Saturday, June 30, 2007


Its In My Top 10

One of the more under-rated restaurants in KL is Chalet Suisse. Its located inside Koreatown in Ampang. The food ranges from good to unbelievably good, and it does not cost you an arm and leg.

The place opened in May 1996 and all the wood paneling were constructed from old sea freight containers. The place is littered with real antiques sourced from Switzerland. It really feels like a swiss chalet near the alps, now all we need is snow outside the windows.
Heinz Bauert, the owner, was born and educated in Horgen, by the Lake of Zurich. After his Chef training he attended the Hotel -Management School in Lucerne and left Switzerland soon after that for England and then to Thailand. Since 1969 he has been in the Hotel and Restaurant business in Asia and before coming to Kuala Lumpur, was the Franchise Holder of the Moevenpick Group in Singapore.

I am at this place at least once a month. There are a few dishes that must be sampled:

1) Chicken liver terrine with asparagus - at only RM16.50, its a steal but don't tell that to the chef. Goes very well on toast with any of his soups.

2) Sizzling Burgundy Snails - served in their shells in a garlic heavy pepper sauce.

3) Crab Bisque - Thick and flavourful

4) Truffle pasta with fresh duck liver - to me and many of the people who have dined there, this is probably the BEST DISH in the world under RM40.00. I know that sounds over the top, but you have to taste it and tell me it isn't so. All my friends who have had this dish rated it as very good or just unbelievably good, and its really just a simple dish. I cannot say anything greater than that. If I can eat this once a day for the rest of my life, that's as good as it gets. I tried replicating the dish, and it was about 60% there but it cost me RM40.00 and its just plain truffle pasta, no duck liver yet!!! So, I have given up making it.

There are tons of other items on the menu worth trying and keep an eye for his promotional items and specials. Bring you own wine and the entire experience will not cut a hole in your pocket.

http://www.chalet.com.my/web/chalet/chalet.nsf/frmHome?ReadForm


Following Infernal Affairs & PTU

This has to be the best movie I have seen since the two cited in the headline. The movie is called Eye In The Sky, a magnificent film by any standard. It stars Tony Leung Ka Fai as the very smart and careful boss of a gang of robbers, but the role is a bit one-dimensional. Maggie Siu as the foul mouthed senior lady cop. The gangly and lumbering but extremely watchable Lam Suet as the always hungry robber point man even though he has less than ten lines of dialogue. Kate Tsui Chi San, the ex Miss HK, who actually shone in her role as Simon Yam's protege: pleasant surprise, she was able to infuse the eagerness / innocence of a freshie and had to decide between the "greater good" in priorities, quite good really, surpasses her one dimensional roles on TVB series. Top billing goes to Simon Yam as a dedicated, slightly jaded but unassuming group leader of a team of plainclothes cops.

This has to be the best acting for the entire ensemble cast.
The story line grips you from the start, and the camera work was excellent as well as it was unobtrusive and pans around like a reality show. Kudos to the scriptwriter, producer and director, who else but the unmistakable Johnnie To Kei Fung, Au Kin Yee and Yau Nai Hoi. Following the violent Election series and the B-grade Running On Karma, The Mission... Johnnie To has returned to what he does best. This is Yau Nai Hoi's centerpiece actually as he co-wrote and directed the movie.

The brilliance in movies such as PTU and Infernal Affairs is getting the audience to identify and root for the characters. That's an art which lifts an average film-maker to creative genius. The characters were fleshed out brilliantly. In just an hour you seem to know the background and motivations of each of the main players. To me, Eye In The Sky is slightly better than Infernal Affairs and on par with the equally brilliant PTU. Touching, gripping, you don't know what will be unfolding in the next scene-kind of movie. The pacing and mood of the movie were well controlled. Must watch.

Friday, June 29, 2007


Someone To Watch Over Me

The Bear Sterns experience showed that the market will not know how to react when hedge funds implode. In this case, we know its the CDO market, which had been weak for more than a year, and we know 60 mortgage related companies have closed shop over the past year - its a risky business. When the two funds failed, investors will over-react because the best assumption is to be cautious. Surely there are more similar hedge funds using similar investing strategy in a similar asset class. Could this be the trickle before the downpour?

This will continue to be the trend every time a hedge fund collapses, investors will over-react because they do not have additional information on what hedge funds buy and how leveraged they are. The Bear Stearns and Amaranth incidents will propel all to accept greater oversight and transparency for hedge funds. One of the most important issue is to reveal what are the leverage limits and in what instruments. If it was pure equities, even 3x-5x is OK especially its a hedged bet. However, if its primarily in derivatives (which in itself is already leveraged), we may need to rethink. We should not put a cap on things like leverage or what instruments a fund can or should invests in, but the information should be made clear from the start to potential investors. Any deviation from the prospectus should be punished severely.

More regulations will be needed as more US pension funds are invested in hedge funds nowadays. The proportion of U.S. corporate-defined benefit pension funds investing in hedgefunds has increased to 24% in 2006, up from 19% in 2004 and 12% in 2000. Total corporate pension fund assets allocated to hedge funds in 2006 was 2.1%. Because of hedge funds’ risky nature, rapid growth, lack of oversight, and recent losses, some wonder if they are appropriate investments for workers’ retirement funds. In 2004, the Securities and Exchange Commission issued a rule requiring manyhedge fund advisers to register as investment advisers under the Investment Advisers Act. The rule took effect in February 2006, but in June 2006 a court challenge was upheld, and the rule was vacated. In early 2007, while the Bush Administration called for increased vigilance rather than new government rules to handle industry risks, Congress has asked the Government Accountability Office to examine the use of hedge funds by public and private sponsors of defined benefit pension plans. Time for a change, hedge funds can no longer operate as if they own the world, or live by their own rules solely. If we had know how many hedge funds played the CDO market and what's their size and leverage levels, investors could better predict the impact - and when you can impact on the smooth running and perception of risk in financial markets, you need to be more transparent and have better oversight.

Thursday, June 28, 2007


Reweighting On Emerging Markets

There appears to be a growing shift in asset allocation for emerging markets and Asian equities for the second half of 2007. The trend is a recommendation to lower exposure to USD denominated emerging markets sovereign bonds. Probably based on a fear of some emerging markets potential downside on probable higher risk aversion mentality in the near future. While they are still bullish on emerging markets equities, some have scaled back the overweight to just slightly above the benchmark levels. That is to be expected as emerging markets have been performing very well, and it would be prudent to lock up some gains.

Some strategists are worried over the the impact of the sharp rise in global bond yields on the ex-ante equity risk premium of MSCI Emerging Markets over 10-year US Treasuries. The rise in 10-yr US Treasuries bond yields to 5.00%-5.20%, together with recent gains in the MSCI Emerging Markets price index, has compressed the equity risk premium to just 344 basis points currently. This is the lowest level since 2001 and is now within 150 basis points of the levels associated with the major MSCI Emerging Markets' peaks of 1997 and 2000.

