Thursday, August 30, 2007

Near Term Outlook

As mentioned before, sentiment is still shaky and we need market psychology to turn positive before we see better times. Well, we are still waiting for one of two things:

a) Fed's aggressive rate cuts to lift markets, pump liquidity and/or

b) A big investor to step into the mortgage biz and bid for some stocks. Bank of America's convertible preferred bond investment is good but not good enough because the investment was too shrewd and protected BoA in more ways than one, plus they are preferred which puts them top of the heap in the event of bankruptcy by Countrywide. We need either a big hedge fund or a respected investor like Buffett to come in. In an indirect way, Buffett is involved via Berkshire's stake in Bank of America.

The markets all was shaken from the release of the minutes from a Federal Reserve meeting on August 7. The highlights:

The minutes of the August 7 meeting of the Federal Open Market Committee, released Tuesday, show it considered taking policy action to calm the credit markets but remained more concerned about inflation. "a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response," the minutes say. However, "given expectations that the most likely outcome for the economy was continued moderate growth, the upside risks to inflation remained the most significant policy concern." At an emergency conference on August 16, the FOMC lowered the discount rate by 50 basis points to 5.75%, saying the risks to economic growth had "increased appreciably."

The markets got more uncomfortable after the release of the minutes because there appears to be a clear divergence in what is most important. The markets are trying to tell Bernanke that the Fed SHOULD NOT be looking at inflationary risk as the top priority, and that there is severe dislocation in credit markets which the Fed is only gradually recognising but not fast enough.

If you look at fed-funds futures contracts trading, they are already pricing in multiple interest-rate cuts, starting with a quarter-percentage-point reduction at the Fed's next policy meeting Sep 18. Although not a perfect predictor, the 30-day Federal funds futures contract that expires in October 2007 seems to imply a Fed funds rate of 4.90% and is currently pricing in a 100% probability that the Fed will decrease the target rate by 25 basis points to 5.00% at the September meeting. In fact there were times over the last few days that the implied Fed funds rate have gone to 4.78%, which would have mean discounting a 50 basis points cut on Sep 18.

In my view, there are two important indicators which have popped up recently which would cause the Fed to cut rates aggressively:

a) on Tuesday it showed that the U.S. consumer confidence index fell sharply in August to 105.0 from a revised high of 111.9 in July, its steepest fall since the aftermath of Hurricane Katrina in September 2005. Confidence is now at its lowest point in a year. This raises the risk for a consumer-led recession in the near term, which would then throw out Fed's extreme-fascination with inflationary risks.

b) An S&P/Case-Shiller report also released on Tuesday showed a 3.2% decline in house prices versus a year ago, their worst decline in 20 years. The housing slump is making it more difficult for consumers to use home equity to finance their spending, which represents 70% of the economy. The Fed will be aware that the decline is highly likely to continue rather than level out which could only mean more weakness ahead. Realising that rate cuts now will take at least 6-12 months to work itself into the real economy, the pressure to cut at a quicker pace has risen.

To the Fed, the one indicator which is supporting the real economy is the tight jobs market. The same CEOs calling for massive rate cuts are also hiring at a decent pace. Its the one time where many of the US companies are helped by the more robust global economy.

What A Photo!
If ever you need to get motivated to pick up a camera, this photo should do it. This shot alone captures Love, Sincerity, Friendship, Hope, Gratitude all at one take.
Happy Merdeka, as they say, patriotism is about the country not the government. There is an excerpt from a classic which describes Malaysia and Malaysians succintly on this eve of a momentous occassion. Re-reading it makes me think that this has to be the best description of us at this point in time, happy Merdeka everybody ...

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.
Charles Dickens, A Tale of Two CitiesEnglish novelist (1812 - 1870)

Tuesday, August 28, 2007

Here's The Ad:

Friends have been saying how difficult it was to try and catch the ad, well now that its on youtube, np lah.

What An AD By Petronas

We all love the festivity ads and commercials by Petronas - they are always hearfelt, nostalgic and meaningful ... remembering better times and sees the goodness in Malaysians ... that the more different we are, the more things we have in common. Well, when you have Yasmin Ahmad's sensitivity and creative brilliance, its a potent mix.

But have you seen the new Merdeka ad??? OMG, what a daring one! It shows a guy being asked to build a sampan to pay off his debt ... in the end the creditor friend gave the boat to him as a gift which will allow him to be independent and make a decent living. The new boat sank, and the tag lin at the end was in Malay but its resounding, loosely translated: Are what we putting in now able to carry us to the future, what our future will be depends on what we put in now.

Now, I don't know about you but its amazing that this was passed by the Ministry of Information. Yes, the ad was meant for all Malaysians, but one could not help but think of our government. Its very daring, its very timely ... just for that I will try to pump at Petronas as much as I can.

The nuances within the commercial is what makes it special and daring. The guy who owes money said he didn't have money to buy resources to build the sampan. The creditor friend said its OK, he can use the resources and wood available at his house to build the sampan. The symbolism, the symbolism.

Catch the ad if you can cause I believe it could be pulled off the air soon. Some bigwigs are bound to be sitting in their living room thnking, "Hey, its about .... ".

Views On Selected Stocks

yusuf said...
SD, Whats your take on Dialog, Equine and RBLand? Reckon its good? When u reckon this toxic debt scenario will peter off? Will there be a run this week prior to the Budget?
12:14 PM

Salvatore_Dali said...
yusuf,dialog = overpriced, considering the projects they got... sapcrest, coastal and ramunia the way to goequine = fortunes tied with connections, if connex go down, the stock is kaput, connex is in icu now

rbland = nta of rbland is 1.80 only, above 2.50 u r paying too much premium for ijm properties injection, might as well wait for requotation after absorption for better entry px, or just go into Talam as next possible exercise, the catalysts are looking good for talam anyway

Subprime = thrashed the subject to death, pls re-read old postings

Budget = personal n corp tax cuts definitely, nothing to shout about, all the corridors also announced and strategised to death already, whats new, no budget rally

Hold Till When?

For those long or very long in China H-shares covered warrants, you should be feeling good. Now, many are asking "hold till when"? You have to monitor the Shanghai and Hongkong markets to get a sense of perspective. You also have your own investing objectives.

Some Pointers

a) If your aim is to get 50% or 100% returns, you can get out soon, if not already.

b) If you generally agree with what I have been writing on H-shares' attraction, then you should HOLD TILL the buggers expire. This is because the entire H-shares discount scenario, pouring in of China money into H-shares will play itself out over 6-12 months.

c) The longer term factor in that most will have to requote their shares back to Shanghai can only narrow the discount. We should see some having dual listings in HK and Shanghai. Some may completely leave HK and just list in Shanghai owing to government's directive and its more lucrative to re-sell shares in Shanghai (easier to raise funds and get better valuations).

d) Or, they will more likely use my strategy prediction - keep dual listing, but keep buying free float in HK H-shares, then re-sell for a subsequent second listing in Shanghai.

e) Of course, if the China markets start to look shaky dropping by more than 100 points a day, you may want to take profits and wait for re-entry levels.

I can also sense some holders will want to trade these covered warrants instead of holding to maturity, that's their perogative. The need to time the markets and incur transaction costs may/may not work in your favour. If you bought at 10 sen or lower, just let it ride, you would be amazed at the price at expiry. Then we might be able to say we have a 5-bagger or even a 10-bagger.

Friday, August 24, 2007

More Drama Still For Subprime?

