Monday, June 30, 2008

Bear Factors & CFTC

Thanks to Friday's 106.91-point drop left the Dow Jones Industrial Average at 11346.51, down 19.9% from its October record, after it had fallen as low as 11297.99 during the day. At the day's low the Dow was down 20.2% from October. Investors typically consider a decline of 20% or more the mark of a bear market. The last bear market, which extended from January 2000 until October 2002 for the Dow, was accompanied by a mild recession.

The usual bear markets are due to one or more of these factors: inflated stock values, mounting inflation, rising interest rates or a recession. Inflated stock values - not really this time. Mounting inflation - yes for sure. Rising interest rates - not yet but will have to rise to fight off inflations in the coming months. Recession - despite the many wolf calls, a recession is not likely globally, even in the US.

Since 1960, the average bear market has lasted about 14 months and has taken stocks down about 31% before they hit bottom. The mildest bear market saw a 21% Dow decline in the early 1990s, and the worst, during the 1970s oil crisis, a 45% drop. We have to remember that markets are forward discounters. Having reached the 20% correction, it is difficult to bounce back from that level immediately. If we mark to the mean which is 30% correction, its another 10% from here.

However I think we will not get anywhere near 30% as the "inflation" though widespread, its not pervasive enough. The inflation is largely due to commodity and fuel in particular moving its way into food, transportation logistics and salaries. However, unlike previous inflationary scare, the world is not at the tip of recession as much of the inflation had been due to productivity/consumption growth and the US printing tons of money for the past 7 years.

The US currency is already paying for the excessive printing. If inflation is due to productivity and consumption. Those are not essentially bad things. The biggest argument is that a 20% correction in oil prices would soothe the inflationary pressures substantially. If we have that, the rest of the world should have little problem coming to grips with higher food and related prices as most of the global economy is still chugging along.

What has zipped across the media screen but deserves greater attention was that the US House of Representatives on Thursday passed a bill that directs the Commodity Futures Trading Commission to use all its authority to curb speculation in energy futures markets. In just one of a slew of bills, the House of Representatives overwhelmingly passed largely symbolic legislation on Thursday ordering regulators to "curb immediately" excessive speculation in commodity markets. Many Democrats in the House and Senate are blaming loopholes in the regulatory system and want the CFTC to lower the boom on the Las Vegas world of commodities trading. Of course the White House could over-ride the bill but its not just Democrats, there are some Republicans as well willing to cross the fence to support the bill.

Of all the bills, market players are most concerned about the Senate's End of Speculation Act which calls for an increase in margin requirements as a blunt tool to tackle price speculation. That bill has yet to be debated. The chess players have begun moving their pieces. You all know whom I am rooting for.

p/s photo: Pinchaseeni

Wednesday, June 25, 2008

Essential Reading - When Markets Collide

If you are sick and tired of reading Warren Buffett or Ben Graham or even Peter Lynch, try this one. Mohamed El-Erian was the ex-fund manager of PIMCO's highly regarded emerging markets fund. He left to become president of Harvard Endowment for another highly successful tenure, where he managed US$35bn in endowment. Now he is back as co-CEO and co-chief investment officer of PIMCO. He spent 15 years at the International Money Fund, working on policy, capital market, and multilateral economics issues. In 2004, Fortune named him a member of its eight-person “Mutual Fund Dream Team.”

According to the McGrawHill byline: When Markets Collide is a timely alert to the fundamental changes taking place in today's global economic and financial systems--and a call to action for investors who may fall victim to misinterpreting important signals. While some have tended to view asset class mispricings as mere “noise,” this compelling book shows why they are important signals of opportunities and risks that will shape the market for years to come. One of today's most respected names in finance, Mohamed El-Erian puts recent events in their proper context, giving you the tools that can help you interpret the markets, benefit from global economic change, and navigate the risks.

The world economy is in the midst of a series of hand-offs. Global growth is now being heavily influenced by nations that previously had little or no systemic influence. Former debtor nations are building unforeseen wealth and, thus, enjoying unprecedented influence and facing unusual challenges. And new derivative products have changed the behavior of many market segments and players. Yet, despite all these changes, the system's infrastructure is yet to be upgraded to reflect the realities of today's and tomorrow's world. El-Erian investigates the underlying drivers of global change to shed light on how you should:

  • Think about the new opportunities and risks
  • Construct an appropriately diversified and internationalized portfolio
  • Protect your portfolio against new sources of systemic risk
  • Best think about the impact of central banks and financial policies around the world

Offering up predictions of future developments, El-Erian directs his focus to help you capitalize on the new financial landscape, while limiting exposure to new risk configurations.

His main contentions:

a) there is a realignment in global growth, shifting from one big engine (the US) to many smaller planes, which will bring about a bumpy process

b) the return of inflation, the smaller planes went from being producers to being producers and consumers, the inflationary long effects are still not fully appreciated by the markets

c) structured finance has diminished the barriers to entry to mortgage finance, which brought about overeager innovation, and the sub prime crisis, but the global mortgage finance market will never be the same in the future, the sub prime mess was an initial overeager casualty as with any grand innovation, but will elevate the mortgage markets of the future

d) transfer of wealth, debtor countries are now creditor countries, another bumpy ride

USD Millionaires, Where Are They?

NST: The country's poverty rate will increase from 3.7 per cent to 24.3 per cent if the poverty line is raised from the current RM800 to RM1,500 per household.
Minister in the Prime Minister's Department Tan Sri Amirsham A. Aziz said the definition of the poverty line was a household income sufficient for basic necessities. It does not include luxury items. The basics are food, clothes and other expenses like rental, utilities, transport and communication, health, education and recreation.

On such an optimistic note, let's all have a look at the number of millionaire households globally. The definition of a millionaire household is homes with more than US$1m in net assets.

The absolute figures, number of millionaire households:

1) USA 4,585,000

2) Japan 830,000
3) UK 610,000
4) Germany 350,000

5) China 310,000
6) Italy 270,000

7) France 265,000
8) Taiwan 220,000
9) Switzerland 205,000
10) Brazil 190,000
11) Netherlands 145,000
12) Belgium 135,000
13) Australia 135,000
14) Spain 125,000
15) Canada 110,000

Naturally the absolute figures would be skewed favouring those with large population. Although, Australia, Belgium and Netherlands are notable exceptions.

A more revealing figure would be as a percentage of all households in that country:

1) UAE 6.1%
2) Switzerland 6.1%
3) Qatar 5.2%
4) Kuwait 4.8%
5) USA 4.1%

6) Singapore 3.8%
7) Taiwan 3.0%
8) Belgium 3.0%

9) Israel 2.7%
10) UK 2.4%
11) Ireland 2.4%
12) Bahrain 2.2%
13) HK 2.1%
14) Saudi Arabia 2.0%
15) Netherlands 2.0%

We can understand those OPEC nations with their millionaires. USA, UK and Singapore are up there mainly because of the strong property markets over the last 10 years (even taking into account the property correction in the US over the last year and a half). If there are more foreclosures and a further 25% correction in property prices in the US and UK, coupled with another 10% weakness in USD, well you can see USA and UK slipping quickly down the rankings. Switzerland is there with its banking facilities, or rather the millionaires move there. Ireland is a real success story, from the pits the country have risen through smart investment incentives.

It will always be pretty hard for normal public working in Malaysia, Thailand, the Philippines or Indonesia to hold net assets of more than US$1m. The average salaries would put all these countries on a backfoot. We tend to subsidise a lot of necessities and in particular fuel and diesel. The subsidies and a deliberate weak currency policy helps to ensure competitiveness. However, if these countries do not reinvest properly into education and high value add industries, we will forever have to contend with sluggish salaries. In a way, that translates into the property values.

