Thursday, August 28, 2008
Its Budget Day, so nothing much to talk about until after the reveal. So, I think I will do something fun. There are certain dishes/food items in selected restaurants which in itself is enough reason to visit them frequently. Here are the food nuggets, feel free to add to them:
1) Truffle Oil Pasta with Seared Foie Gras, at Chalet Suisse in Ampang. Hope its still below RM50, still the best single dish under RM50 in KL to me.
2) Oxtail Pasta served with Chilli Padi tapenade, at Cava@Bangsar, Jalan Bangkung. The meat comes off the bone and the chilli padi tapenade (for want of a better word) is exhilarating.
3) Almond Tong-Sui Powder Mix, at Restaurant Ipoh Old Town, Lucky Garden. This is not the Old Town chain, its a stand alone restaurant. The almond powder is done in Ipoh, no preservatives. Just add hot water, it taste like the freshest made almond tong-sui. Comfort food.
4) Grilled NZ lamb cutlets, at Max Kitchen, Tengkat Tong Shin. Slathered with freshly made but warm mint sauce. Its a simple dish but the pre grilling and timing in and out of the oven gives it a brilliant crispy texture and great juicy lamb in the middle.
5) Grilled lamb / Grilled fish with great home made chilli paste, at Hing Ket Grill House. Very hard to find but jam packed after 7pm every night. Ask someone who has been there to locate the place: Lot 3569, Batu 3 1/4 Kampung Jawa, Klang.
6) Over-The-Top Nasi Lemak, at Kopi Time @ Wisma Atria. Even better than the luxe version at Madam Kwan, sambal has got great oomph and depth.
7) I don't know what to call this, but I am there almost every evening when I am back in Ipoh. Yellow Tumeric Ginger Rice with very excellent curries available. The lady only comes at around 6pm and the whole thing finishes by 8pm. Its the old Umbrella Square in Canning Garden, the middle store - nyonya style, and she also serves great pandan rice as an alternative.
8) Possibly the best nyonya cakes/desserts around. Pricey. Forgot the name. Its located in the food court area of the Gardens section in Mid Valley. Its the shop next to CIMB Bank as you come up from the premium car park space. Authentic and fresh ingredients... but pricey.
9) I think its very safe to say this place serves the best fried chicken, Restoran Ayam Kampung Bandaraya, at Jalan Tun HS Lee/Lebuh Ampang. Its also the most expensive piece of chicken with the seemingly little meat. Its very crispy and the marinade is a secret, goes exceptionally well with their sour chilli homemade sauce. I did manage to extract some information from the owners, they soak the chicken in milk overnight, and thats as far as I got. But bloody hell, its nearly RM5 for a piece, be warned.
10) Hands down winner for best chips in town, at King Pie outlets. The pepper steak pie is also not bad.
11) The Chinese Homemade Sausages with sweet chilli sauce dip, at The Rib Shop (next to Vintry) at Jalan Kasah, Bukit Damansara, behind Victoria Station. The roast pork is pretty good too.
12) Roast pork at Uncle Ho is pretty exceptional as well.
13) Best basic nasi lemak for RM1.50 at this small bakery @ Centrepoint, Bandar Utama. Its next to Bernard's. I think its called Pandora or Panorama. They only have about 30-40 packets, its the sambal, the pandan and the rice. Very basic but sells out by 3pm everyday.
p/s photos: Yu In Yeong
Aug 27 (Bernama) - Four deaths due to dengue fever were reported one each in Selangor, Kuala Lumpur, Melaka and Johor in the Aug 17-23 period, the director of the Disease Control Division of the Health Ministry, Datuk Dr Hasan Abdul Rahman, said in a statement here Wednesday.
He said in the same period 1,003 cases of dengue fever were reported representing a drop of 36 cases from the previous week. "Although there is a drop in cases it is still about 10 per cent higher than the same period last year when there were 910 cases and 31 per cent higher than the targeted figure of 765 cases," he said in a statement Wednesday. Dr Hasan said seven states and the federal territories of Putrajaya and Labuan had recorded increases in dengue cases. The seven states are Perak, Selangor, Negeri Sembilan, Melaka, Johor, Terengganu and Kelantan. He said the states and the federal territories had 74 per cent or 743 cases of the total cases reported and to date a total of 29,942 cases of dengue fever with 71 deaths had been reported. He said inspections by the Health Ministry and local authorities revealed that residences and shops were primary breeding grounds of the Aedes mosquito that spreads the dengue fever.Ask any doctor, he will tell you there is no cure for dengue. You just have to rest and drink lots of liquid. You also have to take a daily blood count so that the count does not drop. If it continues to drop, you may have to do a blood transfusion. Failing to do so is almost certain death.
The remedies below are not necessarily cures, its unproven, it could be just old wives tale. But I had dengue twice last year, so I guess at least I can comment on their effectiveness. You can take the scientific way and rest and take liquids, or you can try the remedies below, its not going to kill you anyway. I have to reiterate that you have to do a daily blood test count to ensure that the count is not dropping - the remedies below are not in any way a substitute for that.
