Sunday, May 31, 2009

USD Weakness Underpinning Stocks' Climb

If you look at the cumulative show of economic indicators, we are seeing some recovery. Naturally, economists being good economists, will NEVER embrace them as signs of total recovery, but will question the sustainability - thats what pisses me off about economists, one of many things. While economic figures are good, the one binding factor which is sustaining markets globally is the weaker USD. That alone makes US stocks that much more attractive. If US stocks are not falling, chances are good that the rest of the world will not be falling.

The one reason that could shake the upward climb has to be the North Korean situation, so monitor it closely.

Improving vital signs across the globe - from US GDP to Japanese factory output and British house prices to German retail sales - raised hope on Friday that the world economy was responding after months in intensive care. The US economy shrank 5.7 per cent from the first quarter of 2008, less than the previous estimate of 6.1 per cent and slightly worse than market expectations for a 5.5 per cent fall. The report confirmed that economic activity declined for three straight quarters for the first time since 1974-1975, but US stocks rose in part on data showing corporate profits after taxes increased 1.1 per cent - the first increase in a year and a turnaround from a 10.7 per cent drop in Q4.

The potential General Motors Corp bankruptcy also hovered over the world financial picture as GM shareholders and bondholders braced for a Chapter 11 bankruptcy expected by Monday's restructuring deadline.

It's clear that based on the market action, that we've turned a corner in this economy. The question that I have is, when we get a clear view of what's around the corner, is it going to be better growth and moderate inflation, or is it going to be slow growth and bad inflation? While US stocks marked their third straight monthly advance, the dollar fell to five-month lows against a basket of currencies as an advance in global equities and signs of an easing global recession drove investors to snap up higher- yielding currencies and riskier assets.

Gold, metals and soft commodities also rose on the weak dollar. Oil rose to a six-month high above $US66 per barrel.

The United Auto Workers union ratified a new cost-cutting labor agreement with GM to clearing a major hurdle in the automaker's restructuring. With US and foreign automakers, suppliers, workers and retirees all holding a stake in the outcome, GM and Canadian auto parts group Magna International Inc also reached an agreement in principle that could rescue GM unit Opel. The GM saga is also a test for US President Barack Obama, hoping for a quick resolution of the process in which the US Treasury would temporarily hold a majority stake in the venerable US automaker. Obama got a boost when advisers to GM bondholders representing $US27 billion in the automaker's debt urged investors to support a debt swap negotiated with the White House over the past week. Bondholders have until Saturday to register their support for the terms of a deal that would give them up to 25 per cent of a reorganized GM. That offer is contingent on the US Treasury determining that enough investors have signed on in support.

In Asia and Europe, data pointed to signs of recovery. Japanese factory output rose 5.2 per cent in April, the biggest jump in more than half a century, and manufacturers forecast further gains, while South Korean industrial output expanded for a fourth straight month.

German retail sales showed a 0.5 per cent month-on-month rise in April, while private consumption for the first quarter rose a similar amount, despite a 3.8 per cent contraction in GDP. In Britain, house prices registered a surprise rise in May - the second time in three months - but economists were cautious. Indian GDP beat forecasts with growth of 5.8 per cent year- on-year in the March quarter, with strength in services and construction outstripping a decline in manufacturing.

p/s photos: Satomi Ishihara

Friday, May 29, 2009

Why I Like Pelikan

One major investing point which many investors miss out on when considering local stocks is their market audience. That is also one of the sore points among international investors when it comes to looking at emerging market stocks. Pick any local stock, you have first look at their market size, most are just a proxy on the Malaysian market industry. That being the case, their growth would be limited to the size and organic growth of the local industry. At least if you are in exports, your growth can be said to be better than organic. You then pick out stocks with products and services that is not limited by that factor, the brand must travel, not many Malaysian brands travel well, like a good wine on a long haul flight. Pelikan is one of the good strategic story, and brought back by a visionary and gung-ho Malaysian, Loo Hooi Keat.
The principal activities of the Company and its subsidiaries include manufacturing and distribution of writing instruments, art, painting and hobby products, school and office stationery, printer consumables and investment holding. As at 8th April 2005 the Company is involved in the manufacturing & distribution of an international brand of quality writing instruments, stationery & office supplies after disposed the entire logistics business.
Pelikan’s recent 4Q08 results was a big disappointment. While the RM43.4m net loss for the quarter was a worry, the bigger concern is the 29% yoy topline compression, which is a sign of just how bad the recession in Europe is, particularly in Germany. Germany is Pelikan’s largest market, contributing 45% of group sales in 2008. The next two markets are Switzerland and Italy. These three countries alone contribute more than 60% of the group’s revenue.More than 80% of Pelikan’s revenue comes from Europe. From the 2007 peak, share price is down 90% and it looks like market is pricing Pelikan to go bankrupt! That is close to being preposterous. Net gearing as at end-08 is 0.5x and with no major capex plans this year, net gearing should fall to 0.3x. Valuation is at distressed levels, at only 0.4x PBV.

Switzerland saw a 29% drop in revenue in 2008 but Latin America did very well with a 22% rise in revenue. Its operating profit growth was even more impressive at 47%. Pelikan is already feeling it in its hardcopy division, which contributes around 40% of group revenue. The company produces printer consumables such as laser toners and inkjet cartridges, which are compatible with the products original brand manufacturers (OBM) such as HP and Canon. Pelikan’s hardcopy products are usually 30-40% cheaper than the OBMs. However, the OBMs are now slashing prices to capture market share. This could put further pressure on Pelikan’s profit margin.

At current levels, Pelikan is a very very attractive target to be taken over by private equity firms. Just 0.4x-0.5x book value is pretty ridiculous. At its current market capitalisation of only US$55m and still pays dividend (FY07 12.4 sen, FY08 2 sen), Pelikan is an attractive takeover target for regional stationery companies looking for an established stationery global brand. If taken over, a genuine bid should be at least 0.7x-0.8x book value, considering that the company's prospects and valuations are taken during a depressed recessionary period.

I would look closely at stocks that can give me 30%-50% return over the next 6 months, or else its not worth the risk. Pelikan to me is lucrative enough at current levels (below RM1.00) to have that kind of upside, with or without being bought over.

p/s photo: Katrina Kaif

A Quick Run-Through Of Global Real Estate Hotspots

Real estate is a cumbersome slow moving asset. Its not like stock prices which can move up and down a few percent on the same day. Real estate is however a reflection of liquidity, a wealth indicator, a confidence indicator, a leading indicator, and a lagging indicator as well, depending on how you argue and look at things. Hence it opportune to have a peek at some real estate hotspots to see if the surprising bull run ties in with the investing situation in real estate.


The Australian housing market downturn is likely to be milder than in the U.S., UK and EU in 2009. Australia's house price correction had a head start going back to 2003. Furthermore, housing demand from migrants to the commodities-rich west and the chronic housing shortage in eastern Australia will keep prices from stabilizing back at pre-boom levels unless Australia fails to avoid a deep recession. Indeed, building approvals and housing loans to owner-occupiers began to recover since October 2008 after the government doubled grants for first-time purchases of homes until December 2009. Mortgage interest rates fell to their lowest level in four decades after the Reserve Bank of Australia cut the overnight cash rate 425bp within a year to 3% in April 2009, the lowest since 1960. Tax cuts, government handouts and lower petrol prices will also raise the affordability of housing. Affordability may not mean higher house prices, though. Despite increased sales (new home sales in Q1 2009 rose 20% since end-2008), house prices fell 6.7% y/y in Q1 2009. Rising unemployment and lower household wealth will keep buying sentiment mild this year but, short of a deep recession, improved affordability and ongoing housing shortages will help Australia avoid a housing crash as bad as in the U.S. and Europe.

