Thursday, January 31, 2008

Internet Coffee Shop Talk

Blogger Boon said...

I never regard Lee Shau-kee as the Warren Buffet of Asia anyway. Lee Ka-Shing is the Warren Buffett of Asia.

Most Wall Street 'strategists' and fund mangers were calling for a year end target of more than 15,000 and some 17,000 for the Dow when the index broke 14,000. These guys are now at huge losses, and the media has been trying to put a very good spin on the bad news.

We should see the weakness spreading to sectors other than the financials in the future.

Best wishes

boon, nice to hear fm you ... been reading yr great calls for the past few weeks from yr blog ... lol agreed on lee shau kee, thats why the tongue in cheek writing and commentary, at least he stepped down from the pedestal before being pushed from it I agree about the sector spread influence, but a bigger worry should be the collateral damage from even good sectors - even gold and silver may get whacked ... the yen has been on a tear n I suspect the yen carry trade have not been fully unwound yet... my short term watch include European banks implosion due to subprime and related bad debts, UBS figure was a start... it cannot just be the US banks with the bad news, their half yearly reporting (European) compared to the US' quarterly reporting will bring forth another round of bad news from European banks.. Wednesday’s announcement by UBS of a US$14 billion in write-downs was a shocker as this was additional losses ... UBS had said a month back that they anticipated about US$10 billion in write-downs from securities linked to U.S. subprime mortgages... hence the 40% higher figure is huge. .. more importantly, UBS only blamed US$12 billion of the write-downs on subprime. About US$2 billion in write-downs, UBS said Wednesday, are from “other positions related to the U.S. residential mortgage market.” What does that mean? Even the less-risky parts of the U.S. home-mortgage market are running into trouble ... that sounds like bullshit... less risky means what???... prime mortgages? ... or as I suspect... home equity lending??? Citigroup's US$4bn allocated on future detriration of consumer debt was the biggest catalyst for the credit bubble implosion trigger... UBS US$2bn figure though smaller, its huge because their commercial operations and branch operations are nowhere as wide as Citigroup. Citigroup was the catalyst, UBS was the confirmation... which bank will be the destruction...? now that the 50bp cut wanted by the market was given ... players know they cannot focus on the Fed to read the markets for at least a few more weeks... sigh ... what else can they be looking at ... a-ha inflation... Hershey bar up 13% ...

Wednesday, January 30, 2008

HK's Backdraft

Guru Lee Climbs Down From The Pedestal

HK's very own Warren Buffett has gone less bullish. OMG. When even the Supreme Venerable Grandmaster Lee Shau-kee tempers his enthusiasm for the stock market, it's time to pay attention.

The Henderson Land Development chairman yesterday revealed a much more conservative attitude toward the market, lowering his previous lofty targets. He even asked his legions of loyal followers to knock him off his pedestal as the "God of Stocks."Said Lee: "I am not the genuine 'God of Stocks.' I am only a fake please don't call me that any more. I am just a simple investor." At least he is paving the way for a cushioned fall. The man known as "Asia's Warren Buffett" said he has changed to become more stable and calm. He told reporters the Hang Seng Index will only reach 27,000 to 30,000 points by March, then the market will ease its rise in the second quarter. Guru Lee had previously said on New Year's Eve the HSI would surge past 33,000 in the spring - a level 10 to 22 percent higher than his current predictions - before hitting 36,000 in autumn.

Asked about a strategy for the second quarter, he said: "Hold on to your stocks and don't be too aggressive." Lee even said his interest in being a cornerstone investor in new listings has waned. "The share price for the newly listed stocks are rather high and I'm not too fond of it," he explained. What a difference a a couple of weeks make.

Among his portfolio, Lee said his favorite stocks are the ones related to resources that can be burned - including China Coal (1898), China Shenhua Energy (1088), CNOOC (0883), and PetroChina (0857). He also likes China Life (2628) and China Merchants Bank (3968).

Through-Train Being Downplayed Further

The central government may have new concerns about the introduction of the "through-train" policy because of the recent turmoil in financial markets, according to the Hong Kong Monetary Authority.

"The through-train policy should not be seen as a market-saving measure," HKMA chief executive Joseph Yam Chi-kwong told legislators yesterday, adding he did not have any updates about the scheme that would allow mainland individuals to invest directly in the local bourse. Meanwhile, Yam said he does not see any structural problems in the local stock market, despite recent volatility.

The authority does not intend to intervene in the stock market the way it did in 1998, he said, but the government will continue to hold its stake in Hong Kong Exchanges and Clearing. "I do not see large capital outflows, even if some foreign investors are opting to cash out. But I don't rule out the possibility that some may decide to buy now," said Yam. Given the recent financial turmoil, Yam does not think the "decoupling theory" would hold. As most Hong Kong banks follow US Federal Reserve rate cuts, Yam believed negative interest rates - which he described as "abnormal" - are inevitable.

"But economic slowdown will bring down demand and eventually drive down prices," said Yam. He did not rule out the possibility of issuing more Exchange Fund bills as that would narrow the interest rate difference between the Hong Kong interbank offered rate and bill yield.

It is important to remember that the "through-train" is a HK government initiative proposed to Beijing. Beijing had been enthusiastic about it back in August 2007. However the severe correction in China markets have basically made it "unnecessary" for now to consider the "through-train". The plan was supposed to act as another release valve for pent up liquidity in China. That does not seem to be a worrying factor these days. If it was a Beijing proposal, then there may be some follow-through in 2008, but its not.

Volatility & Warrant

Question: In view of the high volatile market, do you think one should continue to invest in warrant as doing warrant will increase one's exposure to higher volatility in the already highly volatile market. I had a discussion with on friend on that but i disagree with him on the current situation that we should be buying the underlying instead of adding more volatility by leveraging on warrant. My view is that we cannot lower the volatility through warrant but we can control the risk exposure by lowering the trade value of warrant and yet achieve a comparable risk/gain/loss. Am i right to say that? An example would be a $20 share and a 10c warrant with June/July expiry, out of money warrant. Conversion is 10. A very vague guide but what i want to say is by varying the trade size, we can achieve good exposure with comparable risk.

Comment - Warrants trading in a down trend marked with intense volatility is not for the faint hearted, but to me, a genuine warrant player absolutely loves this market. Intense volatility and grave mis-pricing, the best kind of markets to trade warrants. If you are cashed out, maybe you can risk 10%-20% of capital to do this. Its pretty simple.

Follow some basic rules:

a) Do not buy on up days, buy on down days where mis-pricing is more readily available. You also have a buffer buying on down days.

b) Throw out all warrants with less than 30 days to expiry.

c) Only consider those with Effective Gearing of more than 5x and a Premium of Less than 20%.

d) Preference to those with lower absolute prices, i.e. a 10 sen warrant is better than a 30 sen warrant.

e) Sell on up days. For the assumed risk, you should be expecting 30%-50% return per trade.

f) Because you selected those with high gearing and low premium, even on further down days, the warrant price would not fall by a big percentage. Set a cut loss level.

Like I said, this is not for everyone.

Tuesday, January 29, 2008

Magic Man

If you thought that David Blaine was good, wait till you see Cyril Takayama. He is more inventive, casual and likes to do multiple tricks with one magic item. You will never view Lacoste polo shirts in the same way again. The second one shows why he will never go hungry. He is an American born of French-Moroccan-Japanese parentage: with those looks he could be in anything he wants. He is very very big in Japan, and should conquer the world next. Looking more likely to be the best magician ever.

Decoupling & Globalisation

Blogger bantersy said...


that was a long post!!! good work with patience!

btw, i wish to bring the your attention to the following.

