Sunday, April 30, 2006

Global Rising Rates Repercussions

China's central bank raised lending rates last Thursday for the first time in a year and a half. This was obviously to rein in the world's fastest-growing economy. The action may not be so important if the US did not also do the same. The Fed appears to imply that there might be further increases in US rates. The Chinese action aims to slow a spectacular surge in investment and it may potentially brake China's voracious appetite on world markets for oil and other commodities. With interest rates already climbing in the United States and the EU, and with monetary officials starting to tighten policy in Japan, China seems to be joining the world's central bankers in trying to gain control of speculation that has driven up prices of assets like gold and real estate. From steel mills and auto factories to luxury apartment buildings and plush office complexes, China has been engaged in a nationwide building boom fueled by easy loans from banks and other financial institutions. New loans soared at least 61% in the first quarter of this year compared with the period last year, causing investment in factories and other fixed assets to climb 29.8%.

China's boom in lending and investment, which has contributed to the country's rapidly rising exports, pushed growth in China's economy to 10.2% in the first quarter. That was high even by China's extraordinary standards, and so strong that President Hu himself warned on April 16 that the country needed efficient, high-quality development and not "excessively rapid economic growth." Prime Minister Wen Jiabao warned on April 14 that China would move to tighten controls on real estate and lending.

One can understand why China needed to raise rates, however that is in an environment where its currency is also appreciating. The rates squeezing movement in the US and EU have also forced second tiered players such as the smaller Asian economies to follow suit. Now we have a situation where most country's stockmarkets, interest rates and currency are on an uptrend. The exception being US where their currency would come under more pressure. Usually higher rates would stifle equity markets but that equation seems to be ineffective for the time being. All that is more surprising in that oil prices are also stubbornly high. Not to mention other commodities, including gold.

Long term observers of gold would note that gold rallies tend to coincide with long periods where returns from other asset class are diminished. Again, that does not seem to apply for now.

Growth in equity markets will be pared down by higher rates but investors are attracted to potential gains in the respective country's currencies also. So what gives?

These are the important conclusions:

1) US is printing a whole bucket loads of money. In order to finance the consumption patterns in America, US dollars in circulation has to rise. As long as there are willing holders of US Treasuries, nothing really bad will happen.

2) More funds chasing after assets of all classes. The result of that is higher demand for all commodities (limited supply) thus pushing prices higher. Hence we can argue that all asset classes are not really rising in real productivity value but due to higher dollarisation. To that end, timber and palm oil prices should have a lot more room to rise in the forseeable future.

3) Investors are still pouring funds into stocks of almost all markets, chasing equity and currency gains at the expenses of US dollar. They will continue to do that until the US dollar drops substantially, thus improving actual returns of investors (hedge funds included).

4) Rates cannot continue to rise without something happening to asset prices. Already equity markets in China are one of the worst performers in 1Q06. Surprisingly, equity prices in America have surged. The inevitable will happen, there will be more rate hikes in the US and the bottom will fall out.

5) While I have argued before in my blog on the resilience of the US dollar, it appears that the moon and stars have converged to force the issue. If the Fed tries to delay the substantial correction in US dollar, they will have no choice but to put in further increases in rates. The next rate increase may still not be sufficient to derail the status quo. I figure a total of 150 basis points increase from now should do it. Roughly 3 times of 50 basis points increase.

6) What China is doing in raising rates is more to protect its domestic overheated economy. Plus China will allow for the yuan to appreciate gradually. Both will put a stifling effect on Chinese stocks this year.

7) As for smaller emerging and developing markets such as Singapore, Malaysia, Thailand, Indonesia, HK - they will be forced to follow suit on any US/China rate increases. However, their stockmarkets would have a better chance of rising further after having recovered from 97/98 financial implosion. A substantial correction in US dollar would spell a temporary end to their bull runs as investors would then be able to lock up gains and cash out.

Is there any way the US dollar could afford to stave off the devaluation? Not this time as every single asset class seems to be ganging up to push the dollar lower. How many more rate increases can the Fed make to support the dollar without derailing the US domestic economy?

Oil prices can stay high while rates rise and equity prices rise because real demand generally comes from real productivity demand. Even if you pay a higher price for a commodity, it still works because the product used generates sufficient improvement in productivity in countries like China and India. Consuming nations like the US and Japan will have to bear the burden as that will eat into margins without sufficient improvements in productivity. For Japan, the case is slightly different because it is finally emerging from its deep recession of over 13 years. Hence the economy can withstand much more rate increases from a very low base.

What is a sufficient devaluation of US dollar? Probably at least 15%-20% from current values.

Chinese officials were probably not worried about inflation, given that the consumer price index in China was just eight-tenths of a percent higher in March than a year earlier. That is a luxury the Fed does not have in the US. While the smaller Asian nations would be able to better cope with inflation via their appreciating currency.

Saturday, April 29, 2006

HK's Missing Legacy Part Deux


Sir Jack Cater's Legacy

The Missing Legacy was first written in a blog of mine dated 7 February 2006 - it was on the passing of Sir John Cowperthwaite, the person most responsible for HK's reputation as the freest economy/capitalism in the world. Cowperthwaite's passing did not get much press coverage at all in HK media, and that kinda pissed me off because a group of people who can forget so easily their "roots" and "how they got here" are doomed to lose the blueprint set by Cowperthwaite.

Now another old gwailo died, and his contribution to HK is no less than Cowperthwaite. Sir Jack Cater died on Guernsey on 14 April 2006 aged 84. He was the founding head of HK's infamous Independent Commission Against Corruption (ICAC), which took radical steps to combat graft in the police force in the 1970s. Cater went on to become HK's Chief Secretary, Acting Governor and Commissioner in London. Bribery had long been endemic in Hong Kong's police and civil service, but was thought of as being confined to the Chinese lower ranks, rather than expatriate officers. Calls to eradicate it were largely ignored by governors before Maclehose, who arrived in 1971. Maclehose lacked the political will to tackle the problem despite strong urgings by Cater . If you were to do a net search, you will find Jack Cater's passing only being solemnly mentioned within the HK's government admin portal at www.news.gov.hk ... how soon we forget!

Cater even threatened to resigned in 1973 when trying to bring down Chief Superintendent Peter Godber. Godber fled HK while under investigation for amassing a fortune of several million pounds, much of it banked in Vancouver. Cater needed to strike at the top, even at one of his own, to further reinforce the dire need for eradication of corruption in HK. The developments forced the hand of Maclehose. Jack Cater was asked to form an independent anti-corruption unit with the support of a former Special Branch officer, John Prendergast.

The establishment and independence of ICAC is crucial to HK's economy. While Cowperthwaite had eradicated bureaucracy, you still needed "pure meritocracy" in the financial economic system to uphold its integrity and transparency. Only with those factors can HK gain an ever growing reputation as a true financial center - attracting professionals and companies to invest.

Cater's reputation for determined leadership had been established during the period of civil unrest in Hong Kong in 1967. He cared deeply about his work and about those closest to him, and he encouraged the careers of talented young officials - including women, who in earlier days had generally been denied promotion. In the first year of its operation, 1974, the ICAC handled 1,798 complaints of police involvement in bribery and extortion. It was said that more than a third of all Chinese policemen were members of triad gangs which controlled prostitution, drug-running and gambling across the Territory - rackets which, as Cater pointed out, raked in more than three times the profits of the Hongkong & Shanghai Bank.

By October 1977 the Commission's uncompromising methods (it acted on anonymous tip-offs, and allowed no presumption of innocence) had caused such anger in the Police Force that 2,000 officers marched through the streets to present a protest petition, and a group of CID men stormed the ICAC's offices. Fearing a breakdown of order, Maclehose felt forced to declare an amnesty for all but the most heinous offences. In spite of this setback, the ICAC's work continued with unflagging determination. Investigations proceeded into other government departments, notably public works, education (parents were often asked for bribes to enrol children in schools of their choice) and health (hospital patients were forced to pay up for bedpans). It was indeed a cradle-to-grave system, with bribes demanded even for burial sites. Among those most grateful for the clean-up were the drivers of Hong Kong's battered fleet of minibuses, whose fares had for many years been preyed upon by bent policemen.