New Zealand

New Zealand housing market is in worse shape than Australia's but is also likely to avoid as deep a correction as in the U.S. and Europe. The Reserve Bank of New Zealand has cut 575bp since July 2008 to 2.5% in April 2009 but longer-term, fixed mortgage rates have recently begun to rise again due to expectations of a quick recovery and higher interest rates. Fiscal policy has been laissez-faire towards the recession, opting merely for tax cuts as the government would rather not stand in the way of the economy's structural adjustment. With housing assets 5.7 times the household disposable income, New Zealand property markets are even more leveraged than their U.S. counterparts. House prices fell 8% in 2008 and are down 9.2% y/y as of April 2009. Some analysts believe the housing market will bottom on an annual basis in 2009. The housing market has already bottomed on a month-over-month basis, with the median price rising from $325,000 in January 2009 to $340,000 in April. Immigration has revived housing demand and sales have been strongest in the low-end segment thanks to increased affordability. However, new building starts and new home sales remain below the boom levels of 2004 and will likely remain so due to credit constraints, rising unemployment and sluggish economic growth in the year ahead.

United Kingdom

The housing sector is one the most important factors affecting the economic slump in the UK, which is similar in many ways to the difficulties facing the U.S. economy. The latest data on the UK housing sector continues to be mixed but some analysts are tentative to call the bottom in Q2 2009. The latest Halifax price index fell 1.7% m/m in April with price levels back to 2004 readings. Nationwide data brought a 0.4% decline in April but the y/y contraction fell from 15.7% in March to 15% in April. Mortgage lending showed some signs of recovery in April according to the data from CML with a 9% m/m drop. Despite hopes of a recovery, lending is still 60% lower than a year. The monthly data could be quite volatile in the coming months, drawing a slow bottom-like pattern. A real recovery of the housing sector will depend on improvement in the personal income and employment situation in the economy, which are not yet foreseen.


Asia has witnessed sharp real estate correction led by the Asian Tigers, plus China, India and Vietnam. All these markets saw declining home and office prices and rentals, lower sales and rising vacancies. Prices are approaching fundamental values and slowing construction activity might somewhat close the estimated excess supply. But further price and rental correction are imminent. This because household and corporate demand will remain subdued in 2009 despite policy measures such as interest rate cuts and fiscal incentives as well as attractive discounts offered by realtors. Slowing or contracting consumer spending and rising job losses in most economies are hitting residential and retail markets. Slowing corporate earnings and capex, declining exports and liquidity crunch are weighing down on commercial real estate. Though banks are reducing exposure to the real estate sector, lower earnings among realtors and income pressures among consumers are raising the risk of delinquencies. Nonetheless, as the global liquidity crunch abates overtime, high growth potential and attractive returns, given rising incomes and urbanization in developing Asia, will revive domestic and foreign investor interests in Asia's real estate.


Unlike many global markets, the residential property market in China is showing some signs of stabilization. Significant price discounting, lower mortgage rates, incentives and overly ample credit extension are contributing to an increase in transactions and helping to reduce the existing inventory. Chinese property prices began falling in mid-2008 as anti-speculation measures and slower economic growth reduced investment. However, transactions could slow if authorities rein in lending growth in mid-2009. Commercial property has yet to show signs of recovery. The global capex retrenchment is also putting pressure on commercial property as it delays some expansion plans especially by foreign companies. Although domestic companies are somewhat less affected, a slower pace of consumption growth may weigh on both office and retail property markets.


The HK real estate seems to be bubbling up again at least in terms of sales to investors as increased credit availability, and a weakening US and Hong Kong dollar, encourage investment. However, new tenants remain scarce and vacancies are on the rise, suggesting further downward pressure on prices, especially as Hong Kong’s economy, including the financial sector, continues to contract and consumption weakens.


Home prices in India have corrected 15% to as much as 40% in some prime areas since September 2008. The recent pick-up in demand due to discounts by realtors and mortgage rate cuts by banks will be largely outweighed by the excess supply of homes in the market. So another 15-20% price correction is underway in residential and office markets over the next 6-to-8 quarters. This is especially because bank lending standards have tightened, households face wealth erosion and slowing job market, affordability remains low and corporate sector faces liquidity pressures. Mall construction and rentals have taken a hit and so have activity and employment in the construction sector. Drying funding from foreign investors and domestic equity market is forcing the indebted real estate firms to divest shares to raise capital, hold back expansion plans, and refinance bank loans which has been helped by recent central bank measures.


Singapore's real estate sector started moderating in Q2 2008 and home and office prices witnessed record decline of over 10% in Q1 2009 with rents also falling sharply. Another 15% to as much as 25% correction is expected in the residential sector and may be even higher in the luxury section. Woes in the financial and service sectors, negative wealth effects among households and shrinking population due to outflow of laid-off immigrants – all will weigh down on residential and retail real estate. This will be exacerbated by falling speculative investment due to tight domestic and foreign liquidity.


Vietnam's property prices are down over 30% in some markets with luxury section taking the biggest hit and office rentals showing steep decline. Though realtors have been cutting prices and banks are resuming lending, demand has been slow to pick up. Investors also remain reluctant to enter the market since they largely depend on foreign liquidity. The sector is unlikely to improve in 2009 and this will be exacerbated by lower investment via remittances and FDI.

Economic downside risk in Japan was highlighted when exports plummeted by 49% year-over-year in February. The steep decline in exports, a key driver of economic growth, stemmed from faltering global demand and the strong Japanese yen. Amid the dramatic drop in external trade, domestic consumption slowed in the quarter as well. The government reports that, on a year-over-year basis in February, household spending shrank 3.5% and retail sales contracted by 5.8%, the steepest decline in seven years. Imports declined 43%. Bank of Japan’s latest tankan survey in March shows that large manufacturers turned more pessimistic about business prospects, which does not bode well for industrial production or the labor market. Indeed, the unemployment rate rose to 4.4% in February, a three-year high. The excess capacity resulting from the collapse in demand and consumption has increased the risk of deflation. Headline inflation contracted by 0.1% in February. In one of the few bright spots in the Japanese economy, bank lending in Japan grew by nearly 4% year-over-year in January and February, much higher than the growth during the same months last year.
Commercial land values are falling. Land prices in the three major urban areas (Greater Tokyo, Nagoya and Osaka) in January declined by 5.4% year-over-year, the first drop in four years, according to the government. The decline was more pronounced in Greater Tokyo, where the government said that prices dropped 6.1% in January. Meanwhile, the tightened lending policies adopted by banks, coupled with the difficult business environment, have pushed up the number of companies filing for bankruptcy. In the first two months of 2009, corporate bankruptcies rose 25.5% over the previous year. That helped prompt a rise in office vacancy in Tokyo’s five wards to 6.1% in March, from 4.7% at year-end 2008. Vacancies are likely to rise further as companies consolidate their space requirements. Newly constructed buildings will be hard to fill as demand dwindles. We believe that weak demand will persist this year and competition for tenants will lead to more concessions from landlords – rental discounts, longer rent-free periods and other incentives. With demand for class-A office space likely to remain soft and rents under pressure, cap rates for class-A offices will likely rise in the quarters ahead, possibly by 10-30 bps. Commercial land prices will see further downside as well. Residential land prices are also falling. Land prices in the three major urban areas declined by 3.5% in January from a year ago, according to the government, which said that the decline was a bit steeper, 4.4%, in Greater Tokyo. The volume and velocity of transactions has slowed sharply. In Tokyo, only 621 new condominium units were marketed in January with a contract ratio of 67%. The number of unsold units stood at about 4,200 units at the end of January, almost double from a year ago. As part of the national budget for fiscal year 2009, the government has included steps to rejuvenate housing demand that include tax breaks of up to 6 million yen for home buyers who move into their property in 2009 or 2010. The amount of the tax break will be lowered gradually after 2010.