"Lukewarm - Rest of Asia will have to come to terms with inflationary pressures as local currencies may not rise enough to counter imported inflation, thus hurting outlook for local equities."

will asia currencies rise as much and pick up steam to match the rising inflationary pressure. bearing that asia export to US is not as dependence as before, the rise of asia currencies will hurt its export to US. although euros, yuan and other major trading partners in east asia, the rising trend in their currencies is seen, thus mitigating the effect of losing its export competitiveness.

You also mentioned oil will stay above 100 and probably settling in that range for year 2008. The thing is, with global economy coming to a slowdown, wouldnt you think it will cushion the consumption of oil though it is the basic neccessity of our life. wouldn't OPEC be wary of "engineering" a high oil that will stay, for as high as possible for as long as possible, will just kill themselves in return. when everything come to a stop, their black gold will also be cheap gold? with all the curbs, measure to cool, china for one, should also tapping their brakes in an effort not to be so jerky. thus, i may be wrong, for i see oil may stay below 100 for year 2008. unless opec is so stubborn to ignore the global issues many are facing. by taking 1 dollar off the oil price, it allows many in the world to have a bit more to spend.


bantersy, i think the currencies that were strong in 2007 will continue to be strong. Dependence on US demand is central to the decoupling theory. I agree that most economies have been less reliant on US demand for trade. However, the flip side is the rise and rise of globalisation - which basically links all markets. A major correction in one will affect the rest.

The question which you want answered is would other markets which are more vibrant be unaffected economically. If the situation is just housing weakness in the US, I would agree to that. However, this is a credit bubble imploding owing to money supply growth for the past few years. All vibrant economies have been tainted with money supply growth as well.

Though we may see vibrancy in Europe and emerging markets, needless to say, the consumer side have been leveraging on the easy money policy as well. Just look at Singapore's luxury market and even houses costing above RM600,000 in Malaysia which is the norm now. My guess is that the "en-bloc sale" gains have been leveraged onto additional new luxury property speculation. My guess is that in Malaysia, the majority of buyers for properties more than RM600,000 over the past 2 years have more than one property and have geared up. Realistically, you need a household to have RM10,000 monthly income to afford funding a RM600,000 or higher property. Judging from the plethora of launches, I very much doubt the long term affordability. Just glance at the sale ads of new properties anywhere. Hence vibrancy in economic trade may cover the excess leverage of debt into other areas masked as positives. That's why I have not been a bull on Malaysia or Singapore property in 2007.

Your other query lies in excluding US from the global trade equation, since they are all vibrant they should be able to continue to have vibrant trade with each other - that could be the case, but not likely. If it was just US housing weakness, maybe that fairy tale scenario can pan out.

I still see delayed sub prime mess hitting European banks as they report half yearly unlike the US banks which makes quarterly reporting. Hence Europe will be affected badly in the coming weeks. This weaken the trade equation further if US and Europe experience similar problems together. Next we have Japan exhibiting another slowdown phase. Just from that, who will China, India, Malaysia export to?

Why a major correction elsewhere would affect vibrant economies elsewhere is hard to fathom as things look rosy and secure in other markets. Problems unwinding elsewhere may not hit us is the initial feeling. As you can see from the chain of events above, US-Europe-Japan, it will hit the rest of BRIC.

The problem is not in trade but "the leverage on inflated assets", that is the critical thing about a credit implosion. Housing is the easiest example to show, but there are other inflated assets that have been leveraged upon for the past few years. Things like credit card and home equity refinancing. Just look at our household debt and you can sense it.
The money supply growth has pumped so much inflation into our system, everyone can feel the price of goods and services rising much faster than our salaries. Official CPIs are twisted. If the emerging markets and Europe currencies did not go up by so much, the actual inflation may have been worse.

One of the biggest con in 2007 have been the surge in almost every currency other than USD. Take USD out of the equation, we are basically ranking parri-passu with AUD, Euro, pound, yuan... when all move up, who is to say we have actually strengthened. We all strengthened against ONE currency only: that is why the Fed has done one very smart thing, being able to export inflation away to the rest of the world. Yes, US still has inflation owing to weaker USD but in a slowing economy, settling for lower growth, they will actually have less to lose.

As for the price oil, whether it averages 110 or 90, does it really matter? There are bigger problems already within the system. Even 80 won't cure inflation worry already in the system.

Sunday, January 27, 2008

What Follows A Credit Bubble Implosion

Some are now debating whether the earlier than scheduled rate cut by the Fed was prompted by the SocGen losses. More have been arguing that the Fed is kowtowing to Wall Street by cutting more than 50 basis points and earlier than planned. We must be be certain that the Federal Reserve is not there to ensure an always strong stock market.

Morgan Stanley's Stephen Roach counters that the decision was ``dangerous, reckless and irresponsible,'' and Nobel Prize winner Joseph Stiglitz says it resulted from ``bad economic management.'' To me, the Fed's aggressive rate cuts mirrors the mistakes Greenspan made the last few years by keeping rates low for too long and printing too much money.

By easing aggressively on the basis of no new information, they're sending a message that they have to protect and defend the markets. Traders anticipate a further half-point rate cut at the Fed's meeting Jan. 29-30. That would put the overnight interbank lending rate at 3 percent and bring the cumulative reduction to 2.25 percentage points in less than five months, the deepest cut since 2001, when the U.S. entered its last recession. What is clear is why does the Fed bring forward the rate cut move, if it wasn't responding to some external market implications. Monetary policy is a strategic lever which works itself into the real economy: an additional week during the official FOMC meeting should not change things. Obviously Bernanke acted because of some additional news. It could be the SocGen situation or the free falling global equity markets.

Although this sounds far-fetched and opinionated, it looks like the Fed just didn't recognize the severity of this crisis.

The Fed's unscheduled move has been a frequent topic of discussions in Davos. George Soros said the Fed is ``doing the right thing,'' just not quickly enough. ``I think the Fed is well behind the curve, and has been reacting instead of being proactive,'' he said. The Fed rate cut showed that the Fed can be pushed around by the markets,'' says Nick Parsons, head of market strategy at National Australia Bank Ltd.'s NabCapital unit in London. ``The Fed is a follower and not a leader. In an attempt to gain control, the Fed has lost credibility.''

If the Fed reacted the way it did when the stock markets fell, what will the Fed do when the credit bubble implosion hits the consumer debt, another rate cut? What about the forthcoming bust in home equity financing? Another rate cut? How many rate cuts will be needed? Its like applying more Vicks Vapourub everytime the person coughs. It feels like some relief but does nothing to address the core condition.

This is a credit bubble implosion due to over exuberant money supply growth for the past 5-6 years. A lot of people would not be aware that you can print as much money as you like, but there are consequences - if not, every central banker would continue to print as fast as they can. This is simplistic but its the reality. When central banks print more money, it offers to the banks, or lend to the banks at cheap rates. Hence the money is "owed" and must be paid back. Its not like the central banks print money and GIVE it free to the banks to lend out. The central banks cannot circumvent the cycle by saying to the banks "OK, don't have to pay that amount, I will just write it off" - although technically they can, its called a bailout but they do it by lending more money with even lower rates or zero rates to bail out ailing banks. The Fed could bail out the Citigroups and Merrill Lynchs by offering a "superfund" to do something like that, but that is tantamount to covering the mistakes in the market place.

Back to the money supply growth issue. Banks with more funds can then lend to the companies and consumers to inject economic activity. Owing to the loose money supply side, the lending has not been all productive. Credit card debts globally is a problem. Especially in the US, home equity refinancing is a huge problem. As property prices surge, many continue to tap on the additional equity for cash: most of it went to holidays, refurbishment, down payment for another property, etc. On the commercial side, the lending went into aggressive repackaging of home lending.

