Saturday, May 31, 2008

New Terminologies Added To Asian Financial Lexicon

I was chatting with the usual bunch of piggy and doggy friends at Fusion Investor, and we were discussing the Vietnam effect. Somehow I managed to coin two new words for the Asian financial players. When you use the following new terms, please attribute appropriately (ahem):

Vietnami (~ tsunami) Definition: Stocks and market sentiment being caught up as collateral damage due to Vietnam's financial implosion.

Vietnamah (~ tnm, cantonese) Definition : When you are actually holding stocks directly impacted by Vietnam's financial implosion. For example, those still holding Gamuda, B Land, WCT, Scomi, Parkson, SP Setia.

photos: Deborah Priya Henry & Hebe/Selina (S.H.E.)

Friday, May 30, 2008

Vietnam, A Repost

This is worth a repost, mark the date down. Global manufacturers streamed into Vietnam, partly to escape rising wage and land costs in China but also to tap a young and industrious work force who saw a glimpse of prosperity after years of war and stagnation. Foreign companies sought approval to invest US$20 billion in the country last year -- a third more than in nearby Thailand -- adding to the inflationary pressure by driving up land costs, skilled-worker wages and office rents.The central bank widened the range in which the dong could trade against the dollar. The idea was to free the local currency from a sliding U.S. currency and to enable Vietnam to better absorb higher oil costs.

Some local banks refused to exchange dollars, and local stock prices collapsed as banks held on to their dong and refused to lend money to buy shares. The government in March lowered Vietnam's growth target for 2008 to 7% from 8.5% to help focus the drive against inflation. Since then, a global spike in food prices and a poor rice harvest have made things worse. The central bank expects Vietnam's current-account deficit -- the difference between a country's import and export of goods and services -- to hit 7.5% of gross domestic product this year, up from 5% in 2007. The current-account deficit in Thailand was 6.5% of GDP when it was forced to devalue the baht in 1997, triggering the Asian financial crisis. The Vietnamese, meanwhile, have been draining bank accounts and buying gold instead. Some have also started hoarding dollars as a hedge against inflation.

Apartment prices in Ho Chi Minh City, the country's commercial hub, have fallen by half so far this year, local media reports say. Morgan Stanley estimates loan growth has been expanding at over 35% a year and exposure to the property market is about 10% of total loans.

Wednesday, October 24, 2007

Vietnam Calling

If you examine Gamuda's earnings forecast for the next 3 years, much of it relies on the success of its Vietnam property and construction projects. Vietnam is the new India or Colombia, the really exciting emerging market today. Foreign funds have been piling into Gamuda and other Vietnam proxy plays. The valuations are such that nothing much can go wrong. Vietnam, for many Malaysian property developers, has become the land of milk and honey. Today, almost every big player wants a piece of the action.

Well, Gamuda is not the first, in fact Singaporean & South Korean companies have been piling in much earlier. On conservative estimates, there are RM200bn on-going projects that is supposed to be completed within the next 5 years. In Vietnam, obtaining an investment licence is very crucial, because without it, foreign developers cannot commence their projects. Berjaya Land Bhd is the first Malaysian company to be given an investment licence to start work in Vietnam. To date, BLand has identified four major projects in Vietnam, three of which are in Ho Chi Minh City (HCMC) and one in Hanoi. BLand is one of the early birds that have made significant progress in its foray into Vietnam. In Hanoi, it is the first Malaysian company to be given an investment licence to undertake the Thach Ban project. In HCMC, its proposed projects include the Vietnam Financial Centre (VFC) and the Vietnam International University Township in the North West Metropolitan Area, about 19km away from HCMC centre. In the province of Dong Nai, BLand is planning the development of a gated community and three apartment blocks on 20 acres of land, with a gross development value (GDV) of US$120 million (about RM408 million). Together, the GDV of BLand's projects in Vietnam is RM31.9 billion.

Investors do note that BLand does not have a track record in overseas projects. The issue of funding is also cited as a possible constraint. So far this year, some US$13 billion in FDIs had flowed into Vietnam. Indeed, demand for properties thus far has outstripped supply, and a major source of this demand is from the Viet Khieus (overseas Vietnamese).

Besides licensing issues, other potential problems include the relocation of squatters, shortage of skilled labour and lack of transparency in business dealings.

The largest foreign investors is South Korea, followed by Singapore. Vietnamese authorities has a list of FDI amounting to US$50bn seeking and awaiting approval as I write. Last month CapitaLand announced a joint venture to develop 1,200 apartments in HCMC - the fourth project by CapitaLand in HCMC, now it has 2,800 new homes in the pipeline. Keppel Land also announced an even greater number - 20,000 homes in Vietnam.

What is luring so many developers there is the margins and pricing. A US$250,000 link/semi-dee in Malaysia will fetch about US$450,000 currently in Vietnam top locations. Its not cheap. Things are looking good in Vietnam, and with "good things newly discovered" there will be a rush of capital to tap the potential. Just like internet was a big thing in the late 90s, VCs fell over themselves to invest in internet startups to jump on the golden bandwagon. The internet itself is a good thing and yes, there is money to be made from it, but it is also true that more than 95% of all ventures started in the late 90s and early 2000 went to zero very fast. This is typical development in any "gold fields being discovered", and the same is being witnessed in Vietnam. Capital is a big extractor of real value. Even when 95% of internet startups fail, the remainder do extract real value and evolve into viable new businesses.

In Vietnam's case, there doesn't seem to be a solid masterplan to accomodate the capital coming in. The pubescent stockmarket is not financially sound enough to support the FDIs. The credit markets there are also not sophisticated enough for the amount of FDIs coming in. The good thing supporting the long term prospects of Vietnam is their adequate population, which is more than 87m. That is sufficient critical mass for a competitive labour force to be galvanised initially. Later as per capita grows, the domestic economy will fuel itself much like where China and India are at now. GDP growth was 8.17% in 2006, the second fastest growth rate among countries in East Asia and the fastest in Southeast Asia. We have to remind ourselves the country is still a socialistic country trying to move into a market economy. The infrastructure is still inadequate and requires rigorous planning.