Public Service Announcement
In my experience, the bitter gourd and frog soup really soothes the body. I could sleep soundly after taking them. I got well both times in less than 2 days after taking the above, it could have been because mine was a mild case, I don't know. But when science gives you zero option, do you lay there to die or at least try something (which will not kill you).
p/s photos: Haruna Yabuki
Monday, August 25, 2008
Finance Asia: The news that Merrill Lynch may have been involved in possible money laundering by members of the family of Taiwan’s former president, Chen Shuibian, has raised questions about the bank’s internal risk controls. Merrill Lynch has declined to comment on any aspect of this article, apart from to say that “as is our standard policy, we are cooperating with the authorities”.
The facts of the case, as they have been reported by opposition party legislator Hung Hsiuchu and the press in Taiwan, can be summed up thus: former president Chen Shuibian's daughter-in-law Huang Jui-Ching reportedly opened two Merrill Lynch bank accounts in Switzerland (at Merrill Lynch Bank Suisse AG) in February 2007, and remitted millions of dollars from an anonymous Credit Suisse Singapore account in February and March that year into two separate accounts at Merrill Lynch in Switzerland. First there were transfers of US$21 million and US$140,000 respectively.
A Cayman Islands account was set up three months later, and Huang transferred all the funds held in her personal name to this company. Merrill Lynch set up the Cayman Islands company on behalf of Huang, which is owned by Huang with power of attorney granted to Chen's son, Chen Chihchung. It has also been reported that an additional US$10 million was wired from RBS Coutts to the Cayman company account at Merrill Lynch in Switzerland. Credit Suisse declined to comment.
A spokesperson for RBS Coutts, says: "At this point in time we are aware that there has been numerous media reports and speculation on this issue. However our policy is not to comment on matters related to any individual on the grounds of client confidentiality." The Swiss authorities earlier this year froze the assets in all the accounts and informed the Taiwan government of their investigation. The Taiwan authorities made this public earlier this month.
Conversations with private-banking professionals in compliance and money laundering as well as relationship managers lead to the conclusion that something must have been awry with Merrill’s risk control system for such a situation to occur. Systems at all leading investment banks are set up with triggers that aim to red flag transactions which are potentially unethical or illegal. These triggers cover the identifying of prospective clients as part of the KYC (know your customer) process; the ‘source of wealth’; and how the client will ‘fund the account’ as bankers say, and why any large sums of money are transferred. All these checks are meant to ensure investment banks are protected from the type of situation Merrill now finds itself in.
In particular, private bankers are trained to watch out for so-called ‘politically-exposed persons’ or PEPs. Any person in a prominent political role (or connected to such a person) normally triggers heightened due diligence.
“Typically, it’s very hard for an Asian PEP, especially (given the corruption in many parts of the region), to open an account. They have to go through a careful and detailed vetting process,” says one private banker, adding that the client profile for a PEP can be up to 40 pages long, twice the length of a normal private banking client application. “As soon as a PEP said he or she wanted to open an account, the bank checks whether he has enough funds to qualify as a client for their private banking arm. They would, or should, have then checked how that person got that money – whether it was inherited or whether they were corporate dividends or the proceeds of a sale or whatever.
The basic principle is to identify any risks at the outset and then monitor how that risk evolves,” says the head of anti-money laundering at a major bank. “If a bank allows large sums of money to enter their banking systems without checking on its origin, you have to ask: how good was the risk analysis at the outset?” he adds. In other words, if Huang said she had large amounts of money in a Credit Suisse account, Merrill Lynch would have checked how she obtained that money, especially given it was transferred from a third party account to Merrill Lynch and especially for an obviously politically exposed person.
Based on local newspaper reports, the sums are huge relative to the wealth of the Chen family (Chen himself has always been in public service, first as the mayor of Taipei and then as president) and especially large relative to Huang herself, who is unemployed, and whose husband (Chen’s son) is seeking to go to law school in the US. Private bankers say that the fact that the funds were being parked offshore should have raised red flags. “You have to ask why the money was being sent to Switzerland, which historically has been a haven for money laundering because of its banking secrecy laws. You then have to ask why that money was transferred to a Cayman Islands company account,” says one banker.
A significant red flag would have been the transfer to the corporate account from the personal account, even within the same bank. “Any transfer to a third party is treated very carefully partly because of the fear it could be funding terrorist activity, or fraud, or money laundering, or – when it comes to PEPs – embezzlement of state funds. Even though the owners of the company were the same as those who had a personal account with Merrill, the key thing is that it is a different legal entity. So that should also have signalled the need for increased due diligence,” says the head of anti-money laundering quoted above. In particular, the fact that the Cayman company in question, Bouchon, was set up as a nominee company by Merrill Lynch Bank and Trust Company (Cayman) is suspicious. Such a structure hides the shareholders’ names and should have triggered yet another red flag. (Fairfield Nominees and Fiduciary Services, companies owned by Merrill Lynch, are acting as nominee shareholder and nominee director respectively.)