The ICAC was often accused of heavy-handedness, but its intervention provoked a culture change which still stands Hong Kong in good stead while corruption remains rife in other parts of Asia. Though Cater moved on in 1978 to the top civil service post of Chief Secretary, it was at the ICAC that he made his most significant contribution. Cater was Chief Secretary from 1978 to 1981. With a rapidly growing economy, it was a golden era for HK. Cater was several times Acting Governor, and was in line to succeed Maclehose in 1982; but Margaret Thatcher was persuaded to appoint a senior diplomat, Sir Edward Youde, to commence negotiations for the eventual handover to China. Instead Cater became HK's Commissioner in London until 1984. He then returned to Hong Kong to work in the private sector, joining China Light & Power Co - the electricity generator for Kowloon and the New Territories - and becoming head of Hong Kong Nuclear Investment Co, which was China Light's participation with Beijing in a nuclear power station venture at Daya Bay in Guangdong province. He was president of Hong Kong's Agency for Voluntary Service, a member of the Court of the University of Hong Kong and an international director of the United World Colleges, participating in the foundation of Hong Kong's own College at Shatin in the New Territories.

Again, another passing of an important gwailo being largely ignored by HK's media. Is it a gagging issue; were media companies trying not to agitate China's political HQ by not bringing up the "glory days" of British colonial influence? How many more "important gwailo septua/octo-generians" must die before HK people recognises its roots, and pay the according tributes and gratitude that are due. One can just imagine the gulf between HK and Singapore as financial centers if "true meritocracy" did not prevail in HK. Will Cater and Cowperthwaite ever make the books of HK's recent history. The Chinese have an oft-quoted saying, "when drinking water, one must never forget its source", how they got here. Just because some of them involved people who are not Chinese does not matter, and should not matter.

Friday, April 28, 2006

AirAsia & Tenaga Covered Warrants
Fairly Valued?

Covered warrants have been going great guns in HK and Singapore, and now is only starting to shift out of first gear in Malaysia. Both issues were brought to the market by CIMB. AirAsia's call warrants closed at 28.5 sen, a 6.5 sen premium over its offer price of 22 sen on a volume of 22.91 million. It opened at 23 sen and traded an intraday high of 31.5 sen. Tenaga's call warrants ended the day at 51.5 sen or 5.5 sen over its 46 sen offer price, after being traded at between 47 sen and 62 sen. A total of 8.99 million units changed hands.

At 28.5 sen, AirAsia-CW trades at a premium of 0.18 + 0.285 / 1.78 = 26%, with a gearing of 6.2x. The CW expires in October 2007. On such a healthy gearing, the CW can be termed as fairly to slightly undervalued. The danger is the short time to expiry of about 15 months. Investors should start discounting the premium they would want to pay as the time to expiry gets closer. Generally, avoid CWs with less than 6 months to expiry unless the premium is below 10% and gearing is still more than 3x. Just some useful rules of thumb.

As for Tenaga, the CW trades at a premium of 48 + (51.5 x 2) / 860 = 17.5%, with a gearing of 8.3x. The CW expires in October 2007 also. Naturally, the AirAsia-CW is more expensive, probably due to its higher beta (volatility). However, in my opinion, the Tenaga-CW is grossly undervalued, considering its gearing of 8.3x and an undemanding premium of 17.5%. Even if the share price does not budge from RM8.60, the covered warrant should trade closer to RM0.63 and not RM0.515. Coupled with the fact that it is a good "GLC revamp play" and chances for a tariff hike is quite inevitable within the forseeable future (probably after the fuel hike/subsidy removal protests have died down). Strong buy and medium term hold (for 8 months) on Tenaga-CW.

Thursday, April 27, 2006

The Next Big Thing For Asian Exchanges (ex-Japan)
Exchange Traded Funds

ETFs are investment products that hold a pool of securities and are designed to generally correspond with a specific Index. Investors can buy and sell ETFs just like stock, through their broker, throughout the trading day. ETFs offer the advantage of trading an index portfolio with the ease of stock trading. Investors can purchase ETF shares on margin, short sell shares, or hold for the long term. Investors also achieve market exposure consistent with the Index on which they are based, through one security. ETFs are also designed to be cost efficient because they are based on an Index, rather than being actively managed. Designed to follow the NASDAQ-100 Index, QQQ tracks one-hundred of the fastest growing technology and non-financial services companies listed on The NASDAQ Stock Market. It is the most actively traded ETF in the world with 80-90 million shares traded daily.

Other popular ETFs on Nasdaq include: Nasdaq-100 Equal Weighted index, Nasdaq-100 Technology Sector Index, Nasdaq Biotech Index Fund, Basket of Listed Depository Receipts Emerging Markets 50 ADR Index, BLDRS Asia 50 ADR Index, BLDRS Europe 100 ADR Index, etc...

ETFs are extremely popular for players on Nasdaq. In just one exchange they can go long, short on almost any and every sector/index in the world. Of course I am kidding, but their options are quite enormous. They have energy ETFs, industrials, midCaps, smallCaps, US Energy, TelecomStocks, 20-Yr Treasuries, MSCI HK ishares, etc.. You need a sufficiently deep pool of players for ETFs to work well. In fact, ETFs on Nasdaq allows a lot of retail players and smaller funds to buy exposure to Asian stocks via country based ETFs, even sector based Asian exposure. Saves them from investing directly. So, in a way, Asian based ETFs suck away at actual real activity by foreign investors buying and selling directly in Asian stocks. A factor that must be taken into account when we try to tabulate trends on foreign participation in Asian exchanges.

Both HKSE and Singapore Stock Exchange have been working furiously over the past 2 years to come up with similar ETFs on their exchanges. To that end, SGX has edged ahead of HKSE. SGX's street TRACKS Straits Times Index Fund have done well. SGX has also launched the FTSE SGX Asia Shariah 100 Index (stocks that are shariah-compliant from Japan, Singapore, Taiwan, Korea and HK) - this will form a good kick-off when they actually launch its Asia Shariah 100 ETF. ETFs for exchanges like HK and Singapore cannot be domestic-themed, it has to have a broad appeal, an Asian appeal as well. The structure of a good ETF is derived from its indexation. The sooner an exchange can aggregate various sector, regional, country specific indices, the faster will be the rollout period.

In HK, they unknowingly launched their most successful ETF when the government bought stocks heavily to support the Hang Seng back in 97. Then, loaded up with primarily HK stocks, the government did not want to unload the whole chunck back onto the market. So, in November 1999, they launch the Tracker Fund of HK, possibly the most successful ETF in the world with US$4.3 billion in units raised. ETFs are better because they can be traded in and out (and even shorted) on low cost unlike most unit trusts.

Both HKSE and SGX have to realise that real ETFs allows themselves to be shorted, and that is a big attraction. That has to be dealt with properly by the two exchanges. The sooner an exchange can come up with a decent array of ETFs, the better the chance of being successful. It is not difficult, here are a few proposed ETFs: 1) Asia-15 Airline Fund 2) Asia Low Cost Carrier ETF 3) Asia 30 Power Plants ... plus an array of Asian country indices as ETFs.

There are now close to 200 ETFs in the US with around US$200 billion in capitalisation. In Canada its closer to US$8 billion in ETFs. In Europe there are about 130. Japan has the second largest ETF market with close to US$30 billion in value.

Both HKSE and SGX have been dragging their feet in venturing big time into ETFs. The potential is there for either of the premier Asian financial HQ to propel themselves ahead of the pack... with an Asian flavour. ETFs allow an exchange NOT to be only reliant on domestic companies for interest and investing options. Just design brilliant ones, using Asia as a platform. Any of you two want to hire me?