This is the end result of excessive money supply growth. Of course many have been saying that for the last 2 years but you needed a proper catalyst for the credit bubble to be pricked. Failing which, this merry go around could go on for a few more years. The catalyst was the sub prime implosion. The accumulation of sub prime related bad news finally tipped the scales when Citigroup not only wrote down US$18bn in sub prime but also provided an additional US$4bn for anticipated consumer debt problems.

Looking forward, there could be more "bad news" related to sub prime write downs from European banks. Most of the bad news for the past 3 months had been from American banks. However European banks only reported half yearly results, unlike the quarterly reporting in the US. It is plausible that there should be much more "bad news" from the European side in the coming weeks.

The credit bubble implosion, if there was to be a progression, would be something like this:
Money Supply Excessive Growth = Reckless Lending = Reckless Consumption = Reckless Leverage = Assets Driven Up Beyond Fair Value = More Leverage On Inflated Assets = Sub prime Mess = Commercial Debt Tightening = Reassessment of Risk = Only a portion of Global Investors Realise Credit Bubble Imploded = Assets Correcting Back To Fair Value = Consumer Dent Implosion = Damage Control By Fed (too late) = Assets Fall Some More = Central Banks Coordinate Even More Rate Cuts = Banks Continue To Write Down = More Bankruptcies and Foreclosures = Everybody Knows Credit Bubble Imploded = Everybody Starts To Tighten Spending = Consumer Confidence Dips = Market Starts To Rise After Prolonged Falling & Recovers Even While All Consumers Feel The Pain Because Markets Are Forward Discounting & Not A Snapshot Of Reality In Present Tense

If you look at the chain of events above, where we are NOW is the RED coloured portion.

Saturday, January 26, 2008

The Terrible Twins

Like many of you, I was glued watching the CNBC the last few nights and was amazed at how many are still looking at the wrong reasons why the markets are correcting. Some are still explaining that the US jobs data are still good and that a recession is not likely. The markets were already factoring in a 50 basis points cut end of January. Doing an additional 25 points a week earlier: is that sufficient?

Downward property prices and impending foreclosure won’t be helped by a 75 basis point cut. This is a correction which aggressive rate cuts won't help, the correction has to play itself out. It’s not just a US recession, neither is it US jobs situation which are killing the markets. If you cannot get to the right reasons, you will mis-read the markets.

If you have to put it down to one reason, it’s the implosion of credit bubble. If you want a secondary reason, it will be inflationary pressures due to the excessive money supply growth worldwide for the past 5 years – which are directly linked to the primary reason.

In Australia, the M3 money supply rose 20.7% from a year ago, Brazil's M3 +17%, Canada's M3 +12.9%, China's M2 +18.5%, the Euro zone's M3 +12.3%, Hong Kong's M3 +31.5%, India's M3 +21.5%, and the United States' M3 +15.8%, a 47-year high.

Under the leadership of Jean Trichet, the European Central Bank (ECB) has shifted far away from its monetarist roots and its original 4.5% growth target for Euro M3. Since Trichet was appointed in November 2003, the Euro M3 money supply has exploded from a 5% growth rate to an annualised 12.3% in October 2007, its fastest in history, lifting the Euro zone's inflation rate to a six-year high of 3.1%, and far above the ECB’s target of 2%.

By doing so, Trichet has immunised the Euro zone stock markets from record high oil prices with money supply. The ECB engineered an 11% Euro rally against the US dollar in 2007, by printing money at a bit slower pace than the Fed.

To use monetary policy to fine-tune economic activity or asset markets, or to gear it above a sustainable level will, in the long run, simply lead to rising inflation – not to faster economic growth. What we are seeing is a credit bubble being pricked. Hence, this is not just a market aberration that will correct itself swiftly. And - it is likely to take more than a few weeks to play out completely.

Not to blame just the ECB and the Fed, but most major central banks globally have been increasing annual money supply M3 at double digits since 2001. Initially it was to reflate the economies that were stricken with credit implosion issues.

The recovery of the global economy was hastened with the emergence of China and India, both as a low cost production centre and a huge additional group of global consumers.

The US central bank has pumped a lot of liquidity into the world economy over the last four years, as a result triggering a synchronised world-economic recovery. The ample liquidity, rise of BRIC, and globalisation trend caused all commodities to surge.

The US has to contend with lower growth compared to the rest of the world, hence explaining the underperformance of US equities relative to other developed markets and emerging markets for the past four years. The trade deficit, which the rest of the world had been financing, became the epicentre for the shift in economic paradigm. The world is not that keen to keep holding US assets as the new paradigm asserts itself. Oil trade resulted in huge surpluses for the oil rich nations. BRIC countries now have a solid economic and industrial framework to pull itself onto the global economic power platform. Currencies began to realign to the new competitive order.

As most commodities were priced in USD, the persistently weaker USD ignited a rally in commodity prices. Added to that, demand for commodities also kicked in with strong demand from China and India.

The Fed initially increased money supply for valid reason in 2001-2002. The last few years have been adding gasoline to fuel the inflationary fire. Now it looks like everything has come to a head. The imploding sub prime mess and credit contraction looks likely to be the catalyst for the unwinding of the upcoming inflationary mess.

Even though the US has been showing signs of recession and a sub prime mess is evolving into a consumer debt problem: inflation is still very much a lagging indicator. Thus the next few weeks will see more “inflationary fears” articles in the media mixed with “US recession” debates. Not exactly fun stuff for the rest of the world.

Inflation is a very slow cycle. The entire cycle takes anywhere from 12 to 16 quarters to work itself out of the data. Thus the weakness in the US may not be of much help to those robust countries trying to contain inflationary pressures on their own.

We have been through a long period of inflationary credit expansion but credit expansion is a self-limiting condition. Credit bubbles are merely the rediscovery by a new generation of the powers of leverage. Every credit bubble that ever existed has eventually deflated. Is this a credit bubble being pricked?

Sure looks like one. We have essentially already reached the limit of debt serviceability that brings the merry go round to an abrupt end. We are already seeing the tightening of credit standards, the refusal of banks to lend to one another, the frozen commercial paper, the bank runs, the redefinition of what constitutes a store of value, the rejection of financial alchemy, the debt defaults, the falling prices in the housing market, the lack of confidence. These are all hallmarks of a credit bubble bursting.

The US has basically exported inflation away from the US with the weak USD and settling for lower growth strategy, and now the problems lie more with Europe and emerging markets. Local currency will still be strong, and will have to remain strong to counter imported inflation. Production capacities have been enhanced already. The slowing US economy will hit hard in 2008.

Twin trouble

Another key factor is the Baltic Dry Freight Index. The Index measures the cost of moving raw materials by sea in container ships. Many economists consider the index to be a good leading indicator of economic activity; when not many people are looking to move cargo, ships will be in less demand, causing a drop in the price that shippers can charge. Recent dramatic declines in the Baltic Index have reinforced views that the US is probably heading into recession. The index has lost nearly 40% since mid-November.

So we have the terrible twins: inflationary pressures still in the system and the credit bubble bursting. Not a pretty sight.