A simple check with the Cayman registrar of companies shows that Merrill Lynch Bank and Trust are also the registered office for Bouchon – the entity which does the administration, record keeping and other corporate services for Bouchon, as well as providing a mailing address. According to one lawyer with 10 years experience in the Caymans, such a structure is unusual. “Nominee ownership of a Cayman company, intended to hide the actual beneficial owners is very rare. I never saw a single example of this in 10 years working as a Cayman lawyer. The anti-money laundering laws in the Cayman Islands are amongst the toughest in the world. It means that we wouldn't touch such a structure unless there were compelling business reasons to do so, and I can't think of a legitimate reason to hide this much.” This makes Merrill Lynch’s decision to go ahead with the structure surprising. The structure could have been an integral part of any money laundering operation. That’s because the names of the ultimate beneficial owners under a nominee structure are withheld. “Setting up a Cayman Islands entity means that in all public documents, it will list Merrill Lynch’s holding companies as the shareholder and director thereby protecting the identity of the true owners of the company. It also gives the true owners an air of legitimacy since Merrill is acting as registered shareholder and director,” says one private banker. “Given that the documents of a Cayman Islands company are not publicly disclosed, you have to ask why such a structure was required,” he says.
At Coutts RBS the account was in the name of Galahad Management. No clarity is available on who the registered shareholders of Galahad were. “It seems as if the plan was to consolidate all the funds held in different accounts under the Chen family and its associates, and to consolidate them in one, supposedly safe, place, namely Bouchon – a company on paper controlled by Merrill Lynch but indirectly under the control of the Chen family,” comments a banker.
The Cayman lawyer points out that finding out who really controls the company is very difficult since “shareholder registers of Cayman Islands’ companies are not publicly available – unless you are a director of the company, you have no right to see who is a shareholder. Even shareholders don't have the right to see who the other shareholders are,” he says. What is disclosed is the registered office, which in Bouchon’s case is Merrill Lynch Bank and Trust – a globally respected brand, likely to give comfort to anybody dealing with Bouchon.
Sources close to Merrill say that the bank tipped off the Swiss authorities after the bank got suspicious. A spokeswoman for the Swiss Federal Prosecutor’s office in Bern told FinanceAsia it is not commenting on the matter. So why the tip off now? We can only speculate, but perhaps they may have decided to come clean after seeing what was happening to UBS in the US, where the Swiss bank is embroiled in a massive tax evasion case. In any case, the system’s triggers are meant to be in place to prevent such situations from arising. Something clearly went awry. One possibility is that a senior person at Merrill Lynch overturned any concerns at the compliance department. “It’s the last thing compliance people want to see happen, but unfortunately, it does occur. Money talks,” says the money laundering expert.
p/s photos: Vivian Hsu
by KathyWang/The Standard
Monday, August 25, 2008 China's leaders are carefully considering an economic stimulus package of about 370 billion yuan (HK$420.7 billion), including a 220 billion yuan new expenditure and 150 billion yuan of tax cut plan, that may ease the government's monetary policy by the end of the year, China Business News reported.
"Although the details are yet to be sorted out, there is such a plan, and it has been approved by a central finance planning team," state-run Xinhua News Agency said in a report yesterday.
The expenditure part will include the spending of 45 billion yuan on social welfare, 46 billion yuan on agriculture, 38 billion on education, 35 billion yuan on construction, and 28 billion yuan on import of energy and commodity products.
The package will also propose tax cuts of 150 billion yuan in total, including measures to raise the threshold of personal income tax, export tax rebate, and preferential tax packages for small and medium- sized enterprises.
However, concerns over whether to launch the plan within the year rose because officials aren't certain if the country has planned enough budget for it.
This year's snowstorms in southern China and earthquake in Sichuan have already cost China 35 billion yuan.
In the first half, China generated fiscal income of 3.4 trillion yuan, running a fiscal surplus of 1 trillion yuan.
Last week, JPMorgan released a report saying Chinese authorities were considering an economic stimulus plan of at least 200 billion yuan to 400 billion yuan. The controversial news, although unconfirmed by the authorities, helped boost the A-share index by nearly 8 percent in a single trading day.
p/s photos: Pace Wu Pei Ci
Sunday, August 24, 2008
Time to talk about music. Made a new discovery when I came across this Joanna Wang. Joanna Wang (王若琳) is a Taiwanese singer/songwriter, daughter of famous Taiwanese music producer Ji-ping "Bing" Wang (王治平). Her debut album, Start From Here, was released in January 2008 as a double-disc set, one in English and the other in Chinese. She is 19 now and was brought up in the U.S.A. She moved back to Taipei when she was 15. She performs regularly in the Taipe Riverside Cafe. Fans have likened her voice to Sarah Vaughn, Norah Jones, Diane Schuur and Teena Marie.
I love her voice, smoky, earthy, and she is a composer as well, contributing 3 songs on the album. However she has been giving interviews saying the debut album was a "product" and not a true reflection of her vision for her music. I think there were some heavy handed production decisions, especially in doing the covers of True and New York State Of Mind - she is much better than that.
Joanna: " I don't really admit that the "debut" was my work because a lot of it was from purposes that were non-musical. also the songs i was forced to sing, in my opinion, are pretty horrible. call me ungrateful, but i'm a jerk. thus concludes my angsty teenage babble..."
I look forward to her second album, which is due out in December, which should showcase more her talents. Still, the debut album is pretty impressive already. I have listed 5 of her songs on the imeem jukebox on the left.
