Thursday, July 31, 2008

Asian Currencies Outlook 2H08

One thing for sure, Asian currencies will not be moving in the same direction as they did for the past 2 years, i.e. appreciating against the USD. Rising food and oil prices and its impact on inflation, delayed monetary tightening by central banks, rising fiscal and external deficits, risk of slowing domestic demand and growth are weakening investor sentiment, leading to equity sell-off, volatile bond markets and FII outflows hence putting downward pressure on Asian currencies.

Let's look at the ones struggling with higher inflationary risks relative to growth issues: India, S.Korea, Thailand, Philippines and Indonesia intervening in currency markets to prevent large depreciation and the inflationary impact of oil imports.

The other group are those with oil and commodity exports, strong FDI prospects, fiscal and trade positions may be less vulnerable than their Asian peers. Mainly in Asia we are talking about Malaysia solely. That fact seems to off the radar of most economists. They tend to lump Asian countries with a big wide swath.
The ones with strong surpluses include Singapore, Taiwan, China and Malaysia again.

Appreciation bias to control import prices but concerns of slowing exports, economic growth will be a challenge for China. China does not really have a growth problem, theirs is still one of controlling prices, hence the yuan has been allowed to rise rapidly over the last 2 months while other Asian central banks have maintained status quo. We saw a faster pace of appreciation against USD since Nov (CNY/USD rose 4.3% by early April).

The ringgit used to track yuan's movements closely but Zeti has left rates unchanged and the ringgit has been slightly weaker because of that.
India, Vietnam and S.Korea have been trying to contain currency decline and import inflation but is hampered by slowing domestic economic growth and rising trade deficits. Coupled with firm intervention in the USD by U.S., their efforts have been stifled. There is now a low possibility of further Fed rate cut.

Hence any rate hike by Asian countries will provide upside for their currencies going forward. However, currency investors will be also looking at overall growth picture and balance sheet as well. I expect the currencies for Malaysia, Taiwan and Singapore to continue its rise in 2H 2008 as growth is still OK and fighting imported inflation via a stronger currency is a route they can take.
Rapid renminbi revaluation adds to already significant inflationary pressure for importers of Chinese goods and might encourage dollar-linked countries to revalue their currencies.

Taiwan dollar, Malaysian ringgit, Thai baht and Sing dollar will perform better due to current a/c surplus, lower capital dependence. Indian rupee, Korean Won, Vietnamese Dong will continue to weaken as high imports impact current a/c deficit.
The recipe for countries to be able to maintain stronger currencies will need to show strong long-term growth prospects, monetary tightening and interest rate differential that may attract capital inflows once domestic/global risks abate.

Conversing about currency outlook is a very important task as its the first determinant to capital flows, and hence also the vibrancy in the respective equity markets.

p/s photos: Aum Patacharapa Chaichua

Wednesday, July 30, 2008

The American Dream (Nightmare)

US GDP in 2007 was US$13.843 trillion (or US$13,843 billion). Malaysia's GDP was US$186.482 billion. There are plenty of long term bears over the US economy. The US economy has been running on empty, running on it being the reserve currency, for far too long. The events and developments over the last 5 years have shown that the world economy is realigning and the rest of the world is making the US more accountable for their excesses. The sub prime mess and Fannie & Freddie bailouts are just a portion of the financial and economic problems within the US. To get a grasp of each problem, lets use it as a percentage of US GDP. Its quite frightening. I certainly would not like to be going into retirement age and living in the US over the next 20 years.

Just consider the sub prime mess so far and we are just talking of US$1 trillion here. The social security and Medicare unfunded liability is supposed to borne by a growing base of tax payers. We know that is not going to happen as America has an aging population, unless the country admit a whole lot more people under 35 into their workforce now and for the next 10 years.

How to pay for all these, well, issue more bonds. We all know where that's going to lead to. Or the country can raise taxes a lot, which will be very bad for consumption and their livelihood. Or the country will have to keep its military leadership and fight some more wars for the democratic world - that will keep the USD as the reserve currency and ensure the current countries buying US bonds will continue to do so.

The IMF estimated asset write-downs resulting from the 2007-2008 credit crisis to be US$1.1 trillion. By most estimates, only half has been written down so far. In all likelihood, corresponding to defaults on 20% to 30% of home mortgages, we should be looking at another US$500 billion in writedowns. (8% of 2007 GDP)

b) U.S. national debt of US$4.4 Trillion. This figure is obtained from the “Long-term Financial Outlook”, U.S. Government Accountability Office, Jan. 2008. The risk is high that the national debt will continue to grow through deficit spending for many years to come. This gigure is likely to continue to grow in the coming years. (31% of 2007 GNP)

c) The unfunded liability of the Social Security System is estimated to be US$6.7 Trillion (Government Accountability Office, Jan. 2008). Thats the problem with having a lot of social safety nets that is not properly funded. (48% of 2007 GNP)

d) The unfunded liability of Medicare is estimated by the Government Accountability Office to be US$34.1 Trillion. This is the motherlode. One can argue that the liability will be funded over a very long time, but the amount will also grow as well. (347% of 2007 GNP)

e) The cost of imported oil. Despite all the hoo-hah, oil is one of US smallest problem. Yearly import cost is between US$825 billion to US$1 trillion. The danger is if the cost of oil were to go to US$180 in 3 years and the American consumption patterns does not change, then we are looking at maybe US$1.8 trillion. (6% of 2007 GNP)

p/s photos: Sonja Kwok Sin Ney

Monday, July 28, 2008

Insightful Comments On Oil

I am glad that there are plenty of intelligent readers out there and their comments on many issues are quite enlightening. Here are a few on "oil strategy" which is worth reproducing here:

Jackie Lee said... Special bulletin - Last week various analysts said there was talk that Mexico, the world's fifth largest oil producer, was hedging its bets - the country was said to be signing contracts to deliver oil several years into the future at today's prices. Essentially, it was betting oil prices have peaked. One analyst, speaking on background only, said he had confirmed Mexico was locking in futures contracts. He said it was being done at the behest of the Mexican government, eager to balance a long-term budget, rather than a bet by state oil company PEMEX, that prices will fall. But could Mexico's move inspire similar steps from other oil producers, and cause oil prices to fall further? "Absolutely," said Neal Dingmann, senior energy analyst at Dahlman Rose & Co., a New York-based energy investment boutique. "It could create a top in [oil prices] in the near term." Dingmann said about 50% of the production from the firms he covers - mostly small firms - has been sold for future delivery at today's prices.

solomon said...