Wednesday, April 26, 2006

Companies That Are Truly Global

In an article by Gordon Redding, the director of INSEAD's business school’s Euro-Asia Centre, he debunked myths about how a present day truly global MNC should look like. The thing is they come in many different forms now. Culture and historical economic evolution of respective countries have played a big part in shaping what can be termed as global MNCs of today. One main thing about a global MNC is the internationalisation of the brand/image - it has to lose its distinct domestic beginnings. He classifies these truly global MNCs which dominates global business into six broad groups:

1 The large multi-divisional, multinational firm found in Britain and the United States
2 The continental European large-scale business, such as Volkswagen and Nestlé
3 The European industrial “cluster”, such as the textile firms of Emilia Romagna
4 The Japanese keiretsu, the networks of interlinked firms still predominant in the world’s second-largest economy (although the links have been weakened substantially due to the prolonged recession of much of the 90s)
5 The Korean chaebol, unique combinations of government and family firms, such as Samsung and LG (their links have been heightened and sharpened with the government's vigilence in clearing corruption and mismanagement from the chaebols - these companies should come out stronger than before)
6 The Chinese private company— the “clans” of vertically integrated small firms that work so well in what is now “the workshop of the world” (an outsourcing web of relationships but this is the weakest of the so called global MNCs category)

In defining who is truly global, Redding have identified only nine companies that are truly global—in the sense that less than 50% of their business is in their home territory and more than 20% is in each of the other two out of the three major regions: America, Asia and Europe. They are: IBM; Sony; Philips Electronics; Nokia; Intel; Canon; Coca-Cola; Flextronics and LVMH, the French luxury-goods business. A couple of the more interesting companies which I think will make the list over the next 5 years owing to their defined corporate strategy include Samsung and Goldman Sachs. Food for thought!

The Devil Does Not Wear Prada
Da Vinci Code Reloaded

Thanks to my Baptist background, good in theology failed practical, ... the almost ridiculous but captivating story in Da Vinci Code has brought much warmth and happy thoughts. While I believe the DV is a great story, it is a story, and I am thankful for the interest it has stirred up - at least some will seek more information for the truth. Anyway, that's not why "The Devil Does Not Wear Prada" (isn't that the best headliner... ever) is written. This blurb was written following the article in Wall Street Journal yesterday on the Pope's accessories.

It seems that product placement advertising has overstepped the normal boundaries of TV shows and movies as the Catholic church leader Pope Benedict XVI has been seen spotting many fashionable items as part of his daily fashion wear. The Pope has been seen with an Apple i-Pod, a sexy pair of reddish-orange set of Prada shoes, some walking shoes by Geox and he wears Serengeti sunglasses. I am pretty sure its all complimentary, well freebies are freebies ... or is the new Pope more fashionable, a closet fashionista? Well, of all closet cases, that would be the mildest.

Tuesday, April 25, 2006

Still Got Them Cowboys In West Australia
Old Boys' Scratchback Mountain

I thought these kind of things happened back in 70s or 80s even, but the Western Australian premier has stirred up stuff not seen since Joh B Pietersen days in Queensland. Rio Tinto (giant and well connected) accidentally allowed the lease on Shovelanna iron ore deposit to lapse last year due to a late courier delivery. The tenement lapse was picked up by the young and hungry Cazaly Resources. Cazaly even got funding from the reputable Investec and an offtake agreement from BHP Billiton. Cazaly planned to develop the mine within 3 years and will be giving the state government approximately A$17 million in royalties a year. Naturally, Cazaly's shares shot through the roof from a paltry A$0.29 to a high of A$2.12 over the last 7 months.

Now, Rio Tinto had the bloody thing for 20 years and have not drilled a flrrucking hole there and probably won't for another 10 years because the company's nearest infrastructure is some 100 km away. After Cazaly got the site, Rio Tinto filed a rare protest to the WA government arguing it was in the public interest for Rio to keep the deposit. In February, WA premier Alan Carpenter said he had discussed the issue at length with Rio's CEO Leigh Clifford during a courtesy call to Rio's London office (starts getting interesting ... London of all places, what a courteous gesture by a premier). Last Friday, WA's Resource Minister John Bowler announced that the WA government has decided to hand back the Shovelanna deposit to Rio Tinto. Bowler could not be located by the press for the last 48 hours.

These kind of things should not be happening in a developed nation's investment arena. Deadlines are set to be met. Courier delays are incidental to business, many things happen that are out of our control, to wait till the last day to submit is plain silly. Cazaly Resources' shares has plunged A$1.45 to A$0.65, after hitting a low of A$0.41. Too many investors have been burnt badly by this debacle. Its one thing to lose money when thing go awry, but this is not fair as investors had put faith in the state government upholding the letter of the law, and in fairness Cazaly Resources did only what is right and available to them. The sad thing is that the integrity of the legal system and the letter of the law had gone to the dogs. The premier and resource minister have a lot to answer for, if only they can be located, ... it is just too obvious and silly a decision to undertake, akin to political suicide. Only in Western Australia? Gee, and I thought Bond and Rivkin were dead ... maybe there is reincarnation after all.

Danger Ahead, China Real Estate

Property prices in China continued to rise in the first quarter of 2006. In Beijing, prices rose by 19.2% in 2005. The odd thing is that the amount of unsold housing also shot up by an even bigger margin of 31.6% to 13.7 million square meters. Overall, in China the amount of unsold real estate rose by a staggering 23.8% in the first quarter of 2006 compared to the same period a year ago. The area of unsold property developments reached 123 million square meters. Now, 23.8% is only meaningful if we know what is a heart stopping rate for property developers. Generally they would start to check themselves into the hospital once the rate goes past 10%-12%, you start writing the will at 15%. So, we are in very dangerous territory here.

Yes, no one can doubt that the underlying demand is there and will be there for a long time. Its the affordability factor which is ridiculous. Only a very small portion of China residents can afford most of the properties, and the market is largely dominated by foreign investors. Again that is further amplified by the fact that most of the buyers also own a few similar investments in China. Rents are struggling to keep as demand from expatriate postings starts to dwindle slightly. Expat postings comes and goes. Once the big events and projects are finished, rental yields will not be able to keep up at the current rates. Even current rentals are not realistic as many do not see rent yields as being necessary because they are in it for the capital gains - recipe for you-know-what.

When more than 70% of the population in the big east coastal areas cannot afford the properties, its not a good sign. The trouble about bubbles is that its easier to spot but harder to prick. To time a correction is almost ludricous. Despite the amount of rising unsold real estate, we also have a massive 1.03 billion square meters of real estate UNDER CONSTRUCTION in China during the first quarter. That figure is up by 23.3% from the same period a year ago. As if that was not enough, in the 1Q2006, property developers invested another 280 billion yuan (US$35 billion) in construction projects.

Another sign that I came across which could start deflating the Shanghai property bubble was the surprising rating given by Standard & Poor / Moody's on Shanghai Real Estate's (SRE) bond issue. SRE is a leading developer in Shanghai's financial hub, and has proposed a US$150 million (HK$1.17 billion) bonds. It was rated as non-investment, or junk status, as rating agencies were concerned about the company's narrow focus and limited cashflow. Standard & Poor's assigned a "BB-" long-term corporate credit rating to the seven-year bonds, three notches below the investment grade, while Moody's Investors Service assigned a similar "Ba3" rating. The ratings reflect the key challenges faced by Shanghai Real Estate, including its lumpy operating cash flow, resulting from its single business focus on property development. The significant geographic concentration on Shanghai alone did not help and the company's rising leverage was a big concern. Leverage is not just an option in Shanghai for property developers. Leverage is a necessary tool to compete. Developers there have to get the biggest projects and complete them the fastest, and try to sell them all yesterday. To enable the retail side to buy, many developers have innovative financing schemes to help the buyers/speculators - hence leverage is not an option in Shanghai property market. SRE said last month its 2005 profit surged 234% to HK$301 million, from HK$90 million a year earlier. The company plans to use the net proceeds from the proposed bond sale to replenish its land bank, rating agencies said. It has a land bank of 1.4 million square meter gross floor area in Shanghai, which the company estimates will be sufficient for its development for the next four to five years. However, S&P did say that SRE's low cost of land bank, good locations of its developing properties, and expertise in the industry are offset by its high concentration risk, small- scale operations, and lack of stable recurring income. After the bond sale, SRE's EBIT will fall to about 3x interest expense in 2007 from 10x in 2005. The thing is, cases like SRE are being replicated many times over all across Shanghai - when your earnings starts coming down from 10x of interest expense to just 3x, its a worry. There is not sufficient cushion for even a minor blip.