For the second half of the year, countries getting promoted include: Japan, South Korea, Taiwan, Russia and Brazil. Countries which saw a reduction in weightings include: Malaysia, China, India and South Africa.


Current Market Turmoil

The fallout from Bear Stearns' hedge funds specialising in collateralised debt obligations (CDOs) has ratted nerves a bit. Bear Stearns bailed out one of the two funds suffering huge losses from the CDO play. Only the one with small losses go rescued not the one with -1 bn USD in losses. The world's bigges bond manager Bill Gross of PIMCO has lashed out at Moody's Investors Service and Standard & Poor as being duped by the make-up and "six-inch hooker heels" of CDOs, and investors now stand to lose all their money.

Sub-prime mortgage bonds made up about $US100 billion of the $US375 billion of CDOs sold in the US in 2006. CDOs are created by bankers and money managers who bundle together debt securities and divide them into slices with varying credit ratings. With defaults on those sub-prime loans rising, buyers of the BBB pieces of some CDOs stood to lose their entire investments.

Sub-prime mortgages are loans made to borrowers with poor or limited credit histories, or high debt burdens. Mortgages at banks with overdue repayments are at the highest level since 1994, according to first-quarter data compiled by the Federal Deposit Insurance Corp. The credit rating companies "were downgrading hundreds of these CDO structures in the last few weeks and that is an early indication of being fooled", Mr Gross added.

At least 60 mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data. New Century Financial and Res Mae Mortgage were forced into bankruptcy. UBS, Switzerland's biggest bank, shut down its Dillon Read Capital Management LLC hedge fund unit after losses linked to turmoil in the mortgage-bond market. The question we have to ask is will this be the turning point of a rise in risk. It is easy to be negative but the subprime asset class has been suspect for moe than 6 months. The implosion in a few hedge funds playing the CDO market was due to over-leverage, and not the inherent risk of CDO itself. One of the Bear Sterns fud bought US$10bn in CDOs on US$600m in equity backing.

Its a bump on the road rather than a blockade. Markets shoud ride this out soon. The other significant news is the vote to be called on removing tax on interest income in China. While the actual impact may not be immediate, the act will signify more moves in store to cool the heated equity markets in China. Some volatiity ahead. Back in KL, some weakness in the ringgit may signify some cashing out by foreign funds on stocks, but its not at a worrying level yet. Hard to fault some funds locking in some gains when market is the second best performing bourse in Asia after Asia.

Tuesday, June 26, 2007


Important Trends For The Future

The highly respected Bank of International Settlements delivered its 77th annual report. If you have the time, its good to try and read through the thick document. The most interesting bit was the 45 pager on Ermerging Market Economies (EME). Here are some of the interesting conclusions:

a) EME grew on average of 6.8% p.a. in 2003-2005. In 2006 the rate was 7.4% and remained strong for 1Q2007. The 2007 figure is expected to beat the 2006 figure as well.

b) Current account surpluses increased in Africa, asia, Latin America, the Middle East and Russia. However, current account deficits grew in india, Turkey, South Africa and remained large in central Europe.

c) Median inflation in 2006 was 3.7%, up from 3.5% in 2005. In Asia, the median inflation was still well below that of other regions in 2006, but was clearly up from near zero rates in 2002.

d) Due to the much higher price of oil, many countries have substantially reduced subsidies to reduce current account deficits, namely Thailand, Malaysia, Indoensia and India.

e) The median debt/GDP ratio for EMEs fell from 47% to 33% between 2003 and 2006. In particular, those which saw debt reduction of more than 10% of GDP, include Brazil, Chile, Colombia, Indonesia, Peru, the Philippines, Russia, Thailand, Turkey and Venezuela.

f) This is probably the most significant trend for me to discover from the article: that Russia has improved in its management of surpluses and oil wealth. From February 2008 onwards, russia's oil stabilisation fund will be split into a reserve fund and a fund for future generations. In addition to taxes on crude oil (goes stright to the oil stabilisation fund), the 2 funds will receive the bulk of revenues from the mineral resource extraction tax for oil and gas, and export duties for the related products. The reserve fund will be maintained at a level equiv to 10% of GDP. This structure improves perception of stability, and accumulation of reserves to level out diequilibrium in the future. This will improve the appreciation rate for the rouble for the forseeable future.

g) There is a growing correlation between EME equity markets and MSCI World Equity markets. Asia EM used to be at 0.4 correlation 2 years ago but in 1Q2007 the figure has reached 0.82. This has linked all global markets as inter-connected. (Alluding to my fresh opinion that the best equity markets for 2H2007 are Japan and South Korea: if you are in EME or US, UK or DAX - its roughly the same net effect. Only Japan and South Korea seem to have the propensity to outperform and diverge away from the developed and emrging markets for the rest of the year.)

h) EME Asia (excluding China) exports to US has declined in importance. Between 1996-2001 exports to US make up 21% of total exports but that figure dropped to 14.6% in 2005-2006. The slack was taken up by China which grew from 12.9% to 21.8% over the same periods. This lends weight to the outsourcing model driving growth in EMEs. The rest of Asia basically act as an intermediary supplier to the outsourcing capital that is China. Surprisingly, EME Asia also saw a corresponding surge in imports from China from 13.7% to 18.4%. This solidifies the perception that trade deals with China will be #1 priority for all Asia for the next 5-10 years at least. Again, the loser on the imports scene was USA, dropping from 14.3% to 9.4% over the said periods. Even Japan saw similar trends, dropping from 17.9% to to 13.9%.

Monday, June 25, 2007


Sapuracrest & A Man Called John Fredriksen

RM1.40 to RM1.70 to RM2.00, I am still bullish on Sapuracrest. Forbes estimates John Fredriksen's fortune at USD 1.9 billion, putting him in 293rd place on the list of 587 persons believed to have more than USD 1 billion in net worth. Fredriksen is a self-made tanker tycoon who grew up in a working class neighbourhood on Oslo's east side. He now controls the largest fleet of oil tankers in the world and also has a variety of other business interests. SeaDrill is the latest adventure of John Fredriksen, who is generally considered the most successful entrepreneur in Norway. Fredriksen is almost a serial entrepreneur, and a very successful one at that. His strategy is in consolidating and leveraging a very diffuse and undermanaged industry. He did the same to Frontline and made money a few times over, before heading up Seadrill.

SeaDrill is a relatively new company, just about two years old, and was IPO'd on the Oslo exchange at the end of 2005. Fredriksen owns a bit more than 30% of it, just as he did with Frontline. Their mission is fairly clear; they want to be a significant consolidator in the offshore rig industry, and within five years, their goal is to become a leading drilling contractor with a focus on Asia, West Africa, and worldwide deep water areas, all of which should be high growth sectors. They plan to grow through purchasing new buildings and used rigs, acquiring other operators, and taking strategic positions in related companies.

