Dow and S&P in Bear Market?

Yesterday, we saw the Dow made a 276-point turnaround to close the trading session with a gain of 38 points. What fueled the rally was the surprising June sales number from GM. And the turnaround actually made people speculate that the second half of 2008 may give investors a better time than the first half did.

Then today, the stock market followed its old pattern, down another 166 points. This time, GM also played a role: despite the stronger than expected June sale, a Merrill Lynch analyst suggested that GM could face bankruptcy (Bloomberg.com). That sent GM shares to the lowest level since 1954!

Since reaching the highest close of 14,164 on October 7, 2007, the Dow has lost 2,949 points. That’s good enough for a 20.8% decline in 10 months, meaning that the index is officially entering the bear market. According to the generally accepted definition,

a downturn of 15-20% or more in multiple indexes (Dow or S&P 500) is considered an entry into a bear market.

The S&P index is slightly better, losing 300 points, or 19.2%. Not exactly there yet, but very close.

So, do you expect this bear market to last long?  This is a tough market that even good news is likely to fall on deaf ears. Tomorrow’s monthly job report isn’t expected to be good and that could push the market even lower

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Stocks Fell Like a Rock

The last time I inserted the Dow’s intra-day chart, the benchmark dropped some 400 points. That’s was less than three weeks.

Today is another bloody day for stocks, under similar circumstance as 20 days ago:

• Oil surged past $140 a barrel;
• More writedowns are expected at financial firms Citigroup and Merrill Lynch;
• Car makers are in deep trouble and Chrysler had to come out to deny bankruptcy rumor;
• Technology companies Oracle (ORCL) and Research In Motion (RIMM) issued weaker-than-expected  profit forecast;
• Economic data is also disappointing as weekly unemployment rate jumped to the highest level in nearly three years.

After today’s decline, the Dow has fallen 2,711 points from its peak of 14,164 points reached on October 9, 2007. That’s a 20% drop for the index in a little over 8 months. And today’s closing number is the lowest in nearly two years.

Amid the bloodshed, one of my stocks (the only stock actually) did post a gain today. Smith & Wesson (SWHC), the handgun maker, rose 6.65% after the U. S. Supreme Court ruled that individuals have the constitutional right to own guns for the purpose of self-defense. Other than that, it’s red, red, everywhere

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Bank Dividend Yield Revisited

Last November, shortly after the Dow peaked at 14,280 points, I had a post on dividend yields of the largest banks in the country. At that time, I thought that, with many bank stocks yielding 6.0% or more, buying banks make some sense if the banks can keep their dividend payouts.

That was then and we all know what happened since then.

Big banks like Citibank, Washington Mutual, were hit hard by billions of write downs tied to bad loans and literally had to be bailed out by foreign investors. At the same time, shares of these banks have plunged to multi-year lows with no end in sight (just when you thought it may be over, another shoe dropped). To have an idea on how bad things have been in the past year for big banks, take a look at the following plot, showing 1-year performances of the big-three: Citigroup (C), Bank of America (BAC), and J. P. Morgan Chase (JPM), against the Dow Jones U.S. Finance Index (^DJUSFN).

As banks eliminated thousands of jobs and sold billions of assets in order to shore up capital, they also cut back dividend distributions, which we can also see as an inevitable step to take in desperation (nobody wants to follow the fate of Bear Stearns for sure). So the above assumption, banks hold their dividends, no longer holds. However, the reduction in dividend payout doesn’t mean the yield will follow because share prices of many banks have fallen even further.

At the time when the subprime mortgage triggered financial crisis approaches one-year anniversary,  I looked again at dividends of some largest banks in the country and to my surprise (well, I am not really surprised), I found that the dividend yields have gone even higher, though many financial companies have cut by half (for example, Citigroup by 41.%, WaMu by 72%). Of course, the increased yield is at the expense of the falling share price (see last colum in the following table, 1-yr return, only two have positive 1-yr return).

If you are an existing shareholder of any of those big banks (I own BAC), you obviously are not happy with how your stock has performed lately despite the high yield. If you are not a owner, but consider buying some bank shares, the following financial ETFs can be alternatives to individual bank stocks:

• Financial Select Sector SPDR (XLF): 1-yr return -39.8%
• iShares Dow Jones US Financial Sector (IYF): 1-yr return -36.7%
• iShares Dow Jones US Financial Services (IYG): 1-yr return -42.4%
• iShares Dow Jones US Regional Banks (IAT): 1-yr return -42.4%
• PowerShares Dynamic Banking (PJB): 1-yr return -23.14%
• PowerShares Financial Preferred (PGF): 1-yr return -14.3%
• Ultra Financials ProShares (UYG): 1-yr return -65.6%
• Vanguard Financials ETF (VFH): 1-yr return -35.7%

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The Worst “Timing” Ever

I have been using automatic purchases plans to buy most of my mutual funds for years. The date that I chose for making the monthly purchase is the 5th of the month. The reasons for selecting this date are:

1. I don’t want to buy funds at the end of the month because that’s the time when mutual funds are likely to make dividend distributions. Buying at the end of the month increases the possibility of buying-the-dividend;
2. Since I pay most of my bills at the beginning of the month, it makes evaluating our saving goal at little easier to have everything done, including investment, at the middle of the month.

