Quibbles Over Top Executive Pay

Financial Talent In Asia Hits New Ground

We have heard of the often outrageous pay packages for many of the American CEOs. The figures are so stratospheric that it does not make any sense to the common folk. You do a job, and you do it well, then get paid well - not paid out of this world. the CEOs pay should be no more than 30x-50x the pay for fresh graduates joining the company. Anything totalling more than that is hard to justify. Of course the more socialist your leanings are, the lesser the multiple. We can all argue till the cows come home on what is fair, but in a capitalistic world, what is paid will be closer to the 50x mark rather than the 20x mark.

When you have boards allowing CEOs to market their pay packages to the top quartile of fellow CEOs, its a never ending game. Now lets look at some interesting developments in Asia. The HK$10 million (US$1.28 million) annual pay of de facto central banker Joseph Yam Chi-kwong and the Exchange Fund's heavy management cost came under sharp fire from lawmakers dissatisfied with the poor investment performance last year. Hong Kong Monetary Authority chief executive Yam, Hong Kong's highest-paid official, took home a paycheck of HK$9.97 million last year, up 12% from 2004, boosted mainly by a 32.9% rise in his performance-linked pay component, which came in at HK$2.5 million. His fixed pay rose 3.55% to HK$6.7 million. Yam had already requested a pay freeze in 2006.

Members of the opposition fiercely criticized Yam's remuneration for being the highest among the world's top central bankers. It was well above US Federal Reserve board chairman Ben Bernanke's US$183,500 (HK$1.43 million) 2006 salary. It is not entirely fair to compare Yam's pay with Bernanke as the Fed operates in a committee, and US levels are not necessarily the best benchmarks anyway, especially for government type positions. In Singapore the top politicians all get paid a lot more than US politicians, including the President post.

But Marvin Cheung Kin-tung, chairman of the Exchange Fund Advisory Committee governance subcommittee, which oversees the governance issues of the HKMA, defended Yam at the Legislative Council panel meeting on Thursday, maintaining that HKMA staff were underpaid compared with the market for financial talent in the SAR. Backing this point, Christopher Munn, the HKMA's executive director for corporate services, said it is facing increasing staff turnover. Last year it was 8%, much higher than the previous year's figure which he didn't disclose. Munn said in order to address the high turnover, the HKMA had to raise staff salaries by an average of 4.2% and hire 10 more staff this year. Some lawmakers suggested Yam's pay be linked to the performance of the HKMA-managed Exchange Fund. Given its poor 3.1% return last year - the lowest since 2001 - Yam should have his pay cut, they argued.

However, Cheung said besides managing the Exchange Fund's investment, Yam has four other roles - maintaining the stability of the Hong Kong dollar, the financial and banking systems, and improving the market infrastructure. He regarded Yam as having done well in all five roles. Lawmakers also lashed out at the high management cost for the Exchange Fund, noting it skyrocketed by 4.36 times from HK$186 million in 1997 to HK$811 million in 2005. Stripping out the new accounting rules that came into effect in 2005 and other non-investment management related items, Yam argued the increase was just 3.49 times. He justified the increase in costs by noting that the fund's size jumped to HK$1,066 billion at the end of 2005 from HK$636 billion in 1997.

Yam said the average return rate was 5.7% over the past seven years, higher than the 5% required by lawmakers and the average 4.5% benchmark investment portfolio return rate set by the authority and then approved by the investment subcommittee under the Exchange Fund Advisory Committee tasked with appraising the performance of the Monetary Authority. Much of the quibbling has to do with the Exchange Fund's dismal returns of just 3.1% last year. Yam attributed last year's paltry 3.1% return to the restrictions placed on the fund's investment strategy, which forces the authority to invest in highly liquid assets with low risk so cash remains available to fend off attacks on the Hong Kong dollar.

Overall, I think Yam is underpaid based on what he can get in the private sector. HK$10 million a year is OK for a position with such importance, responsibility and visibility. For that kind of position, you also have to pay for status, loyalty and a level which deters the person from considering other job offers. If you can find the right person, you must at least match it with what he/she can get in the private sector. Yam is doing a pretty good job. Now all he has to do is to engineer a 10% devaluation/re-peg of the HK dollar over the next 24 months. (Sorry, but that is my best prescribe strategy going forward for HK). The so called paltry returns is necessary as you cannot and should not ask for returns that are more than 200-300 basis points than the prevailing interest rates (i.e. if the prevailing interest rates in 4%, the Funds should not target more than 5.5%-6% in returns). To go above that would automatically require the Fund to seek higher risks - not in the best interest of the Fund. The same mentality should prevail for any retirement / superannuation funds... be it CPF, EPF, 401k and when designing your own personal retirement fund portfolio.

Tallest Buildings As Leading Indicators

Chartists Are People Who Have Given Up...

