Harry Chen Thinks Aloud

Until it stops going up. Based on my understanding, the uptrend of oil price is mainly caused by speculative trading on the market.

If you’re looking for evidence oil’s surge is the result of a speculative bubble, look at the astronomical trading statistics on energy exchanges. Bill Stone, PNC’s chief investment strategist, notes today that the average daily trading volume in energy futures so far this year is $138.3 billion. That’s a 61.6% increase from 2007 and a 3,000% increase from 1997.

I would note that much of this increase might be the result of technology rather than evidence of a bubble: Sophisticated computerized trading systems make it much easier to try to squeeze out extra profits by buying and selling contracts rapidly throughout the day.

What can we do? Nothing. Just sit tight until the price comes down.

Except the commodities, everything else looks cheap. Given that the economy is kind of under the weather, I think it’s an excellent time to invest.

Here is my logic: the future of our economy can only either go up or go down. It has only two possible outcomes. If it goes up, then start investing today will give you a better return in the future. If it goes down, your money in the bank probably won’t worth much anyway — the purchasing power of your savings would be reduced due to inflation.

When everyone is scared, it’s time to be greedy.

Eonomists and policy makers are wondering if the US economy is in a recession. It’s always difficult to tell whether an economy is in a recession because a formal government announcement usually come only after the event has unfolded. In other words, it’s possible that we are in a recession, but no one is sure of it, or no one wants to make a hasty claim about it.

Nevertheless, there are somethings we certain of. First, the economy is not as strong we have hoped. Second, inflation and the housing mortgage trouble are hitting the consumer spending, which in turn affects the US economic growth. Third, many banks and lenders are in serious financial trouble, not knowing how much they’ve lost in the high-risk investments. Lenders start tightening their lending practices, which affects the borrowing power of small businesses and consumers. Again, this affects the US economic growth.

When it comes to the US economy and investment, I listen to what Warren Buffet has to say:

Berkshire Hathaway’s (BRKA $140,000) Warren Buffet said in an interview
on CNBC that he is no longer offering to back $800 billion in municipal
bonds that are insured by the nation’s largest monoline insurers. Buffet
also said he believes the US economy has entered a recession and stocks
are not cheap. Though he does not rule out a big downturn, he does not
yet feel that the current situation is anything like what was seen in
the 1970s.

Source: Schwab Morning Market View for March 03, 2008

The US Dollar is trading historically low against many major currencies. Few questions come to my mind: (1) How did we come to this situation? (2) Who can and can’t benefit from a cheap US Dollar? (3) Should small investors be worried about a cheap US Dollar?

How did we come to this situation?

According to The Economist article, the US Dollar is trading historically low for three key reasons: high oil prices, a weak US economy and a troubled US credit market.

Who can and can’t benefit from a cheap US Dollar?

Individuals and companies benefit differently from a cheap US Dollar. For individuals, tourists travel in the US from countries with a strong currency can benefit. Travelers from Canada and EU find everything to be cheaper in the US. On the other hand, US tourists who travel abroad face a complete oppose situation — everything is more expensive abroad than at home.

A cheap US Dollar can help US companies and depress the economy of foreign countries. US businesses with an international market can benefit greatly from a cheap greenback. This is because the price of their exports are now more competitive than those from countries with a strong currency. Developing countries whose economy depend on exports to the US may be hurt by a cheap US Dollar — a weak US economy will demand less imports.

Should small investors be worried about a cheap US Dollar?

In general, small investors in the US shouldn’t be worried about a cheap US Dollar, assuming that their investment portfolios are diversified and are aimed for long-term investment. Currency exchange rates are cyclical — the US Dollar was the king in the late 90’s. It’s only a matter of time for the US Dollar to come out of its low (the question is when). Meanwhile, I think investors should continue to invest in the US stock market, in particular in S&P 500 companies. The profits of US national business may be hurt by a weak US economy, but multinationals should do relative well because of their diversified international markets.

Experts believe that now it’s a good time to diversify some of your investment in cash. This is because the yield of cash is very attractive given today’s market condition.

1. Cash yield as much as long-term bond. As of July 9th, 2007, 10-year US Treasury yield is 5.16%, and 6-month CD offered by INGDirect is 5.15%.
2. The yield of cash investment is ahead of the current annual inflation rate, which is around 2%. If your cash investment yield 5%, then you enjoy real cash yields of 3%.
3. The Fed probably will keep the short-term interest rate at 5.25% for the rest of 2007.

For those who are interested in cash investment, I recommend CD laddering.

Source:

• Daily Treasury Yield Curve Rates
• INGDirect Orange CD
• Diversify into Cash?

These days investors of the stock market are happy because the Dow is at its all time high. However, US consumers are not very happy because of rising energy costs, grim housing markets and possible inflation and stagflation crisis.

This situation looks odd to many people. If the US economy is doing well, shouldn’t it benefit both investors and consumers (remember the age of dot-com)? If the US economy is not doing well, how is it possible for many companies to report record earnings?

Answers to these questions can be found in Robert Reich’s podcast — Wall Street’s up, Main Street’s down.

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The value of the U.S. dollar continues to soften against the euro and the British pound. According to an IHT report,

Last year, the euro appreciated more than 11 percent against the dollar. The British pound rose nearly 14 percent against the dollar in 2006.

Obviously, this is a good news for the European travelers in the U.S. and the European currency investors. However, it was a bad news for people like me whose salary is paid in the U.S. dollar.

Will the value of the U.S. dollar continue to slide in 2007?

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A key to maintain a country’s competitiveness is to invest heavily in research and development. The U.S. is a good example. Scientific advances and entrepreneurship have helped this country to be a dominant force in the global market.

According to OECD (Organisation for Economic Co-operation and Development), by the end of 2006, China will become the second-highest investor in R&D.

The burgeoning economic powerhouse has rapidly increased the money and manpower being invested in R & D, and spending by government and businesses will reach more than $136 billion in 2006, the OECD said Monday.

For comparison, Japan, formerly the nation with the second-highest investment in research and development, will dole out $130 billion this year, and the EU nations (including France, Germany and the U.K.) together will allocate $230 billion.

An interesting fact is that the growth rate of China’s R&D surpasses the growth rate of the country’s GPD.

Its R&D went from 0.6 percent of its GDP (gross domestic product) in 1995 to more than 1.2 percent in 2004. That doubling growth rate is faster than the rate of growth for China’s entire economy.

Source: China rising rapid in R&D, report says, CNET.com

The rapid growth of China’s economy is a two-edged sword. On one hand, young people have prospered because of the booming economy. Their wages have increased, their life styles have improved, and the wealth of few elites have even surpassed their Western counterparts (link, link, link). Because the country becomes richer, the government now plays a bigger role in changing the political balance in various regions in the world. On the other hand, the booming economy has also brought about critical social issues that people have never faced in the past.

Two articles from The New York Times tell this story well.

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