KNM On Speed

Readers will be aware that this is the first time I'm blogging about this wonder stock. In actual fact I wanted to do it twice, but each time before posting, the stock would have another big run up. Don't really want to jump in the party with nice comments after the stock has jumped.

Now it has reached a level which is interesting. The stock has gone up by nearly 30% since end November. Among the catalysts were: MSCI inclusion, and brilliant Brazilian acquisition that will boost EPS growth. Orderbook has grew significantlt from RM2.1bn in September to RM2.5bn. Plus the company is still tendering for another RM11bn work worth jobs. A recent roadshow in London and HK added new buyers to the list.

Besides the impressive ROA (>15% for next 3 years) and ROE (> 40% for next 3 years), what I see as real positives are:
a) Solid business model
b) Top rate expansion and execution team
c) Global outlook

KNM has 1.046bn shares and a market cap of more than RM8bn. However, the controlling shareholders: Inter Merger 25%, HSBC Nominees (Foreign) 12% and Cartaben Nominees (Foreign) 6.7% hold less than 45% of the company. However, to me that IS the defining cornerstone for the company. You don't have to own 50% or more of your company all the time. The bulk of Asian companies are entrepreneur driven and tend to hold onto control at the expense of expansion. The way the company is going, it looks like the controlling shareholders would not mind diluting their stake further for a bigger company. That is the one major lesson that all small Asian companies should learn. Learn to let go. Look at the majority of biggest 100 companies in the world, no one really is controlling the company, all substantial shareholders are holding 10% or less. Thats because owning 10% of a RM20bn company is a lot better than owning 50% of a RM1bn company. If you run a company well, no one will want to boot you out. Even if the company gets bought out, it will be at a significant premium. Never treat a company like a lover, you will only get restricted and disappointed. A check of the Board members shows the thinking behind the company - integrity and top notch management. KNM is heading the right way.

Following its share price nearing RM8.50, I now see some houses starting to call for a Neutral rating or even a Take Profit rating. Nothing much has changed, the strategies are in place, and from past record, their execution plans have been excellent. KNM's acquisition of HZM of Brazil is a very significant deal which will allow for access to Latin America's booming oil & gas and minerals industries. The deal looks cheap, maybe there are some loopholes we are not aware of, but buying at 0.9x enterprise value smacks of a bargain. As long as the deal gets done properly with no delay, its a huge boost for KNM. To call for a Take Profit stance would be way too early.

If you were to examine KNM's business model, they still have expansion plans into high end process equipment and newer technologies involving CO2 removal, sulphur extraction and desalination operations. All with strong upcycle in their industry outlook. For 2008, I think KNM may trade within RM7.50-RM10.50 and may test RM13.00 next year. One should trade out at the higher end of the range and buyback at the lower end. Cannot put an outright sell on the counter. Not for one that is doing so many things right. The Petronas training has yielded results: they won't be content with a RM8bn company. It can easily be a RM20bn company 3-4 years down the road: that's the road all forward looking companies should take. The world is your oyster, don't be happy with just ikan kurau.

Profile:

KNM is a home grown Malaysian company with a global brand. It is renowned as Malaysia’s leading, world class process equipment manufacturer of the oil, gas, petrochemicals and minerals processing industries with an established and extensive track record of over 100 reputable customers worldwide.

The Group’s current principal market covers North America, South America, Europe, Africa, West Asia, East Asia, Australia and Oceania. As at December 31, 2005, export market contributes to approximately 96% of its sales revenue.

The company’s scope of activities include designing, manufacturing, fabricating, assembling, commissioning and maintenance of process equipment, mounded bullets, pressure vessels, heat exchangers, skid mounted assemblies, process piping systems, storage tanks, specialized structural assemblies and module assemblies for the oil, gas, petrochemicals and minerals processing industries.