I remember reading a piece given to me by a private banker about 5 years ago on how the construction and completion of each of the world's tallest building always coincide with a major equity market collapse. I also remember that the article was written as a matter of fact but there was no attempt to explain why it correlated?!! Today, I came across a similar article by Peter Kendall and Steve Hochberg, analysts with Elliot Wave International. Cannot really blame chartists for not trying to explain as its not in their make-up. Chartists are a wonderful bunch of people for the stockmarkets. Imagine a group of people at a fun-fair whose aim is not to go and enjoy the rollercoasters but to time when the rollercoasters would dip and rise. Chartists are like that in that they have no real interest in trying to explain the fundamentals of the equity markets. All they are interested in is getting to the best correlation and patterns of movements of stocks. If the time of when the moon shines directly on the Big Ben is 95% correlated to the daily trading high of Johannesburg Stock Exchange, thats all a chartist would want to hear - nobody cares why that is so.

So, in my opinion, true chartists are people who have given up trying to understand equity markets. They don't even bother because it is too difficult or its not necessary at all. Maybe its the people who rely on fundamentals that are in the wrong grouping. Maybe stocks cannot be fully understood, it is after all a mixture of euphoria, elation, panic, mob mentality, .... how to truly put that into a logical equation.

Anyway back to those tallest buildings (I should know cos the Petronas Twin Towers is very close by). First, the Empire State Building was started during the euphoric 1920s and finished during the Great Depression. If we are concerned about an upcoming global decline, we might look around the world and ask if are any super-tall buildings under construction? Unfortunately, there is, and the biggest and tallest is the Burj Dubai, designed to be the world's tallest building, now under construction in the Persian Gulf city-state. So what has happened since contruction started? Well since December last year the Dubai Stock Exchange have lost 54%.

Three landmark buildings in New York City - the Chrysler Building, the Empire State Building, and the Manhattan Company Building [40 Wall Street] - remain as tangible reminders of the enormous ambition and exuberance that characterized the era. All three buildings were conceived in the bull market and built through the peak, only to open for business amid the worst office-space market in decades. Each time it was the tallest building then, and each time it opened to down-trodden markets.

The signal to sell is given when the tallest building is conceived/begins construction, the buildings usually will be open for occupation in the "worst of time", usually in the midst a major correction. This was proven true again for the Petronas Twin Towers in Kuala Lumpur, as the twins were started in 1994 and completed in (you guessed it...) 1997. Oh what a year... 1997!

The next tallest building belonged to Taiwan where the Taipei 101 was scheduled to be completed in 2004. A similar end befell Taiwan in 2004. Now, its Dubai's turn, and maybe now there are too many followers of "tallest buildings" as leading indicator because the UAE Stock Index collapsed the moment construction started on Burj Dubai, and its not even completed yet.

Still, no one has attempted to explain the linkages. My explanation is simple: It is a mixture of excess liquidity and egos. You would never get countries like the Philippines or Thailand or even Holland thinking of erecting the world's tallest building. It takes certain prerequisites - your economy must have been thriving; you should have gone through a massive wealth creation period either through real estate / currency / equity markets; and you have a shallow personality that you have a big ego that needed to be satisfied - you want people to know how well your country/city has done. So, in a nutshell, too much money mixed with ego and some brain power deficiency. That spells for an economy / markets / assets that have overshot.

You would only think about conceiving a world's tallest building if all financial aspects are looking rosy. Needless to say, when our egos start making financial decisions, ... its froth, ... its a bubble that needs to be pricked. So when is the next tallest building besides the one in Dubai.... I believe the Shanghai one is due to open just before the Olympics, or am I wrong? De ja vu baby!

Hey, Dawg ... What's In A Name?
Googling For Google In Mandarin

Google decided a couple of weeks back to adopt the Chinese name of Guge in China. Most people in China find the name awkward, nonsensical or even rude. Google said Guge is represented by the ideograms for valley and song. The name conveyed "the sense of a fruitful and productive search experience in a poetic Chinese way". But in a poll by news portal Sina.com, 85% of respondents were opposed to Guge.

Tens of thousands of others have signed an online petition calling for Google to rethink its Chinese identity. The most popular alternatives listed on an alternative website, NoGuge.com, are Gougou (dog dog), already used by China's web community, Goule (enough), Gugu (auntie), Gugou (ancient dog) and Gege (elder brother). But in an apparent sideswipe at Google's obedience to Beijing censors, the seventh most popular is Good Gou (good dog). Readers who understand Mandarin would be smiling by the insinuations of "dog dog", "enough" and "auntie".

Its quite funny too. "Dog dog" is an affectionate term, where most pet dog owners would refer to their dogs as "gougou". "Gugu" as in auntie is funny not so much in Mandarin but in Cantonese its hilarious (in Cantonese it refers to the male external appendage). As for "gege" (brother), its a form of respect to call someone brother in China, a pragmatic and politically correct term.

A dog in Western culture is a good thing - attached to it are traits like obedience, unconditional love, man's best friend. In Chinese culture, the term "dog" can be used to scold someone who is "unworthy", "lower class" or even "despicable". Well, that's what you get from a country where dogs do get eaten every now and then. Man, if you reincarnate as a dog, make sure you are born in the right country.

I personally prefer Goule (enough) as Google's reach and influence is already too much to bear.