If you checked some of the information posted in NYMEX and CFTC, you can notice that the speculation interest had dimmed for a while lately. My prediction last couple of weeks that USD120 /barrel had reached. It will hover around USD100-USD115 next few months, unless geopolitical situation change again. If Dali prediction is correct, equities will rise. In short term, I am positive on equities.

Ben Gan said...

The pictures you posted and together with the music are really refreshing. I like it. The fast retreat of oil from US147 to 124 per barrel is a good indicator that we have seen the peak of oil which is likely to remain unsurpassed for at least the immediate future.
As to whether 120 will be breached, it may not be able to do so in its first attempt.

Anonymous said...

Crude oil prices 'could hit $170 per barrel'. Prices for crude oil could rise as high as $170 per barrel this summer, according to the president of Opec. Chakib Khelil, predicted the increase from their current levels of around $134 per barrel in an interview with French television station France 24. He told the broadcaster: 'I foresee prices probably between $150 and $170 this summer. 'That will probably decline a bit toward the end of the year.' According to Mr Khelil among the factors set to influence the predicted...

The Rock said...

Raising the rate will not change inflation as it is a supply driven not Demand driven inflation. And if indeed the oil price and other commodities are on the way down, why raise rates now? I think Zeti is doing a better job than Ben ! or Greenspan. Traditional economic theories are no longer accurate in times of uncertainty like now. Look at the Eurozone. Is inflation coming down after ECB raised the rates? NOPE.

Note the timing of collapse of the oil trader in US and the reversal of oil futures a few weeks ago. Reported in The Edge recently. And Congress is debating 12 bills on measures to curb energy speculation. What would u do if u are a hedge fund? U take profit in case the Congress actually pass any of the law - since u have no idea of the outcome of the debates.

Net Long positions have dropped by more than 10% in the last few weeks alone from 1.36m to 1.21m. [The Edge] If LONG squeeze happens, oil may crash through USD100. There is no safe asset class anymore. Liquidity - the SWFs and a lot of mutual funds are sitting on piles of cash. Not the banks anymore.

p/s photos: Cholada Mekratree

Sunday, July 27, 2008

Independence Of Accounting Firms

The Saga: The external auditor, BTMH, for Oilcorp Bhd has refused to amend the company's 2007 annual audited accounts despite an independent verification report. Horwarth, the firm hired for the independent report, has said that the value of a long-term contract, which was in dispute by the company and its external auditor, was RM110 million.

Oilcorp had argued that the contract was worth RM110 million. However, Baker Tilly Monteiro Heng said it was worth RM90 million due to a RM20 million variation order. Securities Commission (SC) has directed Baker Tilly Monteiro Heng (BTMH) to carry out additional work on the audited accounts of Oilcorp Bhd for financial year ended December 31 2006 and 2007.

The SC has exercised its powers under Section 320 of the Capital Market Services Act (CMSA) 2007 to call for an investigative audit on the accounts. "In accordance with the CMSA provisions, all public listed companies are obliged to assist auditors as directed by the SC," an SC spokesperson told Business Times.

The announcement comes after BTMH is believed to have given professional clearance to Horwath to take over its job as Oilcorp's auditors.BTMH has informed Horwath that apart from all the issues it had previously raised on July 11, there is no other professional reason for Horwath to not accept the job. It is believed that the reason why BTMH only suggested a probe into the contract in question in early May was because further reviews have raised more issues and more contradicting documents.

But Oilcorp said BTMH was prepared to give its audited accounts a clean bill of health on April 29 2008, a day before the submission deadline. This was provided Oilcorp could give it a letter from a client that the contract was indeed worth RM110 million.

However, BTMH refused to accept and recognise the letter the next day.Another accounting firm, Messrs Horwath, was later hired by Oilcorp to carry out a special audit on the disputed contract, the result of which was favourable to Oilcorp.

The report produced by Horwath, however, was just an "independent verification review", BTMH argued. Hence, it could not change its view on Oilcorp's account merely based on Horwath's report.

Comments: This has been dragging on for far too long. Oilcorp's management has basically threw their own baggage onto the ceiling fan and now its splattered all over the place. While its a relatively small amount of RM20m - the implications are far reaching.

a) BTMH is correct to maintain their stance even with the independent paper from Horwath.

b) MIA staying clear for now, should come out with some leadership on the matter instead of letting the parties resolve this themselves because it involves the integrity of the appointment of external auditors and the room to replace with a favourable firm.

c) Horwath should NOT take up the appointment as it would compromise the integrity of fellow professional accounting firms, especially when they have given a favourable independent report on the disputed contract.

d) MIA should step in with a directive as Oilcorp is basically saying they can change the external auditor if it does not like the one appointed. The external auditor was appointed to do a professional evaluation and give an independent opinion. To remove because you disagree would be like to change the judge in a court case AFTER the judge has ruled against you.

e) Even if Oilcorp wants to change external auditors, it should not be considering Horwath as Horwarth has been asked to do an independent report on the disputed contract and has made a favourable report on the contract. To allow Oilcorp to do so, is akin to allowing companies to shop for the auditors who would give the kind of opinion the company wanted.

f) Oilcorp should have just gone with the qualified opinion, who really cares when they read that its just a matter of RM20m, now it implies the possibility that maybe Oilcorp has something more sinister behind their moves. The management and board of Oilcorp have put themselves in a shady light - I would question their appreciation of proper corporate governance and respect for professionalism.

g) What if another accounting firm is appointed (not Horwarth) and they came to the same conclusion as BTMH? Will Oilcorp also seek to reappoint another firm?

h) It is said that BTMH has given the green light to Horwarth to take up the position if appointed by Oilcorp. While that is fair enough, both firms should consider the implications - companies may be more "open to the idea" of changing external auditors should things not go their way. More importantly, it could invariably affect the "willingness to impart truly independent and fair opinion on accounts" by external auditors now that they can be sacked so easily. Who knows, who is to say that the external auditors independence is not compromised somewhat by these developments - they must be given the room to operate without fear or favour, or risked having their reputation affected if they do not give favourable opinions.

