QE Bubble Burst

Government debts from around the world are being monetized by the central banks of the world. But under no scenario would there be a burst of bubble just because the central banks can always take on more debt on their balance sheets.

The Bank Of Japan version of QE is way bigger in proportion to Japan's GDP. Again, this would not lead to a crash since money supply can be created to support the debt. This would lead to weaker currency as USDJPY increased quite a bit since BoJ QE started.

http://blogs.wsj.com/moneybeat/2014/11/05/should-the-ecb-follow-the-bojs-shock-and-awe/

Porky U.S. Federal Tax Credits

Section 114. Extension of Indian employment tax credit. The provision extends through 2016 the Indian employment tax credit. The Indian employment credit provides a credit on the first $20,000 of qualified wages paid to each qualified employee who works on an Indian reservation.

Section 124. Extension and modification of accelerated depreciation for business property on an Indian reservation. The provision extends accelerated depreciation for qualified Indian reservation to property placed in service during 2015 or 2016. The provision also modifies the deduction to permit taxpayers to elect out of the accelerated depreciation rules.

Section 156. Extension and modification of production credit for Indian coal facilities placed in service before 2009. The provision extends through 2016 the $2 per ton production tax credit for coal produced on land owned by an Indian tribe, if the facility was placed in service before 2009. A coal facility is allowed only nine years of credit. The provision modifies the credit by removing the placed-in-service-date limitation, removing the nine-year limitation, and allowing the credit to be claimed against the AMT.

Indian here is defined by Native American, not people from the nation of India. 

Section 121. Extension of classification of certain race horses as 3-year property. The provision extends the 3-year recovery period for race horses to property placed in service during 2015 or 2016.

Section 123. Extension of 7-year recovery period for motorsports entertainment complexes. The provision extends the 7-year recovery period for motorsport entertainment complexes to property placed in service during 2015 or 2016.

Section 130. Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. The provision extends through 2016 the eligibility of domestic gross receipts from Puerto Rico for the domestic production deduction.

Section 140. Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands. The provision extends the $13.25 per proof gallon excise tax cover-over amount paid to the treasuries of Puerto Rico and the U.S. Virgin Islands to rum imported into the United States during 2015 or 2016. Absent the extension, the cover-over amount would be $10.50 per proof gallon.

Section 141. Extension of American Samoa economic development credit. The provision extends through 2016 the existing credit for taxpayers currently operating in American Samoa.

Hmmm.....

Source: http://waysandmeans.house.gov/wp-content/uploads/2015/12/WM-extenders-2015-2016-summary-12-7-2015-FINAL.pdf

How Much Is Valeant Pharmaceuticals Worth? $VRX

Let's forget all the controversies surrounding Valeant for the moment. Let's just do a quick back -pocket calculation using some what conservative assumptions.

1. Assuming every business Valeant acquired is worth the same market price today - meaning the asset or earning power at these companies did not depreciate or appreciate

2. Then all we had to do is to do a quick sum of all parts addition and take out the debt to calculate the value to equity holders

Bausch and Lomb	8700
Biovail and Valeant	6000
Sanitas and iNova	1000
Medicis	2600
Ora	450
Dermik	425
Pharmswiss	500
Brazilian (Probiotica)	100
Natur	163
Eyetech	22
Solta	250
Precision Derm	475
Pedinol	35
Ora Pharam	312
Obagi	344
Nestle	-1400
Brodalumab	445
Synergetics	192
Amoun	800
Sprout	1000
Dendreon	495
Salix	15600
Total	38508
Debt	-37461
Market Value	1047

*in millions

*They sold rights to their cosmetic business to Nestle for $1.4 billions

*Debt is only accounted for the long term portion. The short term portion was taken out assuming their short term assets can be liquidated at a discount to cover it.

Well, according to this, their business is pretty much worth way less compare to it's current market cap. But they are generating $2 billions a year in cash flow, The question then become, how long can they generate $2 billions of cash per year? Their credit default swap spread is indicating that they are currently shut out from the credit market so their operating cash flow is their only life line.

At the current market cap of $32 billions dollar, they are roughly trading at 15x to 16x operating cash flows.  It is quite rich compare to generic drug maker Teva - which is only trading at 10x operating cash flow.