Global Rising Rates Repercussions

China's central bank raised lending rates last Thursday for the first time in a year and a half. This was obviously to rein in the world's fastest-growing economy. The action may not be so important if the US did not also do the same. The Fed appears to imply that there might be further increases in US rates. The Chinese action aims to slow a spectacular surge in investment and it may potentially brake China's voracious appetite on world markets for oil and other commodities. With interest rates already climbing in the United States and the EU, and with monetary officials starting to tighten policy in Japan, China seems to be joining the world's central bankers in trying to gain control of speculation that has driven up prices of assets like gold and real estate. From steel mills and auto factories to luxury apartment buildings and plush office complexes, China has been engaged in a nationwide building boom fueled by easy loans from banks and other financial institutions. New loans soared at least 61% in the first quarter of this year compared with the period last year, causing investment in factories and other fixed assets to climb 29.8%.

China's boom in lending and investment, which has contributed to the country's rapidly rising exports, pushed growth in China's economy to 10.2% in the first quarter. That was high even by China's extraordinary standards, and so strong that President Hu himself warned on April 16 that the country needed efficient, high-quality development and not "excessively rapid economic growth." Prime Minister Wen Jiabao warned on April 14 that China would move to tighten controls on real estate and lending.

One can understand why China needed to raise rates, however that is in an environment where its currency is also appreciating. The rates squeezing movement in the US and EU have also forced second tiered players such as the smaller Asian economies to follow suit. Now we have a situation where most country's stockmarkets, interest rates and currency are on an uptrend. The exception being US where their currency would come under more pressure. Usually higher rates would stifle equity markets but that equation seems to be ineffective for the time being. All that is more surprising in that oil prices are also stubbornly high. Not to mention other commodities, including gold.

Long term observers of gold would note that gold rallies tend to coincide with long periods where returns from other asset class are diminished. Again, that does not seem to apply for now.

Growth in equity markets will be pared down by higher rates but investors are attracted to potential gains in the respective country's currencies also. So what gives?

These are the important conclusions:

1) US is printing a whole bucket loads of money. In order to finance the consumption patterns in America, US dollars in circulation has to rise. As long as there are willing holders of US Treasuries, nothing really bad will happen.

2) More funds chasing after assets of all classes. The result of that is higher demand for all commodities (limited supply) thus pushing prices higher. Hence we can argue that all asset classes are not really rising in real productivity value but due to higher dollarisation. To that end, timber and palm oil prices should have a lot more room to rise in the forseeable future.

3) Investors are still pouring funds into stocks of almost all markets, chasing equity and currency gains at the expenses of US dollar. They will continue to do that until the US dollar drops substantially, thus improving actual returns of investors (hedge funds included).

4) Rates cannot continue to rise without something happening to asset prices. Already equity markets in China are one of the worst performers in 1Q06. Surprisingly, equity prices in America have surged. The inevitable will happen, there will be more rate hikes in the US and the bottom will fall out.

5) While I have argued before in my blog on the resilience of the US dollar, it appears that the moon and stars have converged to force the issue. If the Fed tries to delay the substantial correction in US dollar, they will have no choice but to put in further increases in rates. The next rate increase may still not be sufficient to derail the status quo. I figure a total of 150 basis points increase from now should do it. Roughly 3 times of 50 basis points increase.

6) What China is doing in raising rates is more to protect its domestic overheated economy. Plus China will allow for the yuan to appreciate gradually. Both will put a stifling effect on Chinese stocks this year.

7) As for smaller emerging and developing markets such as Singapore, Malaysia, Thailand, Indonesia, HK - they will be forced to follow suit on any US/China rate increases. However, their stockmarkets would have a better chance of rising further after having recovered from 97/98 financial implosion. A substantial correction in US dollar would spell a temporary end to their bull runs as investors would then be able to lock up gains and cash out.

Is there any way the US dollar could afford to stave off the devaluation? Not this time as every single asset class seems to be ganging up to push the dollar lower. How many more rate increases can the Fed make to support the dollar without derailing the US domestic economy?

Oil prices can stay high while rates rise and equity prices rise because real demand generally comes from real productivity demand. Even if you pay a higher price for a commodity, it still works because the product used generates sufficient improvement in productivity in countries like China and India. Consuming nations like the US and Japan will have to bear the burden as that will eat into margins without sufficient improvements in productivity. For Japan, the case is slightly different because it is finally emerging from its deep recession of over 13 years. Hence the economy can withstand much more rate increases from a very low base.

What is a sufficient devaluation of US dollar? Probably at least 15%-20% from current values.

Chinese officials were probably not worried about inflation, given that the consumer price index in China was just eight-tenths of a percent higher in March than a year earlier. That is a luxury the Fed does not have in the US. While the smaller Asian nations would be able to better cope with inflation via their appreciating currency.

HK's Missing Legacy Part Deux

Sir Jack Cater's Legacy

The Missing Legacy was first written in a blog of mine dated 7 February 2006 - it was on the passing of Sir John Cowperthwaite, the person most responsible for HK's reputation as the freest economy/capitalism in the world. Cowperthwaite's passing did not get much press coverage at all in HK media, and that kinda pissed me off because a group of people who can forget so easily their "roots" and "how they got here" are doomed to lose the blueprint set by Cowperthwaite.