Is a rate cut enough to create a bottom for equity markets? While I think the subprime's actual financial impact is muted, its the reverse in sentiment it caused which has been doing more havoc rather than real financial consequences. Hence when assessing a bottom for equities in general, we need to look at recovery in sentiment.

Things Casting A Dark Cloud Over Sentiment & Market Psychology

a) The rate cut is insufficient to cause a substantive recovery in sentiment
b) The subprime drama still has a long way to play itself out. There will still be more hedge funds and financial institutions revealing losses every other day. News and media will continually focus on houses being foreclosed in US every now and then. Holders of CDOs and its related instruments will complain that there is NO market to dispose these instruments, and hence difficult to market them to market.

c) The big concern is not subprime but that "credit" in itself has stopped functioning: so much so that genuine demand for credit gets halted.

d) Goldman Sachs predicted that there could be at least a 15%-20% decline in housing prices in the US before they see things bottoming out. HSBC is even more dire forecasting an overvaluation of 35%-40% in US housing.

Things That Could Reverse Sentiment Positively

a) Big influential investor stepping in to bid or buyout of one of the bigger troubled mortgage companies - e.g. Fannie Mae or Warren Buffett or some big hedge fund like Blackstone or KKR.

b) The Fed aggressively tackles the liquidity and sentiment issues by cutting rates by another 50 basis points again to 4.0% before September is over.

Markets will drift lower as the things in the upper category will be pervasive in the news and media. Spurts of recovery will find it hard to reverse the sentiment or psychology.

However, I think the two possibilities in the lower category are real probables. Especially the first one. I do believe there are many shrewd investors, including Buffett and the big hedge funds, already pouring over the stocks whacked by subprime. Bank of America shrewdly pumped in US$2 billion into Countrywide in exchange for a 7.25% convertible preferred stock. The deal allows BoA to convert into Countrywide shares at a steal of US$18 considering the market price of US$23, which could translate to a 16% stake.

I do see still a lot of liquidity in the system, and the smarter hedge funds with some real balls will stick their necks out to bid for these distressed assets. The best thing would be for Buffett to step in and bid for one of those companies - now that would really kick it up a gear. Topping the list of potential candidates to be rescued or bought out include Thornburg Mortgage and Accredited Home Lenders. The change in sentiment driven by these deals will be sufficient to turn sentiment and market psychology around. I do see something happening within the next 1-2 weeks or earlier even, hence a good strategy will be to buy on weakness.

Thursday, August 23, 2007


A regular reader and contributor under the nick of doraidd emailed me a couple of days ago to tell me that he has bought a book for me to read and placed it with Kinokuniya KLCC. That was a big surprise and a pleasant one. Thanks once again!

After grabbing the freebie, I was caught by the untimely heavy rain around KLCC. It was as if a guy who hasn't peed the whole day, lasting nearly an hour. Nothing doing, but to read the book. Finished the first 25 pages and enjoyed it thoroughly. Funny, and while its supposed to be about the misuse and abuse of derivatives, it has a lot of local flavour such as the Asian 97 crisis.

The book is written by a true expert in derivatives, Satyajit Das, titled TRADERS, GUNS & MONEY. Mr Das has worked for Commonwealth Bank of Australia, Citicorp, Merrill Lynch and the TNT Group. Though I have not finished reading the book, the first 25 pages is a hoot already.

Thanks again doraidd...

p/s ARKs - acts of random kindness; ARGS - acts of random generosity of spirit

H-Shares Covered Warrants On Bursa

These covered warrants had a double fillip for the last couple of days. One, was the recovery in all Asian markets following the Fed's rate cut. Second, the allowance by Beijing for its residents to buy HK listed shares with no restrictions. Most have more than doubled in price over the last couple of days. Are they still good buys?

I have been harping on the H-shares and the related covered warrants. The discount buffer is still there, hence I believe strongly that there will more upside in store. The H-shares warrants comes at a unique time, probably investors won't another chance like this. Great discount buffer of 20%-40%. Beijing issued notice that more H-shares will need to come back to list in Shanghai to boost options/supply for mainland investors. QDII rules. Most recently, the permission to buy HK listed stocks.
Read the WSJ just now and they had a negative slant on the size of the liquidity that would be investing in HK listed shares. They cite factors such as mainlanders having a bigger belief in the uptrend of Shanghai and Shenzhen bourses, and the currency factor. I have to say that WSJ have gotten this one wrong. One of the key positives from the new rules is not so much that they can buy HK listed shares, but that they can keep proceeds in currencies other than the yuan. Plus, there is no limit like before. WSJ may be underestimating the amount of funds swishing in China that falls under the "grey areas" (illegal businesses, unreported revenues, business transactions not done at arm's length, "corruption", slush funds, improperly diverted government funds, etc...). This is a great avenue to get these funds out of the country, before they get themselves out of the country.
Even putting the dark side aside, on fundamentals its a prime opportunity and Chinese being Chinese would easily recognise a big opportunity.

Below are the top picks with negligible premiums:
warrant px / maturity

Top Buys

CCCC-C1 0.28 / 31 Jan 2008

China Life-C1 0.42 / 17 Jan 2008

China Mobile-C1 0.17 / 4 March 2008

China Mobile-C3 1.14 / 13 Jan 2008


China Mobile-C4 0.18 / 30 March 2008

ICBC-C1 0.16 / 4 March 2008

ICBC-C3 0.13 / 2 Jan 2008

Petrochina-C1 0.14 / 4 March 2008

Shenhua-C1 0.06 / 25 Feb 2008

Sinopec-C1 0.075 / 31 Jan 2008

Wednesday, August 22, 2007

Where Do You Go To, My Lovely?

I was intrigued by the timely article by The Edge back in July on the "high receivable among certain Mesdaq companies". whereiszemoola has been tearing companies to shreds over these doubtful issues. I have changed my positive view to a negative view on Nextnation based on the surge in receivables. I will be trying to go through each one of those companies highlighted by The Edge. First on the chopping board is Airocom.

From their website: Airocom is a provider of Value-Added Wireless Messaging Platform and Telecom Applications Development. Airocom develops scaleable messaging solutions and telecommunications software via smart partnerships with customers and suppliers.

Airocom provides consumers, enterprises, mobile operators, service providers, carriers, portals and ISPs a complete end-to-end solution to their present communications needs. Our homegrown and flagship product, AiroGate Wireless Messaging Gateway provides maximum performance and availability and has been deployed widely by Malaysia’s mobile communication operators, service providers and enterprises.

Airocom was only listed on Mesdaq on 27 April 2006, and things already does not look that good. Surprisingly, the revenue and net profit figures were excellent in 2005, somehow the listing did not bode well at all for the company and management. Revenue slumped by some 75% and net profits of 5.4m in 2005 became a loss of 3.1m in 2006??? The chairman of the company is Datuk Ali Kadir, the former SC's chairman, and I thought he did a good job at SC. Vellapan??? To be fair, unlike other dubious counters, Datuk Ali Kadir has been adding shares to his stake a few times in the months of April and May this year. At least he is not disposing like crazy.

The supposed CEO Jalaluddin Jaffar resigned in July 2007. In the annual report it stated that the company have a significant concentration of credit risk in the form of outstanding balances due from Mekong Communication Corp Sdn Bhd and PT Ochabawez Dinamika Persada, which together makes up 92% of receivables. Just look at the receivables. The merchant bank bringing the company to list can easily see that the receivables in 2005 was already 19.8m or more than 90% of the revenue for 2005, and nearly 4x the net profit figure. No warning bells, simple first year accounting student would have red-flagged this.

