which of course, involves making a series of assumptions that might not be necessarily true in most cases but just to be there to generate a solution. Of course we all know about the basic concept of "gabbage in, gabbage out" in any models, but for the sake of keeping academics the still, the authority, and the holy, we make believe our models are “goodies in” and argue they are “goodies out.” However, my college life not only started as a take-off point of “college life” that Andy in Toy Story 3 or any other 17-year-old movie characters would be going through, but also a take-off point of preparing for what comes after college.

It took me a while to figure out what I want to do for a living, so that I won’t wind up being street beggars or street performers in the grand New York City subway labyrinth, which might embarrass my mom quite a bit. But when I first set for Boston, I had absolutely no idea what the heck I would do after college except not going to a graduate school as how my parents had wished. 16 years of continuous education has been deemed as for-sure enough, at least for a pause, with already contemplated excuses made up in my mind to deal with my mom’s would-be-coming weeping for the disgrace I would bring into our family if I would away from academia. Sometimes, you just have to bear with Asian parents.

Unfortunately, I had given up being a writer because (1) it’s hard to make a living and (2) all the humanities majors are crunched into Course 21 at MIT, a course that nobody really cares about except when Mr. Dean’s emails reach people’s email Inboxes insisting the importance of humanities requirements for the golden Bachelor of Science certificate. In fact, I only know one girl majored in Course 21L and I remember seeing her going onto Number 1 bus toward Harvard Square every morning. And when I tell my friends, it’s that girl who majors in 21L, they would all be extremely eager to peep. What a big deal! But the most detrimental reason is that I am not a native speaker; I immigrated into U.S. in 2005 knowing only the alphabets and my writings could hardly be recognized, except by The New York Times, who generously took into consideration the fact that I had been to U.S. for less than three years by then and granted me their scholarship. I was flattered.

Besides writing, I basically hate everything but math. The beauty of math is just fascinating; the golden ratio, the prime numbers, pi, natural log…So I ended up studying math knowing that I would have a hard time to keep my grades up while competing with the brightest brains on campus. But I work hard, and hopefully, that compensates.