Roy Ho’s Blog

Senate Banking Committee Chairman Chris Dodd (D-Conn.) yesterday said that his panel on Thursday will consider a draft housing bill that would allow the Federal Housing Administration to insure up to $300 billion in refinanced mortgages, and create a new regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Under the legislation, lenders would, among other things, volunteer to substantially reduce the amount of the original mortgage note. In exchange, the FHA would insure a new loan at a 30-year fixed rate that the borrower could afford. The House last week passed a housing package with some similar measures.

This is not the version of Treasury Secretary Henry Paulson. 

This plan is more consumer-centric than that of Henry Paulson, although improvements can still be made.  For instance, the mortgage write-down has to be initiated by the lender in this version.  For that reason, the lenders have the strongest incentive to unload the riskiest mortgages first.  However, the riskiest mortgages may not be the neediest. 

This riskiness may be perceived as loan by asset.  The lender may also see that as mortgage payment by burrower’s income.  However, the most desperate burrowers usually would see the need as payment by income.

Burrower’s consent is not needed.  The house has to be owner occupied.  The gov’t will also own part of the house’s equity (proceed upon sale).

Bush has threatened veto this legislation.

The text can be found in the Banking panel of the Senate website.

CNN continues to report the newest death toll caused by China’s earthquake.  What stocks are affected by this earthquake?  This natural disaster in China is a lot closer to America than Myanmar’s simply because China is a lot more involved in the global economy.

More than 2 dozens of Chinese public traded companies can be found in the States either as stocks or as ADR.  The PetroChina (NYSE: PTR) is the first one to be affected because it has fields in Sichuan, the province where the quake occurred.  Those oil wells are now shut.  This company is the largest oil company in China.  Nippon Oil (TSE only) has a joint venture with PetroChina.  

China Telecom (NYSE: CHA) may get the worst hit since it has 10% of all land lines in the region.

Sinopec (NYSE: SNP), which is developing a field in Sichuan may see decrease in revenue.  Damage to this gas field is unknown.

China Life (NYSE: LFC) is also dropping since it is expected to have a lot more life insurance claims.  This life insurance company is the largest in China.  The selling pressure is short term since the life insurance penetration in that area is low.  In fact, the price has come back up after the initial drop.  This selling pressure only lasted for 1 day.

PICC Property & Casualty (other-otc: PPCCF) may actually get a bigger hit than the life insurance companies.

Negative impact on HSBC will be minimal since this bank has very exposure to this geographic area.

Qingling Motors (OTC: QGLHF) will get negative impact.  This area has some exposure to auto factories and circuit design.  However, the foreign trade is not concentrated here. 

Huaxin Cement’s price is going up already, in anticipation of more infrastructure projects.  Huaxin is traded in Shanghai only.  Lafarge SA (OTC: LFRGY), of France, is the parent company of Huaxin.  Cement company Anhui Cement is other-otc: AHCHF.

Construction equipment companies that have a presence in China will do well.  Check Caterpillar’s (NYSE CAT) exposure in China or Hong Kong.  Its competitors are Deere, Gehl.  Astec builds road construction equipements and components (NASDAQ ASTE).  Check its exposure in China or Hong Kong.  A strong exposure will be a good sign.   

All medical supplies companies are going up in China and Hong Kong.

Foreign companies such as IBM, Intel, Wipro (NYSE: WIT) have sites here.  Japanese Toyota and Hitachit also have sites here. 

This earthquake will drive up inflation in China.  Given the tourism brought by Olympics, Chinese yuan is expected to appreciate until the end of the games.

If your desired company cannot be found in the States, find a proxy company in Hong Kong stock exchange, or ADR in the states.  If you are interested at funds, then get an Asian (or Far East) fund that has a heavier emphasis of infrastructure and medical supplies industries, a heavier emphasis in Hong Kong.  A lot of companies in China may get suspended if it has a big swing in price.  Hong Kong does not have such restriction.  This gives your mutual fund manager a greater flexibility.

The earthquake in China will certainly have a death toll of over 10,000.  This quake can be felt as far as Taiwan and Thailand.  UN aid relief agencies have very limited roles in China.  Most charities still rely on Hong Kong to work with Chinese goverments.  Of all agencies, UNICEF has the best working relationships with China. 

