8/01 newsletter

*** Market
SP500 avdanced to 1245 during the week, a multi-year high. This is very bullish. If nothing unexpected occurs, this bull could run well into September to challenge 1300 (or even the unlikely 1400), at which time a correction might be needed.

But again, do not count on me for market timing -- as a fameous quote says, "you have heard about fameous investors, but none of them are fameous for market timing". Find good investment rather than time the market. The only use of market timing is to judge over-heated (or undervalued) market and have the guts not to participate in the folly, instead, if you can do better, to take advantage of the folly. Of course, this is easier to say than to do, because by definition folly in financial market always has a large mass participating in it and there is always an atmosphere that nobody think he/she will ever lose. (If some people are still "concerned", the market will push even higher to convince people that they should participate. What are you going to do then?) Benjamin Graham calls this the emotional Mr Market, while Ken Fisher calls it the Great Humiliator.

*** Portfolio (since 12/01/2004 baseline, 8 months)
SP500: +5.1%
My portfolio: +12.6% (7.5% ahead)
           Blend         Value         Growth
Large cap: IWB     6.19  IWD     6.94  IWF     5.43
Mid   cap: IWR    12.68  IWS    13.71  IWP    10.64
Small cap: IWM     7.08  IWN     8.07  IWO     5.39

As you can see from the 3x3 box, mid-cap range is still the darling. Value performs better than growth. But the diff is not that big after April.

On the market, Mr President got his energy bill approved. In the next two years, energy will be the keyword on Wall Street.

--Steve

7/23 newsletter

*** Market
SP500 is hovering around 1230, all time high. YTD return is around 4-5% now. Not quite big as we wished it to be.

My portfolio has outperformed SP500 7% since it was first implemented in 12/1/2004. It averages to outperform ~1% per month over SP500, even during a flat period such as in the past 6 months. The portfolio return is consistent with the model's return, although the stock selection is somewhat different. This seems to indicate, beyond what can be expected from the stochastic advantage, my stock selection method is somewhat dominated by the random force.

On the market front, Greenspan said it is still necessary to raise interest rate to further contain the inflation pressure, especially from oil and real estate. This will impose a cap on the bulls. However, he believes the economy is growing healthily and is able to absorb the rising cost from oil. (This can be accomplished by passing the cost to the downstream consumers, or else cutting the operation cost. If an enterprise is uncapable of doing either, it is in trouble.)

China finally releases its piggyback on US dollar and lets Yuan float against a bag of currencies. Chinese stocks held on US dollar gained a few percent as a result. A couple percent seems too small for China. But the world is changing again...

--Steve

7/15 newsletter

Just to use the few minutes before dinner to write up a few words.

SP500 reached 1230 level this week. This is the highest level in 4 years. Needless to say the bulls are very happy. Oil is around $58-- also at historical highest level. But some believe there is still room for higher price.

The comment from Greenspan about the conudrum of bond market begins to attract more attention. Basically everybody knows that the flattening of yield curve will hurt economy, and low bond yield has resulted in an overheated housing market. But the vested interest of foreign central banks, notibly Japan and China, is to keep bond price high, therefore, yield low. Who is going to win?

If on the other hand, FED gives up the fight on long bond, and turns around to lower the short term rate, it will create a very powerful speculative bull in stock market.

--Steve

7/08 newsletter

*** Market
SP500 inched up a little bit. Still can not break into new high. On the corporate front, Bank of America (BAC) again made the move to acquire MBNA (credit card issuer) for $35B. BAC is becoming a heavyweight of more than $200B, approaching the size of Citi-Group. Very aggressive CEO indeed...