So Valeant is worth somewhere between $1 billion to $20 billions - $1 billion if the cash flow isn't sustainable - or $20 billions is fair given that it is able to proof leverage and binge buying is a business model that is working.

Interesting to see where this going to end up.

1st Quarter Update

1. There hasn't been any chance for me to reallocate to stock in my 401k. The last recent min-sell off did provide some opportunity. Allocated 20% to S&P 500 index in my 401k. Leaving 80% cash.

2. Portfolio is muddling through. All the out performance this year was short lived as Suncor sold off due to the election in Alberta, Canada. The new premier wanted to tax oil companies more. The good news is WTI is pricing fairly at $60 a barrel. The Canadian Sand Oil is usually priced at 30% discount to WTI. That mean they are selling at roughly $42 at the current environment. The cash operating cost per barrel is $33. So Suncor will still produce enough cash flow to cover CAPEX or dividends.


3. Government bonds sold off worldwide for no particular reason or trigger aside from the fact German Bund traded with negative yield for a few days. Not sure where the money will be allocated to if they are shifting money out of govies and stocks. Corporate bonds perhaps? The spreads are already tight enough.

4. Sold LULU this quarter and added small amount of FNMA and FMCC. These two mortgage giants trade like an option. It has a relative high risk-reward ratio. It can pay 5 to 1 if the government decides to re-capitalize them with private capital. That's a big IF.

5. Oil bounced back was unexpected as inventory continue to build. This is mainly due to the weakness in US Dollar rather then change in the fundamental. Oil is priced in dollar.

6. India/Africa remain an interesting investing opportunity as their GDP can grow tremendously with some proper structural reform. The last place on earth that can provide cheap labor and stable political environment (tbd).

In an other news, my job search which started couple weeks ago has not gone too well. It looks like the market died down quite a bit after the initial beginning of the year shuffle. I only managed to score 1 interview so far. Not sure where to go from where. I suppose it's time to get creative as the usual channels are running dry.

Investment Outlook for 2015

There quite a bit more headwind coming into 2015 that makes me cautious:

- Massive QE and undertaking by Eurozone and Japan, which is an experiment never been done before

-Potential tightnening of U.S. monetary policy

-Lower oil prices which can cause high yield energy companies and oil producing countries to go bankrupt, which might have contagion effect (who's holding these risk?)

-China's bubble economy (shadow loans, over investment in real estate)

-Web 2.0 companies evaluation . We are again seeing companies trading at 70 P/E with little or no earnings

- Greece defaulting for the 100x. At this point they should default and leave the Euro. Take the high road and reform the economy like Iceland did post-2009

Tailwind for the economy:

+Lower oil prices mean consumers will benefit via perceived wealth affect. Consumers spending will likely ticked up

+Lower oil prices also is a deflationary force, which would keep the Fed from tightening monetary policy by raising Fed Fund Rate.

+Full employment. Although many would argue most recent hires are working for minimum wage or part time jobs, the employment picture is relative better than same time last year and 5 years ago.

+Technology and innovations continue driving human productivity. Our lives has gotten so much more efficient through the use of technology which has enable us to do more per hour. The downside is the shift in the economy. Manual workers are becoming history - how can these guys retool themselves for the new economy?

What am I doing with my portfolio?

For my 401k:

-Max contribution for the first year

-Allocating to 50% U.S. Treasury fund and 50% S&P 500 Index fund

-Only buy S&P 500 Index when VIX is above 17

-Contribution bi-weekly automatically. Assigned 50% cash and 50% U.S. Treasury fund. Re-balance to the planned 50/50 allocation when VIX is above 17 - looking for opportunistic buy 

For my personal and IRA portfolio which is currently heavily invested in energy stocks:

-Will look to buy quality names as oil prices continue to drop

-Expecting $30-40 crude oil prices by spring

-Favorite name: EOG

-Current holdings: SU, IMG.L, LULU, CHK

-This portfolio has under-performed the market 2 years in a roll. Maximizing 401k would leave me less money to contribute to the alpha and IRA portfolio.

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