Get her album, and I am sure her subsequent albums will be even better.
Thursday, August 21, 2008
...When a ship sailing in a stormy sea with an invisible front side the captain need to apply his common sense that guilded by his previous experiences as well as taking into consideration of the on the spot factors for moving forward to the planned destination.
Thus, the experience (history) and common sense (objectivity of view point) are two helpful gurus for guilding us to sail through the current economy sea.
In my opinion, there were 2 aspects of inter-dependent spending in china, namely consumer spending and infra and capital investments. A strong consumer spending derived from the strong confidence which in turn influence the capital/infra spending and vice versa.
China as we known is a typical export orientated economy. This is to say that the growth factor in CHina for many years has been driven by its "factory of the world" due to it cheapest cost relative to other countries.
However, the comodities boon for the past 3 years had changed this scenario. The external demand has already sunk prior to the olympic games. Apparently, the world is unable to absord and live with this inflation.
Everyone has been wrong on China since Deng opened up including myself. The leaders understood that the strength of a country is in its middle spending class, and China today has over 200m.
China can trade and spend within itself for a period of time while the world stabilized. It has the reserves to do so.
China will continue to confound conventional wisdom.
I often wonder. If the world consumption drops, and China is unable to export its products to the US and Europe, then who will buy them? Products made for the US and Europe markets...are they consumable by the Asian and CHinese markets? Factories fitted with the latest technology at high cost and producing high end products, can these expensive products be sold to fellow Asians and Chinese? Will asians and chinese buyers afford them? Will it suit their taste?
Comments: There is the wrong perception as to why China is still barging along head on when the rest of the world is slowing down, in particular US and Europe... the crux is that China is not producing to sell to the world on their own... it is a fact that some 60%-70% of China exports are by these foreign companies producing in China to export back... this is the crux of the globalisation movement.
China's voracious appetite for global commodities is not for their own consumption, but to satisfy the huge amount of FDI that has been flowing in over the past 10-15 years. Of course, the rise of China as a magnet for FDI has also the effect of bringing up a huge new middle class of consumers, and that kind of feeds off each other. This kind of "new demand" is not so easy to erode as the badge of honour is the "China price".
While the FDI is supposed to generate cheaper manufacturing bases, inadvertently these units will also benefit from the much higher demand from the new China middle class. That's a benefit no one wants to shrug off.
The question about higher commodity prices and materials eroding China's advantage is mistaken because to produce elsewhere would incur the same cost structure. What China does well and cheaper is leveraging on their strong economies of scale in almost every manufacturing process. What started as a global factory is also having a huge domestic demand to further squeeze efficiencies and margins. These economies of scale are hard to beat.
The question is then will these foreign companies shift their manufacturing Chinese base elsewhere? Where can they go? The world has to live in the brave new world of "the China price"... if you cannot compete with the same product and services produced by China, you better close shop. Thats what has been happening in a big way for the last 10 years. Thats also partly why big foreign MNCs everywhere has been able to eke out good margins growth by putting a lot of their manufacturing and processes in China. A slowdown in the US is bad, but not to the extent of shutting their China operations as thats their magic 8 ball. Cuts will be made back in high cost areas back in their local offices. Hence the fear of "who to sell to" is not a China problem.
p/s photos: Melissa Ng Mei Han
Wednesday, August 20, 2008
Fund Redemptions - If you remember the rankings of year to date performances of various markets, the emerging markets have been hit pretty hard. Now we know that last week saw fund redemptions from emerging market equity funds totaling US$1.9bn, which was the biggest outflow in 5 weeks. That on top of the 5 weeks of continued outflow of funds. In total the total fund redemptions was almost US$20bn on emerging markets funds.
The situation was reversed for US equity funds where US$13.3bn flowed in over the past 10 weeks. To me, the outflow from emerging was collateral damage from the massive unwinding and deleveraging by speculators, hedge funds and commodity funds. It was not fundamentally driven. As they unwound, the emerging markets were being sold down to cash up for overal anticipated redemptions. The reversal now seen in commodity would establish some platform for emerging markets to find their feet again.
China Post-Olympics' Blues - The generally accepted fact is that China will see a slowdown following the successful Olympics. Many consider the infrastructure development would slow dramatically. Let's get real for a moment. The total investment in infrastructure which was related to the Olympics totaled between US$40bn-50bn. Now, let's take the China's actual budget for its 5 year plan already announced for 2006-2010:
Transportation Infrastructure US$554bn
Power Grid Projects US$1,000bn
Even if you average it over 5 years, that easily US$300bn a year (or 6x the Olympics related budget on infrastructure). This is one of the main reasons why I think the commodities upcycle is far from over... and this is just China. In fact, infrastructure projects would speed up after the Olympics as these projects may have had to take a backseat to allow the Olympics related projects to be rushed for completion.
p/s photos: Yamasaki Kimami
Tuesday, August 19, 2008
When did I become a commodities trader? Unlike most commodity traders, I do not trade the volatility or very short term trades. I tend to look at sentiment and momentum and compare that with the "noise" in the market place, all the time assessing the underlying fundamentals.
The first short position on oil was at US$139, the double up position was taken at US$119.90. The shorts were covered at US$112.90. I initially was waiting for US$110 to be broken.