The integrity of accounting firms is being called to question. Fellow accounting firms must stand together to show independence and must not be seen as being open to be shopped by companies.
The SC is doing the right thing by warning Oilcorp severely. Oilcorp should just cave and take the BTMH ruling and their medicine, you have no foot to stand on. As usual, we have no leadership from the Bursa.

p/s photos: Fiona Xie

Saturday, July 26, 2008

Oil Price Strategy Update

The call to short the bugger at US139 now looks really good. As I am posting this Nymex Oil is at US123. Assuming I am holding the short position at US139, what do I do now? Take profit? Let it ride? For reasons why I called for the big shorting, please reread my posting a few weeks back (June 8, 2008). The reasons are still valid.

Suddenly now you don't hear about oil supply being unable to meet growth in demand. Why suddenly so quiet? This is an important lesson, the media and market pundits pander to try to explain the trend and take the current price as "god-given correct prices". Hence truth is exaggerated at any point in time, if there is truth at all.
Now its demand destruction to the forefront.

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. Once it breaks US120, that is considered as pretty positive for equities in general and should move all markets up by 4%-5%.

p/s photos: Porntip Wongkijjanon

Friday, July 25, 2008

As If Jessica Alba Was Your Girlfriend

This place has been around a bit and is being discovered with utter joy. Its like you have managed to get Jessica Alba as your girlfriend, and now introducing her with glee to your friends. I am certainly not the first to discover this restaurant. Had the unbelievable set lunch at just RM22++ which was ridiculously priced (they could have charged me RM40++ and it would have still been worthwhile). It was so good, I had to go back twice to make sure I sample most of the things on the menu, they all sounded so good. So, went back for another lunch but ordered a la carte, and went back again at night this time for the degustation` menu (a sampling of almost everything on the menu).

Max is an ex-lawyer who found something more fulfilling to do. He has worked at a number of 5 star international hotels as chef and decided to do something on his own. For the food quality, its probably 30%-40% cheaper than at other similar outlets such as Cilantro (closed for renovation), Third Floor or Lafite. The items are generally good to sublime. As there are more than 20 items on the menu, I shall only name the sublime - get the lamb chops drizzling with heated mint sauce, the duck leg.. anyway he does it is fine, the unagi/duck liver and the yabbies. Though not a big fan of cooked fish, my friends said they were excellent as well. The desserts are pretty awesome too. Probably takes you 3-4 times to try everything, have the degustation` menu.

If you think the pictures I have stolen from other food bloggers look good, the food tastes even better. Wine list is more than decent, although the OZ list is pretty shabby, could have gotten better labels. They have an open kitchen concept, so you can view how they cook if your meal if you wish - adds to the charm. As its a pre-war shoplot, it has a lot of rustic charm. Great place to take your friends from overseas.

The place: Max, Kitchen & Wines
27 Jalan Tengkat Tong Shin, next to Sao Nam, 10 meters from the famous charsiew shop and 30 meters from Ngau Kee. Parking is a bitch, just pay the guys and park.

Thursday, July 24, 2008

Popular Demand, Just For The Guys - Haruna Yabuki

Bailout Starts In The US In Earnest

The catalyst for higher equity prices appears to be that President Bush will sign Congress’s housing bill, which solidifies support for the mortgage guarantors Fannie & Freddie, both of which are rising sharply. Even troubled banks like Wachovia Corp was up 6.2% after a 29% gain on Tuesday on the back of a quarterly report which detailed major losses at the firm.US Treasury Secretary Paulson was confident that Congress would approve his housing rescue plan this week and so far they are moving forward as planned. The plan is to pass the Housing Bill before August recess that includes provisions to extend credit lines to Freddie and Fannie, Treasury purchase of equity stakes and a new regulator. Bill would extend FHA guarantees to refinance $300 bn fixed-rate mortgages for 400k homeowners w/ negative home equity as lenders take a 15% hair cut on principal; its cost would be recovered by profits of Fannie, Freddie and FHA fees on lenders/borrowers with some adjustments.
  • White House: Bill should be financed by (higher) borrower's credit risk-weighted premium paid by lenders/borrowers with strong underwriting standards; Critics: This would reduce size of the program covering smaller no. of homeowners
  • CBO: Treasury assistance to Freddie&Fannie and FHLB may cost $25 bn during 2009-10; Housing Bill may cost $2.7 bn during 2008-13 ($1.7 bn for FHA guarantees; $1 bn in administrative/counseling services); can be financed by loan premium of 2% but may result in higher future credit cost; the absence of such assistance may put severe pressure on financial markets and the economy
  • Risks: Risk of default due to continued decline in home prices, rise in future interest rates; risk to FHA and taxpayers if riskier loans are refinanced; bleak financial health of Freddie/Fannie, impact on its shareholders
  • Paulson: Declining home inventory, stabilizing home sales are leading to price correction and affordability but are constrained by cost and availability of credit; modifying mortgages for credit-worthy homeowners can prevent foreclosure and benefit both lenders and households; 'Covered Bonds' may help reduce cost of financing/refinancing homes
  • Bernanke & Kroszner have also supported FHA refinancing w/ lenders writing down principal, large capitalization of GSEs
  • Lex: Plan may slow new foreclosures but won't reduce excess home supply as tighter financial sector balance sheets will constrain mortgage financing for households; many mortgages are securitized and difficult to modify; Preference of lenders to modify only 'at-risk' loans may pose future default risk for FHA
  • Roubini: Plan will prevent further decline in home prices and loss to lenders, banks, neighborhoods and fiscal cost to govt from foreclosure - cost of debt reduction via debt restructuring much lower than cost of liquidation
  • Levitin: Plan not feasible since principal cut has to be taken not by a single lender but by a pool of securitized trusts; second mortgages (w/ large negative equity) also have to be bought out; lenders may offer only low-potential recovery mortgages for FHA refinancing (adverse selection), thus putting taxpayers at risk
  • Economist: Plan will be ineffective in preventing foreclosures; Instead fasten foreclosures so that homes can be bought by people who can afford them, streamline state bankruptcy laws
  • Ritholtz: Plan will keep home prices artificially high creating market distortions; instead need to speed up market correction and allow home prices to fall so that they become more affordable for others to buy
  • Senai: Plan will reduce poorly collaterailized/unviable mortgages for refinanced/well-backed mortgages, but being limited to first homes and 2005-07 period, it will be insufficient to reduce overhang of houses, banks' balance sheet/liquidity problems
  • Gross: Plan where burden is shared by all parties is a better alternative than free-fall market clearing, asset deflation, foreclosures
photos: Lee Hyori