Now another old gwailo died, and his contribution to HK is no less than Cowperthwaite. Sir Jack Cater died on Guernsey on 14 April 2006 aged 84. He was the founding head of HK's infamous Independent Commission Against Corruption (ICAC), which took radical steps to combat graft in the police force in the 1970s. Cater went on to become HK's Chief Secretary, Acting Governor and Commissioner in London. Bribery had long been endemic in Hong Kong's police and civil service, but was thought of as being confined to the Chinese lower ranks, rather than expatriate officers. Calls to eradicate it were largely ignored by governors before Maclehose, who arrived in 1971. Maclehose lacked the political will to tackle the problem despite strong urgings by Cater . If you were to do a net search, you will find Jack Cater's passing only being solemnly mentioned within the HK's government admin portal at www.news.gov.hk ... how soon we forget!

Cater even threatened to resigned in 1973 when trying to bring down Chief Superintendent Peter Godber. Godber fled HK while under investigation for amassing a fortune of several million pounds, much of it banked in Vancouver. Cater needed to strike at the top, even at one of his own, to further reinforce the dire need for eradication of corruption in HK. The developments forced the hand of Maclehose. Jack Cater was asked to form an independent anti-corruption unit with the support of a former Special Branch officer, John Prendergast.

The establishment and independence of ICAC is crucial to HK's economy. While Cowperthwaite had eradicated bureaucracy, you still needed "pure meritocracy" in the financial economic system to uphold its integrity and transparency. Only with those factors can HK gain an ever growing reputation as a true financial center - attracting professionals and companies to invest.

Cater's reputation for determined leadership had been established during the period of civil unrest in Hong Kong in 1967. He cared deeply about his work and about those closest to him, and he encouraged the careers of talented young officials - including women, who in earlier days had generally been denied promotion. In the first year of its operation, 1974, the ICAC handled 1,798 complaints of police involvement in bribery and extortion. It was said that more than a third of all Chinese policemen were members of triad gangs which controlled prostitution, drug-running and gambling across the Territory - rackets which, as Cater pointed out, raked in more than three times the profits of the Hongkong & Shanghai Bank.

By October 1977 the Commission's uncompromising methods (it acted on anonymous tip-offs, and allowed no presumption of innocence) had caused such anger in the Police Force that 2,000 officers marched through the streets to present a protest petition, and a group of CID men stormed the ICAC's offices. Fearing a breakdown of order, Maclehose felt forced to declare an amnesty for all but the most heinous offences. In spite of this setback, the ICAC's work continued with unflagging determination. Investigations proceeded into other government departments, notably public works, education (parents were often asked for bribes to enrol children in schools of their choice) and health (hospital patients were forced to pay up for bedpans). It was indeed a cradle-to-grave system, with bribes demanded even for burial sites. Among those most grateful for the clean-up were the drivers of Hong Kong's battered fleet of minibuses, whose fares had for many years been preyed upon by bent policemen.

The ICAC was often accused of heavy-handedness, but its intervention provoked a culture change which still stands Hong Kong in good stead while corruption remains rife in other parts of Asia. Though Cater moved on in 1978 to the top civil service post of Chief Secretary, it was at the ICAC that he made his most significant contribution. Cater was Chief Secretary from 1978 to 1981. With a rapidly growing economy, it was a golden era for HK. Cater was several times Acting Governor, and was in line to succeed Maclehose in 1982; but Margaret Thatcher was persuaded to appoint a senior diplomat, Sir Edward Youde, to commence negotiations for the eventual handover to China. Instead Cater became HK's Commissioner in London until 1984. He then returned to Hong Kong to work in the private sector, joining China Light & Power Co - the electricity generator for Kowloon and the New Territories - and becoming head of Hong Kong Nuclear Investment Co, which was China Light's participation with Beijing in a nuclear power station venture at Daya Bay in Guangdong province. He was president of Hong Kong's Agency for Voluntary Service, a member of the Court of the University of Hong Kong and an international director of the United World Colleges, participating in the foundation of Hong Kong's own College at Shatin in the New Territories.

Again, another passing of an important gwailo being largely ignored by HK's media. Is it a gagging issue; were media companies trying not to agitate China's political HQ by not bringing up the "glory days" of British colonial influence? How many more "important gwailo septua/octo-generians" must die before HK people recognises its roots, and pay the according tributes and gratitude that are due. One can just imagine the gulf between HK and Singapore as financial centers if "true meritocracy" did not prevail in HK. Will Cater and Cowperthwaite ever make the books of HK's recent history. The Chinese have an oft-quoted saying, "when drinking water, one must never forget its source", how they got here. Just because some of them involved people who are not Chinese does not matter, and should not matter.

AirAsia & Tenaga Covered Warrants
Fairly Valued?

Covered warrants have been going great guns in HK and Singapore, and now is only starting to shift out of first gear in Malaysia. Both issues were brought to the market by CIMB. AirAsia's call warrants closed at 28.5 sen, a 6.5 sen premium over its offer price of 22 sen on a volume of 22.91 million. It opened at 23 sen and traded an intraday high of 31.5 sen. Tenaga's call warrants ended the day at 51.5 sen or 5.5 sen over its 46 sen offer price, after being traded at between 47 sen and 62 sen. A total of 8.99 million units changed hands.