My reasons for covering:
a) The open interest on oil futures was only about 43% when oil was at US$130, now its closer to 70% and mostly on the short side. The hedge funds and index speculators were not only unwinding and deleveraging, but taking the short side as well in most commodities. The fact was much clearer in gold price movements over the last 2 weeks.
b) Despite the cumulative shorts, the momentum does not seem strong at all to push to test the US$110. If things don't look likely, it will move the other way.
c) The US PPI though a lagging indicator is worth considering. It was pretty significant and may take a few more months to ease down.
d) I still hold to the strategy that the upcycle in commodities is still intact. Though we may not test the highs again this year, it will at least gain back some significant ground.
e) My final conviction came from gold price which broke US$800 too easily but almost as quickly retestes the US$800 on the upside. Its been down below that level again. Its a good sign of price movements in an oversold instrument.
f) I was a bit surprised that the Russian-Georgia issue did not prompt a strong rebound, again lending weight to the strong shorts momentum. Now that the selling did not look likely to break US$110 on the downside, more sober minds would dictate that the Russia-Georgia thing is mostly about controlling a very major oil pipeline.
Link to previous trades:
Long oil futures $113.20
Long gold futures $802
p/s photos: Amanda S (aka Amanda Strang)
Friday, August 15, 2008
Don't make the mistake of thinking USD strength is responsible for the collapse in commodity prices. The dollar DID NOT cause the collapse. To think like that would bring about the wrong investing strategy going forward.
There is very little to support a bullish dollar going forward. The connection is reversed, its not a dollar led sell down. Its the deleveraging by index funds and cut-loss by speculators in almost all commodity asset class which has brought about the cashing up. The dollar has been inversely correlated to commodity prices for the past 3 years. Its only natural for the inverse correlation to hold as well.
To many index speculators, to go long on commodities is one trade. If you wanted to enhance returns, you can also short the USD, its a double whammy. Plenty of hedge funds have taken on this strategy, and what we are seeing is the reversal of that. Hence the strength in USD is pretty fake.
Amidst a slowing US economy, the biggest determinant for USD strength would have to be the outlook for higher rates. Fed funds is at 2%. Even though July inflation was at a 7 year high, or was it 13 year high, either way that is expected to come down significantly owing to the sharp drop in oil and other commodity prices since then.
The biggest factor the Fed and the Treasury will be considering when thinking whether to raise rates is the amount of recapitalisation, the amount of mortgage resetting, and the various restructuring that is ongoing to help the smaller and regional banks to survive. Any rate hike would affect the above issues negatively. The Fed and Treasury cannot allow that to happen.
Hence, to me the fed funds rate has almost minimal chance of being hiked for the rest of the year. I see a 60% for it to stay at 2% for the year, and a 40% that it may go lower to 1.75% before the year is over. That being the case, there is very little chance for USD to maintain its rally.
Once the commodity prices flattens out, the USD should continue its slow downside weakness again. We are getting close to those levels, oil should stabilised just below USD110 and CPO's bottom range is around RM2,450-2,500. The proper investing strategy taking that in mind is a refocus on strong emerging markets with strong trade surpluses and foreign exchange reserves.
p/s photo: Onjira Lamwilai
Wednesday, August 06, 2008
This was a great read. Its an economist who tries to be funny by answering interesting daily life questions and wonderings. The author is Robert Frank, the Professor of Management and Professor of Economics at Cornell University's School of Management. Just look at the questions he tries to answer and you know its a good read already:
- Why does a US$500 tuxedo rent for US$90 a day while a US$20,000 car rents for only US$40?
- Why do female models earn so much more than male models?
- Why might retailers deliberately hammer dents into their own appliances?
- Why do the keypad buttons of drive-up cash machines have Braille dots?
- Why are child safety seats required in cars but not in airplanes?
- Why are whales, but not chickens, in danger of extinction?
- Why is there a light in your refrigerator but not in your freezer?
- Why do 24-hour convenience stores have locks on their doors?
- Why are newspapers, but not soft drinks, sold in vending machines that allow customers to take more units than they paid for?
- Why are brown eggs more expensive than white ones, even though the two types taste the same and have identical nutritional value?
The Economic Naturalist
(Why Economics Explains Almost Everything) by Robert H Frank
Virgin Books Publications (UK)
Basic Books (USA) 2007 / 2008
Are we seeing the collapse of the commodity cycle or as some may like to refer to it as the commodity bubble? CRB Index of 19 commodities fell 10% since June 30. This was the biggest monthly decline since 10.5% drop in March 1980, when US was in recession. Natural gas plunged 32% to lead July's biggest losers. Corn dropped 20% and nickel sank 16%.
Tight supply/demand fundamentals support bull case for commodities, but speculation may amplify price trends to overshoot or undershoot fundamentals.
Wasn't commodity supposed to be a safe haven to fight against inflation? We still see most countries grappling with inflation brought on by the huge upswing in the commodity prices over the last 4-5 years, in particular kicking in strongly over the last 24 months.