Property developers are all looking at 30% margins on their projects. It is achievable if supply ties in with demand. RM200bn or more property coming on stream over the next 5 years is no joke. All is hunky-dory because not much has really reached finished status yet. Everyone is selling off the plan. I am not trying to bash the Vietnam investments, but its not as great as everyone makes it out to be. There are still a lot of unknowns. The dependence on returning expat-Vietnamese to buy is one. Pricey property has to be supported by strong industries and a strong job market, we all know there is still a lot to be done to foster FDIs into long term investments. Hence the 30% margins will look increasingly iffy down the road. I would be more comfortable if companies such as Gamuda and BLand were to tone down their margins expectations, maybe to 20%.

Over-investment is a normal trait into exciting markets / industries - just look at China, the internet, India, Brazil, Colombia - investors still need to guard themselves from over-optimism.

Thursday, May 29, 2008

Vietnam Calling, Anyone?

It seems some readers may have gotten the wrong message fm my posting... i'm long term very bullish on vietnam (10-15 years out)...i'm very bearish now 1-3 years because there has been way way over-investments into Vietnam which is unsustainable in demand... the reliance on foreign Vietnamese buying is overdone... they have to contend with subprime issues themselves n foreclosures in the US and in Australia the BLR there is 8.5%, they have a huge burden on their own mortgages... there are not that many very cash rich foreign Vietnamese as one would think. The properties are generally 20-30% more expensive than the ones u get in Malaysia now. Hence the majority of the early buyers have been foreigners, mainly Singaporeans (gulp) now brown cow?

If you search Vietnam in my blog you won't find many bullish articles. Let's take stock now. The near euphoria on buildings residential and commercial projects have lured a lot of Singaporean firms and a smattering of Malaysians as well. How now brown cow?

a) Stock market: The Vietnam equity market has now lost half of its value from its 2007 high. Is that significant? Well imagine KLCI trading at 750-800 after hiting 1,500 last year. I think that would curb your spending somewhat. The nearly 8-year-old market jumped 23% last year amid investor excitement about Vietnam's economic potential but has slumped 55 percent so far this year, making it the worst performing market in Asia.

b) Technical Glitch: Trading on Viet Nam's stock exchange will remain suspended for a third consecutive day on Thursday following a computer system problem, officials said on Wednesday. Trading has been halted since Tuesday, but the Ho Chi Minh Stock Exchange and the State Securities Commission said it would resume on Friday if testing showed the system was stable.

c) Inflation & Liquidity: Earlier this month, market liquidity hit its lowest level in two years, an unintended victim of the government's battle to try and reduce double-digit inflation and a liquidity crunch at banks. The government estimated on Tuesday that annual inflation accelerated to 25.2% in May from 21.4% in April, one of the highest rates in Asia.

d) Dong Play-Play:
Viet Nam's dong fell to its lowest in more than three months on Wednesday, while the offshore forwards market priced in a 30% depreciation in the currency on worries over inflation and a widening trade deficit. The dong's spot rate stood at 16,216 to 16,221 per dollar by 0413 GMT, after the central bank, set the official exchange rate at 16,069 dong per dollar. That was the lowest since Feb. 20 when it was 16,070 dong per dollar. The State Bank of Vietnam allows banks to trade the currencies only within a band of +/- 1% of the official rate daily on the foreign exchange market. The government has said that during 2008 it would allow a 2% annual appreciation or depreciation of the dong.

The Snake Oil Sales Pitch

Vietnam is one of Asia's most open economies; its two-way trade is around 160% of its GDP, more than twice the ratio for China and over four times that of India. Once a relative newcomer to the oil business, today it is the third-largest oil producer in Southeast Asia, with an output of 400,000 barrels per day. What also makes Vietnam attractive is the potential spending power of its increasing population of 85 million. The interest by foreign investors in Vietnam began following the lifting of the United States trade embargo on the country in 1994. Billions of dollars of trade began to flow in. Its chief trading partners include Japan, Australia, the Asean countries, the US and western Europe.

As a result of land reform measures, Vietnam is now the largest producer of cashew nuts, with a one-third global share. It is also the largest rice exporter in the world. Vietnam has the highest percentage of land allocated for permanent crops, or 6.93% of any nation in the Greater Mekong sub-region. Besides rice, its key exports are coffee, tea, rubber and fishery products.

Foreign investment in the country has grown three-fold while domestic savings have quintupled. To support its strong growth, the World Bank has estimated that Vietnam needs to invest some US$140 billion in infrastructure projects over the next five years.The Reality Show

Vietnam achieved an annual GDP growth of around 8% from 1990 to 1997. Its 8.5% growth forecast for 2007 is achievable given its strong industrial output and focus on administrative reforms, and its ongoing battle against corruption. But having said that, Vietnam is still a relatively poor country, with a GDP of US$280.2 billion, translating to a per capita income of about US$3,300.

Malaysian companies in Vietnam

Scomi Group Bhd says it will focus on markets that have high growth potential such as Pakistan, India, Bangladesh, Vietnam and Indonesia in its next phase of expansion. The Berjaya group has made inroads into Vietnam, setting up a convenience store chain similar to the 7-Eleven that it operates in Malaysia. It is also looking into a US$700 million property project in Ho Chi Minh City, according to news reports.

Gamuda Land Bhd is involved in the Yenso Park, a US$1 billion mixed development project in Hanoi, while the managements of WCT Land Bhd and SP Setia Bhd recently indicated their interest in projects in Ho Chi Minh City. Other companies actively seeking participation in Vietnam's growth story include Kossan Rubber Industries Bhd, United Engineers Malaysia Bhd and PJ Development Bhd.