REIT Markets
REIT markets in Asia posted mixed results in the first quarter. REITs gained in Hong Kong (14%) and Malaysia (5.3%), but J-REITs and S-REITs posted negative returns, as investors raised concerns about refinancing issues. Still, REITs mostly outperformed the broader equity markets, possibly because investors were attracted by the deep discounts to net asset values (NAV) and higher dividend yields.

Total Returns, REITs vs. All Equities

1Q09 / 2008 / 2007 / 2006 / 2005


Hong Kong 14.0% / -28.9% / 10.4% / 9.8% / 2.0%
Japan -4.7% / -49.0% / -2.3% / 29.7% / 13.5%

Malaysia 5.3% / -14.8% / 17.8% / N.A. / N.A.

Singapore -1.1% / -56.1% / 2.8% / 57.9% / 22.2%

All Equities

Hong Kong 0.2% / -52.4% / 40.3% / 32.6% / 11.3%

Japan -8.9% / -41.4% / -11.3% / 2.9% / 47.4%

Malaysia 1.0% / -39.7% / 43.0% / 31.4% / 1.1%

Singapore -3.7% / -50.9% / 22.1% / 33.9% / 16.1%

Indeed REIT yield premiums ranged from 569 to 940 bps above long-term government bond yields. As of the end of March, the region had 83 REITs with a total market capitalization of US$44.4 billion, which is moderately down from US$45.2 billion at end of last year. The weighted average dividend yield fell by 30 bps in the first quarter, to 8.2%.

Market Cap and Dividend Yields of Asian REITs

No. of REITs / Market Cap (US$ bil.) / Average Dividend Yield / Risk-free Rate /* Risk Premium (bps)
Japan 41 / 26.28 / 7.03% / 1.34% / 569

Singapore 21 / 9.93 / 11.40% / 2.00% / 940

Hong Kong 7 / 6.92 / 7.80% / 1.93% / 587
Malaysia 11 /1.10 / 10.80% / 1.89% / 891

Korea 3 / 0.17 / 10.60% / 4.68% / 592

Total 83 / $44.4 / 8.20% (weighted average based on market cap)

p/s photos: Zhou Weitong

Thursday, May 28, 2009

Why Picking The American Idol Is Similar To Stock Picking

I kept telling friends that Adam Lambert was not a shoo-in, even though I think he is the most deserving and talented performer this year. In the earlier rounds, I had little doubt that Adam Lambert would win by a proverbial mile. Then the photos came out which had Adam kissing other men... hmmm. He still managed to brush it off and led most of the way. When it came down to the last 4, I thought this was strange. Gokey and Allen were from the same background, and when the girl was voted out, I thought Adam might not be the winner. When Gokey was eliminated, they announced that out of 65 million votes cast, Allen and Lambert were less than a million votes apart. Then the final winner would be whomever managed to attract the Gokey votes.

Adam Lambert is from California, his background is in touring companies of Broadway shows. While he's been coy about his sexuality, he projects an androgynous image, especially in terms of the heavy make-up he constantly wears. The photos did not help. One thing did help was that most girls thought Adam should be the Edward vampire character in the Twilight series - its a chore to explain to you, go get your girlfriend to explain to you why so many girls are crazy over Edward the vampire.

Allen is middle America, squeaky clean, married. And he's done international missionary work for his church. Gokey is a church musical director. Clearly the majority of his supporters were going to fall in behind Allen. Still, its likely that Adam Lambert will have a much brighter future.

Just because everyone says its a buy, might not be so straight forward. Stock picking involves having that added edge, it rewards those who put in that extra effort. Just like if you read more into the elimination before the finals and the votes break down, and then read into the nuances and factors surrounding each contestant, stock picking is knowing the stock / industry / investors behaviour well. I put emphasis on the last part - at the end of the day, whether you are buying or selling, its not whether you want to buy or sell, its whether you should be buying or selling. Its predicting where you are in the gulf of trading activity, where are you in the midst of a momentum run, are you near the end run when you are establishing a position or the beginning.

Picking AI winner is much like stock picking because you need to look beyond the surface. So, yes, many people thought Adam was the most talented, much like all research houses issuing buy calls on a stock - if everyone had a buy and is long, who is selling? If everyone is long, who will be there to take the long out? Allen was not such a good stock but its pricing offered value and good upside. Not much long positions, so any buying would result in good upside. Sometimes you don't have to pick the best stock, but pick the stock with the better upside.

Genting Singapore Being Queried By SGX

The hoo-hah yesterday in Malaysia and Singapore markets was the sell down in Genting Singapore, Genting Berhad and Resorts World. The whole thing rested on the news that the Lim family disposed their private stake in Genting International. Seriously, the majority of investors in Malaysia were trading blind for most of the morning session because they did not get any news or hints. Same can be said for Singapore save for a substantial drop early in the session in Genting Singapore prompted swift action by SGX to the company querying the drop. The message was posted at 9.38am yesterday. The company answered at 1.21pm after the close of the first session yesterday that they received notification of the sale from the sellers at 12.32pm yesterday.

There are a few uncomfortable issues in that rumours of the deal and the details were floating way before the markets opened yesterday. FinanceAsia had a scoop and the article was available early yesterday. Yes, the article was based on sources close to the deal, which is hard to patrol by the exchanges or the company. The interesting thing was that FinanceAsia was able to say that the deal was launched from 8.30pm the previous day (26 May). Safe to say that the buyers were enticed by the big discount. It is also safe to assume that those who bought will also know that they are likely to get their bids fulfilled, and would sell first thing the next day to lock in the spread (profit). The sad thing is that most of the buyers are not privy to the information and may think they are getting in cheap.

The deal should have been closed before the markets opened. The market should have equal access to information for a fair trading market with integrity. When one side of the buyer-seller have an unfair advantage, that's not right.

You cannot stop the media from trying to get the scoop, that will always happen. What the exchanges and companies must do is to eliminate these situations from resulting in an unfair situation. At fault here are the investment advisors, they should advise the sellers on the timeline and progressive steps to do the deal so as to eliminate the "gaps" between striking the deal, placing the deal, and announcing the deal to the company. J.P. Morgan and UBS acted as joint bookrunners and underwriters for the deal.

SGX should reprimand the advisors severely, even a fine is in order considering the amount of "losses" suffered by the innocent buyers.

FinanceAsia: The 853.88 million shares were offered in a range between S$0.72 and S$0.76 and late last night the indication was that the price would be fixed at the bottom for a total deal size of S$614.8 million ($425 million). However, the deal wasn't launched until 8.30pm Hong Kong time yesterday and, at the request of a number of Asian investors, sources said the bookrunners had agreed to open the books for a short while before the start of trading this morning to give those who were unable to make an investment decision last night a second chance.


27-May-2009 09:38:45
Mr. Terence Tay Wei Heng
General Counsel
Head, Corporate Affairs
Resorts World at Sentosa
39 Artillery Avenue, Sentosa
Singapore 09998

Dear Sir,


We have noted, and draw to your attention, a substantial decrease in the price of your shares today. To ensure a fair and orderly market, please answer each of the following:

Question 1: Are you aware of any information not previously announced concerning you (the issuer), your subsidiaries or associated companies which, if known, might explain the trading?
- If yes, the information must be announced immediately.

Question 2: Are you aware of any other possible explanation for the trading?

Question 3: Can you confirm your compliance with the listing rules and, in particular, listing rule 703?

Please respond immediately via SGXNET. Where appropriate, you may want to request a trading halt or a suspension of trading. Please contact Market Control (or, if you need to discuss the matter, your Account Manager in Issuer Regulation) immediately. Thank you for your cooperation.

We have released this letter via SGXNET.