The combined fleet of Smedvig and SeaDrill is fairly impressive: "a diversified and modern fleet of nine jack-up drilling rigs (including five under construction), seven semi-submersible drilling rigs (including five under construction), three ultra-deepwater drillships (including two under construction), two FPSOs and 13 tender rigs (including two under construction). A total of 34 units (of which 14 under construction)." That's a big boost from the initial portfolio of less than a year ago, which consisted of just three 20-year-old jack-ups and two floating production vessels before they began their buying spree. The forced merger with Smedvig, along with Mosvold, which had attractive new building orders and a large minority position in Apexindo, the big Indonesian driller, gives SeaDrill a good starting point. But if Fredriksen's history is any indicator, they'll continue to aggressively acquire smaller operators and try to leverage large minority positions like Apexindo to gain control of more vessels and rigs.

At their current rate, SeaDrill indicates that once their newbuildings that are now on order have been delivered SDRL, they will be the most modern and second largest operator of ultra-deepwater equipment (after Transocean). And with the Smedvig acquisition, they've also acquired excellent, seasoned management with experience in this specific business, something Fredriksen's executive team of Tor Olav Troim and Kate Blankenship, both of whom have been with him for a while and helped engineer Frontline and Ship Finance Limited, don't seem to have.

It's also possible that another Fredriksen company (or former Fredriksen company, as he no longer controls them) will play a role here. Ship Finance Limited was created as a way to finance tankers, initially buying up the Frontline fleet and leasing them back to Frontline, which was basically financial engineering that allowed Frontline to offload very valuable assets and become an operating company with lower book value but huge cash flows. It is likely in a few years to see a similar relationship develop with SeaDrill, with SFL buying SeaDrill's fleet and leasing them back at relatively low long term rates for SeaDrill to manage and sublease to operators. Fredriksen has historically focused on cash flow and cash earnings, and on dividending out excess cashflow to investors.

James Winchester, a veteran shipping analyst at Lazard Frères has said of him, "He's a modern-day Onassis. The tanker king. He landed squarely in the sweet spot of the tanker cycle, with the largest fleet of ships." In 2001 an article on Forbes.com described him as having "a tanker fleet bigger than anything Aristotle Onassis ever had."

Hence for Seadrill to buy into Sapuracrest is a big show of confidence and be tapped into the big league. Plus it is very likely Seadrill will buy a lot more Sapuracrest shares. Judging from their track record, 10% is nothing, they'd be looking to accumulate at least 20%-25%. Fredriksen's involvement shocked a lot of government officials in Singapore as they had been trying their best to woo him to invest into Singapore. Sigh, the sad thing is that most in Malaysia's political and investing circle did not even know who Fredriksen is. Just imagine Li Ka Shing coming to invest in a company in Malaysia or Warren Buffett investing in a company in Malaysia: that is how significant the move is. The amount of synergies and leverage that now affords Sapuracrest being within Seadrill's armada are gigantic. A lot more upside from here for Sapuracrest.

Saturday, June 23, 2007


Singapore's Property (High-End) & Social Fabric Disintegration

80% of Singaporeans live in HDB housing. Property, especially those in the right districts (9,10,11) rose significantly over the last 2 years. In particular, the two IRs were the catalysts for the boom. The solid success in Macau from the new casinos was basically transplanted to Singapore. The feel good factor from Macau spurred many high net worth Asians to gravitate to the new high end projects. Owing to the sustaininable pricing of the new high end, the existing properties in prime areas looked cheap. En bloc sale then took off as the new pricing was used as a benchmark. In 2006 alone some S$8 billion worth of en bloc sale was transacted. In just the first 5 months this year a similar amount was achieved already. En bloc sale usually prices a premium of 30%-50% minimum to actual market prices. Some have gone higher still. These en bloc sales basically minted many new millionaires or near millionaires. Assuming you have a property worth S$500,000 and somebody offered S$800,000. Even the highest geared owner would have reaped at least S$400,000 in fresh equity.
In total over the last 18 months, some S$16 billion of en bloc sale was transacted. Assuming a conservative figure of 40%, the new fresh equity available to those who sold would come to S$6.4 billion. If you borrow 50% on that it comes to a nice S$10 billion of potential fresh buying in property. This article is not to examine whether the high end boom is fair or sustainable, but a side note: how many will actually live in those super condos worth S$2.0m and higher? There is a market for those willing to pay S$6,000-12,000 a month in rent but the supply side is going to be a lot bigger than a couple of years ago.

Those en bloc sellers basically provided even more new buying power. Thus the demand was self-fulfilling to a large extent. The same owners of S$500,000-S$1,000,000 condos now are buying the spankingly new S$1.5-3.0m condos on offer. That's basically why the present boom in property did not filter down to the masses. If you were lucky enough to be in an en bloc sale, its better than striking the first prize in 4D unless you are the rare type to buy S$200-300 per number. Now there is a new divide in the country, either you have "en bloc experience" or you did not. Taking out the 80% in HDB, probably less than 2% were involved in en bloc sales. The really really rich (net worth more than S$10m), let's put that at 0.5%: now you have this group making 3% of the population among the new class. The IRs was supposed to drive the economy further ahead and create more opportunities for all. Before the dust has settled, the government now wants to double the population via new imigrants/PRs aggressively. Safe to say, the number of discontent voices among the rest of the 97% of population is deafening if they are allowed to be heard. Top that with a humungous pay hike for the sacred few top politicians - its pouring salt to the wound.

The social fabric is breaking rapidly. The new graduates entering the workforce will need to see their pay reaching S$10,000 a month before they can afford decent housing. What used to be 5 years now looks like 15 years before becoming a reality. As far as I know fresh grads pay is still S$2,000-3,000 p.m. Go into the workforce with this new math equation, you are not filled with much optimism.

To attract the professionally qualified new PRs, they will probably take up most of the "lucrative jobs" being offered by the "new economy" in Singapore - why else would they want to come work in Singapore!? Yes, the overall economy will grow and move up the development curve but an awful lot of "native Singaporeans" will not feel they are part of the economic express train muscling past their neighbourhoods. Increasingly, the super rich walking the streets and driving expensive cars will not look like a 'local Singaporean' of the old. Maybe in the not so distant future, a 'local Singaporean' driving an expensive car will more likely be the driver rather than the owner.

How much can the government do to placate the 97% or even the 80%? Refurbish the HDBs again for free? Give token angpows of S$1,000 every year? Retraining skills for free? More will emigrate to other countries, or work in China (where the perceived opportunities are greater with less rules). Singapore is getting to be a lot like HK, its a tough place to live unless you make good money.
So, what's in store for the average Singaporean in the near future? Spanking casinos you can't afford to go to; 3 Michelin star restaurants you won't be enjoying; super luxury hotels you won't be staying at; mega entertainment extravaganza which you won't be going to; night-time F1 around Orchard Road where tickets will be priced out of your reach; etc. Yes, Singapore is moving forward to being a truly non-egalitarian society.