At 28.5 sen, AirAsia-CW trades at a premium of 0.18 + 0.285 / 1.78 = 26%, with a gearing of 6.2x. The CW expires in October 2007. On such a healthy gearing, the CW can be termed as fairly to slightly undervalued. The danger is the short time to expiry of about 15 months. Investors should start discounting the premium they would want to pay as the time to expiry gets closer. Generally, avoid CWs with less than 6 months to expiry unless the premium is below 10% and gearing is still more than 3x. Just some useful rules of thumb.

As for Tenaga, the CW trades at a premium of 48 + (51.5 x 2) / 860 = 17.5%, with a gearing of 8.3x. The CW expires in October 2007 also. Naturally, the AirAsia-CW is more expensive, probably due to its higher beta (volatility). However, in my opinion, the Tenaga-CW is grossly undervalued, considering its gearing of 8.3x and an undemanding premium of 17.5%. Even if the share price does not budge from RM8.60, the covered warrant should trade closer to RM0.63 and not RM0.515. Coupled with the fact that it is a good "GLC revamp play" and chances for a tariff hike is quite inevitable within the forseeable future (probably after the fuel hike/subsidy removal protests have died down). Strong buy and medium term hold (for 8 months) on Tenaga-CW.

The Next Big Thing For Asian Exchanges (ex-Japan)
Exchange Traded Funds

ETFs are investment products that hold a pool of securities and are designed to generally correspond with a specific Index. Investors can buy and sell ETFs just like stock, through their broker, throughout the trading day. ETFs offer the advantage of trading an index portfolio with the ease of stock trading. Investors can purchase ETF shares on margin, short sell shares, or hold for the long term. Investors also achieve market exposure consistent with the Index on which they are based, through one security. ETFs are also designed to be cost efficient because they are based on an Index, rather than being actively managed. Designed to follow the NASDAQ-100 Index, QQQ tracks one-hundred of the fastest growing technology and non-financial services companies listed on The NASDAQ Stock Market. It is the most actively traded ETF in the world with 80-90 million shares traded daily.

Other popular ETFs on Nasdaq include: Nasdaq-100 Equal Weighted index, Nasdaq-100 Technology Sector Index, Nasdaq Biotech Index Fund, Basket of Listed Depository Receipts Emerging Markets 50 ADR Index, BLDRS Asia 50 ADR Index, BLDRS Europe 100 ADR Index, etc...

ETFs are extremely popular for players on Nasdaq. In just one exchange they can go long, short on almost any and every sector/index in the world. Of course I am kidding, but their options are quite enormous. They have energy ETFs, industrials, midCaps, smallCaps, US Energy, TelecomStocks, 20-Yr Treasuries, MSCI HK ishares, etc.. You need a sufficiently deep pool of players for ETFs to work well. In fact, ETFs on Nasdaq allows a lot of retail players and smaller funds to buy exposure to Asian stocks via country based ETFs, even sector based Asian exposure. Saves them from investing directly. So, in a way, Asian based ETFs suck away at actual real activity by foreign investors buying and selling directly in Asian stocks. A factor that must be taken into account when we try to tabulate trends on foreign participation in Asian exchanges.

Both HKSE and Singapore Stock Exchange have been working furiously over the past 2 years to come up with similar ETFs on their exchanges. To that end, SGX has edged ahead of HKSE. SGX's street TRACKS Straits Times Index Fund have done well. SGX has also launched the FTSE SGX Asia Shariah 100 Index (stocks that are shariah-compliant from Japan, Singapore, Taiwan, Korea and HK) - this will form a good kick-off when they actually launch its Asia Shariah 100 ETF. ETFs for exchanges like HK and Singapore cannot be domestic-themed, it has to have a broad appeal, an Asian appeal as well. The structure of a good ETF is derived from its indexation. The sooner an exchange can aggregate various sector, regional, country specific indices, the faster will be the rollout period.

In HK, they unknowingly launched their most successful ETF when the government bought stocks heavily to support the Hang Seng back in 97. Then, loaded up with primarily HK stocks, the government did not want to unload the whole chunck back onto the market. So, in November 1999, they launch the Tracker Fund of HK, possibly the most successful ETF in the world with US$4.3 billion in units raised. ETFs are better because they can be traded in and out (and even shorted) on low cost unlike most unit trusts.

Both HKSE and SGX have to realise that real ETFs allows themselves to be shorted, and that is a big attraction. That has to be dealt with properly by the two exchanges. The sooner an exchange can come up with a decent array of ETFs, the better the chance of being successful. It is not difficult, here are a few proposed ETFs: 1) Asia-15 Airline Fund 2) Asia Low Cost Carrier ETF 3) Asia 30 Power Plants ... plus an array of Asian country indices as ETFs.

There are now close to 200 ETFs in the US with around US$200 billion in capitalisation. In Canada its closer to US$8 billion in ETFs. In Europe there are about 130. Japan has the second largest ETF market with close to US$30 billion in value.

Both HKSE and SGX have been dragging their feet in venturing big time into ETFs. The potential is there for either of the premier Asian financial HQ to propel themselves ahead of the pack... with an Asian flavour. ETFs allow an exchange NOT to be only reliant on domestic companies for interest and investing options. Just design brilliant ones, using Asia as a platform. Any of you two want to hire me?