It is believed that more Malaysian companies will be jumping on the bandwagon in the future to take advantage of Vietnam's economic boom. Local companies that already have operations in Vietnam include APL Industries Bhd, Furniweb Industrial Products Bhd, Kian Joo Can Factory Bhd, Lion Diversified Holdings Bhd (via Parkson Group), Latitude Tree Holdings Bhd, KFC, Public Bank Bhd and Malayan Banking Bhd, among others.

Have fun guys!

p/s photos: Michelle Yip Suen & Flora Chan Wai San

Wednesday, May 28, 2008

TVB Goes Country

Country Garden (2007) chairman Yeung Kwok-keung has secured a 26 percent stake in Television Broadcasts (0511) by paying Shaw Brothers (0080) - the largest shareholder in the TV station - more than HK$10 billion.

The offer trumped that made by competing bidders, US-based private equity groups Blackstone and Carlyle. Sources close to the deal say Run Run Shaw, chairman of TVB, Hong Kong's most popular TV channel, was determined not to sell the company for anything less than HK$10 billion. Another reason the 100-year-old Shaw agreed to the stake sale is that he believed Yeung, who is well-connected in China, would be able to help the company overcome hurdles in penetrating deeper into the mainland market, thus taking it "to a higher level."

Yeung has amassed funds for the acquisition with help from Lee Shau-kee, chairman of Henderson Land (0012), who loaned HK$3 billion to Yeung to finance his takeover. Lee stressed that none of his loan to Yeung would be converted into shares of the TV station, as the billionaire said "I do not do business I am not familiar with."

Yeung has also used part of his daughter's shares in Country Garden, a Chinese property developer founded by him and listed on the Hong Kong stock exchange last year, as collateral to facilitate his borrowing from Lee.,Yeung transferred his shares in Country Garden, worth almost HK$6 billion based on yesterday's close, to his 26-year-old daughter last year. The daughter has officially taken the mantle as one of the top 3 richest woman in the whole of China.

Adpoting a plan of leveraged buyout, or using assets from the acquisition target to finance borrowing, Yeung also mortgaged the 26 percent stake in TVB to collect a further HK$4.8 billion. That's what I don't like about the deal. Yeung has borrowed from Henderson and mortgaged the shares he bought to secure the deal. That can only mean that adveritsing rates will go up, the TVB stars' pay packages will be very tight in the future (which may lead many to do more mainland Chinese or Taiwanese serials instead). I don't know where you can slash the cost side, you can only try to improve on the revenue side - and that is something Yeung has little clue on. You rock the boat on pay, contract terms with artistes and writers, advertising revenue sharing, salaries - you lose TVB's assets, the people ... and thats where 90% of the value of TVB resides.

You buy Manchester United at a premium, at least you can raise ticket prices and sell more shirts or tour more countries. You buy TVB at a premium and on leverage, what will you do, what can you do ... ask the stars to help sell your Country Garden properties?

Saturday, May 24, 2008

The New Economic Order

Bubbles and bear markets are cyclical. But what's different this time around? This time, we have the BRIC newcomers to the party. BRIC is the new fangled acronym for Brazil, Russia, India and China.

BRIC has been playing a highly important role in global economy's growth over the last 7-8 years. This year, Chinese and Indian equities have fallen 30% and 21% in dollar terms respectively. Brazil has gained 7%, Russia matched MSCI world index, falling around 6%.

There is some homogeneity among the BRICs.

At heart, Russia and Brazil are plays on commodity prices, particularly energy while India and China are plays on the ability of countries with low labour costs to grow market share in services and manufacturing divisions. Still as a group, the BRIC plays a highly important role in reshaping the new global economic frontier. By the way, as it stands, BRIC collectively holds about 35% of total global reserves. No joke.

Let's consider a few things they have in common:

a) Huge population – largely owing to globalisation and opening up of economies, outsourcing has ignited the BRIC economies (except for Russia, but that's a whole different story). The lower labour cost saw companies investing in these countries aggressively to lower their production cost. This in turn created a huge new middle class population in BRIC, which in a major way, contributed to the present food crisis as more people could afford better stuff. A richer but substantial middle class has evolved in recent years. This is an important facet of how the economic paradigm is shifting.

b) Drivers and consumers – Again, due to the globalisation movement, these BRIC countries have gained a lot of traction in attracting FDI and reserves. This in turn, generated a lot of projects into real estate and infrastructure spending. They were once drivers of the global economy (by promoting cost savings and production efficiency through outsourcing).

Now that they are wealthier and the governments have better balance sheets, these countries have also become major consumers of goods and services. This another important factor in reshaping the new economic paradigm.

c) Current Account – Brazil, Russia and China are all piling up huge current account surpluses and foreign reserves and their balance sheet look very healthy. They have to contend with excessive growth issues and reducing the inflow of hot money into their currency system. However India sticks out like a sore thumb among the BRICs in that it has a substantial current account deficit. As oil and fertiliser costs go higher, these two items are exacerbating India's deficit problem. However, India still has a high FDI plus their foreign reserves remain high – once either of them gives way, India's currency will start to unravel quickly.

By having a current account surplus, the governments can use forex to contain domestic inflation i.e. by allowing the local currency to appreciate. This is something India does not have the luxury of doing. The looming food crisis will hit India very hard if we were to consider that factor. Hence there are strong reasons to believe that India will be hardest hit among the BRIC nations in facing up to a food crisis.

d) Commodity prices are basically positively correlated to the economic growth of BRIC. There is really no need to have a 100-page dissertation on why commodity prices are currently at stratospheric highs. Sure, there is an element of speculative activity and maybe even a hint of a bubble forming in commodity prices. If you have not heard yet, this year the collective oil demand of emerging markets will exceed that of the US for the first time. That shows the backbone of demand.

