Up Or Down?

After weeks of positive sentiment across all equity markets, Friday saw a pullback. Let's be fair, you cannot be all running at the same time and see no pullback. But its interesting to see what the media and experts say were the reasons for the pullback.



a) China was making news all week, and on Friday the Shanghai Composite rattled world markets with a sudden 5% drop on inflation fears and the threat of tightening by the government. Is this a surprise? Of course not. What is more important is sentiment is still good and the pullback is just a breather. When you run for sometime, you have to pullback even if there were no bad news.

b) US municipal bonds took a huge hit and could be flashing danger signals for further problems to come. Muni prices have plunged as concerns about municipal debt and default continue to grow. So far this has been a back burner issue as everyone has assumed that the Federal government would bail out the states and municipalities, but with QE2 and a new House of Representatives in town, confidence in this outcome seems to be on the wane. So when did the rest of the markets really care about US housekeeping issues?



c) U.S. policy makers had a bad time at the G-20 meeting and while they were getting beaten up there for QE2 and devaluing the dollarIn Seoul, President Obama failed to get a much ballyhooed trade agreement with Korea, and the U.S. delegation took heat from countries like China, Brazil and Germany for devaluing the dollar at their expense. Later in the week, the Chinese again expressed their displeasure with current affairs as Commerce Minister Chen Deming said they didn’t support quantitative easing and espoused on the risks of growing more global bubbles. These are policy concerns, not liquidity driven issues.

d) While investor sentiment remains at extreme bullish levels. However in the U.S., insiders didn’t share the same optimism and set records for selling at a 12-1 ratio, perhaps sensing an interim stock market top. This is a concern.

e) In reality, US data has turned slightly more upbeat, reflected in higher US yields.



f) As the USD recovered, commodity markets have fallen back to earth with a thud, causing some to say the commodity bubble has burst, that's bull. A weaker USD caused a rally in commodity price, a slight rebound in USD would do the same in reverse, and since when we have a commodity bubble???

g) Debt worries are widespread in the Euro zone, the market is currently fixated on the Irish situation. Rumors are currently circulating that EU talks are underway that will lead to a financial rescue plan for Ireland as early as next week. Ireland’s Finance Ministry stated it had made no application for emergency funding from the EU and the European Commission said it has not received an aid request from Ireland. They are going through the motions. The Ireland issue is much smaller than the Greek's crisis, and the ECB have to do likewise and bail them, so what.

Being bombarded by various news and opinions can make one confused on market direction. Like I said before, all markets are running for quite some time, they have to pause even if there were no bad news. What's irksome is the business channels and media have to write "something" to explain the markets' pullback. As you can see, there are a plethora of reasons if you want a reason to sell.

I do not see any of the given reasons as anything new, we all know that. What is real is we are in for a low interest rate environment. The USD is moving down on QE2 and rebounding every now and then but the downtrend is there, which will move commodity prices higher and support US equity prices as well.

Elsewhere in emerging markets we are on a tear, or rather just starting. Its not a long drawn correction, its a blip. Thing should move up this week.

This Irish Joke Is not So Funny

Ireland's finance minister is shocked to discover that Irish banks actually need $43bn in new capital. As mentioned in my talk, the Greece situation is just one of many, its now the turn of the PIIGS - Portugal, Ireland, Italy, Greece and Spain. No matter how you look at it, Italy and Spain are really too big to fail - if things start turning bad there, help will be swift, so those two countries are not a big issue. Now its Ireland's turn. $43bn is very big to Ireland. Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse.



“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”

The Irish government, which has already nationalised one bank, Anglo Irish, is now widely expected to end up as the majority owner of every big bank in the country, except Bank of Ireland. Can you imagine the Malaysian government having to bailout half of the banks in Malaysia and ending up owning majority stakes in them, that's pretty bad.

Even Bank of Ireland, which must raise €2.66bn as part of the regulator’s capital demands, is expected to end up with the government as a near-40 per cent shareholder, compared with 16 per cent today.

