KLSE Market Opening Comments
Wednesday 17 May - Its Generally Good
Global equity prices reveresed path slightly over the last few days thanks to a correctional phase in commodity prices (please read blog on commodity price bubble below). The scare lightened up the load on equity bull runs, at least a potential bubble in one asset class has been pricked slightly, and the market is able to wave it away well. The last thing we need is too many bubbles in a few asset classes. Shares of the commodity stocks climbed too fast, which were mainly boosted by the rise of raw materials. However, the stocks didn't have much positive fundamental change to support such shares price increases. The market has mixed views on whether commodity prices will rebound. Morgan Stanley sees a "bubble," while wealth management company UBS remains bullish on commodities. On April 28, UBS raised target prices for aluminum, copper, nickel, zinc, gold, platinum, coal, steel and a host of other materials by an average 20% for end-2006, and nearly 50% for end-2007, due to strong underlying demand, high portfolio inflows (exchange traded funds largely) and continued supply constraints.
Asian market will open much better. Stay with better second liners and large caps for the time being as the third liners will need time to lick their wounds. "Better second liners" mean companies that you know what they are doing, not losing money for the last couple of years and has a market cap of at least RM100m-500m, certainly not Mesdaq counters. Many investors are counting their lucky stars that they did not get scalded this time by Mesdaq counters, plus the episode on Iris is not entirely over yet, so beware.
Wednesday, May 17, 2006
Is There A Commodities' Bubble?
You Bet - Sell Your Gold Already
Below are the main excerpts by Alan Kohler who publishes Eureka Report, a newsletter financially backed by Carnegie, Wylie & Co.There is now five times as much invested with hedge funds as when Long-Term Capital Management went bust in 1998 - a bit more than $US800 billionn. In 1998 the hedge fund losses totalled about 10%; a similar problem in 2006 would cost about $US80 billion. If this was the extent of the problem and it was isolated to hedge funds, it would be rocky but not a wreck. However, if it was associated with other problems, such as a mortgage crisis in the US sparked by a housing crunch, that would be a different matter. Between March 1 and May 11 the price of copper rose 80%, which is extremely silly. It was the largest of a collection of commodity price blow-offs driven by hedge funds and speculative long-only funds panic-buying in anticipation of a big upsurge in investor demand for metals on the back of the growth of exchange trade funds. Gold rose 40%, zinc 75%, nickel 45%, aluminium 38% and tin 20%. The damage caused by a generalised 25% commodity price correction, or more, would depend to some extent on the leverage of those funds caught long, and given the secrecy in which the hedge fund industry generally is shrouded it is impossible to know until the flag goes up. These jumps in price easily hints at excessive speculation but also the rise and rise of ETFs, but even buying for ETFs would generally involve actual listed stocks and not the physical commodity. The danger is if the commodity prices upswing also led investors to pick up related listed stocks. It's worth noting that the Australian market in general, including market leader BHP Billiton, did not really follow the copper rocketing prices past month. Middle-sized miners such as Zinifex, Oxiana, Hardman and Lihir did follow, which is why they fell about 10% per cent yesterday. Anyway, the commodity price bubble has been bearing all the hallmarks of the internet bubble of the late 90s: assets that don't make profits and don't pay dividends doubling and trebling in price because of a "game of pass the parcel to a bigger fool than me". It is the sort of game that must come to an end.
Morgan Stanley's Steve Roach says the commodity price surge is "off the charts" when compared with all those of the past. Over the past four years, The Journal of Commerce industrial gauge (which includes textiles, metals such as steel, copper, aluminum, nickel, zinc, lead, and tin, petroleum products including crude oil, benzene, and ethylene, plus a miscellaneous grouping of hides, plywood, rubber, red oak flooring and tallow) has increased by 53% - a sharper rise than that which occurred in any of the four previous periods of global recovery. "Moreover, as seen in real terms - scaling the JOC by the cumulative increase in the US headline CPI over the same periods - the current surge in commodity prices stands out as even more extreme," Roach says. "The real JOC is up 42% over the past four years - nearly double the 23% average gains that occurred in the two commodity booms of the 1970s and in sharp contrast with the relatively stable trends during the global growth cycles of the 1980s and 1990s."
But commodities are not the only assets that have been experiencing a bubble - the other is US dollar debt, as a result of the unsustainable American consumption binge, supported by the uneconomic purchases of US bonds by foreign central banks, especially in Asia. A gradual, long term decline of the US dollar has been underway since 2002, although for 12 months during 2005 it reversed because of the widening interest rate differential, as the Federal Reserve raised the US Fed funds rate at every meeting. More worrying, China is also tightening monetary policy and this week has allowed its currency to rise above the important eight yuan to the US dollar. It was that event that probably sparked the panic on commodity markets.