High inflation may eventually slow economic growth and demand. Expectations of monetary tightening and stronger dollar may be crunching the commodity bubble. Though many tend to cast aside the role played by speculators in causing commodity prices to overshoot, what we are seeing now should be a prime example of massive unwinding by speculators, which is not predicated on real fundamentals.
I still think commodities is in an upcycle and prices will recover very soon. That is because the demand for most commodities stems from emerging markets. Although there is some slowdown, the inherent demand is still very strong. The weaker US economy is not a big factor in causing the commodity prices to correct rapidly. What we are seeing now is massive commodity index fund liquidation, speculative unwinding and deleveraging.
We have to remember that despite the current sharp drop, the CRB Index remained up nearly 40% y/y. Which is to say that the last 20% price hike in commodity this year has been mostly pure speculation. I see oil prices stabilising around US$105-110, even so that would still be a 30% y/y increase.
Oil is the market leader and is also where most speculation reside. The rest are only following the herd mentality. Which is also why the sell down has been wholesale and not selective at all. Only when the selling has climaxed would the respective and unique fundamentals governing each specific commodity and soft commodity be properly re-priced.
That said, sharply lower commodity prices is supposed to be "good" for equities but we haven't seen that because the commodity is a bubble onto itself. The cashing up by commodity index funds will probably not find its way back into equities.
Equity markets have other problems at its back: the slowdown in the US; the US consumer spending contraction owing to housing problems; a tightening environment in most countries ... hence commodity prices is not the sole driving factor.
One big reason why equity markets did not move up higher is the "collateral damage" factor. We have seen clearly over the last 3 years how inter-related the markets are. A sudden collapse in one asset class can cause collateral damage to other asset classes as funds are hit hard, thus having to cover the asset contraction by selling other asset classes. Equities will still see the current commodity price collapse as a positive factor, but the dust needs to settle first.
p/s photos: Kang Hye Jung
Tuesday, August 05, 2008
Well, as expected, price of oil broke US$120 thus my proposed double down short would be activated at US$119.90. Should sit pretty all the way down to US$105-110.At the time of writing this, the price has reached US$119.30.
26 July 2008 - If I shorted at US139, I'd be pretty happy to ride along as I am waiting for US120 to be broken, which to me, will be a very huge sell signal to most chartists. At US119.90 I would be doubling up my short position. Why don't I double up now at US123 you might ask. Well, things are still fluid, it could hang around the present levels for another few weeks, which to me would be base building - if it does that, and does not break US120 by mid-August, then I should take profit on my short position as I would interpret that as the bulls still having the upper hand.
Hence I am looking forward eagerly to US120 being broken because it will fall pretty quickly to US105-110, the level which I think there will be better long term support.
26 July 2008
8 June 2008
p/s photos: Som Kanokkorn Jaichuen
Despite the bailouts for Fannie & Freddie and the housing package in the US, defaults and foreclosures are rising rapidly, and not even flattening out. Mortgages in the sub prime category: 8.4% for all sub prime mortgages taken out in 2005 are now in default or foreclosure; for sub prime mortgages taken out in 2007, the default/ foreclosure rate now stands at 16.6% as at June, a pretty sharp hike from May's 15.8%.
The trouble is these high default rates are not just in sub prime but is flowing into other mortgages as well. One rung above sub prime is what they call Alternative-A category. The default/ foreclosure rate here has jumped 300% in April from a year ago to hit 12% (which isn't that far from the sub prime default/ foreclosure rate).
Even some of the prime loans are being hit as well. The default/ foreclosure rate has doubled in April to 2.7% from a year ago.
Even with the bailout packages, housing prices are not likely to do a V-shape reversal but rather a prolonged U-shape reversal. The default rates are going to go much higher before improving. That being the case, consumer spending should see some curtailment. The much weaker oil prices may help ease the burden but it pales into insignificance when a household compares its oil/gas/electricity bill with the ballooning house payments and home equity being erased rapidly.
I think the bigger financials in the US have done most of the needed write downs and recapitalisation, but we shall now see the smaller US regional banks falling like dominos. They are the ones left holding the bag, so to speak. Either the US allows for a wider scope for foreign funds to invest in these banks or we will see another mini meltdown.
Monday, August 04, 2008
The headline must have sounded like bad English. Business cycles and commodity cycles are there for very good reasons. Cycles are basically expansion and contraction periods. However, the contraction periods are usually much shorter than periods of expansion, or else we would all be in deep trouble if it was 50-50 all the time.
Riding out of troughs is essential for business longevity and income preservation. The last two contraction periods was relatively mild in the US, lasting just 8 months. The first one began in mid 1990 and the second in 2Q 2001. The expansion phases for the last 2 cycles were very much prolonged. From 2Q 1991 till 1Q 2001 was 92 months. From end-2001 till 1Q2008 was about 84 months. These two were among the top business expansion phases in history. It was only surpassed by the prolonged business expansion upcycle from 1961 till 1969. Most of the rest of the expansion periods were less than 50 months.
The best explanation may be central bankers and financial authorities are better at using fiscal and monetary measures to massage the longevity of the expansion phase nowadays. The second explanation could be the growth in globalisation, the breaking down of trade barriers, which creates more trade and demand.
