The Final Bits

What we are seeing are the remnants of the blowout by the subprime mess. While the US economy will continue to be weak over the next 2 quarters, the stock markets could be finding its feet now. Darkest before dawn, they say... then its true for E*Trade.

Everyone knows that E*Trade is primarily in online investing, and a successful one at that despite strong competition from TD Ameritrade and Charles Schwab. However, they found that their margin financing business is so good for stock trades that they went and bought a "phone-based bank" that makes and buys mortgage loans, and invests in securities backed by mortgages as well. Since beginning of this year till June the stock held firm just above US$20-US$22 level. The initial subprime surprise in July and August sent the shares down to US$13 and there were days it went close to US$10. Well, that's the good news, cause last night the shares fell another 59%!

There were reports flaming rumours that investors could withdraw funds and ask questions later which will put E*Trade at a real bankruptcy risk situation. The company said its US$3bn portfolio of asset-backed securities includes about US$450 million in so-called collateralized debt obligations. E*Trade is sitting on US$12.4 billion in home-equity lines of credit, in which people borrow against the value of their homes. Of that, US$404 million was delinquent at the end of September. While the lion's share of the home-equity loans was made to borrowers with strong credit, 60% didn't require "full documentation" and at least 25% of the loans were extended to people in California or Florida.

They had their run cause the bank purchase allowed the company to register record revenue from 2003 to 2006, so much so that trading commissions made up only 20% of revenue last year. Well, someone will need to step in and offer about US$500m-US$1bn as capital infusion and take control of the plane with engine failure.

China & Its Private Equity Strategy

Inflow - Foreign PE firms sealed 129 deals in China last year, with a total investment of US$12.9 billion. In the first quarter of this year, the investment soared to US$7.56 billion, a year-on-year jump of 329%. The Chinese government has been actively trying to "control" foreign PE firms from being overly-aggressive in their buyouts. US buyout firm Carlyle Group's high-profile bid to take 85 percent of China's biggest construction equipment maker Xugong Group Construction Machinery in 2005 was a trouble spot for Beijing. Carlyle has since scaled down its original 85% bid to 45%, but the deal is still pending approval.

China issued Provisions on Acquisition of Domestic Enterprises by Foreign Investors last year in a bid to regulate foreign M&A activities in the country. In August, the Anti-Monopoly Law was enacted and will take effect next August. The new rules require any major foreign M&A deal to be examined and supervised for national economic and industrial security reasons by relevant government bodies. But the tightening regulatory environment will not deter or scale back foreign M&A activities. The interest among foreign investors is still overwhelming despite their concerns about regulatory uncertainties.

The number of M&A deals involving foreign capital decreased slightly to 296 in the first half of this year, down from 316 in the first half of 2006. The slump was mainly due to the bull stock market, which has pushed up share prices and transaction costs, and the uncertainty about regulatory approval procedures. The situation is likely to continue in the second half of this year until valuation expectations subside, and financial investors are likely to remain focused on minority positions in larger transactions until they sense a change in the regulatory landscape.

Outflow - This is more tricky for China as they have been rebuffed and chased away like a pack of wild dogs by some countries' protectionist policies on certain big deals - remember CNOOC; the failure to buy Unocal and Maytag!

Owing to nature of these big Chinese companies, they are defacto arms and legs of Beijing anyway - even when they do not have "state enterprise" printed on their front door. Hence diversifying away from USD and reinvesting the forex reserves smartly, can be done via various vehicles.

On October 25, ICBC announced a bid for 20% of South Africa's Standard Bank for US$5.6bn. This ties in very well with Beijing pronounced strategy to secure better ties with the African nations. Beijing is now more willing to accommodate minority stakes in order not to attract negative press. It is considered as a better long term strategy to accumulate strategic stakes without ruffling feathers. Another example, recently China Development Bank bought 3.1% of Barclays. Citic's recent purchase of a convertible note (convertible into a 6% stake) into Bear Stearns is another example. Bear Stearns will get 2% Citic in return.