Even an aggressive REITs boost for commercial China properties may not save them as most of the yields are not sufficiently high enough, plus the bulk of the problem is in residential, which is not REIT-able (my newly coined term). Its going to happen but if you cannot stand the heat, a massive reduction in exposure is recommended. To stay away from China properties when you have made millions may be very difficult. It just takes one event to trigger the domino effect, and the one event could be anything, from the raising of interest rates or a small developer absconding or a developer stretching capital too far or buyers forfeiting their deposits.... it will happen and my guess is it will be way before the Olympics, not after.

Monday, April 24, 2006

Onerous Sarbanes-Oxley To Allow Exemptions

Following from my earlier blogs on Sarbanes-Oxley, now we have the SEC advisory committee with their recommendations on Sarbanes-Oxley. The restrictive and prohibitive Sarbanes-Oxley has diminished the number of foreign companies wanting to list on US exchanges. Inadvertently leading to a boom 24 months period for London Stock Exchange, and the Luxembourg Exchange to a certain extent. The recent negative opinions given by Alan Greenspan, Bob Greifeld (CEO Nasdaq) and The Economist on SOX basically were three additional long nails into SOX's coffin.

These are still recommendations, and it will take a good amount of political and intellectual will to begin implementing the proposals, the most controversial of which exempts many smaller companies from doing full-blown audits of their books and records. The SEC panel is planning to make two broad recommendations. First, companies with a market value of less than US$128 million will be completely free of the SOX law’s auditing requirements (currently the cut off is US$75 million). In addition, the panel will propose that companies with a market cap of US$128 million and US$787 million be freed from some, but not all, of these mandates.

What is so onerous about SOX? First, its the qualitative aspect, when it is qualitative, its like an unending task. Company's board and execs have to certify the quality of firm's reports. Improving the independence, hiring and firing rules with regards to external auditors. Another, and this is cumbersome, is the disclosure of internal controls structure. SOX was rushed out of the gates owing to public dismay and outcry over the demise of Enron and WorldCom, but this has not cure the correct problems, but rather brought on more inconvenience. What SOX has missed out on is that the GAAP available is already sufficient for auditor and accounting firms to do their reviews properly. Enron and WorldCom were allowed to get away for as long as they did because the auditors were asleep, or unquestioningly accept reasons given by clients too readily. First things first, get the accounting bodies to reprimand and think of ways to put in more prohibitive charges should an auditing firm messes up its work. More onus and impairment charges should be leveled on the partners of accounting firms - that way, no one will be taking a dive, and I bet you "real auditing work" will be carried out.

As a percentage of overall compliance cost, it makes sense to exempt the smaller companies. Small companies happen to be the engine of the country’s economic growth. They’re getting killed by a law that doesn’t differentiate between a Fortune 500 company and one with a market value of US$200 million. As a result, this law has become a free lunch for the auditors. Plus the new US$128 million figure is "low enough" to attract mid-sized foreign companies back to list on US exchanges.

The SOX is broadly supported by Democrats and unions, and it will take some political will to implement the recommendations in full as it could lead to politcal suicide for those pushing the buttons. SOX is the straw that kinda breaks the camel's back in terms of management having to spend too much time with compliance stuff rather than doing proper managerial stuff.

Short Sellers Get Short Strawed
The Ugly Child Only A Mother Could Love

When the peerless 60 Minutes TV show picks your group as subject matter, you know it cannot be pleasant. The 60 Minutes team in the States did a scathing overview on short sellers and its negative effects on companies and prices. Some companies have resorted to suing short selling funds for the negative publicity and driving down share prices. Online retailer Overstock.com and drugmaker Biovail have both filed lawsuits against analysts and short sellers for allegedly conspiring to push down their company's share prices. Analysts get drawn into the flak as being in cahoots with the short selling hedge funds.

That kind of defensive strategy by management is not laudable. Management fearing short sellers (or that their stock options may get deeper underwater) should just go and produce the numbers to deflect criticism, and not waste resources to do so much PR. There will always be analysts who will call a buy or sell, at any point in time. To try and sue contrarian analysts, who might be in the minority is useless. Unless the management has solid evidence that the analyst has been citing false data or making silly conclusions based on misguided assumptions. Otherwise, management should leave them kids alone.

As for collusion, well, it happens more often than we care to admit. Not just fund managers with analysts, but also journalists. This is an area where the SEC or regulatory bodies should play their role. Back in 2002, Gotham Partners, a hedge fund started by Bill Ackman, published a critical report about bond issuer MBIA Inc. Gotham also disclosed that it was short the company's stock on the first page. MBIA's management was livid and pressed New York Attorney General cum-sheriff Eliot Spitzer to investigate for possible market manipulation. Nothing came of the investigations. Surprisingly, in a major turnaround, last year Spitzer and the SEC lauched a probe into MBIA instead on the very specific issues that were raised by Gotham's report. Sucker punched!

Management should not fear short sellers. To me, short selling is a clarifying solution, like rain on a muggy day, a clean-blue flush around the toilet bowl, it clears the crap out. If there is nothing negative for the short sellers to hold onto, why would they want to short sell in the first place? Short selling funds can be a nuisance to management, so too can aggravated minority shareholders, they are part and parcel of corporate management - deal with it already! Short sellers takes overpricing and bubbles out of stocks and industry. It pricks holes in bubbles before they get too big. It wakes up management to act more diligently to enhance shareholders' returns. Of course there are cases where short selling funds use their position to veto certain corporate actions, thus putting the company at "ransom" - that's the kind we need to wipe out. Everything else is fair go!

Good short sellers and analysts are messengers of mismanagement, discrepencies and under/over-valuation of companies. You cannot restrict them in what they can or cannot do. Companies and management are increasingly under a larger microscope, and that is what management resents - but its good for shareholders, hence short sellers are here to stay.

In Biovail case, the company said that hedge fund SAC Capital Advisors conspired with research firm Gradient Analytics to write and circulate unflattering reports. A Banc of America Securities analyst was also named in the suit because of negative reports he wrote on Biovail. Overstock.com case is similar but involved hedge fund Rocker Partners and Gradient Analytics (again). Lets' look at this objectively, both companies are not solid companies to start with - Overstock.com has not had profits since 1999 while Biovail has been facing increasing competition from generics for one of its key drugs. So, a sell report is not surprising at all. As to whether there was conspiracy... that is hard to prove because generally if a company's fundamentals are bad, whats the odds of more than a few pros coming to similar conclusions to sell the stock. Even if there was real conspiracy, it would be very difficult to convict unless there is real evidence in print or voice.

Management at Biovail and Overstock.com are like mothers who complain why no guys want to date their ugly daughters. Don't yell at the shallow guys, do something about your daughters' looks!

Saturday, April 22, 2006

Single Stock Futures - Great Introduction

This is even better that regulated short selling as it has less variables and outlay, for about the same effect. The difference is the time limit, which still can be overcome by rolling the futures contract. Naturally, the leverage is the big thing. To me, single stock futures are akin to warrants, only less cumbersome. At least we don't have to worry about gearing, beta, time to expiry, in/out of money and volume issues. Mind you, these single stock futures will also have similar variables but they are not as decisive or delicate as for warrants.

It is likely that there will not be any expiry but settlement end of each day. The outlay is likely to be about 20% of normal exposure or a gearing/leverage ratio of 5x. An investor would only have to worry about topping up the required margin as these contracts will be marked to market at the end of each day. Single stock futures could very well decimate the potential for short selling. The KLSE is not deep enough a market to support two quite similar intruments. Bursa Malaysia is introducing SSFs on April 28, with 10 stocks as a start. The 10 form part of a list of 42 stocks shortlisted for SSFs.