By using the automatic service, I am not trying to time the market. Instead, I buy shares whether the market goes up or come down (dollar-cost averaging). This method has served us quite well over the years and I am very happy with the set-and-forget approach.

Then today, after seeing what happened in the markets in the past two days, I wish that I had bought those shares today, when the Dow dropped nearly 400 points, than yesterday when the index went the opposite direction more than 200 points! The 600-point swing in two days in the worst since I started the automatic service.

So what caused the bloodshed?

For one we knew what happened in the job market last month. The latest government report showed that U.S. employers cut 48K jobs in May, the fifth consecutive month that the economy failed to create jobs. Even more worrisome is the unemployment rate, jumping 0.5% in a month to 5.50%, the highest level in more than three years.

Another thing we can blame is the price of crude oil, which surged $11, the biggest gain in a single day ever, to a new all time high of $139.12 a barrel before settling at $138.54. Events fueling the oil price include:

• European Central Bank president indicates that the central bank is ready to increase interest rates in the Euro zone to battle inflation, making the U.S. dollar less appealing to investors.
• An Israeli official said attacking Iran, world’s second largest oil exporter, is unavoidable if Iran continues its atomic activities, rising fears of disruptions in oil supply.

Actually, I noticed this morning that the gas price at my local gas station dropped 2 cents from two days ago when I filled up my car. Don’t expect that trend to continue though!

And as the oil price jumps, so does gold.

The precious, which has been quite volatile recently, rose more than $23 today to reclaim the $900 mark. Gold price has dropped to below $870 an ounce less than a month ago as the U.S. dollar rebounded against the Euro. Now that rebound seems to be over.

While most of my stocks/funds were down sharply today(Visa (V): -$3.59, China Life (LFC): -$3.04, Research in Motion (RIMM): -$4.18, just to name a few), there is a sole bright spot: Tockqueville Gold Fund (TGLDX) with a gain of $0.52

And today I also bought $200 of Dodge & Cox International Fund (DOGFX), which dropped $1.42 a share. I wish I bought all my shares today

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My Play Money at Zecco

In his book, A Random Walk Down Wall Street, author Burton Malkiel declared that

A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.

Do you believe random walk? Or do you follow your own research? Or maybe experts recommendations?

Early this month I mentioned in my net worth update that I have been using Zecco account to do some trades recently and made a small money from the activities. Here’s what I am doing with my so-called “play account.”

When I opened my Zecco account in the summer of 2006, I was thinking of using it as a play account because of the commission-free trades it offers. For a play account, I plan only to put a small amount of money in it and play with the mo so even if I lose it all, it won’t hurt too much. If I can make any money from it, then good for me, though it won’t prove anything other than some luck.

I didn’t really start to play with the little money I have in my Zecco account until February after I published my first The Dog of the Chinese ADRs. Initially, I thought I would buy the Chinese ADR that performs the worst in the previous month and hold it for one month, then sell the stock at the end of the month and buy the next worst performer. Unfortunately, I didn’t keep up with this method, though I did trade a few Chinese ADRs in the past couple of months without doing any research (random?). I just bought the stocks when I had the money and sold them when the profit was acceptable, no really holding the stocks for a month as I originally planed.

Anyway, I made a total of 7 trades in my Zecco account in March, more than I did in the entire 2007 and made a little over $111 profits, a gain of more than 14%. Stocks I bought and sold since February include:

• Global Sources (GSOL)
• Xinhua Finance Media (XFML)
• Renesola (SOL)
• Baidu (BIDU)

And stocks I am currently holding are:

• China South Air (ZNH)
• WSP Holdings (WH)
• Agria Corp. (GRO)

For me, I think I have no problem deciding when to buy a stock. The problem is when to sell. For various reasons, I am always reluctant to take profits off table when I should. For example, one of my biggest holdings China Life Insurance went to a record high of $106 a share in late October 2007. I didn’t sell any shares when the stock, like many other Chinese stocks traded in U.S., was clearly going down since. Now LFC has lost nearly half of its value, taking away a big chunk of my paper wealth. I guess I am too greedy (always expect it to go higher and higher)! With this play account, I want to sell a stock whenever I think the profit is good enough. So far the average holding time is about a week.

Money in the account were from signup bonuses I got from Zecco for referring new customers to them. I have published the Google spreadsheet that I use to track my trades and performance. The goal of this play account is to make money, small money, and I want to see how much I will have at the end of this year.

Featured Information: Zecco Promotion Code

Ready to buy stocks and ETFs with zero commission? Open a Zecco free trading account and get 10 commission free trades every month:

And be sure to check out my review of the broker and my first trading experience before opening your account.

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Random News: Another 3/4 Point Cut by The Fed, Economic Stimulus Payment Schdule, and myFICO 25% off Promotion

The Federal Reserve, as expected, delivered another three quarters of a point rate cut on Tuesday, bringing the benchmark lending rate to 2.25%, the lowest level since February 2005. The cut came after one of the Wall Street’s biggest investment banks, Bear Stearns, collapsed over the weekend after creditors rushed to the door. Though there were expectations that the central bank may take a even bolder move by slashing interest rate a full percentage point to avert the economy from slipping into a deep recession.