Correlation Between Oil, Commodities & USD

hei Dali You conclude that dollar will be weakening. But oil is dropping, resulting in dollar strengthening. How you justify your analysis?

Comments: My thesis on dollar weakening has nothing to do with oil. For too long oil has been rising on the back of a weaker USD as most commodities are priced in USD. This is the speculators mantra, that commodities deserve to go higher because dollar is weakening as they are priced in USD. That has only some truth in that statement, which has been overplayed for what its worth to the benfit of speculators in commodities. Naturally as the oil is starting to fall along with other commodities, the reverse correlation will hold for a while.

My reckoning on a weaker USD going forward has a lot to do with the bailouts necessary to be undertaken by the Treasury and The Fed (read below). Do not be blinkered by knee jerk reactions - such as this, and the recent sell down in CPO (which has quite different fundamentals to oil). The USD will resume its downtrend once the heat goes off commodities and people start to refocus on the credit bailouts and the strong likelihood of lower interest rates going forward by the Fed.

p/s photos: Aum Patcharapa Chaichua

Wednesday, July 23, 2008

Paulson's Revealing Comments

WSJ: The stability of Fannie Mae and Freddie Mac is key to erasing underlying uncertainty in U.S. financial markets and making way for an economic recovery, Treasury Secretary Henry Paulson said Tuesday, while voicing confidence that Congress will approve a rescue plan for the mortgage giants this week. "Because of their size and scope, Fannie and Freddie's stability is critical to financial market stability," he said in a speech at the New York Public Library. "Their continued activity is central to the speed with which we emerge from this housing correction and remove the underlying uncertainty in our financial markets and financial institutions." Mr. Paulson's speech comes a little more than a week after the Treasury Department unveiled a plan that would increase the government's US$2.25 billion credit lines to Fannie and Freddie and allow the government to buy an equity stake in either company. Lawmakers on Capitol Hill are expected to wrap the proposals into broader housing legislation.

"We need to act in the short term because the [government-sponsored enterprises] are vital institutions in our capital markets today and are vital to emerging from the housing correction." Mr. Paulson said his "highest priority" is to stabilize the financial markets and financial institutions, which have been suffering this year in wake of the subprime mortgage crisis and related credit crunch. "Today our No. 1 priority is market stability as we work through the current market stress," he said.

As part of his efforts to stabilize the financial system, he said he had no choice but to ask Congress for new authorities to prop up battered mortgage finance giants Fannie Mae and Freddie Mac. "I would rather not be in the position of asking for extraordinary authorities to support the GSEs," he said. "But I am playing the hand that I have been dealt."

Meanwhile, Mr. Paulson said continued stresses in the financial markets should be expected until the housing market fully stabilizes. Still, he said the failure of IndyMac Bank shouldn't lead people to believe the U.S. banking system is at risk. "The American people have every reason to remain confident that the U.S. banking system is sound," he said, adding that 99% of the country's banks are well-capitalized. He added that periods of economic difficulty aren't new. "We will work through this period, as we always do," he said.

At the same time, he urged banks to continue to raise capital, noting that U.S. financial institutions have already raised more than US$150 billion. Mr. Paulson said it will take "additional time" to work through the current market turmoil as the markets and banks reassess risk and re-price securities across a number of asset classes and sectors. Meanwhile, "additional bumps in the road" can be expected," he added. Mr. Paulson highlighted the need for improved market infrastructure and increased transparency, especially in the over-the-counter derivatives market and the tri-party securities repurchase system. He also said "we need to get to the point where large, complex financial institutions are not perceived to be too big or too interconnected to fail."

The Treasury secretary also called for new powers to manage the impact of the failures of large non-depository financial institutions, such as large hedge funds. "Over the last few weeks, the need to move more quickly toward an optimal regulatory structure that establishes a prudential financial regulatory system, focused on promoting long-term market stability, has become all the more apparent," he said.