I like to use the last period of contraction to make another point, started by the Internet bubble imploding. We saw companies falling like flies, venture capital firms running around aimlessly. Over-optimistic future valuations and projections being destroyed literally overnight. Despite all that, the contraction period was only 8 months, mainly because companies were allowed to fail, forced to fail, if you cannot survive and did not get new funding you die. It was brutal but cleansing. That's why those internet companies that can survive that period deserve to stand high now.The major point being, there was no Federal bailouts of any kind then. Mainly because none of these are linked to the government.
Cycles need to go through boom and bust periods, and when they bust there must be pain in order for a cleaner and more prolonged upcycle next.
The other example was the massive trough in the Japanese financial markets back in the early 1990s - the whole financial system went into tai-chi, nobody called on the bad loans, so there were not classified as bad loans. Cross holding of shares was critical in order to secure long term business dealings, so nobody sold shares a lot for fearing of upsetting clients (fellow listed firms), business contracted massively. Until they cannot take it anymore, balance sheet was so bad, they had to sell the shares, they had to put most loans as bad loans. Only then can the government face up to the massive need for recapitalisation and closure of many finance companies and banks. It has to be the longest recession ever in any country, from 1990 till even now, though conditions have improved slowly over the last 3 years. Imagine have a 15 year recession. You have to let companies fail, you have to address bad loans, you have to write off, and you have to recapitalise. Japan could have come out a lot faster and be an even bigger force if they did that as they would have recovered from the recession within 2-3 years, not the 15 which they had.
So how is the US dealing with its current "recession"? The rest of the world basically is nowhere near a recession though. Financials in the US have been busy with write downs and recapitalisation - that's good. Bailouts and capital injections into government linked companies are basically OK. However, owing to the size of the bailouts, it weighs heavily on its currency and would also prolong the over-zealous money supply cycle again. The bad thing is that this is basically a credit implosion cycle, due to over-enthusiastic money supply growth policies by the developed world for the past 7 years, and the medicine prescribed by the Treasury and the fed are not addressing the cause but in fact are feeding it (again). Technically speaking we needed to see a lot more contraction in the US economy from this credit implosion. The US Treasury and the Fed are not going to let that happen as the repercussions might be too catastrophic if they did nothing. There is nothing you cannot save if you throw enough money at it.
Hence I believe that the US may be able to avert a recession judging from their government strategy. These are demand stimulation policies. Global governments are still not doing enough to encourage supply stimulation policies. We are all a bit short sighted in addressing immediate painful areas. Supply stimulation policies could include tax breaks to encourage production of alternative fuel sources (nuclear, solar) or incentives to go for deeper wells and more difficult prospecting areas. It could also include policies to jazz up research into better crop and land management, better fertilisers and more land being zoned for agriculture and farming.
This short sightedness may bring the global economy chugging along as demand would have been saved and restimulated. However, we are still faced with the prolonged problem of inflation in prices of goods and services. If the US can avert a recession, it means global demand will be on a firmer footing. Hence demand resuscitated will continue to drive up the commodity and soft commodity upcycle.
When prices continue to rise, it will be the same battle between company profit growth and higher cost of operations. We have seen that to a large extent in late 2006 and much of 2007 where company profits surged, but also cost of logistics, materials, livestock and salaries. We will see good periods for stocks as profits are good, but it will always be countered with higher prices. Hence going forward, we will see shorter boom periods for stocks, followed by big dips. It means everyone will have to live with higher volatility when investing in stocks. Investors will have to move in and out of stocks more often.
p/s photos: Monica Chan Fatt Yung
Saturday, August 02, 2008
Its that time of the year as the brewery and cigarette companies (BCCs) make their public relations rounds to spread the news against any sin taxes in the upcoming budget.
There were no sin taxes last year. Following the windfall taxes being imposed on CPO companies and IPPs, it’s only natural for BCCs to make their case known before the upcoming Budget is finalised. Recently, in The Star’s business section, breweries in Malaysia cautioned that another round of excise duty hike could result in more smuggling and increased competition from wine, spirits and hard liquor. The article also highlighted that excise duty rates in Malaysia is already the highest in Asia and second highest in the world, after Norway (and I thought we were only tops in car prices).
The sector contributes some RM1.24bil in excise duties, corporate taxes and personal income taxes.
It provides direct employment to over 1,000 full-time employees and more than 60,000 people through indirect employment where the industry provides businesses through distributors, packaging, materials suppliers, transporters, retail outlets, media and advertising.
They have been models of good corporate citizenry.
The industry has raised approximately RM500mil in CSR initiatives over the last two decades to help the community. It supports tourist-related activities such as the Rainforest Music Festival in Sarawak and KL Food and Fashion Fest, including the KL Fashion Week and the Malaysian International Gourmet Festival.
It includes public events to view sports-related programmes such as EPL and Euro football matches.
Victim of commodity upcycle
Like other industries, the brewery industry is already faced with rising costs as a result of the recent fuel price hike, electricity tariffs, commodity prices and rising inflation.
Additionally, costs of key raw ingredients, which include malt, hops and barley, have risen by between 50% and 150% in the last two years.
Packaging, materials and services costs have increased by RM40mil a year. Between 2004 and 2006, consumption of tax-paid beer fell by 14%.
