Sunday, January 31, 2010

The Volcker Rule

Despite the mostly good corporate earnings, with many beating analysts' estimates, couple with a surprising GDP perk up in 4Q2009, the markets had trouble turning around the bearish trend. Methinks it has a lot to do with the uncertainty with respect to the Volcker Rule. Although you will find pundits giving many other reasons for the current downtrend. The market got hints that Obama was mulling some banking reforms, and you could see the south ward bent from then onwards.

The NYT had a good article on the Volcker Rule, my comments in colour:


New York Times / Dealbook: Obama is pushing hard for stricter financial regulation, promising in his first State of the Union address that he would not sign a bill that “does not meet the test of real reform.” This has left Wall Street wondering how much Mr. Obama’s regulatory proposal, known as the Volcker Rule, will cut into its profits.

The proposal, named for Paul Volcker, the former Federal Reserve chairman, would limit a bank’s ability to trade on its own account and would ban banks from investing in hedge funds and private equity funds. It could put an end to the huge Wall Street profit machines that emerged in the last decade since financial deregulation. Some analysts are already offering estimates about how costly the Volcker Rule could be. (Limiting banks' ability to trade on its own account IS GOOD, we are not going to see total prohibition, just a more sensible guide on exposure with respect to capital - now tell me that is not a good thing, but markets tend to discount absolute profits straight away... here we are talking about better quality and less volatile profits.)

In general, most analysts feel that Goldman Sachs has the most to lose if Congress passes some form of the Volcker Rule. David A. Viniar, Goldman’s chief financial officer, told analysts last week that the firm derives about 10 percent of its revenue from proprietary trading.

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As such, Citigroup estimates that the Volcker Rule would cost Goldman $4.5 billion in revenue based on its 2010 estimates, translating to a $1 billion drop in profit. Analysts at JP Morgan Chase said the Volcker Rule would knock about $4.67 billion off Goldman’s future revenue stream, but they came to their projection a different way, estimating that the firm would experience a 20 percent decrease in its overall trading revenue.

Meanwhile, analysts believe that Morgan Stanley has less to lose than Goldman, as it shuttered most of its proprietary trading units after it was hit with huge losses in those divisions during the financial crisis. The firm has only two small proprietary desks left, one of which the bank is considering spinning off.

(Well, lessening the power of Goldman Sachs certainly cannot be a bad thing... seriously ... if they are allowed to do as they like and grow even bigger they can dominate the capital markets even more, in particular over the past 12 months where they showed their ability to bounce back a lot faster, but also because they read the markets well and largely avoided the subprime mess. In fact they made money from the mess. So, lessening the power that is Goldman Sachs is not a bad thing - if not, they can be a lot bigger too fast and we are back to the same thing of having something that is too big to fail.)

Factoring in losses from Morgan’s private equity and hedge funds business, Citigroup estimates the firm’s future revenue could decline 3 to 4 percent. Meanwhile, JPMorgan analysts estimate the firm could take a 15 percent hit to its overall trading revenue, about a $2 billion reduction in earnings.

JPMorgan, like Morgan Stanley, also got rid of most of its proprietary trading units after experiencing big losses, so it, too, is not expected to suffer as badly as Goldman on the trading front, but it will still take a hit from pulling out of its $7.3 billion in private equity investments.

Citigroup estimates that JPMorgan’s private equity business generates earnings of 15 cents a share for the bank. Meanwhile, analysts at Morgan Stanley estimate that JPMorgan would have a 3 to 5 percent hit to its earnings over time based on reduced trading and private equity investing.

Citigroup would likely take most of its hit from its proprietary trading units, as the firm is already in the process of getting rid of most of its hedge fund and private equity fund investments. Morgan Stanley estimates the bank’s overall revenue could be reduced 2 to 5 percent if it suffers a 5 to 15 percent decrease in trading revenue. Put in perspective, Morgan Stanley estimates that Citigroup could lose $134 million to $534 million from its bottom line in 2012, based on the bank’s making $3.5 billion after tax in trading that year.

Bank of America is expected to take minor hits from its private equity and proprietary trading businesses. Citigroup estimates that the bank has about $16.6 billion in private equity investments that it may have to get rid of, but that is small compared with its balance sheet. Citigroup estimates that Bank of America generates only 2 percent from that investment anyway, so the hit would be minor. Meanwhile, analysts at Morgan Stanley estimate that the bank’s bottom line would fall 3 to 5 percent through reduced trading activity and private equity investments.

(The reforms would include barring these banks from funding or seeding hedge funds. This incestuous relationship is one that is full of conflict of interests, and will usually result in "insider information trading fomenting", riding on coattails of mega trends, thus enlarging volatility.)

But all the analysts warned that their estimates were based on factoring out earnings from the banks’ wholly owned proprietary trading units and not taking into account trading the banks perform to facilitate client trades.

If the Volcker Rule is narrowly defined to count just trades done purely with the bank’s money, then the analysis would likely be correct. But if the Volcker Rule is broadly defined to encompass all trading that might put the firm’s balance sheet at risk, the banks could face higher costs.

That’s because 90 percent of the banks’ proprietary trading activity is linked to trades made on behalf of clients as the banks make markets to facilitate trades, Goldman recently said in a note to clients.

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For example, Morgan Stanley and JPMorgan are large commodity traders, so they take on a lot of principal risk on behalf of clients because of the illiquid nature of that business. If the Volcker Rule is broadly defined to encompass that kind of proprietary trading, the two firms would have to stop performing that service, translating to a big loss to their bottom lines that would be far above analysts’ estimates.

If broadly defined, firms like Goldman and Morgan Stanley could simply give up their bank holding company status and operate without the government safety net — even though both have said they have no plans to do so. But for banks like JPMorgan, Bank of America and Citigroup, which have huge retail banking operations and cannot give up their banking charters, the Volcker Rule fallout could be very expensive in terms of lost profits.

Of course, the Volcker Rule may look very different once Congress gets its hands on it. It is not yet part of either of the financial regulatory packages in the House or Senate, and much will depend on committee hearings on the proposal in the weeks to come. The Senate is expected to take up the issue on Tuesday.

– Cyrus Sanati


I believe the markets have tried their best to discount a worst case scenario for the Volcker Rule, hence downside will be limited from here. Seriously, the corporate earnings figures coming in have been pretty good and the 4Q09 figure tells us a lot of things are panning out better than expected. You may get the markets focusing on some other issue temporarily, but they will always go back to earnings and growth and jobs. Unless you are talking about a bubble or a financial crisis, the markets won't be down for long. The Volcker Rule is not a crisis or a bubble of any kind, its the right things to do to rein in excessive risk taking and bring about better quality earnings, and getting banks to do what they were SUPPOSED to do. Its good, but knee jerk wise, they have wiped almost 5% already and that is already too much no matter how you cut it.

p/s photos: Macy Chan Mei Si

Friday, January 29, 2010

Must Watch This: The Blind Side

In our cynical world and hardened hearts all around, it was gratifying to watch a movie that lifts our senses. Its a feel good movie but never milks the audience for tears. What makes this so wonderful is its a true story. The other bit which makes it so enticing was that it was based on the book by my favourite author Michael Lewis - yes, the same guy who wrote Liar's Poker, Moneyball and The New New Thing.

Sandra Bullock was amazing in the dramatic role and should finally win the coveted Best Actress Oscar this year. Remember to wait for the credits as they will show photos and video snips from the real life family members of the characters. Quinton Aaron was spectacular too as he brought sensitivity and allowed us to empathise with his character.