But what is also important to note is that many of these emerging market do not really pay for oil. Basically, if growth in BRIC stays from 7%-10% this year and next, commodity prices will continue to be firm – simplistic but probably true.

Between 2000 and 2005, Goldman Sachs estimated that BRICs had contributed some 28% of global growth in US dollar terms, and 55% in purchasing power parity terms. BRIC's share of global trade now stands at 19%, almost double the level back in 2001. What is even more important is that the BRICs trade among themselves a lot more, lending some weight to the decoupling theory.

Back in 2000 intra-BRIC trades made up only 5% of their total trade; the figure now hovers above 11%.The Chinese government shrewdly knows where the action is and a lot of work has been focussed on improving relations with Brazil. In fact, significant results are now flowing through. This will be a big asset when it comes to WTO and Doha negotiations.

Hence, while it is all good and noble to monitor the US housing starts or read Bernanke's mindset or look for leads in US banks recovery, it is probably more important to monitor BRIC's growth trends to get a better read of the macro picture for the rest of 2008 and 2009.

Looming Food Crisis

I have highlighted the looming food crisis as the new monster in the works for financial markets. How BRIC handles this crisis will count a lot towards resource allocation, appearance of market restrictive policies, currency outlook and inflationary outlook – all of which will play key roles in the rating of global equities globally and regionally.

History repeats itself, they will say. In the midst of any bull or bear markets, there will be shouts of “this time it's different”.

Only this time, it WILL really be different. It will be so because there has been a substantial shift in the economic paradigm as evidenced by: the prolonged demise of USD; the rise and rise of BRICs; the massive recycling of petrodollars; the emergence of a substantive new middle class in emerging markets; and the diminishing economic power of the US.

Here's to a new decade of possibilities!

p/s photo: Ella Koon

Tuesday, May 20, 2008

Everybody Wants To Be Buffett

Lee Shau-kee said his investment strategy will switch to aggressive from defensive in August, and he forecasts the Hang Seng Index to hit 30,000 by that time. "The present moment might not be a good chance to enter the market. As I mentioned before, the right chance to buy more stocks is when [the Hang Seng] is at about 22,000," Lee told reporters yesterday after the annual general meeting of Hong Kong and China Gas.

Lee said the market will be "quiet" in summer, when stocks' performance tends to be unsatisfactory. "I will rather be defensive instead of aggressive," he said. Lee expects the blue-chip index will hover around 27,000 in the summer. "The investment environment will improve in August. When opportunities come, I will invest more."

Recently, Lee added Datang Power (0991) to his long-term investment portfolio, which also includes CITIC Pacific (0267), Country Garden (2007) and China Overseas Land (0688). "They are not alright [for reaping profits] in the coming few months. You've got to hold these stocks for two to three years," he explained.

Meanwhile, Lee sees continuing weakness in the US dollar in the coming 12 months. "Three years ago we already converted the currency of our assets into the Australian dollar when it was at about 70 US cents. With the Aussie dollar having increased to about 95 US cents, the value of our assets has risen about 30 percent.

Comments: Defensive or aggressive, Lee is basically adopting the Sell In May & Go Away strategy. Funny thing is Lee only talks about stuff he made money on - I am sure he has lost some money too, why no reporting on those? You want to be like Warren Buffett, be transparent with your picks. Its Ok l\to lose in stocks, I think you can have a 6 or 7 out of ten strike rate and still make a lot of money - what you have to make sure is that the 3 or 4 times you strike out, you must manage and limit your losses.

p/s photo: Carmen Soo

Raiders Of TVB

Country Garden's Yeung Kwok-keung is apparently the front-runner in the bidding for Run Run Shaws indirect stake in Television Broadcasts Ltd (0511), after he secured HK$3 billion in financing from Lee Shau-kee, the Henderson Land chairman and also sometimes known as HK's Warren Buffett, that gives him a clear edge over the other suitors.

Yeung has been interested in acquiring Run Run Shaws stake in holding company Shaw Brothers (0080) for at least six months. The Country Garden chairman may have outbid the other potential suitors. Several foreign private-equity firms are said to be vying with Yeung to take over the Shaw Brothers stake, but the chance for their bids to be successful is believed to be slim considering the present market conditions

There have been rumors in the market for years that various parties had approached Run Run Shaw, who is now 100, about taking control of Hong Kong's most influential media outlet. The deals always fell through because of the high premium sought by Shaw. The source said it is unlikely a foreign private-equity firm would be willing to pay Shaw's asking price, while Yeung is comfortable with the price tag. The credit crunch in the West could also make it more difficult for private-equity firms to line up funding.

One reason for Yeung's aggressiveness in bidding for control of TVB is that having an interest in a Hong Kong media and entertainment company would significantly raise his profile and status in Hong Kong, something Yeung is keen to do. Yeung, who was born in Foshan, Guangdong province, and worked as a farmer, boatman and construction worker before founding his property company, has no previous business ventures in the media field.

Run Run Shaw has a total beneficial interest of 32.49 percent in TVB. Holding company Shaw Brothers, in which Shaw has a 75 percent interest, is the single largest shareholder in TVB with a 26 percent stake. The Shaw Foundation Hong Kong Ltd holds a 6.23 percent stake in TVB.

Acquiring Run Run Shaw's stake in Shaw Brothers would likely require between HK$10 billion and HK$11 billion, according to the source, so Yeung would need to secure additional financing from banks to clinch the deal.