Is this a man made disaster?

The epic center is 600 km away from the Three Gorges Dam, the largest in the world.  It holds 9.5 cubic miles of water (Denver is a mile high).  That amount of water is approximately equal to 40 million metric ton.  With that much weight sitting on a quake zone, it is very likely to alter the movements of the plates.  And if the weight is acting against the geological movements, it can induce more earthquakes than normal. 

There is precedence: Koyna Dam in India, earthquake in 1967.

The area is not a major economic centre, not a hot tourism spot, not a major manufacturing site.  The immediate economic damage is well contained.  Shanghai index may get affected.  However, Hang Seng Index in Hong Kong is more reliable to measure the magnitude of the problem.

The reaction will be a much greater challenge to the government.  It will measure the maturity of emergency response team in China.  How is China’s FEMA doing?  How will the local financial system, at the county level, sustain the resources exchange?  How does China recover the transportation system?  It now seems the snow storms earlier this year were more like a preparation exercise for all the troubles China is now facing. 

Will China use this opportunity to divert more resources to Tibetan areas and score more points?  Will Dalai Lama be able to make a stronger case for his involvement / return to heal the wounds?

In the states, capitalism is blamed for the environmental crisis.  The opposite, i.e. communism, could be worse.  

Forbes published a few articles related to patent laws that are English friendly in the last 10 weeks.  The patent universe is likely to change very soon.  And Rumsfeld probably would not like this idea. 

The legislature has been considering patent laws reforms for the past few years.  The pressure of this reform comes from major corporations, which hold a lot of patents, have been getting sued by patent trolls, or patent speculators, for royalty fees.  Additional royalty fees of course cuts into the profit margin.  However, intellectual property suits are costly to fight simply they are so difficult to understand (and thus higher legal fees).  

For some industries, intellectual property (IP) lawsuits affect the legal fees and royalty fees.  However, for some industries, these lawsuits affect their capitalization the suit hits the news.  These are the IP-centric industries, such as IT and medical industries.  

When RIM, the maker of blackberry, got sued for patent infringement, its stock price dropped to its knees.  After all, RIM has nothing but blackberry.  And even if RIM’s patent is not void, a heavy royalty fees will seriously affect its profit.  

A key element of the reform is revolved around unique concept of American patent system: first to invent versus first to file.  The congress will remove the first to invent rule and make US to be in sync with the rest of world: first to file.  In the first to file rule, one needs not be an inventor, but just to be the first to walk into the patent office to own all rights of the invention.  

The first one to be disadvantaged is obviously the legal industry.  However, not many people will feel sorry for that.  And we will skip.

A loss to one may be a gain to another.  Here are some of those:

The second to be affected (not necessarily disadvantaged) are the medical and IT industries.  A lot of drug patents are expiring, just like the copy rights of a lot of Disney characters.  For these US giant pharmaceuticals to stay afloat, they need new patents.  They either have to invent or find other people’s invention to file before the inventor does.  So, the firms that are better industrial espionage will do better.  

Some items are affecting directly the rights of the inventor: 1) Damages will be restricted as well, a classic republican cause; 2) Challenges will be for the entire life span of the patent rather than a probation period; 3) Disclosure of invention will be required prior to granting the patent. 

Who gets the benefit out of this?  Infringers.  Infringers will be able to have a cap on the compensation to the patent owners, able to challenge the patent until the patent runs out (yes, they can), able to learn the invention before it is patented and therefore free from paying royalties fees, and no injections from the inventor to stop the infringements. 

Alright, how does it relate to Rumsfeld? 

As a defense hawk, Rumesfeld is interested at slowing the China’s economic growth.  Making it cheaper for patent violation is a big favour for the medium enterprises in China.  Inventors lobby groups probably would want to get more funding from pharmaceuticals and hire Rumsfeld to be the lobbyist for a cause that its core constituents probably does not have the funding nor the votes for.