Kicking off this first tranche are Bursa Malaysia, AirAsia Bhd, AMMB Holdings Bhd, Berjaya Sports Toto Bhd, Genting Bhd, IOI Corporation Bhd, Maxis Communications Bhd, RHB Capital Bhd, Scomi Group Bhd and Telekom Malaysia Bhd. The stocks were selected based on the structured warrants guidelines. Bursa has also obtained the commitment from 50 quasi market makers to play the role of market makers for the SSFs, and expects that number to swell to 100.

While the SSFs is a good thing, it does nothing for market fundamentals. What it does is to give investors things to do if they are bearish on the market/certain stocks. If they are savvy enough, they could do a market neutral hedge fund of their own - this means picking stocks correctly regardless of whether the market goes up or down. If I was creating a market neutral hedge fund, I would go long on Bursa Malaysia and Genting. At the same time, I would go short on Air Asia and RHB Capital. So technically, no matter in a very bullish market or a deep correction, the fund would still come out evens. The returns from the fund would come from picking the stocks that will move up more compared to the ones we shorted. (While I like Air Asia as a company, their share price is prohibitive, no room for mistakes).

Investors will have to appreciate beta or volatility, the volatility between Petronas Gas and Genting is quite wide a berth. The more volatile a stock is, the better it is as a stock future. That is one area which Bursa has missed out. Pick large caps but also stocks with high beta as a preference. A Petronas Gas stock future would yield very low turnover and interest.

A Shift To Small Caps

If we look at the senior employees of General Electric, Intel, Citigroup or Microsoft... they are a sober bunch. What a difference a few years make. The main difference being their sluggish stock options. In the 90s, they were making millions from stock options. However, its a bit mind boggling as these astute big caps are making good profits and even decent growth considering their size. What they couldn't understand is why their share prices haven't moved in tandem. The last 3 years have been "good not spectacular" for stocks in general, surely something must be amiss.

If we take the average 3 year return for big caps in the US, it registered a very decent 17% return a year. However when you compared that to small caps of US stocks, the figure is even better at 27%. What is even more shocking is the spectacular returns of international stocks (which can be termed as small to mid caps) of 32%. When you have these figures staring back at you, what has changed?

Investors are preferring smaller stocks, or rather they have more credible options than the safety of big blue chips. A big instigator for this movement is the rise and rise of hedge funds. Hedge funds need to extract higher returns, and to attack a big cap is ardous, lengthy and may need very sizable capital to effect "noise". A lot more hedge funds have replicated their operations in developing markets, as they are smaller in size and a rush of hedge funds onto their shores will have a multiplier effect on equity prices there. The higher the returns of small caps and international stocks, the more investors will be lured to move some of their holdings away from the safety of the big blue chips. What we will find for the next 2 years at least is the big blues paying their senior execs bigger bonuses, and much much less in share options.

Big blue chips have one thing going for them, most are sitting on very large cash holdings. Once the hedge funds and private equity buyout funds have finished with their pickings in international markets, they will refocus on the big blue chips - demanding for higher dividends, share buybacks and cancellation, or deploy the funds in a more meaningful manner. However that kind of task is generally drawn out, just look at Kerkorian and his battle with General Motors. Hedge funds don't have that kind of patience but private equity does. The main reason why there isn't a bigger shareholder revolt against big blue chips holdings so much cash is that equity returns in general have been more than decent over the past 3 years - once that starts to dip, the knives will be out.

Thursday, April 20, 2006

Calpers / Wilshire Associates


Dumb & Dumber

Calpers is the California pension fund. Not many would care what they do, but somehow over the last few years Calpers have been very vocal about what they buy and what they don't buy. Calpers practices responsible investing, or so they think. They avoid companies which treats employees or minority shareholders unfairly and stays away from regimes that they do not support. Throwing their weight around, it appears that the people behind Calpers are trying to enhance their jaded lives by living vicariously through Calpers. Calpers can be branded as ultra-conservative and belligerent (my system is the best system), much like the in-your-face Californians who will yell and question why you smoke in public.

In order to throw their weight around, Calpers needed better research and analytics to support their platforms and causes. They hired Wilshire Associates. Based on Wilshire's ranking systems, Calpers have recently decided to return to the Jakarta Stock Exchange. The news further fueled the rise in Indonesian stocks, which had already been rising steadily in recent months. Calpers had stopped all investing in Indonesia in 2003.

Calpers usually will make a big hoo-hah in their annual announcement of who's in, who's out, in their emerging markets investing strategy. Now most investment pros won't be bothered much with what they have to say. In fact, Calpers' strategy is being regarded as a good lagging indicator, rather than a more important leading indicator. Hence it may be toppish for Indonesian stocks!?

Calpers political voice box movement is tiring and incorrect. Wilshire Associates' analytics is highly questionable. For example, the decision to get back into Indonesian stocks was based on a rating of 2 (out of 3) given by WA on market worthiness. WA also ranks the following countries 2 out of 3: Turkey, Malaysia, Argentina and India. Investment pros in emerging markets would wince and roll their eyes at those scoring. That's paying a lot of money for a good deal of generalised B.S. When you pay for analytics, you are supposed to get all the nuances, value added distinction and analysis. I think from the report, its a very shoddy piece of advisory and research work.

WA also did a scoring on "creditors' rights", and had given Indonesia a BETTER score than Brazil, Malaysia, Hungary and Poland. To continue writing, I would have to use words that would generally not appear in any dictionary but in everyone's vocabulary. So, enough said.

Wednesday, April 19, 2006

China Construction Bank Eyeing Bear Stearns

After Lenovo's audacious move to buy the PC business of IBM, now we have rumours that China Construction Bank might be buying a stake in Bear Stearns. This is a reversal of normal moves by big investors such as Goldman Sach, Morgan Stanley, JP Morgan and Temasek - who have all been buying small stakes in Chinese banks to obtain a piece of the action in China's financial markets. China Construction Bank, a big boy in China, does the unconventional thing by considering a buy in reverse. Savvy! Hmm... jokes aplenty... A Chinese Bear Stearns ... would a name change to Panda Stearns be in the offing? CCB buying Bear Stearns... gives an entirely new meaning to the term Chinese Wall in investment banking.

Now, what we would not like to see is another blowout like the Dubai Ports World's acquisition of US ports operations. There better not be any over-gregarious US senators voicing displeasure over the potential acquisition. That is highly unlikely given that many US investment banks have been taking up strategic stakes in many Chinese banks over the last 3 years. Bear Stearns has a market capitalisation of around US$17.5 billion. Bear Stearns share price rose a bit more yesterday to close at an all time high. The thing is Bear Stearns does not have the financial muscle like Morgan Stanley or Goldman Sachs to pony up extras cash for stakes in Chinese banks - hence doing it this way solves the problem.

Tuesday, April 18, 2006

Pirated DVDs/VCDs Tycoons' Operations


A Fictional Account

It is a widely known fact that Malaysia is the production and distribution center for pirated DVDs/VCDs for most parts of Asia, and even as far as Souh Africa (I have a friend who can confirm that the sellers in South Africa got their supplies from Malaysia). If you think about it, to run such an empire is no easy task. I believe the mastermind behind it all would have (could have) been a very successful business person in the legit world too.

Think of all the things to manage:

1) Ensuring master copies are somehow diverted to you by hook or crook. This will mean obtaining the lucrative master copy even before it gets anywhere near the theatres. Not an easy task. Payoffs and important contacts needed to be made globally.

2) Ensuring your production center has the latest technology and speed efficiency in stamping out copies. A link-up post production unit will have to be handy with printing of covers and boxes. May have to outsource the plastic covers and boxes to a reliable source - calls for open tender every 3 months to get best prices.

3) Always be the wholesaler, appoint a master distributor for each region and get a cut of sales. For example, it may cost 15-30 sen (US 4-8 cents) for each DVD. Add in packaging, it could come to RM0.50 to RM0.60 per piece. A master distributor could take it on consignment basis - which means paying only what is sold (saves on capital) but will have to share more with the mastermind. A master distributor may be able to retail DVDs at RM8-RM10 per piece. The youths with multi colored hair may get anywhere between RM1 - RM2 per piece, with the master distributor (usually small time gangster heads) getting RM1-RM2 per piece also. Mind you, each master distributor will have a few hundred youths backing him up. Whether you buy from the front end of Jalan Alor/Petaling Street or the middle part of the streets, its the same team. At the end, the master wholesaler will get RM3-RM4 per piece. Mind you, he will have to write off a large portion of the DVDs left unsold, so his net could just be RM2 per piece.