Friday, June 22, 2007



Its A Lot Better Than American Idol

Still on the show Britain's Got Talent, there are other amazing talents which are worth watching:

Damon Scott & Bubbles - Amazing what you can do with your bare hands, and Bubbles is a star in his own right:


The KitKat Dolls - No need to go to Bangkok, they have `em in UK too. Brilliant cross dressers and appropriate song too:


Tony Laf - Original song, raw talent on stage just like James Blunt and John Legend, "I'm Good":


The show's good cause Simon Cowell is a lot nicer, and the audience does not hoot and holler every 3 seconds, and Amanda's the loveliest looking woman in UK right now.



Lift Your Spirits

There was a big hit show in the UK called Britain's Got Talent. It has unassuming people from all walks of life auditioning to a live audience. The final winner was a mobile phone sales guy called Paul Potts. You would never pick him for someone who looks like an entertainer. He has below average looks, a bit chubby, lack self-confidence and certainly does not look the part. Click on the youtube video on his audition, watch the judges faces when he says he was going to sing opera. Paul will lift your spirits to the heavens. A most unlikely thing will happen. Talent surpasses all things superficial. The best aria sung to perfection by the most unlikely guy. Tears will flow and they are good tears.

http://www.youtube.com/watch?v=1k08yxu57NA

http://www.youtube.com/watch?v=YQ-dJHNbFPQ

http://www.youtube.com/watch?v=rDB9zwlXrB8&mode=related&search=

Besides Paul, the candidate who will also lift your spirits effortlessly is Connie Talbot (also competed in the same show). She is 6 and she is heavenly. She picked the right song for an angel to sing. A song of hope from a voice of innocence and purity. Her voice is effortless and ethereal. Some things are just beyond dreams!

http://www.youtube.com/watch?v=XqVqJ1HLHNo

http://www.youtube.com/watch?v=TtQ6nzN0ejM

http://www.youtube.com/watch?v=MndLRdPsuJE&mode=related&search=

Thursday, June 21, 2007


Sugar & Spice For Telekom Malaysia

Next to Tenaga, Telekom Malaysia has also been very stale as well for most of the year. However, there are sufficient signs that TM is primed a good run very soon. The lofty valuations enjoyed by DIGI and Maxis totally bypassed TM. As the first 6 months draws to a close, many equity strategists are putting out reports for the second half of 2007. The consensus is, things are still great for most emerging markets. Many of them still have bucket loads of recommedations on stocks with at least 20% upside. Most favoured markets include Brazil, South Korea, Malaysia and Thailand. Sectors favoured include energy, industrial and telecoms. Markets most are avoiding for the rest of the year were China and Indian markets.
TM looks a safe bet below RM11.00. The supposed merger of TM's 49% entity, Spice Communications, with Idea Cellular in India have been dismissed. TM should be in the limelight with Spice Communications' IPO due in a couple of weeks time. Watch it fly! Following the IPO, TM will end up with a 39% stake while the Modi group will have 41%. Growth for Spice will come from the Karnataka and Punjab areas: collectively they have an 80m population.

To compare, Maxis' Aircel operates in 9 areas while Spice only has 2. Aircel now has a subscriber base of 5.5m while Spice has 2.7m. Outlook still very good for both Indian companies as penetration rate in India is just 13% compared to Malaysia's 75% rate.

TM's overseas contribution to revenue is around 28% and should rise further in the coming quarters. The stock has underperformed KLCI by -22% over the last 12 months. Dividend yield around 3.8%-4.0%. Celcom will be making a capital repayment exercise to TM worth RM730m, finally.

The kicker will be Spice's valuation. When TM bought its stake in Spice, the company was valued at US$365m in March 2006. Based on the staggering IPO price of 48 rupees (110x FY2008 earnings, or 8x EV/Ebitda): the valuation of Spice is now US$750m. This will result in an exceptional gain of RM391m for TM. Though a one-off item, its still significant.

TM should move higher after being ignored for so long. The valuations now are undemanding. Looking for RM12.50-RM13.00 as fair value targets.


The Yuan, Scrips Supply & Funds' Outlets

HK shares had a huge fillip just before they went for the Tuen Ng festival holiday (the most meaningless holiday in the Chinese calendar), guess somebody knew something before the actual announcement. Yesterday, the turnover of HK stocks exceeded HK$120 billion for the first time as the blue chips and H shares set fresh records. The good news for the local shares came as the China Securities Regulatory Commission announced on its Web site that mutual funds and securities houses will be allowed to invest in Hong Kong stocks for the first time starting July 5. Banks had been granted permission on May 11 under the qualified domestic Institutional Investor (QDII) scheme. Among the mainland mutual funds and securities houses, only Hua An Fund Management had received a QDII quota of US$500 million (HK$3.9 billion).

Meanwhile the International Monetary Fund seems to have exerted more pressure on Beijing to revalue the yuan by changing its monitoring policies. The new rules, released last Friday, were aimed at overhauling its exchange rate surveillance program, under which IMF asks member nations to avoid exchange-rate policies that result in "external instability" as well as refrain from currency manipulation and foreign exchange intervention.

"China has expressed reservations about the adoption of this decision, as it does not fully reflect the developing countries' opinions," the People's Bank of China said yesterday. The Washington-based IMF is an international organization of 185 countries that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical aid. China said IMF should take into full consideration the fundamental impact of economic globalization, and to value the relationship between domestic economic stability and external stability.

Now the Chinese authorities have two problems. One is to prevent excessive speculation in the stockmarket, but also at the same time not have a meltdown. Secondly, to pacify US lawmakers on the trade surplus solution. They were so scared when the stock indices started collapsing a couple of weeks back, that they had editorials of the 3 top newspapers printing the similar address: that stocks have been oversold. It was so obvious that the authorities were more concerned that there should not be a meltdown even though they are concerned of excessive speculation. The authorities are now more aware not to scare the stock investors via sudden fiscal hikes. Hence they have shifted their attention to providing more scrips supply and improve outlets for China funds. Outlets include the QDII scheme, and the just announced liberalisation to invest in HK shares as well. Encouraging more scrips supply, just look at the number of big companies coming to the market to issue more shares or bond issues.

Thirdly, the wave has started to get China companies listed in HK to move back to Shanghai. The first one should be PetroChina. PetroChina is planning to raise up to 43 billion yuan (HK$44.1 billion) by floating shares in the China A-share market to fund oil and gas exploration, build refinery facilities and make overseas acquisitions. The A-share listing - to take place as early as the end of August - would become the biggest initial public offering so far this year, eclipsing that of Ping An Insurance, China's second- biggest insurer, which raised 38.9 billion yuan when it listed March 1 on the Shanghai Stock Exchange. PetroChina shares rose as much as 8.2 percent Wednesday to HK$12.08 before closing at HK$11.74, a gain of 5.2 percent. The closing price valued the company at US$269 billion (HK$2.1 trillion), surpassing Royal Dutch Shell's US$257 billion to become the world's second-largest oil company. The mainland's biggest oil and gas producer will sell up to four billion shares in Shanghai. Following completion of the A-share offering, H shares will account for 11.53 percent of the total shares issued, down from 11.79 percent, while A shares will take up 2.18 percent. PetroChina, China Construction Bank (0939), China Shenhua Energy (1088) and China Telecom (0728) were the four Hong Kong-listed H shares which received special approval from China's State Council last week to list on the mainland bourse. While these supply measures will be greeted as positives by investors, in actual fact they bring on a lot more supply of share scrips. The bond issues also suck up some of the liquidity. While they may not ruin the bull run, these measures will act as a balancing lever to ensure a more gradual ascend for the Chinese bourses.

