Monday, March 31, 2008
Hajime - A Really Nice Discovery
Is there such a thing as the best Japanese restaurant in KL? You can debate till the cows come home because the essence of good Japanese food is largely determined by the selection of fresh seafood and cuts. Only then can the chef add some zing to its preparation.
Too much fusion detracts from the inherent cleanliness of taste so desired for truly good Japanese food. Fusion is seen in a more negative light here, although Japanese are quite ok with it.
Zipangu is a bit too fusiony for my liking. The Starhill place is more palatable but looks orchestrated. If it was just the sushi bar alone, sit at Sagano inside Renaissance Hotel and talk to the sushi chef. He always have a few incredible items hidden away from the menu (the very fresh & huge deep sea NZ prawns are to die for - pour some hot sake on the head before sucking the whole head dry - heavenly).
Well, I can safely say that I have discovered a Japanese restaurant that is unpretentious, elegant, with just the right amount of fusion (meaning very little) and even their fusion is to bring out the complementary freshness in ingredients. However I would still prefer to stick to the traditional stuff. Just ask for Sally or Edwin, and let them design the menu for you - they always bring out the best available. Tuesdays and Fridays are the best days to go (fresh supplies flown in). Must try, their soft shell crab maki. Their sashimi cuts are always decent and professional. The presentation immaculate. When very good food is being handled by excellent service staff, its a huge plus. It won't break your bank but expect to pay RM100-150 pp.
The design is fetching in turning the bungalow into a sophisticated dining experience. Using a lot of wood to get at simplicity, naturalness and cozyness. Lower ground has excellent ambience with well thought out lighting and decor. Its private and parking is a cinch. For bigger groups or corporate functions, there are 4 very luxurious tatami rooms (up to 20 per room) and a garden area for smokers.
If there is such a thing as the best Japanese restaurant in KL, Hajime will come very close to that.
64 Jalan Damai off Jalan Tun Razak, KL
p/s photo: Fiona Xie, tv host from Singapore
Fed's Actions Inflationary?
I think the Fed has been the suitable punching bag to blame all financial and economic ills on. Much like the role of Tung Chee Hwa for HK during Asian financial implosion. Bernanke will get it left right and center no matter what he does as there will always be somebody who doesn't like what he does to bring up their own points. Hear the experts on CNBC or Bloomberg and you will find all kinds getting in their two minutes of fame.
I will try in this posting to be as fair as possible to Bernanke. Regard me for the next few minutes as Bernanke's best friend. The sub prime and credit implosion, well he wasn't there long enough to create the mess. Much of the mess should be attributed to two main sources: one, Greenspan keeping interest rates too low for far too long in 2001-2003; two, the fucked up ratings agencies, well there are the 3 main ones really - they really have a license to print money, they get to rate all kinds of debts and investors base their decisions largely on their ratings. Much of the sub prime mess now can be traced to papers rated as AAA by these agencies. By virtue of their rating, the banks are then happy to leverage up to package them as prime low risk instrumets. If they are AAA and low risk, well it should be ok to leverage on them. Of course banks have to do their own due diligence, risk assessment and research, but aren't these rating agencies paid to do a certain task. If they get paid to do the rating, why shouldn't people who pay them be able to rely on them. Why are the investors or banks then have to do their own research on these papers again? Why then aren't any of them being sued to the hilt by the banks???
Fed's been pumping too much money into the system, to the tune of US$400bn so far and also standing for US$30bn for the Bear Stearns-JPMorgan deal. Well, Fed has to do it as the situation was looking to be turning into a banking confidence crisis, and you cannot have the entire credit market totally shut down - the ramifications which will be very hard to undo later. As for pumping liquidity - the Fed has also been simultaneously selling a lot of Treasury securities while pumping in the US$400bn, this shows that the Fed is also trying very hard to neutralise the extra liquidity in the system.
Bernanke also knows that with a credit bubble imploding, that is likely to be highly deflationary. Property prices have been correcting rapidly, another deflationary factor. Hence the pumping in of liquidity by Ben is thought out to some extent.
The one factor which will be affected by Ben's recent moves is the dollar outlook. The dollar will continue to weaken as the liquidity being pumped in is to sustain questionable debt. The US deficit while being lowered in recent times, still has a long way to go. Though Ben and Paulson might not say so, they both want a weaker dollar, if that's what it takes to reduce the trade deficit, maintain confidence in the financial system and ride out the credit crisis. I think the fact that Ben did not come up with the Super Fund which was to buy all these questionable debt from the baks (though they were heavily favoured by the affected banks) indicate that both he and Paulson wants the correction to play itself out and the bad decisions made by banks be punished on its own accord by market forces. Having said that, they also do not want to see confidence being eroded substantially, which prompted the heavy handed rate cuts and the US$400bn injection.
In actual fact, Ben and Paulson are smartly exporting away their problems to other countries whose currencies have strengthened - but in reality shouldn't have. Its ok for the ringgit, OZ dollar, Canadian dollar and the yuan to strengthen against the dollar. But the ones like the Euro and yen and pound are headed for future grave problems - they don't have the trade surplus nor can they compete effectively with such artificially strong currency vis-a-vis their lifestyle, consumption patterns and labour pricing effectiveness. Those "not deserving" of the current currency gains against the dollar will suffer over the next 12-18 months.
Be a friend, give Bernanke a hug.
p/s I know many will not even know the girl in the photo... she is a model, Joyce Sialni from Klang
Sunday, March 30, 2008
I would like to take some credit for highlighting Curlin even before he won the Preakness. In actual fact Curlin should have easily won the Triple Crown if not for some bad luck. Still, the horse gained momentum after that and less than a year later was named USA's Horse of The year - if only my stock tips were that good (yes, I know, Evergreen mah...).
Curlin is ready to defend his U.S. Horse of the Year title against the rest of the world in the Dubai World Cup today.
"He's an exceptional horse," Curlin's assistant trainer Scott Blasi said on Friday, the day before Curlin takes on 12 challengers in the US$6 million (€3.8 million) race at Nad Al Sheba racetrack. "It's a big opportunity for us to show the world what a great horse he really is."