US stock indices briefly cut their early gains after the Fed announced its rate decision, but rallied back to finish the trading session at the peaks. The S&P 500 climbed 54.14 points, or 4.2%, to 1,330.74, its biggest rise since October 2002, the Dow gained 420.41, or 3.5%, to 12,392.66, its fourth-biggest point gain ever, and the NASDAQ added 91.25 points, or 4.2%, to 2,268.26.

IRS announced yesterday that the economic stimulus checks will be mailed out on May 2nd and most people won’t get their checks until the middle of July. IRS also published on its website a payment schedule based on the last 2 digits of the social security number. From the schedule, our check will be sent to us by June 20. if you wonder how much you will receive, IRS has a payment calculator to help you determine the size of you stimulus check.

Finally, myFICO, the official provider of FICO credit score, is now having a 7-year anniversary promotion with 25% off on all products including credit scores, credit reports, and credit monitoring services. In the past, I bought my credit scores from myFICO.com several times after credit card arbitrage to see how my score was affected when I paid around $15 to get one report plus the score. To take advantage of this sale, use promo code 7yrsale at checkout. The promotion ends April 30th, 2008.

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Stocks Gained Most in Five Years!

Haven’t seen rally like this for quite a while. Actually, the last time it happened was more than five years ago.

US stocks surged Tuesday after the Fed, in a coordinated action with other central banks, said it will pump $200 billion into the financial market to ease credit fears. Stock index futures jumped when the news came out at 8:30 am and traded sharply higher from beginning to finish. According to Bloomberg, the Dow gained 416.66, or 3.6%, to close today’s session at 12,156.81, the NASDAQ surged 86.42 points, or 4%, to 2,255.76, and the S&P added 47.28 points, or 3.7%, to 1,320.65, the most since October 2002.

On the currency front, Euro is last traded at $1.5357 after reaching $1.5495 against the dollar and one dollar buys 103.08 Japanese Yen. Spot gold is at $974.80 an ounce, silver $19.73/ounce, and spot platinum $2042.50/ounce. Meanwhile, crude oil future traded at record price for fifth consecutive day as traders bet on commodities to hedge against the falling dollar. Crude oil for April delivery traded as high as $109.72 a barrel in New York, the highest level since oil contracts began trading in 1983.

Looking at my own investments, Global Resource (GSOL) led the way with a gain of 34.21% after Citibank upgraded the stock from hold to buy, followed by China Life Insurance (LFC) 11.16%, and Blackstone Group (BX) 7.93%.

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Random News: Visa IPO, Euro/Dollar and Good, all the Records

In case you didn’t hear the news, Visa Inc., the largest credit card network, is preparing to go public next month under symbol V. According to terms filed with SEC, Visa plans to sell 406 million common shares in its IPO, plus additional 40.6 million shares that will be available for underwriters, priced at between $37 and $42 apiece. The offering could potentially reach a total of $18.8 billion dollars, making Visa IPO the largest initial public offering in US history.

Apparently, this is going to be huge if the performance of the smaller rival, MasterCard, Inc., (MA) since its debut in May 2006 can give us any indication. MasterCard was priced at $39 in its IPO and now the stock is traded around $200, propelled by Americans’ addiction of using plastics to pay everything. According Bloomberg, MasterCard’s 4th quarter net income rose sevenfold! No wonder MA’s stock has more than quadrupled in less than two years after becoming a public company,

So are you going to buy Visa (Moneymonk says Visa IPO date will be in the week of March 17)? If you believe Visa is going to do as well as MasterCard, it doesn’t really matter whether you buy it at $40, $50, or $60.

Today, February 27th, is another record day for Euro/Dollar and gold after government report showed no end in sight of the troubled housing market and the larger-than-expected drop of durable goods orders pointed to a slowing economy. In Wednesday’s trading, US dollar fell to its lowest price ever against Euro since the currency was launched in 1999. At $1.5132 per Euro, the dollar dropped below $1.50 verse the Euro for the first time.

Meanwhile, spot gold continued to march into new territory after Fed chairman Ben Bernanke singled more rate cuts in a congressional testimony to prevent the economy from going to recession. Spot gold touched an intraday high of $964.70 an ounce, another record for the bullion. As the dollar keeps weakening and inflation remains a risk, a $1000 gold seems to be within reach.

BTW, crude oil future also reached record today at $102.08 a barrel in New York. Eventually, it settled at $99.81 after weekly inventory report showed US stockpile has grown to the highest level since November as a slowing economy reduced demands. At least, that’s a good side effect

Update:  Gold set another record on Thursday, February 28th when the precious metal reached $973.15 an ounce.

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The Dog of the Chinese ADRs (1) — GSOL

I have had this idea on my mind for a while, but only implemented this month.

The idea is to buy last month’s worst performing Chinese stock (ADR) at the beginning of the month and hold it for one money. At the end of the month, sell the stock and buy again the worst performer of the previous month.

This sounds like the “Dogs of the Dow” theory, except that there’s no dividend yield involved (most of Chinese ADRs don’t pay dividend anyway) and I only plan to hold the stock, and only one stock, for one month instead of one year. My selection is based on the monthly Chinese ADRs performance that I have been updating in the past two months.