As for the trade surplus, Beijing has significantly reduced tax rebates on a huge list of items, which will hurt companies operating on labour intensive industries in China. The rebates reduction is a strong way to reduce surplus for the medium term, and to move companies and FDIs up the production value chain. The trade surplus may not be reduced immediately but these rules will ensure a medium term rebalancing. Yuan will be rising again significantly soon.

Wednesday, June 20, 2007


Ringgit & The Markets

Having highlighted the solid reserves backing the ringgit, it now looks to be building an even stronger base to try for 3.30 before the year is over. The reasoning behind is fundamentals driven and also on the strategy surrounding the renminbi. To placate the Americans, Beijing has widened the band with room for more upside. The ringgit has been only allowed to track the gains of renminbi and not surpass it, or so it seems by Bank Negara. Though most of the Malaysian public are still unconvinced, the ringgit is probably the second strongest currency in terms of under-valuation in Asia after the renminbi. Zeti is only taking an appropriate strategy to keep in step with the renminbi. Why do i say a wave is coming, its because a wave is coming for the renminbi with higher rates in the works and a wider band for China.

The other reason why I say a wave is building is to follow the benchmark yields on the 10-year government bond. Despite the slight weakness when US bond yields went above 5.0% last week, the Malaysian bond yields have actually come down a full percentage point in just the last 8 months, and that's despite the wooblies in China back in March. Hence long term FDIs and even investments in stocks have grew at a solid pace into ringgit denominated assets. Bond yields is now the lowest since 2001 and for very different reasons, I might add. A strong ringgit outlook bodes well for the local stock market, make no bones about it.










Best Smokes 2006/2007

I genuinely love cigars. Been smoking them for nearly 20 years. Its not a luxury thing like owning a Porsche. If you really enjoy cigars, you enjoy them in times of solitude and calm, usually by yourself or with similar minded friends. People who brandish cigars all around town are smoking for the wrong reasons. Friends who are pure cigar smokers tend to be healthier, don't ask me to justify. Inhalation is limited and I think its very destressing. The world moves on by slower, you reflect, the aroma envelopes you and your mind, triggering good feelings all around. Cigars should be enjoyed with pure water or an iced tea, anything stronger will compete attention for your taste buds. I know good cigars from bad ones, but a bad cigar is still better than none, I say any day. A tip for girlfriends or male friends wanting to buy cigars for their smoker friend - don't just buy one stick, its just not done that way. I have come across this 'one stick' incidence so many times. Yes, its the thought that counts, but not one stick, its like buying half a lipstick or giving one sock as a present. Cigars are meant to be shared. A good cigar should come in a box or at least 4-6 sticks so that the smoker can share with some friends or smoke the same cigar a few times. Just the way it is. Cigars are not cheap, so if its one stick or none, always select none at all.
As cigars vary in smokability depending on the year of release, I have chosen to highlight the best Cuban smokes I 've had in 2006/2007:

Top - Montecristo, Edmundos

Middle - Ramon Allones, SmallClubs

Bottom - Por Larranaga, Petit Coronas


Olympia & Mycom

MARC has assigned a BB- rating to OlympiaIndustries' (OIB) RM137.12 million redeemable unsecured loan stocks(RULS). The rating reflects the risks associated with the implementation of the group's restructuring scheme. OIB is involved in property investment, construction, stock broking andlotteries/number forecast.

OIB's lotteries/number forecast business resumed operations at the end of 2001 upon renewal of its licence. Its stock broking arm subsidiary, Jupiter Securities Sdn Bhd (JSSB), has been trading with restrictions since October 1998. The restructuring scheme involves, among others, a capital reduction, recapitalisation via a rights and special issue exercise, and a debtrestructuring. The debt restructuring, in turn, involves the issuance of the RULS andother debt instruments as settlement of OIB's debt obligations. The restructuring scheme also involved the divestment of OIB'sproperty-related companies to Mycom as several of OIB's subsidiariesholding land bank will be disposed off to Mycom.

OIB's property development projects namely Bandar Sri Duta (BSD) andK-Residence will be financed from the proceeds of the restructuring scheme. BSD, the 42:58 joint venture mixed-development project with Mycom, is located near the upmarket area of Sri Hartamas and will target the higher end of the residential market. The K-Residence development, on the other hand, is located in thevicinity of the KLCC, and comprises a condominium tower and a service apartment tower.

MARC assigned a BB- rating to Mycom's RM60.32m RULS. The rating category reflects significant uncertainties that could affect the ability of the issuer to adequately service debt obligations. Mycom is an investment holding company with subsidiaries engaged in property development and investment, plantations, manufacturing and plywood. The management has proposed to acquire property based companies from its related company, Olympia Industries Berhad in order to increase its project portfolio and landbank for future developments. The Group may eventually dispose certain non-core assets under its plantations and plywood businesses in order to supplement its cash coffers. Mycom’s property developments, Bandar Sri Duta (BSD) and the Duta Grand Hotels (DGH) projects will be financed from the proceeds of the restructuring scheme. The Group has recorded consecutive losses since 1998 resulting in negative shareholders funds of RM500.4 million as at FY2006. The Group’s past net cash flow position has been tight, plagued by the continued losses.

In May 2007, Pengurusan Danaharta Nasional Bhd has emerged as a substantial shareholder of Olympia Industries Bhd with 101.16 million shares or 13.85%. Olympia also saw the cessation of Tan Sri Lim Kok Thay as a substantial shareholder pursuant to the company's capital reduction exercise and rights issue. Lim is also no longer a substantial shareholder of Mycom Bhd as at April 27. Koperasi Polis DiRaja Malaysia Bhd too ceased to be a Mycom substantial shareholder the same day.

To revive both companies, the Yap family injected 73.4 acres of prime land. It looks like Mycom has the better hand of the deal with the prime landbanks. Jupiter Securities will not be able to have the capital to compete with the brokers in town and will die a natural death. Under the revamp, Mycom's debt of RM1.13 billion is restructured with the issuance of new shares and other debt instruments worth about RM790.6 million. The cash repayment portion is RM230.4 million. As for Olympia, its debts of RM1.68 billion will be converted into new term loans, while new shares and debt instruments worth about RM1.18 billion will be issued. The cash repayment portion is RM237 million.