Curlin enters the world's richest race having won his last three races — the Jockey Club Gold Cup, the Breeders' Cup Classic and the Jaguar Trophy Stakes at Nad al SHeba. Among those lining up against Curlin in the highlight of the seven-race, US$21.2 million (€13.4 million) event will be local favorite Jalil, owned by Dubai Sheik Mohammed. The 4-year-old colt purchased for US$9.7 million (€6.1 million) has won three in a row, including the Maktoum Challenge on March 6. Frankie Dettori will be aboard. Curlin leaves from the No. 12 post — which has yet to produce a World Cup winner — while U.S. rival A.P. Arrow will break from the No. 13 gate under Ramon Dominguez. The 6-year-old horse won the Clark Handicap at Churchill Downs and ran second in the Donn Handicap, a race that has produced several World Cup winners. Curlin has won seven of 10 races and earned US$5.2 million (€3.3 million).
With a victory, Curlin would join Cigar and Pleasantly Perfect as the only horses to win the BC Classic and World Cup the next year. The field also includes Sway Yed, Well Armed, Happy Boy, Kocab, Great Hunter, Premium Tap, Vermilion, Asiatic Boy, Lucky Find and Gloria de Campeao. While six horses were bred in the United States, the field also includes two from South Africa (Sway Yed and Lucky Find), two from Brazil (Happy Boy and Gloria de Campeao), one from England (Kocab), one from Japan (Vermilion) and one from Argentina (Asiatic Boy). PremiumTap was runner-up to Invasor in last year's World Cup. The 6-year-old horse is owned by Saudi King Abdullah bin Abdulaziz. Asiatic Boy won last year's UAE Derby and is owned by Dubai's Sheik Khalifa . The plan for Vermillion, winner of four Group I races in Japan and fourth in the 2007 World Cup, is to stalk Curlin and see what happens.
Result Of The Richest Race: Curlin jumped well but had to sit 3-wide all the way, kicked away with 350m to go winning by an ever lengthening margin of about 6 lengths in the end. Jockey Albarado stopped using the whip in the last 100m. That's as easy as you can get running against the world' top horses.
To watch the race, click on link below and look for Race 3 (Overseas).
Saturday, March 29, 2008
Famous Lines & Lies
Language is a funny thing. It can be revealing when people don't intend for it to be. Let's look at some opening lines, they betray the speaker almost immediately.
"Trust me ... " - You can bet that whatever the person will say following those two words cannot be trusted.
"I am not a racist but... " - You can be certain that what the speaker say next will be racist.
"I have nothing against gays... " - Similar to the above, and what they say will show they are homophobic.
"I hear what you are saying ... " - The speaker is not hearing what you have said but is dying to say something else.
Sometimes its the intonation and nuances which give them away. For example, a stock tip whispered in hushed tones to you is more likely to be useless.
"No offence .... " - You can bet your bottom dollar that what the speaker says next will offend.
"Correct me if I am wrong..." - Usually means the speaker is damn sure they are right and you are wrong.
"Let's talk ..." - Usually means the start of a not-too-happy conversation, and usually turns into a lecture.
"Hypothetically speaking... " - Usually means the speaker is going to paint a scenario which will make you look bad or put you on a spot of bother.
p/s photo: Kavita Kaur
Wednesday, March 26, 2008
That singles day itself sent many analysts to pull back their BUY and Overweight ratings on plantations to Neutral or Reduce within the next couple of days. It was important for them to do so because plantations had remained one of the last bastion of buys left. Were these houses too early? Short answer: YES. Long answer: Hell YES.
It was very clear that the fall in commodity prices was due to funds and investors seeking to cover losses in other markets. We must remember that although the Dow has regained substantial ground after the BS sale to JPMorgan, prior to the deal, the US markets nearly collapsed on a confidence crisis among the banks. Hence the Fed's US$200bn and backing the BS deal were critical albeit theoretically flawed. With that scenario, many funds and big time investors, hedge funds etc... sought to cash out of positive investments in anticipation of a "collapse and probable big redemptions from affected funds".
Tuesday, March 25, 2008
Multiplier Effect & Fed's Agony
Comments: So, to you, stock market is not that important. Well, it is the biggest reflector of global wealth. The stock market is not a fixed thing. It is valued largely in multiple of forward earnings, i.e. growth and margins outlook. Naturally, a 12x global valuation would be a lot less "wealth" than 15x - and that in itself is a lot of trillions. Even if you assume each person's wealth has 1/3 tied up in stocks, this valuation drop will affect their spending, plus the trickle down effect and the velocity of money impact. Each dollar you spend is thought to be worth about $6-$8 to the economy, i.e. you spend $100, that will have a multiplier effect as people and companies use the funds for other trade, service, investments or consumption. So, the stock markets are very important.
It is not as important in some countries than others. For example in most developed European nations, only 50% or less of their GDP is listed. There is still large components of wealth and assets being held privately. Malaysia, surprisingly, has one of the highest of our GDP being listed, more than 80%. That's why you'd find that a company that makes RM1m-2m in net profit will find bankers swarming them asking them to list. Only things left unlisted are your laundromats, mamak stalls (though many do make more than a million ringgit a year...easy), hairdressers, etc... you get the drift. Hence for countries like Malaysia and HK, the stockmarket has a very high beta multiplier effect (up and down) on the real economy. While most of developed Europe would not blink an eye even in the event of a major correction.
On the issue of currency, yes Fed's moves will literally weaken the dollar. The Fed knows that, and its a deliberate strategy even though they may not voice it out too often - its unpatriotic and depressing news to tell your fellow citizens that they will have to have a weaker currency to maintain competitiveness and load up more debts. Weak USD is the right recipe for the US. The country has been living off future receipts for far too long. The imbalances are just righting itself. You cannot just keep consuming and consuming with no dire effects. The rise of sovereign wealth funds is a reflection of too much trade surpluses for certain nations - the US deficits has to go somewhere.