There’s no theory behind this idea and there’s no guarantee of profit either. Therefore, I only want to use a small amount of money to play with it. And since at least one sell order and one buy order will be executed every month, the cost of the trades is critical. For this reason, I decided to use my Zecco account to play “The Dog of the Chinese ADRs.” I have about $228 cash in my Zecco account, from left-overs from previous stock purchases, dividend distributions, and bonus money from referring others to Zecco. I want to see how much I will have at the end of 2008.

On February 1st, I bought my first dog, Global Sources (GSOL), at $14.26 apiece. The stock was down more than 53% in January, making it the worst performer among Chinese ADRs last month. The $228 was enough for me to get 16 shares of GSOL. As of today, however, the stock is traded around $13.00. Not a good start of my experiment

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The Dow: Worst Start of The Year Since 1929

I don’t know exactly when the worst ever start of the year was, but from the available data since 1928, the return of the first three days of the Dow in 2008 seems to be the worst since 1929. In the first 3 trading sessions of 2008, the benchmark lost a total of 464.64 points. That’s equivalent of a decline of 3.5%.

Before 2008, the worst start since 1929 happened in 2000 when the index lost 3.26% in three days to start the new millenium.

Now the question is how low it will go.

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Bought 2000 Alibaba.com Shares

At first, I was very excited when Alibaba.com announced its IPO on the Hong Kong Stock Exchange in early November, but then only to be disappointed by a regulatory procedure which blocks any purchase by US investors of any foreign IPOs within the first 40 days of trading. At that time, I thought I might not be able to buy Alibaba at all after seeing the share price jumped to HK$39.50 at the close of its first trading day in Hong Kong.

That was then. Things are quite different now.

Alibaba actually went through a roller-coaster ride in the first month after becoming a public company. The stock reached a low of HK$27.35 one week after the IPO, then bounced back to a record close HK$39.70 on November 30, but only to touch a new low of HK$26.10 on December 17, the exact date when the 40-day freeze period expires.

As I was getting ready to make the purchase, E-Trade announced last week that they are having a zero commission day today when customers can make unlimited commission free trading of both US and global stocks. It’s just what I need at the time when I need it. So last night after 12:00 pm I placed order to buy 2000 shares of Alibaba.com (1688.HK) at a limit price of HK$27.50.

It saved me $30 of commission and at the close of Hong Kong trading over night, Alibaba.com settled at HK$28.00, HK$0.50 above the price I paid.

Well, is it a good time to buy the stock? Maybe, maybe not. And what’s happening in the US stock markets is not helping the HK market. Will the stock fall even more? That’s possible, especially when China is going to tighten monetary policy next year. But I plan to hold the stock for a long time, so I am not too concerned about the price at which I bought it.

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Performance of My Defensive Stocks

First of all, what are defensive stocks? According to Investorwords.com:

A stock that tends to remain stable under difficult economic conditions. Defensive stocks include food, tobacco, oil, and utilities. These stocks hold up in hard times because demand does not decrease as dramatically as it may in other sectors. Defensive stocks tend to lag behind the rest of the market during economic expansion because demand does not increase as dramatically in an upswing.

From the definition, defensive-type companies refer to those whose businesses do not heavily depend on economic cycles. These companies’ stocks won’t fly when the economy is booming and won’t tumble either when things are slowing down because demands for these companies’ products are stable. Investopedia gives some examples on what are defensive stocks and what aren’t: Car makers are not considered as defensive stocks because people don’t have to buy cars during tough times. However, we all have to eat every day and keep our homes warm even during recession. So food and utilities are defensive stocks as we can put them off.

I own several defensive stocks, all purchased for the purpose of generating dividends. As the broad market declined sharply in the past two months (both the Dow and the S&P have lost 10% on November 25th from their peaks reached on October 9th), my defensive stocks are holding up pretty well, even with some moderate growth:

• Altria (MO): October 9 - $69.93, November 26 - $71.08;
• Procter & Gamble (PG): October 9 - $71.08, November 26 - $72.19;
• Progress Energy (PGN): October 9 - $47.29, November 26 - $47.89;

It’s said that defensive stocks are considered as “smart investments during an economic downturn.” Maybe I should increase my positions in these stocks instead of betting heavily on Chinese stocks, only to watch them lose some 30% during the same period.

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Bank Dividend Yields Rise after Sharp Decline in Prices

Besides homeowners who lost their homes through foreclosure, another victim in this sub-prime mortgage crisis is the lenders which provided the loans, including the nation’s largest banks which also exposed themselves to investments tied to bad loans. The financial sector was hit very hard and the steep decline of financial shares since the summer also brought down the entire market. In fact, the turmoil in the housing and credit markets put the economy at the risk of slipping into a recession (Bloomberg.com).

After reaching the record high of 14,164 on October 9th, the Dow has given up all the gains after the Fed’s surprise larger-than-expected rate cut in September, losing 8.5% from its peak. At the same time, The Dow Jons US Financials Index (^DJSFN) has dropped 14.6% and nearly 20% so far this year.