BOA Averaging Down

To me, averaging down means you totally ignore the fact that you were terribly wrong in the first instance, and went in with fuller gusto the second time around at lower prices. That's Bank of America. Bank of America offered an all-stock deal valued at $4 billion for Countrywide - a fraction of the company's US$24 billion market value a year ago.

The deal is a landmark in the housing crisis, given Countrywide's prominence as the nation's largest mortgage lender, at least until recently. Bank of America's move is a gamble that the U.S. is nearing a housing bottom and crystallizes the divide on Wall Street over whether now is the time to buy housing-related assets on the cheap - or flee from them to avoid further losses.

Or is it a gamble. BOA did invest back in the middle of last year when trouble first hit Countrywide. A loan which is convertible into Countrywide shares at an effective US$18 or so. The share price has since fallen to US$5. BOA is buying a deeply troubled company, and it faces the risk that Countrywide's assets could continue deteriorating.

As of Sept. 30, Countrywide's savings bank held about US$79.5 billion of loans as investments. Three-quarters of these loans were second-lien home-equity loans - where Countrywide doesn't have first crack at the collateral in case of default - or option adjustable-rate mortgages, which let borrowers make minimal initial payments and face sharply higher ones later. Overdue payments by Countrywide borrowers are surging as house prices drop and loans reset to higher payments.

Bank of America already has a full plate. It is still digesting its US$3.3 billion acquisition of U.S. Trust and the US$21 billion purchase last year of Chicago's LaSalle Bank. The same team that reviewed the Countrywide acquisition is also leading the restructuring of Bank of America's troubled corporate and investment bank, which has taken its own big hits in the credit-market turmoil.

BOA made its initial investment in Countrywide in August, purchasing preferred shares convertible to a 16% stake in the company. The deal looks like a sorry deal that the CEO has to follow through. Well, if you though it was good around US$20, it must be better at US$5. To me, that's totally ignoring the fact that he read it wrong in the first place. Great CEO strategy. All within 5 months.

BOA was one of the least affected among the big banks with sub prime write downs. The company should have stayed the course and not try to be too smart. Well, they have dug a hole for themselves already, might as well continue digging.

The Young, Old & Restless - A Reminder

You might be a 20, 30, 40, 50 or even 60 year old reading this. Although I find the message below a bit sappy, its very real and very true. Its a letter written by the parents to their child. I am sure all parents would want their kids to read THIS letter at least once a year, every year when they grow up and the parents grow older. Take from it what you may... have a nice weekend (watch and listen with audio):

http://parentswish.com/site01/big.html

p/s in case you were wondering, no, its not my family, just a free image

IOI A Shining Example

Finance Asia - IOI Resources became the first company globally to issue equity-linked bonds in 2008 when it launched and priced a highly anticipated exchangeable into Malaysian palm oil producer IOI Corp. While undoubtedly helped by the rising palm oil prices and the fact that investors have made money on two previous exchangeables into IOI, the demand was nevertheless impressive and suggests investors are ready for more CBs. While the credit environment hasn’t changed much since the significant widening at the end of the third quarter, investors and issuers are now coming to terms with the fact that spread levels may have been too tight before and that current levels may be the new reality. Instead they have started to focus on high volatility, which is something CB investors like and want exposure to. The IOI bonds were launched at an initial size of US$500 million but after attracting about US$3 billion worth of demand, the upsize option was exercised in full for a total deal size of US$600 million. About 120 investors participated in the deal, many of whom bought on an outright basis. The bookrunners were also able to push the yield all the way to the tight end of the 1.25% to 2.25% range, which is significantly lower than the 3% IOI achieved on its previous US$370 million exchangeable in December 2006. The exchange premium was fixed at launch at 30.18% over yesterday’s close for an exchange price of RM$11. The pricing and the demand shows that the company - and Citi as the sole bookrunner - made the right choice not to go ahead with this deal in December even though everything was ready. By waiting, they have been able to capture the positive momentum in the palm oil sector that has been triggered by crude oil prices touching $100 per barrel last week. The company had the luxury to wait for the right opportunity as it had no specific use for the money raised. According to the term sheet, IOI Resources intends to lend all of the net proceeds to IOI Corp and its subsidiaries to be used for capital expenditure, investments and acquisitions as well as for working capital and other general corporate purposes. The bonds, which are guaranteed by IOI Corp, have a five-year maturity but can be put back to the issuer at the third anniversary. There is also an issuer call after two years, subject to a hurdle of 130%. The bonds will pay no coupon and were issued at par.
Comments - The deal was very significant for a variety of reasons. Besides being in the right sector, it was also regarded as the "safest" and best play into palm oil. The fact that IOI Corp had been exemplary in transparency issues, had effective yield management and a very sound global expansion strategy and execution team: caused a stampede for the CB. How many Asian companies can have those kind of boasting rights. Even Sime Darby would not have been able to get away with such low rates.