Companies That Are Truly Global

In an article by Gordon Redding, the director of INSEAD's business school’s Euro-Asia Centre, he debunked myths about how a present day truly global MNC should look like. The thing is they come in many different forms now. Culture and historical economic evolution of respective countries have played a big part in shaping what can be termed as global MNCs of today. One main thing about a global MNC is the internationalisation of the brand/image - it has to lose its distinct domestic beginnings. He classifies these truly global MNCs which dominates global business into six broad groups:

1 The large multi-divisional, multinational firm found in Britain and the United States
2 The continental European large-scale business, such as Volkswagen and Nestlé
3 The European industrial “cluster”, such as the textile firms of Emilia Romagna
4 The Japanese keiretsu, the networks of interlinked firms still predominant in the world’s second-largest economy (although the links have been weakened substantially due to the prolonged recession of much of the 90s)
5 The Korean chaebol, unique combinations of government and family firms, such as Samsung and LG (their links have been heightened and sharpened with the government's vigilence in clearing corruption and mismanagement from the chaebols - these companies should come out stronger than before)
6 The Chinese private company— the “clans” of vertically integrated small firms that work so well in what is now “the workshop of the world” (an outsourcing web of relationships but this is the weakest of the so called global MNCs category)

In defining who is truly global, Redding have identified only nine companies that are truly global—in the sense that less than 50% of their business is in their home territory and more than 20% is in each of the other two out of the three major regions: America, Asia and Europe. They are: IBM; Sony; Philips Electronics; Nokia; Intel; Canon; Coca-Cola; Flextronics and LVMH, the French luxury-goods business. A couple of the more interesting companies which I think will make the list over the next 5 years owing to their defined corporate strategy include Samsung and Goldman Sachs. Food for thought!

The Devil Does Not Wear Prada
Da Vinci Code Reloaded

Thanks to my Baptist background, good in theology failed practical, ... the almost ridiculous but captivating story in Da Vinci Code has brought much warmth and happy thoughts. While I believe the DV is a great story, it is a story, and I am thankful for the interest it has stirred up - at least some will seek more information for the truth. Anyway, that's not why "The Devil Does Not Wear Prada" (isn't that the best headliner... ever) is written. This blurb was written following the article in Wall Street Journal yesterday on the Pope's accessories.

It seems that product placement advertising has overstepped the normal boundaries of TV shows and movies as the Catholic church leader Pope Benedict XVI has been seen spotting many fashionable items as part of his daily fashion wear. The Pope has been seen with an Apple i-Pod, a sexy pair of reddish-orange set of Prada shoes, some walking shoes by Geox and he wears Serengeti sunglasses. I am pretty sure its all complimentary, well freebies are freebies ... or is the new Pope more fashionable, a closet fashionista? Well, of all closet cases, that would be the mildest.

Still Got Them Cowboys In West Australia
Old Boys' Scratchback Mountain

I thought these kind of things happened back in 70s or 80s even, but the Western Australian premier has stirred up stuff not seen since Joh B Pietersen days in Queensland. Rio Tinto (giant and well connected) accidentally allowed the lease on Shovelanna iron ore deposit to lapse last year due to a late courier delivery. The tenement lapse was picked up by the young and hungry Cazaly Resources. Cazaly even got funding from the reputable Investec and an offtake agreement from BHP Billiton. Cazaly planned to develop the mine within 3 years and will be giving the state government approximately A$17 million in royalties a year. Naturally, Cazaly's shares shot through the roof from a paltry A$0.29 to a high of A$2.12 over the last 7 months.

Now, Rio Tinto had the bloody thing for 20 years and have not drilled a flrrucking hole there and probably won't for another 10 years because the company's nearest infrastructure is some 100 km away. After Cazaly got the site, Rio Tinto filed a rare protest to the WA government arguing it was in the public interest for Rio to keep the deposit. In February, WA premier Alan Carpenter said he had discussed the issue at length with Rio's CEO Leigh Clifford during a courtesy call to Rio's London office (starts getting interesting ... London of all places, what a courteous gesture by a premier). Last Friday, WA's Resource Minister John Bowler announced that the WA government has decided to hand back the Shovelanna deposit to Rio Tinto. Bowler could not be located by the press for the last 48 hours.

These kind of things should not be happening in a developed nation's investment arena. Deadlines are set to be met. Courier delays are incidental to business, many things happen that are out of our control, to wait till the last day to submit is plain silly. Cazaly Resources' shares has plunged A$1.45 to A$0.65, after hitting a low of A$0.41. Too many investors have been burnt badly by this debacle. Its one thing to lose money when thing go awry, but this is not fair as investors had put faith in the state government upholding the letter of the law, and in fairness Cazaly Resources did only what is right and available to them. The sad thing is that the integrity of the legal system and the letter of the law had gone to the dogs. The premier and resource minister have a lot to answer for, if only they can be located, ... it is just too obvious and silly a decision to undertake, akin to political suicide. Only in Western Australia? Gee, and I thought Bond and Rivkin were dead ... maybe there is reincarnation after all.