4) Sales to overseas distribution points would be done at less than RM1 per piece net (free of shipping and delivery) as there are no returns and the sales are immediate. Poor sales items would be knocked down to half price to clear stocks. Failing that, you will sell them 3 for RM10, sure no problem, particularly at Berjaya Times Square or Sungei Wang Plaza.

5) Certain master distributors would be more savvy and appoint people with actual shops to sell their wares instead of on the streets. This cultivates customer loyalty and service. Many will have loyalty cards for redemption purposes (you are not the only ones, Starbucks!).

6) Certainly for the entire system to work, a lot of people will have to be on the payroll. Warnings of raids are known beforehand. Shops selling these stuff seldom gets raided or closed. I wonder why...

In fact, I have a sneaky feeling that I might know the mastermind behind all this.... and they are probably not from Malaysia, surprisingly. Its certain film tycoons (and triad heads) from Hong Kong. The reason being, all movies will get pirated and out to the retail market at the same time as the picture is released - except for a group of films from HK, by a certain production company. Strangely, these select films will eventually get pirated but not at least 3-4 weeks after it has been shown in the cinemas. Next time you are in Malaysia, keep an eye on certain HK movies, the ones that you cannot even get a pirated one if you offered to pay RM30 - then check out the people behind them. Problem is, many films are still financed by triad's money in HK. But why Malaysia and not in China - well, if you get caught or the authorities decides to clampdown on your activities, in Malaysia they will not shoot you and ask you to pay for the bullets.

Oh, yes.... and this is a fictional account ... in case I get rubbed off.

Sunday, April 16, 2006

The New Corporate Raiders
The Burger King Story

Back in the 80s, when Kholberg Kravis Roberts ruled the world, companies were at their mercy. KKR would usually ante up 10%-30% of their own money and borrow the rest to buy out big companies. KKR would then round up a team of management and give them some equity to turnaround the company, at the same time selling bits and parts of the company to pay down debts to a more manageable level. Usually, they end up taking them private to do this, but not all the time. It will take anywhere from 5-10 years for each project to be completed. While it is easy to rubbish KKR as corporate raiders, they do add value, improve margins and processes before exiting.

Now, the new KKRs are the private equity buyout funds. Only, the strategy they employ is more pragmatic, risky and places the burden more on banks and minority shareholders. This group of corporate raiders tend to be more short term oriented, do not add much value, and exit as fast as they could. Some of the notable private equity groups include Texas Pacific, Apollo Management, DLJ Merchant Banking, One Equity, Bain Capital, Goldman Sachs Funds and even a reinvented KKR.

Texas Pacific, Bain Capital and Goldman Sachs Funds bought Burger King from Diaego in 2003. They managed to knock down the asking price from US$2.26 billion to just US$1.5 billion. All in, the three put up just US$325 million and borrowed the rest. They hired a top notch CEO to produce good figures. Last year, they arranged for Burger King to borrow an additional US$350 million so that Burger King could pay the new owners a special dividend of US$367 million – so that took care of their initial investment. They also got another US$30 million to cancel out a management contract of US$9 million a year to the three owners.

Now Burger King is slated to go for an IPO which will raise US$600 million, but a listed Burger King will have over US$1 billion in debt, which is more than double that of McDonalds and Yum Brands. The debt is effectively rated as junk status. For comparison, Burger King’s profit margin is just 2.4%, while Wendy’s at 5.9% and McDonalds clears at 12.7%.

To put in the “good figures” new CEO Brenneman closed low producing outlets quickly, introduced a number of new food items, opened smaller sized outlets/franchises, and advertised like hell (NFL games). To maintain good “same store sales figures”, the CEO pushed struggling franchisees to close their stores ruthlessly. In the end, the losers are the buyers of listed Burger King and the lenders.

Hence, a smart private buyout fund would target companies that can “easily be turnaround or have their figures re-worked”. Any company can be listed provided the figures are worked cleverly to ramp up revenue. If the company has a good product or brand name, it should be easy to refinance halfway in the process to allow for new owners to pay off their initial investment. Hence their risk is zero even before bringing it to an IPO. Too many of them have employed this tactic - getting the company to borrow to pay the new owners special dividends, way before the turnaround process is complete. This loophole needs to be looked at and controlled.

You cannot fault them for acting in such a pragmatic fashion if the lenders are willing. The investment bankers are also willing to bring such crap listed in order to increase market share of new listings. Hence more new listings via this route will be of poorer quality – all signs of a market that is taking on higher risk. Naturally all these would eventually fall flat as a secular market correction catches them or they self-implode once they cannot make debt payments. Welcome to the new decade of greed and mismanagement.

Malaysia-Singapore Ties
Brawling Teenage Kids That Never Grow Up

Friends and regular visitors to this blog have been asking why I haven’t commented on the Malaysia-Singapore bridge situation. Generally, I wanted to stay away from the Malaysia-Singapore thing as nothing ever changes, it’s the same thing over and over again. Its like raising two teenage brats who never grow up. The Malaysia-Singapore thing is like the Sydney-Melbourne rivalry. Back in the 70s, citizens from both countries would take any opportunity to make a jibe at the other on various issues – politics, currency valuation, progress, economic viability, jokes, sporting rivalry etc… That kind of mentality eroded as we stepped into the 90s as citizens from both countries got really tired over the squabbles. Now, we tend to disagree about the belligerent stances taken by both governments in private, and just roll our eyes every time something erupts. Both sides never learn, both governments use the squabbles to score political brownie points, and both countries failed to recognize that we need each other in more ways than we care to admit.

The water issue, an agreement made many years ago to supply water at a certain rate (that does not make economic sense in present days) should have been renegotiated to accumulate goodwill. A decent offer from Singapore should have been accepted by Malaysia to generate that kind of goodwill – but no, both parties harp on mind numbing trivial stuff that irritate each other, scratching open wounds that never have the chance to heal properly.

There are certain important points to note on factors affecting both countries:

1) Do not link demands with other issues. Settle each issue on its own. To try and solve 100 issues all in one fell swoop is naïve. To try and gain an advantage with each issue is a mentality that both sides have to drop.
2) The fact that Singapore now gets to deal with PM Badawi is as good as it will get. I believe you have a more rational and less-combative figure than you-know-who. Take advantage of that for both countries.
3) The Malaysian CPF issue (Malaysian superannuation savings under the Singapore’s CPF) is not going to get settled by Singapore because if the Singapore side allows Malaysians to withdraw, it might lead to a big outflow of Malaysians working in Singapore. We are not talking of blue collar but the capable senior executives. A senior Malaysian exec who has worked more than 15 years in Singapore could very well have S$200,000 to S$500,000 in CPF (a big chunk could be in property). Some really well paid ones could have S$1 million or more. The property gains inherent would be the kicker. To allow CPF withdrawal would give these people a real option of moving back to a good lifestyle back in Malaysia even on a reduced salary. Singapore economy thrives on capable brainy people, and I estimate that about 20%-25% of the top execs in Singapore are Malaysians. So, this CPF thing will never happen.
4) Sand and air space are two separate issues. Sand is an economic item and should be treated as such – a deal should be struck on a government to government basis with a regular repricing that is fair. Air space is a no-no, if Singapore wants to test their planes and strategies – go further south, its all open airspace. There is no reason for Johor to let open their airspace as it encroaches – would Singapore allow Malaysian air forces to invade their airspace??
5) Don’ use certain advantages to irk the other side. The old KTM plot in Singapore is a good example.
6) Don’t threaten to use legal ways to settle matters all the time. Unless its for the best of both sides. Even if one country claims victory in one specific case in international arbitration – you can bet your sweet ass that the other party will remember that and would wait for the right opportunity to make the other side pay for it. So, it will never end.