Yours faithfully


27-May-2009 13:21:33
Glenn Seah
Vice President
Head, Market Surveillance
Risk Management & Regulation

1. Subject to limited exceptions in rule 703, an issuer must announce any information known to the issuer concerning it or any of its subsidiaries or associated companies which is necessary to avoid the establishment of a false market in the issuer’s securities, or would be likely to materially affect the price or value of its securities must be publicly disclosed (rule 703).
2. An issuer must undertake a review to determine the causes of any unusual trading activity (paragraph 20 of Appendix 7.1).
3. An announcement should, among other things, state whether the issuer or any of its directors are aware of the reasons for the unusual trading activity and whether there is any material information which has not been publicly disclosed (paragraph 31 of Appendix 7.1).
4. Your responsibility under listing rules is not confined to, or necessarily satisfied by, answering the questions in this letter.

We refer to the queries from the Singapore Exchange Securities Trading Limited (the “SGX-ST”) regarding the substantial trading activity of the shares of Genting Singapore PLC (the “Company”) today.

SGX Question 1:
Are you aware of any information not previously announced concerning you (the issuer), your subsidiaries or associated companies which, if known, might explain the trading?

The Company is not aware of any information not previously announced concerning the Company, its subsidiaries or associated companies, which if known, may explain the trading.
However, we wish to inform that the Company has just received confirmation from the following substantial shareholders at 12.32 p.m. today that:-
(i) Kien Huat Realty Sdn Berhad has disposed of 265,809,000 shares in the Company by Lakewood Sdn Bhd via a placing agreement;
(ii) Parkview Management Sdn Berhad as trustee of a discretionary trust, has disposed of 265,809,000 shares in the Company by Lakewood Sdn Bhd via a placing agreement; and
(iii) G Z Trust Corporation as trustee of a discretionary trust, has disposed of 649,073,320 shares in the Company by Golden Hope Unit Trust via a placing agreement.

The respective substantial shareholders will in due course be releasing the relevant Notice of Substantial Shareholder’s Change in Interests/Cessation of Interests (as the case may be).

SGX Question 2:
Are you aware of any other possible explanation for the trading?

Saved as disclosed above, the Company is not aware of any other possible explanation for the trading.

SGX Question 3:
Can you confirm your compliance with the listing rules and, in particular, listing rule 703?

The Company confirms that it is in compliance with the listing rules and, in particular, listing rule 703 of the Listing Manual of the SGX-ST.

For and on behalf of the Board
Genting Singapore PLC
Justin Tan Wah Joo
Managing Director
27 May 2009

p/s photo: Ayame Misaki

Are Hedge Funds Investors Gullible?

The Economist came out with a scathing article on May 14, 2009 basically saying that hedge funds investors were naive and were gluttons for punishment. Their points were:

Hedge fund investors are gluttons for punishment.

1. That hedge funds spectacularly failed to achieve the absolute returns that were supposed to justify their high fees.

2. That hedge funds ran liquidity mismatches between the assets in their portfolios and their volatile funding and investor terms.

3. That hedge funds suspended redemptions or gated investors attempting to redeem.

4. That funds of hedge funds were only marginally less useless than Madoff's auditor.

5. Yet, says the Economist, a recent survey of most of the world's big hedge fund investors conducted by Goldman Sachs, suggest that investors remain surprisingly happy. Also there is anecdotal evidence that redemptions are slowing and that money is actually flowing back into the industry.

6. The Economist also finds that there does not appear to be much appetite to reform the structure of hedge funds. They also point out that there is scepticism or at least a tepid take up of managed account structures.

7. The Economist finally suggests that hedge funds will slowly but surely become more like the old-fashioned asset managers they once threatened to usurp.

To hear the other side, Bryan Goh of First Avenue Partners in London, a hedge fund, has drawn up a rebuttal:

Let's deal with the charges.

1. Hedge funds did indeed fail to generate absolute returns in 2008. But was the playing field a level one? From Dec 2007 to June 2008, hedge funds were almost flat, the HFRI Index returning -1.6%. Once Lehman collapsed and bans on shortselling were established, once FNMA and FRE were bailed out arbitrarily within their capital structures, hedge funds' losses accelerated resulting in a return of -19% for 2008. Long only equity indices, credit indices, commodity indices, real estate indices would have lost between 30 - 45% for the year.

2. Some hedge funds did indeed run liquidity mismatches between their assets, their funding and their equity bases. Macro hedge funds and equity strategy managers did not have this problem. However, barriers to entry were low in the last few years leading to a proliferation of mediocrity, to a contamination from long only mindsets and expertise and thus correlation of industry aggregate indices to long only indices. A good hedge fund manages the downside as much as the upside. Examples abound of managers who have protected capital in the turmoil suggesting again the importance of due diligence and manager selection. As for downside from illiquid positions, this afflicted mostly the special situations, mezzanine finance, quasi private equity strategies which while historically at the fringe of hedge funds had gained popularity in the last few years.

3. Suspensions and gating. Guilty as charged. Some strategies cannot be run in open ended hedge fund format. They require lock ups and in some cases they just need a closed end fixed term self liquidating vehicle. However, once an ill structured investment vehicle has been hit in the crisis of 2008, there are basically 2 choices to be made.

a) Liquidate to meet redemptions, liquidate at all cost, even at firesale prices, and

b) Suspend redemptions and undergo an orderly liquidation. The devil is in the details and the behavior of the manager in such a liquidation. It is hard to swallow that a manager continues to charge fees of any kind during a suspension or liquidation. Open and frank communications are also in order in a liquidation. And next time, if there is a next time, if you want to stick illiquid assets into a portfolio, let investors know before hand and structure the investor vehicle to lock in the equity capital and the financing. Otherwise, get ready for some misrepresentation suits.

4. Funds of funds are of varying quality. One broken down car doesn't mean that all automobiles are unreliable. More importantly, funds of funds serve specific purposes. They provide a service not only to the investor but to the hedge funds as well.

5. Why do investors remain relatively happy with hedge funds? Look at the numbers. Sure, hedge funds didn't exactly do what they said they would do in terms of protecting capital in the midst of one of the worst financial crises in recent history. But they would have lost only half of what they would have lost had they been long only. Investors are only reacting rationally.

6. That there does not appear to be appetite to reform the hedge fund industry is disturbing because for all the outperformance of hedge funds versus traditional and other alternative investments, the hedge fund industry is in need of reform. Hedge funds terms and structure are not always optimal for the strategy; often they are driven by what sells, in other words, what investors want. How ironic is that. Investors have always wanted more liquidity than the portfolio could bear. Hedge fund managers pandering to investors gave them what they wanted. Standards of transparency and clarity and alignment of interest need to be addressed. While there has not been much visible activism in terms of reforming hedge fund terms and manager behavior, witness CalPers new policies for investing with hedge funds. Also, the near halving of assets under management in the industry from some 2 trillion USD to 1 trillion USD over the last 2 quarters is evidence of investors policing the market.

7. Will hedge fund managers come to resemble old-fashioned asset management companies? I hope that hedge funds become more accessible to investors of all types. Including retail. More choice can only be better. Of course intermediaries will be required to manage the added complexity of hedge fund strategies, and here funds of funds are challenged to step up to the plate. I hope that hedge fund techniques of investment become more mainstream and widespread. Leverage and short selling can only improve market efficiency. I hope that hedge funds find traction among retail investors as much as sophisticated ones. Hedge funds have proven their worth in 2008 relative to other investments. And retail investors by reason of their size and numbers represent a more predictable and stable asset base and are therefore good for the stability of hedge funds.