You may criticise the Fed's move as being too nice to stock prices. The Fed's move may have stave off a confidence crisis in banks but at the same time it has injected fresh funds into dicey debts and assets - thus forestalling the proper implosion of the credit crunch. Things may stabilise for now but the pockets of "dicey debts" will resurface later on. It is difficult at times for the Fed to ensure the US economy weakens properly in an orderly manner, and at the same time not whipsaw on the downside that paralyses the economy (and the global economy) for an extended period. While theoretically, it is better to let the credit crisis work itself out, taking a few weak companies out of their misery - it is very hard to also realise that you don't want all funding and credit to stop functioning in a confidence crisis among banks (which was where US markets was headed over the last 2-3 weeks). Damn if you do, damn if you don't.
p/s photo: Michelle Ye
Sunday, March 23, 2008
Absence Of World-Class Companies
The Economist, known for great analysis, is spot on – again. This time, it has bashed SEA companies for failure to come up with great brands or companies with sustainable long-term business plans.
The article said:
“It is easy to forget, now that China and India are all the rage, that until ten years ago South-East Asia was the world's fastest-developing region, winning the sort of investor attention and breathless column inches that the two new giants now enjoy.
The region has, slowly, recovered from the blight of 1997-98. It has recently had several years of strong growth and its government' finances have been greatly improved.
Even so, after all this time, the region's five main economies – Indonesia, Malaysia, the Philippines, Singapore and Thailand – are still notable for the near-absence of companies that could truly be called world-class.
The region has 570million people and had a head start in economic development over much of the rest of Asia.
So why does it still have no global consumer brands of the stature of South Korea's Samsung and LG? Where are its rising technology leaders, like Taiwan's AU Optronics and Taiwan Semiconductor? Where are its equivalents of India's world-conquering Tata Steel, Ranbaxy and Wipro? Or China's market-devouring Huawei and Lenovo? Ask an investor in London or New York to name globally respected South-East Asian firms and the answer is unlikely to consist of much more than Singapore Airlines.”
If there is one caveat, its that the domestic demand / population is SEA countries are too small and not a cohesive market. Over 500 million people are a lot but it's not the European Union. Plus, a bulk of the population is in Indonesia, scattered among the hundreds of islands.
It may appear to be only too easy for Michael Porter (the author of that report) to sit on his desk trumpeting disdaining commentary on SEA companies.
A good company operating in the US, China, India or Brazil may find it easier to achieve economies of scale in terms of demand, thus making it easier to reinvest into marginal improvements and research and development. But scale also makes it a lot easier to penetrate other markets successfully.Unfortunately, that is a luxury SEA does not have. Even so, it is not enough to excuse the management of companies from planning and strategising more effectively.
The article continues:
“The region's business scene remains dominated by old-fashioned, mediocre, sprawling conglomerates, run at the whims of ageing patriarchal owners. These firms' core competence, such as it is, is exploiting their cosy connections with governing elites.
“Their profits come from rent-seeking: being handed generous state contracts and concessions, or using their sway with officialdom to keep potential competitors out. If they need technology, they buy it from abroad. As a result, the region has “no indigenous, large-scale companies producing world-class products and services.”
There is truth to that. We have to disband the state contracts and concessions seeking companies – but even a first year college student can tell you that.
SEA, as a whole, sides with the narrow elites in major projects, and we know how good that can get. But there are notable exceptions, although too far and few between - IOI Corp, Public Bank, AirAsia, YTL, SIA, Keppel Corp, Sembawang Corp, DBS, Creative...
Is it an issue related to education?
Well, a good many SE Asians do enter good foreign universities and perform exceptionally well in general, and many are helming important positions in numerous world-class companies. They are simply not lured to return home to work.
This dilettantism was once summed up damningly by Michael Porter, of Harvard Business School: “These companies don't have strategies, they do deals.”
How do we get world-class companies?
This is not rocket-science. Boards need to sift through a check list of attributes that make a world-class company and pretty soon, they will have the answer on whether or not they are on the right track. The check list can read something like this:
a) Does your company have a strong product strategy, a good understanding of its strengths and weaknesses, the ability to leverage on strengths and work off the weaknesses?
b) Is there sufficient transparency in managing costs? Always seeking to improve margins and efficiencies?
c) Does the company have a strong understanding and appreciation of the competition? Knows where the sector is heading and where they are in the business growth curve?
d) Is the company innovative in seeking new ideas, adding value upstream and downstream, positioning itself well for the future?
e) Does the company have a good strategy on growth, is it going to be largely organic or should it be via acquisitions?
f) Does the company have a coherent product – sales-clients delivery platform that is always striving to improve?
g) Is there a strong appreciation of branding issues? How to develop the brand and know what the company stands for?
h) Is there strong leadership, the ability to communicate well and motivate well, plus getting everybody on the same page and platform? Is there a strong professionalism culture? Is there gravitation to always adopt global best practices?
i) Is the organisation structured to work well and encourage feedback to the top. Is the company entrepreneurial driven, or are divisions working against one another?
j) Does the company know where it wants to be in 5 or 10 years time?
k) Is it able to attract and retain critical staff? Are there proper standards and integrity in recruitment and appointments of staff?
These are just some of the issues. The board would easily be able tell if they have the right people to move forward. If the board knows that and is unable to effect the changes – then we have an ineffective rubber-stamping board: at least you know where the problem lies. Khazanah's implementation of KPIs is a good move, but it is just a management tool.
You need companies that are “going somewhere”, creating value and knowing what the critical success factors are – only then can they grow beyond local shores and extend their reach.
We also have far too many family-run enterprises. They have to learn to let go and let professionals take over. Nepotism is rife in Asia, and only a very small percentage of family-run companies do very well.
Their mentality also restricts how a good company can grow further. Professional managers know better. Do we have the political will to employ them? Or are the entrenched interests too strong to dismantle?
We should assess our strengths in the various sectors and start from there.
Saturday, March 22, 2008
Market Timing – Fool’s Gold
There are those who believe you cannot possibly time the market in terms of entry and exit. Fair enough.