Bill Gross, who manages the world's biggest bond fund (Pimco, a unit of Munich-based Allianz SE, has US$830 billion of assets under management.), said it's not possible for government sponsored mortgage-finance companies Fannie Mae and Freddie Mac to raise capital without the Treasury Department's support. `Let's be blunt: to the extent the Treasury suggests they'll never have to use their authority, that's a sham,'' said Gross of Pacific Investment Management Co. ``It's fallacious to suggest that the agencies could issue capital, preferred stock, without the co-participation of the Treasury. I don't think that's possible.''``To suggest that the Fed or a central bank should raise interest rates in the face of a significant asset deflation, a significant housing deflation, is certainly the wrong approach, to put it mildly,'' Gross said. An increase in the target rate for overnight lending between banks amid rising unemployment ``would be tantamount to raising interest rates in the mid- 1930s,'' he said. The U.S. dollar will continue to fall against currencies of emerging-market countries, Gross said. The dollar will also weaken as the U.S. federal budget deficit, which widened to US$163 billion last year, swells to as much as US$1 trillion and leads to larger sales of U.S. government debt, he said.

``Three years hence, we will see a trillion-dollar deficit to support the U.S. economy,'' Gross said. ``That's a lot of paper, and that's a lot of compression downward of the value of the U.S. dollar against most other currencies.'' U.S. Treasuries including Treasury Inflation Protected Securities, or TIPS, remain ``overvalued'' relative to assts like mortgages and corporate bonds, Gross said.

Comments: If you read Paulson's words carefully, you will come to the conclusion that the Treasury will be bailing out Fannie & Freddie. Not only that, his sentiments point directly to more bailouts, and that the end is not over by a mile. This lends credence to my belief that the USD will be on a steep decline over the next 12-18 months. That's because each major bailout will depress USD. Paulson has to choose his words carefully in that he does not want a stampede out of USD or GSE debts and US Treasuries, but he obviously has little choice. Gonna have to negotiate my pay to be unpegged to USD...

photos: Pancake Khemanit

Tuesday, July 22, 2008

Best Beef Noodles In Town?

Some of my friends commented that when the market is no-good, I will blog about food or music. Not true, not true. I have been mentioning this in some chatbox before, this is too good to keep it a secret. Shin Kee beef noodles have been around but I only manage to get to it recently. Its addictive, now I'm there on a weekly basis. Its really just a bloody tiny shop on Jalan Tun Tan Cheng Lock. Yellow on the outside. The owner consider herself as a beef noodle specialist - and how arrogantly right she is. You know the food is good when they only open from 10.30am to 3.30pm, closed on Wednesdays. They are also open at night at the back of Hong Leong Bank Berhad along Petaling Street's night market.

If you were to compare with the famous beef noodle store at Tengkat Tong Shin, Shin Kee is superior in every way, seriously. The minced beef and the sauce is finer, the essence of beef is better. Go for the lowshuefun (they sell out quickly) or the yellow mee, I prefer the latter. Go for the dry version, the beef balls and tripe/meat will come in a soup bowl separately. The soup's very good as well, and the beef balls just as it should be, flavourful. Did I mentioned that the chilli/garlic sauce is to die for as well!

Park your cars at Central Market car park and walk across, its directly opposite the popular Lai Foong coffee shop. You can make it a nice outing by visiting Central Market after, when was the last time you were in Central Market. After refurbishment, its a nice clean tourist trap but still very charming.