India held its last election in 2004 and due for another one in 2009 or earlier.  The party in power is Congress and they won primarily for their agenda for the lower castes and/or the poor.  India has been having great economic performance as well.  India still has potential to be exploited.  This potential can be achieved when the social integration of the untouchable is successful.  And investments in that area require a tacit knowledge. 

CNN made a mistake in using the word class.  It could have been a typo if class were used consistently through out its content.  However, class and caste are used inter-changeably in the content.  That seems to suggest the difference between caste and class is misunderstood.  Class can be ascribed, as Plato suggests.  Caste is innate.  

Prior to Congress’ victory, many foreigner investors considered the previous government led by BJP as more investor friendly.  This is to argue otherwise.  

BJP’s core value was Hindutva.  That was to ask: who is Indian?  That came as polarizing as Bush was to the States.  Yes the poor were ignored and that constituted as a block of votes for Congress.  However, investors need this much needed Congress for political stability is the first requirement for any investor into long term investment cycle.

Violence in the rural areas can be instigated by religion as well as by caste differences.  This is only one case that gets to the media.  

Labour upgrade is difficult because education is not as accessible to the lower castes as the upper castes, not necessarily just the untouchables.  Jobs, lending practices are sometimes not favourable to the untouchables in some areas.  

Although the federal government has strong affirmative action laws for the lower castes since the first legislature, social inequality continues.  And sometimes it can turn violent with great organizational support.  

Differences in religion can be just as problematic.  And with the separatist movement at the far corners, although calming down in recent years (or decades now), managing such a diversity requires great political skill.  

Having investments in that area requires all this local knowledge.  The current Congress is just as pro-economic growth as BJP.  In fact the current government is much better equipped than anyone else to manage growth in India.  They have a good finance minister from a major seaport of India.  They have a long history of governance.  In a country where they have strong regulation and a lot of oligopolies, this is an important asset.  The current government is also the party that can unite different castes, religion, promote peace in the region and continue its relationship building effort with its greatest perceived threat of China at the same time.  

There are reasons for both house and senate not to do anything with Bush in regard to recession (or anything else, like treaty ratification) for their personal and political gains.  However, such a delay may not be a bad thing for the country.  

A new president will be mandated by November, almost down to 6 months now.  A new administration will start operation by next January, 9 months away.  So, the good reason for not doing anything with Bush is: if legislations are passed now, then it will be the new administration that has to execute them, what if these legislations will completely contradict to the new administration’s mandate?  Is this legislative prescribing “solutions” that are going to be doomed? Or even worse sour the relationship with the new president?  

And if these legislations turned out to be successful, guess what, the outgoing president will definitely claim to be his credit years from now in his memoir just as the same time the new president will claim to be his credit.  Will any new president like such a trap?  How can any well intended legislator purposefully set such a political trap up for the new president to step on?  

We know there is no solution that would be “the only” solution.  Creating grand standing solutions right now requires an unquestionable monolithic ideological conviction that says this is the only solution to the problem.  The worse is this conviction can be misinterpreted as: arrogance. 

How can the legislators trust the new administration to execute these solutions faithfully when they just push them down the new administration’s throat?  Therefore, the delay tactic is not only for the gain of the legislature as a whole as well as individuals, but also prudent for the nation.  

Bush is complaining the Congress is delaying his every effort to get us out of recession, CNN reports.

What does he expect?  He is about to go.  Who would want to send him legacy legislations?  

Everyone should be in a transition mode and see what solutions will better fit the direction the next President will want to take.  After all, there is never one solution.  So, any legislator would think “why not wait and see?”

Any real meaningful legislation will require work from both House and Senate.  Every Joe, Dick and Harry will want to add his stamp, his pet project, pet cause, pet donor’s wishes to the legislation.  And it is much better to trade favours with a new president than an out-going president.  

All possible outcomes from this congress are items that are fiscally inexpensive and good for TV items.  This mortgage crisis cheque is a good example.  Everyone gets a few hundred bucks.  It is good for re-election.  And if the problem persists to 2009 January, then there is something the legislators can trade with the new president.  

This is just a blamemanship game. 

The political solutions usually cannot do a dent in a short run.  The effects of government fiscal policies and programs usually do not affect the economy in a matter of months.  These interventions affect the market set up and their effects are measured in years and decades.

