TARGET SET

It’s New Year’s day and 2004 did not appear as bad as expected. Total return for investment portfolio is up by 23.9%, in which savings account for 12.8% and investment for another 11.1%. This is a return that will be very difficult to duplicate in the coming years. I exceeded my plan for Year 1 significantly. For the new year, I am looking for another 20% return with 11.6% from savings and 8.6% from overall investment gains. While the plan appears modest and reasonable, I have learnt that it’s not easy to achieve an overall 8.6% return.

A few thing to pay attention to: (1) economies; (2) China; (3) commodity prices. While I believe the portfolio is in a reasonably good shape, it continues to skew towards commodity stocks (energy, drillers, chemical, metals and coal). If there are any signs of weakness in the above three key factors, I must promptly rebalance the portfolio by reducing the exposures in commodity and increase bond, cash, utilities, and may be some consumer staples. Coming Q1/05 earnings season will be very important. Returns from oil patch should be very good with very strong production, cash flow and earning growth. Drillers should deliver very strong results as well. Pay attention to earning guidance for Q2/05. I plan to significantly reduce my exposures to energy and drillers during the next two quarters. Given the strong run of the energy sector, my return expectation is rather modest (10-20%), particularly for domestic producers. Chemical price has turned a little in the last few weeks. Is this the sign of tops? It could very well be. The momentum of chemical stocks appears to have slowed. Steel price is also topping, and this will not bode well to coal price going forward. When steel stocks start to unravel, it will be the time to cut exposures in coal.

The overall expectations for economies are rather positive. Consensus are at 3%-3.5% for North America and 7%-8% in China. If this level of growth is achieved, commodity will have another strong year. I am a little bid suspicious as the bullish sentiment appears too strong.

New Year Resolution: avoid blow-ups. If I could avoid blow-ups, or limit their overall impact, I believe I will be able to achieve my modest target for 2005.