The hedge fund industry has come under considerable fire since the financial crisis of 2008. The reasons, however, are many, and complex, and in some instances are justified and in some, not. For those of us who have invested in hedge funds, we have been encouraged by some and disappointed by others, but by no means have we lost faith in the industry as a whole. Most of us would like to help the industry grow and develop to be stronger and more investor and market friendly. Some of the blame does fall on the hedge fund manager, where they have been arrogant, stubborn or self serving, some of the blame must go to the regulators for legislating before understanding, but some of the blame is the investors' as well, where they have been ignorant, negligent, lazy, or behaving blindly as a herd. Most of all, the hedge fund industry suffers from a PR problem, as will any industry which is inherently complex. Unfortunately, so many features of this industry cannot be overly simplified, try though the mainstream press might.

p/s photos:Dhini Aminarti

Wednesday, May 27, 2009

Lim's Family Sells Stake In Genting Singapore

Genting and Resorts had a nice run for the past two weeks. I did not highlight both companies as buys because I am not convinced that the gaming industry restructuring and pain is over by a mile. But if they want to go up, let them. I do not have a strong case against them except that the Sentosa project cost overruns needs to be detailed out to investors. I did not like the left hand right hand transaction between Lim Kok Thay's private company to the listed vehicle a few months back.

I like the fact that Genting and Resorts are much better off than most of the other gaming giants who have over leveraged substantially. I like the fact that most operators in Macau are bleeding and that Genting/Resorts should be able to profit by moving in as a white knight to secure a foothold in Macau.

The sale, through the family’s vehicles Golden Hope Ltd and Lakewood Sdn Bhd, was aimed at boosting the liquidity of the stock, according to the bookrunners .... eeerrr... Genting Singapore is already very liquid thank you very much, next reason please!!! That's like tricking the ghost to eat taufoo!!! Hmmm... who is the ghost here??

I don't like it when the Lim family's private vehicles start to sell down shares in Genting Singapore. Suffice to say that they think Genting Berhad's 55% stake in Genting Singapore is deemed sufficient, or so they say. As in anything, remember Gamuda's Lin selling his stake substantially, supposedly to facilitate estate planning for his family... well we know what happened to Gamuda after that. Its never a good sign. Chances are that Genting Singapore will have to pile on more borrowings, from Resorts or Genting Berhad as I really think the cost overruns issue has not ended. If it has, please come forward with absolute transparency, how much was budgeted before the project started, what is the variance now, how will that impact the payback period, when can Genting Singapore start paying back dividends? Its looking to be a very very long investment.


Finance Asia: Two investment companies controlled by Malaysia's Lim family were in the market last night attempting to divest their direct 9% stake in Genting Singapore, a Singapore-listed subsidiary of the Genting Berhad group. Genting Singapore is involved in international casino operations and the development of integrated resorts, including a new casino resort on Singapore's Sentosa Island, which is due to open in the first quarter of next year.

The 853.88 million shares were offered in a range between S$0.72 and S$0.76 and late last night the indication was that the price would be fixed at the bottom for a total deal size of S$614.8 million ($425 million). However, the deal wasn't launched until 8.30pm Hong Kong time yesterday and, at the request of a number of Asian investors, sources said the bookrunners had agreed to open the books for a short while before the start of trading this morning to give those who were unable to make an investment decision last night a second chance.

As a result, the terms will not be fixed until this morning. However, the deal was already covered last night and the books included close to 40 accounts. The buyers ranged from specialist gaming investors to long-only Asia funds to deal players who liked the big discount.

The price range corresponded to a discount range of 12.1% to 16.8% versus yesterday's close, which at first glance looks well wide of where most other recent Asian placements have priced. However, the share price has rallied 18.5% over the past three trading sessions, which means investors may have needed the additional incentive to invest at current levels.

There is a lot of positive momentum surrounding the company at the moment however and the share price has more than doubled from the beginning of March when it matched its 2009 low of S$0.415. The company has caught the attention of investors as, contrary to other casino and resorts developers, it is seemingly having no problems to stick to its completion target.

This was confirmed two weeks ago in connection with Genting Singapore's first quarter earnings release, when the management said that it will deliver the Sentosa resort on time and on budget. It also stressed that there is no need to raise more money for this project. This is in sharp contrast to some of its larger rivals like Sands and MGM, which are already laden with debt and have been forced to delay projects because of difficulty in securing the necessary funding. In fact, market talk has it that MGM is looking to sell its 50% stake in MGM Grand Macau and Genting may be a potential buyer.

Aside from Singapore, Genting currently has casino and leisure operations in Australia, the Americas, Malaysia, the Philippines and the UK, but nothing yet in Macau.

Sources say the fact that the Lim family is selling its entire direct stake in Genting Singapore, which it holds through investment companies Golden Hope and Lakewood, isn't a reflection of its views on the company. But with the share price having gone up so much in such a short time, it makes sense for them to monetise part of their holdings. It will also streamline the family's holding in the casino business through one vehicle. The family will still control 55% of Genting Singapore through Malaysia-listed conglomerate Genting Berhad.

J.P. Morgan and UBS acted as joint bookrunners and underwriters for the deal.

p/s photos: Linda Chung Kar Yan

ETFs Developments In Asia

Hong Kong's Securities and Futures Commission (SFC) and Taiwan’s Financial Supervisory (FSC) Commission last week signed and exchanged a side letter detailing conditions to a bilateral memorandum of understanding (MOU), which would pave the way for the cross listing of exchange-traded funds (ETFs) in the two markets. The agreement is expected to move closer the two regulators towards a common goal of cross listing of ETFs and help increase demand for ETFs.

In a press release, Hong Kong's SFC said that under the terms of the side letter, ETFs listed on the Hong Kong or Taiwan stock exchanges and managed by licensed asset managers would be mutually recognized in each other’s jurisdiction for the purpose of cross listings and offerings. The MOU was signed in 1996. The side letter will also strengthen regulatory co-operation between the SFC and the FSC, in particular arrangements relating to information sharing and confidentiality regarding management of ETFs.

“This side letter marks a milestone in the regulatory co-operation with our Taiwan counterpart since the signing of the MOU. This is a major step forward to consolidate Hong Kong’s position as a preferred ETF platform with exposure to markets in Hong Kong, the Mainland and Taiwan. The fund management industry will benefit not only from the diversified product markets, but also increased investment flows resulting from the new measure,” said SFC’s Chairman Eddy Fong.”

These developments are part and parcel of opening of trading in shares between China and Taiwan. Plans are underway to have a platform to allow trading in 30 stocks from both countries as a start. Presently both countries' investors are forbidden from investing in each other country's listed stocks. Later it will include trading in ETFs and will lead to full liberalisation. This will allow Taiwan to bring back the 37 Taiwanese companies currently listed in HK Exchange.

An important part of the agreement will be on the convertibility of yuan with the New Taiwan dollar. Taiwan already stated that it would scrap a rule that bans companies held by Chinese investors from selling shares on Taiwan's stock exchange. Already the 60 year long ban on direct shipping, air and postal links have been lifted on December 15 last year.

A report by Asian Investor cited Deutsche Bank which said that there were 200 ETFs in the Asia-Pacific region, with 243 listings in 12 countries across 15 exchanges. It said that ETFs’ total assets under management was estimated at $57.4bn. Hong Kong is the region's second largest ETF market by AUM next to Japan, while Taiwan is the fifth largest. The report also quoted Hong Kong-based investment director for quants at BOCI-Prudential Tang Hing, who said he was eager to cross list his fund house's products between Hong Kong and Taiwan once the plan pushes ahead.

Lyxor to expand coverage in Asia, launches 5 ETFs in Singapore
News of cross listing between Taiwan and Hong Kong's ETFs came as Lyxor International Asset Management, announced early this month the launch of five new ETFs on Singapore Exchange Limited (SGX). Four of these ETFs would cover indices that track markets outside Asia and the United States, for the first time on SGX.

p/s photo: Anggun

Tuesday, May 26, 2009

Randy Roubini, Not That There's Anything Wrong With That!

Its a tough life being Nouriel Roubini. He has been written disparagingly a number of times for his now famous parties at his NY loft. Party-having economist Nouriel Roubini is no longer inviting reporters to parties in his vagina-studded we hear! *(A single tear)*

So, what makes his parties so great?

"Fun people and beautiful girls," Roubini said, grinning. "I look for ten girls to one guy." His friend Bill Clinton, he added, is a fan of this ratio.