While I am loathed to put Singapore in a shining light, they have reinvested very well. In 5 years time, if you have finished paying off your HDB flats, you can retire as an easy RM millionaire in Malaysia. If you have an executive HDB flat and paid that off, well, you should be very very close to being a USD millionaire - we are not even talking private property here. These are government housing.

For Malaysian graduates, work hard for the first few years then plan your career well. You may want to move to "internationally competitive" arenas, prove yourself and really earn good money, or get reposted back to Malaysia. You stay local, you will be paid local. Unless you try and establish your own business, which is no guarantee. Or pick industries which pay industry competitive rates - technology, investment banking, oil & gas, advertising, private banking, etc.

p/s photo: Sarunat Visutthitlada Lider

Tuesday, June 24, 2008

India's Insurmountable Oil Subsidy Problem

China have raised prices of gasoline, diesel oil, aviation kerosene and electricity by as much as 18%. China's new gasoline price is at about US$3.29 a gallon, and the diesel price is at US$3.08 a gallon. Despite price hike, break even price for refiners still far below market price (based on crude oil price of US$92 below market price pushes demand growth faster than in an undisturbed market.

Chinese fuel subsidy costs are lower than in some of its Asian counterparts on a GDP basis as it produces around one-half of its oil consumption. Subsidies distort demand. A more efficient way to protect people’s purchasing power would be to let prices increase and introduce direct, targeted subsidies for afflicted consumers like Korea has done, and which Malaysia is now trying to do.

China's total amount of implicit subsidies (financial support from the state budget and losses incurred by state companies) in 2007 was about US$27 billion, 0.8% of GDP. 2008 costs might be US$100 billion, or 2.2% GDP. Chinese fiscal position means it can afford to continue status quo, can do so longer than its neighbors or could raise prices gradually.

China's oil subsidy situation is quite manageable. However, the market seems to be ignoring India's potentially more explosive situation with respect to oil subsidy. I can forsee a dramatic demand destruction in India. If you have been to India lately, you will find a lot of petrol stations closed, seriously. Many of the big refiners and petrol pump stations are state controlled in India. Take Indian Oil, it has 17,800 petrol stations and can register revenue of US$59bn. However, Indian Oil loses US$76m (RM247m) A DAY for every day it allows its petrol stations to operate. That's due to the government insisting that these state companies continue to subsidise all gasoline, diesel and cooking oil.

Presently petrol cost only one-third the price in USA despite a nastily handled 13% hike in fuel price on 4 June recently. If oil stays at US$130 for the rest of the year, there should be at least another 13%-15% hike in order to stop the state budgets and government budgets from totally imploding. Even then, the problem would not be solved.
Politically and socially, the Indian public are pretty angry with the recent hike. Can you imagine another round before the year is over?

Manmohan Singh, the PM, is seriously betting that the price of oil would drop back to US$100 by year end or else you can basically kiss the whole government machinery goodbye.
Due to the diverse political landscape across India, managing a substantial and dramatic reduction in oil subsidy will probably require military intervention and curfews. It is just unmanageable.

Private oil players such as Essar Oil and Reliance Petroleum are still trying to expand but their oil is unsubsidised, which totally puts them out of the competition. Reliance Petroleum has shut down all 1,400 of its new gas stations while Essar has temporarily closed its 1,250 pumps. Even Shell has closed 40 of its 50 stations.
Removing oil subsidy is like one of Buffett's stories. You don't know who is swimming naked until the tide recedes.

Oil subsidy is a bloody crutch and a bloody curse. Industries and economies must compete as close to international input prices as possible. Wealth from resources should be used less and less to subsidise the price of fuel to the general public but rather be used to target support for specific affected groups and improve the social safety nets for the poor.
Just Indian Oil is already losing US$76m (RM247m) a day. If you add the other state controlled Bharat Petroleum and Hindustan Petroleum, you are looking at a gigantic problem. If you add the 3 together, you might be looking at RM500m losses a day - how long can any government stomach that??!!

p/s photos: Cholada Mekratree

Monday, June 23, 2008

Remembering Eva Cassidy

Beautiful Eva died in 1996, from melanoma, the most deadly form of skin cancer. Her music was little-known during her 33 years of life, but today her soul-stirring voice is reaching people all over the world. For some fans, the pleasure of listening is enough. Others want to know more: "Who was this remarkable singer? Why haven't we heard of her before?

It was the fall of 1996, and Eva Cassidy was dying. As she lay in bed in the Bowie home of her parents, musicians in a nearby studio were laying guitar, piano, and violin tracks on vocals Cassidy had recorded over the years.

"After they'd finish, they'd come in and say, 'Eva, we just finished one of your songs—would you like to hear it?' " recalls friend Jackie Fletcher. "She had left so many incredible recordings."

Her friends wanted to do something—anything—for Eva. They wanted to share with others a voice that had been little heard outside Washington. Fletcher sent tapes to local radio stations, requesting that they play Cassidy.

"If they'd tell me, 'Jackie, I'm going to play Eva in this hour,' I'd call Eva and say, 'Listen to the station—they're going to play you tonight.' It made her so happy. She had worked so hard, and finally she was getting some recognition."

No one guessed then how the voice of Eva Cassidy would spread.

Four and a half years after her death from melanoma, a posthumous album, Songbird, reached number one on the United Kingdom chart with more than a million copies sold. One Web site devoted to Cassidy—there are five and counting—has messages from fans in Australia, Poland, Hong Kong, even Vatican City. In this country, National Public Radio aired a nine-minute segment on Cassidy in December, and soon her albums occupied five of the top seven slots on Amazon's bestseller list.

What is it about Eva that has created such a sensation?

For one thing, her voice is captivating. Mary Chapin Carpenter, a gifted singer herself, says that the first time she heard Cassidy's voice she "just about fell off the couch."

When radio stations play Eva, their switchboards light up. Many callers say they were in their car when they first heard her and had to pull over to cry.

"Eva evokes that kind of reaction. Not just 'She's good' but 'Who the heck is that?' " says Keith Grimes, who was a guitarist in the Eva Cassidy Band.

Cassidy had great control, phrasing, and range. She was petite—five-foot-two—but could belt out a bluesy "People Get Ready" as easily as she could sing a delicate tune like "Autumn Leaves." Some who heard this soulful Scotch-Irish-German woman thought she was black.

It's more than Cassidy's technical skill that grabs people. It's the sense as she sang that she was reaching from her heart to her listener's.

"There are singers that have great instruments but are just singing the notes," says Grace Griffith, a friend and local chanteuse. "Other singers have emotion but not the instrument. Eva had both."

No song speaks to this expressiveness as much as her rendition of "Over the Rainbow." Cassidy, who loved the Wizard of Oz books as a child, breathed new life into an old song about hope and longing.

An amateur video of Eva shot at Blues Alley, her face full of feeling as she sings "Over the Rainbow," is largely responsible for the big sales in England. It's just about the most requested video in BBC history.

Eva's parents receive two or three letters a week that mention how soothing and uplifting Eva's music is, how it helps them through troubled times. Her mother, Barbara, recalls a letter from a woman who said that when her son died, "the doctor gave her a hug and Eva's record."

In 1998, when David Finn's mother was dying, Cassidy's voice provided comfort.

"With the diabetes, she had lost her sight and was bedridden the last six months of her life," recalls Finn, who once owned an Annapolis restaurant called Pearl's, where Cassidy performed. "We would sing along with Eva's songs. The diabetes causes a lot of pain. It was one of the things that would help ease the pain."