The random walk theory lies in the fact that you cannot beat the market over the long term. But we also have the proliferation of hedge funds where managers get a lucrative 20% of profits kicker annually on gains. If the random walk theory is correct, then the “hedgies” would be a terrible business to be in.
The out performance relative to the benchmark is called the alpha. Hence the name of the popular website Seeking Alpha.
Out performance can be gained via market timing strategy and/or superior stock selection strategy, to simplify matters.
For this article, I am only looking at market timing.
If we could really predict the market's moves, market timing would be great. The problem is that there is evidence to show that market timers do not do well.
An annual study by DALBAR, a research firm, showed that the average investor in equity funds has averaged only 4.3% per year in returns over the most recent 20-year period in which the S&P500 averaged 11.8% per year – and DALBAR finds that most of this under-performance of the basic market index is due to attempts to time the market.
There are a host of other studies that show that market timing leads to returns that substantially lag the market.
Even if there were a few funds out of the thousands that have proven to market time successfully and outperform consistently over a 5 or ten-year period, would it be smart to give them your money?
Essentially, you have to bet on these funds' ability to maintain their track record or on the long-term evidence pointing to the low success rate of market timing.
There is a large body of research, which concludes that actively-managed funds that beat the market in some period are not likely to continue to out-perform over any extended period.
In 1975, William Sharpe published a seminal article on this topic: “Likely Gains from Market Timing”. In this article Sharpe demonstrated statistically that in order to benefit from a market timing strategy you had to guess right 74% of the time. Hence it is possible, but very arduous indeed.
Alpha is a definition only; it may or may not exist. For people to get alpha, they need to be better at market timing and price timing.
Warren Buffett obviously does not believe in market timing or price timing. He sees them as businesses, and for the right price he will buy the business regardless of sentiment.
He may even suffer short-term weakness or short-term losses holding these businesses, but he does not market time or price time his purchases. To him, if the price is cheap relative to future value, then it's good enough.
If market timing and price timing works for only 5% (1 person in 20 is about right) of participants (or even just 1%), all studies would reveal that market timing and price timing does not work as the results are not substantiated – hence the random walk theory.
Suffice to say that even if the 5% or 1% do make it work (which is what I strongly believe), it's just that much harder.
When things are that much harder, many will opt for easier routes such as buy at good price and hold, or buy the business and forget the volatility.
I am not saying I can do this well. I am not saying anyone can do this well. I am suggesting that one can do market timing and price timing well provided they get two things right – the big picture and the catalysts.
People like Buffett and Lynch are big picture guys, but you still need to get the catalysts right for market timing to work properly. For example, Buffett has been short on USD since 2000 but he only made money over the last two years and lost some in the first 3 years. As for Soros, he is trying to be both. When he shorted the British pound and made billions, he got both right.
But even Soros cannot get both right all the time.
Getting the big picture right is the easy part. Determining the catalyst(s) for a dramatic change or trend swing is a lot harder.
Truth is, there is no known classes on catalysts like what is significant, what is not, the cumulative effect of several catalysts, catalysts for differing economic environment, how sentiment relates to catalysts and so forth.
If you see a bubble forming in an asset, say property, you can fairly judge the probable steps ahead for the market in coming to terms with the bubble: you project that prices will rise, there will be over-exuberance, followed by resistance to bearish calls, rising rates to counter inflation, prices stubbornly refusing to come down, start of some foreclosures, some concerns among banks, some leveraged property companies failing, rising foreclosures, a crisis being discussed by the media, and so on...
These are the natural chain of events, which make up catalysts in bringing to fruition changes to trends.
I do think that if someone learns to follow cycles and chain of events closely, they will be able to better time the market.
Someone who calls the Shanghai index overvalued at 4,500 on the way up would be a good read but a poor strategist. The index hit 6,500 before moving down to 4,000 six months later.
The pro is correct but if he made any money, he probably lost on the upside and if he kept short all the way from 4,500, he would have lost even more on a net basis.
One should have stayed invested as bull runs tend to overshoot, but stay alert to trade out on warning signs.
The listing of Petrochina on Shanghai was a “high” – how to recognise that as a critical catalyst? Experience, predicting capital flows and most importantly, predicting or anticipating the behaviour of investors.
Let me give you some recent examples:
·Subprime mess – Big picture calls were loud by mid-2007 but markets were still resilient. There were plenty of catalysts, but deciphering which one will break the camel's back is the hard part.
Sometimes, few cumulative catalysts are needed before the water overflows. I regard the second plunge of Countrywide to be a major catalyst, which prompted Bank of America to average down dramatically.
The other major catalyst was the Citigroup's write down, not of the CDOs holdings but because of the significant provisions made for future “problems with consumer debt”.
Thanks to CNBC and Bloomberg news, there is an overload of information. To be able to stand back and pick the real catalysts is nirvana, for want of a better word.
The key is getting the big picture right first. Then assess the catalysts accurately, but it can be an arduous task. If we still cannot market time or price time, then at least we know why we are not good at it.
To do well in market timing is like climbing the Everest. There are those who will make it to the top (very few, that is). Most will die trying halfway. Some will give up after a few inclines. Others will opt for hills instead.
Friday, March 21, 2008
Different Falls For Different Markets
The above chart shows the year to date returns for the selected markets. The US markets, though hogging the negative headlines, did not perform that badly. That's largely because the correction was a bank-centric, its a banking problem rather than a widespread consumer issue (for now). We may even be able to explain China's sharp correction owing to inflated valuations and tough anti-inflationary measures being instituted. However, the hidden lever has been the USD weakness. If the dollar had not been losing ground so much this year, the US stock prices would have been down a lot more. By weakening the dollar, it an immediate way to acknowledge that yes US economic fundamentals are pretty stuffed. Its like giving yourself a red card for wild infractions of the past.
The resource rich nations did not really fall by that much. Look at Brazil, Australia, South Africa and Canada. This lends some weight to the decoupling theory. Markets are obviously less correlated to the US than before.