The apparent deal still makes little sense to me. One would think that Run Run Shaw would have "higher objectives" in offloading TVB, not just on price alone, but to ensure that the longevity and continued growth path of TVB be secured. Selling to the Country Garden's chairman is like selling to Vincent Tan, where got difference? If its HK$10 billion, I am sure Ananda Krishnan would be falling over himself to buy TVB, if he is not then he has some very poor advisors by his side. The balance sheet of Astro may not be able to take the whole deal, may have to be shared with Usaha Tegas first - then take Astro private - that would be the way to go.

p/s photo: Nasha Aziz

Tuesday, May 13, 2008

Red Devils' Greats

Coming up with lists will always bring about disagreements. I have to qualify that I followed M.U. from the mid-70s till now, and hence my list of my favourite Red Devils will have to come from that period:

10 Ole Gunnar Solskjaer
9 Peter Schmeichel
8 David Beckham

7 Cristiano Ronaldo

6 Gordon Hill
5 Norman Whiteside
4 Paul Scholes
3 Mark Hughes
2 Ryan Giggs
1 Eric Cantona

Once you have done a top ten list, you will find that you have no where to put in Wayne Rooney, Andy Cole, Lou Macari, Brian McClair, Bryan Robson, Rio Ferdinand ... Sigh... but I am sure I can squeeze in Rooney sometime later as he contributes more. Our list may differ, love to hear from Red Devil fans.

p/s photo: Asha Gill

Saturday, May 10, 2008

The Food Train Wreck - Feed Me Please!


In just two months, rice prices have risen 75% globally, while wheat prices are up 120% compared with a year ago.

Prices of oil and commodities are another thing. Food is food. Central banks in Brazil and India, seeking to tame inflation, recently took new steps to slow down lending and throttle back growth.

India raised the proportion of deposits that banks must hold in reserve, and Brazil boosted its key interest rate for the first time in three years.

Last Tuesday, Thailand's central bank said inflation this year could be twice what it was in 2007. Rising global food prices are contributing to high food inflation in many countries (Sri Lanka (34%), Costa Rica (21%), and Egypt (13.5%).

China and Vietnam are battling their highest price increases in a decade or more. India, Russia, South Africa and much of Latin America also face a growing threat from rising prices.

In a report released earlier this month, the Asian Development Bank said the risk of spiralling inflation in the region is “palpable,” and noted that official figures tend to underestimate the phenomenon.

Higher interest rates and government moves to put the brakes on economic growth tend to be bad for stock prices.

Inflation also hurts stock prices by increasing input costs for companies and putting pressure on profit margins. While I have been highly critical of developed countries central banks for being too liberal in pumping liquidity over the past 10 years, the emerging markets central banks have also been doing likewise albeit at a smaller scale in recent years as well.

The biggest problem, which many are still not aware, is that unlike the subprime crisis and the credit implosion, a food crisis cannot be solved or minimised by pumping liquidity or through more bailouts. And this – you can't plant more rice or coffee overnight.

Hence the headline: it's a train wreck waiting to happen. It will happen. There is nothing much we can do to stop it. How's that for being optimistic?

On the wisdom of hindsight, the move to boost production of biofuels now, seems pretty lame. This shift has increased demand for bio-fuel raw materials, such as wheat, soy, maize and palm oil, and triggered competition for cropland.

Almost all of the increase in global maize production from 2004 to 2007 (the period when grain prices rose sharply) was used for biofuels production in the US, while existing stocks were depleted by an increase in global consumption for other uses. The use of land to grow corn to feed the ethanol maw is reducing the acreage devoted to other crops.

Food processors who use crops such as peas and sweet corn have been forced to pay higher prices to keep their supplies secure and these higher costs have been passed on to consumers.

Similarly, with crude palm oil. The shift in turning edible oils and crops into fuel has resulted in a demand and supply shift. We are all seeing the consequences of that. In addition, it is not just an issue of absolute supply (of crops and edible oils).

The rise of biofuels also depletes the land available for genuine agriculture. Less land, more competition (for the land).

The rush in modern China to turn traditional farming areas into industrial zones or residential areas for expanding cities has decreased arable land to critical levels.

Climate change has hit certain important regions. Six long years of drought in Australia has reduced its rice crop by 98% contributing to a doubling of rice prices in the last three months. In several countries like Kazakhstan, China, Mongolia and Afghanistan, winter crops were devastated by extended periods of freezing temperatures. In Bolivia, severe floods have resulted in crop and livestock losses.

Not just 'An Inconvenient Truth': we will see rising frequency and intensity of floods and droughts due to global warming that will lead to a prolonged food crisis.

The food crisis is not an IF but WHEN.

Things we will hear more often for the rest of the year: levying export taxes and export bans to maintain domestic supplies; raising import tariffs; heavier monitoring of smuggling; further acceleration in price spiral; more riots and social unrest in particular from the poorer nations; heavy handed subsidies; and a lot more high powered talks and conferences on the food crisis that will not amount to much.

These high prices make it nearly impossible to cut the extensive subsidies maintained by many emerging economies.

With prices rising though these subsidies impose major fiscal costs. But removing them could cause greater political and social welfare costs. High oil prices are already making their way through the food production chain. Machinery, transportation and fertilizer costs will also rise.

With most commodities priced in dollars, a fall in the dollar usually implies a rise in prices. Any increase in commodity prices (in dollar terms) is particularly costly to those countries whose currencies track the dollar.

Even stocks in those supposedly good sectors with positive black swans (food manufacturers, plantations), their earnings jump will be regarded as an anomaly and would not get a long term hike in PER valuation.

What can the governments do? Put more funds into subsidy? Putting more into subsidy literally means putting more funds to chase after the limited fixed supply of goods – you can bet prices will rise as well as hoarding and panic. This is a case of people getting richer but clamouring for a reduced supply of goods. Prices get bid higher.

Unlike oil, which on a relative scale affects corporations a lot more, food prices leaves its imprint on a much larger and across the board segment.