Short term interventions require government’s active participation in the market (be it real estate or stock market or whatever else).  This kind of short term interventions are effective only when the action 1) is rare and 2) is taken shiftly.

Interest rate fluctuation is the first type, however the Fed can affect only the interest rate aspect of the economy. And that is not the solution for everything.

Shiftly is a time element.  The reaction has to be quick.  Such a quick action can only be carried out by an undemocratic institution, like the Fed.  And China’s interventions are effective because they are undemocratic.  They can shut down all stock transactions to serve whatever the political purpose is.  But we live in a democracy with freedom, right?

Some environmentalists are embracing the more expensive gas as the way to push for a greener America.  And we are now getting close to USD$120/barrel, after CNN reports a strike in UK’s North Sea. 

We all know that there is very little difference between Obama and Clinton in terms of green policies.  We also know that McCain has risked a lot more of his political capital against his Republican Party than Obama and Clinton have risked against their Democratic Party.  Ever since Bush announced his own plan, the differences among green policies in the country is getting narrower.  However, has anyone actually explained anything other than recycling and driving less?

Climate change is becoming an inevitable issue in the United States as it takes more and more media space as well as more and more votes from opinion polls.  Some government intervention will eventually occur.  How will these actions affect our life styles?  And it is more than gas prices or recycling.  How will it affect our consumption? Land prices? Zoning? And one may ask: “how are they related in the first place?”

Cost of transportation from your house to your job may not be that much.  However, the cost of transportation factors into everything in your household.  All this cost essentially is dependent on the distance between your residence to a national major transportation node.  Now, we are looking at a fraction of all your after tax income as transportation cost.  At the aggregate level, companies move ever closer to national transportation nodes.  This in turn encourages higher density, nationally. 

People are demanding more and more “walkable communities”. People are demanding more green space to produce more oxygen production, more farm land and everything else natural.  Governments and voters will eventually find out that the most effective way to conduct business is to revitalize downtowns everywhere.  That is equivalent to increase density. 

Instead of creating layers and layers of enforcement agency, chaotic laws that benefit no one but compliance lawyers auditing firms, governments may eventually consider turning to some economic or organic ways to increase density in order to minimize the eradication of green space and farm land.  If fiscal policy is to achieve this goal, then it will turn to some modification of property tax. 

Most of the property tax in North America is calculated based on two parts: the value of the property and the value of the land.  Very often, more than 2/3 of your property tax is derived from the value of property rather than the land.  This taxing philosophy prevents the most innovative use of the most expensive resources (land) in a city.  As a result, no land developer sees the value in having more retail space, having more office space, more residential space on the same piece of land. 

Values of properties in downtowns have little to do with the properties themselves but more to do with the land, i.e. location.  A tax philosophy that encourages efficiency of resources would place tax more on the value of land.  In such a scheme, the most profit would be extracted based on the value of the land rather than the property.  This encourages having the best property on a given piece of land rather than having the least cost to have a property on a valuable land.  Two storeys buildings in a downtown of a metropolitan of a 1 million would then become uneconomical.  It would only encourage a speculator or a developer to develop a high rise to make use of this most valuable land. 

Therefore, if your house happens to be in a big metropolitan, green politics will eventually make your wallet to realize the value of your house’s location.  Saving on your property tax bill may encourage you to sell your house.  Comparing house value based versus a land value based property tax scheme, one may argue that suburban residents and country residents have been subsidizing downtown residents through property tax.

How so?

Land prices in country vary not as much as cities.  Lands in cities vary the most in downtown area.  A 100 by 100 feet parcel of land in a downtown can easily fetch the same value of an acre in the country although the properties on top of the land are the same. 

The high expense of gasoline is effective in making people aware of their consumption choices.  However, letting the location of a residence to be swayed by gasoline price is difficult to be justified for a lot of families.  And since downtown land owners will prefer their continual land squatting for the next perfect sale opportunity, such a property tax modification may speed up the progress.

Therefore, having a property tax based on land value actually would serve country voters much more favourably than the suburbs’ and more for the suburbs’ than the urban areas’.  At the end, having such a green fiscal policy actually brings more benefit to the Republican voter base then Democrat voter base.  You would think voters make rational choices.