7) Let's be realistic, at the end of the day, Singapore wants more things from Malaysia than vice-versa. Malaysia should not use that as an advantage in negotiations, and don't always use threats (you only use threats on desperate cases) - e.g. stop supplying water, no more sand, no more produce or veggies, etc... Singapore should not always play the "let's be fair and transparent" card, because it irks Malaysia. Malaysia feels that any deal done do not see a corresponding form of gratitude from the southern neighbour. Singapore tend to be smug about it as they can afford to pay almost any price for anything - and that is the kind of mental arrogance that is hard to swallow or stomach.

Back to the bridge (most of the problems is by Malaysians on Malaysia) - it highlights the very POOR EXECUTION and advisory work in the project. OK, we have to disband the bridge, but now what will happen to the CIQ complex? Why was there no tender? Why so much preliminary work was done when the entire project wasn't possible to push through without Singapore's agreement? What about the terms of the construction and completion? Doesn't anybody advise the authorities that the new bridge project has NO LEGS to stand on in an international arbitration case - why proceed alone? Prudent spending, this is certainly not! Now, we will see compensation for stalled project? Why is the bridge crooked - to stop tanks from rolling from one country to the other? Will heads roll? Again, noooooo..... Heads Must Roll .... A Thorough Audit MUST Be Undertaken To See Where We Went Wrong ... (To be fair though, this has nothing to do with PM Badawi as it was initiated before his tenure).... So when can we annex Johor to Singapore?

Everybody knows the bridge is not the real issue, it’s a case of brawling kids with a real history. The best way forward, now that we have a more conciliatory PM in Badawi is for Singapore to offer the same approach – have a high level weekend session – make sure both countries settle on a few issues and announce it together as a major step forward. On other issues, agree to disagree for the time being, don’t link up all issues to be settled at once. If we can even come out and settle on two or three issues, it will project a new “makeup and image” for both sides to their citizens.

At the end of it all, we will never go to war with each other. We have too much at stake, too many blood ties, too many friends …. So, let’s be pragmatic.

Friday, April 14, 2006

Reiterating A Bullish Year For Asian Stocks



Just in case some of you may have missed my earlier blogs - I am still bullish on Asian stocks, and not just in 2006 but for the next couple of years at least. The main factors for my saying so:

1) Currency Realignment (Wealth Re-creation) - Bulk of Asia-Pacific have recovered from the financial crisis, and are being rerated by investors. Led by the yuan, other undervalued currencies such as the ringgit, Indon rupiah and baht are being brought up at the same time. Only this time around, there is a bit more room on the upside. The yuan can appreciate another 30% from here over the next 3 years without much dent to its competitive edge. Malaysia's ringgit can easily gain another 10% over the next 2 years without losing steam. An appreciating currency means assets denominated in that currency will see demand as well. Better purchasing power will stifle inflationary pressures, which will further boost stock and property prices. The wealth re-creation process will translate into better purchasing power, domestic demand and higher velocity of money in the region.

2) Japan To Rise (Really This Time) - Readers of my blog will be familar with my conviction that Japan's economic and prices recovery are genuine this time around. Last year was good for stock and property prices in Japan, but 2006 and 2007 should even be better. A more open financial market with more restructuring, buyouts, private equity and foreign investment will drive the cobwebs away. The fact that Bank of Japan is increasing interest rates from ZERO is not a sign to be feared but to be welcomed, because it shows that liquidity is more than ample in the system and that prices finally are rising. A genuine recovery in Japan will translate into great multiplier effects for the rest of Asia. A good rule of thumb is every 1% growth in GDP for Japan will have the effect of raising Asia's GDP by 0.7%. You do the math, this is good math.

3) The Really Big Picture - Please read my blog on "Asian Equity Markets Have A Lot Of Ground To Make Up" dated 8 February 2006. Basic argument is that Asia's GDP will account for 22%-24% of total global GDP by 2008-2010. Meanwhile Asian stock markets only account for 12% of total global market capitalisation. Structural changes in the competitive landscape have been witnessed over the last 5 years. Creativity, technology, globalisation and competition have all converged and brought Asia higher up the global playing field. We shoud see a very positive next 5 years for Asian equity markets as I forsee Asia's share of market cap to rise from 12% to a more respectable 16% (or one-third in size).

Sarbanes-Oxley/Nasdaq/LSE



Well, finally Nasdaq has done the smart thing, at least get a foot in with LSE. It has just acquired a strategic 15% stake in LSE. Though not a controlling stake, it is a very smart move as it places Nasdaq at the front of the queue should anyone else wants to sell. This also securitised ties with LSE and would stave off any potential bids from NYSE or Euronext. Nasdaq has had to acquire aggressively because its spate of new listings have been drying up. Much of the blame can be attributed to the introduction of Sarbanes-Oxley law (SOX). SOX was introduced after the Enron and WorldCom scandals in 2002. However, the SOX were more onerous and burdensome and many new listings opted to go via London instead of the US.

SOX itself is more qualitative as an "accounting standard". The actual compliance is not that big, but new wordy introductions and requirements tend to have the effect of scaring companies off. The most troublesome part would have to be the company's regulatory structure and the governance with regards to any changes. Provisions in SOX that forces companies to have their internal controls certified by auditors borders on the excessive. The London Stock Exchange has managed to lure more Asian listings over the last 3 years as the US tied itself in knots with reglations.

SOX in itself is good, and would point to better governance, however, the regulators have to be aware that better governance makes more sense with US companies that are already listed. For foreign companies contemplating a listing, the SOX adds unecessary cost and paperwork. If SOX really is effective and important, companies raising funds WITHOUT SOX rules should be paying higher interest rates, and those complying with SOX should be paying lower rates for funding. Presently, there is no such distinction. If the lenders are not making the distinction and pricing nuances, it means SOX as a whole is more hot air than substance.

Wednesday, April 12, 2006

Possibly The World's Most Valuable Unlisted Website



If you are older than 30, chances are high that you have never visited YouTube, or more specifically
www.youtube.com ... Well, you should, as this could very well be the most valuable website/company next to Google and EBay. It probably would never come close to Google but its going to make the owners billions.

YouTube is just 14 months old, can you believe that... and the founders are probably just a tad older than that!!! The two founders are 20-something ex-PayPal veterans. Chad Hurley and Steven Chen got US$8 million in second round venture capital funding from Sequoia (the same early investors in Yahoo and Google). YouTube's premise is simple but effective, it is a tech-savvy and easy to navigate site for people to upload videos of various antics /mind blowing lip-synching performances / comedy sketches / etc... to share with the world. You are likely to view interesting snippets from TV comedy shows - and the traffic/hits/views are a brilliant indicator of what's hip / funny / cool / jazzy... The site now has about 30 million views a day and is growing rapidly.

Facebook, another social networking site, has already just rejected a buyout offer of US$750 million. To me, YouTube is a few times more exciting than Facebook. The potential for media companies to use YouTube as a research and marketing tool is enormous. The only thing to iron out is the copyright. While a lot of the submissions are from private individuals, there have been a substantial number of snippets from copyrighted shows/programs. They have been smart enough to limit the uploads to 10 minutes thus erasing the hot TV episodes breaches. They have also installed the control whereby if a clip has been taken down, it can never be uploaded again.

To see why you will be hooked on YouTube in just less than 10 minutes, just go to:

www.youtube.com

then click on "Top Favourites"
then click on "robot dance" video

(now, tell me that is NOT the most amazing piece of dancing you have ever seen?!!!)

still game, then click on "guitar" video to see Joe Satriani reincarnated into a very young (probably Asian) kid ... absolutely unbelievable.

and finally, check out the absolutely bonkers sketch in "Crazy Asian Mother" about the zealous over-achieveing Asian moms on their poor, brilliant children studying in America.