The strange market was the HK market which fell the most, almost doubling US losses. It was supposed to be biggest beneficiary from the weak USD and Fed's rate cuts. The HK peg would make HK more competitive, and the rate cuts would result in an attraction of hot money into the economy. What went wrong? It looked like HK markets are now more closely correlated to China. If thats the case, then this is a big misread by investors. Is HK market dominated by mainland investors? Obviously no. In fact, the zero interest rates for depositors in HK would really force HKMA to consider revaluing the HKD, thus lending weight to have more HKD assets - property and stocks.
The strongest reason I can think of for HK to mirror China's stock movements is the perception that growth for HK companies are tied very closely now to China's fortunes. There is a lot of weight to that perception. Although many HK companies are in the export markets, many are still not international enough in its revenue stream. As a matter of fact, HK regained momentum in its economic prowess over the last 6 years largely due to being a service hub for China companies, and the fact that a lot of HK companies have invested early into China projects.
This will make HK finances a lot harder to manage. You now have the stock markets following China's, but your monetary policy follows the US. China's stock prices may be tanking but the economy is still buzzing. While US economy is grappling with a credit implosion and a slowing economy, HK's economy is still buzzing and grappling with inflationary pressures as well. What kind of central bank would be able to address the growth, inflation, prices and employment issue adequately for HK when it's monetary policy follows that of another country??!!
It was okay when HK economy exported primarily to the US, and most international goods and services were priced in USD. HKMA cannot afford to defend the peg anymore. The performance of HK stock prices for the first 3 months this year clearly shows that the "end is near" for the peg. To profit, one would be wise to hold as many HKD denominated assets in 2008.
Thursday, March 20, 2008
Zero Interest Rates
The Standard & Bloomberg: Hong Kong bank customers will be earning virtually no money on their deposits as lenders slashed their rates in wake of the US Federal Reserve's move to cut its key interest rate, bringing their saving rates practically to zero percent.
Two of the city's major lenders, Hongkong and Shanghai Banking Corp, and Hang Seng Bank, will offer an interest rate of 0.01% for deposits of more than HK$5,000. This means that, starting from today, their customers will receive HK$1 interest a year on a deposit of HK$10,000 or HK$100 on HK$1 million.
And, at HSBC, depositors whose monthly balances are less than HK$5,000 will not only receive no interest at all, they will be charged a monthly fee of HK$50 to boot. Senior citizens over 65 or recipients of the Comprehensive Social Security Assistance Scheme will be exempted from the charge. Standard Chartered Bank (Hong Kong) and others offer slightly better deposit rates. Standard Chartered will pay 0.05 percent interest for deposits under HK$500,000.
Although depositors will feel squeezed by the lower savings rates, homeowners will rejoice, as banks have lowered their prime lending rates by half a percentage point. Some 25 percent of Hong Kong's households have mortgages.
Hang Seng, HSBC and Bank of China (Hong Kong) lowered their best lending rate by to 5.25 percent from 5.75 percent, while Standard Chartered, DBS Bank (Hong Kong), and others cut their prime rates by 50 basis points to between 5.5 percent and 5.75 percent.
The market is expecting the Fed to lower the benchmark interest rate by another 50 basis points at its next meeting on April 29-30.With benchmark lending rates to the lowest in three years, this is adding to inflationary pressures that are straining the city's 24-year-old fixed exchange rate.
``With the latest Fed rate cut, the timing is now ripe for a Hong Kong dollar de-peg,''
With the depreciating dollar, Hong Kong's currency has declined 8.2 percent in the past year against the yuan, driving the cost of imported goods higher. One yuan now buys 1.1 Hong Kong dollars. The peg survived the 1998 Asian financial crisis and the 2003 outbreak of severe acute respiratory syndrome.CPI rose 3.2 percent in January from a year earlier. Eliminating the effect of a property-rate waiver, inflation accelerated to 4.3 percent, the fastest since May 1998.
HK dollar - float or repeg?
(as published in The Star 8 March 2008) Naturally when your currency is pegged exclusively to the USD, there will be good and bad problems. I had examined in Part I (in my column last week) and concluded that the Hong Kong dollar would have been better off if the government had floated the currency or re-pegged it from HK$7.8 to HK$10 to the dollar back in 2000.
To peg to the USD might have been a sound idea back in the 70s or even the 80s as the USD had a special position in global trade and was the “reserve currency”. However, the economic paradigm has shifted substantially over the last 5 years and while US still retains economic leadership, their economic dominan ce has diminished substantially.
While it can still be said to have the “reserve currency” status, even that appears to have diminished somewhat. The euros, the pound and even the yen have emerged as viable alternatives in global trade.
No longer tied to US
While HK's trade had been significantly with the US in the past, that is clearly not the case over the last few years. HK's economic fortunes are more closely tied to China now. In fact, if it wasn't due to the rise and rise of China as an economic force in recent years, HK would have not recovered so fast and so spectacularly over the last 5 years. Hong Kong has sustained a protracted period of stagnation and deflation following the Asian Financial Crisis in 1997; it did so to preserve the HK dollar peg.
Now they are faced with a good set of problems, which still need to be addressed. If the weakness of the USD is only temporary, then there is strong case to maintain the peg. But what if it's not? It looks increasingly likely that the global economy paradigm has shifted, and HK's peg has to shift with the changes or else face the dire consequences.
Hong Kong Monetary Authority has matched Federal Reserve cuts over the last 2 years – required of currency board – despite rising inflation, thus giving rise to possible asset bubbles in Hong Kong. How long can HKMA play along with this charade? HK now basically has to accept inflation as the cost of maintaining peg.
As explained in the first part, it is certainly too early for HKD to be pegged to Chinese Yuan. China's financial and monetary systems have to be more mature and credible before that can happen – a convertibility issue. Even so, HK should see more trade and services being priced in CNY, which might crowd out the dollar's significance.
Are there no credible alternatives? Free floating is one. A safer option would be to peg to a basket of currencies: e.g. ¼ yuan, ¼ USD, ¼ Euro and ¼ yen. Certainly that would be an easier way to manage the capital flows and trade competitiveness given HK's reputation as a financial centre.