However, the conventional wisdom

In fact, a property tax scheme that is completely focused on the value of land or just the sale price of the property and land will eventually make land speculation more expensive, land development more expensive, building them require more engineering sophistication. 

Therefore, no one would want to squat on a piece of downtown land for decades without either developing it himself or selling it to a developer since the tax would serve as a good indicator to the owner how much value the land could possibly worth. 

Such a scenario will moderate urban sprawling depending on the proportion of land value in the property tax.  Downtown land owners will be the most immediate beneficiaries.  The land owners in the fringes of the city also see benefit.  The grumpiest of all the land owners will be the ones who have been expecting urban development in the future 10 years on their land but now an unforeseeable eternity. 

Land development is a hair splitting business.  A few basis points in the business loan will make or break the deal.  In this green scenario, since land becomes even more expensive and a higher density is very much needed to become profitable,

Downtowns in the states have been in decades of decline.  This is only partly due to the white flight.  A big portion of incentive has been due to the government unintentionally induced incentives for land squatting.  In other words:  a big portion of disincentive for innovative and cost effective use of land has been unintentionally created by governments all over the country. 

Being green is about having the least “economical footprint”.  In the words of economics, it is about being “cost effective”, “consuming” the least resources.  Currently, not all the costs are being factored into the environmentally wasteful products and therefore we are consuming at a cost that is far below the recovery cost of our consumption causing to the environment.  Fixing the environment requires money, just like anything else. 

Suppose the government finances the fix from levying a tax on gasoline.  Gas consumption goes down while demand for public transportation goes up.  Automobile manufacturers will have to create more energy efficient cars for the market.  But that is not the end of it.  This change of transportation habit is only a facet of the high expense of natural resources. 

There are many social injustices that require rectification.  Climate change is only one of them.  The difference is urgency, or priority.  If there is money to be made, there is a way for many willing change agent who will work on the cause.  For instance, Walmart is taking a serious effort into greening itself. 

If that is not possible, there are charities.  However, no one can fund a non-profitable cause with as much resources as a government can since government takes taxes off everyone to finance the actions. 

McCain promises a gas tax relief to fight recession, see chart.  This is another political talk completely for electoral consumption.  This piecewill explain why.  In a time like this, mergers are expected.  And this industry is very sensitive to the price of oil.  If it were not because of pilot union and anti-trust issues, mergers in airline industry could have happened long agon.  Will a recovery prevent more mergers? 

More importantly, when will we get out of this recession? 

We can buy all sorts of data.  We can then plug the data into all kinds of models.  Depending which economist and which paper / website you land on, you get a different estimate.  Of all these estimates, only one (1) of them will be correct.  So, as you get more and more estimates, the probability of getting the correct one among these will turn to zero (probability = 1/N, as N increases, probability goes to 0).  So, when will the government get out of this hole? What can the government do to get us out? This is an election year, they better say something! Right?

This piece does not interpret economics based on knowledge from the discipline of economics.  This piece explains some of the political certainties around this recession.

We are in an election year.  In particular, an open race election year.  That means no one can play and say “well, I will just stick with the same guy this time.  Although I did not vote for him and I don’t like him much, I feel even less certain about the other guy.  If I vote for the incumbent, at least I know what is in store.”  Everyone is forced to choose for a new guy.

This is a political risk to the equity market, to the currency market.  As the output of US slowly decrease in proportion to the rest of the world, more of the investment $ are from outside.  So, while all the money want to find a place to wait this out, they naturally take the money home for a couple months.  So, even if we were having a boom, our boom would not be as smooth.  And of course if we go down, we go down harder, faster and longer. 

Political risk will evaporate when the election result is settled.  Given our interesting history, I doubt all the players have a fixed date in mind as to when the election will be settled. 

Similarly, no politician wants to get their hands dirty at this time of the political cycle.  They are either busy running their re-election campaign and therefore no time to study the fix of the recession legislation or they are waiting for the next White House tenant and bargain their best deal out of any kind of recession fix.  So, no meaningful fix can come.   We will get a tax rebate.  However, this rebate is not a meaningful fix.  A tax rebate is a political fix during a recession, i.e. to make the voters feel good enought to vote for the incumbent.