Thoughts On Roubini's Thesis

Below is Roubini's thesis on the current implosion. My thoughts in PURPLE.
  • This is by far the worst financial crisis since the Great Depression
  • May be pretty bad but not actually the worst. We have to remember that Roubini is speaking mainly from a US perspective. Even so, the 70s oil crunch and hyper inflation was a lot worse for the US. Interest rates went to nearly 20%, can you believe that. Roubini's version of the worst financial crisis basically rests on the huge implosion within the US and the rippling effects through the global economy. I tend to think that its VERY DIFFICULT to have the worst recession since the Great Depression because the US economy and the global economy is so so much bigger now. Yes, things are also quite inter-connected but the sheer size of pockets of world economy would ensure that the whole world would not die if USA really implodes big time. The pockets in global economy being sustainable enough in size (Asia, Australia, parts of Europe, Latam, Middle East) would be able to deflect the imminent weakness from the US. The US economy is very deep, just look at the number of biggest companies in the US, most have strong global operations as well. Despite losing much economic muscle and leadership, USA is still way in front in technology and innovation. The biggest pillar being affected is the financial companies in the US - they used to be global behemoths, now being cut down to size. Bear Stearns, Citigroup, Merrill Lynch, and now even regional banks and government agencies in financial markets. Besides being pummeled in terms of size and market cap, the financial sector is also selling large portions to overseas investors as well, thus reducing "wealth" in the US. More of every dollar earned are going to be going overseas. Its the start of a long diminishing role of American might in finance, but the trends are clear. The willingness of the recycling of petrodollars and SWFs back to help ailing US financial companies is already cushioning some of the ill effects which Roubini's describing.
  • Hundreds of small banks with massive exposure to real estate (the average small bank has 67% of its assets in real estate) will go bust
  • Dozens of large regional/national banks (a’ la IndyMac) are also bankrupt given their extreme exposure to real estate and will also go bust
  • As mentioned above, foreign investors are lining up to buy up and inject capital to own these financial companies, if the Americans do not suddenly turn nationalistic.
  • Some major money center banks are also semi-insolvent and while they are deemed too big to fail their rescue with FDIC money will be extremely costly.
  • In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure (i.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks). Firms that borrow liquid and short, highly leverage themselves and lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and formal permanent lender of last resort support from the central bank.
  • The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression
  • Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
  • This financial crisis will imply credit losses of at least $1 trillion and more likely $2 trillion.
  • This is not just a subprime mortgage crisis; this is the crisis of an entire subprime financial system: losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to unsecured consumer credit (credit cards, student loans, auto loans); to leveraged loans that financed reckless debt-laden LBOs; to muni bonds that will go bust as hundred of municipalities will go bust; to industrial and commercial loans; to corporate bonds whose default rate will jump from close to 0% to over 10%; to CDSs where $62 trillion of nominal protection sits on top an outstanding stock of only $6 trillion of bonds and where counterparty risk – and the collapse of many counterparties – will lead to a systemic collapse of this market.
  • This is where Roubini goes on a rippling effect argument, most of which is highly probable. Fannie and Freddie probably will be nationalise. The Fed and Treasury will more than likely print more money to sustain liquidity in many of the affected organisations. Rather than seeing pockets of these GSEs failing, the sheer size of the bailout will whack the USD down a lot more. I forsee the USD going to 90 cents to the AUD, 1.2 to 1 with the Singdollar, 2.8 with the ringgit, 6.2 to the yuan, and 1.7 to the euro by end 2009. Foreign investors will still be very willing to lend capital, buy bonds and inject funds to these affected financial companies in the US - at the same time, the forex market will exact a price on the USD to reflect the deluge of USD in the system. Last year China bought US66bn in GSEs debt and only US12bn in US Treasuries. Russia bought US34bn of GSEs debt and SOLD US22bn of US Treasuries. There is no way foreign buyers of Treasuries and GSEs debt will be sustain unless they remains attractive. They will remain attractive if the Treasury and Fed stand firmly behind these GSEs and even regional banks. Hence a bailout is a must even though its inequitable. Only by a declining USD will the Dow and S&P be able to avert a more severe sell down. Paulson and Bernanke know this is the strategy to take, but they will not be making it known publicly. For the strategy to work, it has to be a gradual and calm decline.
  • This will be the most severe U.S. recession in decades with the U.S. consumer being on the ropes and faltering big time as soon as the temporary effect of the tax rebates will fade out by mid-summer (July). This U.S. consumer is shopped out, saving less, debt burdened and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation and rising oil and energy prices. This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.
  • As for the longevity of the downturn 12-18 months is about right, and that will be the time needed to take the USD on a gradual decline to balance out the bailout funds into the system, and to make things cheaper to foreign funds for them to keep buying and reinvesting capital into US companies.
  • Equity prices in the US and abroad will go much deeper in bear territory. In a typical US recession equity prices fall by an average of 28% relative to the peak. But this is not a typical US recession; it is rather a severe one associated with a severe financial crisis. Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.
  • If the Dow is supposed to go to 10,000 or 9,000... that may be averted if the USD fall gradually, and the Fed bringing down fed funds rate to 1%. I do not see another major downside of 20% for all markets like Roubini does, but I do think most markets will be range bound for some time. If USD stays strong and they keep doing big bailouts, you can bet that the Dow will crash to 8,000 even - but things are not static, the Fed and Treasury will react. There are too many variables to predict strongly that the Dow will hit 9,000 (the Hand Seng hitting 17,000... the KLCI hitting 950..etc.) like what Roubini is implying.
  • The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a global recession. Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.
  • This is where Roubini score high marks. He sees demand destruction as a bigger factor going forward. If global commodities and soft commodities were to weaken by 20% over the next 6 months, it cools inflationary expections even though many countries are grappling with higher inflation. To a large extent that will create a higher platform for equities as well as inflationary expectation is a big factor killing off sentiment for stocks.
  • The current U.S recession and sharp global economic slowdown is combining the worst of the oil shocks of the 1970s with the worst of the asset/credit bust shocks (and ensuing credit crunch and investment busts) of 1990-91 and 2001: like in 1973 and 1979 we are facing a stagflationary shock to oil, energy and other commodity prices that by itself may tip many oil importing countries into a sharp slowdown or an outright recession. Also, like 1990-91 and 2001 we are now facing another asset bubble and credit bubble gone bust big time: the housing and overall household credit boom of the last seven years has now gone bust in the same way as the 1980s housing bubble and 1990s tech bubble went bust in 1990 and in 2000 triggering recessions. And a similar housing/asset/credit bubble is going bust in other countries – U.K., Spain, Ireland, Italy, Portugal, etc. – leading to a risk of a hard landing in these economies.
  • There will be hard landing as the liquidity bubble is not just a US problem. In most of Europe, like the countries cited above, the ECB had been on a strong money supply growth curve for the last 6 years as well. There will be some hard lending in those economies brought on by a slump in property prices. While its bad, it will also rein in inflation and slow these economies down somewhat. That is another reason why this won't be a truly bad recession as it is brought on by a liquidity bubble only in selected parts of the world. I see this more like an earthquake with fault lines appearing as the whole economic paradigm adjust to revise global economic power bases, a reallocation of resources, and adjustment to purchasing power throughout the world.
  • But over time inflation will be the last problem that the Fed will have to face as a severe US recession and global slowdown will lead to a sharp reduction in inflationary pressures in the U.S.: slack in goods markets with demand falling below supply will reduce pricing power of firms; slack in labor markets with unemployment rising will reduce wage pressures and labor costs pressures; a fall in commodity prices of the order of 20-30% will further reduce inflationary pressure. The Fed will have to cut the Fed Funds rate much more – as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster and severe recession cycle.
  • The Bretton Woods 2 regime of fixed exchange rates to the US dollar and/or heavily managed exchange will unravel – as the first Bretton Woods regimes did in the early 1970s – as US twin deficits, recession, financial crisis and rising commodity and goods inflation in emerging market economies will destroy the basis for it existence.
  • Thus, the scenario of 12 steps to a financial disaster that I outlined in my February 2008 paper is unfolding as predicted. If anything financial conditions are now much worse than they were at the previous peak of this financial crisis, i.e. in mid-march of 2008.
p/s photos: AF (that's all I got, and that she is Thai)

Saturday, July 19, 2008

Roubini Thinks It Will Be The Worst Since The Great Depression

Nouriel Roubini: As I put it in the interview: ``This is a systemic financial crisis, there is no end to it,'' Nouriel Roubini, professor of economics and international business at New York University, told Bloomberg Television. ``It's a vicious circle between a contracting economy and greater credit and financial losses feeding on the economy.''