The current situation actually yields more economic benefits for HK's economy in terms of competitiveness. The downside being asset bubbles will form in stocks and property. Another factor to keep in mind is that the longer the HKMA holds onto the peg, given the persistent weakness of USD, the better for stocks and property in HK which will witness upside momentum. On that note, the signs are evident already of the beginnings of future asset bubbles in HK.
As things stand now, with rising income in China, and a strong yuan – there is a rising trend of China mainland buyers of HK property. The perception of HKD being undervalued will increasingly attract more hot money as well. We can expect these strong inflows to exert a lot more pressure on the HKMA to act in the future.
Greenback – then & now
If you carry out a survey of HK citizens and international investors, it would appear that most of the non-Chinese prefer the idea of the HKD peg being dismantled, while most HK citizens beg to differ.
There needs to be a better appreciation of the global economic changes and trends, and the fact that USD now is not the USD of old.
What we will see is the HK economy accepting the yuan as part of the dual currency system. Soon, we will be able to use both currencies for all goods and services in HK. That's because the yuan will not reach full reserve status for sometime yet (not for at least another 5 years and even that is optimistic).
For the Chinese yuan to fully displace the HKD, the yuan will need to be seen as the superior money in all three aspects: store of value, medium of exchange and unit of account.
That is not going to happen anytime soon, but the dominance of trade flow and investments with China will cause the yuan's usage to be widespread in HK in the not too distant future.
Another 100-150 basis point cut by the Federal Reserve over the next 12 months, which is likely, will exert enormous pressure on the HKD.
The near term path of USD is dragging the HK's economy down with it, littering HK with a whole load of monetary, economic and financial problems.
Initially though, the results will be higher stock prices and property prices, which will be seen in a positive light by most HK people. That's the devil in disguise.
However, even if Joseph Yam and Donald Tsang were open to revaluing the HKD, the move is unlikely to move ahead without the political approval from Beijing.
In my opinion, Beijing may be more open to a revaluation of the HKD than most people would think.
Beijing is already pressured to keep the yuan gaining from strength to strength – they would be in a better position to appreciate the difficulties faced by HKMA.
Pegged to the past
An appreciating HKD would also help Beijing as it strives to cool markets with mini measures. But Beijing supports the dollar peg partly because it fears change of any sort and partly because it does not really want to see the HKD being an independent currency. If they could, Beijing would want full convertibility for the HKD to the yuan.
HKMA has a huge arsenal to intervene to maintain the peg. Still, no arsenal is unlimited and eventually it will become critical. In theory, if Hong Kong is prepared to accept runaway inflation, there is no limit to the ability of the HKMA to defend the HK dollar peg on the upside.
As foreigners pile into the HK dollar the HKMA buys the foreign currency and sells HK dollars. The HKMA is the legal entity that can create money by the stroke of a pen.
However, it is better to revalue on HK's accord rather than be forced by capital flows and market forces. To do so in the latter scenario would bring about more negative repercussions and leave HKMA with less room to be flexible. To revalue with the former scenario will bring forth better conditions and planning to execute the move well.
For an economy which has the reputation of being the freest in the world, the currency issue is making HKMA more manipulative and dictatorial in their monetary policies.
HKMA is making a big bet that the USD's weakness is only temporary. In my opinion, a collapse of the USD is more likely than a stable USD in the next 12-24 months.
That is what Hong Kong should prepare itself to face.
Wednesday, March 19, 2008
Wedding & Marriage
What we had yesterday from the US was a wedding, but they are in a long drawn out marriage as well. Weddings are joyous occasions, weddings are an event... marriage is a sentence, no, marriage is a life long thing. Weddings are always made up of hyper optimistic people and well-wishers, maybe they know the couple need all the luck they can get.
Pumping an additional US$200bn and then standing by Bear Stearns/JP Morgan for up to US$30bn, basically staved off a mini confidence crisis. Obviously the Fed has spent a lot on this wedding, maybe too much. Somebody has to pay off that via credit cards. There had been too much drinking during the wedding, now the day after, everyone has to trudge back to work and wait for the weekends again.
The chart above shows that the bulk of the recovery was in stocks which had the highest short positions - hence a short covering rally. Another 200-300 points uptick from here will see shorts starting their positions again.
Sunday, March 16, 2008
Bear Stearns collapsing following the US$200bn injection by the Fed scared many investors. Below was the conference call held by the company:
12:30 P.M. ET: While the bulk of the investment community is listening to classical music in anticipation of the call’s beginning, here’s an update of where the world stands. Bear Stearns shares are down 36.7% on more than 100 million shares traded, making it easily the most actively traded stock on the Big Board today. The options market shows a ballooning in interest in put options at the US$20 strike price – more than 29,000 contracts have traded, and headed into today there was no open interest at this strike.
12:37 p.m.: Finally, the call is beginning. Elizabeth Ventura of Bear’s corporate communications department is starting the call with the usual boilerplate about forward-looking statements.
12:38 p.m.: Sam Molinaro, CFO notes that the firm is moving up its earnings relase to Monday, and also to share some information on the shared loan facility.
12:39 p.m.: Mr. Molinaro turns it over to Alan Schwartz, CEO, who immediately sets about blaming rumors. “Bear Stearns has been subject to a significant amount of rumor and innuendo over the past week. We attempted to try to provide some facts to the situation but in the market environment we’re in, the rumors intensified and given the nervousness in the market a lot of people it seemed wanted to act to protect themselves from the possibility of rumors being true and didn’t want to wait to see the facts.” MarketBeat is having a hard time remembering what “facts” the firm put out other than to say the rumors weren’t true.
12:42 p.m.: Mr. Schwartz drops this fact — that the firm has been talking to Lazard about “alternatives.” He doesn’t elaborate on this, and quickly opens the floor for questions.