*** Portfolio
My Portfolio +10%
SP500 +3%
Mid-cap +9%
The smaller cap is moving up while large cap is struggling...

*** Comment
I want to share with you my observation of executive compensation with you. Before that, I want to mention a bible paragraph: Matthews 25:14-29. http://bible.gospelcom.net/passage/?book_id=47&chapter=25&version=31

In the parable of the Talents, it is quite interesting to observe first that the ancient money unit, talent, is used in English as 'ability born with' or 'charisma'. The second observation is that Jesus used a exponential scale for servant's ability, 1000, then 2000, then 5000 (more below). The third observation is that the first two servants were able to double the asset (during the entrusted time window) and Jesus' response was to put them in charge of more things. (And they should continue to double). The fourth observation is that the lazy servant was afraid of taking risk to double the entrusted asset. He hid the money in the ground, and after number of years, he returned the same amount back to the master. The master was very unhappy.

From these observations, does that kind of lead you to think Jesus is quite a savvy capitalist? Especially the point the lazy servant made -- you harvest where you have not sown and gather where you have not scattered seed. That is exactly what a lender is expecting.

Now executive compensation. Let's take a big company like Merck as example. There are many grades and titles in the company career ladder. Let's simplify the picture and say there are 8 major ladders from top (CEO) down to the lower level (say a secretary). This kind of fair -- CEO, subsidiary head (SVP), division head (VP), senior director, director, manager, analyst, technician. I am setting you up.

Now let's say the technician is making $40K per year. And the CEO is making $10 mil per year. If you divide the two numbers, you will get a number of 250. Let's use a rounded number, 256. That is 2^8. Remember I say there are 8 major ladders. So the difference between each ladder is doubling of compensation. I was amazed when I got this number. It is not 10% or 20% higher. It is exponentially higher. Now if I ask you why people are so aggressive in climbing the corporate ladder, you probably will not be surprised.

Money and talent go hand in hand. Of course, people always mention to you the high goal of leadership and serving the society, but you rarely heard about the money part. In this respect, unfortunately, the leaders exhibit the same behavior as the crooks. In fact, corporate America has been fighting hard with Federal Accounting Standard Board (FASB) on the issue of revealing executive compensation for more than 10 years. Only until recently when the executive corruption became so wide-spread, FASB won the battle. And that is when people began to know and be furious of how much the CEOs are making. You wonder why SOX 404 is taking such rigor...

There is another observation I made that is quite interesting. I was aware of there are about 200 so-called senior executives in Merck in a news release that these executives are being protected by a special pension and severance provision right after the Vioxx debacle. If you multiple 200 with say $3 mil of average compensation of these senior executives, you get $600 mil. That is about 1% of Merck's market capitalization as of today. Remember the mutual fund industry charges you 1% for maintaining your investment (no matter they win or lose). Guess what? The senior executives as a whole also charges 1% to the shareholders for their jobs of taking care of the company.

They are not cheap. In fact, quite expensive. So when I hear so-and-so executive is fired, I am no longer surprised, considering how much money he/she is making and how much cost incurred to the shareholders...

But for those of us who are climbing the ladder, that is a different story...

--Steve

7/01 letter

*** market
Pretty much a flat week. (SP500 = 1200)

*** portfolio (since 12/1/2004 baseline)
My Portfolio: +7.1%
SP500: +0.7%
Mid-cap: +7.5%
Small-cap: +1.3%

*** comment
My portfolio is performing pretty well, thanks to a uniform rise plus the blockbuster CME.
CME (Chicago Merc Exch) rose from $250 to $300 this week on the news it is merging CBOT into its fold. This stock was traded at $170 in March, and now is $300. It boasts the same gain as Google. And CME's PE ratio is half of Google. What the hack, Google?

Well, the morale is that when an enterprise has "high moat" in Buffett's language, it will continue to find ways to grow and investors are happy to put money to its use. If you are influenced by analyst forecast, like $260 is top, you are topped out (long time ago). Sorry... It is a test to your faith.

Speaking of faith to a high-moat enterprise, I added some position in LSTR last week, when it hit 25% stop. The price soon recovered and wiped out a lot of trader positions. Again, 25% stop is questionable. LSTR is a truck load company (not a big deal!). But it has a scalable business model. In May, it is added to Dow Transportation index. This is a proof of its strength. But you should not think that it won't stop you out on a technical basis, especially on top of this publicly known good news. Strange, right?

Have a nice July,4th...

Steve