If you own any of the big banks, you probably won’t be very happy with your stock’s performance if the share you own lost a quarter of its value in one month like what happened to Citigroup (C). There’s one brighter side though and it’s the dividend yields of the banks. As the share price dropped, the dividend yield increases. The following is a table of the nation’s largest publicly traded banks with their dividend yield, share price and year-to-data return (as of November 19th).

One year ago when I purchased my first share of Bank of America through DRIP, the dividend yield was at 4.10%. Now it jumped to 5.40%. And the yield of Citigroup is even higher at 6.80%. Of course, there isn’t much to smile about when the share price dropped nearly 40% since the beginning of the year. But for investors who reinvest the dividend distribution instead of taking it as cash and want to hold the stock for a long time, the drop in price means now the distribution can buy more shares of the stock at cheap (Citi has a 1-year forward P/E of 7.5), provided that the company can maintain its current dividend level. And those shares added without commission will make a bigger contribution in terms of return later if the stock rebounds.

At least that’s little something to gain from this mess

Featured information

Be sure to find out more about great personal finance resources with smartmoney.com. If you stay ahead on the latest financial news about stock quotes and the market value of your investment so you can make your money go further!

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Guess I Can Forget about Alibaba

All my efforts were wasted as November 6th came and went and my money is still sitting in my E-Trade account.

Last night I logged into my account and tried to see if I could buy 1688.HK when the stock was at HK$29.90 though I knew it was almost impossible because of the rule. And indeed I got an error saying the stock isn’t available at this time, no 40-day period was mentioned, but I was certain that’s the reason.

Then the stock surged to close its first trading day at HK$39.50, making Alibaba.com the second largest internet company in Asia, only after Yahoo Japan (Bloomberg.com). At 155 times 2008 earning estimate, Alibaba’s share price could fell in the coming days (currently at HK$35.35 in Hong Kong trading), but what will happen after the 40-day waiting period is over is anybody’s guess. In the long term, however, investors buy this stock for its growth potentials (the company indicated that proceeds from the IPO will be used for expand the company’s user base). Another high-flying Chinese internet stock, Baidu.com (BIDU) is currently traded at nearly 200 times of forward earning estimate.

Let me see if I can afford some on December 17th. I am not very optimistic though.

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Chinese Stocks: Too Hot to Handle?

Chinese stocks, especially IPO stocks, are as hot as they can be, thanks to the growing appetite among investors who look Chinese stocks as a proxy to tap into Chinese economy, which is still growing at a sizzling 11.5% in the latest quarter despite measures introduced by the government to cool it off. And an increasing number of Chinese companies are choosing to sell their shares on foreign exchanges such as NYSE/NASDAQ and HKSE. These days, it’s not unusual to see the price of a Chinese stock, whether it’s listed on domestic or foreign markets, skyrocketing in its first day of trading, sometimes more than doubled, as noted in a recent Forbes article, Sell China Before The Games

Recently, The Wall Street Journal reported that the average first-day return for Chinese initial public offerings (IPOs) in 2007 has been 192%.

Chinese stock markets

However, from what I read, the debate right now seems to be focusing more on Chinese domestic markets than stocks traded overseas and the concern is whether there’s a bubble waiting to burst. Arguments for the bubble are made based on stock valuations and the magnitude that Chinese stock index, particular the Shanghai Composite Index, has risen in the recent couple of years.

Analogy has been drawn between the Shanghai index and the NASDAQ index in the late 90s. According to the same Forbes article, the Shanghai Composite Index took a little over 2 years to gain 500% from below 1,000 in June 2005 to above 6,000, while the NSADAQ returned 240% in less than two years to reach the record of 5,000 in March 2000. On the valuation side, the article cited a recent UBS report that the Shanghai index has a P/E ratio of 68, identical to the NASDAQ’s P/E right before the tech bubble burst.

Granted, the two indices look a lot similar on charts, but I do feel that valuation alone may not tell the whole story. During the go-go days of the NASDAQ, stocks of companies that had no means to make profits what so ever could be traded at 50 times projected earnings, as long as they had the right concept to make money. Many Chinese companies that started to offer shares to the public, however, do have solid businesses, especially the state-own companies (such as PetroChina, Sinopec, China Mobile, China Life Insurance, Huaneng Power, etc.) that have dominate positions in the nation’s economy. As the Chinese government encourages domestic companies to list in Shanghai instead of New York as a way to diversify the country massive savings (total more than $7 trillion dollars in private and official savings), there are reasons to believe that the Shanghai index could go even higher (PetroChina will start to offer A-shares in Shanghai next month which attracted more than $440 billion dollars). And China is still a nation of savings, not consumption.

And by comparison, Chinese stock markets, which have less than 20 years of history, are still quite small. According to Wikipedia figures, the total market capitalization of two Chinese stock exchanges is about $3 trillion dollars, while the NYSE and the NASDAQ combined have nearly $24 trillion dollars in market value. Yet China has a 2006 nominal GDP of $2.6 trillion dollars compared to the US’s $13.2 trillion dollars. The Chinese stock markets still have lot of room to grow.