The story was all the more amazing as it wasn't just Sandra's character that did the right and noble thing, but that all of her family members got on board as well - and that is not a common thing.

Its a very good movie when it not only entertains but it makes you think about our value system. What is charity, what is empathy, what one person can do to completely change the path and destiny of another, why so many of us only have good intentions but is cowered by what others might think .... Its a very very good movie.


Review From Inquirer: ADAPTED FROM MICHAEL Lewis’ 2006 true-to-life book “The Blind Side: Evolution of a Game,” the film “The Blind Side” tells the extraordinary story of an impoverished young boy who is adopted and subsequently brought up by a wealthy couple to become a potential star in the National Football League. Although initially perceived as a rags-to-riches story, the film effectively positions itself as a heartfelt yet humorous drama, minus the common themes and elements found in most inspirational stories.

Michael Oher (Quinton Aaron), a homeless African-American young man who comes from a broken home, is adopted by Leigh Anne (Sandra Bullock) and Sean Tuohy (Tim McGraw), a wealthy white family who helps him develop his true potential and character. Oher’s presence in the household leads to several self-realizations by the Tuohy family, including their two children, Collins (Lilly Collins) and Sean “SJ” Jr. (Jae Head).

At the same time, the teen, while living in his new environment as a student and football player, faces an entirely different set of challenges to overcome. With the help of his newfound family and teachers, he works hard to hurdle the obstacles in his life and become a professional offensive left-tackle.

Genuine, nontraditional

In many instances in the film, you may feel the story of an African-American boy being taken in and raised by a wealthy white family may seem too good to be true. But it is this reason—and the fact that character relationships in the movie center around a poor yet innocent young man—that makes the film more magical than the book. One of the factors that make the film special is that Oher, played by Quinton Aaron, is undeniably likeable. Aaron’s seemingly pure and innocent demeanor onscreen enables us to connect with him more in the film than in the book. His relationships with his new family and his genuine amazement at his new environment are believable.

Bullock as Leigh Anne, on the other hand, is able to effectively flesh out a role in which she strikes an amazing balance between a feisty iron maiden and a loving and compassionate mother to a complete stranger —all capped with a convincing accent. But in the film, Leigh Anne’s relationship with Oher goes beyond the premise of a white person rescuing a black man from poverty and despair, which viewers may also perceive.

Their chemistry and bond onscreen result in an authentic mother-and-child relationship which you can easily identify with. What’s truly unique about this film is that it has no clich├ęs or traditional scenes usually found in inspirational and rags-to-riches stories. There is no true villain in the story as the main conflict is Oher’s struggle to overcome his weaknesses, and eventually succeed in life.

While loaded with drama as in the book, the film is genuinely funny, too. For instance, the sudden yet snappy quips of “SJ” are welcome breaks in between Leigh Anne’s emotional self-realizations. As a result, you do not tend to be completely drowned by its heavy drama.

Overall, “The Blind Side” is truly a film that strategically plays on your emotions and genuinely makes you feel good as the credits roll.

Thursday, January 28, 2010

What A Speechmaker ... What A Leader

As I am writing this, Obama is only halfway through his State of the Union address. At a time when Americans have kind of lost track of Obama's vision and "change" mantra, they have a kind of disconnect to the whole thing. At a time when the media cast doubts over Obama's plans to tax the banks, impose new regulations to control them, at a time when Main Street thinks the government is losing its fight to reprimand and teach Wall Street a lesson ... it wasn't easy for Obama.

Choi Ji Woo

I have posted on how and why Obama is such a great speechmaker - you can learn most of it, but you cannot learn how to connect. He is not only charismatic, he does not seem artificial at all. In the end, you trust him more because he connects all the dots of your concerns.

Obama's speech is genuine sounding, he made sure that he connected to the everyman in smaller towns, just count the number of small towns he mentioned. He also did not gloss over the realities, that he knows things are not all that rosy, that things put in place are working and that all should be in the same boat.

We have to remember that the media is still largely controlled by Republican-leaning people. In one simple sentence, Obama's contentious tax on big banks gains huge acceptance - when these banks asked for bailouts, and in less than a year are preparing to reward themselves with a huge bonus pool... Obama's tax on them does not seem so bad, especially when it is going to support a jobs bill to create jobs and sustain lending to small businesses.

He did not alienate the Republicans but will put them up to be on the same side to lift the US out of their difficulties. More importantly, Obama has showed all that HE is still very much in CONTROL, that he is still on top of the matters that concerns all, and that he is still addressing the major issues effectively, decisively and continuously.

He punctuates his speech with strong convincing ideas, logic and persuasiveness that is hard to shake off. Well, you can cast a lot of market doubts on Obama government's thrust to reform banking, ability to create jobs, the ability to lift the economy out of the doldrums, and the ability to maintain a stricter fiscal prudence to eliminate deficit ... in one fell swoop, Obama has literally dusted all those concerns off with aplomb and credibility. He reminded all on the cohesiveness of his government's every step and that all actions are working towards many bigger visions for all Americans. I think all market shorts will be running to cover their positions FAST...

Yes, I am in awe again ... this speech is even better than those he made in the past ... even when you know he has the gift of gab, even when you know he is already charismatic ... you still go away feeling you can trust him even more in spite of his natural abilities (which many may use to deceive and con others with).

p/s photo: Choi Ji Woo

Wednesday, January 27, 2010

My #1 Black Swan In 2010

While the whole black swan thing sounds interesting, how are we to make a conscious effort to incorporate it into our analysis? Let's look again at Taleb's thesis:
... the existence and occurrence of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations. Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans"—undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War 1, and the September 11 2001 attacks as examples of Black Swan Events. To a large extent, the subprime crisis is another prime example of a Black Swan.

"What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives."

Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan Events and are exposed to losses beyond that predicted by their defective models.

Taleb's Ten Principles for a Black Swan Robust World

Taleb enumerates ten principles for building systems that are robust to Black Swan Events (my comments in brackets):