Some may wonder if Cassidy's death at the age of 33 accounts for some of the popularity. No doubt her life story is part of it. But articles about her haven't boosted sales as much as when her songs are played on the BBC or NPR. Hearing about Eva Cassidy isn't as powerful as hearing her.

Says her father, Hugh Cassidy: "The letters, the things I read, more and more confirm that there's something afoot here. It is kind of mysterious the effect it's having."

Eva Cassidy was happiest not in a smoky nightclub but outdoors, where she hiked and biked and basked in the beauty around her. She and her mother—her best friend—went for a walk, bike ride, or drive to the water almost every Sunday.

"She had this old pickup truck, and one time we were on this country road and she started swerving," recalls Barbara Cassidy. "I said, 'What are you doing?' And she said, 'Mom, don't you see those caterpillars? I can't run over those.' "

"She's one of those people who see God in everything," says Keith Grimes. "She had respect and appreciation for living things. She wasn't a religious person in the churchgoing sense, but she was spiritual."

Cassidy's favorite "holiday" was the first day of spring. Her birthday was in February, and she'd save one of the sugar roses off her sheet cake and stick it in the freezer. Then on the first day of spring she'd take it out and savor it.

Cassidy's favorite time was sunset, which she called "the golden time."

"When I'm working out in the shop, I wait for the golden time," says Hugh Cassidy, a retired Prince George's County teacher and a metal sculptor. "You just stop what you're doing and take it in. When I see those golden rays, every once in a while I'll say, 'It's time to put on Eva.' "

Oil Majors - Comparative Stats

btw, my fellow blogger Seng is absolutely correct to insists that pages 81-165 of the 2007 annual report be made fully available on the website... I think other oil companies (the listed ones in particular) does that, so I doubt there are trade secrets you cannot reveal, maybe executive compensation information may be deemed sensitive, but hey, its a brave new world Merican, so let's get it all out there ... at least make my job in defending Petronas ass easier OK!

Petronas Malaysia

ROE - 2005: 38.5%; 2006: 41.6% ; 2007: 40.9%

Net profit - 2006: RM43.1bn (US$13.26bn) ; 2007: RM46.4bn (US$14.27bn)

ROE Of Majors
(Most Recent Year)

1) Royal Dutch Shell 24.06%

2) BP Plc 26%

3) Total SA 29.5%

4) Repsol YPF 17.9%
5) Statoil 33.23%

6) Lukoil 23.23%

Net Profits Of Majors (Most Recent Year US$)

1) Royal Dutch Shell 91.8bn

2) BP Plc 75.3bn
3) Total SA 56.4bn

4) Repsol YPF 18.3bn

5) Statoil 12.3bn

6) Lukoil 20.4bn

Notes: Just for comparison sake, Statoil makes about the same amount of money as Petronas. However, Norway is the world's third largest oil exporter behind Saudi Arabia and Russia. Norway is also the world's seventh largest gas producer and the second largest supplier of natural gas to Europe. Statoil merged with Norsk Hydro and is the leading petroleum company in Norway, and also the world's largest operator of deepwater fields. To be fair, Norway has more than just one oil giant.

Asian Majors Net Profit (US$)

1) Petrochina 19.13bn

2) CPCC 7.096bn

3) CNOOC 3.96bn

Return On Equity (Most Recent Year)

1) Petrochina 24.19%

2) CPCC 19.46%

3) CNOOC 28.7%

A detail report was submitted to the Select Committee on Energy Independence & Global Warming last month. The report covers Exxon Mobil, BP, Shell, Conoco Phillips and Chevron. The 5 companies CEO's average pay was US$23m. At Exxon Mobil, the top 5 executives was paid a total of US$28m (average RM18.2m pp) in 2001 and a total of US$76m (average of RM49.4m pp) in 2007. Keep that in mind as Petronas starts to reveal executive compensation in the coming days.

photos: Rain Li Choi Wah

Sunday, June 22, 2008

2v1g, Got Yours Yet?

After visiting a few cd shops for the last couple of days, I finally got the cd today at 1st Floor Bangsar Village 1. Its value for money at 39.90 considering its an audiophile pressed cd.

Since I only had listened to the previewed 6 songs, I was delighted to find the other songs were equally impressive. The great thing is playing the cd on a proper stereo, it really enhances the experience, especially Roger Wang's guitar. The two vocalists must be applauded for their sense of timing and tempo as they only have a guitar as backing.

The toughest song for Roger and the singers must be the last track, "we want us to be together", hard to play, harder to sing, harder still to sound good. Great effort.

My new favourite track, "sher fou / perhaps", refreshing take minus the wailing /screeching by the original singer.

Friday, June 20, 2008

Market Moving News & Developments?

Market Watch: While the economy is very weak, better times may be ahead, an economist with the Conference Board said Thursday on a report that the index of leading economic indicators rose slightly in May for a second straight month. The index, which attempts to forecast turning points in the economy, rose 0.1% in May, matching April's gain. "Latest data suggest the economy has not fallen into a contraction and may not undergo one in the second half of the year," said Ken Goldstein, labor economist at the Conference Board. "In fact, the economy might even begin to turn a corner early next year."

Market Watch: Weekly U.S. initial jobless claims dropped by 5,000 to 381,000 in the week ending June 14, a two-week low, the Labor Department reported Thursday. The four-week average of initial claims rose by 3,250 to 375,250. Continuing jobless claims fell to 3.06 million, the lowest since April, but still well above the year-ago level of 2.52 million.

Market Watch: Oil prices fell sharply Thursday following media reports that China will increase retail gasoline and diesel prices by 1,000 yuan a ton starting Friday. Dow Jones Newswires reported the news citing a Reuters story. Crude oil for July delivery dropped $2.27 to $134.40 a barrel on the New York Mercantile Exchange.

The above news items are all positive but the equity markets seem to be still finding its feet. Largely, I am not a chart-person, but followers of technicals still think the Dow and Nasdaq are having a downtrend even though the strength behind Nasdaq is appreciably stronger.

The weaker oil price was a boost but on long term charts oil has been registering higher highs and higher lows for the last 3 years. Technically speaking, if left on its own, the uptrend would not be broken until a significant support level has been broken. That level, viewed by many chartists, currently stands at US$120. If it breaks that, then we are looking for the US$100 as the next significant support level.

Hence current oil price weakness, while welcomed, may not be sufficient to be a strong rallying point for equities.
Why am I not more into technicals, I could write a small book if given the chance. Take oil for example, its important information to know that the price is still on the uptrend channel. However, as I have explained, I see oil having a lot more "fiscal enemies" at current US$140 level. Its a bubble no doubt, the high price is there to generate interest to seek out more difficult and expensive oils. The shortage is not immediate but is projected 4-5 years out.

What the charts will not tell you is when "fiscal measures" or "when regulators decide to intervene" to move the goalposts. I have not been commenting on oil being a big problem for the longest time. When it short squeezed twice within a week jumping a few dollars each time, it triggered alarm bells. Its too easy to jump on the oil bubble bandwagon. There are certain trigger points which you sense will cause certain people to act. Left alone, oil will merrily go ahead upwards. But people will act, by cutting subsidies, the promotion of demand destruction factors, and the implementation of strict position limits. Even OPEC does not welcome the current situation.

Funnily enough, I don't seem to have a snappy conclusion to what I have just written...

p/s: Nook

Thursday, June 19, 2008

Oil Subsidy, The LATAM Experience

We have been so preoccupied with the drastic cutbacks in fuel price subsidy, we haven't paid sufficient attention to what's happening in other countries. Let's have a look at some countries in Latam, some are net oil exporters, some are net importers, some subsidise, some don't. Their report card tells quite a story.