12:46 p.m.: Guy Moszkowski of Merrill Lynch wants to know where the liquidity problems came from — prime brokerage, repo markets, or what. Mr. Molinaro notes that both he and Mr. Schwartz said earlier in the week that liquidity issues were not a problem at the beginning of the week, but “I would would say on Thursday we experienced pretty broad cash outflows from a number of different sources,” including prime brokerage and repo, and also saw “mark-to-market calls on open derivatives contracts. It was from a lot of places and there was a lot of concern in the market, and we had a significant level of outflows.”
12:49 p.m.: Mr. Schwartz, in response to a question, notes that the reason the firm went to J.P. Morgan was because the firm “is the clearing agent for our collateral. It’s easy for them to see the kind and quality of the collateral we had available and therefore could move very very quickly.”
12:52 p.m: Mr. Molinaro is asked about the firm’s view on its liquidity ratios in terms of coverage of unsecured debt. He says this ratio has actually increased because the firm’s short-term unsecured debt has “rolled off,” or declined. But then he goes again after market rumors. “The difficulty we found ourselves in was, counterparties that were providing secured financing against assets that were well liquid and routinely financed, they were no longer willing to provide financing,” he says. This was a result of a market being “fanned by rumors that were not true,” he adds.
12:54 p.m.: Glenn Schorr, analyst at UBS, wants to know if the facility being provided through J.P. Morgan (the size is not known) is large enough to “fill the gaps of all the pulled lines” from those who pulled credit lines from the company. He also wants to know if the 28-day lending facility from J.P. Morgan was given that length because the Fed’s Term Lending Facility comes into play during that time period. Mr. Schwartz says Bear Stearns has “been able to convince customers and counterparites that we have the abillity to fund ourselves every day and do business as usual and there is overlap where liquidity does become available to us and other dealers on some other very high quality collateral.”
12:55 p.m.: Mr. Schwartz continues, calling the facility a “bridge to a more permanent solution.” He then goes back to talking about fact vs. fiction (although the firm’s statements earlier in the week, about not having any liquidity problems, are clearly no longer operative, and the firm did not provide any detail, either. He says the facility is a “bridge to look at strategic alternatives which could run the gamut, but put us in the position where… investors will be able to see the facts instead of the fiction.”
12:56 p.m.: The brief call ends. Shares are down 39%, having not received any kind of boost from the call. The company’s credit default swaps, which measure protection against default on debt, are in a range of 690 basis points to 720 basis points, which is slightly better than the 730 level quoted earlier in the day, but still worse than 685 yesterday, according to Phoenix Partners Group, a derivatives broker.
a) This panic is largely unwarranted. You are not going to have US$250-350bn write downs with no companies collapsing. BS is the weakest of the lot. Citic from China showed that not all Asian sovereign wealth funds or linked companies investing in troubled international invest banks are that savvy, or are just picking on the cheap. Their investments can backfire just as well.
b) BS troubles was amplified because it came almost immediately after Fed's silly move. The markets interpreted that as extreme pessimism, and wondering aloud which banks were the Fed trying to save.
c) To lend weight to the above opinion, shares of Lehman Brothers lost 15% and even Citigroup dropped another 10% as shorts betted on the next to follow BS. To me, that showed extreme pessimism - which shows that the reversal is probably very near.
d) Still sticking to 11,500-11,750 as the level where smart investors such as Buffett and the like will start buying large stakes in depressed companies. This is still largely a banks issue. Yes, the employment data has softened and retail sales in the US have tapered off, but that is understandable in light of the sharply correcting property markets there. The bulk of the global economy is still fighting inflationary pressures ( from sustained growth) and not part of this liquidity problem (with the exception of parts of Europe: or more specifically the European investment banks).
e) The Carlye situation also exacerbated matter as troubled hedge funds may be forced to sell other "good stocks" in other markets to cover their asses. However, Carlye's problems was due to extreme leverage - they geared up 1,200% on their positions to lock in certain credit risk papers to magnify returns which did not pan out as they hoped. There is good leverage and silly leverage.
f) Hence this does not look like "another round" but rather darkest before dawn scenario.
Friday, March 14, 2008
WSJ: Standard & Poor's now estimates that subprime write-downs could reach US$285 billion, US$20 billion higher than its estimate just six weeks ago, and is forecasting future pain for financial companies as the credit crisis moves beyond home loans. But the ratings agency also said "the end of write-downs is now in sight for large financial institutions. The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime asset-backed securities," said S&P credit analyst Scott Bugie, lead author of the report, in a statement.
While the hint of an end in sight helped to buoy the sinking stock market yesterday, Mr. Bugie's report was tempered. "We believe that any near-term positive impact of reducing subprime risk in the financial system via increased disclosure and write-downs will be offset by worsening problems in the broader U.S. real-estate market and in other segments of the credit markets," he said. The write-down estimate was boosted to reflect higher projected write-downs on high-grade collateralized debt obligations of asset-backed securities of 2006 and 2007 vintage.
S&P noted that the largest players have undertaken a "rigorous valuation methodology" in their subprime write-downs but that market forces could bring pressure for even more. The firm said that while there has been some deterioration in the first quarter, "the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses."Comments: Just like S&P to come out with the pessimism report, albeit 6 months late. It was largely the ratings agencies fault that we had the sub prime mess and over-leveraged effect of a lot of these similar instruments - they are the ones who just took the fees and rated these blardy instruments AAA. When they started collapsing, the ratings agencies were too slow to downgrade them. Now they are saying, well, forget what we said before, now the banks are in for it. What a load of crock-shit. Its good also that S&P came out with the report as it shows that the reversal is coming. Already the markets have factored another US$100bn of write downs from US banks. The rest should be coming from largely European side. Another 3%-5% downside from here and we should be in cherry picking territory. A rough gauge, DJII 11,500-11,750.
Thursday, March 13, 2008
Even Big Boys Cry!