  1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. (We cannot allow financial firms to get so big that they cannot be allowed to collapse on its own. We cannot allow a domino effect owing to firms getting too big. Big financial firms need to be broken down into smaller units. In that respect, Obama is taking a leaf from Taleb's book by trying to reform some of the banking practices - consumer banking to be separated from investment banking. IBs to have a strict guideline on leverage to be used for proprietary trading and deal management.)
  2. No socialisation of losses and privatisation of gain. (US banks, insurance firms and automakers are prime examples of this. Malaysia and many other nations have been guilty of this as well. If companies were badly managed, they should be allowed to fail.)
  3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. (The funny part was Taleb putting in the phrase "and crashed it", because if a person drove a bus blindfolded and did not crash it, that person must have very special abilities and hence can be trusted to further drive buses. This rule of thumb points to decision makers who have acted recklessly, e.g. CEOs of many mortgage companies; the rating agencies; even Greenspan ... to be never considered for a similar position. In Malaysia, so many CEOs have proven themselves to be inept, thankfully most were not reckless, but still we need to be more vigilant to engage suitable performers and not to always give greenhorns a go at the top job without a good track record managing smaller units.)
  4. Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks. (This one is key. We always give incentivised bonuses to managers based on profits or ROE. Take the investment bankers, their bonuses are linked directly to profits generated, and not accounting for the amount of risk and/or leverage deployed. I give you an even better example, which financial firm in the US had the best ROE in 2007 .... you'd never guess it, its Lehman Brothers. We have to rethink how we reward employees, not just in profits generated but also on "safety measures" i.e. no time bombs being created - hence we should include a hefty penalty on cost of capital and leverage deployed on profits generated, plus I would want bonuses tied more closely to "net margins improvements" and staff turnover ratio.)
  5. Counter-balance complexity with simplicity.
  6. Do not give children sticks of dynamite, even if they come with a warning. (Many local councils, even government bodies have been left holding lots of derivative contracts which puts their firms at a very high risk, without a proper assessment of the gravity of the exposure. Even firms like Citic got trashed. More regulations should be put in place on the kind of contracts companies can enter into, maybe some firms should never be allowed to even enter into any new fangled instruments unless board approval has been obtained. Accounting rules should have more detailed reporting standards enforced on all companies who have entered into these derivative contracts, so that investors can better assessed the risks.)
  7. Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence". (This one, I do not agree with Taleb. When consumer confidence is dented to a pulp, we need to have the "spender of last resort" come in to keep the velocity of money going. Confidence is a huge thing, the lack of it translate to risk-aversion. Governments and regulating bodies are not there to always maintain a bullish market, but they are there to ensure that things do not get whacked to both extremes of the pendulum. You have to restore confidence when things got so hairy following the subprime crisis, if not, the social cost could be too enormous to recover from.)
  8. Do not give an addict more drugs if he has withdrawal pains. (Taleb must be quite against the amount of bailout funding given to firms. I do agree certain firms have gotten too big to fail but there were many that should be allowed to fail.)
  9. Citizens should not depend on financial assets or fallible "expert" advice for their retirement.
  10. Make an omelette with the broken eggs.
So, what's my #1 Black Swan so far for 2010? I have a few, but I will share with you the one on the top of my list. Japanese yen may go in for a huge devaluation in 2010. During the risk aversion period, many people flocked to the yen currency. Seriously, for an economy still grappling with the excesses of the late 80s and early 90s, and going into a deflationary mode, you don't need a strong currency.

Why is this a black swan? Most people assume that Japan should not have a strong currency. Its zero interest rate policy has not been working but most will assume that it may go back from 90 to 100 at the most vis-a-vis the USD. The biggest catalyst has to be the mega government deficit that Japan has. Japan being Japan is doing tai-chi on that issue. The tons of fiscal stimulus pumping over the last few years have not budge the economy. The budget deficit is unsustainable.

S&P: The outlook on Japan was revised to negative on diminishing economic policy flexibility, and ratings were affirmed at AA/A-1+. At a forecasted 100% of GDP at fiscal year end March 31, 2010, Japan’s net general government debt burden is among the highest for rated sovereigns. The ratio of gross government financial debt to GDP is already around 170% on a general government basis (i.e. central and local government and social security funds) and is the highest by far among developed countries (OECD average was 75% in 2007). Moreover, the policies of the new Democratic Party of Japan (DPJ) government point to a slower pace of fiscal consolidation than previously expected. Combined with other social policies that are not likely to raise medium-term trend growth and with persistent deflationary pressures, Japan’s net general government debt-to-GDP ratio may peak at 115% of GDP over the next several years.

Many think that the yen carry trade is done by big hedge funds, but there are a substantial number of Japanese individuals who have borrowed in yen to invest overseas. A weaker yen will reverse that trend.

The key here is many think Japan's fiscal deterioration is a given but also note that Japan has a AA long term rating. A catalyst could come from a few rating agencies downgrading Japan, or Bank of Japan engineering (or allowing) the yen to fall. A major catalyst should be if/when they decide to make a landmark decision on how to tackle their outstanding debt. Its a time bomb because the yen's un-natural strength is largely due to the subprime mess but is dragging Japan into a recession if its allowed to continue. The shock could be exogenous (e.g., a rating agency putting a major AAA-rated country on negative watch) or endogenous (e.g., failure to match supply and demand on a major sovereign issuance). These fears actually emerged on several occasions in 2009, but were not amplified by massive sell-offs as occurred in 1994, despite far higher volatility this time around. The actual catalyst may not even have to come in a downgrade of Japan's ratings, it could be triggered by a major downgrade of another country's sovereign rating.

In 2009, downgrades and debt auction failures in countries like the UK, Greece, Ireland and Spain were reminders that advanced economies are not immune to being reprimanded for "poor fiscal fundamentals This year, the "pervasive negative big issues" should be: a weak economic recovery and an aging population, translating to a focus on the increase of the debt burden of many advanced economies, including the U.S., UK, Japan and several eurozone countries.

The weaker yen should happen because Japan does not have foreign currency debt, and the "devaluation" would not hinder their debt absolute value. Key implication of all estimates of Japan's debt is that without increasing the national tax burden (i.e., tax and social security costs)—which is relatively low compared to other major countries—it is impossible to sustain public finances. Unfortunately, raising taxes would curb already weak domestic demand.

Wafer-thin interest rates make it cheap to issue bonds, but the Japanese have decreasing incentive to invest in Japanese government bonds. If Japan must start selling more debt to the foreign market, interest rates may rise to attract any investors. If the market demands an interest rate of anything more than 3.5% then Japan will not have the [tax] revenue to service its debt. Even without a weak economy, Japan's debt numbers are set to get worse because of its aging population and underfunded public pension fund.

Not all black swans are negative events, and in this case, I think the yen can go back to 120 level, literally overnight. When that happens, we will have a chain reaction:
- Japanese stock markets will boom as exporters benefit immediately and companies can be a lot more competitive
- A sharp rise in FDI both short and long term into all types of Japanese assets
- Many Japanese exporters have come to terms with the strong yen over the last 10 years by expanding overseas. The net effect of this yen weakness will reverse the trend and cause more Japanese companies to reinvest in Japanese operations and manufacturing
- BOJ will start to raise interest rates, which will be a good thing really all around
- Exporters in same competitive categories in other countries could see a temporary sell down in their shares

p/s photos: Angelababy

Tuesday, January 26, 2010

The Hype Surrounding Black Swans

No, we are not talking about the beer. Investors who read a lot would have come across the quite audacious yet thought provoking book by Nassim Nicholas Taleb. You can summarise the book with the line: The Impact of The Highly Improbable.

The Nobel Laureate Daniel Kahneman proposed the inclusion of Taleb's name among the world's top intellectuals, citing "Taleb has changed the way many people think about uncertainty, particularly in the financial markets. His book, The Black Swan, is an original and audacious analysis of the ways in which humans try to make sense of unexpected events."

Before the discovery of Australia, poeple in the Old world were convinced that all swans were white, an unassailable belief as it seem completely confirmed by empirical evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologists (and others extremely concerned with the coloring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans. All you need is one single black bird.

Consider these factors: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives. We amble through life, in our careers, personal life, investing, etc... and these are punctuated by "black swans" - the humdrum would not kill you or make you rich and wealthy, its the black swans that turns everything around, be it in relationships or investing.

The central idea of this book concerns our blindness with respect to randomness, particularly the large deviations. In other words, we do not see the big picture but base our decision making process on what has happened in the past.

For those of you who attended my talk, I have spoken on how most of us make decisions: anchor & adjust. That in effect is one way to make sure we will never see or predict black swans in our analysis. When you anchor & adjust, you fixate on what happened recently and make your guesstimates from that point of reference. When Malaysia's GDP growth last year, say was 3%, to predict GDP growth the following year, we would anchor at 3% and make adjustments according to how we view FDI, unemployment, currency, interest rate differentials, blah-blah... Hence 99% of the predictions would be plus or minus 100-200 basis points from 3%. A black swan effect would be tantamount to something like two major banks collapsing in Malaysia overnight, and the resulting GDP growth was a contraction of 8% - now, that's a black swan effect - most did not see it coming because they never figured in our calculations.