The agency aims to cleanse banks of toxic loans, the legacy of plunging real-estate prices and the country’s deepest ever recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy.



The information that has emerged from the banks in the course of the NAMA process is truly shocking. The black hole, equivalent to about 20 per cent of gross domestic product, is far bigger than expected. It emerged after the country’s new bad bank, the National Asset Management Agency, announced the acquisition of €16bn ($21.5bn) of mostly real estate loans, setting it on the road to become Ireland’s biggest property owner. But NAMA paid only €8.5bn for the loans, applying a bigger discount than expected – a reflection of their poor quality.

The regulator’s capital shortfall calculation is based on a requirement that banks increase their capital ratios – to 7 per cent for tier one equity, and 8 per cent for core tier one by the end of the year – as Ireland seeks to insulate its banks from the impact of ongoing loan losses.

Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros. Anglo Irish Bank Corp., nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively.

“The regulator is taking the bank system by the scruff of the neck,” said James Forbes, senior equity strategist at Irish Life Investment Managers in Dublin. “Allied Irish has a lot of work to do to avoid majority state ownership, Bank of Ireland less so.

Ireland may not be able to afford to pump more money into the banks. The budget deficit widened to 11.7 percent of gross domestic product last year, almost four times the European Union limit, and the government spent the past year trying to convince investors the state is in control of its finances.

“The bank losses, awful as they are, represent a one-off hit. It’s water under the bridge,” said Ciaran O’Hagan, a Paris-based fixed-income strategist at Societe Generale SA. “What’s of more concern for investors in government bonds is the budget deficit. Slashing the chronic overspending and raising taxation by the Irish state is vital.”

The bank plan is the latest building block in the stabilisation of the Ireland's economy, which has suffered the most severe contraction of any industrialised country: gross domestic product shrank by a cumulative 12 per cent in the three years to 2009. The announcement came as the government announced landmark deal with trade unions, under which future pay rises for the 350,000 public sector workers will be contingent on equivalent savings from the improved delivery of public services.

After a fiscal tightening equivalent to 6 per cent of GDP since 2008, the government is still targeting €2bn of cuts in both 2011 and 2012 and a further cut of €2.5bn in the following two years to bring the deficit back to below the European Union target of 3 per cent of GDP by 2014.

New York Roadshow By JP Morgan

J.P. Morgan's Malaysia Corporate Access Days

November 5-6 (Thu-Fri)

Grand Hyatt New York, 109 East 42nd Street at Grand Central Terminal, New York

• Roundtable discussions, presentations and Q&A sessions with Malaysian government officials and regulators
• 1x1 meetings with participating Malaysian corporates

Senator Tan Sri Amirsham Abdul Aziz, Chairman - National Economic Advisory Council
Dato' Ooi Sang Kuang, Deputy Governor, Bank Negara Malaysia
Dato' Yusli Mohamed Yusoff, CEO, Bursa Malaysia

Participating Corporates

Air Asia (AIRA MK) - Dato Kamarudin Meranun, Group Deputy CEO

Axiata Group (AXIATA MK) - 1. Dato' Sri Jamaludin Ibrahim, President & Chief Executive Officer / 2. Dato’ Yusof Annuar Yaacob, Group Chief Financial Officer

Bursa Malaysia (BURSA MK) - Puan Nadzirah Abd Rashid, CFO

IJM Corporation (IJM MK) - Datuk Krishnan Tan Boon Seng, Chief Executive Officer & Managing Director

Public Bank (PBK MK) - Mr. Leong Kwok Nyem, Chief Operating Officer

Sime Darby (SIME MK) - 1. Azhar bin Abdul Hamid, EVP, Plantation / 2. Mohamad Hishammudin bin Hamdan, Group Head, Strategy & GBD / 3. Shariman Alwani bin Mohamed Nordin, Gp Head, Value Mgt & IR