The coming weeks and months will see these things being played out:

· Occasional bad news about companies affected by CDOs related writedowns and bankruptcies by companies hit by higher credit cost or inability to refinance;

·Banks in the US coming to terms with worsening consumer loans;

·Fed dropping rates by 75 percentage points by February but failing to re-ignite the markets (this happened on Tuesday night);

·USD to lose 3%-5% in value in 1H2008;

·Commodities prices ease from their peaks but still stubbornly high;

·Real estate led correction hits Britain hard;

·Developed markets and emerging markets having to contend with inflation in goods and wages, plus coming to terms with a weaker US demand; and

·Some collateral damage in “good sectors” being sold down to help cover losses and redemptions in affected funds.

All said, the sooner we wring out the excesses due to the irresponsible money supply growth policies, the better. All markets will become attractive once they have fallen sufficiently. However, we have to wait for things to unfold from here. A good yardstick would be to monitor the financials in the US. Many are already trading below book value. We probably should see good value with another 5% lower from here. The catalyst which could bring about a buying platform should be a major purchase effected by a well regarded investor or institution, e.g. Warren Buffett. Are we there yet? Unfortunately, no.

Friday, January 25, 2008

Societe General, Old News

A trader has stunned global financial markets by defrauding France's second-largest bank of €4.9 billion (US$8.2 billion) - potentially the largest fraud in financial history. Societe Generale, has announced a loss of €6.9 billion, the largest in European history. Lost in the exceptional loss was an important €2 billion write-down linked to the subprime mortgage crisis in the US.

Putting it in perspective, British trader Nick Leeson, who defrauded Barings bank of £725 million, causing Barings to collapse in 1995. The young Paris trader used his position, plus a knowledge of the bank's security system, to construct "a scheme of elaborate fictitious transactions" on European equity markets. He had been dismissed and legal action will be taken against him, said the bank's chairman, Daniel Bouton - who offered to resign but whose offer was rejected by the board. Also fired were "executives, including leaders, responsible for the supervision and controls on the operation concerned".

With trading in Societe Generale shares down by nearly 50 per cent in the past six months - largely due to concerns over its exposure to the subprime crisis - the bank said it would be forced to raise €5.5 billion in new capital to restore its balance sheet. Calling all Asian sovereign wealth funds, calling all sovereign wealth funds ...

Societe Generale was a leader in derivatives and was considered one of the best risk managers in the world, you would think they know a thing or two about minimising risk. Societe Generale said in a separate statement that its rogue trader had been carrying out what it called "vanilla futures hedging" on European equity markets. It said the trader took out "massive fraudulent directional positions in 2007 and 2008 beyond his limited authority".

In 2003 rogue traders who entered false trades cost NAB's foreign exchange book US$360 million. The traders, who were all jailed, entered false trades to inflate profits, securing annual bonuses worth tens of thousands of dollars. In 2006, a 32-year-old trader named Brian Hunter at Amaranth LLC, a hedge fund, made a series of bad bets on natural-gas futures that led to losses of US$6 billion. Credit Agricole SA, one of SocGen's French competitors, in August 2007 revealed a similar trading incident that wiped €230 million off third-quarter net profit.

Its not a big deal nowadays, now its very difficult to bring down the company, so we must amaze at what Leeson did. These losses wouldn't affect the markets one bit. Gone are the days of Leeson and LTCM... those were the days.

Thursday, January 24, 2008

The Best Instant Noodles The way the markets are headed, I thought it might be timely to feature my favourite instant noodles: some of us may be eating these for some time. Numero uno, beating the shit out of all has to be Ibumie's Har Mee. Friends from overseas having tasted the Har Mee buy packet-loads home with them. Don't worry, those not residing in Malaysia can order them from for instant delivery. Its the soup base, forget about the noodles, in fact get your own noodles, it will be even better. You know they have thought seriously about the product because they have 5 sachets of chilli oil, fried shallots, soup mix, spice and soy mix. The soup is damn close to the best prawn mee soup in Penang. Slice a hard boiled egg, some freshly boiled prawns and bean sprouts and you have 90% of the real stuff.

Next is the wonderful HK brand of Noodle King by Sun Shun Fuk Foods. The lobster flavour is number one, followed by the scallops and then the abalone & chicken flavour. The soup base is very Cantonese, but the noodles is very good. Its still springy after boiling.

Getting The Right WHY

Been watching the CNBClast two nights and I was amazed at how many are still looking at the wrong reasons why the markets are correcting. Some are still explaining that the US jobs data are still good and that a US recession is not likely.
The markets were already factoring in a 50 basis points cut end of January. Doing an additional 25 points a week earlier: is that sufficient? The markets recovered, and Asian markets went ballistic. Thank goodness Malaysia was closed, if not, many would have been sucked in buying, and would be staring and shaking their head later today.

Downward property prices and impending foreclosure won't be helped by a 75 basis point cut. Like I said before, this is a correction which aggressive rate cuts won't help, it has to play itself out.
Its not US recession, neither is it US jobs situation which is killing the markets. If you cannot get to the right reasons, you will mis-read the markets. If you have to put it down to one reason, its the implosion of credit bubble. If you want a secondary reason, it will be inflationary pressures due to the excessive money supply growth worldwide for the past 5 years - which are directly linked to the primary reason.

We have seen through a long period of inflationary credit expansion but credit expansion is a self-limiting condition. Credit bubbles are merely the rediscovery by a new generation of the powers of leverage. Every credit bubble that ever existed has eventually deflated. Is this a credit bubble being pricked? Sure looks like one. We have essentially already reached the limit of debt serviceability that brings the merry go round to an abrupt end. We are already seeing the tightening of credit standards, the refusal of banks to lend to one another, the frozen commercial paper, the bank runs, the redefinition of what constitutes a store of value, the rejection of financial alchemy, the debt defaults, the falling prices in the housing market, the lack of confidence. These are all hallmarks of a credit bubble bursting.

Wednesday, January 23, 2008

Ice Cream After A Beating

Remember when you are a young kid, you did something wrong, your parents whacked you, and after they felt sorry and gave you ice cream. Well, thats close to why the Fed cut 0.75%. Is that enough? I have argued before, that won't be enough because this is not something a rate cut can rectify. It has to play itself out. If your property is heading for foreclosure, a 75 basis point cut will do nothing to save your home. Not in an era of slowing economy.
The rate cuts is largely anticipated, though better than the 50 basis point but there is really not much the Fed can do now.

The entire movie has to play out on its own in entirety. I may sound like the ever bearish Marc Faber now cause I was never bearish for a long time, but this is pretty bad, and its pretty bad because the majority still are unsure why the correction is happening, and that is the killer blow.

Its a devious bursting of the credit bubble which had been engineered for the past 5 years, yes, Greenspan was largely the culprit, though he would not admit so.
If you have a tumour, you cannot stop the surgey halfway by putting more chloroform onto the patient. The patient has to go through with the surgery for complete recovery. Still not time to buy yet.

The scrambling to cut 75 basis point also indicate some kind of panic, nothing much left for the Fed to do, any more they risk the USD going into a freefall. Just like antibiotics, you have to take the medicine for the whole course, cannot stop halfway. Any rebound in any stocks are likely to be a dead cat bounce (have you ever tried to bounce a dead cat).

Tuesday, January 22, 2008

Who's Not A Bear Now

Suddenly everyone is a bear. Now we have George Soros saying that the world was facing the worst financial crisis since World War II and the United States was threatened with recession. "The situation is much more serious than any other financial crisis since the end of World War II," Soros was quoted as saying. He said over the past few years politics had been guided by some basic misunderstandings stemming from something that he called "market fundamentalism" - the belief financial markets tended to act as a balance. "This is the wrong idea," he said. "We really do have a serious financial crisis now."

Asked whether he thought the United States was headed for a recession, he said: "Yes, this is a threat in the United States." He added he was surprised how little understanding there had been on how recession was also a threat to Europe.