Its not just in investing, you can be dating a girl for 5 years and planned to marry next year, and wham, she turned into a lesbian - turning your world upside down, what a black swan.

It is easy to see that life is the cumulative effect of a handful of significant shocks. It is not so hard to identify the role of Black Swans. Consider the significant events, the technological changes, and the inventions that have taken place in our environment since you were born and compare them to what was expected before their advent. Look into your own personal life, to your choice of profession, say, or meeting your mate, your sudden enrichment or impoverishment. How often did these things occur according to plan?

Taleb appeared to be vindicated against statisticians in 2008, as he reportedly made a multi-million dollar fortune during the financial crisis of 2007–2008, a crisis which he attributed to the failure of statistical methods in finance. Universa, where Taleb is adviser, made returns of 65% to 115% in October 2008 in its approximately $2 billion “Black Swan Protection Protocol.”

While most human thought has focused us on how to turn knowledge into decisions, ... if you follow Taleb's reasoning, we should be more interested in how to turn lack of information, lack of understanding, and lack of “knowledge” into decisions. That is because the world is always a place where information and understanding are lacking in most areas. Knowing that we will never be able to grasp all critical issues is important. The question of "what if" carries with it graver consequences when we know how to ask "what if" properly.

The LTCM collapse, with two finance gurus in the company (Nobel prize winners no less), was very Black Swannish. Using standard deviations and pricing models, they try to extract price differentials when certain factors move in a certain way. They looked at correlation between various asset classes and instruments. Well, the best minds could not explain when things that are supposed to correlate, starts diverging in a big way.

Our system of rewards is not adapted to black swans. We can set up rewards for activity that reduces the risk of certain measurable events, like cancer rates. But it is more difficult to reward the prevention (or even reduction) of a chain of bad events (war, for instance, the recent subprime crisis is a major example).

When our system of risk-reward is not geared towards detecting, spotting or preventing black swans - that put everything at risk. We can get into a very theoretical debate on black swans, but for us who are in investments, how does Black Swans apply to our senses?

The impact of black swans has been enhanced many times over due to the globalisation of markets, as well as financial firms getting a lot bigger and international (and fewer of them as a result). You can be owning very safe stocks with splendid dividend yields in Timbuktu, but due to over speculation in certain asset classes in Eastern Europe, or a maniacal over leverage by some Icelandic banks, you could have a cascading effect which hits at banks, markets, confidence ... leading to a de-rating of emerging markets, smaller currencies ... i.e. risk aversion, nobody wanting to own stocks. Hence your so called blue chips could be halved in value, to no one's fault.

The Black Swan thing should alert us to reflect that we really CANNOT adopt a buy and hold forever type of investing mentality. The markets are so different now, many things are the same, but there are critical nuanced differences now. Black Swans in investing will usually be found in over-leveraged situations, bubble type situations in certain asset classes, sovereign debt defaults, the collapse of a major financial firm, ... You may be just investing in stocks, but now you have to read and follow closer on what's happening or bubbling in other areas as well. Their bubbles will affect you in the end.

There are things we cannot control, that is external to us. We need to stay tuned to potential black swans, even though we may be laughed at initially. Take any industry or markets, think of a few really "upsetting things" can whack them out of the water - these are your potential black swans, then you start ticking things off in your research and analysis to see of any of these potential black swans are about to morph into something sinister.

Do not take things at face value, learn to ask better "what if" questions even when they appear to be silly sounding. Beware of leverage, beware of things like "value at risk" because nobody really knows VAR in reality.

p/s photos: Gu Chen

Thursday, January 21, 2010

Country PEG Ratios

The folks at Bespoke Research have put up an attractive piece on PEG ratios. Ratios are very useful especially when comparing things across countries and industries - it makes them comparable.

The PEG ratio is the P/E ratio over the growth rate, and a PEG of less than one is generally considered good, according to Bespoke - however, guys, that is almost none existent. For example if a country is looking at GDP growth of 20%, can we safely try to find the markets at just 20x PER. Generally if you can even get a figure of 3, that is very decent already.That is we are talking of GDP growth rates and not company earnings growth rates. Even the very robust China markets only showed 10%-12% GDP growth in their robust years, so the 1/1 things never will exist.

In this regard, they have created "PEG" ratios for a number of countries using the P/E ratio of each country's main equity market index along with 2010 estimated GDP growth rates. Just as with stocks, the lower the country PEG, the more attractive.

click to enlarge

India ranks as the most attractive, followed by China and Brazil. Save for Russia, that's the whole BRIC trump card. Now, what's even more interesting is that Malaysia ranked near the top as well together with Singapore and HK. Foreign funds have been avoiding Malaysia like a plague for the past 18 months, will that trend continue. Many research strategists seem to think foreign funds will continue to underweight Malaysia. I have shifted tack and I think the Malaysian market may actually outperform most Asian bourses for the first half of 2010. The second half is still a bit unclear to make a confident call.

Worries over political stability should be ebbing now that Najib seems to have stood the "uncertain first year" in the office. Many funds were adopting a wait and see attitude with respect to Malaysia as many were thinking that many issues and factors were very "volatile" and fluctuating in the first few months. I think that stage has passed.

Bank Negara has managed very well, not letting the economy dwindle and keeping a lid on pessimism. The catalyst for Malaysia will be the ringgit outlook. I do think Bank Negara will be allowing the ringgit more leeway going forward, and that is a major attraction to funds. Valuation wise, its not demanding. The domestic economy is flushed with liquidity, just go to any new property launches. These are all a potent mix.

p/s photos: Jarah Mariano

Wednesday, January 20, 2010

Bernanke's Likely Weapon Of Choice

This is my prediction for Bernanke. He will raise fed funds rate very very soon. Just because of that, it does not mean that it will be bad for equity markets.

But lets go back to why it will happen very soon (by February I think). Most developed nations' central banks have been reluctant to move the low interest rates regime up because the Main Street has been showing nascent growth. What Bernanke wants to see are corporate spending on R&D and hiring - both not really evident yet. Despite the tons of liquidity being poured into markets, many banks are just sitting by idling.

The Fed has had to maintain a low fed funds rate for obvious reasons, but look at the chart, banks are earning very decent net interest margins by lending to the system, and not to clients. High ranking officials have been calling the banks to lend more aggressively, but that does not seem to be working.

Erika Sawajiri

Bernanke's hands are being tied a lot more now that many of the banks which received funds from the government are returning it - that means the government will have a lot less leverage to "move the banks" toward certain persuasions.

It looks like Bernanke will have little choice but to close the gap and raise fed funds rate. When net interest margins start to shrink, then the banks will have to put the money to work. The summary from all this deduction is that don't be worried when Bernanke raises fed funds rate, in fact it is a new bullish sign.

p/s photo: Erika Sawajiri

Tuesday, January 19, 2010

Making Sense Of The Risks & Rewards Of Owning UC Rusal

None of what's written below is original. All have been culled from various business publications:

... at the core of Rusal’s pitch to institutions is this claim on how it wants to invest in its $2.6bn flotation proceeds:

Rusal has deliberately positioned itself to exploit the urbanisation and industrial growth of China and now claims that it can put aluminium on to the docks at Shanghai more cheaply than its Chinese rival, Chalco.

Rusal’s secret weapon over rival producers, says the paper, is an abundance of “stranded” hydroelectric power in Siberia that cannot be moved far afield and is sold cheaply to local industry.the indebted company sources nearly 80 per cent of its energy requirements from hydroelectric power in Siberia, unlike its rivals which are dependent on fossil fuels.