The present run up looks like an exercise to offload / profit from the recent warrants and new shares subscription. Back in 2003 a circular by Mycom indicated that post-restructuring the diluted NTA will be between 81-85 sen. Since 2003, the company has had further losses, so one can do a guesstimate that the NTA should be around 50-60 sen now on the safe side. Mycom will rely on the development of the Mont'Kiara land to generate cash flow for the group. The development of the entire 73.44 acres of Mont'Kiara land will be done jointly by Mycom and Olympia. However, 58% of the share of the profit will go to Mycom as it will own a larger portion of the land. Stage one of the Mont'Kiara development will take 10 years, covering an area of 50.93 acres, with a total gross development value of RM2.9 billion. Mycom's 58% share of the profit is expected to be more than RM348 million over the 10 years from stage one. Other than the Mont'Kiara land, Mycom will also resume works on the Duta Grand Hyatt project situated at the corner of Jalan Sultan Ismail and Jalan Ampang. The project, in which Mycom owns a 51% stake, has a GDV of RM740 million. Other than a five-star hotel, there are plans to build serviced apartments, retail units and other components on the same site. Mycom also owns a small piece of land measuring some 20,000 sq ft next to the Ampang LRT station, but there are no concrete development plans yet. In terms of project financing, the development of Mont'Kiara stage one and the Duta Grand Hyatt project will be funded by part of the proceeds raised from the rights issue as well as a special issue, which together may bring in RM168.5 million. Still does not look to be sufficient enough to sustain these projects. The saving grace is that the projects are in very desirable and prime locations, and property sentiment for the high end has never been better since 1997.

Olympia's diluted NTA per share is estimated at 80 sen or lower. The gaming division posted revenues of RM103.4 million for the financial year ended June 30, 2005, and RM117.3 million for FY2006. But the profit from the division was only RM4.4 million and RM5.1 million, respectively, for FY2005 and FY2006. The payout ratios in these instances were above 90%, which are much higher than the industry average of about 60%. The broking business is doomed to fail. Hence prospects for Olympia is bleaker.

Mycom is the better bet if you must have a bet, but the run up looks for like a push following the new shares subscription and issuance of free warrants. There are certainly much better investing options around town. Though some of the assets are prime and desirable. The management track record leaves a sour taste, and shouldn't that be the defining point of investing? Lim Kok Thay's "no thanks" should be a big indicator as he would really have wanted to get hold of the prime landbank and hotel.

Monday, June 18, 2007



Implosion Risks Elsewhere
It used to be that when global markets had a calamity, it had to be something imploding in Latin America. If it wasn't Argentina, then its Colombia, or Mexican peso, or the inflation spiralling out of control in Brazil. That was the tough times in the 90s. Even Russia contributed with a rapidly diminishing rouble in the 90s. Asia contributed its fair share with the 97 liquidity crisis.
Currency risks and default risks are now much lower. Just examining the table will show that countries do live and learn. Financial prudence and balance sheet management have been improved significantly, especially at Agentina and Brazil. While Colombia did not change much, its now one of the hottest country among the group of Latin American countries for FDIs and growth prospects. The one bad apple was the nationalising plans in Venezuela.
The better report card is also replicated in most Asian economies following the 97 financial implosion. Even Russia has improved by leaps and bounds, strong foreign reserves, even greater natural resources and its proper leverage into the global economy. Thus to find surprising financial implosions now are harder, which is also why the external risk element has been reduced significantly from the 'usual suspects'. Now the new suspects are innovative trading ideas - the carry trade in yen into high yield currencies. Track the following currencies close, in order of riskiness: NZ dollar, Turkish lira, Icelandic krona, Hungarian forint, South African rand, Australian dollar and Brazilian real.


Stocks In Vogue

Market sentiment has improved somewhat and oil & gas stocks are leading the charge. Surprising coincidence that Ranhill is the top volume stock when there is a big oil & gas conference about town. Top volume game in guessing the worth of the oil find, your guess is as good as mine - not my cup of tea.

Eden - Correct sector, power. Wrong client, not Genting. Should be divesting the poorly performing food business. Moulding itself into a power player. Good prospects and upside.

Sapuracrest - Top pick from oil & gas. More upside likely.

Mycom & Olympia - Avoid like H5N1. Not out of trouble, don't be dragged through the mud.

UEM World - Consolidated looking good to retest the RM4.30 level.

Sime Darby - A big re-rating in the works. Break out likely soon.

Saturday, June 16, 2007


Kian Joo In Play

They kept it a good secret. Now its all out in the papers. What's the upside?

52 week High-Low: 1.71-0.98

Last Traded: 1.54

NTA: 1.46

ROA: 3.7%

Cash Flow Per Share: 10.7 sen

Share Capital: 442.2m

Par Value: 25 sen

Free Float: 34.4%

Major Shareholders: KJHSB 34.87%, EPF 13.97%

Debt/Equity: 21%

Business model still good. Absorbed newer canning technology (Microflex). Private equity firms very interested. One brother really wants to sell, the other kinda going along with it. May end up with a new buyer who will work alongside with one of the remaining See shareholder. Owns 54% of Box Pak. Stand alone bidder unlikely to bid past RM1.80. Buyers with synergies and existing big user will see very good returns. Cartons business very good in Vietnam, foothold there already.

I expect a bid of at least RM2.05 for a buyer with synergies. Chance to unlock values in Vietnam and also via Box Pak. As this will not be a G.O. exercise for new buyer, share price may not reach actual transacted price. Trade within the range of RM1.60-RM2.00.

Friday, June 15, 2007


Too Shy, Too Modest

Ask any Malaysian on the street about the ringgit and its gains from 3.8 (pegged) to 3.45 to the USD following its floatation - many would think that its good, but at the same time worry silently that maybe foreign investors have been too exuberant. Some may even be thinking that foreign investors are more bullish than local investors for no good reason - but let's keep quiet about it cause FDIs, liquidity driven bull runs cannot be all bad.

We are like kids who have been scared shitless from the 97 implosion which took years to recover. We are so used to the 3.8 peg that we don't know where the true fair value is. We are not certain whether there was sufficient banking reforms since then. Everyone else seem to think we are scoring well, but are we? Most Malaysians suffer currently from the "we are not worthy" mentality.

This is not going to be a Merdeka rah-rah article, and certainly not a Malaysia-Boleh piece of diatribe. Malaysian public support tend to over-rate themselves when compatriots are playing in sports events. However, when it comes to local business and finance, we are the first to step on ourselves. This willingness to be the first to rubbish ourselves is acceptable as it keeps humility within grasp, and we do not get ahead of ourselves. We are never quite certain that we are "good enough", "productive enough", "competitive enough" ... We always think we have a lot of excess baggage in various pockets of our economy, government, bureaucracy, political landscape, transparency, civil service and social infrastrcuture - and to a large extent there is truth there.