However, sometimes you will have to get your hands dirty because you just have to get involved. BHP's audacious bid for Rio Tinto cannot be allowed to happen just like that, in the eyes of Beijing. Word has it that China Development Bank has been buying Rio Tinto shares by the bucketloads even as I write. That's because a BHP-Rio Tinto company amounts to a near monopoly in many areas of commodities supply chain. However, a bid by China development Bank for Rio Tinto looks unlikely in light of last week's comments by China's Vice Minister of Finance, Li Yong, who effectively barred CIC from taking control of "strategic" global assets. He said one-third of fund capital had been earmarked to buy banking assets that the state already owned and another third would recapitalise the Agricultural Bank of China and China Development Bank. Only about $US67bn would be left to invest in global financial markets, he said. Li said the fund would invest gradually and cautiously and it would steer clear of industries such as airlines, telecommunications and oil. Well, Rio Tinto does not fall under those categories, so still game on.

To just look at the US$200bn under the newly established China Investment Corp (CIC) would be a blinkered move as that will not fully reflect the firepower and arsenal within Beijing's grasp and overall strategy. CIC's swift purchase of a minority stake in Blackstone (one of the world's leading private equity house) is more than just an investment. it serves two main purposes. One, CIC will get shown a lot more important deals under the purview of Blackstone - hence CIC will get access to invests together on significant deals should CIC so chooses. Two, by dancing with Blackstone, CIC will not be seen as the main aggressor when acquiring stakes of important and sizable companies around the world, even in sensitive sectors CIC will be able to hide under the professional guise of Blackstone.

Word has it that CIC will take up similar minority stakes in some other big private equity firms as well for the same purposes. Apparently 3 big PE firms have been approached, including KKR, Texas Pacific and Carlyle. I would expect a deal with Carlyle to be tabled soon as that group understands the political landscape better, and would better appreciate the synergies beyond just capital involvement. Beijing just doesn't want more backlash on the movement of China's capital juggernaut.

Remember The Yen Carry Trade?

The yen carry trade caused some anxious moments a few months back when the fear of players unwinding their trades took centrestage. That died down and investors continued to borrow in yen to invest in other higher yielding currencies, stocks or bonds. Just like Britney Spears, oops, I did it again... the sustained but managed weakness in USD has basically unraveled the yen carry trades. The current equity weakness globally is merely a result of yen carry trades unwinding. The stronger the yen, the worse off will be the investors who borrowed in yen to buy Aussie bonds, Singapore REITs, US stocks, Malaysian plantations, HK-H shares, etc...

While we were sleeping, the USD has breached the 110 yen level. The yen's strength is not the only one. The euro has also moved from strength to strength against the greenback hitting record highs after expectations of a further interest rate cut at the next Federal Reserve policy meeting. Further euro support came in the form of comments from a senior Chinese political figure, who said that China should diversify its US$1.43tn foreign exchange reserves by buying more strong currencies like the euro.

Ben Bernanke told US lawmakers that the Fed expects economic growth to slow in the fourth quarter of 2007 and the first half of 2008. Further dollar depressing news came in the form of US consumer sentiment data, which fell to 75.0 in November, hitting its lowest level in two years. On the other hand, the European Commission said eurozone economic growth this year will be slightly better than expected, however, financial market turbulence is seen slowing growth in 2008 and 2009. Markets largely ignored comments from US Treasury Secretary Henry Paulson, who defended the dollar’s status as the world’s reserve currency.

The yen has appreciated against a basket of currencies and not just the USD, but the effect was more pronounced with the greenback. The yen also found support from comments by Bank of Japan Governor Toshihiko Fukui, who underlined the need to increase interest rates in a timely manner. The greenback made some small recovery against the yen on news that the US trade deficit unexpectedly narrowed in September on strong export growth. However this was short lived as the yen soon hit a 1 ½ year high against the dollar on the back of fears of wider credit related losses in US financial firms which resulted in speculators unwinding carry trades.