That means Rusal’s flagship smelters, which generate nearly 80% of the company’s total output (an estimated 4.3m tonnes in 2009), do so at an average cost of $1,338 a tonne.This puts the company in the 1st quartile of the cost curve by exploiting availability of abundant, low cost, stranded hydro power in the region. Power costs constitute only 26% of the company’s total production costs compared to 36% for the industry in H1 2009.

We estimate power consumption in Siberia is running somewhere below 50% capacity right now. Given there are few other power intensive industrial activities in the region, we the potential for aluminium production to double before it become constrained by the availability of cheap power.

So Rusal, which owns 18 aluminium smelters, 12 alumina refineries, 8 bauxite mines and some other mines, is basically a Siberian power play.

But that’s not all. Rusal’s smelters are close to the world’s biggest aluminium consumer — China. This, it is claimed, gives Rusal a transport advantage of circa $40 a tonne over the weighted average of China’s trading partners.

At the moment, Rusal sells only 14% of its output to China, according to the report. But that could change given anticipated increases in carbon regulations in China and the intention of the Chinese government to restrict new aluminium supply.

The report eventually arrives at a valuation range of $20bn-$26bn, using discounted cash flow and peer group valuation multiples. (That implies a PE range of 14.1-18.3 times 2010 earnings, apparently).

Below are excerpts from the IPO prospectus, released on Thursday through the Hong Kong Stock Exchange, the first time ever that RUSAL has given key financial and company details. Russian aluminum giant UC Rusal won backing for its US$2 billion Hong Kong initial public offering from Asia-based tycoon Robert Kuok and two prominent hedge funds, two people familiar with the matter said Tuesday.

The backing could lend credibility to an IPO that got off to a rocky start, after Hong Kong regulators forbade retail investors to participate amid concerns over Rusal's $14.9 billion in debt.

According to the people familiar with the matter, the investors include Mr. Kuok, also known by Chinese name Kuok Hock Nien, whose Kuok Group includes Hong Kong-listed Kerry Properties Ltd. and English-language daily South China Morning Post; blue-blood hedge fund manager Nathaniel Rothschild, through his NR Investments; Paulson & Co., the hedge fund run by John Paulson; and Russian state development bank Vneshekonombank, or VEB.

The four will serve as cornerstone investors, these people said. Cornerstone investors buy into a company during the pre- IPO stage and agree to hold their stakes for a certain period of time, in this case six months.

Rusal plans to raise about US$2 billion from selling around a 10% stake as part of efforts to repay debt. The company is set for a primary listing in Hong Kong and a secondary listing of its depositary receipts on Paris' Euronext stock exchange on Jan. 29.

We believe that Rusal should trade somewhere between Chalco and Western peers considering its low cost, tier 1 assets, the Russain risk and the Chinese premium for the Hong Kong listing.

Although it could be worth more.

UC Rusal is scheduled to repay some $5bn of debt to its lenders by the end of 2013 under the proposed debt terms (excluding the VEB loan). Even after considering this, we estimate free cash flow to equity increase at 7% CAGR creating a value of $36.5bn by 2012, a 40 per cent upside to the top end of our valuation range.

There are other risk factors, however, such as the fact that US Rusal is net short bauxite (it purchased 8.8m tonnes of the stuff in 2008) and also the rather mature age of its assets.

Its smelters and refiners, according to the report, have an average age of around 42 years and nearly 75 per cent of the group’s aluminium production comes from “Soderberg technology,” which is said to be power intensive and pollutive compared to “pre-technology” (whatever that is).

So its just as well that cheap power is on hand.

Rusal also has a very low effective tax rate of 13%, compared to the corporate tax rate of 20% in Russia, the report states.


Rusal's restructured debt is $14.9 billion. It includes $7.4 billion to international lenders, $2.1 billion to Russian and Kazakh lenders, $4.5 billion to state-run VEB bank and $895 million to Onexim Group, owned by tycoon Mikhail Prokhorov.

RUSAL, under the terms of the restructuring agreements, may be forced to dispose up to all of its 25 percent stake in the metal giant Norilsk Nickel .

RUSAL is prohibited to pay dividends unless the Group's debt to banks, except for VEB's and Onexim's debt has been repaid by at least $5 billion.


Moscow-based Norilsk Nickel is the world's largest producer of nickel and the world's largest palladium miner. Norilsk's main shareholders are billionaire Vladimir Potanin and RUSAL, each with a 25 percent stake.

RUSAL has pledged 25 percent plus one share in Norilsk as collateral to secure its indebtedness to VEB.

VEB agreed to switch collateral and will now accept a 5 percent stake in RUSAL itself instead of a 25 percent stake in RUSAL's Bratsk and Krasnoyask aluminium smelters.

EN+, Deripaska's investment vehicle, is expected to pledge 15 percent of the issued share capital of RUSAL to the lenders of EN+ in connection with EN+ $1.04 debt restructuring.


By 29 October 2010, unless RUSAL obtains an extension, it must repay a $4.5-billion loan from VEB.

RUSAL plans to seek a further extension of the amounts outstanding under the $4.5-billion loan, dated 30 October 2008 between the company and VEB. RUSAL's directors believe that, if requested, VEB will extend the loan maturity for successive one-year periods through the override period to October 2013.

RUSAL can also request state-controlled Sberbank to assume all rights, claims and obligations under the VEB debt following a request from RUSAL, and to extend the debt to Dec. 7, 2013.


From the prospectus: RUSAL does not meet the profit test to qualify for listing on the Main Board of the Hong Kong Stock Exchange Limited. The company has been admitted on the basis of a large market capitalisation, revenue of more than HK$500,000,000 and positive cash flows from operating activities.

If the repayment of the whole of the group's indebtedness is accelerated... or if the Company should be unable to extend or refinance or repay the VEB loan as and when it falls due, RUSAL may cease to continue as a going-concern.


Deripaska has confirmed to RUSAL that he had an application for a U.S. visa denied in 1998 pursuant to Section 212 of the U.S. Immigration and Nationality Act, which relates to aliens deemed ineligible for U.S. visas based on security, unlawful activity and related reasons, and this position was reiterated in 1999 and 2000. Deripaska has consistently challenged these denials as being unwarranted and unsupported.

He has also confirmed to the Company that he subsequently visited the United States lawfully a number of times. The most recent visits were in August and October 2009.

Deripaska has also confirmed to the company that, to the best of his knowledge, he is not under investigation by any U.S. authority.


In its prospectus, Rusal said if the Michael Cherney case were to prevail on its merits it could require a payment in excess of $4 billion from Oleg Deripaska. The company cautioned, however, that the case is still in the early stages and that it is too early to say what the final amount might be. [ID:nGEE31QV]

If Deripaska were forced to use his UC Rusal shares to fund the payment, his influence over the company would be "significantly reduced", the company said in its prospectus.

According to the company, Deripaska "strongly denies and will vigorously resist Mr. Cherney's claims."


After the placement, Deripaska's EN+ will have 47.59 percent of RUSAL shares; Onexim Group of tycoon Mikhail Prokhorov will hold 17.09 percent; SUAL Partners, controlled by tycoons Viktor Vekselberg and Len Blavatnik, will have 15.86 percent; and Swiss-based commodities trader Glencore will hold 8.65 percent.

RUSAL will place 10.81 percent of its shares, of which VEB will buy 3.15 percent and International lenders 0.17 percent.