Let's look at those a bit like Malaysia, namely Argentina and Colombia. Both are small net exporters of oil, around 300,000 barrels a day. The public in Argentina and Colombia pay US$1.04/l (RM3.38) and US$1.10/l (RM3.57) respectively. Both countries still subsidise fuel products for the people. Argentina spent US$11bn a year and is grappling with an inflation rate of 9%. While Colombia spends around US$3bn a year, and they have a more manageable inflation rate of 6.3%.

Big exporters include Mexico and Venezuela. They export some 1.4m barrels a day and 2m barrels a day respectively. Naturally fuel price is heavily subsidised and cheap. The public in Mexico and Venezuela pay US$0.69/l (RM2.24) and US$0.04/l (RM0.13). Boy, don't we all want to live and work in Venezuela??!!

Mexico's subsidies total US$19bn, while Venezuela's total subsidies were US$11bn. Of course Venezuela's population is almost the same as Malaysia at 26m, while Mexico's population is nearly 110m. Hence you need to divide the subsidy with the population to get at a realistic figure.

However, the good news ends there for Venezuela because they are currently struggling big time with inflation at 32% while Mexico is chugging along nicely with inflation at just a tad below 5%. Draw your own conclusions.

Let's now look at the net oil importers, Brazil and Chile. Brazil imports 30,000 barrels a day while Chile imports 244,000 barrels a day. Brazil has NO subsidy, while Chile's subsidy is a mere US$311m. Naturally fuel price for the public there is high. Brazilians pay US$1.58/l (RM5.13) while Chileans pay US$1.35/l (RM4.38). Brazil's inflation is at a manageable 5.5% while Chile's at 8.9%.

It maybe premature to draw solid conclusions from the Latam countries' experience but seemingly the countries that practice lesser fuel product subsidies do better over the longer term. It probably has to do with working in proper competitiveness in the industrial structure of the economy when you do not have oil subsidy. I guess, in a way, you can call it the curse of having oil. If you have it, you have to do a lot better with it as it can mask inefficiency. If you don't have oil, you are already competing at international standards of efficiency, you'd probably try harder already.

p/s photos: Jennylyn Mercado

Tuesday, June 17, 2008

Lift Your Spirits, Pie Jesu

Last year we had the enchanting Connie Talbot. This year we have the unassuming 13 year old kid named Andrew Johnston. Open up your hearts and be touched by his voice. Remarkable to say the least. Click on the link for a bit of magic.

p/s photo: Shiho Hoshino

China Market Irregularities

The detention of Wang Yi, vice governor of China Development Bank and a former China Securities Regulatory Commission vice chairman, for his involvement in market irregularities may just be the tip of the iceberg.

Wang, 52, is the first high-ranking executive of the regulators arm of the securities market to be detained, mainland papers reported. And his situation may well open the lid on a series of wrongdoings among listed companies and securities firms.

Wangs former secretary has been under investigation for his alleged involvement in bribery cases, while his brother Wang Lui was said to be deeply involved with the controversial Shanghai listing of Pacific Securities. News of his detention has also poured cold water on the market as Wang has established a good network in his years with the watchdog.

p/s photo: Taksaon Pasukcharean Thaksarn

Useful Economic Info Nuggets

+ Indonesia's relatively limited oil price rise means that the government will still be vulnerable to further international price increases - the worst of both worlds, a rising deficit with higher retail prices and inflation.

+ Thailand has one of highest oil consumption/ GDP ratio of key Asian economies.

+ Rising Inflation: China, India, Taiwan, Singapore, Hong Kong, S.Korea, Indonesia, Thailand, Philippines, Malaysia; even worse, Inflation in double-digits: Vietnam, Pakistan, Sri Lanka, Bangladesh.

+ According to Asian Development Bank and World Bank, inflation is a bigger risk to Asia than U.S. slowdown; Commodity inflation may impact terms of trade for importers/exporters and feed into higher prices, wages.

+ Rising inflation (oil prices), monetary tightening, equity sell-off by foreign investors is causing downward pressure on Asian currencies; India, S.Korea, Thailand, Philippines, Indonesia already intervening in currency market to prevent large depreciation and the resulting inflationary pressure from food and oil prices.

+ Bank Negara’s international reserves were at an all-time high of RM399.92bil as of May 15. The reserves position was sufficient to finance 9.9 months of retained imports and was 7.3 times the short-term external debt. The reserves comprise gold, foreign exchange and other reserves, including special drawing rights. The international reserves had risen by RM64.18bil from RM335.74bil as of Dec 31 last year.

+ Malaysia raised fuel prices by 41% in early-June w/ cash transfers for small car owners; move may raise inflation up to 5-7% in the coming weeks, forcing monetary tightening ahead in spite of slowing exports and growth forecast and impact on domestic demand.

+ Taiwan dollar, Malaysian ringgit, Thai baht will perform better due to current a/c surplus, lower capital dependence; Indian rupee, Korean Won, Vietnamese Dong will weaken as high imports impact current a/c deficit.

+ Malaysia's Q1 2008 GDP grew at 7.1% on energy exports and increase in govt wages but Govt has lowered 2008 growth forecast to 5-6% (2007: 6.3%); forecasts by IMF: 5%; ADB: 5.4%; WB: 5.5%.

p/s photo: Haruna Yabuki

Why So Many Female Photos????

Thanks to Rocky Bru's posting, there have been a number of fresh visitors to the site. To anticipate the first thing that pops into your minds, here's why:

I will probably have to repost this every other month, but its worth it. Strictly speaking, if I wanted to be a difficult a-hole, I will just say that its my blog - hence there is no need to explain or justify the pictures. But I will try to be nice so I will venture an answer:

I used to have to search for "intelligent photos" which somehow may relate to the topic of my posting, you can see from the first 2 years of postings. It was exhausting and not very fun at all. Posting has to have photos as its nicer to look at and more captivating.

Then I said to myself, its my blog, there is no need to look professional. Its all in the comments. If readers want to read it, they will read it. Why not put up photos I like to see. I am a very single hetrosexual guy. Hence I like pretty girls - or rather to look at them.

I don't just put up any girls, they have to be my type and have some jenaisequa' (pardon my Japanese) ... some readers prefer me not to post the photos, some really wanted me to. As for myself, I really wanted to as well.

What I post is to share, there is no fee or subscription, or membership... in exchange I would ask my readers to "pardon my habits and indulge me a bit".


p/s photo: Akemi Katsuki

Monday, June 16, 2008

The Paulie & Benny Show - Fight Oil With Strong Dollar?

How many people actually make critical decisions in Washington? Definitely not Bush. Why aren't there more pressure on the CFTC to clamp down on the position limits issue? If you read between the lines, Paulson does not think speculators are to be blamed for the spike in oil price. Bernanke has been unusually quiet on the matter. Bush has been quiet because nobody has told him what to say on that matter.

Its significant that Paulson holds that view because that will point towards the mediation prescribed by Paulson and Bernanke. If it was me, you all know what I would have prescribed already.

Hence, the Paulie & Benny Show is prescribing the stronger dollar as the medication for curb oil prices.The US dollar just cnotched the biggest weekly gain against the Euro since 2005 and the biggest weekly rise against the Japanese yen since December 2004. Bernanke’s speech on Tuesday prompted the strong turnaround in USD sentiment; he said that US economic risks have diminished and he’s paying attention to the weak dollar. Increasingly over the past few months, a weaker dollar seems to be negatively correlated with oil prices although whether a causal relationship exists between these two is another issue altogether.