Now it looks likely that high yielding currencies such as the AUD, Canadian loonie, NZD and Thai baht should see an exodus of hot money due to carry trades, and weaken a bit from here.

Shanghai Au Revior? Sayonara USD??

Following the listing of Petrochina-A share, the markets in China just continued to tumble. The People's Bank of China announced Thursday it might use a variety of measures, including bank and treasury bond issues and reserve requirement ratios, to control the country's "severe" liquidity problem.

A PBOC report gave no details about the extent of the measures or when or how they would be implemented, but it stressed that absorbing liquidity in banks and strengthening credit control could not fundamentally tackle the constant and rapid accumulation of liquidity and other structural problems. Recent talks about stock market risks by senior economists have also intensified worries about further government measures. China's economic growth is expected to exceed 11 percent for 2007 and growth in the consumer price index (CPI), the main measure for inflation, will be around 4.5 percent year-on-year, though some foreign analysts put the inflation figure to be at 6.0% at least. The latest figures and report by PBOC hints at at least one or maybe two more rate hikes before the year is over. Hence the rate hikes will definitely occur, and that is what's spooking China markets. The effort to maintain the dollar-renminbi exchange rate at a level approved by China’s State Council has already led to an enormous increase in the Chinese economy’s financial liquidity. The consequences of this are now manifested in property and stock market inflation, but not yet in rampant and uncontrolled consumer price inflation – at least for now. But if China does not accelerate the renminbi’s revaluation, the world might see a large burst of consumer inflation in China in the next 12 months. If so, the consequences will be a choice between the destructive runaway inflation and stagflation. The fall-out from this scenario, however, would be largely confined to Asia.

That being the case, the Shanghai and Shenzhen markets will find little incentive to buck the trend. Why bid prices higher when you higher prices will mean pushing PBOC to raise rates even more aggressively or worse, come up with penalising fiscal measures. Hence the China indices is in for a welcome breather. In actual fact, PBOC is not so concerned over higher stock prices as long as its a managed run up. They are more concerned over things like inflation and renminbi. It looks very likely that the yuan will be allowed to rise significantly over the next 2 weeks, it has to happen already - looking at how the USD is weakening, and how the Euro is headed for 1.5 against the USD, and the likelihood of the AUD reaching parity with the USD. Controlling inflationary pressures is utmost in the priority of PBOC, no two ways about it. Raising rates are not having the desired effect (they have done that 5x already this year).

As for the USD, we are seeing a realignment ala 1987, though in a more controlled manner. The Fed seems to be in agreement to have a weaker USD. Bernanke commented on the upside risks to inflation but focused more on the downside risks to growth. The Fed Chairman expects growth to slow noticeably in the fourth quarter, which confirms his dovishness. If he had done the opposite and focused more on inflation like his counterparts in the Eurozone and Australia, the dollar could have rallied. However he chose to spend his time expressing concern that higher energy prices, tighter credit and continued weakness in the US housing market would lead to softer consumer spending. This coincides with the survey results from 10 of the nation’s largest retailers, 7 of which including Wal-Mart and Macy’s reported sales below forecasts. For dollar bears still looking for a recession, the Fed’s acknowledgement that consumer spending could be at risk indicate that they haven’t completely ruled out another rate cut. Although extremely volatile, Fed funds future are now pricing in a 90 percent chance for an interest rate cut next month. Recent trade fairs in Asia mostly showed a 10%-20% drop year on year in order from the US on the credit squeeze in the US, and slowing US consumption due to that. This real evidence should translate to a genuine weakness across the board eventually, thus a flattish to lower fed funds rate will dominate the capital flows over the next 3-6 months, thus prolonging a weaker USD. The weaker USD will sustain interest in the US equity markets but will cap any rise in other equity markets. Another 5% drop from here will ensure that the business and trade dynamics change substantially. The outlook for emerging markets won't be as rosy as it was a year ago. Trade surpluses will start to narrow, and FDIs will slow as well.