Danger Ahead, China Real Estate

Property prices in China continued to rise in the first quarter of 2006. In Beijing, prices rose by 19.2% in 2005. The odd thing is that the amount of unsold housing also shot up by an even bigger margin of 31.6% to 13.7 million square meters. Overall, in China the amount of unsold real estate rose by a staggering 23.8% in the first quarter of 2006 compared to the same period a year ago. The area of unsold property developments reached 123 million square meters. Now, 23.8% is only meaningful if we know what is a heart stopping rate for property developers. Generally they would start to check themselves into the hospital once the rate goes past 10%-12%, you start writing the will at 15%. So, we are in very dangerous territory here.

Yes, no one can doubt that the underlying demand is there and will be there for a long time. Its the affordability factor which is ridiculous. Only a very small portion of China residents can afford most of the properties, and the market is largely dominated by foreign investors. Again that is further amplified by the fact that most of the buyers also own a few similar investments in China. Rents are struggling to keep as demand from expatriate postings starts to dwindle slightly. Expat postings comes and goes. Once the big events and projects are finished, rental yields will not be able to keep up at the current rates. Even current rentals are not realistic as many do not see rent yields as being necessary because they are in it for the capital gains - recipe for you-know-what.

When more than 70% of the population in the big east coastal areas cannot afford the properties, its not a good sign. The trouble about bubbles is that its easier to spot but harder to prick. To time a correction is almost ludricous. Despite the amount of rising unsold real estate, we also have a massive 1.03 billion square meters of real estate UNDER CONSTRUCTION in China during the first quarter. That figure is up by 23.3% from the same period a year ago. As if that was not enough, in the 1Q2006, property developers invested another 280 billion yuan (US$35 billion) in construction projects.

Another sign that I came across which could start deflating the Shanghai property bubble was the surprising rating given by Standard & Poor / Moody's on Shanghai Real Estate's (SRE) bond issue. SRE is a leading developer in Shanghai's financial hub, and has proposed a US$150 million (HK$1.17 billion) bonds. It was rated as non-investment, or junk status, as rating agencies were concerned about the company's narrow focus and limited cashflow. Standard & Poor's assigned a "BB-" long-term corporate credit rating to the seven-year bonds, three notches below the investment grade, while Moody's Investors Service assigned a similar "Ba3" rating. The ratings reflect the key challenges faced by Shanghai Real Estate, including its lumpy operating cash flow, resulting from its single business focus on property development. The significant geographic concentration on Shanghai alone did not help and the company's rising leverage was a big concern. Leverage is not just an option in Shanghai for property developers. Leverage is a necessary tool to compete. Developers there have to get the biggest projects and complete them the fastest, and try to sell them all yesterday. To enable the retail side to buy, many developers have innovative financing schemes to help the buyers/speculators - hence leverage is not an option in Shanghai property market. SRE said last month its 2005 profit surged 234% to HK$301 million, from HK$90 million a year earlier. The company plans to use the net proceeds from the proposed bond sale to replenish its land bank, rating agencies said. It has a land bank of 1.4 million square meter gross floor area in Shanghai, which the company estimates will be sufficient for its development for the next four to five years. However, S&P did say that SRE's low cost of land bank, good locations of its developing properties, and expertise in the industry are offset by its high concentration risk, small- scale operations, and lack of stable recurring income. After the bond sale, SRE's EBIT will fall to about 3x interest expense in 2007 from 10x in 2005. The thing is, cases like SRE are being replicated many times over all across Shanghai - when your earnings starts coming down from 10x of interest expense to just 3x, its a worry. There is not sufficient cushion for even a minor blip.

Even an aggressive REITs boost for commercial China properties may not save them as most of the yields are not sufficiently high enough, plus the bulk of the problem is in residential, which is not REIT-able (my newly coined term). Its going to happen but if you cannot stand the heat, a massive reduction in exposure is recommended. To stay away from China properties when you have made millions may be very difficult. It just takes one event to trigger the domino effect, and the one event could be anything, from the raising of interest rates or a small developer absconding or a developer stretching capital too far or buyers forfeiting their deposits.... it will happen and my guess is it will be way before the Olympics, not after.

Onerous Sarbanes-Oxley To Allow Exemptions

Following from my earlier blogs on Sarbanes-Oxley, now we have the SEC advisory committee with their recommendations on Sarbanes-Oxley. The restrictive and prohibitive Sarbanes-Oxley has diminished the number of foreign companies wanting to list on US exchanges. Inadvertently leading to a boom 24 months period for London Stock Exchange, and the Luxembourg Exchange to a certain extent. The recent negative opinions given by Alan Greenspan, Bob Greifeld (CEO Nasdaq) and The Economist on SOX basically were three additional long nails into SOX's coffin.

These are still recommendations, and it will take a good amount of political and intellectual will to begin implementing the proposals, the most controversial of which exempts many smaller companies from doing full-blown audits of their books and records. The SEC panel is planning to make two broad recommendations. First, companies with a market value of less than US$128 million will be completely free of the SOX law’s auditing requirements (currently the cut off is US$75 million). In addition, the panel will propose that companies with a market cap of US$128 million and US$787 million be freed from some, but not all, of these mandates.