We will have to live with much higher food prices, not to mention fuel prices.

Governments will have to pay higher salaries for civil servants. Countries like Malaysia will be net beneficiaries as we have oil royalties and plantations to help cushion the blows. Without a doubt, resource-poor nations will feel the heat. Developing economies with high poverty levels will be hit especially hard.

Even the aid in US dollar have depleted in value. In other words, it can now buy a lot less on the back of rising cost, which translates to less aid.

A looming food crisis equals spiralling inflation equals restrictive market policies equals higher interest rates to curb spending, which then translates to not-so-good news for equities.

A looming food crisis also means mounting government subsidy, controlled prices breaking loose that may lead to social unrest and riots which also translate to not-so-good news for equities. The greatest damage from this oncoming food train wreck is not the shaky outlook for equities but the unravelling of years of development aid to the poorest nations. Soaring global commodity prices will force the World Food Program to scale back food aid.

Food makes up 50 to 60% of household income, the rising prices is leading to social unrest in Haiti, Indonesia, Peru, Egypt, Cameroon, Ivory Coast, Senegal , Ethiopia and many more countries.

While the gap is still large between the poorer developing nations and developed countries, much ground has been made to close that gap over the last 20 years. Now in just one major looming food crisis, a lot of the “good” is threatening to go down the drain as the gap widens yet again.

p/s photo: Lee Ji Ah ... she is so my type, not over the top pretty but the demeanor is just right

Friday, May 09, 2008

Chinese get a taste of investing's downside

By Ariana Eunjung Cha
The Washington Post

SHANGHAI, China — When emergency workers found Wang sprawled unconscious after having downed two bags of insecticide, he was still clutching the PDA he had been using to check stock prices. Like a number of other small investors in China, Wang had bet — and lost — his life savings, about $15,000, on the Chinese stock market. The propaganda office and doctors at the hospital where he was treated said the 36-year-old factory worker had been preparing to get married and that he had hoped to use the money to buy an apartment for his fiancée.

Wang's attempted suicide and those of other investors are a heartbreaking consequence of China's great experiment in capitalism. In February, Li, a 25-year-old engineer, jumped from the seventh floor of the building where he worked in the city of Chengdu. His company said he had lost a huge amount on the stock market. On March 30, a 39-year-old former ice-cream- shop owner, also named Li, leaped to his death from his apartment building in the inland province of Shandong after losing a third of the $4,500 he had invested.

As China's stock markets crashed over the past six months, the Communist government reacted in a way most consumer investors like Wang did not anticipate: It watched from the sidelines. It wasn't until last week, after the Shanghai benchmark index's fall to a symbolic milestone, below 50 percent of its peak in October, that Beijing finally stepped in. Its announcements that it would slash a tax on stock transactions and control volatility by requiring some big block trades to take place off the regular stock market, pushed the market up 14 percent. It has fallen again since then, however. But given that the Chinese government has the power and money to do much more, some say the fact that its help arrived so late and is so limited means it is sending a message to shareholders that they should no longer expect a government bailout in such situations.

The former shop owner's sister, Li Chunyan, 34, said she understands that those who lost everything have only themselves to blame for risking so much. But because the stock market is "damaging common people's lives this much, there should be policies" to help them. She said even the U.S. government is doing more to help its investors: "I heard about the U.S. lowering interest rates to save the market," she said. "Well, different countries are different."

In online bulletin-board postings, small-time retail investors — who, unlike in U.S. markets, make up the vast majority of those who hold money in China's exchanges — have vented their anger at the government. "China's stock market is piled up with investors' tears and blood," wrote one shareholder.

Institutional investors, fund managers and analysts who follow the Chinese stock markets are less sympathetic, saying that the suffering of consumers who lost money is a necessary step on the road to capitalism.

"You lose money, you jump out the window, too bad. It's your problem," said Vincent Chan, head of China research for Credit Suisse. "For any market to grow, this is something the government should realize: At the end of the day, it's the investors who bear the responsibility of the investment, not other people."

The nose-dive of the Shanghai stock market and its sister exchange in the southern city of Shenzhen has been humbling for Chinese investors who had once believed the only direction share prices could go was up.

Analysts say they were overdue for a correction. Despite weak earnings by many companies and rampant corruption, the Shanghai composite index quadrupled in value from 2002 to 2007.

Briefly in November, PetroChina became the world's first $1 trillion company by some measures of its market value. But by the end of April, shares of PetroChina had plummeted to below its IPO price for the first time.

Andy Xie, a former chief economist for Morgan Stanley Asia Pacific and now an independent analyst, said the challenge for the Chinese public is that "generally speaking, retail investors bought stocks at a high point. They listened to their relatives, friends and heard propaganda. "When the stocks fall, they are unwilling to sell off and they sit there waiting for the government to save the markets," he said. "This is not rational."

Psychologists across the country say that in recent months they have seen more patients seeking treatment for addiction to gambling.

Some investors like Ma Guocheng, 26 and an office worker, say they have learned their lessons from the recent stock-market plunge. In April and May 2007, Ma invested some 270,000 yuan — about $38,600 at today's exchange rate — in stocks. By November, those shares were valued at 440,000. He thought about selling, but then he thought they would climb even higher. Now his holdings are worth 50,000, about $7,000. "I was greedy," Ma admitted. As a consequence, "I lost more than 80 percent of my total investment."

Comments: Thanks to Moolah who had featured the above news article. Somehow, it shows that the majority of Chinese are just dipping their toes in stocks for the first time over the last few years. You need to go on a bit longer so that people see stocks investing in the proper light. Already I think the Chinese government has been extraordinarily "kind" to individual investors - at least margin financing is almost non-existent in China. If it was you can probably quadruple the suicides due to the loss of savings.

