The market is starting to turn over

So it is a wise decision to sell in early March so far. That is if you have followed my suggestion. Some of my friends are still waiting to sell in May. Well, I hope they are lucky and I am wrong. Now the big question is whether company profits are starting to plateau. It is probably not as obvious at this point but as the earnings season unfolds, we will know more about it. I am not optimistic about earnings growth, but it is not safe enough by my standard to do naked short. So if you are brave enough, you might take some bets on the short side, especially on those benefiting big from the risk rally.

HK's future

HK really has to think hard to find its right place in a more open China, instead of waiting for Beijing’s implicit subsidies. Otherwise it would lose its future pretty quickly. The 20 some percent high school graduates entering college is extremely low and the 20% poverty rate is extremely high. The future might move past HK pretty quickly.

But the tycoons do not care, as long as they can keep paying no taxes on capital gains, from which they draw most of their income, while charging high prices on everything in HK, from which they make a lot of money.

• HEARD ON THE STREET
• Updated April 11, 2012, 12:02 p.m. ET

China Gets in the Zone for Luxury

By LAURIE BURKITT And TOM ORLIK

China's government departments are locked in a battle over whether to cut the country's luxury tax.

The Ministry of Commerce wants to drop a roughly 30% tax that drives shoppers to Hong Kong and Paris to buy their Prada handbags and Chanel sunglasses. The Ministry of Finance is suspicious of a plan that threatens to lower tax revenue. The outcome could be a boon for the luxury brands themselves.

One possible compromise is the creation of special luxury zones— urban centers where the normal high taxes are lowered. If that plan gets off the drawing board, the big loser would be Hong Kong, where mainland shoppers arrive in droves to take advantage of zero luxury taxes. Around 28.1 million arrivals from China made up more than two-thirds of the visitors last year.

Inbound visitors spent about 253 billion Hong Kong dollars (US$32.6 billion) in 2011, equivalent to 13.4% of gross domestic product. Queues of mainland shoppers outside Hong Kong's most expensive stores testify that a big chunk of that spending is from luxury tourism.

As a style center and shopping hub, Hong Kong is akin to China's New York. But losing its price advantage over mainland cities would hurt its retail sector. A downturn in luxury shopping trips from the mainland could have a meaningful impact on hotels and airlines as well.

The big winners would be the luxury companies. To be sure, the big brands have already established networks of stores in China, so a change in the tax regime wouldn't necessarily make luxury goods physically more accessible for Chinese consumers. Aaron Fischer, luxury expert at CLSA, downplays the impact of relaxing the tax laws. Chinese demand for luxury goods hit $46.9 billion last year, of which $27.1 billion was spent abroad; the main impact of lowering taxes or creating luxury zones would be to drag some offshore sales onshore, Mr. Fischer argues.

Still, the creation of luxury zones on the mainland would bring luxury goods closer to home for parts of China's rising middle class that don't want the hassle and expense of a trip to Hong Kong. More importantly, lowering the taxes gives the luxury houses an enviable choice for ratcheting up the profitability of their mainland businesses. They can lower prices and generate more volume or keep prices high and reap higher margins. Either way, they win.

 

Write to Laurie Burkitt at laurie.burkitt@wsj.com and Tom Orlik at Thomas.orlik@wsj.com

Investment and Entertainment

Most investors equate investment to entertainment to some extent. Many, like the retail investors who have no information (e.g., my dad), invest purely for the entertainment. This is a severe behavior bias that we all need to guard against.

In the last couple of months, there are friends who ask me when I would advise them to sell, especially when they do not see I post anything. They are always itching toward the next trade. There will be people who would regard low portfolio turnover as being slacking on managing money for them. This happens even to many institutional investors.

There will also be people, who have MBA degrees from great schools and work for big banks, argue that they are still unclear what to do when they see my posting on risk on and risk off. Some of them also argue that my postings are not a track record because I do not tell them exactly what to do. Well, the simplest thing would be to buy or sell a Heng Seng index ETF, mutual fund, or futures contract. It cannot be easier. If one wants to spice up the trade a big more, bringing in high beta stocks and long term US treasury bonds or bond ETF, mutual funds, or futures contracts. Since some of these friends are managing money for other people, I think their clients should be really concerned. If these friends are so lazy to even think of these, they probably should give their clients’ money, plus their own money, for me to manage.

Investing should really be emotionless. Ups or downs, right or wrong, it should not affect your mood and behavior. This takes some experience to achieve. Good luck in getting rid of the entertainment aspect from your investment.

It is time to lighten up risks

I meant to post the day after ECB’s second LTRO to post this update but I was too busy. Four seminars of three papers in three weeks are a killer and I am still digging out of the hole due to the travels done in the three months till early February.

So what has changed? 1) ECB finally answers to the call of duty to its lender of the last resort responsibility and the risk of imminent breakup of Eurozone is greatly reduced. But ECB does not have clear plan for more large scale QEs unless things gets much better. 2) Bernanke announced the same intention in the last few days. The US first quarter GDP estimate consensus is likely to be revised down slightly. The US corporate earnings have peaked out. If it were not due to the blowout profit from Apple in the last quarter, corporate earnings would have pivoted then. 3) China will not loosen up as much as people have expected (of course they have always yielded to pressure of economic slowdown every time in the last ten years, which finally leads to the current dire situation).

On the eve of ECB’s second LTRO, the market has priced in all the great news (and likely more than the realistic level). Now some of the good news has not come as much as expected. So the market is a bit disappointed and is consolidating. It might still go up in more volatile environment than in the last three months but the risk has started to overweigh the return. The further gains can only rely on investors’ unrealistic overreactions to good news.

Is this a good time to set up shorts or buy long term T-bonds? I would wait at least another couple of weeks to examine the situation. Likely the biggest potential bomb is disappointment in earnings, which would happen after April 1. Even then, one has to see how much a correction it will be, if any.

When to set up the same trade that I described to start on Jan 1 last year for last year

Since I have been telling people about a potential rally in risky assets from last December that could last till the end of the February, due to the temporary extension of US payroll tax cuts to the end of February, the best time to set up the trades that I mentioned as performing extremely well last well may be some time close to the end of February, unless some disaster in Eurozone erupts. Also, if the US Congress extend the same cuts longer, the markets could have even longer a relatively calm period.

Is there anything to do in the meantime? Are those trades the only thing one can do by believing my longer term predictions? Yes, of course. Plenty of them. As I mentioned a few times in the past, "Only the complacent lazy investors, which is the majority, hope for bull markets to make money."

Who is the most novice investor I refer to in my prior post?

My dad. He is about 75 and a retired professor. He has gambled invested in Chinese stock markets for a long time but I do not think that he made any money from this effort. Throughout 2011, I strongly urged him not to invest in stocks but put money in the highest interest yielding saving instrument he could find or Chinese T bond. Since I have not been back to mainland Chinese for almost six years now, it is difficult for me to check his actions. But I did learn that he is not heeding my advice even if I have been trying all the means to rein him in. When I finally met him this last December, he has lost a decent sum this year, instead of making money if he has followed my advice. It made me realize how biased human behavior could be. Even though it does not mean you can necessarily make money from market inefficiency, the markets are surely not efficient, to the smarter minds!