Due to the Chinese currency policy, Asian monetary policy has basically been locked into a dollar system. No Asian country wants to lose competitiveness to China, and thus they have been forced to maintain quasi-pegs to the dollar. The official removal of the dollar system means that the Asian dollar-based monetary system is now just about to self-destruct. Asian central banks have racked up unprecedented amounts of dollars, just as Europe and Japan took in excessive amounts of dollars … in the early 70s. A rush for the US dollar door again would be very bearish for Wall Street. The commodities correction, on the other hand, may be just what the resources sector needed.
You Bet - Sell Your Gold Already
Below are the main excerpts by Alan Kohler who publishes Eureka Report, a newsletter financially backed by Carnegie, Wylie & Co.There is now five times as much invested with hedge funds as when Long-Term Capital Management went bust in 1998 - a bit more than $US800 billionn. In 1998 the hedge fund losses totalled about 10%; a similar problem in 2006 would cost about $US80 billion. If this was the extent of the problem and it was isolated to hedge funds, it would be rocky but not a wreck. However, if it was associated with other problems, such as a mortgage crisis in the US sparked by a housing crunch, that would be a different matter. Between March 1 and May 11 the price of copper rose 80%, which is extremely silly. It was the largest of a collection of commodity price blow-offs driven by hedge funds and speculative long-only funds panic-buying in anticipation of a big upsurge in investor demand for metals on the back of the growth of exchange trade funds. Gold rose 40%, zinc 75%, nickel 45%, aluminium 38% and tin 20%. The damage caused by a generalised 25% commodity price correction, or more, would depend to some extent on the leverage of those funds caught long, and given the secrecy in which the hedge fund industry generally is shrouded it is impossible to know until the flag goes up. These jumps in price easily hints at excessive speculation but also the rise and rise of ETFs, but even buying for ETFs would generally involve actual listed stocks and not the physical commodity. The danger is if the commodity prices upswing also led investors to pick up related listed stocks. It's worth noting that the Australian market in general, including market leader BHP Billiton, did not really follow the copper rocketing prices past month. Middle-sized miners such as Zinifex, Oxiana, Hardman and Lihir did follow, which is why they fell about 10% per cent yesterday. Anyway, the commodity price bubble has been bearing all the hallmarks of the internet bubble of the late 90s: assets that don't make profits and don't pay dividends doubling and trebling in price because of a "game of pass the parcel to a bigger fool than me". It is the sort of game that must come to an end.
Morgan Stanley's Steve Roach says the commodity price surge is "off the charts" when compared with all those of the past. Over the past four years, The Journal of Commerce industrial gauge (which includes textiles, metals such as steel, copper, aluminum, nickel, zinc, lead, and tin, petroleum products including crude oil, benzene, and ethylene, plus a miscellaneous grouping of hides, plywood, rubber, red oak flooring and tallow) has increased by 53% - a sharper rise than that which occurred in any of the four previous periods of global recovery. "Moreover, as seen in real terms - scaling the JOC by the cumulative increase in the US headline CPI over the same periods - the current surge in commodity prices stands out as even more extreme," Roach says. "The real JOC is up 42% over the past four years - nearly double the 23% average gains that occurred in the two commodity booms of the 1970s and in sharp contrast with the relatively stable trends during the global growth cycles of the 1980s and 1990s."
But commodities are not the only assets that have been experiencing a bubble - the other is US dollar debt, as a result of the unsustainable American consumption binge, supported by the uneconomic purchases of US bonds by foreign central banks, especially in Asia. A gradual, long term decline of the US dollar has been underway since 2002, although for 12 months during 2005 it reversed because of the widening interest rate differential, as the Federal Reserve raised the US Fed funds rate at every meeting. More worrying, China is also tightening monetary policy and this week has allowed its currency to rise above the important eight yuan to the US dollar. It was that event that probably sparked the panic on commodity markets.
Due to the Chinese currency policy, Asian monetary policy has basically been locked into a dollar system. No Asian country wants to lose competitiveness to China, and thus they have been forced to maintain quasi-pegs to the dollar. The official removal of the dollar system means that the Asian dollar-based monetary system is now just about to self-destruct. Asian central banks have racked up unprecedented amounts of dollars, just as Europe and Japan took in excessive amounts of dollars … in the early 70s. A rush for the US dollar door again would be very bearish for Wall Street. The commodities correction, on the other hand, may be just what the resources sector needed.