Things can look ok at 13,300. At 12,600 you want to buy on weakness. At 12,000 everything looks expensive. At 11,700 you swear you never want to touch stock ever. Its the same, you can replay that in all markets: the Bursa 1,520 looking good for a CNY and election rally. At 1,500 govenment won't let it fall, they need to boost market for election. At 1,460 we will say "don't buy now, sure regret". At 1,420 OMG very oversold already, pity no more funds to buy. At 1,350... all you can hear are swear words.

This is not to piss people off. I'm a bit lucky to call for a sell as the Citigroup results and writedowns looked more than just bad news, it was a huge catalyst. Markets will go on being overbought or oversold till a proper catalyst comes about. I was especially uneasy with the US$4bn provision for consumer debt writedown. A correction can be a temporary thing if it was a minor issue. This is big, its the terrible twins: inflation and credit bubble being pricked. Good thing is we are falling fast which means we can reach bottom faster. But we are not there yet, stay tuned.

Through-Train's Significance

WSJ did a write up on the "through train" program which was hinted in August 2007, and was largely responsible for propelling the Hang Seng index from 24,000 to 30,000. Since November, the China markets (Shanghai and Shenzhen) have been on a substantial correction phase. Now Hong Kong's investors could use the Chinese government's help, but it isn't clear when that help may come. Last week, there was a report which cited that there could be a 2 year delay before the program will be implemented. That caused a panic among the retail investors thus explaining for the volatility in HSI over the past week.

Until that happens, one significant leg of support for last year's gains in Hong Kong shares is going to be increasingly wobbly. If that support is removed altogether, Hong Kong stocks could be in for a bigger bruising than they've already had. The move was proposed by the HK financiers initially to help create valves to let out some of the liquidity in the mainland. Since then, the subdued China markets have caused Beijing to be very quiet on the "through-train" program.

The Hang Seng rose 55% from its August low to a late October high, following that news and the Federal Reserve's decision to slash interest rates in the U.S and also theanks to the "through-train" program.

Shares of Chinese stocks listed in Hong Kong, reflected in the Hang Seng China Enterprises Index, did even better, gaining about 85% over that period.

Based on the prospect of coming inflows, investors in Hong Kong began to demonstrate a kind of immunity to global turmoil. That immunity had previously only been apparent in mainland China, and stocks in China and Hong Kong surged while other markets wobbled. However, since the news of the delay, the invincibility of HK stocks have evaporated substantially. So these traders have gone back to worrying about the other factors that affect stock prices.

There is reason to think the plan will eventually be approved. Last week the head of the Hong Kong Monetary Authority, Joseph Yam, was reported as saying the plan is "an important project and we hope to start it soon." Of course Yam would say that, but the real authority still lies in Beijing. Other officials, most notably Chinese Premier Wen Jiabao, have raised concerns about the plan in the past. Mr. Wen said the government had to first consider the potential negative effects the plan could have on both mainland and Hong Kong markets.

There are many who still think that the "through-train" program will be introduced this year. That is risking a lot on the line for a big maybe. People should really forget about the "through-train" for the time being. It will highly unlikely as long as Shanghai and Shenzhen markets are subdued.

One should be buying on the Fed's likelihood to cut rates substantially in the near term, which will have a huge effect on HKD which is pegged and on the HK lending rates which are higher that in the US. The higher rates in HK will suck in more liquidity, and at the same time HKMA cannot risk lowering rates too fast in an already vibrant economy. The unbalanced equation will provide HK with a stronger reason to buy stocks than other markets. For now, HSI will continue to drop like the rest as the equity markets in general have a lot more pressing issues to contend with.

Monday, January 21, 2008

Ramunia Heart MISC

The Edge: MISC Bhd launched a reverse takeover (RTO) for Ramunia Bhd in a proposed deal valued at RM3.2 billion, where MISC would inject its heavy engineering business in exchange for new Ramunia shares. Ramunia told Bursa on Jan 21 that it had received an offer letter dated Jan 18 from MISC’s unit MSE Holdings Sdn Bhd offering to dispose of its entire stake in Malaysia Marine and Heavy Engineering Sdn Bhd to Ramunia. The total consideration of RM3.2 billion would be satisfied by the issuance of new shares of 50 sen each and new irredeemable convertible preference shares of Ramunia. Ramunia said MISC’s offer would lapse by Jan 21 or at such other time which might be extended by MISC.

Comment: Smart move. Saves on listing cost with Malaysia Marine & Heavy Engineering. MMH was supposed to be a hidden gem to be unlocked by MISC via a listing. In one fell swoop, MISC ends up with the facilities under Ramunia, major controlling stake in Ramunia, savings on listing cost for MMH, and a huge kicker in Ramunia's post-deal share price.

The main beneficiary will still be Ramunia shares and not MISC (too big, too heavy). MMH is expected to rake a net profit of RM213m in FY2008. That's 15x 2008 earnings, good for MISC rather than Ramunia. In terms of fabrication yard space, MMH has 80 acres, Ramunia 180 acres and Sime Engineering 45 acres. Sime Darby had thought Ramunia's asking price to be too high last year. I think MISC's got better brains at the top because absolute price will always be expensive for a good asset. However, if you are willing to think outside the box, its a great win-win situation. With the deal, Ramunia will have an unassailable 260 acres of fabrication space. This will put Ramunia in the driver's seat to get a huge slice of the RM10bn fabrication jobs to be doled out in 2008. The government strategy is to build 65 new platforms over the next 5 years. This deal will also help Ramunia in terms of meeting demand for offshore fabrication equipment.

Ramunia will also get MMH's outstanding orderbook of more than RM3.3bn. Though we do not know the details (we can still do a guesstimate), but assuming MISC gets the new shares @RM1.00 = 3.2bn new shares. Add that to Ramunia's existing 557m shares = 3.757bn shares. Ramunia is expected to make RM53m net profit in 2008, add MMH's RM213m = RM266m.

Owing to the synergy and enhanced business model with the RTO, I would be comfortable to ascribe an 20x PER for 2008 valuation = 5320 / 3757 = Target price RM1.42.

The merged entity is basically a Petronas controlled company, and there will be positive management changes. Naturally the company will be able to "compete" better in tenders. Its like a moth into a butterfly, hopefully with a longer life.
p/s please note that there had been a revision in target px, got the prior Ramunia's net profit figure wrongly

Saturday, January 19, 2008

Passing Commentary

Media / Hillary - Why is it that the media often put up "ugly" photos of Hillary, why the bias? I don't see other candidates being portrayed in a negative manner. Is it because the media is largely still male-dominated? The fact that she is now a likely candidate may be scaring these editorial teams who are actually fearful of having a woman leader? I thought journalism attracts those with integrity, but apparently not. This is not American Idol, its not a popularity contest. Where are your journalism ethics?

Hillary / Obama - Frankly I hope one of them will be the next President, we need a Democrat President. We need change. Change at its very core. You cannot have a more definitive change, in either having an African American or a woman at the helm, amalgamate the two you have Oprah Winfrey .... one step at a time, they say. The rise of younger voters should ensure that either Hillary or Obama once nominated, should win. The whole world needs a change in US Presidency, we need new blood to mend the global fences, thanks to the destructive decisions by Bush and Cheney.