The conversion price at RM11 is rather high but does not seem to bother the plentiful funds clamouring for the papers. That would be a very strong hint on the upside in store for IOI Corp, currently hovering above RM8 only. Looking at the very low yield, obviously the buyers are very optimistic that its the conversion into equity which would be most attractive, they obviously did not buy for the yield.

What IOI Corp basically did was "issuing new shares" @ RM11 in effect when their share price was just above RM8, and in USD which is the right currency to issue in (hedge or unhedged). That would also hint that the funds would be use to widen their expansion and acquisition into the US (which has not yet been conquered by IOI Corp).

There are so many basic but insightful business lessons for all Asian companies, in particular Malaysian companies. Too many have been too complacent just getting listed - that is pathetic. Malaysia with about 30m population is just too small. Good companies should take the strategy of gradual expansion exemplified by KNM, IOI Corp, IJM, Maxis ... to name a few. Its the fear of the unknown, or sub-standard management thinking. When the going is good, take advantage to expand wisely not recklessly. Its very sad when the index has surged from 1,000 to nearly 1,500 in 2 years and we still see many local companies playing around with local assets or waiting around for domestic projects.

Citigroup advisors are to be applauded for having the foresight to withold the deal tilll now instead of doing it in November or December. Those are the fees worth paying for.

China Coal - Caveats

WSJ - China Coal Energy Co.'s H-shares rose after the company estimated that its earnings soared 90% last year and said it plans a second listing in Shanghai, which could raise around US$4.8 billion. China Coal, the country's second-largest listed coal producer by revenue after China Shenhua Energy Co., said it plans to issue as many as 1.525 billion new A shares on the Shanghai Stock Exchange, representing about 11.5% of its enlarged share capital.

The company didn't say how much it hopes to raise from the IPO, but based on the closing price of its Hong Kong shares on Monday of HK$24.75, it could raise as much as HK$37.74 billion, or US$4.84 billion. Yesterday, shares of China Coal rose 2.6% to HK$25.40, after hitting a high of HK$26.30 earlier in the session. The benchmark Hang Seng Index ended down 0.3%.

China International Capital Corp. and China Galaxy Securities Co. are the IPO underwriters, China Coal said. China Coal said it expects that its net profit rose to 6.01 billion yuan (US$826.8 million) in 2007, from 3.17 billion yuan in 2006, based on international accounting standards. It didn't elaborate on the profit increase, but the company benefited from a rise of more than 10% in spot coal prices in China last year. Coal is the country's major source of electrical power and China's demand for electricity has been soaring amid its rapid economic expansion.

However, the outlook for China Coal's upside is not as rosy as CNOOC or China Mobile, and definitely we won't see Petrochina's experience being replicated here. The thing is China Coal has already rose four-fold last year, tracking the stupendous rise by China Shenhua Energy.

China Coal's H-share is trading around 48 times estimated 2007 earnings, while China Shenhua Energy H-share is trading around 37 times estimated 2007 earnings. Thus the upside and premium upon listing in Shanghai will be muted, and will drag China Coal H-share price closer to Shenhua's valuation.