What we do know is that Paulie & Benny would not do things halfway. If they are prescribing a stronger USD to counter oil price, then believe you me that it will be a sustained and prolonged strategy for more than a few weeks.

I hope its successful. If not, I hope Paulson would kindly remember how Nelson Hunt tried to corner the silver markets in the past by hoarding futures. Hence speculators can be akin to hoarders, especially when they act as a group, and when this group is overwhelmingly stronger than other genuine players. Paulson may think that asking CFTC to change rules is tantamount to market intervention, well, remember that the LME had to step in and changed the rules to bust the silver cornering attempt by Nelson Bunker Hunt.

To me, thats where oil price is headed, for its Alamo. Hence it is infinitely better for all to "tweak the rules" at US$130 than to tweak it at US$180. Surely if oil were to go to US$180 this year that Paulson would maybe admit that speculators are responsible. I do think Paulson is still beholden to the big investment firms in New York rather than do the right thing for the markets. I do think that Paulson may be buying time for the big investment banks to neutralise their positions before asking CFTC to act to lower position limits.

Choice A or B, Paulie & Benny are acting to strike down oil price. The more successful they are, the better it is for equities.

photo: Carmen Soo

Sunday, June 15, 2008

CPO Boost Due To Iowa Massive Floods / Saudi To Raise Output

WSJ: The effects of flooding in the Midwest are rippling across and beyond the Great Plains, striking at the ethanol industry, hog farmers, pork producers and even catfish farms as grain prices continue to soar.

Cities in Iowa, Wisconsin, Illinois and Missouri sandbagged levees to keep them from bursting and urged residents to seek higher ground. River levels in some places have surpassed records set during a flood in 1993, considered the worst in recent history.

The entire state of Iowa is experiencing flood conditions, according to the Army Corps of Engineers. In Cedar Rapids, population 124,000, a railroad bridge collapsed, 3,000 homes were evacuated and a downtown hospital had to be evacuated. Experts say Iowa's Cedar River could crest above 30 feet -- more than 10 feet higher than its crest of 19.27 feet in 1993. Heavy rains are expected to continue across the Midwest at least through Monday, though drier, sunnier weather is forecast next week.

The flooding threatens to wipe out farms' crops of corn or soybeans, and this has pushed prices to record levels. On the Chicago Board of Trade Friday, corn prices hit a new record high of $7.3175 a bushel, while soybeans traded near record highs, closing at $15.60. Corn prices have climbed about 10% in the past week, threatening to put further upward pressure on food prices that have been climbing for a year.

Bill Lapp, an economist at consulting firm Advanced Economic Solutions, Omaha, Neb., and former chief economist at ConAgra Foods Inc., said higher grain prices brought on by poor weather will help push food prices up by 9% a year through 2012, including this year. Last year, food prices rose by 4%, and the Department of Agriculture estimates they will rise by as much as 5.5% this year.

The Iowa Renewable Fuels Association said Friday the flood has caused 300 million gallons of ethanol production, on an annual basis, to be forced off line and that could quickly grow to 400 million gallons. The higher corn prices are also hurting big grain processors like Archer Daniels, which turns the grain into products from corn syrup to ethanol. Expectations for tighter ethanol supplies because of higher corn prices could increase demand for gasoline, in turn helping to force up gas prices. The squeeze on ethanol also could heighten calls for the federal government to suspend its requirement that nine billion gallons of biofuels be blended into gasoline by the end of this year.

WSJ: Saudi Arabia's oil minister today will address reports that the world's largest oil-producing country is set to raise production by about 500,000 barrels a day, his adviser said.

The increase would bring Saudi Arabia's oil production to 10 million barrels a day, the country's highest ever, according to reports by the New York Times and the Middle East Economic Survey, an industry publication.

Saudi Arabia has called for a meeting of oil producing and consuming countries on June 22 in the port city of Jiddah to discuss ways of dealing with soaring energy prices.

The New York Times report on Saturday, citing unnamed analysts and oil traders briefed by Saudi officials, said the production increase was to be announced following the meeting. The Middle East Economic Survey said Friday that Saudi Arabia was considering a production increase, but didn't provide a source.

The Saudis are concerned that sustained high oil prices will eventually slacken the world's appetite for oil, affecting them in the long run. Crude prices have reached record highs, surpassing $139 a barrel on June 6 after surging nearly $11 in the biggest single-day price leap ever. The prices had receded by Friday, with the benchmark light, sweet crude for July delivery falling $1.88 to settle at $134.86 on the New York Mercantile Exchange. In London, July Brent crude lost $1.84 to settle at $134.25 on the ICE Futures exchange.

p/s photo: Sonja Kwok Sin Nei & Sharon Chan Mun Chi

Saturday, June 14, 2008

Potential Puncture In Oil Bubble

According to Shell Oil president John Hofmeister, the “proper” range for oil should be somewhere between US$35 - US$90 a barrel.

Based on that statement and assuming it’s more or less accurate, what do you think we should make of the current oil price of US$130 - US$140 per barrel? How much of the spectacular rise in oil is due to speculation? That is important to determine as excessive speculation could basically drive prices much higher than its real demand-supply equilibrium.

Open interest in WTI oil futures has been growing exponentially at 18% per annum since 2001, thanks to the entry of non-commercial players. The entry of more non-commercial players and speculators generally mean they would be on the long-side of the futures and options.

Many reasons are being cited for the oil price boom – speculation, fundamentals, dollar weakness, fuel subsidies, inflation, low interest rates. All factors are playing a part at some time or another, with different factors dominating at various times.

But one factor stands out as the biggest culprit – SPECULATION.

Spike in speculation

According to Michael Masters, index speculators are the primary cause of the recent price spikes in commodities. This is not selective information to back my view as he heads a highly respected fund management company – Masters Capital Management.

He recently (May 20, to be exact) delivered a testimony before the Permanent committee on “Investigations committee on homeland security and governmental affairs” to the US Senate. Hence his testimony carries a lot of weight.

Masters talked about the resurgence of several groups over the past five years who he deemed as newcomers to the “commodity speculation scene”. They are corporate and government pension funds, sovereign wealth funds, university endowment funds and other institutional investors. Collectively, they constitute the largest share of outstanding commodities futures contracts than any other group.

Masters refers to them as “index speculators” because they distribute their allocation of dollars across 25 key commodities futures according to popular indices, namely the S&P Goldman Sachs Commodity Index and Dow Jones AIG Commodity Index.

The rising interest in commodities was largely based on the assumption that historically, commodities have no correlation to fixed income and equities. It has to be noted however that while previously the futures market may have been relatively “not big enough” to provide this kind of diversification, this has not been the case over the last 10 years.

As at end 2003, assets allocated to commodity index trading stood at a whopping US$13bil. As of March 2008, that figure has ballooned to US$260bil! Obviously, something highly significant has happened here with equally significant consequences.

The culprits

Some political leaders have pointed their fingers at speculators as the primary culprits for driving oil price by more than 50% over the last 12 months alone. In my opinion, they are correct, partially.

The new index speculators are not your average in-and-out trading outfits. Collectively, these funds have stockpiled (long on inventory via the futures market) 1.1 billion barrels of petroleum. It’s not like they are actually going to take delivery of these oil barrels, but their stockpiling is tantamount to hoarding 1.1 billion barrels from the real market place. If real supply is constant, one can imagine what the 1.1 billion long positions will do to oil futures prices if they are rolled over.