However, when it comes to business and finance perceptions, the indicators and factors to consider are actually quite straight-forward. The nuances are reduced: you produce the numbers, people will re-rate you accordingly.

First, we must know why Asia went through the 97 implosion. It was not a solvency issue but a contraction of liquidity. That is important to acknowledge as insolvency would be a really bad thing which permeates through the balance sheet of the respective economies. Thus many Asian nations affected went about taking their medicine and tried to exercise better financial discipline and improve their financial infrastructure to better cope with future "liquidity crisis".

Malaysia has been more successful than most in accumulating reserves, so much so that we are now #12 largest in terms of foreign reserves. For a country as tiny as Malaysia, that is highly significant. Oil/gas and palm oil have provided a generous kicker over the last 5 years, and the pegged undervalued ringgit magnified returns.

Did we improve in other areas? The banking system needed revamp. Malaysia has whittled down the number of banks, made them better capitalised, and enforced stricter lending and recovery methods/rules. Overall, risk management and banking infrastructure have improved. In allowing foreign banks to be involved in the local scene was a critical sign of being more open, and helps to facilitate competition, thus encouraging adoption of more global best-practices.

There are other macro risks and interest rate risks to consider before we get ahead of ourselves. In terms of inflation, Malaysia's CPI has been running at the benign 2%-2.5% for the past 2 years, very admirable and thanks to a stronger ringgit which reduced imported inflation. Another important indicator in the present world of money supply growth is to look at money supply growth vis-a-vis the read gdp growth. If the gap is wide, there is the first sign of trouble and deficiency in the quality of economy recovery. However, the readings for the past 3 years have shown that real gdp growth has kept close to money supply growth in most of Asia with the exception of India, Korea and HK. Next close to the danger levels are Singapore, Indonesia and the Phillippines. These readings would lend itself to predicting inflationary blowout cases. In Asia, if we were to take into account the velocity of money (M2) as well, we can find that countries on the danger list for inflationary blowouts are Indonesia and the Philippines. Followed by india and Thailand. Next would be Singapore and Korea. then its HK. Towards the last quartile are the safe haven economies (strong currency, strong reserves, inflation under control, low gap btw money supply-real-gdp): Taiwan, Malaysia and China.

Updated Foreign Reserves (in millions of USD)

1 People's Republic of China $ 1,202,000 March 2007
2
Japan $ 911,140 May 2007
3
Russia $ 406,500 June 2007
4
Taiwan $ 265,700 May 2007
5
South Korea $ 250,740 May 2007
6
India $ 208,373 June 2007
7
Singapore $ 140,900 May 2007
8
Hong Kong, China $ 136,200 May 2007
9
Brazil $ 122,389 May 2007
10
Germany $ 117,998 April 2007
11
France $ 102,703 April 2007
12
Malaysia $ 98,400 May 2007
13
United Kingdom $ 85,910 April 2007
14
Italy $ 79,266 April 2007
15
Algeria $ 77,780 December 2006
16
Mexico $ 77,576 April 2007
17
Thailand $ 70,396 May 2007
18
Turkey $ 69,845 April 2007
19
Australia $ 69,752 May 2007
20
United States $ 66,850 April 2007

These are just absolute figures which may not make much sense. You need to compare that as a multiple of months of imports, or divided by the population, or divided by the GDP, or divided by GDP per capita to get a better hold of the reserves. No matter how you look at it, Malaysia comes out smelling like roses. All said, the amount of reserves for Malaysia is extremely healthy, even excessively so. There is a school of thought that you need not accumulate so much reserves as that will mean ineffective utilisation of funds. However, most emerging markets have regarded reserves as a good buffer to protect the currency and to show inherent strength. You cannot stop that mentality following the 97 implosion experience.

Zeti has done very well, and in fact Badawi has done well as well in terms of practising financial restraint, better transparency, more open economy, and giving the proper institutions the needed independence to do their job well.
I don't think the previous guy would have done as well, financial restaint???,.. what financial restraint... non-meddling / independence for important regulatory institutions ... what independence? Does anyone remember how Bank Negara was considered the biggest rogue forex trading central bank in the world by forex traders in the 90s? Hmm, some people involved still in government now actually - so my point is that for many important government institutions, its a far cry from the maddening days of the 90s.
Of course, I am not saying Badawi's reign is perfect, far from it, but its a whole lot better than people are willing to give him credit for. Back to Zeti, she has done exceedingly well. The balance sheet looks very good, financial infra has improved, and now that resrves has reached excessive levels: Bank Negara has loosened capital controls and allowed for appreciation in ringgit to move the economy up the value chain. Most of us are still at pains to even dare to consider positives to the financial and fiscal balance sheet, and themselves not convinced of where the ringgit is or where the stock market is.
Its OK to be slightly proud, its OK, the ringgit won't fall through a hole, its OK, the ringgit will appreciate further from here, its OK, there is sustainability in the Malaysian economy; its OK, the foreign funds are not that flighty and more long term this time around; its OK, local interest rates won't go through the roof; its OK, we won't see CPI breaking our budgets despite the tight labour markets and recent round of increments for goods and services. Its OK to regard the economy as better grounded now. Really, it is. No need to be shy-shy lah.

Thursday, June 14, 2007


Shine A Light On Sapuracrest

The sustained buying in Sapuracrest over the past few weeks can be attributed to two things:

a) a counter-intuitive report from Citigroup calling for a buy on the stock (most of the other research houses have the company at neutral or sell)

b) the rapid collection by a substantial and influential shareholder in Seadrill Limited

As of yesterday, Seadrill owns 93.317m shares in Sapuracrest or a 9.13% stake. If you check the records, Seadrill has been buying aggressively. Seadrill is a Norwegian offshore drilling contractor providing services within drilling and well services. The company has 35 drilling units, of which 15 are under construction. Seadrill's versatile fleet includes harsh-environment semi-submersibles, jack-ups, shallow and deepwater tender rigs and deepwater drillships. In addition, Seadrill provides platform drilling, well intervention and engineering services. Seadrill is operating in 14 countries on four continents. Seadrill is listed on the Oslo Stock Exchange.

Seadrill recently reported revenues for the first quarter 2007 of US$479.2 million compared to US$387.1 million for the fourth quarter 2006. Revenues included a gain on the sale of the two FPSOs Crystal Ocean and Crystal Sea. Operating profit for the first quarter was, excluding gain on sales of the two FPSOs, US$82.2 million as compared to US$78.9 million in the fourth quarter 2006. Analysts at UBS maintain their "buy" rating on SeaDrill Ltd (ticker: S9A), while revising their estimates for the company. The target price has been raised from NOK133 to NOK140. The analysts mentioned that the company is expected to post revenue and EBIT growth of 46% y/y and 192% y/y, respectively, in 1Q07. SeaDrill’s net debt is expected to grow from US$2.9 billion in 1Q07 to US$3.3 billion in 2Q07, in view of the offer for Eastern Drilling as well as other acquisitions (including Sapuracrest). The EPS estimate for 2007 has been raised from US$3.90 to US$4.60. The EPS estimate for 2008 has been reduced from US$9.83 to US$9.77 to reflect recent contracts, several acquisitions during the year and equity issues.