Regular readers of this blog are familiar with my views. But here is a summary and significant extended update of my views that this will turn out to be the worst financial crisis since the Great Depression and the worst US recession in decades…

NR is to me, one of the top economists around now with his highly popular website (subscriber only) RGE. His views are worth mulling over. My favourite line by Roubini: ..." it is the continuation of a corrupt system where profits are privatized and losses are socialized" ... now what does that remind you of??? ... Bailout 101 brother...

Friday, July 18, 2008

Wine Buffs Or Winos - Must Read

Don't you love it when the pretentious get it up the proverbial place. This would be a lovely early Christmas present to those snobs and pretentious bastards. The brilliant thing is that the book is entirely based on a real event. Hardy Rodenstock created a fake wine and managed to sell millions of dollars of it. Malcolm Forbes, the publisher of Forbes, paid 105,000 British pound for a bottle of Chateau Lafite 1787, yup thats the fake. Well, pretty much in line with the quality of Forbes the publication (yes, i think Forbes the magazine is very third rate) - same owner, same product, same line of thinking ... Even the very much smarter Marvin Shanken, the publisher of Wine Spectator and Cigar Aficionado, bought a half bottle of Rodenstock's wine for US$30,000.

The book is to be made into a movie, yippee ... its brilliantly funny, smart, deception-ladened, making smart people to turn into lunatics, what more you want in a book. The book is called THE BILLIONAIRE'S VINEGAR, written by Benjamin Wallace.

Wine buffs, cigar aficionados, purveyors of finer things in life ... don't take yourself and the subject matter too seriously... never use your additional knowledge to lord over people ... don't be a pretentious bastard ... enjoy these things if you must ... its a privilege not a right

Monday, July 14, 2008

Fannie & Freddie Had A Big Fall

Market Watch Sunday July 13: In a dramatic statement released Sunday, the White House and Federal Reserve moved to give the mortgage giants the capital they need to survive the depression in the housing market and turmoil in financial markets that had left them dangling over a cliff.

Of most immediate importance, the Fed's board of governors voted to open up its emergency discount window to Fannie and Freddie. In addition, Treasury Secretary Henry Paulson announced that he will seek Congressional authorization to by stock in the two companies and increase the government's credit line.
At the moment, each company may borrow only $2.25 billion. In return for the capital, Paulson said that the Bush administration would ask Congress to grant the Fed a "consultative" role in the capital standards of the companies.
The housing rescue package that is nearing final approval by Congress would put in place a strong independent regulator for the companies is slowly moving through Congress. Paulson says he wants a new provision allowing the Fed to work hand-in-hand with the new agency. That would be a bitter pill for Fannie and Freddie, which have been at loggerheads with the central bank over the capital issue for years. It is not clear how Congress will react to Paulson's request. The Treasury secretary said he has been in close contact with the Congressional leadership over the weekend, so his request will not come as a surprise to lawmakers. It would be logical to attach the lifeboat for Fannie and Freddie to the housing rescue measure.

The Senate passed its version of the legislation last week and sent it back to the House of another vote. It is expected to get to President Bush for his signature before Congress leaves town for its summer recess at the beginning of August.
The House Republican leadership vowed to put politics aside to craft legislation. Fannie and Freddie are strange hybrid companies, known as government-sponsored enterprises. They were chartered by Congress but are owned by private shareholders.For years, Wall Street has believed that the government would never allow Fannie and Freddie to default. The companies have been able to sell debt at lower prices than their competition. But the agencies have grown to mammoth size. They own or guarantee $5.2 trillion of U.S. home mortgages.
July 13 Sunday (AFP): US Treasury Secretary Henry Paulson on Sunday unveiled measures to bolster housing finance organizations Fannie Mae and Freddie Mac, stressing their key role in the US housing market."Fannie Mae and Freddie Mac play an important role in our housing finance system, and they should continue to play this role in their current forms as shareholder-owned companies," White House press secretary Dana Perino said in a statement.

"This evening, after working with the companies, the Federal Reserve, and other regulators, Treasury Secretary Paulson outlined a plan that we believe will help add stability during this period. President (George W.) Bush directed Secretary Paulson to immediately work with Congress to act on this plan," she added.

"It is crucial that Congress quickly works to enact this legislation as a complete package along with the strong oversight reform legislation recently passed in the Senate," Perino added in her statement. Troubled mortgage giant Freddie Mac is aiming to sell off three billion dollars in securities on Monday following last week's meltdown, in a potentially decisive move to heal shattered investor confidence. The two government-chartered, shareholder-owned giants underpin some five trillion dollars in home loans, and the meltdown in their shares last week raised fears of a government bailout, or a possible worsening of the credit crunch.

July 14 (Bloomberg) -- The dollar rose for the first time in four days against the euro after U.S. Treasury Secretary Henry Paulson asked Congress for the authority to buy shares of Freddie Mac and Fannie Mae . The currency also climbed against the yen after the Federal Reserve said it will offer direct loans to the two largest U.S. mortgage finance companies, easing concerns that confidence in housing and financial markets will worsen.

Comments: Should I gloat, nah that would be in poor taste. Surely I cannot be the only one in the world to see Fannie & Freddie were bankrupt before. (For those interested pls read posting "Unconvincing Selling In The US" posted Friday 11 July and "Fannie & Freddie Sat On A Wall" posted on May 8 this year. Technically speaking, Paulson is asking for permission to use American's public money to bail out Fannie & Freddie - they have to bail them no doubt about that. All things being equal, the bailout would be another solid whack to pummel further the demise of USD. However, Fannie & Freddie seems to be the biggest "obstacle" that the market had been waiting for Treasury/Fed to do something about it. Now that they have finally, sentiment on USD and hence equity prices would swing to the positive side of things. Not all clear yet but I see some light.

photos: Catherine Hung Yan

Sunday, July 13, 2008

Infra Spending In Emerging Markets

Merrill Lynch & Co. has raised its annual infrastructure-spending estimate for emerging markets by 80%, as developing countries try to keep pace with fast-growing economies and large cash reserves, BusinessWeek reported.