Apart from index speculators, a huge number of long-only commodity funds and plethora of dedicated commodity ETFs have entered the scene in the past five years. A quick glance at Nasdaq will be able to give you an idea on the rising emergence of ETFs. Essentially, they are long players, trying to cash in on investors interest on a prolonged commodity bull run. But are they really interested to consume these commodities? NO.

Joining the bandwagon

Lending a great deal of support to index speculators are, unsurprisingly, investment banks. Swaps loophole exempts investment banks like Goldman Sachs and Merrill Lynch from reporting requirements and limits on trading positions.

The loophole allows pension funds (or any other aforementioned funds) to enter into a swap agreement with an investment bank, which can then trade unlimited numbers of the contracts in futures markets.

Even more interesting is that the WTI crude oil futures traded on ICE in Europe are exempt from regulatory action! ICE (Intercontinental Exchange) operates global commodity and financial products including the world’s leading electronic energy markets and soft commodity exchange.

Amidst all these hoopla, it would appear that Opec, which is traditionally everyone’s punching bag, is probably an innocent party to this catastrophe, this time around.

According to market estimates, the actual costs incurred in producing the most expensive oil is only around US$70-US$80 a barrel; the rest of the current oil price represents the market’s risk premium plus speculation. Note, that assumption is based on the high end of the cost spectrum and most are produced at a much lower cost.

Rising trend

You have heard this before: according to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels – an increase of 920 million barrels.

Over the same period, Index Speculators demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

Bearing in mind that commodity futures markets are much smaller than capital markets, these substantive funds will have a far greater impact on commodity prices.

In 2004, the total value of futures contract outstanding for all 25 index commodities was US$180bil. In 2004, index speculators poured in US$25bil into these markets – a significant 14%. It would be safe to assume that the sums being ploughed into the commodity futures markets in the ensuing years to present is much higher.

Rising trend means index speculators are making a lot of money. The run attracts momentum players. Typically, rather than take their profits and run, index speculators tend to stay on because the allocation is a diversification bet not a straight out investing bet. They are more likely to reinvest their compounded gains and even more due to profit-motivated demand thinking.

Psyche of speculators

Index speculators are different from traditional speculators. The latter will trade, take their profits and run. The former prefers to keep the long position and generally, never sell. Instead of providing liquidity, index speculators are actually draining liquidity. Even if Opec promises to release more oil now, it would probably not dent the rally by much.

If index speculators weren’t a group but an individual, regulators would be on his back like a hawk and he’d be hauled up for attempting to corner a market. Masters highlighted to the US Senate that it is most important to close the loophole in the Commodity Exchange Act 1936 which exempt investment banks from speculative position limits when these banks hedge OTC swaps transactions.

According to Masters, almost 90% of index speculators effectively enter into commodity index swaps and face no limits on their positions. To puncture the oil price bubble, and yes, it is a bubble, Masters recommended that pension funds be forbidden from using commodity index replication strategies.

He added that the swaps loophole should be plugged immediately, thus causing all speculators to face position limits. In all likelihood, if the recommendations put forth by Masters or moves similar to that are put into action, the oil price bubble may be punctured.

Judging from market developments in recent weeks, it may be wrong to assume that “nothing will be done” by the US lawmakers soon.

We will find out – very soon.

p/s photo: Leah Dizon

Friday, June 13, 2008

Peak Of Oil Demand

Media has been plagued with articles on peaking of oil supply. Let's have a look at what some others say about the peaking of oil demand. But whats most important is with the fresh developments with CFTC, comments at the bottom.

Overall, crude oil consumption growth so far in 2008 softened to a paltry 0.4%, in line with non-OPEC supply gains and well below overall total world production growth. OECD led the decline, with non-OECD demand growth to slacken further

Even with oil hitting record highs, China's oil imports during May reached their second highest levels on record

The increase in fuel prices in India, Pakistan, Indonesia, Malaysia will slow oil consumption growth only marginally since these countries account for only roughly 5% of global demand for oil. China may follow suit after the Olympics

Market tends to conflate legitimate reasons for demand growth with what is likely a temporary spurt in recent demand for inventory related to Olympics

Fuel subsidies breed soaring rates of domestic fuel consumption, particularly in OPEC countries, where gasoline is 25 cents/gal in Venezuela and 50-60cents/gal in Saudi Arabia, Kuwait and Iran. No sign of plans to remove subsidies soon in any of these countries

China's car ownership, at only 4% of the population, is expected to rise to 10% by 2015. The fuel-efficient Prius costs nearly twice as much in China as in the US

At constant nominal GDP growth rates, oil burden would have to be US$190-200/barrel to drive oil burden index towards 1980 peak

Commonwealth Bank:
Though global growth may slow down in 2008-09, economic development in emerging markets should contribute to oil demand in the long run to 2025

As per my call to short the bugget at US$139, one of the major catalyst I was looking forward to was regulatory changes to curb the seemingly unlimited position limits of many speculators. These are referred in the market place as the "London loophole". The Commodity Futures Trading Commission (CFTC) held talks yesterday with its UK counterpart about the possibility of introducing limits on traders' positions in London's oil markets. The belief is that traders are exploiting London's openess.

CFTC announced that it has created an interagency task force, which will include the Federal Reserve, to study the role of speculators and index traders in London and their trading activities.
CFTC requires US exchanges to put in place limits on the size of positions taken by traders to reduce potential threat of market manipulation. The FSA has no such rule. It is hoped that a similar futures contract mirroring WTI traded on ICE Futures Europe would voluntarily impose position limits. Currently ICE does not. The wheels have begun to turn.

p/s photo: Andrea Fonseka

Thursday, June 12, 2008

1210-1220 Shopping List

Faber < $0.96

Dialog < $1.35

Parkson < $5.10

Bursa < $7.80

TMI < $6.90

Maybulk < $3.70

Sapuracrest < $1.35

KNM < $6.10

Opus < $0.94

Hap Seng Consolidated < $2.80

RCE Cap < $0.55

Evergreen < $1.40

Wah Seong < $2.14

Ranhill < $1.08

Kinsteel < $1.55

You will note that some are actually worth collecting already (as they have moved lower than these target prices) based on those target prices.

p/s photos; Lee Ji Woo & Miho Yoshioka

Wednesday, June 11, 2008

Two Ways To Ward Off Mozzies

This is another public service announcement. How to effectively ward off mozzies. This is especially relevant in light of the many of us who have been bitten by the dengue mozzies.

The first product highly recommended is a Korean disinfectant called FLOOR MASTER, it has a little label "y-slimz" on it. To my knowledge it is only available at Jaya Jusco. I think I am going to cause some hoarding and clear their shelves here. Floor Master has about 4 different solutions, pink, blue, lemon and green. They specialise in using non-toxic herbal remedies. The pink one is good at warding off ants and lipas. For mozzies, get the green bottle. It has tea tree oil. Its great against mozzies, cockroaches and ants as well. It has anti-bacterial quality. How it wards off mozzies, well, its all in the smell of citronella.

Just a small cap full for half a pail of water, mop and don't rinse, let it dry on its own. Works for up to 3 days, then mop again. Another way is to put the same into a sprayer and spray your bathroom wall tiles. Smells great as well.