Nouriel Roubini has quite the reputation. A Turkish-born Iranian-Jew that was educated in Italy and the US, Roubini’s name recognition shot through the roof after his stubbornly bearish outlook on the US economy turned out to be true. Since 2008, the head of RBE Monitor has made countless appearances on most of the network business news channels, pushing his gloomy views of the US, and the world economy in general. His private party boy life came into mainstream media when a leaked email which Roubini invited his friends to one of his parties, boasting Scarlett Johansson had moved in upstairs to him having paid more than he had for his. Details of the artwork in his loft were rumoured to resemble some aspect of the female genitalia. Hilarity ensued when the Gawker started referring to Roubini as the “playboy professor” who inhabited a “vulva” and “vagina-encrusted Tribeca loft”.

Its bound to happen when you are so high profile. I like it when business experts and professors can party, it shows they have a good sense of balance between professional work and play time. I am also happy to see that my subscription to RGE is being well spent.

State Wealth Funds, Only In Malaysia

Well, we didn't know that our country can actually support so many sovereign wealth funds. A bit of trivia, the most number of monarchies in the world reside in Malaysia, by virtue of our Sultanate states within the country. Looks like we will have the most number of sovereign wealth funds within a country as well soon. Obviously, the Penang's initiative is to "counter reflect" how audacious the move by Terengganu was, and not an entirely genuine request. I guess Penang leaders will argue that it is genuine if we all treat things at face value.

The key point is that the Federal government will act as guarantor for the bond issuance by Terengganu. A similar backing will almost allow any state to start their own sovereign wealth fund, or should I say, state wealth fund. Cynical yet smart, now Federal government has to come up with a reasonable rebuttal on how to say no to Penang.


The Penang government today sent a proposal and letter to Prime Minister Datuk Seri Najib Tun Razak office, seeking the approval from the federal government a guarantee of RM5 billion for the creation of Penang Sovereign Wealth Fund.

Chief Minister Lim Guan Eng said the fund to be known as Penang Investment Authority (PIA) shall be capitalised at RM5 billion, to be raised via an Islamic Bond issuance, fully guaranteed by the federal government. "PIA is something similar to the Terengganu Investment Authority (TIA), where the fund is to be given to Penang to carry out the state's high-impact economic projects with high-end value," he told reporters after receiving a courtesy call from a delegation comprising members of the Thailand Senate Committee of Foreign Affairs here today. TIA, which was set up in February this year, will have an initial fund size of RM11 billion, with RM5 billion to be raised from the capital market on the back of a government guarantee and the remainder to be raised through the assignment to TIA of some of the future oil royalties due to the Terengganu state government. Lim said if the federal government can guarantee in support of the PIA with RM5 billion, the state government was confident of raising another RM5 billion.

"With RM5 billion guarantee from the federal government, we believe we can raise another RM5 billion to carry out infrastructure works, research and development and education projects for Penang. "We are not asking for another RM11 billion, we are only asking for RM5 billion guarantee from the federal government," he said. In the letter to Najib who is also the Finance Minister, Lim stated that the state government has identified several economic activities as key growth drivers for the state over the next five to 10 years. He hoped for a fair treatment from the federal government, saying Penang was are also in dire need of infrastructure projects. He said all the projects were crucial in order to turn Penang into an international city to be a destination of choice for tourists, a location of choice for investors and a habitat of choice for those who desire sustainable living. - BERNAMA

p/s photo: Fasha Sandha

Looking For The Next Sell Sign

We all know markets come and go, and as keen as I am on the bull run, I also know that there should be some form of downtime for the markets. While I do not think we will revisit the lows anytime soon, I do think that there will be periods of prolonged weakness. Always keep an eye out for things that could evolve into a Sell signal.

US banks are ok now, so too are the automakers - when I say ok, I meant them not needing further bailouts over the next 6-12 months, not the real health and viability of these companies for the longer term.

An interesting development was when S&P warned that it could downgrade the UK government's credit rating because of its heavy debt burden. Seriously, shouldn't S&P be saying that to the US??!!!

The looming danger with that kind of statement is that it will cause some sell down in UK and US bonds, especially since the UK and the US are preparing to issue truckloads of bonds. Maybe not so much in the US case as they sell truckloads of bonds regularly. In the UK case its more significant because one can expect any new bond sale will come at much attractive yields, owing to UK's not so good balance sheet going forward. Sell current ones and wait to buy the new ones.

Even though UK's gross debt at 63.6% of 2009 GDP, which is still lower than France's 76%, the USA's 78% and Germany's 66%, UK's public finances are more exposed because of the higher risks that international investors might be forced to sell UK bonds. International investors hold some 40% of UK bonds and many might have to sell if the downgrade actually comes through because many are not allowed to hold debt that is not rated AAA.

Having said that, the markets are already adjusting itself to pacify the concerns over UK. The pound will be weaker till the time they issue the bonds, by then the yield would be enhanced in the eyes of foreign investors via a weaker currency exposure when buying in. As long as that happens, the big sell down will not be there. Still, this development bears watching. To a large extent, the S&P news has been priced in via the UK bonds yield and the sterling's weakness. The danger to be wary is if this is just the beginning of a series of downgrades - i.e. next might be France or even Germany, then it could turn into a tsunami of risk aversion again - better be aware and follow developments closely. No danger for now.

p/s photo: Pace Wu Pei Ci

Monday, May 25, 2009

How To Speak Like Obama

One of the main reasons why Obama is so popular and effective is his oratory skills. Yes, oratory skills can be honed. You can actually improve your public speaking skills by joining Toastmasters. You will learn how to develop the necessary skills in engaging your audience, build on your subject matter, learn about delivery, phrasing, etc... To get to Obama-level, you need natural charisma, much like JFK and Martin Luther King. Leadership qualities, to a large extent can also be honed, but to be a natural leader where people instantly look up to you is a quality that is hard to find. I have come across a few articles that tries to look at how Obama works his oratory skills. Here are the main points:

a) Always know your audience, their expectations, their anxieties, their concerns. When you speak to a group of parents-teachers, its different, when its with union workers about to lose a lot of jobs, its different, when its in front of TV, its different, when you are speaking to political reporters, its again different.

b) Following on the first point, you then broadly define the issues at hand, bring up the context of issues in the audience's perspective, show that you know what they are concerned about. Anticipate what they are thinking. Bringing up points on both sides of the issue and clarify your stance. Justify your stance. At the same time, you must not be seen to be playing your audience - hence you must show integrity, honesty, pragmatism and be realistic about the issues.

c) You have to learn to pause, to allow the audience to reflect and absorb the points. You need to build up your argument and thesis and let your words resonate. When you rush past prepared text, you will lose the impact key words and phrases can have on the audience... e.g. "yes, we can" long pause...

d) Use short phrases. Use phrasing techniques to bring your audience along, like a boat ride, riding out each wave of euphoria and reflection.

e) Be aware of your body language. No fidgety movements. Eye contact and facial expression must be correlate. You have to rehearse how to maintain calmness. If you have to flip pages, do it slow and deliberate. Always look out to the audience as if you were commanding the troops.

f) Always have a good beginning, a casualness (or light hearted humour) to embrace the audience to your side before you launch into your speech. Be aware that you do not climax in your speech too soon, you need to b uild it up, much like a conductor writing the various parts for his orchestra - you want to bring things to a crescendo.

g) Always end well, with the key phrase or what the audience should get from your speech.

A person even of Obama stature cannot do all things by himself. In Obama's case, he has a very very good speechwriter in Jon Favreau. Though only 27, he has the necessary energy and idealism to act as the sounding board. He has the tenacity to understand various tough issues, and drive through the points in a clear way in line with Obama's political views and leanings. That is not an easy task. He has to write the way Obama is thinking, and even the way he usually speak, because if not the speech will sound contrived and regurgitated.