So, who actually gave permission for this company to list? Did the Bursa or SC even go through the figures and projections? Were the merchant bankers at Ambank sleeping or just signing off on the deal with their eyes closed? The company almost immediately went into losses less than 12 months after being listed. How can investors have any kind of confidence in Mesdaq listings? One or two good ones out of twenty is a terrible hit rate. You get better odds at Magnum and the horses.

We have to bring up the role of the sponsor / merchant bank bringing these companies to Mesdaq, what were they thinking of? Where is the "due diligence"? Was there a proper examination of the solidity of the business model? If it went from a profit to a loss after a few years, I can absolve much of the merchant bank's role. Guys, the company went into the red less than 12 months after listing???

2005 / 2006
Revenue 21.1m / 4.8m

Net Profit 5.4m / -3.1m

Receivables 19.8m / 23.9m

Airocom has a 52 week high low of 0.34 to 0.11 and at present has been rarely traded at 0.14. Airocom's slogan, "get unwired", ... well things are really unraveling fast! Somebody should be asking a lot of people a lot of questions.

Tuesday, August 21, 2007

H-Shares Marching On

Excerpts from The Standard HK news daily: Millions could plow their money into the Hong Kong securities market following a trial initiated yesterday by the mainland to allow individuals to invest in stocks traded on the bourse. The decision by the State Administration of Foreign Exchange came just days after a Beijing visit by a top-level delegation led by HK Financial Secretary John Tsang Chun-wah. The pilot program will solidify Hong Kong's status as an international financial center and will help narrow the huge price gap between mainland-traded A shares, which trade at extremely high earnings multiples, and Hong Kong- listed H shares, which trade at relatively lower earnings. The move is also in keeping with initiatives outlined in the Action Agenda on China's 11th Five-Year Plan and the Development of Hong Kong.

SAFE earmarked Tianjin's Binhai New Area for the trial run. In a statement on its website yesterday, the forex regulator designated Bank of China's (3988) Tianjin branch and its Hong Kong-based securities arm BOC International to handle transactions. All mainland citizens will be allowed to invest and it is not limited to residents of northern Tianjin.

Welcoming the initiative, Financial Secretary Tsang said it demonstrated the mutually assisting, complementary and interactive relationship between the financial systems of the mainland and Hong Kong. Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong said the program was conducive to the interaction and the mutual development of Hong Kong and mainland financial markets.

But why Tianjin only? By designating a specific branch to facilitate the flow of funds will allow authorities to monitor foreign currency transactions first , soon we will see the program being replicated throughout the major cities in China as long as the "outflow and inflows can be monitored properly". This will fundamentally change the dynamics of the Hong Kong market. Needless to say, this is one of many steps taken to create release valves for the liquidity swishing in China's financial system.

Hate to repeat it again, but H-shares was, is and still will be the best asset class before, now and over the next 12 months. Until now, mainland citizens were only allowed to invest overseas through banks, brokerages, insurers and fund managers licensed as part of the qualified domestic institutional investor program. SAFE said individual investors will not be bound by a rule that restricts forex purchases to US$50,000 (HK$390,000) annually. Investors may convert unlimited yuan into foreign currency and invest in Hong Kong. They could also retain their foreign currency earnings.

It is thought that the new plan could boost daily turnover for H-shares by 10%-20%. I expect an even greater rate of participation as this scheme allows the mainland Chinese to pick up Chinese shares at a great discount buffer since most of them will have to have a Shanghai listing within the next 2 years. Petrochina will be the first.

Good News & Bad News

Whenever people ask us which do we want to hear first, always go for the bad news first cos then we can have a "worst case scenario", e.g. bad news: your granduncle passed away last night of a sudden heart attack... good news: the autopsy revealed that he actually had 3rd stage terminal cancer in his lungs and liver, would have had to suffer and die anyway .... you get the drift.

The Bad News:

Again, the subprime thing has been magnified and compounded by the leverage by hedge funds. The domino effect has been due to the same thing. Even markets which have little correlation the subprime got hammered. The way the yen has appreciated over the last few trading days confirms the huge unwinding of yen carry trades, which can explain the bulk of sharp selling across Asian markets.

The Malaysian bourse has been one of the top performers for the past 6-18 months and is a favourite among foreign funds and hedge funds. The subprime mess caused a fear of redemptions in hedge funds, causing a lot of unwinding of yen carry trades (the yen actually appreciated from 122 to 114 over the last 10 trading days). The liquidity being sucked out of yen carry trade caused a selloff in Asian markets (except China because it was not a beneficiary of the yen carry trade). However the subsequent recovery was more pronounced in the bigger Asian markets such as HK, Korea, Taiwan and Singapore ... and less so for Malaysia.

That means I see the KLCI lagging most of the other Asian bourses in recovery for at least the next couple of weeks. The reason being the KLCI was too popular, and too dependent on foreign funds and hedge funds. I suspect the bulk of the recovery now in Asian markets is due to local funds and retail funds. Unfortunately, Malaysia's local funds and retail are still under invested in the markets. The local funds and retail side are more vibrant in Singapore, Korea, Taiwan and HK. Hence the KLCI will lag for a while as foreign funds will not jump back so soon after liquidating.

The Good News:

This is an excellent time for the "under invested local funds" to re-enter the markets and I suspect they are already nibbling. Local funds are never known to push up prices when buying. The extended lagging period will give all investors a better opportunity to pick and choose stocks for the resumption of the bull run, no need to chase stock prices.

The severe unwinding of a lot of yen carry trade will offer a stronger footing for the upcoming resumption of the bull run. In one fell swoop, the markets have tried to:

a) totally discount the worst case scenario from the subprime mess

b) caused a major unwinding of the potentially fatalistic yen carry trade, thus removing a huge rain cloud hovering above all markets

c) hasten the dropping of interest rates by the Fed and thus also hastening the emergence of a period of global easing of interest rates

d) continued selling of the USD which is necessary to sustain the US economy, and liberate the emerging economies to move to the next level: thus prolonging the economic engine for all

So, to me, the Good News seriously outweighs the Bad News!

Friday, August 17, 2007

The New Investing Paradigm

I still think that the subprime thing is just a small thing, however the blowout due to the repercussions of subprime give rise to many fresh lessons in the continually evolving investment paradigm. You can call it the globalisation effects. Unless you still have walls around your stock markets like China, you are no longer immune to seemingly unrelated hiccups 10,000 miles away.

Put it another way - almost every asset class or sectors or country effects will have an effect on your stock portfolio, whether you like it or not, whether you have even heard of them in the first place is immaterial. Hence you can be safely buying and keeping Public Bank and UMW and IJM, but something could have happened to cause wild gyrations in gold futures due to a no-export and no-gold trade rule put up by Russia, leading to a 25% jump in gold prices. Now, nothing PB, UMW or IJM does is in any way related to gold or even something as far away as Russia. But the thing is NOTHING is unrelated anymore. By virtue of the leveraged hedge funds seeking out investments in every nook and corner of the world, all investments are related, whether you like it or not!