Chinese stocks traded in the US

That average 192% return, however, is for stocks in domestic markets. For stocks traded here in US, the performance is different. According to data from IPOHome.com, the returns of Chinese IPO stocks in 2007 are shown in the following table. While many have posted double- even triple-digit returns since IPO, quite a few actually dropped below their IPO prices.

After the sell-off of Chinese stocks in late February which also sent the Dow 416 points south, there were many discussions on the risks of investing in China, but since then Chinese stocks have been growing at a even fast pace. The risks are certainly there, so are the opportunities for people who are willing to take them. The Chinese economy is growing at 11+% annually while the growth rate of the US is about 3%. That alone is worth some premium. For investors who invest in Chinese stocks, what they are looking for is growth, as pointed out by a recent article, A Taste of China for the Bold Buyer:

Even where stocks are pricey—Jason Hsu, principal director for research and investment management at Research Affiliates, says U.S.-listed Chinese stocks trade at an overall P/E ratio of 60—those valuations represent high growth expectations for earnings. But, Hsu adds, the risk to investors is also high. Then again, says Dennis Stattman, a portfolio manager for BlackRock Global Allocation Fund, “you don’t invest in China for safety. You invest in China for growth.”

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Sold MSFT, but at Probably the Worst Time

In November 2004, I bought 200 shares of Microsoft. The purchase was to add some tech stocks to my investments as I had only one tech stock (Taiwan Semiconductor) and none of my mutual funds were heavy in technology companies. Though Microsoft was no longer a high-fly stock as it used to be at that time, it’s still a solid company with dominant position in PC software. Plus, it pays dividend. The purchase price was $29.82 a share.

In the past three years, however, the stock went absolutely nowhere. When Microsoft announced stock buyback plan last year, I decided to keep the shares with me because I was hoping that the release of the long anticipated Windows Vista operating system could restore their glory and boost their share price. That didn’t happen. Instead, the stock was hit by production delays and earning disappointment. And every time the stock made a recovery, it dropped again almost immediately.

After seeing this stock went through the seemingly endless one-step forward, one-step backward cycle, my patience finally ran out and cut it loose at $30.23 early this month, though I have heard that the release of Halo 3 was the most successfully entertainment event ever. Today, the stock finally broker the cycle and every MSFT holder is jubilated by the 10% gain after the company released the better-than-expected first quarter earning, which was indeed helped by Vista and Halo

For the past three years, I made a total of $846 from MSFT, mostly are dividends including the $3 special dividend they distributed at the end of 2004. That’s equivalent to an annual return of less then 5%. I probably could do better if I put the money in a savings account.

And what did I do with the proceeds? I bought some ValueClick (VLCK) shares and immediately lost all the money I made from MSFT

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Getting Alibaba IPO Stock: Not So Fast

I have been keeping my expectation high for the upcoming Alibaba IPO on Hong Kong Stock Exchange. Got an E-Trade Global Trading account and transferred a substantial amount of money (to me) in hoping to get a piece of it when the stock begins trading on November 6th in Hong Kong. Now it seems I will have to wait 40 days before I can get my hands on it.

After I posted the entry on Alibaba IPO the other day, I got a couple emails questioning whether I will be able to purchase the stock on Nov. 6. That’s basically my assumption because I can buy an IPO stock on the secondary market as soon as it goes public in US. And when I searched E-Trade’s website, no information turned out that’s related to stocks listed on foreign exchanges.

To make sure I didn’t misunderstand the rule, I called E-Trade Global Trading yesterday and asked specifically the 40-day period and IPO stocks listed on Hong Kong. I was told by a CSR that I can indeed trade the stock on Nov. 6 when it goes on to the open market. However, late yesterday afternoon, reader Mike emailed me a message he received from E-Trade regarding the IPO which says “It is true that E*TRADE customers are not able to place trades for forty calendar days after the IPO begins trading.”

One said Yes and another said No. Still very confusing. So I called E-Trade again this morning and asked if there’s any rules for this matter. At first, the CSR said it’s between E-Trade and HKSE (or any other foreign exchange) that electronic trading for an IPO stock won’t be available in the first 40 days. Then, after putting me on hold for a couple of minutes, the CSR came back and said there’s indeed a SEC Regulation S that defines the 40-day cooling-off period.

I did a little search and found an article on FindLaw.com that explains the 40-day period:

The 40-day “restricted period” for equity securities sold offshore by U.S. issuers who are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (”Exchange Act Reporting Companies”), has been lengthened to one year, and has been renamed the “distribution compliance period” (”DCP”). The DCP is the 40-day or one-year period beginning on the later of (i) the date when the securities are first offered to persons other than distributors in reliance on Regulation S or (ii) the closing date of the offering. During this period, issuers and investors must observe certain restrictions (including compliance representations and legending of the offered shares) to ensure that the securities have not been purchased with the intent to resell them into the U.S.

Further more, according to the article, the rule seems to apply to the so-call Category 2 securities, which are defined by SEC as

• Equity securities of foreign 1934 Act Reporting Companies; or
• Debt securities of (i) U.S. and foreign 1934 Act Reporting Companies, and (ii) foreign non-reporting companies.