The company's Global Depositary Shares will be also listed and traded on the Professional Segment of Euronext exchange in Paris. Each Global Depositary Share will represent 20 shares. The company will be renamed as United Company RUSAL plc.

p/s photo: Marsha Milan Londoh

Friday, January 15, 2010

Cookies To Die For - Festivity Gifts

I look forward to each Hari Raya and CNY celebrations for the past few years because a good friend of mine will be making her famous almond shortbread chocolate cookies for sale. Exceptionally good! 20 pcs ~ RM 19.00. Contact Nooraini 012-3859815.

Tuesday, January 12, 2010

How The West Was Won & Lost - Why Has This Not Been The Headline For The Past Week???

Reon Kadena

Almost every major international papers have made this their headline news for the past few days - well, not in Malaysia apparently. With two gigantic Free Trade Agreements (FTAs) entering into effect on New Year’s Day—China- Asean and India-Asean—Asia’s economic interlinking has taken off. Asia has for long been divided into self-contained sub-regions like South Asia, West Asia, Central Asia, Southeast Asia and East Asia. Now, Asean’s two path-breaking FTAs with Asia’s second (soon to be first) largest economy, China, and third largest economy, India, enmesh the fortunes of South Asia, Southeast Asia and East Asia into a mosaic. Together with the currency swap agreements among South Korea, Japan and China, these FTAs signal a definite turn towards Asian countries viewing each other as valuable partners, markets and investors.

For decades, the target of reference for Asia’s leading economies was the West. The FTAs couldn't have come at a more ironic time. Now China is about the major engine of growth to lift the global trade. It is also timely as the US and EU are at a weakened position economically. Talk about salting the wounds. The financial meltdown since 2008 has reconfigured these horizons and brought home the imperative for Asian producers to diversify their export markets away from just the West.

A similar pattern of China's successful engagement with neighbors can be seen in the Shanghai Cooperation Organization with Russia and Central Asia and, less successfully, in the six-party talks in northeast Asia over North Korea's nuclear program. With the exception of China's trans-Himalayan border, promotion of regional multilateral institutions has progressed hand-in-hand with strengthening bilateral relationships.

Every country in Southeast Asia has benefited from broader and deeper relations with China, and ASEAN as a regional organization has been strengthened by China's involvement.China's single most successful gesture in its regional relations. In 1997, China held the value of the yuan steady against the dollar while the Southeast Asian currencies were falling. Its neighbors were impressed that China could succeed where they failed, and they were grateful that China prevented a race to the bottom in currency devaluations.

Since August 2008, China has pursued exactly the same policy, but its effects on Southeast Asia are the opposite of a decade earlier. Now the yuan's peg to a declining US dollar is forcing neighbors to compress their currency values in order to maintain market share. China's neighbors wonder how long currency compression will last and what will happen when the yuan finally does revalue. There is little reassurance from China, and no claim that it is helping the neighborhood.

World's Third Largest Free-Trade Zone Takes Full Effect Between ASEAN and China / 31 Dec 09

A free-trade agreement between China and 10 member states of the Association of Southeast Asian Nations (ASEAN) will come into force on 1 January 2010, liberalising trade and investment in an economic zone covering 1.9 billion people.

IHS Global Insight Perspective


China and South-East Asian countries will tomorrow establish the world's third largest free-trade area, after the European Union (EU) and the North American Free Trade Area (NAFTA). Coming into effect, the ASEAN-China Free Trade Agreement (ACFTA) is set to cover 1.9 billion consumers and an estimated trade volume of US$1.2 trillion, with a combined GDP of US$6 trillion.


The FTA is a key milestone for Asian regional integration, heralding a more open market for goods and services in the region. While zero tariffs for 90% of the agreed products, and the removal of 6,682 import duties on Chinese goods, offer great business opportunities for some, not all are enthusiastic. The ACFTA raises economic and political concerns in South-East Asia over China's increasing dominance.


The ACFTA is likely to provide a major boost to regional trade and investment following a year of sharp economic slowdown. Given the similarity of ASEAN and China's industrial structures, competition in domestic markets will increase, however, provoking fears particularly in those less economically developed ASEAN countries. For China, the ACFTA offers great prospects of being able to sate its enormous hunger for natural resources.

New Year's Day 2010 marks the establishment of the world's third largest free-trade area between China and the ten member states of the Association of Southeast Asian Nations (ASEAN). Under the ASEAN-China Free Trade Agreement (ACFTA)—signed in 2002—China, Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand will eliminate barriers to investment and enforce zero tariffs for 90% of the agreed products, ranging from textiles to steel and vegetable oils. This will require the average tariff rates charged by ASEAN countries on Chinese products—currently at 12.8%—to be cut to 0.6%, while average tariffs imposed by China on ASEAN goods are set to fall from 9.8% to 0.1%. The late participants to ASEAN—namely, Cambodia, Laos, Myanmar, and Vietnam—will follow behind gradually reducing tariffs and totally eliminating them by 2015.

The new free-trade zone will have an estimated trade volume of US$1.2 trillion and a combined GDP of US$6 trillion. It will cover 1.9 billion consumers—more than any other regional economic block. Clearly, this marks a huge milestone for Asian regional integration, traditionally less advanced in comparison with Europe and the Americas, as the region has played "catch up" in recent years. Although the realisation of ACFTA brings huge opportunities for both China and ASEAN, it also raises concerns over China's increasing economic and political domination in South-East Asia.

China's Expanding Economy—Driving Force Behind Integration

The rise of China in economic and political terms has been the most important development in pushing Asian integration further. The ACFTA framework agreement was signed in 2002 and was the first stand-alone free-trade agreement signed by China. The agreement followed China's joining of the WTO and its decision to start pursuing a regional trade policy that led to the initiation of negotiations on free trade with the ASEAN bloc. Evidently, from China's point of view, the ACFTA will help in securing access to South-East Asia's abundant natural resources. Despite the economic downturn, China's economy is expanding and it needs resources to satisfy its hunger for energy. Closer trade relations with South-East Asian countries also provide China greater control over the crucial nexus between the Indian and Pacific Oceans. There is also the opportunity to strengthen political ties within a region that has traditionally been under strong Japanese influence.

ASEAN Opportunities and Fears

The ACFTA is set to determine regional co-operation and trade relations in 2010. What ASEAN seeks through the ACFTA is to gain greater market access for exports and the ability to attract more foreign direct investment (FDI). "In 2010 we are sending as a strong signal that ASEAN is open", Sundram Pushpanathan, of ASEAN, told Agence France-Presse yesterday, indicating that the pact is set to offer huge benefits for ASEAN economic growth, too. In particular, as U.S. and European demand for ASEAN exports plummets following the global economic crisis, China's growing economic interaction will generally be very welcome.

Given the huge economic and development disparities within ASEAN, the impact of the free-trade regime will, however, be felt differently across the region. Under the ACFTA Early Harvest programme, China granted ASEAN economies very beneficial terms to export more competitive agricultural products to China, bringing benefits to grassroots-level farmers in South-East Asia. However, as soon as the clock strikes midnight tonight, small- and medium-sized farmers and enterprises throughout ASEAN will face a harsh reality—they will need to compete with more price-competitive imports from China. Rising fears and subsequent social tensions have already been evident in some countries. Earlier this month, the Indonesian government came under mounting pressure from the country's domestic industries to delay full implementation of the ACFTA. A number of business associations proposed a temporary exemption of 11 additional industries from the FTA. The proposed exemption list included textiles, footwear, steel and iron, food and beverages, plastic, transportation, tools, electronics, forestry and plantations, the downstream chemical industry, the creative industries, and machinery. While the government opted not to take an eleventh hour appeal further, it has agreed to seek a delay in eliminating import tariffs on over 300 goods that are deemed too "fragile" to compete with cheaper Chinese imports. Indonesia is still "committed to the [agreement]… but we will ask for a tariff modification on 303 products whose competitiveness we consider has declined because of the global economic crisis", said Edy Putra Irawadi, Deputy Minister for Industry and Trade at the Co-ordinating Ministry for the Economy.