2 Party System Lesson
- Seeing how politics are being played out in Australia, the US and UK, even in Japan should make us realise that Malaysia and many other countries desperately need a two-party system. Be it Liberal or Labour, Democrats or Republicans, we just need two strong party. If not, the population basically DO NOT HAVE AN ALTERNATIVE. In 2 party system, there will always be self-imposed check and balance because there is another party at the wings. In Malaysia, we need another party looking like Barisan /UMNO but is not Barisan/Umno. The Keadilan camp is just accomodating too many differing interests thus alienating many on the opposing ranks. Forget NEP or religion for the time being. Create a real alternative on the platform of no-corruption and bringing up the livelihood of the poor, all the poor, no distinction. Enhance the independence of ACA, the judiciary, the Treasury and central bank. Promote small government.

- I pity the guy. He has been thrown into the fireplace very early in his tenure as Fed chairman. If you watch him answering the questions on TV, he needs to improve his delivery substantially. His voice quavers and brings a sense of uncertainty in what he wants to say. I am sure he is better than that. Paulson is much better. When Bush speaks, I am sure all the handlers are crossing their fingers that he does not say something stupid and inappropriate - alas, he opened his mouth in the end.

Thursday, January 17, 2008


Construction on new homes in the US fell 14% in December to a seasonally adjusted annual rate of 1.01 million, the slowest monthly building pace in more than 16 years, the Commerce Department reported Thursday. Housing starts for single-family homes in the West fell 16% to the lowest level since the data were first collected in 1959. Building permits fell 8% in December to a seasonally adjusted annual rate of 1.07 million, the lowest since May 1993. For all of 2007, housing starts fell 25% to 1.35 million, the lowest annual total since 1993. The question is whether one sector can bring down the economy. The property side is just playing out its excesses, to me, any rebound is and will be temporary in nature.

Then we had another conflicting signal, the seasonally adjusted number of people filing initial claims for state unemployment benefits in the US in the week ended Jan. 12 fell to 301,000, down 21,000, to mark the lowest level seen since Sept. 22. Initial claims have now fallen for three consecutive weeks. The four-week average of new claims fell by 11,750 to 328,500 -- the lowest level since late October. The previous week's level of initial jobless claims was unrevised at 322,000.The four-week average is considered a better indicator of the health of the nation's labor market because it smoothes out one-time events such as holidays or strikes, analysts say.Compared with the same time last year, initial claims are up about 5%, while continuing claims are up about 11%. Its too early read too much positives into the job claims improvement. On a year on year basis claims are still higher.

Initial claims ranging from about 300,000 to 325,000 are consistent with healthy job growth, economists say. Readings consistently higher than 350,000 would signal significant weakening in the labor market. Hence market watchers are still neutral on the jobs data.

From the chat room, I often see comments that the Dow futures are positive and hence indicate recovery. Futures during Asia time zone or after market closes in the US should not be read in such a one-dimensional way. Players of futures largely involve traders who were already short or long certain stocks. Depending on their risk appetite, they could lock in gains, take some losses, or hedge their shorts - with so many variables, it would be very shallow to regard premarket futures as a directional guide with confidence.

My prognosis, we are in for a difficult period, not just a difficult week, with or without an election.

Wednesday, January 16, 2008

Vikram's Hot Pot

Citigroup's shares lost
US$2.12, or 7.3 percent, to $26.94 a five-year low, following its quarterly results. It wiped away almost US$10 billion in market value in one day on top of US$125 billion lost over the past year. The loss for the quarter totaled US$9.83 billion, or US$1.99 per share, compared with earnings of US$5.13 billion, or US$1.03 per share, a year earlier. Citigroup's revenue declined to US$7.22 billion, off 70 percent.

Citigroup's biggest hit came from a US$18.1 billion write-down in the value of its investment portfolio. But the bank also set aside US$4 billion Tuesday to cover anticipated losses on consumer loans.

The reasons the results caused more panic:

a) Though the write dow was substantial at US$18.1bn, that still leaves Citigroup with more than US$30bn in SIVs. Analysts anticipate more write downs in the coming quarter because of that.

b) The fact that the bank set aside US$4bn to cover consumer loans hints that the sub prime mess and higher credit cost will surely be hitting the consumer in the coming months.

Vikram Pandit can only do so much write down judging from the fact that the bank has already asked for capital infusions from substantial shareholders and sovereign wealth funds. Plus he probably was instructed to cut dividends but if given a choice I think he would NOT be paying any dividends. Hence his hands are tied. Of course Vikram would have wanted to do more write downs but he has capital reserve requirements to meet, and can you imagine the bloodbath if Citigroup actually took a US$35bn capital injection from the sovereign wealth funds? That would have triggered "protectionist protests" and may hit a few limits with foreign ownership issues, plus it would have scared the market shitless.

Everyone knows that when you reveal bad news, its better to take the full whack one time rather than keep reporting sorry numbers quarter after quarter.
This also highlights the problem with having quarterly reporting. Everyone wants a quick fix. If we had just half yearly reporting, Vikram may have more room to move. He may not need to write down so much as the situation and valuation of the SIVs could improve in 6 months. However, due to the quarterly reporting, all are focusing on treating the problem immediately. In a difficult market that is imploding, its hard to sell the securities at a good price and difficult even to try and do a valuation.

Just looking at the table above, its not sufficient to have the banks doing the write downs and having the capital injections. These capital injections does not mean the worst is over. These SIVs and CDOs are not made up vehicles, they actually make up of actual home owners - and they too will be hounded to either cough up or have their property foreclosed so that these banks can write back some of the amounts. The banks will end up holding the SIVs and CDOs, even if they sell them, someone will be holding them, and they all will want to collect from the people they lent to. Citigroup and the rest would want to write back as much as they can, so there will be a long way to play out: the homeowners will be pressed hard over the next 6-12 months. Just adding up the write downs from the table above comes to US$53bn. Assuming US$300,000 per home, we are looking at 176,666 homes. Its not the end, its the beginning of a difficult period.

Another Positive Down The Drain

The HK market was supposed to be on the receiving end of a the "through-train" program which would have allowed individuals from the mainland to trade in all HK listed securities. The proposal back in August caused a dramatic revaluation in the HK market. However, owing to the corrective phase in Shanghai and Shenzhen, apparently the long-awaited through-train scheme will not start for at least two years.

The program for individual mainland investors to put money directly into Hong Kong stocks has been held up because the mainland authorities want more time to make sure everything is running smoothly in the new system before opening it up to the public. Also, the authorities feel there is no need to rush the launch of the through- train program since mainland investors can already use the QDII program to invest their money overseas. BS, the reason why the program was delayed was due to the significant pullback in China stock markets. If the Shanghai and Shenzhen markets had continued to surged, believe you me, the "through-train" program would have been accelerated to allow liquidity to pour out of the system.

When news of the program first surfaced in August, the market became flush with excitement, thinking a torrent of money might start flowing into Hong Kong almost immediately. Now, we will see the same air being sucked out of the system in HK. Downgrade on HK immediately. The sentiment has turned.

Tuesday, January 15, 2008

Welcome Feedback

Blogger bantersy said...

hi dali,

what about those sovereign funds that are pumping in billions of dollar. aren't they digging their own grave as well? everything has a price, in midst of difficulty, if valuation is fair, shouldn't some counters be worth buying? talking about palm oil play, some of the counters have racked up 3x the value since 3Q last year. what is deemed fair in valuation? most stocks have came down. using a long term view, the valuation may work out to be quite a good buy. of course, market is sentiment driven and sad to say now it is quite bleak and sell seems to be the only call by everyone. citi has just released yet another set of result with more write down. with more info being released into the market, uncertainty is more certain now than months ago.