Imagine a US$2 billion hedge fund, they gear up by borrowing an additional 100% in Kiwi-carry trade, and then gear up another 100% doing a yen-carry trade. Now the fund has US$6 billion in investible funds. The US$2 billion borrowed on Kiwi dollars is used to invest in Singapore REITs which are yielding 5.5% in Sing dollars - the bet being the Sing dollar will appreciate at least 4% against the Kiwi dollar over the next 12 months, and the REIT yields give a good buffer. Then with the other US$2 billion in yen carry trade, borrowed at a ridiculous rate of 1.0%, the fund invests in hot markets such as Malaysia, HK, Singapore and Vietnam shares. Again the rationale being the stocks there are hot and the currency outlook all looks better than the yen. The remaining US$2 billion is invested in American instruments. Now somebody in the firm decides to sell US$500m in gold futures as a hedged bet against oil as the volatility indicates a spread play. They get caught in the 25% gold price correction, investors got wind of the US$500m losses from the gold exposure gone bad. Hedge fund put up no-redemption as each US$1m redemption will require them to dump US$3m in actual stocks. They sell stocks where they could get liquidity fast.

This kind of scenarios will play out more often in the future. As long as leveraged hedge funds' portfolio have 10 different assets exposure, each of the 10 asset class will be related whether you like it or not. As investors, its not enough to study capital flows, yield differentials, economic growth rates and inflationary rates. You have to open your eyes to Colombian stocks and maybe even English football clubs because certain hedge funds have bought heavily in them, etc... you get the drift. Hence its time for more regulations to have all hedge funds reveal their asset class exposure so that this information is known to all. Money supply growth figures have been compounding in most countries leading to high liquidity in the financial systems. Unfortunately a disproportionate amount has found its way to pump up private equity and hedge funds. The sheer size and the ability to leverage easily makes the hedgies the probable root cause of this new investing paradigm shift. The sheer size of many of these hedge funds forced them to bet big stakes in order to obtain alpha returns - these big bets can only be in certain instruments, and many of these quants think alike, thus ending up making similar bets: when there is even a little wobble in these instruments, the whole chain reaction gets magnified along the way.

Its the new investing paradigm, get used to it. On the flip side, we can also benefit from the new paradigm - when they are throwing out the baby with the bathwater, you know they are being irrational, and you can easily spot stocks that have been battered for nonsensical reasons.

Thursday, August 16, 2007

Morgan Stanley Was Right, I Was Not

A few weeks back I posted the bearish piece by MS on the subprime mess. Going through it again magnifies how prescient the article was. Here's a rerun PLUS AN UPDATED OPINION BY MS:

Morgan Stanley has warned that current jitters on the global credit markets could spread to equity markets. Stock market corrections - after an increase in the cost of debt - historically follow six months later, suggesting that the current rally on Wall Street and European bourses may be more fragile than it looks

The current rally on Wall Street and European bourses may be more fragile than it looks. A rise in the interest rate spread between risky debt and benchmark treasuries knocks away a key support for share prices by raising the cost of money for leveraged buyouts, but there is often a long delay before investors react. A study by MS found that credit spreads began to widen on average six months before every stock market correction of 10pc or more over the past 20 years. The current widening began in February, picking up speed over the past three weeks. If history is any guide, this could point to a global stock market slide as soon as August. Morgan Stanley's model suggests a 14pc fall, or 2,000 points off the Dow. (a 14% correction will take the Dow to 12,000).

"This is not the first time that equity markets take their time to react to bad news," said the bank's chief Europe strategist, Teun Draaisma. "The fundamentals have deteriorated. Equities have reached all-time highs despite higher rates, wider spreads, higher oil, Chinese tightening, and a stronger euro. There is a widespread belief in continuation of good global growth without inflation. While we are not expecting a recession for another two to three years, we believe chances are high that this belief will be seriously tested soon." Mr Draaisma added that ever clearer signs of "stagflation" would soon start weighing on confidence. The current pattern looks similar to the relentless rise in spreads from February to September 2000 when the stock markets finally tipped over.

Morgan Stanley said the trigger for a stock market fall could be a sudden unwinding of yen "carry trade" from Japan, a major source of global liquidity. The worst stock market falls have been -58.4pc after the dotcom bust, -34.3pc in October 1987 and -30.8pc in a two-month shake-out after Russia defaulted in 1998, as measured on the MSCI Europe index.

Well, somebody deserves a big bonus this year.
Thanks to xatomic, here is the latest opinion by Morgan Stanley:

Equity Strategy from Morgan Stanley: Credit market turmoil in the US is likely to extend the period of sluggish US growth well into 2008. It may also slow Europe and the commodity producers. The fallout in Asia, however, should be limited, given Asia’s strong momentum, liquidity boom and potential for stimulus. We foresee Asia outperforming the US like it did in the early1990s. On our indicator checklist, we believe we are close to the trough in this correction. The implications of the US credit squeeze: The housing downturn will deepen, declines in housing related employment will accelerate, household debt burdens will rise, and wealth effects unwind, in our view. Whilst the US is vulnerable to downside risks, Federal Reserve support should be quickly forthcoming if the outlook deteriorates.
Four offsets for Asia: Export diversion to commodity producers and the EU has proven effective, though this is likely to slow. More significant, strong momentum, the liquidity boom, and potential stimulus, particularly from positive political change, should limit the fallout on Asia.
The Analogy Is the Early 90s, Not 1998: In the early 90s, the US was held back by the workout from the S&L crisis. Sluggish US growth versus strong Asian growth led to record capital inflows and substantial Asian equity outperformance. Today’s US home mortgage crisis is more akin to this, rather than the EM crisis of 1998. Where is Asia-Pac in this Correction? We conclude that we are close to the trough. While valuation is still relatively high in Asia, in the US it is just above 11-year lows. Whilst sentiment still appears too high, and US indicators a redecelerating, we believe we are beginning to see Fed supportf or markets.

Betting On A Rebound At 1,200

You can monitor and monitor your stocks, and they keep getting whacked. Put them aside and don't look at them. For those with still some capital left and itching for a kicker on rebound around 1,200 - the simple list is for you to monitor and pick from:

(warrant px / premium / effective gearing / expiry)

Great Leverage, A+ Fundamentals, Low Premium

AMMB-CA 0.09 / 3% / 6.0x / 11 Oct 2007

KL Kepong-CD 0.06 / 19% / 8x / 17 Jan 2008 ~

Public Bank-CD 0.055 / 15% / 7.5x / 4 Apr 2008 ~

Great Leverage, B Fundamentals, Low Premium

Air Asia-CA 0.075 / 9% / 9.0x / 19 Oct 2007

CCCC-C1 0.165 / -10% / 18x / 31 Jan 2008

Tenaga-CF 0.075 / 15% / 7x / 4 April 2008

YTL-CD 0.05 / 25% / 5.5x / 2 Jan 2008

Really Specky, High Stakes Gamblers Only

Bursa-CD 0.025 / 22% / 7x / 12 Oct 2007

Commerz-CD 0.025 / 27% / 7x / 16 Nov 2007

Maybank-CD 0.015 / 15% / 16x / 14 Sep 2007

Genting-CD 0.015 / 20% / 7x / 28 Sep 2007

Resorts-CB 0.09 / 4% / 7x / 20 Sep 2007

Tenaga-CE 0.015 / 20% / 12x / 2 Oct 2007

YTL-CC 0.035 / 12% / 9x / 2 Oct 2007

~ stand out great buys

p/s this is not buy call or a bullish call, its for those who think the mkts are close to bottoming, so as to get a narrowed down list

Tuesday, August 14, 2007

Dreamgate's Potential

The principal activities of Dreamgate are manufacturing, refurbishment, technical support, and maintenance, sales and marketing of gaming and amusement machines and equipment, sales and marketing of security surveillance products and systems, renting of property and investment holding. Dreamgate is one of the ten companies, which are given the licensed by the government to deal in gaming machines and equipment in Malaysia. Those equipments for table games produced and supplied to the gaming industry are such as roulette, blackjack, baccarat, poker and Pai Kow. In addition, it also produces gaming accessories like, dice chips, playing cards, card shuffle devices etc. Meanwhile, it also produces amusement machines and equipment to theme parks, amusement arcades, clubhouses and other entertainment centres. Dreamgate supplied its products locally and as well as to countries like, Thailand, Cambodia, Vietnam, Macau SAR, Singapore, Nepal, South Korea, Philippines, Myanmar, India and Laos.