What is so onerous about SOX? First, its the qualitative aspect, when it is qualitative, its like an unending task. Company's board and execs have to certify the quality of firm's reports. Improving the independence, hiring and firing rules with regards to external auditors. Another, and this is cumbersome, is the disclosure of internal controls structure. SOX was rushed out of the gates owing to public dismay and outcry over the demise of Enron and WorldCom, but this has not cure the correct problems, but rather brought on more inconvenience. What SOX has missed out on is that the GAAP available is already sufficient for auditor and accounting firms to do their reviews properly. Enron and WorldCom were allowed to get away for as long as they did because the auditors were asleep, or unquestioningly accept reasons given by clients too readily. First things first, get the accounting bodies to reprimand and think of ways to put in more prohibitive charges should an auditing firm messes up its work. More onus and impairment charges should be leveled on the partners of accounting firms - that way, no one will be taking a dive, and I bet you "real auditing work" will be carried out.

As a percentage of overall compliance cost, it makes sense to exempt the smaller companies. Small companies happen to be the engine of the country’s economic growth. They’re getting killed by a law that doesn’t differentiate between a Fortune 500 company and one with a market value of US$200 million. As a result, this law has become a free lunch for the auditors. Plus the new US$128 million figure is "low enough" to attract mid-sized foreign companies back to list on US exchanges.

The SOX is broadly supported by Democrats and unions, and it will take some political will to implement the recommendations in full as it could lead to politcal suicide for those pushing the buttons. SOX is the straw that kinda breaks the camel's back in terms of management having to spend too much time with compliance stuff rather than doing proper managerial stuff.

Short Sellers Get Short Strawed
The Ugly Child Only A Mother Could Love

When the peerless 60 Minutes TV show picks your group as subject matter, you know it cannot be pleasant. The 60 Minutes team in the States did a scathing overview on short sellers and its negative effects on companies and prices. Some companies have resorted to suing short selling funds for the negative publicity and driving down share prices. Online retailer Overstock.com and drugmaker Biovail have both filed lawsuits against analysts and short sellers for allegedly conspiring to push down their company's share prices. Analysts get drawn into the flak as being in cahoots with the short selling hedge funds.

That kind of defensive strategy by management is not laudable. Management fearing short sellers (or that their stock options may get deeper underwater) should just go and produce the numbers to deflect criticism, and not waste resources to do so much PR. There will always be analysts who will call a buy or sell, at any point in time. To try and sue contrarian analysts, who might be in the minority is useless. Unless the management has solid evidence that the analyst has been citing false data or making silly conclusions based on misguided assumptions. Otherwise, management should leave them kids alone.

As for collusion, well, it happens more often than we care to admit. Not just fund managers with analysts, but also journalists. This is an area where the SEC or regulatory bodies should play their role. Back in 2002, Gotham Partners, a hedge fund started by Bill Ackman, published a critical report about bond issuer MBIA Inc. Gotham also disclosed that it was short the company's stock on the first page. MBIA's management was livid and pressed New York Attorney General cum-sheriff Eliot Spitzer to investigate for possible market manipulation. Nothing came of the investigations. Surprisingly, in a major turnaround, last year Spitzer and the SEC lauched a probe into MBIA instead on the very specific issues that were raised by Gotham's report. Sucker punched!

Management should not fear short sellers. To me, short selling is a clarifying solution, like rain on a muggy day, a clean-blue flush around the toilet bowl, it clears the crap out. If there is nothing negative for the short sellers to hold onto, why would they want to short sell in the first place? Short selling funds can be a nuisance to management, so too can aggravated minority shareholders, they are part and parcel of corporate management - deal with it already! Short sellers takes overpricing and bubbles out of stocks and industry. It pricks holes in bubbles before they get too big. It wakes up management to act more diligently to enhance shareholders' returns. Of course there are cases where short selling funds use their position to veto certain corporate actions, thus putting the company at "ransom" - that's the kind we need to wipe out. Everything else is fair go!

Good short sellers and analysts are messengers of mismanagement, discrepencies and under/over-valuation of companies. You cannot restrict them in what they can or cannot do. Companies and management are increasingly under a larger microscope, and that is what management resents - but its good for shareholders, hence short sellers are here to stay.

In Biovail case, the company said that hedge fund SAC Capital Advisors conspired with research firm Gradient Analytics to write and circulate unflattering reports. A Banc of America Securities analyst was also named in the suit because of negative reports he wrote on Biovail. Overstock.com case is similar but involved hedge fund Rocker Partners and Gradient Analytics (again). Lets' look at this objectively, both companies are not solid companies to start with - Overstock.com has not had profits since 1999 while Biovail has been facing increasing competition from generics for one of its key drugs. So, a sell report is not surprising at all. As to whether there was conspiracy... that is hard to prove because generally if a company's fundamentals are bad, whats the odds of more than a few pros coming to similar conclusions to sell the stock. Even if there was real conspiracy, it would be very difficult to convict unless there is real evidence in print or voice.

Management at Biovail and Overstock.com are like mothers who complain why no guys want to date their ugly daughters. Don't yell at the shallow guys, do something about your daughters' looks!