Comment: My criticism of the BOA deal is not buying at low prices but that they made an earlier "purchase" just a few months back on Countrywide. On August 23, 2007 BOA announced a US$2 billion dollar repurchase agreement for Countrywide. This purchase of preferred stock is arranged to provide a return on investment of 7.25% per annum and provides the option to purchase common stock at a price of US$18 per share. In just less than 5 months the stock tank below US$5, hence they are buying the whole company now. What I was getting at is that they read the sub prime mess totally wrong just a few months back. Now their hands are dirty and they cannot not buy the whole company at US$5. However, no mention of their previous purchase, why? They must at least explain why they got it wrong, and why they think it is OK now.

remember your call earlier that you believe market will gear up again especially US and HK but what make you reversed your gear and calling an exit on any sign of tumbling. if these few days of wrecking fit your definition of wobble, should investor turn to the exit door now and sooner?

Comment: I was slightly bearish end of December, now I am more bearish, things are fluid. I always try to explain my calls and my change in outlook. I don't think I just make calls and not at least attempt to say why. I already said the article will be in The Star this weekend, so I cannot post it up yet. The least I can do is to haul up a warning sign. At least that is consistent.

not trying to dig out the wrong calls you have made last year but you called for japan and korea market to be top pick for 2H 2007. on hindsight, it turned out otherwise. exactly, in your opinion now, what actually gone wrong.

Comment: For Japan, another change in PM and the failure to open financial markets for foreign M&A. Korea, well, I got that wrong as well.

Naive & Vulnerable

If you check out the last 30 minutes of yesterday's market in Bursa, you will find that it broke below 1500 for a while but was artificially lifted to close above 1500. Hmmm... , powers to be think they can manipulate the market's direction and sentiment?!! How naive and silly. The market is bigger than all of us. If we can "control" the market, why did we correct to below 500 in 1997/98 and spent a few years below 800?

Or is it that the people dishing out strategies to state funds think that the rest of investors are silly enough to believe that coming back above 1500 is a credible technical signal. Are investors that gullible? Maybe some are, but most are not. If you guys are trying to do a financial engineering, please be smarter la. This smacks of some guys playing with their Game Boy console. When the global equity scene is bleak, you don't try to counter the wave. If things were calmer, maybe you can lift the index and generate some plays in certain stocks to create a vibrant mood. When overall equation is not conducive, go and play also no one follow la.

Decoupling? What decoupling? Last I heard, the US is still Malaysia's biggest trading partner.

How dumb do you think investors are in Malaysia? Of course it does not hurt the guys planning all this as its the state funds which suffer. Just looking at the market for the past few days, with the exception of palm oil, there has not been genuine buying or follow through. But I did see the Maybank covered warrants going limit up, conveniently before Maybank shifted to fourth gear. This is insider buying if ever there was one. Please, SC and Bursa, please just go through all buyers who bought more than RM50,000 worth of Maybank covered warrants one or two days before the jump, and bring them to court. I know we have never done this before, but if you are always talking about maturing into a first class financial center: this needs to be done. Haul them up, and see if they or their relatives are part of any state funds or fund management companies, ask them why they bought. At least scare the shit out of them. Do we have the political will to do so, or will SC and the Bursa risk stepping on many rich and influential toes?

Who cares what I think.... or what the people think... and that's the real problem with our country.

Not-So-Top Glove
Business Times - The world's
biggest manufacturer
of rubber gloves,

Top Glove Corp Bhd,
has set aside RM100 million this year to buy a rival and
expand its
factories. Currently, TG produces 29 billion
pieces of gloves a year, which
is about 24 per cent share
of the global market. It aims to capture 35
per cent by
December 2010. The estimated annual demand by then is 160

billion gloves. Cheong Guan, who is also the finance
director, said that TG
expects to boost its net profit by
22 per cent to RM125 million for the
fiscal year to
August 31 2008. TG is also confident that a slowing US
economy will not affect
its business because rubber gloves
are a necessity.

1) A slowdown is a slowdown, how not to be affected. 30
per cent of TG sales comes from the US, rubber gloves.
2) Patent suit pending - Even though the company is
optimistic of winning.The reality may indicate otherwise.
On May 30 last year, the US-based Tillotson Corp filed a
complaint against all nitrile glove manufacturers,
distributors or importers worldwide, claiming to be the
patent holder for nitrile gloves until 2010.
Eight glovemakers, through the Malaysian Rubber Glove
Manufacturers Association (Margma), are contesting
Tillotson's claim. TG is part of the group. However,
Supermax Corp Bhd, which is not part of the group, has
agreed to settle and pay royalty to Tillotson.
3) TG has been able to offset USD weakness by raising
prices: not going forward in a slowdown.
4) Latex prices still pushing higher putting pressure
on margins.
5) Net cash per share only 33 sen and will go to 24
sen next year.
6) Capacity being boosted by 25% p.a. in 2008 and
2009, more stock going into a down cycle.
7) Reduction of tax rebates for China exports will
hurt expansion business model.
8) Its gearing is low as its acquisition spree has
been funded by new shares, however that creates a
huge free float of about 60% with many substantial
shareholders of previously acquired companies.
They won't be sitting around waiting for the grand
master plan to pan out.
9) Net cash flow is about only RM10m in 2008 and is
projected to jump to RM50m in 2009. Still a
projection with many variables.
10) Receivable is about 15%, watch for danger signs if
it gets closer to 20%.
11) Looking for rubber plantations hints at margin
pressures. Looking to do share buybacks
hints of even bigger problems.

Property, CDOs, SIVs

Citigroup plans to announce a “sizable” cut in its dividend, a cash infusion of at least US$10 billion and a write-down of as much as US$20 billion in mortgage-related investments as part of its fourth-quarter earnings report Tuesday morning, the Wall Street Journal reported Monday. There is also a strong chance that some 20,000 jobs will be cut.

The unwinding of the sub prime mess exaggerated the correction that was needed in property. Let's re-examine how we got here. Property, largely commercial had new legs beginning 2000.

The spectacular performance by REITs from 2000-2006 was largely due to the property boom in the US. The property boom was largely ignited by the "invention" of REITs itself. The availability of REIT allowed many commercial property owners to unlock cash from their long term hold type asset. The unlocking of cash also helped charge up the rise and rise of private equity and hedge funds (where most of these excess cash went to).

If you chart the absolute rate of returns year by year on REITs:
2000: 31%
2001: 12%
2002: 3.6%
2003: 36%
2004: 33%
2005: 14%
2006: 36%

What we didn't see was the invention of CDOs repackaged into Structured Investment Vehicles from 2004 onwards - that contributed to the jumps in private housing as these instruments caused mortgage brokers to lend recklessly to buyers who did not qualify, but there were substantial lenders via buyers of CDOs and SIVs.

Property had a decent run in the late 90s already but took steroids over the last 8 years. The sub prime mess and the beginning of the property correction in the US also contributed to the negative 17% returns for 2007. Safe to say that from the above that there may be quite some distance to go for the excesses to be unwound from the US property market still after such a prolonged run. Can expect 2008 to post negative returns as well. What we are seeing in all the investment bank write downs is not the end. After such a prolonged run, there will be more excesses that needs to be wrung out from the system.

The whole thing is being replayed, albeit less severe, in the UK. That's because CDOs and SIVs did not play a huge part, but their property run was more robust than in the US. There will be more companies failing and funds falling by the wayside.

Monday, January 14, 2008


Readers should reread my postings on "Macro Predictions 2008" and "Assessing Bursa's Run-Up". The rally looks temporary. Any sign of wobbling, one should get out. This looks like it. I have submitted a detail article for this weekend's column in BizWeekly, which is a bit more bearish on all equities. I cannot publish it on the blog before it makes the paper. Just a warning note.

p/s the photo is funny but its more than that, in playing stocks, we all get xxxxed one way or another, that's the reality, we just have to make sure we are not at the very end of the queue, we all need to try not to be the last in the food chain ...