Its not easy to speak well with integrity and class.

p/s photos: SPEED is an all Okinawan female J-pop group

Interview With Charlie Munger

Just who is Charlie Munger. To many people he is the other half of Berkshire Hathaway. Buffett's partner, sounding board, confidant, strategist, etc... Charlie has often allowed Warren to hog the limelight, but his contribution has been significant as well. Just read Warren's notes and memoirs.

Charles T. Munger is a man of many interests, much like his hero Benjamin Franklin. Self-taught in a range of disciplines, he's a strong advocate for interdisciplinary education saying, "If I can do it, many people can." A student of physics and mathematics before entering law school, he left his mark on the legal profession early in his career by co-founding Munger, Tolles & Olson in 1962—a firm that is today consistently ranked at the top of its field. Now an icon of the business world, he joined forces with Warren Buffett in the mid-1960s—leaving law to become vice chairman of Berkshire Hathaway and a partner in one of the most successful firms in the world.

Over the years Munger has gained a reputation as something of a no-nonsense voice for sound investment strategies and responsible business practices—as well as simple common sense. But lately it is the mythical Greek character Cassandra who is much on his mind. After living through the Great Depression, serving in WWII, and entering the business world in an era of restraint and sensible regulation, he is irritated by what he calls "the asininities" of today's government and business leaders that led to the current crisis. He saw the financial train wreck coming and voiced his concerns loudly. But almost no one shared them.

"It is painful to see the tragedy coming, to care about all the people who are going to be clobbered, and not to be able to do one damn thing about it," said Munger, as we prepared for the interview that follows. As the nation navigates through this crisis, entering waters previously uncharted, perhaps the powers that be will be more willing to address issues previously ignored.

Joseph Grundfest is the W. A. Franke Professor of Law and Business is more than familiar with many of Munger's complaints. A former commissioner at the Securities and Exchange Commission (SEC) and counsel to the President's Council of Economic Advisers, Grundfest is today a prominent voice for sense and responsibility in corporate governance. Grundfest founded Stanford's Directors' College, the premier venue for continuing education of directors of publicly traded firms, and also founded the award-winning Stanford Securities Class Action Clearinghouse, which provides detailed, online information about the prosecution, defense, and settlement of federal class action securities fraud litigation. His scholarship focuses on matters related to securities fraud, complex litigation, corporate governance, and statutory interpretation, and his name regularly appears on lists of the nation's most influential attorneys.

GRUNDFEST: I'll begin with two words: Bernie Madoff. What do you think "l'affaire Madoff" teaches us about the operation of our financial system?

MUNGER: One of the reasons the original Ponzi scheme was thrown into the case repertoire of every law school is that the outcome happens again and again. So we shouldn't be surprised that we have constant repetition of Ponzi schemes.

And of course there are mixed schemes that are partly Ponzi just shot through American business. The conglomerate rage of buying companies at 10 times earnings and issuing stock time after time at 30 times earnings to pay for them was a legitimate business operation mixed with a Ponzi scheme. That made it respectable. Nobody called it illegal. But it wasn't all that different from mixing a significant amount of salmonella into the peanut butter.

Harry Markopolos, a hedge fund expert, sent a detailed memo to the Securities and Exchange Commission (SEC) articulating why Madoff must have been a fraud. The SEC did nothing with it. We don't know the reason why, but I'm willing to suggest that the lawyers who received Markopolos's warning simply didn't understand the finance or math that Markopolos relied on.

Lawyers who only know a mass of legal doctrine and very little about the disciplines that are intertwined with that doctrine are a menace to the wider civilization.

Why didn't the SEC understand the warning that was clearly placed at its door?

The SEC is pretty good at going after some little scumbag whom everybody regards as a scumbag. But once a person becomes respectable and has a high position in life, there's a great reticence to act. And Madoff was such a person.

Why aren't our regulators capable of addressing many of the issues that we confront in the market today?

Most of them plan to go back to living off money made in the system they are supposed to regulate. You can argue that financial regulation is so important that no one in such a position should ever be allowed to do as you partially did—serve and then leave to make money in the regulated field. Such considerations led to lifetime appointments for federal judges. And we got better judges with that system.

So government service should be a little like a monastery from which you can never escape?

What you can opt to do is retire, which is pretty much what our judges do.

What about the idea that investors should be able to fend for themselves?

We want the sophisticated investor to protect himself, but we also want a system that identifies crooks and comes down like the wrath of God on them. We need both.

And here I think what's intriguing is we have a failure of both.


As we look at the current situation, how much of the responsibility would you lay at the feet of the accounting profession?

I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They've sold out, and they do not even realize that they've sold out.

Would you give an example of a particular accounting practice you find problematic?

Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.

And they can't both be right. But both of them are following the rules.

Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there's a demand for it from the financial promoters, (2) fixing the system is hard work, and (3) they are afraid that a sensible fix might create new responsibilities that cause new litigation risks for accountants.

Can we fix the accounting profession?

Accounting is a big subject and there are huge forces in play. The entire momentum of existing thinking and existing custom is in a direction that allows these terrible follies to happen, and the terrible follies have terrible consequences. The economic crisis that we're in now is, in its triggering circumstances, worse than anything that's ever happened.

Worse than the Great Depression?

The economy hasn't contracted as much as during the Great Depression, but the malfeasance and silliness, the triggering events for today's crisis, were much greater and more widespread. In the '20s, a tiny class of people were financial promoters and a tiny class of people were buying securities. Today, it's deep in the whole culture, and it is way more extreme. If sin and folly get punished appropriately, we're in for a bad time.

And do you see a chance that our current economic woes could reach to a level closer to the Great Depression?

Well, nobody can predict that very well because we've never faced conditions as extreme.

Very few people realize how much we've screwed up. Even in leading law schools and business schools very few people realize that the mess at Enron never could have happened if accounting customs hadn't been changed. What we have now is a bigger, more widespread Enron.

When the regulators put in the option exchanges, there was just one letter in opposition saying "you shouldn't do this," and Warren Buffett wrote it. When they wanted to make the securities market function better as a gambling casino with vast profits for the people who were croupiers—there was a big constituency in favor of dumb change. Buffett was like a man trying to stop an elephant with a pea shooter. We're not controlling financial leverage if we have option exchanges. So these changes repealed longtime control of margin credit by the Federal Reserve System.

You get unlimited leverage.

Unlimited leverage comes automatically with an option exchange. Then, next, derivative trading made the option exchange look like a benign event. So just one after another the very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we'd put in the last time we had a big trouble—devices that worked quite well. The investment banks of yore, chastened by the '30s, were private partnerships, or near equivalents. The partners were dependent for their retirement on the prosperity of the firms they left behind and the customs and culture they left behind, and the places were much more responsible and honorable. That ethos, by the time the year 2006 came along, had pretty well disappeared. Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the "repo" system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome. The investment banks, to protect themselves, controlled, to some extent, the use of credit by customers that were hedge funds. But the internal hedge funds, owned by the investment banks, were subject to no effective credit control at all.

You and your partner, Warren Buffett, have for years warned about the dangers of the modern derivatives markets, particularly credit derivatives, and about interest rate swaps, currency swaps, and equity swaps.

Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess—from something that was already gross and wrong. In the '20s we had the "bucket shop." The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn't buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the off-track betting system.

Until the house lost its money and suddenly disappeared. Or the house made its money and suddenly disappeared.

That is right. Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance—including Alan Greenspan— argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There's another word for this: bonkers. It is not a credit to academic economics that Greenspan's view was so common.

Isn't it ironic in a sense that what we now have is a world in which every major financial institution is a federally chartered bank.

We had a rule that a business couldn't also be a deposit-insured bank, because we didn't want every business to be able to use the government's credit to do anything it wanted. It was a profoundly good idea to prevent the banks from being in other businesses.