The way to play this is to trade and get out before the actual listing date, and use the H-share target price of HK$27-28 as the sell signal.

Well, Look What The Cat Dragged In

Analysts believe CNAC's hostile acquisition of China Eastern's stake would push Air China into heavy debt, although there is hope for long-term financial returns, while it will almost have no impact on Cathay Pacific's balance sheet. Even so, you cannot deflect a higher bid based on that conclusion. It is CNAC's strategy, who is to say their planning is improper. If CNAC can muster a higher bid that is funded, everyone else eat crap and shuddup.

"We are not considering any other deals and will continue pushing the partnership with Singapore Airlines," said Li Fenghua, president of China Eastern after the vote at a special meeting. In November, Singapore Airlines and its parent, Temasek Holdings, signed definitive agreements with China Eastern to take a 24% stake in the carrier worth HK$7.2 billion or HK$3.80 per share.

The battle between Air China's (0753) parent China National Aviation Corp(CNAC) and Singapore Airlines over SIA's potential partnership with China Eastern Airlines (0670) took a new twist yesterday after China Eastern shareholders voted against the deal.

The deal was voted down yesterday with 77.61% of attending minority shareholders going against it. Altogether, 75% of H-share and 94% of A-share voting power opposed the deal.

"Air China is not a strategic partner for China Eastern. In this alliance, price is not the only issue that matters. We need foreign rather than domestic management expertise. I do not think Singapore Airlines will walk away from this," Li said.

CNAC said on Monday that it would offer no less than HK$5 per share (HK$9.43 billion) for the 24% stake. Cathay Pacific (0293) said it would "seriously consider any proposal made by CNAC to participate [in a] strategic partnership with China Eastern Airline."

CNAC voted against SIA even though the "higher authority" has already verbally lashed out in the open admonishing all minority shareholders to vote for the deal. CNAC was also reminded NOT to bid higher for CEA. What is pushing boundaries is basically CNAC is saying "fluck you" to the higher authority. The implications are very important. If Beijing does NOTHING, it basically will be seen as allowing business and market forces to dictate matters. What CNAC did is basically challenging state-controlled strategy and advisory control. Let's see if Beijing is pissed off. If Beijing puts more pressure on CNAC to do a reversal, that won't be seen in a good light, and would be a blight in upping China's reputation as a transparent financial center.

Naturally, as long as CEAs management has a say in choosing its partner, there is a chance minority shareholders would receive nothing in the near term, the way it is panning out, obviously CEA's management are the "YES guys" to Beijing. If CNAC succeeds, it would be an interesting corporate action piece for all to see cause China has never really gone down this road of stubborn M&A and hostile management before. No more angpows for you this year, my so called friend.

China Eastern's vice president said the company was studying the possibility of raising the offer price with Singapore Airlines. Singapore Airlines reiterated that it has no plan to do so. Well, it looks like SIA is going to hide behind the headmistress' skirt and let the headmistress teach the bullying student a lesson. SIA is saying nothing probably because it hasn't got the green light on the new strategy from Beijing and CEA. For heaven's sake, if CNAC can offer HK$5, SIA should do so too and then be allowed to gobble up CEA, at least THAT will be fair to minority shareholders. WHY SHOULD TEMASEK BE ALLOWED TO BUY SO CHEAP WHEN THERE IS A MUCH HIGHER OFFER? Sounds like a privatisation tender exercise among the favoured sons - oops, too close to Malaysia ...

In the first half of 2007 China Eastern accounted for 36.57% and 30.18% of all flights from Shanghai's two airports, Hongqiao and Pudong International, respectively. " We've been listing for 10 years and the stock price was always lower than HK$6, nobody cared about us, until Singapore Airline offered help," said Luo. So what Luo, so that makes it OK to accept the first offer on the table, you need to grow up. You sound very un-independent and not to be working for ALL shareholders' interest - esp the minority.