For Malaysians, most have been through at least a couple of devastating bear markets (no, not the recent 1,500 to 1,150: that's not scary enough). The survivors would learn that ultimately each is responsible for their own actions and decisions. Nobody takes a cut from your winnings, so no one should share your losses. My favourite saying about the stock market: The market does not owe you a living, it is not there to make you rich but it can make you very poor.

Asians in general tend to bitch more when they face losses. Tung Kin Hwa took the brunt from HK people. Somehow, we never really saw similar "reactions" in USA when the Dow collapsed in late 1920s, I wonder why. People did jump off buildings but there were not a lot of bitching. Things happen and if you were caught off-guard, just damn your luck. People have to TAKE PERSONAL RESPONSIBILITY more, not just your investing decisions but in most things in life. The BLAME SOMEONE ELSE trend has taken a remarkable growth passage over the last decade - its always somebody's fault, never your own. Don't play the VICTIM, its stupid and immature. More self-introspection please everyone.

While it is sad that people commit suicides owing to market losses, people around should do their bit to encourage, educate and calm those around them who are facing "difficulties". That's as much as we can do.

p/s photo: Jolin Tsai

Thursday, May 08, 2008

A Temporary Bottom For USD

Although I am a firm believer in USD needing to fall some more, indications are that the USD will recover and stand firm for the next couple of months at least. The USD sentiment boost came from weak Eurozone data and comments by Kansas City Fed President Thomas Hoenig. Hoenig, a non-voting member of the FOMC, said that “serious” inflation problems may lead the Fed to raise interest rates. There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it.

There is also a medium to long-term danger of letting rates go lower in an environment of rising food and energy prices. In fact, the short FOMC statement gave hints that the Fed may pause rate cuts for now, something which is a big support for the US dollar.

Eurozone retail sales data released this week showed a drop of 1.6% in March compared to a year ago, the biggest fall since the data collection started in 1995. Sales fell 0.4% from the previous month. Another government report showed that German manufacturing orders fell 5% in the year ended in March, compared with an 8.9% rise the prior month. Is the slowdown due to the strong Euro or the credit implosion, I think it has more to do with the former. This will certainly cap the Euro's strength temporarily. I am sure the ECB would like to see the Euro stop climbing for a while at least.

A short term rebound in USD will usually be seen as a good thing for US equities, but it will be more of a bear trap than a sustained rally. However, the USD alone would not be sufficient to mask the whole gamut of issues crowding the US markets. Housing, Fannie and Freddie, these are just two major potential blow outs. As for Asian currencies (ADXY), even a temporary respite will still keep most Asian currencies above the long term uptrend line. A short term stronger USD will take the steam off commodities price rally. Eventually, we all will come to the conclusion that demand for commodity is not from US or Europe but rather from growth in BRIC and the smaller emerging markets. Hence when that conclusion is arrived at, business as usual, Asian currencies to continue its rise. The USD strength will be very temporary. I'd be more worried about the Euro as its strength is not warranted and the effects are working its way through the economic and financial system.

Fannie & Freddie Sat On A Wall

Following the scare at Bear Stearns, Paulson and Bernanke are now furiously looking at the troubled Fannie Mae and Freddie Mac. These two were created by the US government and now hold more than 80% of all mortgages bought by investors in 1Q2008. This was doubled the same period last year.

They are the mortgage financiers of choice nowadays because lending has frozen somewhat in other avenues. Both companies have a combined capital of just US$83bn, but holds US$5 trillion in debt and other commitments. Fannie just announced a US$2.19bn loss for 1Q2008 and Freddie will announce next week.

Estimates range from US$17bn-US$22bn, the additional losses they are now sitting on.
Weak and weaker housing prices are gnawing at the value of the debt they are holding. Even if both fail, they should not hurt the equity markets badly (but will drag sentiment down) because they will definitely be bailed out. However, such a move will put further downward pressure on the USD.

The potential of just any one of them failing will cause housing prices to dip even further. The longer they are operating on a respirator, it is unlikely housing prices will find a bottom anytime soon.
Both companies will need to raise a lot of capital from the market, but will there be investors willing to pony up? The SWFs may be willing to look at them but both are sensitive companies and will not be allowed to have any SWFs on board. Both companies do not lend directly to home buyers but they buy from banks and other lenders. The reason why they account for 80% of all mortgages written in 1Q2008 indicates that banks are quick to sell the mortgages and lighten up as much as they could. Not exactly promising. To alleviate the sub prime issue, these two companies may have been "asked" to buy mortgages from the banks so that credit does not freeze up. But their balance sheet cannot withstand much further if housing prices fall further, which is highly likely. Something's gotta give soon. Another bailout so near election time will be prime fodder for the Democrats to nail the Republicans.

What is exceptionally worrying was that Congress temporarily raised the cap on the size of mortgages these two companies can buy from US$417,000 to US$730,000. This can only mean that credit is also freezing up in the higher range of properties, not just the lower end.

p/s photo: Coco Chiang Yi

Tuesday, May 06, 2008

Can Someone Help?

I am the biggest fan of Stephen Chow movies. I have regarded his version of A Chinese Odyssey I & II as masterful works of art in comedy. (Btw, my favourite Chow Sing Chi's movie is Out Of The Dark or in Cantonese Wooi One Yea). Anyway, I need help from you guys and gals out there. I absolutely love the songs from the Sai Yau Kei movies.

For the last 10 years, every time I go to HK I would visit the CD shops to try and get the soundtrack of the movies but to no avail. It really frustrating. They all know of the album but its always out of stock. The CD cover is one of the photos in this posting. The songs were all brilliant and I am really dying to get my hands on a copy.
I looked into ebay and found someone willing to sell for US$50, would have grabbed it if I had PayPal. This would be the best gift I can receive for Christmas (hint, hint)... lol... If any of you can help, please let me know. Thanks in advance.