Investment in infrastructure, which the firm sees as the long-term solution to inflation, will rise from $1.25 trillion to $2.25 trillion annually over the next three years. And China, the Middle East, and Russia will account for 70% of infrastructure spending.

The report from Merrill Lynch pointed out that Xstrata PLC recently predicted emerging markets would spend $22 trillion on infrastructure in the next 10 years.

“That estimate is among the highest we’ve seen,” the report noted, “with an implied run rate of $6.6 trillion over the next three years.”

The report basically puts to rest the potential slowdown from emerging markets. Just looking at the demand side for building materials and commodities, we can expect prices to remain firm despite some slowdown in developed countries. One caveat though is that although the estimated infra spending in these countries have been revised higher, a lot of it is due to higher materials and related costs, rather than actual number of infra projects. Direct and indirect costs have surged by 40%-200%, so we have to take that into account as well.

Estimated Infrastructure Spending For the Next Three Years


New Estimate

Previous Estimate


$725 Billion

$400 Billion

Middle East

$400 Billion

$225 Billion


$225 Billion

$100 Billion


$325 Billion

$195 Billion


$240 Billion

$110 Billion


$65 Billion

$50 Billion

Saturday, July 12, 2008

Chinese Strategic Buyers For CPO Companies?

According to a recent Reuters report, some refineries are overflowing and need to stop operations as there is no real additional demand to take away this surplus.

Malaysia’s June palm oil stocks surged 9.8 per cent to 2.10 million tonnes, the highest in at least 25 years, as the production cycle shifted to a higher gear amid a slowdown in shipments.

Palm oil output in Malaysia, the world’s second-largest producer, rose 4.9% to 1.53 million tonnes in June, according to a median estimate of five plantation houses. Overseas demand for palm oil, used mainly in soaps and chocolates to biofuels, dropped 3.4% in June to 1.15 million tonnes.

June’s palm oil reserves would be the highest in the past 25 years, or since 1983, historical data from industry regulator Malaysian Palm Oil Board (MPOB) showed.

Although palm oil prices have eased roughly 22% to RM3,489 (US$1,060) from a record high of RM4,486 in March, demand from traditional consumers India and China remained lacklustre.

A decline in exports usually occur in the second quarter of the year as there are no festivals to lock in supplies.

Traders in Malaysia and Indonesia generally expect overseas demand for palm oil to pick up in July, as buyers tend to stock up at least two months before the Asian festival season that begins in early September.

But demand will have to really strengthen in the coming months to cut into reserves significantly, which have swelled due to healthy output growth on the back of good weather and strong yields.

SWFs on a binge

Sovereign wealth funds and to a large extent, the linked government corporations, have been big buyers of banking assets in the past. Energy related companies have been targeted as well.

Some US pensions and endowments have followed in the highly successful Yale’s endowment strategy, which has invested in real assets like timberland, oil and gas for some time now.

This is a model for other institutional investors and sovereign funds.

Since many sovereign funds are explicitly modelling themselves on endowments, they could have a similar exposure, particularly in their allocation to absolute return strategies and alternative investments.

We have seen China’s sovereign wealth funds and government linked companies launching themselves aggressively to buy energy and banking assets.

In recent times, these companies have ventured to lock in supplies of critical commodities.

The recent 97% hike in iron ore prices affirms that their strategy is correct and it will be reflected in other commodities critical to the domestic economy.

Hence it is surprising that no China company has bought a significant stake in any palm oil company.

That does not mean it is not going to happen but rather palm oil has to wait its turn.

Reliable sources confirmed that there have been a number of company visits by Chinese executives to palm oil companies.

Chinese interest in palm oil

The recent experience of blaming oil price spikes on speculators should have brought about the reality that the futures markets is probably not a good place to try and secure future supply.

The example of iron ore prices being jacked up by 97% owing to the fact that it does not have a futures market, but is open to contractual negotiations, also lends weight to owning real assets.

I would expect a surge in the top few plantation companies in the near future, owing to the likely passive investment by the said Chinese companies.

Any investment is likely to be sizable in the 5%-15% range. This will soak up an enormous amount of free float.

The other factor is that they will likely stick with the top few established companies, and refrain from investing in government linked counters.

To China, palm is becoming a strategic asset to have in order to ensure supply. It’s still a relatively cheap vegetable oil, plus palm oil is critical to manufacture other essential products. China cannot grow palm oil.

The trans-fat issue has also improved demand for the healthier palm oil. Besides cooking oil, palm oil and fats are critical for production of cosmetics and detergent, chemicals (paint, grease) and food products (biscuits, cakes, chips, ice cream, margarine, mayo, to name a few).

The viability of biofuel also adds to the long term sustainability of demand for palm oil, considering the future outlook for fuel price.

Plantation stocks

None of the top plantation companies need cash infusion.

Probably none of them even need to sell down any of their holdings - hence there would probably be no new share issue, which would mean having to mop up from the open market.

I doubt very much that any of the smaller substantial shareholders would be thinking of selling their stakes at this point in time.

The more intrusive government intervention by Indonesia to palm oil exports may cause the Chinese strategic buyers to shy away from Indonesian centric plantation companies.

Sime Darby RM9.00 / Mkt cap US$17bil / Free float 40%

IOI Corp RM7.30 / Mkt cap US$14bil / Free float 41.2%

KLK Berhad RM17.00 / Mkt cap US$5.7bil / 28%

Wilmar S$5.00 / Mkt cap US$24bil / 18%

Golden Agri S$0.90 / Mkt cap US$6.8bil / 51.5%

That being the case, all the above stocks are expected to trade at a higher premium than previously. Particularly, KL Kepong, which has a tight free float. Wilmar’s free float may be even tighter but may be at a prohibitive level to attract the passive Chinese investors.

The investment into even one of the four is likely to result in a ratings upgrade for all the top tier companies.

photos: Nancy Wu Ting Yan