Revenue from 2004 to 2006 were RM115.3m, RM154.1m and RM215.4m respectively. Operating profit over the same period were RM18.3m, RM29.7m and RM37.3m respectively. Net margins f0r the 3 years were 15.8%, 18% and 14.6% respectively. Revenue is expected to grow by 8% in 2007. The jump in 2005 and 2006 was helped by the sharp jump in gaming business in Cambodia and Macau. What is interesting is the business model has shifted from being a pure manufacturing concern to one where they have a revenue share model via TSM division. Dreamgate's attraction rose significantly via its 40% stake in a casino in Bavet, Cambodia. Similar strategies will be employed for TSM operations in Camodia and the Philippines.

Upcoming catalysts include the 2-for-1 bonus and its transfer to the Main Board (a very significant move for a Mesdaq stock). Balance sheet wise its gearing is only 0.25x with an enviable cash flow per share of around 25 sen per share. The business model is improving and its ROE for the last 3 years averaged at around 28%, while its PER is nearing 11x 2007 earnings. A rerating upwards should come soon.

Dreamgate also participated in he recent Asian Gaming Expo where presenters include Las Vegas Sands, Melco (HK), Genting, E-Sun (HK), Aristocrat (Aus) and Galaxy (HK). New products by RGB (pat of Dreamgate) garnered good response from the participants. The expo also helped propel Dreamgate's presence among the Asian gaming players. Quietly Dreamgate has carved a 30% market share in Asia for the gaming slots products they produce.

Some caveat here on the 40% stake in Bavet casino. The other 60% is held by 3 Cambodians, and they are responsible for securing the licenses, permits and approvals for the casino opeations. Dreamgate's investment is just a paltry RM20.4m. Of the total, more than 80% will be spent on land acquisition, construction cost and equipment. The IRR is a stupendous 40% but as the picture is painted, there are obvious execution risk. In addition, Dreamgate has alo taken a 70% stake in Mekong Recreation Club, similar execution risks involved. Nonetheless, they are catalysts and the share prices have not gone ballistic yet on "hype". Back in April 2007, Dreamgate has proposed to issue a seven-year RM200 million worth of commercial papers (CP) and/or medium term notes (MTN) programme to refinance its existing borrowings, for working capital and investment purposes. The bond was approved in May 200. Company is scaling its operations, the business model is attractive even though its Cambodia (where else can you get some action for gaming??).

In 2006 the company sold 1,860 slot macines and is on target to reach 2,250 this year. The share price has eased back to below RM1.60 and steady collection is evident as the share price did not collapse with the 100 points drop in KLCI. 2-for-1 bonus coming up and a transfer to Main Board. Looks good for a buy and hold for the exercise. One of the very few shares worth picking up despite the current market turmoil.

Updates On Credit Situation

The ECB has worked much harder than the Fed over the last few days to neutralise the tightening situation. Last Thursday the ECB injected 94.8 billion euros, and on Friday the ECB topped it up with another 61 billion euros. Not satisfied, the ECB injected another 47.67 billion euros. The strong persistent stance by the ECB showed speculators that the ECB is not to be messed with. The aggressive and compounding action by the ECB probably drove away traders and vultures trying to feed on the weak.

Other central banks chipped in by injecting some liquidity, just to show some solidarity. BOJ injected a token 600 billion yen (US$5 billion) while the Reserve Bank of Australia pumped in A$1.52 billion. The Fed put in another US$2 billion into their financial system. The amount shows that the US side is not showing much vulnerability. The rest of Asia's central banks have made statements that liquidity is ample but will be ready to act if anyone tries to mess with the system. Financial institutions in Asia, excluding Japan, have at least US$258 billion worth of bonds outstanding as at the end of March, according to the Bank for International Settlements. By comparison, institutions in the United States have US$4.12 trillion in outstanding debt. The credit tightening issue is not affecting Asia by and large, but still have to wait for the typhoon to pass through the system.

Even when you are Goldman Sachs, you are not invincible with the best financial brains money can buy. Last week Goldman shares were sold down aggressively as investors worried that market turmoil had generated significant losses at two Goldman-managed hedge funds: the flagship US$8 billion Global Alpha and North American Equity Opportunities. Goldman Sachs executives said risk and leverage in those funds had also been reduced. Global Alpha has fallen 27 percent this year, with half of that decline coming last week. Yesterday, AIG's Greenberg together with Goldman Sachs and other investors will pump US$3 billion into Goldman Sach's Global Equity Opportunities fund, thus becoming the third Goldman Sachs hedge fund to be battered. However, the swift response and injection of funds probably hinted that problems are under controlled. Have to clarify that the injection of funds is not a rescue but a recapitalisation or reinvestment by investors.

What's happening now? While some hedge funds have put their "no redemptions" clause into action, most are deleveraging, hence the volatility due to the unwinding process. Many hedge funds may be down 10%-30% ytd but the fear in redemptions will cause them to deleverage from say 2x-4x back to 1x just to cash up for future redemptions. The other type of unwinding will be the yen carry trade, hence the intermittent selling in Asia's most popular markets have been more severe than most: e.g. Singapore, Malaysia and Hong Kong; needless to say the less popular markets to foreign funds have seen lesser volatility, such as Japan and Thailand. To stress the point further, why has Shanghai been able to brush aside the subprime worries - a) little or no yen carry trade invested in China stock hence no unwinding; b) little access for foreign hedge funds or even mutual funds to direct Chinese shares (with a few exceptions).

Sunday, August 12, 2007

44m x 0.14 x 0.13

Excerpts were taken from Jack Miller's popular blog "Stocks Or Bonds"
Many would have liked Bernanke to cut rates by 50 basis points last week on hindsight. The business media has been having a field day with the majority believing that Ben Bernanke has held short rates too high too long.

The President of the Federal Reserve Bank of Richmond wrote a nice rebuttal to some of the negative press. It was published as the President's message in the "Regional Focus," spring of 2007. The summary point of the article was, "Monetary policy works best when it allows the real economy to respond appropriately to economic fundamentals, rather than attempts to insulate the economy from shocks by tolerating swings in inflation." Ben could have lowered rates to "fix" the sub-prime problem. This would have been like castrating a dog to prevent breeding. Ben has injected reserves into the system so that those who are running scared can hoard all the cash they want at relatively low market returns. Neither the fed funds rate nor the discount rate was changed. In a few more months, Ben will be getting high praise for standing firm in order to bring inflation expectations to very attractive levels. In the meantime, "talking heads" will continue to make "much to do about nothing."