Tuesday, May 16, 2006
KLSE Closing Comments
Tuesday 16 May
Well, it was close, if Iris did not see support coming in, we could be in for the longest haul. The fact that support came is a lifeline, and everyone can breathe a sigh of relief. It does not matter whether Iris drops some more, all that matters is that it continues to trade. Another lesson when stocks get designated. Allowing it to trade and to see support even though cash has to paid upfront are important developments, it ensures that the entire system does not get constipated.
40 million shares is decent for the last hour of trading, though still nowhere near my estimated 100 million that needs to be traded. Is the worst over? Yes and no. Yes, in that the main players are still liquid enough. Support has to come from main players, smaller syndicates and other unrelated players would not be so dumb as to pour funds after something they do not control. Herein lies the danger, there is one main group of players - if the main group gets into further financial difficulties, the whole thing goes up in smoke (remember Fountain View). If things are still trading, no red signal is up (yet), at least no broker has not announced that they cannot meet settlement. Chances are high that a large portion of Iris is cornered which can lead to a nasty end - not there yet but the signs are there. Not easy to hold up a RM1 billion valuation company.
Yet, these events happen too frequently, designation and rumours of a smaller broker holding too many shares of designated counters. While all brokers have clearly laid out rules on margin facilities, sometimes these rules get bent when very big players are involved. The SC and Bursa must have some form of regular audit and reporting on these level of margin for one share exposure in order to calm the market. Investors need not and should not have to worry that one or two radical brokers have flouted the rules and put everybody's investments at jeopardy. Brokers who have been flouting the rules must be severely reprimanded and failure to adhere should result in suspension of license.
While Iris is still trading, it is still early days yet, we may still have to watch for a few days to see that all pending settlements are being properly settled. So, it is not all clear yet. Having said that, players with a higher risk appetite may want to re-enter the market. Sometimes we have to say to ourselves that there are certain type of money you cannot / should not try to make. To bet now is too high a risk compared to the rewards. It may be better to forsake the potential gains during "troubling periods" like these. Giving up the 5% may save you a lot of headache and sleepless nights. The markets WILL ALWAYS be there, your money may not! There will always be another stock, another bull phase to look for, this one is not the last one, no one is.
Markets will not run far even if Iris stays healthy as the markets needed a breather. The pullback will need to find a consolidation phase (they always do). The good thing is that Asian equities is still looking good, thanks largely to bullish currencies. The only thing is we want a gradually weaker dollar and not a collapsing dollar - a collapsing dollar may force Bernanke to up rates aggresively (like 100 or even 200 basis points) which spells a temporary doom and gloom in global equities.
Tuesday 16 May
Well, it was close, if Iris did not see support coming in, we could be in for the longest haul. The fact that support came is a lifeline, and everyone can breathe a sigh of relief. It does not matter whether Iris drops some more, all that matters is that it continues to trade. Another lesson when stocks get designated. Allowing it to trade and to see support even though cash has to paid upfront are important developments, it ensures that the entire system does not get constipated.
40 million shares is decent for the last hour of trading, though still nowhere near my estimated 100 million that needs to be traded. Is the worst over? Yes and no. Yes, in that the main players are still liquid enough. Support has to come from main players, smaller syndicates and other unrelated players would not be so dumb as to pour funds after something they do not control. Herein lies the danger, there is one main group of players - if the main group gets into further financial difficulties, the whole thing goes up in smoke (remember Fountain View). If things are still trading, no red signal is up (yet), at least no broker has not announced that they cannot meet settlement. Chances are high that a large portion of Iris is cornered which can lead to a nasty end - not there yet but the signs are there. Not easy to hold up a RM1 billion valuation company.
Yet, these events happen too frequently, designation and rumours of a smaller broker holding too many shares of designated counters. While all brokers have clearly laid out rules on margin facilities, sometimes these rules get bent when very big players are involved. The SC and Bursa must have some form of regular audit and reporting on these level of margin for one share exposure in order to calm the market. Investors need not and should not have to worry that one or two radical brokers have flouted the rules and put everybody's investments at jeopardy. Brokers who have been flouting the rules must be severely reprimanded and failure to adhere should result in suspension of license.