Outlook and Implications

Even though ACFTA's final realisation comes after years of gradual implementation, it is still a landmark event, promising great opportunities for traders and investors and raising the region's status in the international trade arena. No doubt there will be challenges too. What the ACFTA does not mean, however, is that China-ASEAN integration is complete. Instead, it will provide further impetus for deeper economic co-operation between the two entities. Further progress is expected to be made across the board, including laws and regulations on the free-trade area; construction of infrastructure facilities; agriculture and rural co-operation; sustainable development; and cultural and social exchanges.

Although bilateral trade between China and ASEAN has already exploded over the past decade, the most eagerly awaited advancements that the ACFTA is expected to bring are in the fields of greater trade and investment volumes. China and the ASEAN bloc are already each other's fourth largest trading partners, and trade volumes have been growing from US$105.88 billion in 2004, to US$202.5 billion in 2007. This is nevertheless likely to increase significantly now, with ASEAN's secretary expecting exports to China to grow by 48%, while China's exports to ASEAN will increase by 55.1%. Integrated markets and lower market risk and uncertainty are also expected to generate more foreign investment into ASEAN countries, not just from China, but also from U.S., European, and Japanese companies. In addition to this positive impetus, there will be increasing competition which will likely decrease the enthusiasm for integration among the general public in those involve countries, for example particularly in Indonesia. All in all, the realisation of ACFTA represents a turning point in the Asian economic and political sphere, and is another indication of China assuming a leading role in the South-East Asian region, where it looks set to stay.

p/s photos: Reon Kadena

Monday, January 11, 2010

China Moving To The Big Stage

Jan. 9 (Bloomberg) -- China took a “big step” toward opening its capital markets by approving stock index futures, paving the way for increased investment in the world’s fastest- growing major economy.

The China Securities Regulatory Commission said yesterday it may take three months to complete preparations for index futures, agreements to buy or sell an index at a preset value on an agreed date. The government also approved margin trading and short selling, when investors seek to profit from declines in shares, according to a commission statement on its Web site.

“They’re taking a big step forward in developing their capital markets and allowing people to express their positive and negative views on stocks,” Invesco said in a statement. Invesco, which invests in China as part of its Asia Pacific business that had $26.8 billion of assets as of Sept. 30. “You’ll have more people participate in the market and thus greater efficiency.”

Increased investment in Chinese equities may help narrow the gap between prices of shares traded in both Hong Kong and the mainland. Companies in China’s benchmark Shanghai Composite Index trade at 33.9 times 12-month trailing earnings compared with 20.9 times for the Hang Seng China Enterprise index in Hong Kong. A potential long-term development is more clarity in the market now that there’s more liquidity in the market for the true valuations of the companies that are dual listed.

China, whose economy grew 8.9 percent in the third quarter of 2009, currently bars overseas investors from trading yuan- denominated stocks and bonds on the mainland except through a so-called qualified foreign institutional investors program, which has approved 94 international firms. Foreign ownership of fund management companies is restricted to 49 percent.

Index futures may help ease fluctuations in the world’s third-largest equity market by value after the Shanghai Composite Index doubled in 2007, then slumped 65 percent in 2008 before rebounding 80 percent last year. Until now, Chinese investors could only profit from gains in equities.

China is going to the direction of freedom for its markets and more flexibility for its investors so it’s good news. More liquidity in the futures leads to more investors as you have a bigger pool of tools. You can be long on the future and short on the stock.

Allowing short-selling in China probably will spur the start of more hedge funds in Asia. Short selling is when investors sell borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.

Rules for the index futures will deter participation by retail investors, said JPMorgan Chase & Co. Investors will be required to put up 10 percent of a contract’s value to buy, sell or short CSI 300-based futures as collateral, according to rules published on China Financial Futures Exchange’s Web site in 2007. The bourse has been conducting mock trading in the securities since October 2006. The value of the futures contracts will be points of the CSI 300 multiplied by 300 yuan, according to the trading rules the exchange set.

Investors will need to spend 105,000 yuan ($15,379) to buy a single futures contract when the CSI 300 is at the 3,500 level, establishing a “cost barrier to retail participation. These initiatives will provide tools for institutional investors to hedge risks and should reduce market volatility in the long-term. Citic Securities Co., China Merchants Bank Co., Ping An Insurance Group Co., Industrial Bank Co. and Shanghai Pudong Development Bank Co. are the most-heavily weighted stocks on the CSI 300.

Comments: The article basically says it all. As things stand, with so much restrictions on foreign funds participation, coupled with a monolithic broking business (i.e. relatively benign equity margin business and minimal leverage by participants) - China equity markets is already very huge. The combined daily turnover for China exchanges is nearly US$25bn.

In comparison, HK's figure is around US$5.7bn. Seoul's figure is US$3.2bn. Taiwan's at US$3.7bn. Can you imagine when markets in China opens up a little bit more to foreign participation??!! HK is getting a lot of attention from large companies wanting to list overseas because their legal infrastructure and transparency are a lot better and is of global standard. You and I know that China will take a looong time to do both well. To companies, HK is as good as listing and tapping into China funds swell.

Back home, the smaller exchanges have to carve out their own niche. I have said this for the umpteenth time, let investors do day-trading short selling - meaning they have to cover by end of day or face buying in consequences. What's so bad about that? I think it will boost daily turnover by at least 20% on Bursa. What is so bad about selling first, since that same person will have to cover by end of the day. It is not the same as short selling and holding that short for an extended period of time, which presents a higher risk to the markets.

p/s photos: Sharon Xu

Sunday, January 10, 2010

What Could Endanger The Markets In 2010

What could cause problems in 2010, these are all IFs. Pays to keep track. If Bernanke gets itchy and push down 10-year US Treasury yields again, that could put more oomph to the already excessive liquidity in the system. Bernanke could be scared into doing so if jobless numbers do not show signs of improvement. The funds will try to play the liquidity game yet again, piling into crude oil, gold and this could really create a swift liquidity bubble again.

Japan is the best bet for calamity in 2010. Things may suddenly turn focus on their huge fiscal measures and their imbalances with respect to their public debt. Already the public debt is at a staggering 225 per cent of GDP. What could start the cascade is a big dip in the value of the yen, which may require stabilisation by raising interest rates. Any kind of rates rise will push debt service costs up the roof. The country will flip from deflation to early bouts of hyperinflation. The yen may crash to 130 yen to the dollar ... which will wreck their bonds market but actually sustain interest in Japanese exporters.

China may find that it is the only engine for growth, and shouldering global demand alone may reach its peak. Wild credit growth can mask the weakness of its export model for a while but only at the price of an asset bubble. Beijing must hit the brakes this year or store up serious trouble. What will Beijing do? Prick the asset bubble, the shares will also tumble, and its effects will be felt all across emerging markets.

The EU could be placed under attack as some nations complain bitterly for having to shoulder the weak ones. The weak ones complain that they need to revive their country's employment and wants the Euro much weaker and rates a lot lower. When rich nations spending power is under threat, the union may start to wobble. Rallies and protests may rage across Europe.