And requirements for Category 2 securities include:

• Offering effected as an “offshore transaction.”
• No “directed selling efforts.”
• “Offering restrictions” apply.
• No offers or sales to (or for the account of) any U.S. person (other than a distributor) during 40-day DCP.

Well, if that’s the rule, then there’s nothing I can do but wait for the 40-day period to expire. Sure, I am a little disappointed that I won’t be able to buy the stock on the first day of trading, but it may not necessarily be a bad thing. Unless it goes up every day, there’s always opportunity to get it after the initial frenzy settles down

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Getting Ready for Alibaba’s Big IPO

The first time I heard that Alibaba.com was planning for an initial share sale this year was in 2005 when Baidu.com went public. Since then, I have been following news about Alibaba.com’s initial public offering with a lot of interests because I knew I want a piece of it (maybe I should have bought some BIDU given the price of that stock today).

Early this month, Alibaba.com won regulatory approval to list shares on Hong Kong Stock Exchange and last week, the IPO date was finally settled on November 6th, under symbol 1688.HK. According to latest reports, Alibaba.com has just revised its price range from $HK10.00 - HK$12.00 to HK$12 to HK$13.50 a share due to strong demands. The IPO could bring Alibaba an estimated $1.5B, the second largest internet IPO in history only after Google’s $1.67 debut.

Alibaba.com is a e-commerce website that provides small buyers and suppliers sales leads from China and overseas for online trading. Currently, its online marketplaces have more than 24 million registered members.According to Bloomberg.com, Alibaba’s IPO will value the company at 54 times its estimated 2008 profit. For 2007, Alibaba.com forecasts $83M in revenues, nearly doubling the earnings from the previous year. Currently, Aliabab.com dominates a Chinese B2B market with a 69% share. Its closest rival, Global Sources, has 8.4% market share and is traded at 33 times estimated 2008 earning.

Two months ago, I opened a Global Trading Account at E-Trade. The main reason for having such an account is to trade mainland Chinese stocks that are only listed on HKSE. I have bought one stock already (Industrial & Commercial Bank of China (ICBC), purchased at HK$5.00, now traded around HK$6.50) and Alibaba.com’s IPO will be my next bet. To get myself ready for the IPO, I transferred $7,000 to my E-Trade account and hopefully I could buy about 2,000 to 3,000 shares when the stock begins trading on November 6. In the past, I have bought several Chinese IPO stocks on or a little after their IPOs on the secondary markets. There were some successes (LFC and EJ) and failures (GRRF and XFML). The reason I like Alibaba.com is its dominant position in the e-commerce business in China and growth potentials. And from what I have seen, going with the leaders is always profitable.

Following are some recent reports on Alibaba and its IPO.

• Oriental Morning Post (in Chinese)
• Financial Times
• MarketWatch.com
• Bloomberg.com

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Did You Miss the Rally?

It feels like it was just yesterday that lot of *advices* were floating around in the personal finance blog community on how you should get out of the markets if the 1000+ points drop of the Dow (the Dow as 14,000 on July 19 and 12,845 on August 16) made you sweating and get up in the middle of the night worrying your investments. Granted, the 1,155 points loss was huge in less than 30 days. But is it the right thing to do to simply get out when you are nervous(or make any dramatic change to your investment strategy)?

If “Get out” was indeed what you have done, you may now in an entirely different mood, regretting your action, as both the Dow and the S&P 500 not only reclaimed all the losses, but also are entering new territories they have never been before.

Sure there’s no guarantee how the markets will perform tomorrow, next month, or next year. It may lose 10% again. But if you have a long term investment plan, it shouldn’t be altered by short term market fluctuations. Adjustments is fine, but upside down change isn’t the right course to take.

You are not a kid. Stop investing like one!

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China Life Closed at All Time High

It was just a week ago I was troubled by the steep decline of China Life Insurance (LFC) after the stock lost more than $12 in two weeks. Sure the market was cooperating during that time period when everything was down, but the more than 18% drop was a little bit scary. Then just as the speedy downhill the stock had went through since August 1st, LFC climbed back at even greater pace. In the past five trading days, LFC not only made up all the ground it lost since August 1st, it actually closed at all time high of $67.15 a share Friday.

According to Xinhua Financial News, LFC will report earnings tomorrow. Let’s see how the stock moves after the report.

China Life Insurance Co Ltd is expected to report on Monday a net profit of 18.46-19.82 bln yuan for the first-half to June, up 106-121 pct from 8.97 bln achieved a year earlier, driven mainly by strong investment income, analysts said.

The mainland insurer said last month that its first-half net profit could be up over 100 pct due to steady insurance business growth and a substantial increase in investment gains.

Credit Suisse expects the company, which is listed both in Hong Kong and Shanghai, to report a net profit of 19.04 bln yuan for the six months to June, on strong growth in investment income.

The brokerage estimates net investment income for the period at 18.11 bln yuan, up 60 pct year-on-year, while realized and unrealized gains are seen at 31.38 bln yuan.

Net investment yield is seen coming in at 4.7 pct.

“We believe that China Life struggled to maintain sales momentum in first half, with portfolio run-off, equity competition, bank competition and stepped up efforts from direct competitors,” Credit Suisse said, but added that net earned premiums should rise 8.5 pct to 58.88 bln yuan.

