ECB holds the key to solve the current European sovereign debt crisis

Last Friday, on the EU Summit, 26 out of the 27 EU nations agreed to a tight fiscal union and stringent fiscal discipline, with the only exception of UK not signing. While this agreement is important to address long term issues with regard to the lack of market confidence in European sovereign debts, it does not provide any solution to the problems at hand. Without full commitment of the ECB to supporting the sovereign debts, any other method will prove to be inadequate. No rescue fund is large enough to staunch the spreading of the crisis. Not EFSF (European Financial Stability Fund). Not IMF (international monetary fund). Only the powerful printing press of ECB.

We have to understand the true nature of the current crisis. Clearly there is widespread budget deficit problem among the EU nations. I believe Greece has to restructure its debt to be solvent. But we need to separate solvency problem from liquidity problem. Outside of Greece, we have a liquidity problem, not solvency, at least not yet. But investors have lost confidence. They are pulling out of the sovereigns of Italy and Spain, threatening the solvency of these nations. And I do not believe the fire will end there. It will spread further to France, and even Germany, eventually destroying all Euro denominated sovereign debt markets. The very survival of Euro is now at the mercy of the whimsical financial market.

In a crisis of this nature and proportion, what's the rightful role of a central bank? The answer is unequivocal: the central bank should act as the lender of last resort and move decisively to arrest the quick erosion of confidence in the financial market. But facing with a crisis of unprecedented scale, ECB chose to hand off, doing little. The half-hearted bond buying efforts are like using water cups to try to extinguish a house fire. The correct action for ECB to take should be 100% backstop of any sovereign that is committed to future fiscal discipline. That should bring down the interest rate on those sovereigns and give them time to work out their long term budget problems.

I understand the concern of "moral hazard". But I think now is the right time to act. The 26 EU countries, including all 17 Euro nations, have agreed to stringent austerity measures and future fiscal discipline. That should remove ECB's rightful concern about moral hazard.

The other argument against ECB buying the sovereigns is the fear of inflation. That should be the least of the worries right now. Given the austerity measures that many EU nations are undertaking, it is very hard to imagine any real chance of high inflation. Furthermore, ECB may not have to print much new money at all to stop the crisis spreading. Oftentimes the show of determination by the central bank is sufficient to stop the capital outflow from the sovereigns of the troubled nations.

One more benefit of ECB buying sovereigns, a very important one, is that it will restore the financial stability of the banks that are affected by the sovereigns. This is two birds with one stone.

My suggestion is nothing new or innovative. My opinion is shared by many. I simply can't understand why ECB goes against this. Probably because Germany is the primary beneficiary of the crisis. German ten-year bonds are yielding below 2%. But watch out Germany. Don't be complacent. Fire in your neighbor's house could spread to your own.

It is all in the price of the stock

I often hear this refrain from investors: all the news is already in the price of the stock. This becomes an excuse not to buy high quality stocks or not to sell crapy ones.

The fact of the matter is we never know whether it is all in the price of the stock at all. In many cases, good news begets more good news, and success breeds more success. On the flip side, failure engenders more failure. If a company is poorly run, it is very likely it will stay that way for a long time. Turnaround is very, very rare.

In investing, people are always attracted to "value". But what is "value"? I believe you get what you paid for. A fundamentally strong company rarely sells cheap. Cheap stock is cheap for good reason. In majority cases, cheap stock is value trap.

In a competitive market, great products are expensive and cheap products sells cheap. Occasionally, you do find expensive products are actually craps. But you rarely find great products sell cheap. It is same in the stock market. Great stocks are expensive, and cheap stocks are craps. And you do find cases in which expensive stocks are craps. Avoid those, then you will beat the market.

There are periods when great stocks can sell at cheap valuation. It is not due to the fundamentals of the companies, but due to difficult financial market or cyclic factors. As long as these companies are well managed, and fundamentally strong, when financial market dynamics turn around, or the end market improves, they will come out stronger, gaining more shares from fundamentally weak competitors.

In conclusion, if you are an investor, not trader, I suggest you focus on the fundamentals of the company, not its valuation. And you need to make sure that the strong fundamentals of the company you invest in are sustainable. If you can do this, you will have better returns than average investors over a long term.

Steve Jobs resigns as CEO of Apple

The news just hit the tape: Steve Jobs wrote a letter to Apple's Bard of Directors to resign from the CEO position of Apple. He will remain as Chairman and director of the board and an Apple employee.

The prognosis is not good for anyone who has pancreatic cancer, liver transplant and then cancer recurrence. I hate to say this, he is getting close to the end of his life. I hope I am wrong. I pray that he survive this. But reality is reality.

Apple will never be the same without Steve, employee No. 1. He is the soul of the company. He is the essence of the brand.

Steve is a great visionary. Back in the late 90s, he saw the end of PC era coming. He admitted that WinTel (Windows and Intel) has won the PC battle. Let's move on to the next battle front. He re-positioned the company for the post PC world. He refocused Apple's product strategy on the "digital life style" of the post PC era.

Steve is a great communicator. He is the ultimate salesman for Apple products. When Steve gives a presentation, you can't help but be mesmerized by his salesmanship and then go on by the products he pitched.

Steve has a great sense of what is cool. He is extremely detail oriented. I have heard that he personally pick the songs to be played on every single Apple's TV Ads. Apple is the first technology company that thinks aesthetics is equally important for tech products as the technology itself. That's why Apple's products are intuitive, meticulously and beautifully designed, and simply works.

Steve is also a very demanding executive. In the early days of Apple, he personally interviewed every job applicants. If you are not performing, your life at Apple would not be fun. You better find a job in another company. But if you perform, you will be richly rewarded, no matter how young you may be. It is really meritocracy in Apple.

I hope the culture that Steve instilled in Apple will last. If it does, I think Apple can continue its success.

I am a lucky early investor in Apple. I bought the stock in single digit price range and have hold the stock for many years. The stock may be under pressure tomorrow. But I am not selling. I think Apple's success momentum is really strong. Opportunity for Apple in China is enormous. Over time, I think the China market can rival that of the US. But that's over a long time.

Good luck Steve.