Relative Returns By Asset Class

The above table clearly depicts the shifts in performance of different asset class. It is a very useful table to decipher the macro developments and how capital are being allocated to chase after various asset class.

The spectacular performance by REITs from 2000-2006 was largely due to the property boom in the US. The property boom was largely ignited by the "invention" of REITs itself. The availability of REIT allowed many commercial property owners to unlock cash from their long term hold type asset. The unlocking of cash also helped charge up the rise and rise of private equity and hedge funds (where most of these excess cash went to). If you chart the absolute rate of returns year by year (2000: 31% 2001: 12% 2002: 3.6% 2003: 36% 2004: 33% 2005: 14% 2006: 36%). The sub prime mess and the beginning of the property correction in the US also contributed to the negative 17% returns for 2007. Safe to say that from the above that there may be quite some distance to go for the excesses to be unwound from the US property market still after such a prolonged run. Can expect 2008 to post negative returns as well.

Commodities had a wonderful run with the exception in 2001. The continued weakening of the USD coupled with the new middle class emerging in BRIC countries will ensure a more sustained run for commodities. The bull cycle does not appear to be over by any means.

Emerging markets (including Malaysia) were still reeling from the liquidity contraction and correction from the excesses of the 90s from 2000 to 2002 (2000: -32% 2001: -4.7% 2002: -8%). However, the last 4 years were boom time Charlie days for emerging markets (2003: 51% 2004: 22% 2005: 30% 2006: 29% 2007: 36%). Naturally if a single emerging market were to post those kind of returns, we are looking at a ridiculous compounded growth rate. Though the returns were explosive for emerging markets, there were a lot more rotational plays among those emerging markets. Malaysia only got into the groove in 2005-2007 and was largely ignored by most in 2003-2004. Colombia, China and India were the stars for the last 4 years.

Now going forward we may see that drifting to Vietnam and some of the smaller African markets. What is important to note is that despite the massive rotational plays, most emerging markets still managed to keep most of their gains even when they were not among the top performers year in year out.

Foreign (non-US) developed markets stocks also shared a similar pattern with emerging markets, in that they posted negative returns from 2000-2002 (2000: -14% 2001: -21% 2003: -16%). They posted above average returns from 2003-2007 as they basically obtained great impetus from the enlarged outsourcing into BRIC countries, which helped established companies to save enormous costs: at the same time the rise of BRIC inhabitants as a new consumption middle class provided plenty of opportunities for all concerned. A wonderful win-win situation, a real positive from the globalisation movement. Hence the high correlation between the developed markets and emerging markets. Save to say that that trend is likely to continue into 2008. Owing to higher volatility, the emerging markets as an asset class will usually outperform the developed markets during bullish phases.

US stocks have largely underperformed the foreign developed markets from 2003-2007 (Foreign/US 2003: 38%/31% 2004: 20%/12% 2005: 13%/6% 2006: 26%/15% 2007: 11%/5%). This can be explained by the complete shift in investing paradigm and global economics. One can say that while the US may still be retaining global business leadership, it has had to share out a lot more "equity/economic power" to other developed markets and emerging markets over the last 5 years.
The various bonds asset class' performance over the last 5 years was largely due to the shifts in global currencies realignment. Non-US bonds outperformed US bonds significantly.

Can we use the relative returns table to predict 2008 and beyond? Maybe 2008 with some confidence but beyond that would depend on too many uncertainties to make any calls with assurance. Emerging markets posted strong returns of 29% and 36% for 2006 and 2007 respectively. While the economic structure has changed sufficiently to provide a stronger framework for emerging markets going forward, it is unlikely to reach the same kind of returns in 2008.
It will be a lot tougher for emerging markets as a whole to end the year on a positive note (please refer to the inflation factor, the US weakness and commodities price outlook below for reasons why).

REITs is an easy call. Probably negative return for 2008 as an asset class. Of course foreign REITs may experience better returns owing to better fundamentals. However as an asset class, the sheer size of US REITs would skew the curve.

US stocks will continue to under perform foreign developed markets in 2008 as its returns is now weighted as a significant percentage of foreign markets vibrancy. Owing to the uncertain domestic economy, the US stock markets is likely to stand in the shadows of foreign developed markets in 2008 and even 2009.

The best performing asset class for 2008 is likely to be commodities, looking at the demand and supply factors. The supply side of things cannot be increased solely by ramping up production that easily. The time lag is still in favour of sellers. Take the oil example.
World consumption will rise to 87.8m barrels a day this year, 2.1m more than last year, or about the amount that Nigeria supplies. Demand from China alone will rise 5.7% to 8 million barrels a day as imports expand to support an economy that is likely to grow 10.5% in 2008.

Oil suppliers are straining to increase production. Brazil's Tupi field, the second-largest find of the past 20 years, is more than eight kilometres below the ocean surface and will take at least five years to develop. Mexico's state oil monopoly, Petroleos Mexicanos, suffered a three-year, 40% decline at its Cantarell field, the world's third-largest. Since December 2005, fighting in Nigeria has reduced production 11% to 2.18m barrels a day.

Its the same for agriculture products. According to Bloomberg, agriculture products were among the best performing commodities for the past 13 months where palm oil has gained 56%, soybean 75% and soybean oil 62%.

A fairy tale - Once upon a time, the world was just an island where there were 1m inhabitants with resources to feed and supply 1m people. Suddenly, 300,000 new inhabitants came to the island from nowhere who are willing to work for a lot less and produce at a higher rate. The 1m inhabitants enjoyed cost savings and a better life style. But now, there is this additional 300,000 consumers. Suppliers ramped up production for everything to meet the new demand. Prices rose to rebalance the equation. The council of advisors decided to print more money into the system bringing about simmering inflationary pressures.

The present economic reality is akin to the fairy tale. The commodities upcycle this time may not be all hot air or even just cyclical in nature. Demographics have changed, consumption patterns have changed thanks to globalisation. We are just not sure if this has a fairy tale ending a few years down the yellow brick road.

Inflation - The one big danger which could rein in equity returns win 2008 will be inflation. Food prices are 18% higher in China from a year ago, and Beijing fears that runaway inflation could ignite social unrest. The price of pork, which forms the core of most Chinese diets, was up a staggering 56%. China has become a victim of its own phenomenal success. China’s economy expanded at a blistering 11.5% last year, but was plagued with a 7% inflation rate, largely linked to the country’s voracious appetite for global commodities. Even with a more subdued growth rate in 2008 of around 10%, the inflationary pressures will take a lot longer to work off.

In the U.S, producer prices were 7.7% higher in November from a year ago, the highest in 34-years. Consumer prices rose at an annual rate of 4.2% through the first 11-months of 2007, the most in 17-years, thanks to soaring food and energy prices. The same scene can be replayed in almost all countries, especially in emerging markets. Having said that, that factor will actually fuel the commodities upcycle.

US Factor - The sub prime fallout has started a more widespread correction in real estate, and may crimp consumption in the US. In the UK, a similar pattern, albeit less severe, is evolving. The danger is clear as many emerging markets still rely on the US to export to. A pullback will keep most emerging markets' run up in check in 2008.

The Pendulum - The pendulum has swung, now emerging markets will have to contend with strong local currency, enlarged capacities, inflationary pressures, higher prices, plus a weakening US economy. The US economy have settled for low growth, some inflation, weak USD (to make their assets more attractive): thus shielding themselves somewhat from excessive money supply growth repercussions, now unwinding in our face. Its going to be a difficult 2008.

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