Seadrill is a major player and its choice of Sapuracrest as a partner speaks volumes. The attraction: capacity and unique assets in Sapuracrest. Tired already, no strength to elaborate. Bodes very well for Sapuracrest.


Its A Money Supply Growth Driven Bull (Mainly)

Why is the bull so resilient?

The problem stems from this being a money supply growth driven rally, which basically moves everything up. Developed countries have been encouraging money supply growth to boost their economies for the past 5 years and we are seeing the end result. The liquidity has push prices up for everything, especially commodities.

Then you have the China and India factor as new turbo engines to the global scene. What these two countries provide is the outsourcing phenomena. Almost every big listed company has to to outsource some of their production or operations in order to save costs and improve margins. These gains are recycled back to huge cash flow in these listed companies via profits. The cash balances in corporate coffers are being recycled back as "share buybacks" which reduces the available assets meant for investments.

The China factor again kicked in as a vast group of new consumers in return, availing many new business opportunities for foreign investors to partake in growth in China economy (other than the outsourcing mode).

Reducing share supply, good corporate profits - a heady mix for bullish rallies for the stock markets globally. Naturally inflationary aspects will creep in especially with such vibrant money supply growth over the last few years. The entire global economy is on tenterhooks as the fundamentals are good for corporate profits and reducing in share supply. On the other side you have rising rates to counter inflation and enormous liquidity swishing around everywhere.

Not just money supply, but you also have the huge unlocking of fixed assets into cash via REITs over the past few years. What was just a fixed asset in your books are now tons of cash in hand. More liquidity, and a lot of it went into hedge funds and private equity. You now have private equity at levels never seen before, and they also leverage up to buy companies. Thus increasing share prices, increasing valuations across industries where activity is hot, and taking companies off the tables reducing free float.

The danger in a money supply driven rally is how much of it is "real productivity gains", and how much is just "inflationary" (more printed money chasing after limited alternatives). If it was the latter, then there is quality lacking in the bull run. We are not really producing better, just printing more money.

Even though it sounds bad, nothing really bad will happen unless they start soaking funds from the market. And they won't do that unless inflation is really posing to be a problem. Prices of goods and services are not going to come down. The one thing that is driving prices higher is labour costs because of near full employment. Hence the upward pressure for higher rates is felt by all central banks.
For that, I am leaning against companies taking themselves private as that is based on "above factors" which in itself are a bit deluding. Rising valuations and not being able to keep up with these valuations is not a sufficiently good reason to go private. It looks good on paper to go private but check the factors driving the valuations, its not that strong. They will unravel. Management are supposed to ride out the good and bad, and stop looking at the screen for share price movements in running a company well.

The real problem is too much liquidity which will inevitably create bubbles somewhere. Now a lot is vested in tricky investing solutions such as taking advantage of differentials in interest rate among currencies. Hot money flowing into the highlighted high yielding currencies is the most dangerous of all factors considered. These funds are temporary in nature, and when they play, they will swish around in the assets of that country's economic system. When even they start to trickle out, it can have severe repercussions, not only for those countries but creating a risk aversion mentality.

The bull is there, alive and kicking in stock markets, and it will have to take something external such as an imploding emerging market currency to take the steam out.

Wednesday, June 13, 2007


How Is Your Credit?

Came across this in the highly reputable (and bloody expensive) Bank of International Settlements publication. The chart on the right is very interesting. It looks at per capita credit card balances. Korea went havoc in 2000-2003 and the jump then was hard to understand but it was like a battle cry among the consumers to spend more aggressively in order to get the Korean economy out from the Asian financial crisis. There was a rallying cry and it showed what people can do if they acted as one.

Economists tend to believe that every individual act for its own good - the Korean experience would have sent economists revising that line of belief. The Korea economy in that 3 years basically spent its way out of a recession, and it was the first country to come out of the Asian financial implosion. Instead of relying on the government to pump up the economy. The Korean public, either knowingly or unknowingly, rescued their own economy. What was even more surprising was they consumerism binge tapered off after the economy recovered, and not vice-versa. Korea has now managed to reduced their credit card outstanding balances significantly now that things are rosy again. This is a phenomenon worth studying over and over again. How to spend your way out of a recession. Of course the binge was not all due to the public deliberateness but also a confluence of factors such as bank's strategy and government's policies in allowing certain leeways to boost the economy. Having said that, the binge also has its consequences. The credit balances went to as high as 15% of Korea's GDP (compared to US' 7% of GDP) and was unsustainable. What followed in 2004-2006 was tighter lending by banks and also more bad debt being written down.


HK is steady and their per capita balances are highest but also its a reflection of their per capita income. Cannot run away from the link. You earn US$5,000 a month you have US$500 in credit card balances. You earn US$15,000 a month you will have US$5,000 in credit card balances. Its like that in life. The countries where growth in consumer finance has been the greatest were at HK, Korea and Taiwan. Following the Asian financial implosion, the loans to deposit gap has narrowed substantially, forcing banks to seek out other growth areas aggressively. Consumer finance was a big target. The growth was exceptional in Taiwan as well and credit card balances did reach a 9% of GDP in 2005, which was a big worry. Banks began to tighten and write down bad debts since then.

Singapore, Thailand and Malaysia are not in any trouble. It showed good restraint and planning from their monetary authorities and central banks. It also points to the level of lending standards being enforced. It also points to the level of asset quality and the risk inherent. Credit card balances is a big indicator on the "real consumerism aggressiveness" of each inherent economy - it indicates the multiplier effect when the country does well, and also the severe contraction when things go awry.

Per capita card balances has to be put side by side to per capita income of each country to make it meaningful. Putting credit balances as a percentage of total household loans would be even more meaningful as it takes into account country specific factors.
Credit Card Balances As A Percentage Of Total Household Loans
1) USA 37% (gulp!)
2) Taiwan 15%
3) South Korea 11% (during the 2002-2003 crazier times, that figure went to a ballistic 45%)
4) Thailand 14%
5) HK 8.2%
6) Japan 6.6%
7) Malaysia 6.1%
8) Singapore 2.1%

From that angle, HK's figure is not that bad. Taiwan's going through some tough times now in consumer finance downturn and tightening, bound to get worse before better there. Thailand's figure looks bad and this would put enormous pressure should the economy there goes into a slow down. Japan's figure is surprisingly high compared to historical trends - the main factor could be the very low deposit rates and the correspondingly not so high credit card interest rates (e.g. deposit rates at 0.5%, banks would be charging only 1.5%-2.0% on credit card balances there).

Singapore's figure is very low. I think that's not due to better cash management but rather the efficient link-ups of your credit to your CPF to your ID to your employment records to your passport to your asset file to your army records to your academic records - you don't want to fuck up anywhere along the chain line.