Hence the China markets will be forced to find its feet first and consolidate, and we will have to see how much more will the USD be "allowed" to go weaker (I suspect another 5%).

More Upside For IJM Plantations?

Even at RM3.50, there should be more upside for the stock. Those who followed at RM3.00 will do well to hold till then or near that level. Just to recap the reasons for the rerating:

a) the company did not sell forward the bulk of their current production, unlike many companies

b) Hap Seng Plantations listing on November 16 should see the share trade at RM3.40-3.50, and all things being equal, IJM Plantations should trade at a premium to Hap Seng Plantations (please re-read previous post on both companies)

c) the expansion into Kalimantan is proceeding better than expected

d) a narrowing of discount from over 30% to maybe 20% as IJM Plantations is getting bigger and better managed (better yields comparatively to the average in the industry)

e) expansion plans aggressive and well managed, has acquired 3 parcels in East Kalimantan (11,000ha, 10,200ha and 11,000ha)

f) the managed landbank expansion puts IJM plantations from being a smallish player to mid-size and well on the way to narrowing the gap to the big boys - the planned expansion will see a CAGR of at least 6% over the next 5 years

g) hence, just like Petrochina-A listing, good to hold till Hap Seng Plantations listing as IJM Plantations is superior in almost every way even though both trade on the same EPS for 2007 and 2008

I Know What You Did Last Summer

Being in finance and investments, you have to keep learning new jargon. Six months ago many probably don't even know what CDOs were, many kept hearing it over the last 2 months and had a vague idea of what that is, but probably would find it hard to remember the actual definition in totality - man, where's our c-drive, no retention power, somebody defrag me... or just close all windows in my house and reboot!

Just when you thought it was safe to no longer mention "subprime"... hey all suddenly screamed "I know what you bloody banks did last summer!!!" You got me on HSBC, then Bear Stearns, the UBS joined the fray, jumped across to Northern Rock, now Merrill Lynch and the bigdawg Citigroup.

As I have said recently, the big banks waited for Paulson/Fed to come up with a US$100bn Superfund to help bail them out. That did not arrive, hence the revelation (just as scary as the one in the Good Book). Let's look at why so many investors are caught unawares on these shitty stuff. HSBC did the right thing, first to acknowledge that there is a problem, admit & write down the assets and control the exposure - that's why HSBC always trade at a premium in the eyes of Asian investors. The rest dragged their feet and evaded until it the cows actually rang the doorbell.

Many banks created Structured Investment Vehicles to carry a lot of these CDOs, and they did not show up on the balance sheets. Citigroup had the biggest OBS (off balance sheet) assets at US$222bn and their biggest SIV exposure was US$80bn, hence it would not be too far off to estimate that Citigroup may have to write off 50% of that in total or US$40bn. Bank of America staffers are probably the happiest as their banks have ZERO in SIVs and the OBS assets amount o only US$97bn. JP Morgan has US$128bn in OBS and has an exposure of over US$40bn to private equity firms. In total, Citigroup may have to write down US$21bn. That compares with potential losses of US$5.4 billion for Bank of America, the second-biggest U.S. bank, and US$4.1 billion for JPMorgan Chase. I think Bank of America is quietly sniggering that this debacle will close the gap between #1 and #2.

Merrill Lynch last month reported US$8.4 billion of writedowns in the third quarter and may be on the hook for another US$9.4 billion. However, the potential losses related to CDOs at the three major banks in absolute terms dwarf those of the largest brokers. Lehman Brothers, Bear Stearns, Goldman Sachs and Morgan Stanley, all stand to lose as much as a quarter of their equity. The announcement of Citigroup's potential losses and the exit of its CEO prompted Fitch Ratings to cut its rating to AA, three levels below the top, and say it may reduce the rating again. Standard & Poor's said it may lower its AA grade.

As bad as it sounds, the bad news seem to be a sigh of relief for the markets as more of the actual risks are now known. When you do not know the numbers, you worry more, now that you do - you can start to work off those numbers accordingly.