Jerry Bowyer wrote yesterday about the "sub-prime mess." He notes that of the 44 million mortgages in America, 14% are sub-prime. Of those, 13% are currently at least one payment behind, however: 44m x 0.14 x0.13 = 800,800 mortgages that are one payment behind. Many developed countries would want to have those figures. The large majority of the late payers are still paying and many are working with lenders to restructure payments. The bottom line is that there are about 250,000 mortgages that are moving to foreclosure. The total value of these loans is about US$7 billion. If these houses are worth 30% less than what is owed, the total money lost will be in the neighborhood of US$2 billion. Even in a worsening case scenario, double that o US$4 billion (Gee! Malaysia would have squandered that amount in a few unfinished or incomplete projects). Thats why I am not bearish but the shorts and bears have been having the upper hand for the last two weeks. Americans have net worth of US$53 trillion dollars. The "total hit" will be in the neighborhood of .003% of value.

Saturday, August 11, 2007

PPT Part Deux
Many people can produced charts much like the ones above and the one below. This is 2007 and what is interesting is the amount of strong buying at "critical moving averages" As the indices are about to break the long trending moving averages, more often than not, there will be big buying (usually computer generated trades) to whisk them to high ground causing investors to regard there is a strong bounce from "not breaking long trending moving averages usually the 200 day moving average".
Of course the counter explanation is that there are a lot of quant funds, and usually these computer models to buy at critical levels. That would hold water but these quants would not have the balls or gumption to do that day in day out or even try to lead reversing the market. What I think is the PPT generated trades come in first thus triggering the quant funds into action as well. Sometimes the down trend is so strong it is highly unlikely that quants will be wanting to lay on the train tracks themselves as the last bastion.
When the stock market is at risk of plunging, it is alleged that the PPT will employ the this tactic i.e. dipping into the Treasury Department’s US$40-billion US Exchange Stabilization Fund to buy S&P 500 index futures and cause spreads to widen between the futures and cash markets for equities. This then gives arbitrageurs a chance to reap risk-free profits by shorting the futures contracts and buying the stocks in the S&P 500 basket. Just consider the way the US markets closed again on Friday (reversing almost all of a triple digit losses most of the day). It is hard to believe otherwise as it has happened too often, and this time on a Friday to boot.

Friday, August 10, 2007

Plunge Protection Team

The Working Group on Financial Markets (also, President's Working Group on Financial Markets or the Working Group) was created by Executive Order 12631, signed on March 18, 1988 by the then President Ronal Reagan. The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 (Black Monday) to give recommendations for legislative and private sector solutions for "enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence. One theory regarding the Working Group refers to it as the Plunge Protection Team. This theory claims that the Working Group is a scheme to manipulate US stock markets in the event of a market crash by using government funds to buy stocks, or other instruments such as stock index futures. The term "Plunge Protection Team" was originally the headline for an article in The Washington Post by staff writer Brett D. Fromson, published on Sunday, February 23, 1997.

This PPT is supposedly run by a team 4 only. They include the Fed Chairman, the Secretary of the Treasury, and the heads of the SEC and the Commodity Futures Trading Association. Following the 1987 crash, the most talked about "market intervention was the US markets surrounding the 9-11 incident: a confounding and puzzling rise for the 4 months proceeding 9-11. The US media dubbed it a "patriotic rally". The European Press called it a "PPT rally". Obviously, the U.S. markets were manipulated and rigged to an inflated value in advance of the 911 disaster. Was this a coordinated measure in anticipation of what was to come?

An event that should have sent markets spiraling downward was the Enron, et al, unprecedented corporate accounting scandals. Yet despite this, an unprecedented accross-the-board markets rally began on July 24, 2002. Once again, the European Press called it a "PPT rally". In November 2005, the Fed announced with little comment and no palatable explanation that it would no longer report the M-3 number after March 2006. Without the useful resource of M-3, we need to find other tools to monitor when the PPT is likely to intervene, and kill shorts. The M-3 factor would allow the PPT to eliminate shorts without he rest of the markets knowing when they are acting.

The chart above was a model devised by Robert Mc Hugh Phd called a Plunge Protection Team Risk Indicator. This indicator is based upon the premise that the most effective PPT intervention requires an extreme Bearish sentiment as measured by short interest. This indicator measures short interest from the level of CBOE put options outstanding. It simply compares a 10 day moving average of CBOE puts with a 30 day moving average of CBOE puts. Whenever the ratio of the 10 Day to the 30 Day rises above 1.18, we are at great risk of a short covering rally of some sort, probably PPT induced. In other words, whenever the 10 Day MA is more than 18 percent above the 30 Day MA, if you are holding short-term puts, or a short position of some other form, you may want to think about getting out with whatever profits or losses you have.

On August 8th, 2007, President Bush hinted at government intervention in the US stock market. “Treasury secretary Paulson and his advisors are paying close attention, as the market begins to readjust its assessment of risks and are watchful for any downturn,” he said. “There is a lot of liquidity in our system and liquidity will provide the capacity for our system to adjust,” Bush added, alluding to the Fed’s tolerance of double digit M3 money supply growth. The big question is whether US Treasury chief Henry Paulson and Fed chief Bernanke are pursuing a more active interventionist policy than what was originally mandated for the PPT? The turnover of interest rate, currency and stock index derivatives rose 24% to US$533 trillion in the first quarter, and that’s a big time bomb that can blow-up at anytime. It requires constant surveillance and “vigilance” over the world’s greatest casinos. Warren Buffett calls derivatives “weapons of mass destruction.” If correct, then the PPT is “watching the markets closely”, (Japanese code words for intervention) and Paulson and Bernanke aim to prevent a 10% correction at all costs. So far we have edged past the 6%-7% as at time of writing. Are we close to the end of the horror movie?

I have to state that I favour the existence of a PPT to eliminate any one group cmpounding he correction effects to the detriment of global welfare and recovery. I do not favour ecessive intervention by PPT (if they do exist) that only ensures a uptrending market place for long players.

Don't Blink!

While writing about Bernanke, I spoke of how he had to project a feeling of confidence, and by not lowering rates: he basically told investors that there is no need to panic. Markets are like that. While one bigwig do one thing, and then do something to destroy that very thing. In an unprecedented move yesterday, the European Central bank poured a record 94.8 billion euros (US$130 billion) into the markets, with the Federal Reserve also injecting capital as banks gasped for liquidity. Now, isn't that a bit silly. Bernanke looked like Churchill for a while and then like a Japanese prime minister the next. When you cave so soon after a non-action on the fed funds rate, you send out a strong signal that ALL IS NOT WELL.

The move came in the aftermath of France's largest listed bank BNP Paribas shutting the door on withdrawals of funds worth 1.6 billion euros, tied to subprime securities. BNP Paribas said it can not provide a fair value of the holdings of the funds, regardless of their quality or credit rating. Credit issues spilled deeper into the European markets, engulfing more of the continent's banks, and concerns grew that losses could multiply. BNP's woes and ECB's firefighting move sparked a sell-off in all major European markets

The Federal Reserve injected US$24 billion in temporary reserves to the US banking system as there was spillover demand for funds from the European market. Dutch investment bank NIBC Holding also said it had incurred a loss of at least 137 million euros on its subprime investments.