S P Setia (SPSB MK) - 1. Ms. Wong Sheue Yann, Head, Corporate Services - Group Corporate Services / 2. Mr. Cheong Heng Leong - Manager, Investor Relations - Group Corporate & Finance Division

YTL Corp Berhad (YTL MK) - Tan Sri Dato' Dr Francis Yeoh, Group Managing Director

p/s photo: Chrissie Chau

Hedge Funds Reexamined

Hedge funds have taken a lot of criticism over the last 2 years for pumping up markets and/or leveraging their capital to make big momentum bets. Naturally when the markets corrected, which took a lot of hedge funds down with it, many of the critics were rubbing their hands with glee - sometimes, we just love to see tall poppies being hacked, or misery happen to the rich and successful ... Hedge funds took the blame for much of last year's financial havoc, but the fact is that they have played a much more benign role than is commonly thought.

Plenty of funds went under with the market plunge: a record 1,471 in 2008 out of a total of 6,845, according to the Chicago tracking firm Hedge Fund Research. But the government didn't bail out a single one. That's the way capitalism is supposed to work: incompetents go out of business, smart guys clean up. How about that, hedge funds NEVER GOT ONE CENT from any government. You fail, you close shop. you lose money, you take it on the chin and walk away to do something else.

The hedge-fund industry has shown remarkable resiliency, turning in a gain of more than 12 percent for the first seven months of 2009. The firms that caused most of the trouble on Wall Street were not hedge funds but big investment banks and insurance companies trying to act like hedge funds. They did a lot of risky proprietary trading with other people's money, and they failed. The key is betting using "other people's money" or your own capital. Funnily, firms that bet using their own capital have generally performed a lot, lot, lot better. This is the one big lesson all regulators, investors and senior management need to know by now.

Wall Street's most successful long-term model has been companies like Brown Brothers Harriman or Goldman Sachs, where firms bet the owners' own capital. Such a structure ensures careful risk assessment. Similarly, many hedge-fund managers have a lot of net worth invested in their own funds. Former Fed chairman Paul Volcker has proposed that federally insured banks be barred from proprietary trading. Maybe only hedge funds have earned the right to be the big risk takers of the future.

While many will continue to sneer and hope that more hedge funds will find troubled waters in the future ... much of it is envy and the inability to accept their compensation schemes. Most hedge funds charge an annual 1%-2% fee, plus a 20% cut of any positive returns. Some funds may have a minimum hurdle return rate (e.g. 5%) before the 20% share kicks in. All you need is a couple of good years before one can retire comfortably. Say a team of 3 runs a US$100m hedge fund. They have US$1.5m in fees to cover costs. If their fund gets a return of 18% for the year, technically they will get US$3.6m in performance profit share. You can do the math if one person manages US$100m or more. You can also do the math if you can leverage that capital 100% and double your return to 36%, thus doubling your profit share to US$7.2m. In a good run, not many investors will care about the leverage or risk that you took to get the returns as long as they were spectacular. In a down market, only then will investors and fund of funds start asking hard questions about leverage, reporting frequency, the ability to take money out at regular intervals without penalty, the amount a fund pays in commission, the percentage of portfolio that was turned over in a year, the alpha and beta and the gamma (no, we are not talking about radioactive rays).

My view is that hedge funds are here to stay. I would want to pay somebody a 20% bonus if they make me more money. I am sure the managers' interest is aligned with mine. What an investor has to be careful is that the compensation structure encourages big bets. The structure also encourages to bet aggressively to notch super normal returns as losses are not the end of the world - many dubious players will close the funds when they have one or two years of negative returns (you would then have to make up the deficit before getting the 20% profit share again)... only to reemerge somewhere else again with a new fund and new partners. Thus investing in hedge funds mean you have to know a bit about the people running the funds. You also have to know their strategy and leverage, and if you are rich enough to invest in hedge funds, spread it among a few funds, with differing investing strategies, and a decent track record.