Shares in China Eastern were suspended yesterday pending the shareholder vote. Air China's H shares plunged 3.04% to close at HK$10.20. Cathay Pacific shares rose 1.25% to close at HK$20.25. There is certainly a very nice business book in this deal.

Assessing Bursa's Run Up

Out of the blue, the Bursa woke up like a giant disturbed from its sleep. Investors were gleefully shouting that this is the general election run up or the Chinese New Year routine run up, or both.

Well, lets look at the candidates shoring up the index. Please re-read my posting Macro Predictions For 2008 on Wednesday 2 January. Following the US jobs data report, which was dismal, it looked like equity strategists and asset allocating team globally came to the same conclusion - forget about USD assets, commodities and agriculture products are the way to go for 2008. The rush for taking up new positions in palm oil by investment pros was largely due to that conclusion.

Fresh statements by OPEC (not upping production) and problems at a couple of the biggest wells sent oil prices skywards. Taking into account inflation and a weaker USD for 2008 (as the Fed would be pressed to reduce rates by a bigger quantum), traders piled into oil futures. There were significant big bets for oil to hit US$200 in 2008 options as well. Oil & gas plays followed naturally as a second tier play from the outlook for oil prices.

There is some truth in that a general election driven rally has started as well judging from the jumps in IDR plays, MRCB and even Maybank (which has been dormant for more than a year).

So how do you play the markets in Malaysia? Trade with the trend, I guess. As I have said before, the only things worth holding are palm oil and O&G stocks in 2008. Anything else you should cut once there is any wobble. Thats because other than the two sectors, anything else being pushed higher looks to be driven by pure liquidity, thus pushing them to over valued territory. Take note. Ride the trend but be prepared to cut if things start to look iffy.

Another In The Queue

SHANGHAI, Jan 7 (Reuters) - The China Securities Regulatory Commission said on Monday it would consider on Friday a plan for a Shanghai initial public offer of shares by China Coal Energy Co (1898.HK), the country's No. 2 coal producer.

The regulator made a brief statement on its Web site (www.csrc.gov.cn). No other details were immediately available.

Following up on the news, the queue should be as follow:
1) China Mobile
2) CNOOC
3) Zijin
4) China Coal

China Coal may leapfrog Zijin and even CNOOC as it is state-controlled, while Zijin is not. The authorities may also deem CNOOc as too big a listing to attempt so soon after Petrochina. China Mobile should take the lead as it will surely be highly successful and could even be the impetus needed to rally the China share markets. A quick trade on China Coal-C1 is worthwhile if you can get in at 10 sen or even 11 sen.

p/s the photo is a famous statue in China suffering from the pollution from a nearby coal plant

Green Packet / Why Buybacks Fail

I should really consider writing as a team with Moola. He has provided a glaring example of why buybacks fail in Green Packet. It is relevant as it is current. One additional thought, I wonder if any of the company's substantial shareholders were SELLING during the period Green Packet is buying back shares.

From Moola:

Here is one GLARING "LIVE" example.

Green Packet.

1. Dec 26th. 2007 Notice of Shares Buy Back - Immediate Announcement

Lowest price paid 2.38. Highest price paid 2.50.

2. Dec 27th. 2007 Notice of Shares Buy Back - Immediate Announcement

Lowest price paid 2.43. Highest price paid 2.53

3. Dec 28th. 2007 Notice of Shares Buy Back - Immediate Announcement

Lowest price paid 2.54. Highest price paid 2.80.

4. Jan 2nd 2008. Notice of Shares Buy Back - Immediate Announcement

Lowest price paid 2.80. Highest price paid 2.93.

So, from Dec 26th 2007 to Jan 2nd 2008, Green Packet's share buybacks saw it paid a lowest price of 2.38 and a highest price of 2.93!

Consider the points Dali made and do put that into perspective of Green Packet's current share buybacks.

Do you like what you see?

Well for the record, Green Packet, share price has been performing terribly.Green Packet's highest traded share price was 2.94 on 31st Dec 2006. GPacket closed at 2.77 yesterday, 4th Jan 2008.