Reasons & Excuses

Business journalists, analysts, business presenters, fund managers, strategists ... all need to have reasons to explain market movements. The reasons had to be somewhat sensible and printable, and coming from the mouths of experts, it sounds more believable.

We sometimes go searching for reasons and excuses when there is really none. We are all brought up to pull out one of maybe twenty or thirty reasons from the basket everytime the market goes up or down excessively. Its like an objective test. The basket could include reasons such as:

a) the Fed is willing/ not willing to loossen

b) the BOJ is staying firm / raising rates

c) the market is overbought

d) the market has discounted the US$90 oil

e) the market is discounting the Turkish situation

etc...

Are we really picking the right reasons? We can only pick what is most plausible. Its a hindsight harry situation - you ask the "experts" after the event, not before the event, hence the "experts" will go through his/her usual bag of tricks (sometimes updated) and pull one or two reasons out of the basket. Chances are, markets sometimes goes up and down just because there are buyers and sellers, no big underlying reason.

Sometimes, markets go up and down based on the most unimportant news or excuses. How about more sellers than buyers? HK and China are down because I read everywhere the "direct train" (allowing Chinese to invest directly into HK shares may be delayed)... Please-lah... the HK market went up because of the disconnect with US monetary policy and USD peg. The China markets all having difficult days probably due to the huge amount of funds being tied up in Petrochina or those wanting to buy Petrochina-A shares in the secondary market, .. and/or huge amount of funds tied up in Alibaba.com IPO in HK.

Isn't that the main reason why Beijing wanted more A-share listings? To soak up liquidity and to offer more choices to mainland investors. Naturally index will go down a few percentage points just to accommodate such a popular and mega listing. Everyone wants to own a piece of Petrochina, its not cheap, the funds has to come from somewhere ...

Sometimes the reason for a swing is not as academic or ingenious. In fact, most of the time, the reasons are simpler. I get tired when the papers, the Bloombergs, the "experts" all tout the same diatribe of reasons ... because they have all been schooled the same way. Stick to people who can really add value, people who can be honest enough to say "I don't know, man"... instead of churning out the same old, same old without much thought or logical argument in their heads.

Beware of "experts" commentary, 99% of them come from the same bag of tricks, the reasons are all the same ... after a while they all learn to deliver each line of reason with much gusto convincingly. The more often you hear the same reasons, the more you believe its probably true, that's propaganda, the convenient truth, but usually not the truth because these group of people are too lazy to think properly or are just not market-savvy enough to understand the nuances of the markets.

People who read markets better are generally: willing to stick their necks out on a prediction; give well argued and well thought out points; not wishy-washy; and the reasons are persuasive and engaging.

Mahler vs Master O'Reilly
Too Young vs Too Long

Its Melbourne Cup again. Since my massive praises for Curlin about a year ago, the horse has gone on and should easily win Horse of The Year 2007 in the US. Having looked at this year's Melbourne Cup, it lacks stars, its an ordinary cup, which automatically puts the top 5 weighted horses out of the race. It will be a win because of handicapping.

My selections: the 3-year old Mahler (right) who have just been beating maiden class in the UK before winning the Ascot convincingly and looks to be the best weighted horse, has speed and will be well placed, has strong grinding quality towards the end. Hard to go past Master O'Reilly (left) as the winner of Caulfield Cup and a bunch of other recent races, sweeps from the back very well and the long track at Flemington will suit. The other maybe is Zipping, which nearly got Danny Nikolic suspended in the Mackinnon last week (not trying hard enough to win). Zipping could be the omen tip because when bad things happen throughout the year, a victory in the Melbourne Cup would be a nice resurgence from adversity - Danny Nikolic had been treated badly in HK this year, given dud rides and getting blamed when horses did not win. Well, Mahler's supposedly too young. Master O'Reilly is untried at 3200m. Zipping looks to be not trying too hard last win so as to not over-stretch the horse ahead of the Cup race. Hmmm!