There are many who will be starting afresh hedge funds, calling for subscribers. They are not as dangerous as one might think. They offer a fresh start, always judge them on what they had done before and what they want to achieve. New funds are more agreeable with "anytime withdrawals" and lower fees. Bear in mind that there is a danger when funds get too big. It gets that much harder to perform when its starts getting close to the US1bn mark, unless the hedge funds is based solely on quant models and program trades.


p/s photos: Chrissie Chau

Asset Class Returns As At 31 July 2009

The month of July was a very exciting month. Things really moved! Emerging markets continued to defy most expert predictions by surging headlong, led by China. It wasn't just emerging markets but developed markets surged as well. The funny thing is that when emerging markets moved, we always get the nasty and critical pieces on how and why emerging markets are too risky and have no reason to outperform the developed markets - hello... how the fuck do you think we got into this current mess, thanks to the fucked up brilliant greedy financial experts in developed markets!!!

REITs is a very interesting vehicle as they will only attract buyers when investors can see a genuine bottoming in the real estate space. Although the REITs are mainly representative of the US sector, it does indicate some vibrancy - despite its 10.4% gain last month, REITs as a whole is still down 41.3% year to date, an indication that there is still a long road to recovery. Another way to look at them is that it is time to really buy aggressively those REITs that currently yields very well (low teens) in Grade A or even Grade B offices. Wait another two months, and it won't be so attractive anymore.

Despite the concerns over commodity price gains in recent weeks, its pretty clear that the gains have not been excessive. As a group it is only up 3.2% and on a year to date basis, it is still down by 38%.

p/s photos: Chrissie Chau

Marketocracy Portfolio Updated

For the period ended 31 March 2009, my Marketocracy fund beat 97.8% of the participants. Thankfully, the record for the period ended 30 June 2009 saw my fund improving further to beat 99.5% of the participating funds.

The last 3 months saw S&P500 rising by 13.71%, my fund rose by 23.99%. The last 6 months saw S&P500 rising by 19.29%, my fund rose by 77.88%.

Sigh... I should really get back to fund mgmt ... ok head hunters, email me at malaysiafinance@gmail.com

Rankings Report for salvadordali's Mutual Fund

July 27, 2009

my fund rankings
		For the six month period ending June 30, 2009 your fund outperformed 99.5% of the other funds on our site.

price history
		SMF m100 S&P 500 DJIA Nasdaq

recent returns vs. major indexes
		Beating Today YTD SMF 0.71% 58.73% S&P 500 -0.21% 10.02% DOW -0.22% 3.61% Nasdaq -0.40% 24.66%

recent returns
		RETURNS Last Week 3.99% Last Month 5.91% Last 3 Months 23.99% Last 6 Months 74.88% S&P500 RETURNS Last Week 4.16% Last Month 8.85% Last 3 Months 13.71% Last 6 Months 19.29% RETURNS VS S&P500 Last Week -0.16% Last Month -2.95% Last 3 Months 10.28% Last 6 Months 55.59%

alpha/beta vs. S&P500
		Alpha 45.75% Beta 1.22 R-Squared 0.81

turnover
		Last Month 21.90% Last 3 Months 82.87% Last 6 Months 298.38% Last 12 Months 371.48%

Symbol Price Shares Portion of Fund Inception Return BAC $13.02 6,000 6.78% 28.77% STT $49.25 2,000 8.57% 42.52% ACTG $8.10 12,000 8.45% 36.81% MGM $7.81 14,000 9.47% 21.77% F $6.99 20,000 12.10% 17.38% BDD $10.15 11,000 9.71% 13.35% QSII $54.85 1,500 7.17% 11.52% LVLT $1.70 40,000 5.91% 10.78% WFR $18.63 6,000 9.66% 5.69% SXE $30.69 3,000 8.00% 4.67% JEC $43.02 1,500 5.59% 2.92% STAR $23.88 3,500 7.27% -0.07%

p/s photo: Chrissie Chau