Malaysia has the lowest consumption of beer per capita in the region. Industry growth is almost flat today which means that it took the industry five years just to get to flat growth.
As it stands, excise duty on beer in Malaysia is currently the second highest in the world (after Norway) and highest in Asia.
The price of beer and stout in Malaysia is one of the highest in the region. The industry witnessed three consecutive years of duty hikes from 2004-2006, totalling 50% (there was no duty increase from 2007-2008.)
Any further increase in excise duty will be offset by continued decline in sales volume, thus Government does not gain any higher revenue. Using the consumption forecast model, when excise duties increase, beer and stout consumption will decline between 6.5% and 20.8% respectively.
If duty increases, Government stands to lose between RM6.2mil to RM29.3mil net income due to the lower sales volume.
The government had already increased the excise duty consecutively from 2004 to 2006, with a stupendous 27% hike in 2006.
Hence, any further increase in excise duty will result in demand destruction and net negative tax collection revenue to government coffers. Between 1997 and 2007, per capita consumption of beer had fallen whenever excise duty was raised.
While the drinking population in Malaysia (non-Muslims aged 20+) has increased from 3.9 million in 1990 to 6.2 million in 2007, per capita consumption has dropped from 30.1 litres to 19.9 litres. When excise duty is raised, the resultant effect is that more people will switch to illegitimate alcoholic products and compounded hard liquor, which is priced lower but has up to eight times higher alcohol content.
The Government loses RM217,000 in unpaid duty for each smuggled container of beer/stout. The industry estimates that some 150 containers of smuggled beer/stout escape duty every month and this translates to a revenue loss of about RM400mil per annum. To curb smuggling, the Government introduced tax stamps on every imported can/bottle to show that duty has been paid.
However, stricter enforcement is required as consumers can still buy imported beer, which is easily available at supermarkets, mini markets and sundry shops at below the value of the duties.
Various brands of cheap imported beer, with an alcohol content of 8% to 12%, are retailing at these places at only RM5 per can. Realising the huge potential of tourism, Hong Kong cut duty on beer and stout from 40% to 0% in the last two years. It has proven to be a boon to tourism. Let’s not forget that tourism plays a key role in the growth of the Malaysian economy.
The flip side
There are two sides to every story. Despite having the second highest excise duty in the world; despite retail prices being among the highest in Asia; despite the demand destruction cited, the Malaysian breweries are still making decent money.
Guinness Anchor is still paying 9.5% dividend yield and has an excellent ROE of 21.5%. Carlsberg (M) is paying 10.4% dividend yield and has a ROE of 19.7%.
Compare that with Asia Pacific Brewery (Tiger Beer) which pays a paltry 2.3% dividend yield and has a ROE of 15.4%. Fosters pays a dividend yield of 5% and has a ROE of 16.5%.
Tsingtao Brewery pays a dividend yield of just 1.5% and has a ROE of 14.9%. Anheuser Busch pays a dividend yield of 2.1% and has a ROE of 80.4%. Kirin Brewery pays a dividend yield of 1.5% and a ROE of 10%.
That said, the strong dividend policies for these two Malaysian companies is largely driven by the government policies.
Most profits are repatriated back to holding companies as investment in growth is pretty limited considering the current Malaysian political landscape.
These companies can’t use the profits to fund growth regionally because of the strict Malaysian policies. By right, Guinness Anchor and Carlsberg (M) could have been the platform to invest into other operations in Asia.
These two companies if treated like other companies, would have tripled their market capitalisation over the last 10 years if the dividends were reinvested. But who would do that with the aggressive excise tax hikes?
Hence both companies are mainly dividend plays when they could have been so much more.
Many will say sin taxes are good for the economy. You may punish these companies to a certain extent as these are not necessarily desirable products (including gaming and cigarettes). You may even say there are additional costs to society due to people consuming these products (drink-driving, smoking related diseases, etc.) However, we live in a society where we should respect others’ lifestyles, even when we do not agree.
The additional social and medical costs is a good counter argument but these products are not illegal. In the same way, I would consider luxury brand items as frivolous and a waste of resources. But can we tax these products 200% or 500%? Where do we draw the line?
Government officials need to sit down with these industry players and think of ways to encourage investment rather than repatriation of profits. That is a lot of opportunity cost to the nation.
Similarly, for gaming companies, where extremely high taxes have opened a huge market for illegal bookmakers in 4D draws and horse betting. It is commonly perceived that the turnover for illegal 4D and horse betting is about 20x-30x the actual turnover at legal counters. JUst working together to reclaim 20% of the illegal activity would have boosted tax collection 100% to 200% more!
Global practice has proven that where taxes for gaming is low, it automatically curbs the “spread” of illegal bookmakers.
Bottom line – the government ought to work more closely with these companies with the aim of promoting efficiency and maximising tax collection for the overall economic and social well being of the nation. The failure to engage these companies will mean creating a huge underground and illegal economy for the country.
p/s photos: Sririta Jensen
Friday, August 01, 2008
I have posted this about a year ago, but its still great to watch. My Hokkien is hopeless but I understand enough to know what its all about. Laugh your heads off if you can understand Mandarin and a bit of Hokkien. Click on the link below:
p/s photo: Elanne Kong
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