Result	Win	Place
6 Efficient	$22.60	$7.40
12 Purple Moon		$1.80
24 Mahler 9 Zipping		$3.30

Now That's An Invention!

As reported in SMH: How do you like to have your existing internet connection boosted 100x with no additional charge? Talk about a revolutionary idea. Well, its no longer just an idea. This could change absolutely the communications and networks platform for everybody. An Australian researcher is on the road to riches after discovering a way to make broadband connections up to 100 times faster.

University of Melbourne research fellow Dr John Papandriopoulos is in the throes of moving to Silicon Valley after developing an algorithm to reduce the electromagnetic interference that slows down ADSL connections.Most ADSL services around the world are effectively limited to speeds between 1 to 20Mbps, but if Dr Papandriopoulos's technology is successfully commercialised that speed ceiling would be closer to 100Mbps.

Stanford University engineering professor John Cioffi, known by some as the "father of DSL", was one of the external experts reviewing the research, which made up Dr Papandriopoulos's PhD thesis. Professor Cioffi, who developed the computer chips inside the first DSL modems, was so impressed he offered the 29-year-old a job at his Silicon Valley start-up company, ASSIA, which is developing ways to optimise the performance of DSL networks.

Dr Papandriopoulos, whose efforts also earned him the University of Melbourne's Chancellor's Prize for Excellence, said he would leave for the US in about two weeks. He has already applied for two patents relating to his discovery.Melbourne Ventures, the University of Melbourne's commercialisation company, is now shopping the technology around to vendors of DSL equipment and modems. The vendors would then sell the supporting equipment to internet providers worldwide for placement in their exchanges.

Richard Day, commercialisation associate at Melbourne Ventures, was optimistic about the technology's licensing prospects but said it was too early to tell how lucrative it would be. "That's a question which is impossible to answer, simply because we don't yet have a feeling for the extent to which it could be adopted ... [but] it has the potential to be adopted worldwide in any country that has a copper network," he said.

"Many years ago people used to pick up the phone and make a phone call and you'd be able to hear a faint or distant telephone conversation taking place, and that's called cross-talk," Dr Papandriopoulos said when attempting to explain how his algorithm worked. "That is not an issue for voice calls these days but it becomes a problem when you're trying to wring more bandwidth out of these existing copper telephone wires [which power ADSL broadband connections]. This cross-talk in current day DSL networks effectively produces noise onto other lines, and this noise reduces the speed of your connection." Dr Papandriopoulos said his algorithm served to minimise that interference and thus maximise the line speed.

Final Words On Petrochina

waited for nirvana, came and gone... people now trying to do bottom fishing do so at their peril .... the fat is gone, its a normal trading stock now, not the chosen one anymore

take yr time to pick up cnooc, buy on weakness, but should start accumulating

petro-h shares whacked and disfigured as many punted on the h-shares ... expect h-shares to regain at least some of the discount back end of the day and tomorrow

shenhua, a similar industry leader now trades at 60% of A-share, petrochin-h is now only at 45%, expect it to at least go to 55%, you do the math, so trade on your own risk threshold

After Merrill Lynch, Citigroup's CEO "Resigns"

The surprising downfall of Stan O'Neal at Merrill Lynch & Co. has caused the CEOs of Wall Street's biggest banks to start updating their resume, or spruce up the holiday home in South of France for an extended break coming up. We are seeing the remnants of CDOs mess finally catching up with the big guys. O'Neal became the first chief executive to be shown the door after leading the world's largest brokerage to a US$2.24 billion third-quarter loss — and he is unlikely to be the last. Chuck-eeze Price finally calls it quit. The funny thing was that O'Neal was a respected figure within Merrill Lynch but most employees really do not like Prince at Citigroup. Hence popularity is not a factor. Following Prince should be Bear Stearns Cos.' James Cayne, but could be saved by the swift deal with Citic Securities as the board there feels they will need some follow through with the joint venture.