I think by the time you go to Jusco, the green thing should be sold out. Try the other solutions as well, they are almost as good, but the green is supposed to be the most effective.
The second secret is to use Listerine, use the original amber coloured one. Do not mix any water, hence its pretty expensive if you calculate that way. Its non toxic. Simply pour the Listerine into a spray bottle and spray. Not so cost effective for mopping the floor but useful when you are out barbecuing or on the beach. Wards off flies and mozzies. It's safe to spray around food and kid's play areas! Mosquitoes will stay away for 2 or more days after you spray. You can even spray inside your dog's kennels to keep mosquitoes away from your pets. Try not to spray on wood, you could spray the towel or blanket you're going to sit on outside at a beach or garden. Another tip, now you can even dab some on a hankie when you go to a nice al fresco dining restaurant. Just wet the hankie, put it in a plastic bag, and when you are eating, place it on your lap or near you - no more pesky insect repellent spray on your skin.

Oops, all these might make me look domesticated... I'm not, really, ...

p/s photos: Aoi Miyazaki

Tuesday, June 10, 2008

2v1g - the songs

When you visit my site, you will hear the songs by 2v1g. Below is the commentary by the producer on the 6 songs previewed.

Its probably unlikely that an "english" blog would highlight a Mandarin album. Asians in particular have this inferiority and stupid attitude. Especially those who are English educated. You'd find them across Asia, not just Malaysia. They would have no problems giving "foreign music" a listen, even though they do not understand the language - you'd find them giving a lot of leeway to appreciate Salif Keita's African lingo and music, or Laura Fygi's Latin songs, or German opera or Italian opera, or Tibetan esoteric music, or Korean music, needless to say Japanese music, Celtic fusions, Gregorian chants, and the very popular rainforest world music festival thingee ... you get my drift. Do they understand the language, generally no. I am not saying these music are worthless, far from it, I think we all should be open to appreciate the wonders and creativity from all corners of the world.

But give them their own music, in their own language - the Mak Yong, Mandarin songs, Cantopop, Hakka song styles, Hindi songs, dondang sayang, kabuki, Bejing opera, dangdut, etc... you get the drift, they'd frown immediately. Music is universal. To discriminate against your own is to be shallow and pretentious, not worldly or westernised. I am not even asking all to deliberately give their roots a chance - just regard all with the same open-mindedness. Treat all music as equal. Its not a matter of preserving or valuing your culture, its a matter of being true to your identity as a person of the planet earth. Not just music, but in all things, be it cultural or racial. Its pretty silly to see some regard with disdain their own local musical culture, but then they find many foreigners appreciating them. Just go to the rainforest world music festival and you will find plenty who are open and embrace the goodness in all of us.

Good music is good music. Whether we understand the language or not is secondary.

[1] coming home - this is winnie ho's award-winning song; it is also the song which many people associate her with. unlike previous versions sung by winnie, this version has a slower build-up and milder climaxes. winnie has purposely lightened up the song with less emotional intensity. she has grown up as a singer and she wants the audience to appreciate a more mature version of this classic song. roger's guitar is light and simple, fully letting the vocalist to take the center stage.

[2] snowy love - this is a tracy huang's classic, made popular by faye wong. regine's rendition is appropriately sweet without overdoing it. this is one of the most accessible love songs in the album. nothing complicated, just pure sweet music.

[3] endless love - this is the boldest interpretation in the whole album! a passionate love song being transformed into a bossa nova, roger's creativity is most evident on the guitar solo where he infuses a decidedly latin feel to the song. the two singers also ad-libbed a lot in the last part (not in the edited version here), making the whole rendition rather adventurous and fun.

[4] airport at 10:30 - a david tao's r&b classic, this song will make most guitarists frown in frustration on working out a groove/rhythm in the guitar solo. i suppose only roger wang can do it. winnie ho is having a hell of good time in singing this song; she doesn't seem like she wants to stop.

[5] tempting hearts - my fave in this album. there is so much outpouring emotions in this song that makes it memorable. regine's rendition made me weep the first time i heard it (she also broke down after singing this song in the studio) and roger's guitar solo is so heartbreakingly gorgeous. try to listen to this song alone at night with your hifi on, a glass of red wine, lights dimmed, and you will understand.

[6] march - my producer, chow's original work, march is not easy to sing at all. roger has attempted many arrangements for this song. at the end, we settled for one with a bit of "swing" feel. there is a certain sadness of helplessness in this song, if only you know the meaning behind the lyrics.

p/s you can click on the photo to read the full article on 2v1g

Monday, June 09, 2008

Best Mandarin Album Ever? ... 2V1G

When I got this from a friend, I thought it was some software thing that she wanted to promote to me. Well guess what 2V1G... I hope it means 2 Voices and I Guitar... cause I immediately thought that it could be 2 Virgins and 1 Gigolo!!?? 2V1G is the brainchild of producer Leslie Loh and Chow Kam Leong. It is an acoustic trio that plays classic Mandarin love songs in a simple 2-voices 1-guitar format. Roger Wang (the Guitarist), Winnie Ho (the Vocalist) and Regine Tai (the Vocalist) combined to create a sound that is both refreshing and easy-listening.

Recorded using the legendary AKR C12VR microphone and mastered by Keith Yip from Hong Kong, the mastering engineer for HK Audiophile Diva, Susan Wong. Stop reading, click on the link below to enjoy the brilliant music, delivery... its acoustic heaven.

The CD is pressed in Hong Kong by Sony DADC, one of the top CD duplication factories in HK.
It is an imported CD, priced at the normal standard CD price of RM39.90. 2V1G CDs will also be distributed in Singapore, Hong Kong, Taiwan and possibly Thailand.

I am not a very big listener of Mandarin songs though I am familiar with the more popular songs. The trio have basically maximised the enjoyment of these very popular songs by stripping down the music accompaniment to the barest bones. It allowed for the two outstanding vocals to caress the notes and bring out the nuances and intricate melodies. Well, its certainly the best Mandarin album I have heard in a very very very long time. I listened to the first song Coming Home sung by Winnie Ho, and got major goosebumps - its exactly the same impact when I first heard Eva Cassidy sang Over The Rainbow. Now go tell your friends.

Oh, btw, they are Malaysians ... and they deserve the great success I am sure they will have as they had to sell themselves constantly to win over the commercialised "managed artistes" syndrome ... they have just gotten distributors in Taiwan and HK. Cheers!!! Great talents unwasted through sheer perseverance. Those that cannot find the album, go buy online first.

Sub-Prime Losses Overstated?

WSJ: A key measure of estimating the value of subprime mortgage-backed securities may be overstating potential losses of triple-A securities by more than 60%, according to the Bank for International Settlements, which puts its own estimate of such losses at US$73 billion.

The BIS, often called the central bankers' central bank, has few formal banking duties but is a hub for economic and monetary research as well as for global policy makers. Its most recent quarterly report adds to growing criticism of a key measure of the subprime-mortgage market called the ABX.

Launched more than two years ago by Markit Group Ltd., the ABX is an index that tracks the value of securities backed by subprime loans. ABX is based on credit-default swaps: actively traded instruments that insure against default on the securities.

The index often is used by banks and other organizations as a proxy for the value of mortgage-backed securities. Echoing other concerns, the BIS says the ABX prices may be unreliable because the indexes only cover a small percentage of the market. Some observers also contend that ABX prices have been driven lower largely by bearish traders.

The BIS also says the ABX indexes may misrepresent the structure of the securities they claim to reflect. The specific triple-A securities referenced by the index, in the case of a default, would be paid only after all other triple-A obligations had been met. Recalculating with new data for triple-A securities that would get paid faster, the BIS says the ABX overestimates triple-A losses by 62%.

The BIS says the value of subprime mortgage-backed securities outstanding issued from 2004-07 is about US$600 billion. At the end of May, the report says, ABX prices suggested a value of about 59 cents on the dollar for such securities, indicating losses of about $250 billion, almost half of which -- US$119 billion -- would come from triple-A securities.