These are all IFs, but they could emerge as realities swiftly, hence its best to be on our toes.

p/s photos: Zhang Zhiyi

Friday, January 08, 2010

This Is Really Funny Stuff!!! Kudos To Zach Galifianakis

"Funny or Die" is a web comedy portal launched by Will Ferrell and Adam McKay. Its been getting good viewership thanks to some of its "exclusive" content. As the founders know a lot of people in the comedy business, they have no problem getting many of them to put their stuff up or even create original content for the site.

The funniest stuff is a series of interviews conducted by Zach Galifianakis. In the sketch-talk show, he is the self-absorbed, politically incorrect, with deviant sexual fantasies, awkward, insensitive and rude talk-show host. The guests he interviewed were smashing as well, basically they too have to act brilliantly as "themselves on a talk show". The end result: magic.

Those who are easily offended, go to another site now.

Zach interviews Michael Cera (from Superbad and Juno):

Zach interviews Natalie Portman and her dog, Whiz (even Natalie cannot help but laugh in the middle of her sketch):

Zach's pissed off interview with Conan O'Brien, plus Andy Richter and Andy Dick:

Easily, the best of the lot, Zach's interview with Charlize Theron. Charlize showing why she is one of the top actresses in the world as she more than delivers, even for this mini-sketch. Fall off the chair funny!!!

p/s photo: Isari Yanti

Thursday, January 07, 2010

Wait For It - Shaolin Temple IPO!!!???

Its started out as a media scoop when some of the international media agencies started reporting of an IPO by Shaolin Temple.

HONG KONG, Dec 31 (Reuters) - China's fabled Shaolin Temple, the birthplace of kung fu immortalised in countless martial arts films, may help drive home a Hong Kong IPO soon. The government of Dengfeng -- home to a mainstay of kung fu films for decades -- plans to float shares in local tourism assets ranging from hotels to a cable-car service, many of which thrive on the monastery's fame, the South China Morning Post reported on Monday.

But the monastery itself -- known in the West as the training ground for David Carradine's character Kwai Chang Caine, or "grasshopper", in the 1970s hit television series "Kung Fu" -- doesn't plan a listing in the short term for fear of besmirching its reputation, the newspaper said.

Foreign students train wushu at 5 Dragon Lake in Shaolin

"To become involved in such a highly risky business is against the spirit of Buddha," abbot Shi Yongxin was quoted as saying. And we have adequate money to support what we want to do."

Indeed, Shaolin has embarked on a number of commercial ventures in past years, from kung fu shows to film production and a reality TV search for the next kung fu star. Monks from the temple, in the central province of Henan, have embarked on world tours to perform super-human feats of agility and balance.

Monastery executive director Shi Yanlin told the newspaper admission fees and donations amounted to about 50 million yuan ($6.9 million) this year, versus last year's 32 million yuan. But the temple came under fire in 2006 after a senior Chinese monk was awarded a luxury sports car for services to the local tourism industry, stirring up heated debate on the Internet.

Dengfeng's government has set up a listing vehicle, the Songshan Shaolin Tourism Group, that it wants to debut in Hong Kong, the newspaper quoted tourism official Pei Songxian as saying in Dengfeng without offering details or a timeframe.

Tourism accounts for a third of the city's gross domestic product; some 4.13 million tourists visited the city last year, a rise of 29 per cent, with the temple a main draw. Pei added that Dengfeng's government wanted to open a chain of vegetarian restaurants across China next year.

Maybe it was from the barrage of criticisms, now the local government in charge of Shaolin Temple has denied the report that it is pushing to offer shares in an IPO in 2011.

Reuters Jan 07: The city of Dengfeng, in Henan province, had signed a deal with Hong Kong-listed China Travel International to set up Shaolin Culture and Tourism and list it in 2011, the paper said, citing documents that have not been made public.

“The report about Shaolin Temple’s IPO and ‘selling state assets at a low price’ is absolutely untrue,” the government of Dengfeng, where the temple is based, said in a statement on Xinhua news agency’s website. Dengfeng acknowledged that it was negotiating with China Travel International on a new tourism joint venture in the Songshan mountains, home to the Shaolin Temple, but said no formal agreement had been made.

‘Sixteen cultural relics at national and provincial levels, including the Shaolin Temple, in the area will not be managed by the new joint venture,’ it said in the statement.

Heywood Ho, the general manager of China Travel International’s investment department, confirmed negotiations with Dengfeng but added: “We have not signed any definitive agreement...It is premature to say anything about the deal.” The Oriental Morning Post’s report said the Dengfeng city government transferred the rights to temple ticket revenues valued at 49 million yuan (RM34 million) in return for 49 per cent ownership in the new company.

Shaolin has developed into a lucrative business enterprise, raising controversy among some who disapprove of the commercialism of the temple’s business-savvy abbot, Shi Yongxin. Since taking over as abbot in the 1990s, he has moved aggressively to promote and protect the Shaolin brand, threatening to sue companies that use the temple’s name or image without permission and serving as executive producer for martial arts films centred on the temple. Its Hong Kong branch has urged the local government to allow construction of a Shaolin theme park in the former British colony.

I think there were commercialisation intentions by all involved but they had to backtrack when faced with the barrage of criticisms. What is commercialisation? Shaolin is first and foremost a temple, and then a place where martial arts are honed to the highest quality. The martial arts is more for a sense of personal discipline and maturity, and to have control over your physical and mental abilities. I am not a Buddhist but certainly doing a commercial venture would probably force the temple to "accommodate a lot of fresh demands" in pursuit of margins and EPS growth.

Imagine a slew of new extravagant shows: Cirque du Shaolin in Las Vegas running for 3 years, followed by a new Cirque du Shaolin & Chinese Fairytales in London, followed by Elton John being roped in to do Shaolin's Circle of Life, The Musical ... which will be so successful that a second musical will be written as well ... The Missing 18 Bronzemen, A Dance Extravaganza. A new theme park based on Shaolin Temple will be built in HK, followed by in Sentosa.

A new line of street-cred clothing line named "Shaott" will be unveiled with guest designer Sean Coombs. A new line of fragrance will come out ... brand name: SWEAT - the natural energy of Shaolin, musty, woody... But the best seller has to be Shaolin Sweat - the energy drink!!! The next best seller has to be the book in its umpteenth edition: Shaolin For Dummies!!! .. which will be quickly followed by a motivational book.. Tuesdays With Shaolin.

A bank will be set up across all Asia, naturally called Shaolin Bank, but all interest on deposits will be paid as dumplings. Naturally, the Shaolin Eye ferris wheel will be the new major attraction just outside of the temple. Lastly, a super duper hit reality show will hit the airwaves, Growing Up With 12 Shaolin Teenagers ... which will be followed in a TV joint venture Shaolin-Knockdown-WWF ... need I say more?

Asset Class Returns As At 31 December 2009

REITs have continued to climb, a sure sign of sustained bottom fishing, which may explain the still subdued recovery in real estate in the US. This kind of sustained bottom fishing is important as it will enable funds to tap new investors or old ones to put in fresh capital to take advantage of a recovering sector. As in any recovery, you need to see fresh capital re-emerging. Uptrend boosts confidence, and a bit of confidence is a lot more powerful than a spreadsheet or power point presentation.


Emerging markets equity closed off the year very well. Developed markets equity continue to suffer from a perception of delayed recovery, and subsequently a lack of fresh funds flowing into those markets. What was surprising, or not really, was the sell off in US bonds and emerging market bonds. This is a strong indicator - it shows that risk aversion has continued to ease, and more importantly investors are preparing funds to obtain higher returns in the first quarter of 2010 (i.e. equity).

p/s photos: Mona Chopra