The scale of the write downs is no joke. Write-downs across Wall Street have wiped US$25 billion from the income statements of investment banks. But analysts have begun to speculate that more pain is left — and that Merrill Lynch might have to write-off another US$4 billion after a US$7.9 billion third-quarter charge. The big banks had been delaying biting the bullet as the top guys busily lobbied for Paulson to step in to create a US$100 billion Superfund to bail out the current credit mess. Well, at least the Fed and Paulson did not do a LTCM bailout this time. You reap the profits and took the fees, now thre is a slashing of asset values of the paper you hold, you cry like a baby asking to be rescued - you are a big bank now, in fact they are among the biggest in the world, so take your medicine and be quiet.

Don't think that these CEOs are like the Japanese CEOs who would perform corporate seppuku should they find themselves in similar financial straits. No, no ... these CEOs went straight into action when the credit problem exploded, and started ascribing blame and chopping heads, to offer to the "gods" as "offerings" to save their own jobs. Bear Stearns Chairman and CEO Cayne dump Warren Spector, who ran two hedge funds that imploded from subprime losses. At Citigroup, investment banking head Thomas Maheras was cut. And, O'Neal swiftly showed the door to fixed-income head Osman Semerci. Ken Lewis, CEO of Bank of America Corp., also swung the axe. He slashed 3,000 investment banking jobs, fired a number of top executives, and stopped offering home mortgages through brokers. Sometimes, even the "gods" are not easily swayed. Ok, let's rearrange the chairs, and put the music on again.

Before anyone starts to feel sorry for the CEOs, let me remind you that Stanley O'Neal got US$160 million as his severance package. Prince should get a similar sum. The Citigroup board was highly likely to name Robert Rubin, the former Treasury secretary and an influential adviser to its embattled leader, as its interim chairman at an emergency meeting yesterday. Gawd, now Goldman Sachs really, really controls Wall Street & the world (Rubin and Paulson were ex-Goldman Sachs clones).

What pulled the trigger for Citigroup was a SELL report by Meredith Whitney from CIBC World Markets (ranked #2 stockpicker in 2007 Forbes survey). The report said that Citigroup needed to raise US$30 billion to resore its cash cushion for payments to investors. Citigroup' share price lost about US$3.00 or 7% of its share value following the report.

Petrochina Reaches Nirvana

After hyping and broadcasting about Petrochina for the past 4 months, this baby has finally been delivered by the golden stork as planned. Its the chosen one because there is only one Petrochina. China investors have accorded a much higher premium for A-shares of companies that are top in their industry. How do you value, what pricing for Petrochina? It is not only top of its industry, its valuation would put it firmly to be the second biggest company in the world, and pretty soon the biggest. It is also in the most explosive sector possible - oil.

Despite the unsuccessful funds being returned to investors in China, many have not reinvested back into Shanghai or Shenzhen stocks with gusto, the word on the street is that most want to buy and keep some Petrochina shares. The average estimate by market players is 40 yuan which would give its H-shares a 50% discount. Methinks its possible for the share to run up to 46-50 yuan. Bearing that in mind, and keeping the 50% discount, the H-shares should close firmer today (closer to HK$21) and may trade between HK$21-HK$23 on Monday and Tuesday. Anyone holding Petrochina covered warrants on the H-shares should be happy to hold on because I doubt very much that Petrochina A-share will ever dip below 40 yuan from here on judging from the amount of potential buying available for the shares. If it won't fall below 40 yuan, it shouldn't fall below HK$20.50.

As if all the news about the share is not positive enough, Beijing decided to raise gasoline and diesel prices by 10% yesterday to stop the erosion of refiner's margins and to guarantee the supply of fuel amid public discontent over shortages. Car owners now have to pay 0.4 yuan (5 US cents) more per liter of gasoline. This will increase the operating cost for rail cargo, public transportation and aviation immediately. The increase will boost the prospects of the already bleeding pure refiners such as Sinopec.