Highly Speculative Stocks On KLSE Now
Their Danger Levels

Don't get me wrong, I do not abhorr specky stocks, they are part and parcel of a normal stockmarket. In fact, they are a necessary evil. However, there is good risk and silly risk. Some of these stocks, I have highlighted before ... you can refer to my blog on January 26, 2006 when I said that some hedge funds took up large placements of stocks in Farm Best, Iris and Fonics. Their prices at the time were RM4.08, RM0.26 and RM0.36 respectively. Farm Best went as high as RM5.80 and has now settled at RM4.90 - not bad at all for the buyers. Fonics is a dog, or rather dog with fleas - it had a sharp run up the week prior to January 26 from RM0.24 to RM0.36 - so the placements to hedge funds was more a sell-down by main owners on hindsight as it never breach RM0.39, and is now trading at RM0.32. The leader of the pack is Iris, probably because it has the largest paid up and the volume placed out would probably be the biggest as well. Iris has risen from RM0.26 to a present day high of RM0.85 on very good volume. All this in a matter of 3 months or less.

There are plenty of these type of high volume specky stocks, some are overdone, some have a bit of merit, some are downright dangerous. When I term a specky stock as highly dangerous, I am talking about the scope of that share correcting massively (i.e. absolutely nothing worthwhile in the company). For example, I do think Iris is overdone but it has some fundamentals and a 50%-60% correction is possible but not much more. However, some other stocks I can forsee a 90% correction based on their "inherent value" and share spread.

The following are some of these highly traded stocks, their price jumps, and the rating of danger - ZERO being neutral, 3 being dangerous but should have more upside, 7 being highly flammable (players must be in and out like a fox), 10 being just plain silly and ridiculous (not worth punting seriously as it could and should fall like a rock soon). Marks out of 10.

Iris
The share has zoomed up by more than 300% in just a few weeks. The head keeps talking in the press of a potential foreign buyer. Yeah, sure... where was the buyer when the share was below RM0.20 a few months back.
Danger level: 8/10

IFCA
Share price was just RM0.20 mid-March 2006 and now it is trading at RM0.54. Volume jumps only recently, may have some petrol left as volume traded looks to be insufficient to help the players to get rid of stocks on hand yet. A couple of laps left, but when its over its back to RM0.20, so beware. Fundamentals, almost non existent.
Danger level: 7/10

MEMS Technology
Traded at RM0.35 during mid-January period, now at RM0.50. At least the company has some fundamentals and have been reporting profits at least. Not too specky. Can go up a bit more.
Danger level: 5/10

Karambunai
This one is sucking in too many retail players, especially the ones who cannot read. Traded forever at RM0.02 to RM0.03 for the longest time. In just 3-4 weeks, its now at RM0.11. The owners are laughing, trust me. To retail players, RM0.11 is very low in price, but please check out the company. Lost between Rm57m-83m EACH YEAR for the past 3 years. Has a massive 2 over billion shares and if it wasn't because the players were "related" to some politico, this thing would not have been listed in the first place. Fundamentals zilch.
Danger level: 13/10

Nasioncom
Price traded around RM0.19 during mid-January, now at RM0.31. Volume is good, look like players are gearing for one final move before getting rid of stocks. Fundamentals wise, the stock is worth about RM0.10.
Danger level: 6/10

GHL Systems
Share price mid January RM0.13, spurted over the last 2 weeks to RM0.33. Volume surge just started, so should have some legs in it. Company have some decent fundamentals, OK still.
Danger level: 3/10

NovaMSC
Almost the twin brother of Karambunai. Price during mid_january RM0.06, now its at RM0.19. Seems "cheapish" to retail players, but trust me, its now. Bottom can fall out anytime when even the owners don't want to hold the stock. Danger level: 10/10

Furquan Business Org (FBO)
This is hard to judge. Could go either way. Looks OK and main shareholders don't look to be disposing. Share price has beeen occillating between RM0.15 and RM0.22 for the longest time.
Danger level: Not rated.

Global Economics - Generalisations & Hidden Truths


Learning While You Laugh

I am sure some of you have heard about this Heaven and Hell scenario on global economics. Sure, we will laugh, but look deeper and there is an element of truth behind each humourous stab.

HEAVEN is when you have:

An American salary
A British home
Chinese food
A Swiss economy
An Italian body
Japanese technology
An African "tool"
An Indian wife

HELL is when you have:

An American wife
A British body
A Chinese "tool"
Swiss food
Italian technology
A Japanese home
An African economy
An Indian salary

In a rapidly changing global economy, even jokes have to be refreshed every now and then. Things like "British body" and "Indian salary" may not be so funny very soon.

Friday, April 07, 2006

The Parable Of Paternalism


Soon To Be Made Into A CGI Animation Classic By Dreamworks

A frequent visitor to this blog, Rohan888, brought this quote to my notice:

"The combination of excessive paternalism and a reluctance to accept foreign help has left Malaysia sticking out as the new poor man of ASEAN. Its listed companies are generally inward-looking with limited ambition."

This was apparently an opinion of a foreign fund manager, not exactly positive. The quote reminded me of a story/joke which I heard a long time ago, which now I am going to paraphrase and turn it into my own Parable Of Paternalism, enjoy! Its a bit long, but its worth it man! There is good paternalism or not so good ones, the latter abuses the right to decide in favour of some. This parable is about the dark side of paternalism.

I once visited my uncle in the Isle of Putrajaya, it was a nice place, hot and humid, occassional flash floods, plenty of natural resources... in fact very much like Malaysia. He took me around the island state and we had a wonderful time, but by the second day I was feeling ill, probably from gorging myself with all kinds of delicacies. My uncle said, no problem, and took me straight to Hospital PJ, apparently a heavily subsidised government hospital. At the check in counter, my uncle chatted intimately with the Head Matron for a few minutes. He came back and said, we should be able to get in and out quick. He told me there were three types of physicians I could see, all cost the same - traditional medicine department, western medicine department or mental retardation department. There were 3 queues, one to each of the respective departments, the longest being for western medicine, I think there were about 50 people. The traditional medicine line was shorter with just 20 people, about the same for those suspicious looking types lining for mental treatment.

Naturally I ruled out the third option, and told my uncle that I preferred traditional medicine as the line was shorter. My uncle whispered to the Head Matron and she held my hand leading me to go pass the queue to traditional medicine. I was shocked and embarressed at the same time. I mean, to jump the queue of 20 people in front of me, they must be waiting for at least 2 hours before they get to see the doctor. Plus I was fearing that someone in the queue might jump out and curse at my queue jumping for no apparent reason - I mean, I wasn't the sickest one there by a mile, and I am certainly not even near my retirement age, and I am certainly not physically handicapped in any way (that I know of). But the people in the queue were quiet, some even nodded to me as I passed them. The doctor treated me patiently and thoroughly, and as I walked back out past the line of people, some even smiled and waved goodbye. My shock and embarressment have turned into a power trip, I remember thinking "Hey, this is cool, I jumped queue and no one even showed me ugly faces... man, my uncle must know some important people here". It felt good. It felt so good that I turned to my uncle and said, "Well, since I am here, you think I could also visit the western medicine doctor?" Half hoping not to offend my uncle, but he said it was "No problem". We did the same thing again, only this time, the queue was much longer, but the same response I got. I was feeling quite full of myself, it felt like walking on air, exaggerated self-importance is a wonderful feeling I say. Heck, initially I felt sorry for those in the queue, but that kinda evaporated by now.

Coming out of the western physician's office, an outrageous thought crossed my mind, why don't I visit the mental physician too, just for the fun of it. I told my uncle that, and he whispered to the Head Matron, and off we went, passing each wierd looking person in the queue to the mental department. I looked at each of them as I walked past them, some stared blankly towards the ceiling, another just buried his face in his hands, then there was one with his mouth wide open making sqawking noises every 3 seconds. I was almost at the door of the physician when a lady in the queue stepped out, stared me down, stopping me in my tracks. She was quite pretty too, but there was something wierd about her. She was circling her left nipple with her index finger (non-stop). There was an uncomfortable silence, I couldn't stop staring and I didn't know where to look .... then she blurted out "Hey, who do you think you are.... don't you need to line up like everyone else ... or are you mentally retarded?" ... and then she gave out this bone chilling laughter that I will never forget. The end.

So, who are you - are you in the queue keeping quiet, why are we in line in the first place, are you the gatekeeper like the matron, are you like my uncle, who actually runs the hospital ... and who is the mental one in the parable?