WSJ: Carlyle Capital Corp. said late Wednesday it expects its lenders will seize its assets, causing the likely liquidation of the fund, which until recently owned US$21.7 billion in mortgage securities. The fund's likely collapse would be a major black eye for Carlyle Group, the powerful Washington-based private-equity firm whose executives own 15% of the fund. Though it's registered in Guernsey, U.K., and trades in Amsterdam, Carlyle Group runs Carlyle Capital out of its New York offices. Early Thursday in Amsterdam, the shares plunged 70% to US$0.83 each. The stock has lost around 83% since the company first disclosed its funding problems last week.
The news comes just one week after Carlyle Group began pleading with some of the world's largest banks to hold off on margin calls and the liquidation of its mortgage assets. Several of the lenders, led by Deutsche Bank and J.P. Morgan Chase & Co. ignored Carlyle's request. Wednesday night, they began selling the fund's assets, which were committed as collateral against huge borrowings. By Monday, dealers had sold US$5.7 billion of the fund's assets. The fund said that through yesterday it had defaulted on approximately US$16.6 billion of its loans, and expects to default on the rest. Other dealers that sold Carlyle Capital's collateral included Merrill Lynch & Co. and Bear Stearns Cos., according to people familiar with the fund.
The fund's collapse shows how Wall Street's biggest players have begun playing hardball with some of their best clients. And they reveal how jittery banks have become about their own loan exposures. In the case of Carlyle, 12 banks had lent the fund about US$21 billion, or US$20 for every dollar of initial capital. It also illustrates how the credit crunch has moved far beyond subprime mortgages. Carlyle Capital's portfolio consisted exclusively of AAA-rated mortgage backed securities issued by Fannie Mae and Freddie Mac. They are considered to have the implied guarantee of the U.S. government and pay par at maturity.
Carlyle Capital's investment strategy looked like easy money at first. The fund would exploit the difference between the interest earned on its investments in mortgage securities and the costs of financing those investments. Like so many other hedge-fund blowups, Carlyle's troubles came from borrowing too much money. The secret to making money was borrowing massive sums. Carlyle Capital managed only US$670 million in client money, but used borrowings to boost its portfolio of bonds to US$21.7 billion. Until last week, when the dealers started selling the fund's collateral, it was about 32 times leveraged, a level one mortgage-company analyst called "astronomical." The leverage, combined with severe dislocation in the credit markets, has proved to be Carlyle Capital's undoing. With their balance sheets under extreme pressure, banks have tightened their purse strings and are now requiring more collateral for loans. And in Carlyle Capital's case, the prices of the collateral -- the residential mortgage backed securities, or RMBSs -- have dropped to levels not seen in more than 20 years. The fund said in its statement late Wednesday that the value of the RMBS collateral continues to drop.Comments: Why Carlyle? Its newsworthy because of the people behind the company. Just look at the list below. Unfuckingbelievable. Connections seemingly can only get you so far.
Notable current and former employees and affiliated persons
- G. Allen Andreas - Chairman of the Archer Daniels Midland Company
- Daniel Akerson - company director
- Joaquin Avila - investment banker
- Laurent Beaudoin - CEO of Bombardier (1979-)
- Paul Desmarais - Chairman of the Power Corporation of Canada
- Arthur Levitt - former Chairman of the U.S. Securities and Exchange Commission
- Karl Otto Pöhl - former President of the Bundesbank
- Olivier Sarkozy (half-brother of Nicolas Sarkozy, President of France) - co-head and managing director of its recently launched global financial services division, since March 2008 .
Politics and public service
- James Baker III, former United States Secretary of State under George H. W. Bush, Staff member under Ronald Reagan and George W. Bush, Carlyle Senior Counselor, served in this capacity from 1993 to 2005.
- George H. W. Bush, former U.S. President, Senior Advisor to the Carlyle Asia Advisory Board from April 1998 to October 2003.
- George W. Bush, current U.S. President. Was appointed in 1990 to the Board of Directors of one of Carlyle's first acquisitions, an airline food business called Caterair, which Carlyle eventually sold at a loss. Bush left the board in 1992 to run for Governor of Texas.
- Frank C. Carlucci, former United States Secretary of Defense from 1987 to 1989; Also, former Princeton wrestling partner of former US Secretary of Defense, Donald Rumsfeld. Carlyle Chairman and Chairman Emeritus from 1989 to 2005.
- Richard Darman, former Director of the U.S. Office of Management and Budget under George H. W. Bush, Senior Advisor and Managing Director of The Carlyle Group from 1993 to the present
- Allan Gotlieb, Canadian ambassador to the United States (1981-89) and member of Carlyle's Canadian advisory board.
- Liu Hong-Ru, former chairman of China's Securities Regulatory Commission
- William Kennard, Chairman of the U.S. Federal Communications Commission (FCC) under President Bill Clinton, Carlyle's Managing Director in the Telecommunications & Media Group from 2001 to the present.
- Arthur Levitt, Chairman of the U.S. Securities and Exchange Commission (SEC) under President Bill Clinton, Carlyle Senior Advisor from 2001 to the present
- Peter Lougheed - Premier of Alberta (1971-85)
- John Major, former British Prime Minister, Chairman, Carlyle Europe from 2002 until 2005
- Frank McKenna, Canadian ambassador to the United States and former member of Carlyle's Canadian advisory board
- Mack McLarty, White House Chief of Staff under President Bill Clinton, President of Kissinger McLarty Associates, Carlyle Senior Advisor from 2003 to the present
- Anand Panyarachun, former Prime Minister of Thailand (twice), former member of the Carlyle Asia Advisory Board until the board was disbanded in 2004
- Randal K. Quarles, former Under Secretary of the U.S. Treasury under President George W. Bush, now a Carlyle managing director
- Fidel V. Ramos, former president of the Philippines, Carlyle Asia Advisor Board Member until the board was disbanded in 2004
- Dan Senor - political consultant
- Thaksin Shinawatra, deposed Prime Minister of Thailand, former member of board, who resigned on taking office in 2001
- Luis Téllez Kuenzler, Mexican economist, current Secretary of Communications and Transportation under the Calderon administration and former Secretary of Energy under the Zedillo administration.
- Norman Pearlstine - editor-in-chief of Time (1995-2005)
p/s photo: Syafinaz
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