The ECB said it will provide unlimited cash to meet demand after the fastest rise in the overnight interbank rate seen since June 2004. The supply of funds by banks was sharply reduced as investors retreated from investments due to losses in subprime related assets. BNP said it would suspend three funds - Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia - which have all declined rapidly in value in the past few weeks to 1.593 billion euros on August 7, down from 2.075 billion on July 27. The suprime crisis hit commodities as US oil fell more than US$1 to US$71 a barrel and metals futures plunged 1.1 and 2.9 percent respectively. Emerging debt spreads blew out 12-14 basis points over US Treasuries while the volatile equity market saw investors scurry to bonds with a rally in eurozone government bond futures.

This looks like a pre-emptive strike to head off any possible liquidity problem. Its a bit funny, in the US the Fed did not think its a big thing but the ECB is telling everyone ITS A BIG THING - it seems the Europeans are saying if you don't act first, we will. We should also bear in mind that ECB's 95 billion euros move is significant and will calm waters, while Fed's US$24 billion is only a trickle to US markets. Before the injection of funds the overnight rates for the euro spiralled to 4.62% the highest level in 6 years. After the injection the rates went back to the targeted 4%.

Volatility will reign for a while as markets try to anticipate other problems coming out of the closet. I still do not think the subprime mess is a big problem, but when you have the media "hyper-focusing" on the issue 24/7, it gets magnified. Have to wait it out while they play "horror movie game". Look at it this way, I have already calculated the dividend yields for the few US big financials. The story is the same everywhere else, the rebound will be substantial once the scary clowns finish their act.

Thursday, August 09, 2007

Bernanke's Stance

Bernanke has taken up a job that has shoes that are hard to fill. Alan Greenspan has had a long stint at Federal Reserve and has left behind a strong track record. Greenspan has ridden out the LTCM debacle and internet bubble and his policies helped set the platform for good quality economic growth, keeping inflation at bay.

Last night was crucial for Bernanke. Would he kowtow to market pressures over the jitters caused by subprime and lower rates? In the end he stood firm, and his message sent a clear message that this was his term and he was going to set out his parameters as chairman of Federal Reserve.

The clear message was that investors should not look to the Fed to cure short term jitters. Another message was that the Fed would not play a direct interventionist role to "manipulate" the stock markets. This affrms the belief that the Fed's role is NOT to ensure an always trending up stock market. Many things have to be worked out by the market themselves - be it excesses in certain sectors, they must be allowed to correct on its own terms.

The Fed also indicated that they look at many factors such as overall growth, employment, prices inflation and the dollar. They also look at the rates set by other major countries as the dollar has been on a downswing and need to stabilise. While Bernanke probably welcome a weaker dollar, he did not say so, but his non-action probably hinted that he wanted an orderly decline in the dollar.

On the cynical side, you probably won't get the Fed to step in to tackle the subprime matter because it did not involve the big investment banks (such as the LTCM problem). Of course the Fed would have acted if the problem was severe enough and the Fed was the "last resort" solution. The Fannie Maes could still step in later to buyout some of the suprime mess. As explained, hedge funds can expect zilch help from the Fed. Most of the CDOs were packaged by the banks and sold to private funds, hence another reason for non-intervention.

The stance taken by the Fed also hinted that the underlying US economy (minus the property side) is still firm enough. The Fed also wanted no panic, in fact if they had reduced the fed funds rate, we could have seen markets dipping further.

Overall, 9/10 for Bernanke, he has added to his stature, reputation and resolve. He has shown confidence in his analysis and conviction in his beliefs. This gives markets confidence to expect the Fed to act responsibly, and intervene only when things are really dire. Bernanke has successly stepped out of Greenspan's shadow.

China Says "No More Bullying"

The Chinese government has hinted that it may liquidate its vast holding of US Treasury bonds if Washington imposes trade sanctions to force a yuan revaluation. Henry Paulson, the US Treasury secretary, met with Chinese president Hu Jintao in Beijing last week. Two Chinese officials at leading Communist Party bodies have given interviews in recent days warning, for the first time, that Beijing may use its US$1,330bn of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies. Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is breaking down through historic support levels. This comes at a time when it looks like the bill looks to passed soon which would allow US to put trade sanctions against China goods. After being told, cajoled, pestered by US officials on how to run their Chinese economy - Beijng is basically saying enough is enough, if you are going to hurt my economy, I am going to hurt yours. Of course a selldown won't benefit anyone, its like cutting off the enemy's two legs after having your arm chopped off by the enemy.

Just the hint of a selldown could send US bond yields further up, probably destroyng the US housing market, sending the US ecnomy into recession, and exert a substantial correction in the US dollar (10%-20%). Can you imagine the repercussions? It is estimated that China holds more than US$900bn in a mix of US bonds. Xia Bin, finance chief at China's Development Research Centre (which has cabinet rank), kicked off what appears to be government policy, with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US. "Of course, China doesn't want any undesirable phenomenon in the global financial order," he said. He Fan, an official at the Chinese Academy of Social Sciences, went further yesterday, letting it be known that Beijing had the power to set off a dollar collapse, if it chose to do so. "China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US Treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency," he told China Daily.

Already Russia, Switzerland and several other countries have reduced their dollar holdings. China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese strategy is shrewd and basically gave Americans a strong reminder that the US and China economies are tied closer than you previously thought posible.

The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached US$26.9bn in June. Henry Paulson, the US Treasury secretary, said any such sanctions would undermine US authority and "could trigger a global cycle of protectionist legislation".

Despite all the talk, nothing much is likely to happen, but the pendulum has shifted to favour Beijing which will basically cause the Americans to give China more leeway and latitude to move the yuan stronger on China's terms.

Wednesday, August 08, 2007

Reassessing Talam

Talam was one of my better calls in 2006. Below was the posting made almost a year ago on 24 August 2006 when the share price went to 10 sen:

Desperately Seeking Talam
Making Sense & Assessing Risk

August 24, 2006 - When things like Talam happens, what do you do? Talam's shares already at a 52 week low of 17 sen, dropped as low as 10 sen today on huge volumes after both Bursa and the company disclosed that Talam has again delayed finalisation of its annual accounts for year ended 31 Jan 2006. Bursa has warned that failure to submit by 31 August will result in suspension and maybe delisting. The knee jerk sellers would theorise that most companies who delay submission are prime candidates for PN4/PN17, or there is a huge writedown, or need to restate losses for previous years, etc...

1) The company has a MOU with major financiers to pare down debts by 70% over a 2 year period. Its current debt is RM864.3m. That makes its current gearing at 1.4x, not that exceptionally high that it is unmanageable.
2) Knowing IJM, it would want Talam to clean up its books before doing anything with Talam/K-Euro.
3) It has a good NTA at RM0.89. It will have impairment losses and losses on land disposals, and late delivery charges. Prudent to whack 75% off NTA = RM0.225.
4) Outstanding shares 629.18m. Market cap at RM0.12 means the company is worth just RM75.5m. Even a Main Board shell is worth RM20m.
5) If it fails to submit by National Day, an automatic suspension will be imposed. Talam knows that and acknowledged that, so what gives??
6) The delay has been invoked since end May 2006, so nothing really new here.Why the sell-off?? The delay has been known for sometime. Not having enough employees is a stupid excuse, should not even put that in. Valuation and restructuring stuff, plausible excuse. The market is pricing in a lot of potential bad news. The threat of delisting is just a normal announcement of Bursa, so its not a real threat. Look at the existing PN4/PN17 companies, most are trading higher than RM0.10 and they are in a lot more shit than Talam. These are the facts, make your own assessment. Of course, I could be proven terribly wrong... and end up with just eating kuih talam for a very long time...