For a full version of Moola's post, please go to the link:

http://whereiszemoola.blogspot.com/

Market Mutterings

US Jobs Data - Well, it looks like the final pillar standing has finally crumbled. That has caused players to factor in even a total of 1.25% in rate cuts by the Fed by March/April. The knee jerk reaction to sell down the Dow should be just that. The Dow should regain lost ground from here on because the jobs data would definitely force the hand of Fed to lower rates by at least 1.0% in total (in two strikes) by end March/April. That will give stocks a better footing going forward.

USD - That being the case, the USD will immediately be under pressure on the lower rates scenario, thus causing funds to flow to stronger currency markets for 1Q2008 at least. The sharper gains in yuan over the last few days (following a meeting between US and China officials) would indicate that an "agreement" has been reached to have a much stronger yuan and a weaker USD.

Inflation - That's the ugly spot affecting many developing countries but will be mitigated somewhat by stronger local currency. Almost every commodity and soft commodity have gained enormously over the last 3 years. We have to factor in some of the increase has been due to the persistently weak USD as the bulk of commodities are priced in USD.

Oil - That also explains part of the higher oil prices as it is in USD. Plus the fact that OPEC has said over the weekend that they won't be raising production just yet would continue to support high oil prices. Problems in Pakistan and Nigeria continue to contribute to high oil prices. We should be wondering how oil prices at triple digit levels cannot be pushing inflation through the roof! That's because much of the increased demand for oil and other commodities are due to higher consumption and higher production efficiency. Naturally all goods and services will be priced higher but strengthening local currency helps to combat that somewhat - as the bulk of the consumption growth is in developing countries and not the US.

Globalisation - The US can still stand because many of its companies now derive almost 50% of their revenue from the rest of the world. As long as growth from overseas is strong, it can cover their dependence on US domestic economy.

Stock Prices & Liquidity - At present levels, markets pushing higher are more likely to be due to liquidity forces rather than company fundamentals. Hence one can say its bubblish area going higher. If there is a further contraction in liquidity, it could be messy. Thus investing now may bring more volatility.

H- Shares Lined Up For A Shanghai Listing

As mentioned before, those H-shares going for a Shanghai listing have a much better upside than the rest of the H-shares. However, the corrective phase in China markets over the last 2 months have caused some of them to be postponed till they get better sentiment.

Things appear to be moving again, but with some reshuffling and changes. A month ago, it was supposed to be CNOOC followed by Zijin Mining. Now, there appears to be a new frontrunner in China Mobile - possibly the best China stock to own with or without the A-share listing.

China Mobile, whose US$341 billion market value makes it the largest telephone carrier, and CNOOC Ltd, China's third-biggest oil company. China Mobile is "actively" seeking a listing on the mainland, Chairman Wang Jianzhou said recently. Hence just these two could carry and create a sentiment change, especially China Mobile.

For better choice of exposure, one should go and buy in HKSE for the covered warrants. Below are some commentary on the covereds on these 3 companies:

1) China Mobile: China Mobile- c5, c6 & c7 are fair valued and would represent good exposure into June/July, can hold for a few months. For more speculative purposes, the China Mobile-c4 looks interesting with low single digit premium and will only expire in March 28.

2) CNOOC - Just switch to CNOOC-c2.

3) Zijin - Even though I knew the stock was lined up for a Shanghai listing, the covered warrant Zijin-c1 NEVER reached even decent value, it was always traded hugely expensive, very expensive or quite expensive. Even today its premium is still above 25% with a poor gearing. Wait for a Zijin-c2 or c3.

Ah "Chua", Somebody "Soiled" My "Leg"

These things happen every now and then, to celebrities and politicians, but in actuality, it happens to be just as common among commoners. As always, there will be disgruntled groups calling for the person to resign. C'mon, for what, because he didn't fuck you as well?... or because he did? What CSL did was reprehensible to his wife and kids - its a private matter.

