Monday, July 11, 2011

External Publications - 7/11/2011

Two articles are published on SeekingAlpha today:
  • Moving Into Earnings Season: Staying Long Energy, Short Financials: Alcoa (AA) will report earnings this Monday and unofficially kick off the earnings season. New earnings numbers will prove or disprove investment theses, and the market will see more fluctuations as investors punish losers and applaud winners. Sometimes the market moves drastically in face of any “surprises”, and it is highly recommended that investors have their portfolio protected from downside risks...
  • The Growth Perspective of the First Trust ISE Cloud Computing Index Fund, SKYY: Last week the debut of the First Trust ISE Cloud Computing Index Fund (SKYY) – the first of its kind – attracted a lot of buzz in the media. It also received many critiques from analysts and investors...
There were interesting discussions for the first one and I'd like to recapture some key points I've made:
Personally I think copper is a better macro indicator than crude oil. It is said that copper has a Ph.D. in economy. Recently copper was very strong on the chart, much stronger than crude oil. That should say something about macro economic trend, at least investors' / traders' collective expectations about it.

Secondly, in my opinion China is the engine of global economic growth, not U.S. I think copper and energy are hot because China is one of the biggest consumers of these two vital resources.

Thirdly, the recommendation was not based only on macro views. Otherwise I'd recommend XLB instead of XLE. A hot product does not automatically make its producers rich, let alone its investors. An important part of the story is how effectively the industry translate products into cash flow. According to our ETF ranking system, energy sector is the best among its peers as for now.

[T]his article was composed 36 hours ago. At that time the debt ceiling talk didn't fall apart and there wasn't yet another earth quake in Japan, as least I wasn't aware of. That's one sad thing about financial markets - nobody can foresee the future. What investors can do is to come up with good strategies to profit from the upside and, at the same time, to protect against the downside.

One thing I've learnt from my experiences is to underweight news and overweight numbers. Debt ceiling talk fell apart but they will resume the talk sometime later. Japan earth quake will have negative impact but investors will, quite legitimately, start to think about the "pent up" demand for reconstruction. That's the nature of human beings, and that's the driver of zigzags of the market. Actually there was an article about this: "Why I Don't Watch CNBC".

China's growth is driven by the demand from U.S., at least it was true in the past. China is the producer and U.S. is the consumer.

But there are subtle changes already.

U.S. is not the largest trading partner of China. Europe is the largest trading partner of China as for now.

China has a large population, it would be a much bigger consumer if their demand is unleashed. As an early sign, China's trading with other Asian countries, most of them are poorer south east Asian countries, is constantly increasing in past years, and in those trades, China is playing as the consumer and the other countries are playing as the producers.

Nonetheless the China - U.S. grand cycle is still working. But I think it's not to the benefit of either country to stick on to it.

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