Monday, May 05, 2008

Snippets From Berkshire Hathaway AGM

As if we were there yesterday, sourced from WSJ:

With entertainment involving loud music and bright lights kicking off at 6 a.m., Warren Buffett’s legendary “Woodstock for Capitalists” isn’t for slackers or morning dozers. Some 30,000 Berkshire investors are expected to squeeze into the stadium by 9 a.m. central time to hear Mr. Buffett, 77 years old, and his droll sidekick Charlie Munger, 84, hold forth for six hours on just about anything. They came for the serenading Fruit of the Loom minstrels and the limited-edition T-shirts that say, “I’m a Berkshire Hathaway Shareholder!” They came for the Dilly Bars, the Borsheim’s baubles and the 6 a.m. show by artist Michael Israel, who speed-painted a Buffett portrait with Benjamin Moore paints and U2 music blaring in the background. They came for the zeitgeist.

As rain the night before forced flight delays and cancellations, some investors chartered private jets (NetJets, natch) while others piled into rented cars with strangers and drove through the night. Many checked themselves into hotels and motels in Lincoln or over the state line in Iowa, since Omaha’s accommodations were long sold out.

Did they seem tired or discouraged? No way.

While so much bad news these days keeps other investors lying awake at night, Berkshire investors slumber well on the fact that their Class A shares are trading at a respectable US$133,600 a pop. No wonder they’re morning people.

Warren Buffett and his vice-chairman Charlie Munger frowned on the use of options as ways to buy or sell equities.

“We virtually have never used options as a way to enter or exit a position and we would doubt very much that we do,” he said, adding that Berkshire had owned some puts on Coca-Cola years ago, but they were never exercised. “If we buy something, we just buy it. We don’t get involved in fancy techniques.”

Mr. Buffett did acknowledge, however, Berkshire’s investment in long-dated equity-index options. The billionaire investor, who studied under famed value-investor Benjamin Graham at Columbia University, then proceeded to criticize business schools for spending too much time teaching students “about things like options pricing, which is absolutely ridiculous.” The only two things students need to learn, he said, are “how to value a business and how to think about stock-market fluctuations.”

Mr. Munger, as usual, was more blunt. Pondering out loud the widespread use of stock options and his reaction to options exchanges, he said: “The idea of turning financial markets into gambling parlors that enable the croupiers to make more money has never been very appealing to us.”

None of the 31,000 Berkshire Hathaway shareholders at the Qwest stadium in Omaha rushed for the exits when Chairman Warren Buffett told them they might be better off owning other stocks. “Anyone who expects us to come close to replicating the past should sell their stock. It’s not gonna happen,” he told the hushed crowd.


Berkshire’s securities portfolio, tipping the scales at more than $60 billion, scours the world for stocks of market capitalizations of at least $10 billion and often more than $50 billion, “otherwise they don’t move the needle,” Mr. Buffett said. Berkshire’s securities investments, which for years have included stalwarts like Coca-Cola and Wells Fargo — have increased in aggregate by dollar amount, but they now drive a smaller percentage of Berkshire’s book-value growth. Berkshire’s 70-plus wholly owned subsidiaries, such as precision tool-maker Iscar, based in Israel, reinsurer General Re, Geico and Dairy Queen are bigger drivers of the book-value growth.

The 77-year-old billionaire hearkened back to the 1950s, when he managed his first investment partnership and racked up spectacular annual gains for about a decade. He often bought small stocks, and still refers to his investment performance of those days as the best of his decades-long career. “You may have something better to do with your money than buy Berkshire,” he said. “We don’t think it’s the most attractive investment in the world if you’re willing to take the time to go through the thousands of possibilities that Charlie and I used to do,” he added.

Over the past two years, Mr. Buffett has significantly pared down Berkshire’s position in foreign-currency futures, which he starting using in 2002 to bet against the dollar. As interest rates rose in the U.S., making that bet more expensive, he preferred to buy companies that earned foreign-currency revenue that Berkshire could convert back to U.S. dollars.

Berkshire’s biggest stock and operating-company holdings, ranging from shares in Coca-Cola to Iscar, an Israeli precision-tool maker, ring up big non-dollar revenues, which translate into bigger boosts to earnings for Berkshire. Later this month, Mr. Buffett will tour five cities in Europe to look for more buying opportunities.

“We are happy to invest in businesses that earn their money in the euro, or in companies that derive their earnings in Germany, or from the sterling in the U.K. because I don’t have a feeling that those currencies are going to depreciate in a big way against the dollar,” he said in response to a question from a German shareholder who asked if Berkshire hedged its foreign-currency exposure. “Overall, I think the U.S. is going to continue to follow the policies that have made the dollar weaker in recent years. I’m willing to bet the dollar will weaken against other currencies over the longer term, so I feel no need to hedge those currencies.”

p/s photo: Akemi Katsuki (remember her name)

Thursday, May 01, 2008

Canto Albums

Well, I didn't think many would be interested in Cantopop, but since there were a couple of emails asking for my Canto picks, here are my favs. Cantonese albums are generally inconsistent. They tend to have a couple of big singles and the rest are so-so. Hence many of my fav artists don't get their albums up here (e.g. Sam Hui, Eason, Jacky Cheung, Alan Tam, Sammi, Anita Mui, etc.. to name a few). The following are the few rare ones which I deem as indispensable. There are a few of Danny Chan's which made the grade mainly because he takes a lot of care in putting in everything to producing great albums. Many artists suffer from being uneven. Beyond is too great to miss out but there's not one album alone which do justice, hence their compilation made the cut. Of the entire lot, George Lam's black n' white album, to me, was and still is, the best Cantonese album ever.

Margin Valuation Prices As Price Targets

What a novel idea... the supposedly latest share margin valuation prices for glove stocks MAY actually present itself as a ready-easy targ...