Under the BIS's new calculations, losses on triple-A securities total only US$73 billion. That would bring the total subprime-mortgage-related losses down some 18%, to US$205 billion.

Comment: This is highly significant for the investing landscape going forward. BIS is highly respected and their findings are usually highly accurate and fair as well. That being the case, this lends a lot more weight to a potential super bull run in 2H2008. As I expect the oil price bubble to be deflated by then, a drop back to US$100-110 would act as a good deflator of inflationary pressures. This in turn should ignite a bull run for equities. Soon as funds start to swish around, there will be greater re-evaluation of the sub-prime write offs as being too severe. Analysts will then be trying to estimate the amount available for banks to write back some of the losses, thus adding to the equity upswing. Very important news to digest and keep in mind.

p/s photos: Ying Chatcha Rujirano

Oil Market Views & Updates

  • Jun 6: WTI crude oil for July delivery spiked US$10 to new all-time high $139.12/b on dollar weakness and Morgan Stanley forecast revision for oil to reach $150/b within a month. Near-dated crude oil futures move back into backwardation. Futures past April 2011 remain in contango.

  • Deutsche Bank, Lehman: Back in the double digits, forward prices had already reached point at which new supplies can be triggered. But now market at a point where higher prices won't generate more supply. For every US$100 million in new inflows, WTI prices increase by 1.6%.

  • Hussman: Contango implies commercial inventory to build up on stockpiling

  • New record price obliterates not only nominal high but inflation-adjusted high of US$100-111/b reached in 1981 (when Iran cut exports)

  • Schwab: We are not experiencing a demand shock. Lack of spare capacity to match supply disruptions exacerbates fear factor, driving speculation and frenzied hedging.

  • Thanks to fuel subsidies, real price not high enough to cut demand.

  • Upside risks: low inventories, higher cost of production (due to labor shortages, credit crisis, extraction of unconventional sources), growing demand supported by fuel subsidies, $ weakness, speculation, hedging.

  • Spike risks: weather, geopolitics.

  • Downside risks: recession bets, end of refinery maintenance, high inventories, Saudi output hike, fuel subsidy cuts, increased non-OPEC supply and refinery capacity.

  • Consensus estimate for avg WTI price in 2008 raised from US$76/b to US$112/b (BNP: $124; UniCredit, UBS $115; EIA: $110; Goldman Sachs: $108; Barclays $97.70; Danske $83.5; Standard Chartered Bank $82; Natixis $67.7). Goldman Sachs raised forecast for H208 avg oil price to US$141 from US$107 due to fundamentals and resource protectionism by oil producers. Boone Pickens predicts US$150.

  • Fed: Absent supply disruptions, it will be difficult to sustain oil prices above US$100 (in 2008 dollars) over next 10 years.
photos: Fahrani

Sunday, June 08, 2008

Short The Bugger At US$139 For Year End Delivery

US$139. Asset prices don’t rise indefinitely — but oil is surely testing that hypothesis. US$139, thats the second short squeeze in a couple of weeks. That, to me, is a sure sign of over-speculation on the long side. Thus, it makes brilliant mid term trading to take a 6 month dated put option on oil at US$139. The interplay suggests a peaking of buying frenzy. Just imagine the number of long positions taken up over the last few weeks. Now imagine who will be taking over these positions when these long players take their profits. A brief pullback to around US$122 a barrel early in the week fooled a few investors into thinking perhaps oil’s peak had passed.

But oil exploded on Thursday and Friday, gaining a ridiculous 13% on the New York Mercantile Exchange in two days to trade at US$137.08. Every bubble in history had a good story.

According to the IEA: Economic slowdown and high oil prices have continued to depress demand - global consumption forecast cut again by about 400,000 b/d from April report, bringing total cut to 1.2m since December to 86.8 mb/d. This is still up from the average level of 86 mb/d recorded in 2007. April global oil supply fell to 86.8 mb/d from 87.3 mb/d in March, led by lower supplies from OPEC, North Sea and non-OPEC Africa. 2008 non-OPEC supply projected to reach 50.6 mb/d. Non-OPEC output growth in 2008 is now seen averaging 680 kb/d, compared with 550 kb/d in 2007.

Oil demand fell in the first quarter, which supports the idea that prices should drop. On the other hand, the trade is being dominated by investment flows.

According to OPEC: Recent high volatility in oil prices due to short-lived, non-fundamental factors. Although fundamental factors such as cold weather and refinery difficulties have had some impact, prices have mainly been driven by non-fundamentals, in particular financial market turmoil, US dollar depreciation, and worsening US economic outlook. Moreover, the influx of financial investments into commodities has helped to repeatedly push crude oil prices higher, amid occasional periods of profit-taking.

The biggest culprits are the long-only commodity index funds and ETFs. They simply buy baskets of commodities at whatever the price is, speculating on the rise in the price of the overall commodity market. It is a one-way trade. But there are limits to how much exposure speculators can buy, because the CFTC will allow a speculator to only buy so much of any given market, to keep large players from getting a corner on the market and driving up prices, a la the Hunt brothers and silver in 1980. These limits are known as "position limits."

There are no position limits for commercials who are hedging. They are in theory hedging their physical exposure to a given commodity they are selling or buying. The CFTC created a loophole when they allowed investment banks to be classified as commercial investors. So, when a long-only commodity index fund wants to buy a million barrels of oil, they can go to the investment bank, who will sell them a "swap" on the price of oil, and then immediately hedge their exposure in the futures market.

To be sure, the long-only index fund can now create positions far in excess of the position limits that are enforced upon normal speculators. These funds can grow to be huge - multi-tens of billions of dollars. Even though they are speculators, they are not included in the data as speculators. Because they get their exposure from an investment bank, they are ultimately listed as a commercial. In total, they represent an enormous part of the commodities markets. But they are providing liquidity, so what's the problem? They are not actually hoarding the commodities. The price is still set at the spot price. From the rumblings in Washington and I am sure among many big central bankers, I would bet on some "new rules" to be introduced very very soon to limit these so-called commercials from having "excessive position limits" - these so called long positions matched by swaps can easily be curtailed by new "rulings". Because seriously, even I have to agree with AAB that he is probably right that speculators have driven up oil price to pretty excessive levels. Forcing many countries to abandon subsidy on oil is a clear sign that central bankers are almost at the end of their patience with the "free markets".

How much speculation? According to the Dept of Energy, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculators demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

You can see from the media frenzy that all seem to be focused on supply constraints only. None appears to be giving much weight to the demand destruction given the explosion in oil price. Economies are being rein in, the US looks like edging towards higher unemployment and their oil consumption habits have changed dramatically owing to the last few hikes in price of fuel, oil subsidies in emerging economies have be slashed which should curtail demand substantially - all these demand destruction seems to mean nothing to the speculators.

Hence my SHORT call is based on: quick successions of two major short squeeze; rampant open long interest and subsequent rollovers plus momentum players in this bubble run; players ignoring the fact that many countries have reduced their subsidy on oil which pulls back substantial demand for oil and changes consumption patterns dramatically; higher inflationary rates globally as economies try to rein in their economies by raising interest rates; overall demand destruction owing to price explosion; and finally look for legislative rulings and "new regulations" which would severely curtail some of these "commercials" in curtailing their inexhaustible "position limits". Watch your steps on falling bodies when the profit takers stampede out of their long positions.

The good news from all this is that its looking very much like a bubble now for the price of oil, and a correction will be pretty good and severe. If the price of oil falls back to a more manageable US$105, the impact will be very good for global equities. So just get ready.

p/s photos: Tangmo Pattarathida

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