Next, when the election is settled, the out going president is unable to fix anything.  And he should not.  For if he passes any legislation or even by executive order, how can such action be honored by the next president?  It would only get messier.  A responsible outgoing elected official would not do such a thing. 

Then it comes the new President.  Now, when will this happen?  That would already be 2009 January.  A new President still has to check the pulse and any other mess under the carpet that the previous president did not pass along “informatively”.  But the time the new guy can have prescrition, we will be looking at another 2 or 3 months.  That will work out to be 2009 April.

When there will be an idea, a decent idea, it has to get through the negotiation with the House and Senate.  Every Joe, Dick and Harry has his own pet proect, pet cause, pet donor to put on a price to pass the legislation and what not.  That will also take a little of time.  Let’s give it a month for all phone tags, tea times, the favours and scores to get settled over with.  We are now looking at 2009 May.  Forget about the summer and all that.  Any economic plan to overcome a recession will not work over a weekend. 

If the economy will come back based on government intervention, the earliest time will be by the fall of next year.  We have two (2) recessions that lasted 16 months (73 and 81) in the last 60 years.  If an economy can only get back on its feet based on government intervention, then this is usually not a recession.  This probably is a depression. 

So, don’t listen to the political talk.  These “solutions” usually cannot do a dent.  The effects of government fiscal policies and programmes do not affect the economy in such a time span (as in months).  These interventions affect the market set up and their effects are measured in years and decades. 

Short term interventions require government’s active participation in the market (whatever market we are concerned with).  This kind of short term interventions are effective when the action 1) is rare and 2) is taken shiftly. 

Interest rate fluctuation is the first kind, however the Fed has been too active and its effect is wearing out. 

Shiftly is a time element.  The reaction has to be quick.  Such a quick action can only be carried out by an undemocratic institution, like the Fed.  And China’s interventions are effective because they are undemocratic.  They can shut down all real estate transaction given one day’s notice in order to freeze the price drop.  But we do not want that kind of life, do we?

The checks the federal government cannot save you, right?  “They are better than nothing” is exactly what it is.  It is a feel-good thing.  It does not save you and the politicians knew it.  It is for them to say they did their work and it is unfortunate that it did not work you, in this case.  

The moral of the story is that expect government interventions to be ineffective to save us given the time frame we wish a recovery will happen.  Some of the government interventions will be effective though, if we can sit with a much longer time span. 

Zimbabwe got a new twist.  CNN reports Mugabe decides not to atten the submit to be held in Zambia, its neighbour.  However, the opposition (Tsvangirai) is attending.  This will give the Tsvangiraia great opportunity to sell his plan of stabilization and strengthens Tsvangirai’s edge both internationally as well as domestically. 

The instability in Zimbabwe affects copper’s prices.  However, the copper price has been receding from its historical high.  This Zimbabwe episode will provide a support price level to copper.  So, this price will probably slow down.

Further down, Sino Union Petro & Chemical secured an oil field with Madagascar, expected to be worth 2B barrels.  China will own 50% of the venture. 

Chinese oil exploration firms have been trying to secure sites overseas with little success.  This is a firt major break not only for them, but also to Madagascar as well.  Madagascar has not produced oil for 60 years, reports Reuters! 

This company is not traded in LSE nor NY.  It is traded in HK only. 

This will also strench India’s resources as well.  Although India is not in as an urgent need as China in terms of resources.  Over the years, China is slowly moving in East Africa (more so than Africa in general), the traditinoally perceived sphere of influence by India.  Not that India has navy bases all over the place, but it has a lot of migrants and control a big portion of trade in East Africa.  It will only be a matter of time for India to express its security concern not only about the Himalaya border and Parkistan, but also about pan India Ocean security issues with China.  These oil exploration companies will have to learn that getting listed in London and NY helps them mitigate political risks.

For India, issues such as Kenya and Zimbabwe will have to become the leverage points for it to enter the stage.  It is probably too late for this episode.  But next time.