The hike in gasoline and diesel prices in China have checked the stock prices in China a bit - however, I think people are reading too much into the hike. Soaring food prices have caused inflation to jump this year, although the increase in the benchmark consumer-price index slowed to 6.2% in September from 6.5% in August. Underlining official caution about inflation, the government issued an estimate shortly after revealing the fuel-price increase, saying it will have a limited impact on inflation, likely adding only 0.05 percentage point to the consumer-price index. The share price weakness in China yesterday and today are not really due to "inflationary scares" or "fuel/gasoline price hikes" - it is because almost all investors are cashed up to ready themselves to buy Petrochina A-share come Monday - I know this sounds like a sidewalk Chinese medicine oil salesman, but go and do a survey by phone in Beijing, Shanghai, Tianjin, etc... you get the same response.

There are concerns that these could have a ripple-on effect across other industries and could halt the uptrend of China's stock markets. Everyone would always slip in a question as to how and when the China stock market bubble will end. I have heard the Shanghai being called a bubble (including by me) since it was 4,000. A re-examination and study of Beijing' persuasions have led me to be a bull a again (even though a cautious one). I agree it is bubblish but its not extremely over valued. As for any super bull (and this IS definitely one), the momentum, liquidity, fundamentals all are converging. Year on year profit growth is still in the 20%-30% range, though there should be some concern still that some 30% of all profits are from investment income (stock market investments and holdings). Shanghai is trading at 38x forward earnings - frothy, yes... bubble, yes ... more upside, also yes... If we all examine super bulls of the past such as Nasdaq in 1989 or the HK market back in 1973 - they all went as high as 50x -60 x forward PER before crashing. If we were to use that as a guide, the Shanghai markets still has another 35% upside from here before we really should call the cops on ourselves.

Oil Prices & Ramifications

Even though we saw US$93.80 for oil, in real terms, the price is not an all time high as its still below its all-time inflation-adjusted high of US$101.70 back in April 1980. However, Crude has climbed 47.3% over the past 52 weeks, and since 2001, it is up 511%, from US$18 to US$93. We have examined the reasons why & potential ramifications, here's a repeat:

a) Increasing Global Demand: Booming growth in China and most of Asia-Pacific. Add India, Korea, Russia, Brazil, and Australia to the equation as well. Even old E.U. is moving in the right direction.

b) Correcting U.S. Dollar: The dollar is at 15 year lows versus a basket of currencies. The Fed is engineering a cheaper US stocks scenario amidst credit problems in the US. The correction in USD is reflecting itself in oil prices.

c) Under Invested: We are reaping the consequences as many big oil companies and state controlled firms have under invested to replenish natural production declines.

d) Money Supply Growth: What we are seeing is not just oil prices but almost every single commodity. The growth machinery cited above coupled with aggressive money supply growth policies undertaken by most developed nations over the last 5 - 7 years have resulted in a load of liquidity swishing in the system.

e) Shift In Balance of Power: Due to the dependence on oil and their record prices, the producers have minted a lot of surplus cash. Russia has used its proceeds wisely, effectively bankrupt in 1998, now Russia has more than US$450bn in reserves. Russia is also using petro money to "control" the surrounding small countries via joint ventures and questionable deals. China, realising its vulnerability has deliberately courted African countries with proven oil and gas reserves.

f) USA May React: USA being USA will be facing untold problems if oil prices stay at US$100 for a prolonged period (say a few years). Politicians will work feverishly to control the consequences of living with US$100 oil. Push comes to shove, USA may fight certain wars for the oil - if you know what I mean.

g) Petrodollars Balance Sheet: Used to be 100% in US Treasuries - this way the US can continue to consume as the petrodollars were recycled back to lend to the US via Treasuries. Over the last 2 years,many countries with hefty trade surpluses have started huge sovereign funds to invests in foreign companies. These companies are a mask to move funds away from buying Treasuries. I don't see this trend reversing, hence I see further downside for USD.