Well now, when the captive finance companies like General Motors Acceptance Corporation are too big to fail and get in trouble, we give them a bank charter so that a company whose main interest is to preserve employment in Michigan gets to use the government's credit in huge amounts to sell more cars. This is crazy. Our whole regulatory system was long designed to prevent what we're stumbling back into as a reaction to a crisis. We do not need a bunch of non-banks with unlimited access to the government's credit.

So some of the steps that we're putting in place now to try to correct the problems are creating new problems.

Yes. We're also recreating old problems because we're reacting hurriedly to a crisis.

I think it's a given that you have to change General Motors in order to save it.

Well, of course. But count on some changes being silly.

The Federal Reserve is today buying assets that it wouldn't have even considered looking at a year ago.

I think the problem is so extreme that nothing non-extreme has any chance of working. I like the fact that it is so willing to do things that have never been done before, because we have problems that we have never seen before. I am a right-wing Republican, and I like the fact that Obama has put into the White House Larry Summers, who is a ferociously smart human being and will try to do the right thing even if it offends some people. I think that's a quality that we need right now.

What do you think of the job that President Obama is doing so far?

Given the circumstances, I think he's doing very well indeed. I don't want to trade him in at the moment for any other Democrat.

Do you have any views on the fiscal side of things—the mix of fiscal stimulus, tax cuts, and the like?

We have to save the financial system, in spite of our revulsion about the way many of its denizens behave. We also need a huge spending stimulus from the federal government. We have a whole lot of things that are worth doing. By and large, the president does not plan to have people standing around holding shovels in the middle of some forest. He is talking about fixing infrastructure and so on. In the city of Los Angeles, where I live, the streets are a disgrace compared with the streets in Japan. Japan had so much fiscal stimulus that you can't find a pothole on a side of a mountain.

As part of the response, the U.S. government and governments worldwide are printing money at a rate that is absolutely unprecedented. Should people be worried about deflation?

Sure. But the dangers from what we have to do are less than the dangers that would come if we responded much as we did in the '30s.

I think it is dangerous to have big disasters in a modern economy. I regard pre-World War I Germany as an advanced, decent civilization. After all, little Albert Einstein got a very good, subsidized primary education in German Catholic schools. But in its economic misery, Germany became dominated by Adolf Hitler. We've seen some god-awful people come to power in various miseries in various countries. Enough misery has huge dangers in a world where we have new pathogens, atomic bombs, and so forth. So we can't afford to have huge economic collapses. I think we have to do what we're doing. We're hooked. And so are the other advanced nations.

What I'm hearing from you, Charlie, is "so far so good"?

It is very reasonable to react with the extreme vigor that's been shown. In retrospect the vigor wasn't quite enough. I would argue that it was pluperfectly obvious the government had to save all these banks and major investment banks.

So on a scale of 1 to 10, how big a mistake was it that they let Lehman Brothers go?

I don't think that was a mistake. You can't save everybody. That would have created unlimited revulsion in the body politic. I probably would have let Lehman go, too.

Even though the market seized up very dramatically afterwards and we had some of the most difficult short-term financial consequences of that failure?

We needed a total correction to a system that was evil and stupid. You can't have a rule that no matter how awful you are, you're always going to be saved. You have to allow some failure. We don't need all our bright engineers going into derivative trading and hedge funds and so on. We need some revulsion.

How and why do you think economists have gotten this so wrong?

I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting.

In fact, they've made a profession of driving value judgments out of the subject.

Yes. They say it's not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we're learning is that when you don't understand these consequences, you don't have an adequately skilled profession. You have big gaps in what you need. You have a profession that's like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg.

So in order to cure the lame leg, you would lean more toward an approach to economics that takes human nature into account?

If you totally divorce economics from psychology, you've gone a long way toward divorcing it from reality.

The same could be said of psychology. If you divorce economics from psychology...

That's what's wrong with psychology professors. There are so few of them that know anything about anything else. They have this terribly important discipline that all the other disciplines need and they can't communicate that need to their fellow professors because they know so little about what these other professors know. This is not an unfair description of much of academia.

You've often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.

Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It's not a competency if you don't know the edge of it. And Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.

If you had to characterize a few mistakes that you see executives making, which ones jump out at you?

An extreme optimism based on an inflated self-appraisal is one. I think that many CEOs get carried away into folly. They haven't studied the past models of disaster enough and they're not risk-averse enough. One of the very interesting things about Berkshire Hathaway is how chicken it is, how cautious, how low is its leverage. But Warren and I would not have been comfortable with more risk, entrusted with other people's net worths. There was no reason for our financial institutions to stretch as much as they did, with the leverage, the shady people and the compromises.

Let me play devil's advocate. People might say, "Wait a minute. I'm at bank A and I'm competing with banks B, C, and D, and they're running at higher leverage and the system is willing to give them that additional leverage and they're making more profits. Unless I operate at their leverage ratios, I can't pay my traders competitively and I will fail."

You've accurately described the way the culture generally works and you have seen in the present crisis how well it works for the wider civilization when everyone insists on not being left behind in lowering standards. I think the culture is simply going to have to learn to work more the way Berkshire Hathaway does, instead of the way Citigroup did.

Do we go back to the old partnership model?

It would be vastly better. The culture of Goldman Sachs as a partnership was morally superior and better for the surrounding civilization than the culture that came after it went public.

Do you think we're going to be able to go back to some of the more traditional models that you value?

A lot of it is going to be forced, so we'll go some in that direction. However, there are powerful forces intrinsic to the system that resist reform. But I have lived in my own life with responsible investment banking. When I was young, First Boston Company was an honorable and constructive firm and very much served the surrounding civilization. Investment banking at the height of this last folly was a disgrace to the surrounding civilization.

Looking forward, I think we'll be fortunate if we're able to muddle along with 0 to 1 percent growth, 2 or 3 years out.

If you're used to growing 3 to 4 percent per year and you go to no growth at all for 10 years, which is roughly what happened in Japan, then, as human tragedies go, that's not major. That's not the rise of Hitler. It's painful, but it's quite endurable.

Are you worried about China and the possibility of unrest there, given this global economic slowdown?

The people rising fastest in the Communist Party are engineers, and that's hugely desirable. The Chinese people have vast virtues intrinsic to their culture and their nature that make me optimistic that China will keep advancing. If China has to adapt to 4 percent growth instead of 10 percent growth, China will manage.

In many ways I see China and the United States as being natural allies. Both economies are tremendous importers of oil. It's in both of our interests to come up with effective, low-cost, clean energy solutions. Yet we have these perpetual frictions that tend to dominate the debate. Any views on that and what we could do to address those questions?

China is a nuclear power with more than a billion people, talented, driven, and achievement-motivated. I think we have no practical alternative but to get along with China. I think, properly handled, our relationship can be a big plus.

Getting back to prospects for growth, I would bet on technology.

We think alike. And we may even take our present misery and use it to boost our chance of ending up where you and I want us to go. We probably have a man in the White House who is quite friendly to this concept.

A crisis is...

We may be forced into much desirable change. If there aren't a lot of new jobs in derivative trading, maybe the engineers will have to do more engineering. If you look at the history of Berkshire Hathaway, you will find that time after time we did something that I describe as turning lemons into lemonade. Part of my Berkshire Hathaway holdings came from a dumb investment.

I didn't realize you made dumb investments.

I certainly did. I think it's part of a life lived right that you learn how to make some lemonade out of your lemons.

So turn the clock back. Imagine that you're a young law school graduate from a top law school, one of the top grads the same way you were several years ago, what advice would you give to a graduate looking at the world today?

Well, that's easy. I would avoid fields where prosperity depended to a considerable extent on misbehavior. I would not go into a plaintiffs' law firm. I would be afraid of what that would do to me. And I would want to work for people at a business that I admired, and I would take less money to do that.

p/s photos: Nozomi Sasaki