Recent News:
April 11, 2007 - Talam sold 25.1 acres of land in Bukit Beruntung to Tesco Stores (Malaysia) Sdn Bhd for RM18,587,052 (US$5.4 million). The net proceeds from the sale will be utilised to pare the group's borrowing and sales related expenses. The sale will reduce Talam's gearing and enhance the development in this location.

March 28, 2007 - The long-delayed RM3.12 billion west coast highway project linking Banting in Selangor to Taiping in Perak will resume and the work will be given to the original contractors, Datuk Seri Najib Tun Razak said today. The deputy prime minister told reporters that the decision to resume the project covering 215.8km was made at today's Cabinet meeting.
The project, mooted 11 years ago, was put on hold due to the 1997 Asian financial crisis. Concessionaires for the project, touted to be the alternative to the North-South Expressway, include
Talam Corporation Bhd and Kumpulan Europlus Bhd. In November 2006, Works Minister Datuk Seri S. Samy Vellu said that the Economic Planning Unit (EPU) would re-submit a working paper on the project to the Cabinet.

Things got really interesting yesterday with the news that KEuro may sell its stake in Talam.

August 7, 2007 - In an announcement yesterday to Bursa Malaysia that departs from the norm, K Euro's directors highlighted several observations. The directors pointed out that the two companies – Selasih Jauhari Sdn Bhd and Desiran Johan Sdn Bhd – were private limited companies with paid-up capital of RM2 each, and that they were in no position to ascertain their credibility. It was further highlighted that the K Euro board was not certain the option agreement would be successfully implemented because “there are numerous conditions precedent to be fulfilled”.
The two private companies represented to K Euro were in a position to offer a scheme to enhance the value of the assets of Talam Corp Bhd, an associated company of K Euro. They also said the scheme could enable Talam to generate cash to reduce its borrowings. Should the proposed scheme be unable to meet what the two companies have represented, the boards of Talam and K Euro would not accept it, and the option agreement would lapse. K Euro's board also highlighted that the purpose of the option agreement was to enable the two private companies to submit their proposed scheme to the boards of K Euro and Talam for consideration. In the announcement, K Euro said the option agreement was for Selasih Jauhari and Desiran Johan to acquire a 25% stake in Talam, amounting to 157 million shares, at an exercise price of 30 sen a share.
Presently, K Euro holds 42.94% of Talam, and upon an exercise of the call option, Selasih Jauhari and Desiran Johan would have a 17.94% stake in Talam. The scheme proposed by the two private companies would not increase the borrowings of Talam. Further, the option price was fixed at 30 sen a share but they represented to K Euro that there would not be a reduction in the value it held in Talam, being RM141.4mil, or 51 sen a share, in book value. The granting of the call option is conditional on several approvals, including agreement from the board of K Euro, and the board and shareholders of Talam for the proposed scheme.
K Euro said it would now concentrate on its two principal projects: the West Coast Expressway and Canal City.
Sources said while it was announced in June that IJM Corp Bhd would proceed to acquire a 25% stake in K Euro for RM33.1mil cash, or 28 sen a share, the exercise was not completed and as such, IJM was still not represented on the K Euro board. The conditional agreement with Selasih Jauhari and Desiran Johan was, therefore, a decision made by K Euro's existing board.
There might be a desire to enhance the value of Talam, especially since K Euro's stake in it would eventually be diluted anyway, when the convertible instruments in Talam are issued and converted into shares by its creditor banks.
The sources believe the two private companies' proposed scheme might involve an injection of some assets that have yet to be disclosed. They also believe that although the private companies have paid-up capital of just RM2, they are owned by a businessman of means whose identity had remained undisclosed.

My Two Sen:
- Things were going along hummingly for IJM when they went through with the injection of IJM property division into RB Land. Everything seems to be OK with KEuro as well and Talam was supposed to be next on IJM's plate. KEuro and Talam were operating AS IF they were under the IJM umbrella already. For example: Talam appointed IJM as the contractor /jv partner to resume its various stalled developments such as Taman Puncak Jalil, Putra Perdana, Kinrara Section 3, Bukit Beruntung, Lagoon Perdana, Sierra Selayang and Ukay Land. All that activity has been happening since late last year.
- IJM will almost control Talam anyway through its probable acquisition of KEuro as the latter controls 43.1% of Talam.
- Thanks to a stronger property market, Talam should be able to dispose off its hotel, shopping mall investments and hospital for RM200m-RM250m.
- Talam's NTA per share is at 52 sen (revised from 89 sen last year).
- Major land assets: 400 acres Bukit Sentosa 3 valued at RM258m; 260 acres Puncak Jalil valued at RM159m; 1,284 acres at Batang Berjuntai valued at RM146m; 2.16 acres at Larkin Centre, Johor Bahru valued at RM37m; 67 acres at Bukit Sentosa 1 valued at RM38m; 58 acres at Bukit Sentosa 2 valued at RM33m; 340 acres at Tanjung 12 valued at RM43m; 50 acres at Danau Putra valued at RM51m; 401 acres at Ulu Yam valued at RM25m; 120 acres at Saujana Putra valued at RM58m; the killer asset is 2,500 acres at Bukit Beruntung valued at RM624m; 40 acres at Ukay Land valued at RM45m; 90 acres at Sierra Ukay valued at RM27m; 10 acres at Kinrara 3 valued atRM39m; 80 acres at Lestari Puchong valued at RM109m; 1.5 acres Yin Hai Complex, Jilin, China valued at RM56m; Marcourt Hotel, Jilin, China valued at RM123m; Menara Maxisegar valued at RM58m; Pandan Indah Medical Centre valued at RM40m; etc.
- IJM probably was not going to buyout Talam as by virtue of buying KEuro, it also controls Talam and will get the benefits of the development works under Talam. However, with the presence of the new potential buyers, IJM may be forced into making a bid to control Talam.
- While Talam has its debts to work out, it has a good extensive landbank. Those assets probably rose in attractive ness over the last couple of years from being unwanted to "hey, looks kinda interesting now". The killer asset is Bukit Beruntung, whoever wants to be a player for the next 10-20 years will need this vehicle. The race course will be shifting from Sg Besi to near Bukit Beruntung sometime the next few years, could be interesting for a long term player.
- Methinks IJM will come in aggressively to control Talam, after all save yourself a lot of time to accumulate the assets under Talam. In order to propel RB Land /IJM Property to be a major player, NOT controlling Talam seems to be a bit silly. This is quicken IJM's resolve to control KEuro asap so that they do not sell their 43% stake in Talam. If IJM is going to control KEuro, it will not cost them much to also control and clean up Talam - this strategy could be to force IJM to quicken its acquisition of KEuro and stop them demanding so much from the jvs and contracts under Talam, and take Talam private.
- The danger is in the 2 companies submitting the proposal to KEuro. Esp RM2 companies, man, you know these RM2 companies will be very influential vehicles. Maybe I should use my RM2 and also submit a proposal to KEuro.
- Any way you cut it, Talam is in play and players will be looking hard at Talam's landbank, not many like them around despite's Talam's debt crisis. If IJM loses indirect control of Talam, it may lose out on the development contracts and jv opportunities. An aggressive bidding war could send the share price closer to 60 sen. More upside for Talam surely.

Things To Do During Lockdown

All local councils, utility companies, construction firms (those with permission) and city planners in Malaysia should take the opportunity...