HSBC Securities gave the most optimistic forecast for the insurer, with net profit seen up 121 pct at 19.82 bln yuan.

“We expect earnings in the first half to surge on strong A share performance. (But) whether the momentum can continue in the second half depends on whether the stock bubble is going to last or burst,” it said.

It expects China Life’s total investment income to rise 147 pct to 43.49 bln yuan in the first half, while net earned premiums and policy fees are seen up 17.2 pct at 63.58 bln.

BNP Paribas projects a first-half net profit of 19 bln yuan, up 112 pct from a year earlier, boosted by 16.08 bln yuan stock-investment gains.

It said, however, that China Life’s insurance premium figures have been under pressure in the second quarter.

“China Life’s year-on-year premium growth at end-June was low at 8.9 pct, falling behind its full year expectation of 13 pct year-on-year,” it said, but noted that key individual insurance sales still remain intact and should support the top line in the second half of the year.

Daiwa Securities expects China Life to report a net profit of 18.46 bln yuan for the six months to June, up 105.9 pct from a year earlier.

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Investment Ideas from Berkshire Hathaway’s Portfolio

On August 14, 2007, Berkshire Hathaway filed with SEC its second quarter Form 13F. For the quarter ending June 30, 2007, Berkshire reported 40 stock holdings in its portfolio, including

• American Express (AXP)
• American Standard Cos. (ASD)
• Ameriprise Financial (AMP)
• Anheuser-Busch (BUD)
• Bank of America (BAC)
• Burlington Northern (BNI)
• Coca-Cola (KO)
• Comcast CMCSA (CMCSK)
• Comdisco (CDCO)
• ConocoPhillips (COP)
• Costco Wholesale (COST)
• Dow Jones (DJ)
• First Data (FDC)
• Gannett (GCI)
• General Electric (GE)
• Home Depot (HD)
• Ingersoll-Rand (IR)
• Iron Mountain (IRM)
• Johnson & Johnson (JNJ)
• Lowe’s Companies (LOW)
• M&T Bank (MTB)
• Moody’s (MCO)
• Nike (NKE)
• PetroChina (PTR)
• Procter & Gamble (PG)
• Sanofi-Aventis (SNY)
• ServiceMaster (SVM)
• SunTrust Banks (STI)
• Torchmark (TMK)
• Tyco International (TYC)
• US Bancorp (USBB)
• USG (USG)
• UnitedHealth Group (UNH)
• United Parcel Service (UPS)
• Wal-Mart Stores (WMT)
• Washington Post (WPO)
• Wells Fargo (WFC)
• WellPoint (WLP)
• Wesco Financial (WSC)
• Western Union (WU)

Actually, most of its investments have been held for a long time as Mr. Buffett likes to take the buy-and-hold-forever approach, if possible, after identifying a good stock. What’s interesting is to see how the portfolio has changed from time to time to get an investment idea from what The Oracle of Omaha is buying and what he’s selling.

Berkshire has recently added Bank of America and Dow Jones to its portfolio which did not appear in their first quarter filing. According to a Morningstar article, Berkshire also added stakes in Burlington, J&J, Nike, P&G, Sanofi, UnitedHealth, USB, and Wells Fargo, while eliminating positions at H&R Block and Pier 1. At the same time, it has reduced shares at Ameriprise and Western Union.

The article also noticed that neither Norfolk Southern (NSC) nor Union Pacific (UNP) appeared in the portfolio. The reason could be that

Berkshire is still accumulating a position in both Norfolk Southern and Union Pacific, and regulators have potentially allowed the conglomerate to omit the disclosure during this accumulation phase.

Of the stocks Mr. Buffett is investing, I also have shares in Bank of America and Procter & Gamble, purchased through DRIP programs. These are my parts of my dividend investments that I hope to generate passive income later.

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Did You Feel the Pain?

There is an article in New York Time today with the title “Small Investors Feel Less Pain as Stocks Slide” (registration may be required). The main theme of the article can be summarized by this paragraph:

The excesses in the financial markets are now generally believed to reside in complex mortgage securities and other esoteric investments, not in the traditional stock and bond markets where average Americans put their money.

This could be true if we compare the losses of the broad markets in recent weeks to the losses of some hedge funds investing risky assets backed by mortgage securities. However, the article goes on with suggestions that things could get worse before getting better and it’s quite normal for the markets to see a 10% correction during a bull market. A 10% fall from its peak reached on July 19th will put the Dow at 12,600, another 640 points drop from last Friday’s close. If the indexes will indeed fall 10%, will you still maintain your current investment strategy? Will you do anything different?

For worried investors who already felt the pain in this turbulent market, the article suggests safer investments such as Treasury bonds:

Many financial experts suggest investors consider moving their money to less risky investments like Treasury notes and blue-chip stocks, which they expect to now perform better than junk bonds and smaller stocks.

Then again, there are many cases in recent decades that “stocks began to rise again” after declining 6% or more, according to the article. The problem is nobody can predict when things will turn around in the current market conditions. Staying out of the market for too long because of the possibility of more downturns could mean missed opportunities if we look at this market in the future. So what’s the best long-term investment strategy?

Individual investors should