If what he did was wrong, he would have been in jail already. Its not against the law. Its a private matter. Why do we hold politicians or celebrities as needing to have a "higher standard of professionalism or good conduct"? Because they are leaders or people look up to them? Big BS, we all have people to lead, we all have our family to lead and care for and set good examples, we also cannot let down our family and friends.

So, NO more double standard BS. If its not against the law, its a private matter. Do not use your religious standards or moral standards to judge another person as to whether he is fit for office. Because if I cite the 10 commandments as a standard for asking CSL to resign, does it mean we can ask someone to resign if they eat beef or pork when they are neither Muslim or Hindu? That is imposing your morality on others. If something is deemed wrong, it should be made law. When it is not, and we think it should be, then do so, and UNTIL then leave CSL alone.

Just as Bill Clinton was messed up over what he did, Bill was still an effective leader, but at least CSL did not do it in his office la. Judge a job performance by the job specifications, not by unwritten rules. In any kind of relationship, when there are hidden expectations and unannounced standards of performance (including the marrying kind), you are holding a time bomb. If its not written down, its not law.

CSL at least had the grace and strength to admit, and then had the composure to let the party and people to decide his fate. Again, let the person be the first to throw stones ... If you are still keen to get rid of CSL, then we should at least make an attempt to write down the hidden fuckups that will boot you out of office: having sex with someone other than your wife or wives; kicking a dog or a cat; wearing a toupee and lying to the people that its real; etc... you can never make up such lists. You can only go by what is wrong against the law, anything else is so vague and subjective.

p/s CSL, ok now I've done the job, so how about the secret to 56 minutes ... If you lose your job, well, you can always teach classes.

Macro Predictions For 2008

Oil Prices - To rise to US$115 per barrel before settling above the US$100 for most part of 2008. This will put simmering inflationary pressures globally.

Hot Spots - China to resume its economic machinery. Stock market will retest its all time high in 2008. HK will do even better than China yuan for yuan. Western Europe to attract much of M&A limelight away from US and developed Europe. Latin America to continue on its merry ways. India's fire will dim slightly.

Lukewarm - Rest of Asia will have to come to terms with inflationary pressures as local currencies may not rise enough to counter imported inflation, thus hurting outlook for local equities.

US - Will still have to deal with fallouts from subprime and property correction. Jobs the only factor sustaining the overall economic picture as many US companies still rely more on global growth for their bottom line. US rates will not have much room to fall as defending the dollar will be more of a priority - still we are likely to see the dollar weakening by 3%-5% in 2008.

US Stocks - A lot will be riding on the recovery of financials for index to perform. Pain before pleasure, probably things will improve from 2Q onwards. Depressed dollar will see more foreign M&A buying US companies. That will be creating a lot of pressure on the Fed and related units to stem the slide in the dollar. Corporate profits growth may not be as positive as 2007 and will cap the markets for 1H2008.

Japan - Economic recovery is failing as people still refuse to spend. Carry trade to continue.

Soft Commodities - All commodities to continue to rise, though not as spectacular as 2007. Palm oil should have another 10% in 2008. Biofuels no longer viable for now. Short plantations with biodiesel for idle capacity and extended cost recovery and possible writedowns.

Bursa - Hard for locals stocks to perform with markets at all time high. Favour stocks with strong foreign expansion strategy for growth: KNM, TM International, Ranhill, UMW, Evergreen, Parkson, (not B Land though). Short property stocks as affordability issue will come into focus as well as higher inflationary pressures (interest rates). A topping of most Asian currencies will erode some of the FDI into Asian property. Selective O&G stocks: Coastal, AZRB and Sapcrest. Some high profile foreign investment funds may start exiting critical stocks thus removing part of the allure: Pelikan, B Land, Stemlife, Mah Sing, E&O Property, Uchi, you know the rest. Finally, the Chua Soi Lek Award - still going strong: KNM.

2008 will be tougher than 2007.