While Iris is still trading, it is still early days yet, we may still have to watch for a few days to see that all pending settlements are being properly settled. So, it is not all clear yet. Having said that, players with a higher risk appetite may want to re-enter the market. Sometimes we have to say to ourselves that there are certain type of money you cannot / should not try to make. To bet now is too high a risk compared to the rewards. It may be better to forsake the potential gains during "troubling periods" like these. Giving up the 5% may save you a lot of headache and sleepless nights. The markets WILL ALWAYS be there, your money may not! There will always be another stock, another bull phase to look for, this one is not the last one, no one is.
Markets will not run far even if Iris stays healthy as the markets needed a breather. The pullback will need to find a consolidation phase (they always do). The good thing is that Asian equities is still looking good, thanks largely to bullish currencies. The only thing is we want a gradually weaker dollar and not a collapsing dollar - a collapsing dollar may force Bernanke to up rates aggresively (like 100 or even 200 basis points) which spells a temporary doom and gloom in global equities.
KLSE Market Opening Comments
Tuesday 16 May
Well, at least Iris and Patimas are allowed to trade. The announcement by both companies on sale of building and issue price are basically crap. Non event. The danger is far from over. That's because the number of shares traded must be there - Iris just went limit down as expected but almost zilch shares traded. The next session will see it dipping to about 68 sen, lets hope we see some shares trade then. If not, the next level will be about 46 sen tomorrow - the important thing is to see shares traded so that the overhang, margin, transactions and losses can be reasonably calculated. If Iris is heavily traded in the afternoon, then it is a very good sign to buy other second liners. If the trading is less than 30 million shares, better avoid the rest. For a highly speculative counter with more than a billion shares, at least 50 million-100 million shares must be allowed to trade for the "tension" to be satisfied. Hence the flurry of buying activity on KLSE this morning is largely misguided, and of high risk.
KLSE is facing an internal, localised trading event. Iris may collapse, that is no big deal... the danger is if it brings down a broking house with it, then its a big deal. That is not clear yet!!! As for foreign participation level, just looking at the palm oil stocks and some gaming stocks moving nicely, plus Telekom's good set of results.... foreign participation is still there. The main thing to monitor on foreign participation is the ringgit level. If it keeps staying strong (and it should), then funds are still in ringgit assets. If there is a sharp correction in the ringgit, its the exit of institutional foreign funds. Hence the best development would be for a firm ringgit, as if the ringgit appreciates too fast, the party will be over too soon.
Tuesday 16 May
Well, at least Iris and Patimas are allowed to trade. The announcement by both companies on sale of building and issue price are basically crap. Non event. The danger is far from over. That's because the number of shares traded must be there - Iris just went limit down as expected but almost zilch shares traded. The next session will see it dipping to about 68 sen, lets hope we see some shares trade then. If not, the next level will be about 46 sen tomorrow - the important thing is to see shares traded so that the overhang, margin, transactions and losses can be reasonably calculated. If Iris is heavily traded in the afternoon, then it is a very good sign to buy other second liners. If the trading is less than 30 million shares, better avoid the rest. For a highly speculative counter with more than a billion shares, at least 50 million-100 million shares must be allowed to trade for the "tension" to be satisfied. Hence the flurry of buying activity on KLSE this morning is largely misguided, and of high risk.
KLSE is facing an internal, localised trading event. Iris may collapse, that is no big deal... the danger is if it brings down a broking house with it, then its a big deal. That is not clear yet!!! As for foreign participation level, just looking at the palm oil stocks and some gaming stocks moving nicely, plus Telekom's good set of results.... foreign participation is still there. The main thing to monitor on foreign participation is the ringgit level. If it keeps staying strong (and it should), then funds are still in ringgit assets. If there is a sharp correction in the ringgit, its the exit of institutional foreign funds. Hence the best development would be for a firm ringgit, as if the ringgit appreciates too fast, the party will be over too soon.
Monday, May 15, 2006
Microsoft's Unfathomable Share Price
Running Out Of Ideas
For the many investors who follow Microsoft's share price, it must have been a mind boggling 5 months. US equity prices have performed well for the first 5 months of 2006. Microsoft started the year just above US$30 and reached a high of about US$36 mid-Jan and have ben dawdling and dwindling all the way to US$23 in May.... what gives?
Microsoft is almost the exemplary company. Its got value in terms of dividends and dividend yield, the company pays a 36 cents a share annual dividend. To give back value to shareholders and raising EPS, the company is executing a US$30 billion stock buyback program. Core business units are still growing albeit in single digits. The company is also not backing down on R&D, it plans to spend US$2 billion in new investments in fiscal 07. Microsft has also risen in growth areas such as web advertising. It continues to reward employees with a combination of stock and cash bonuses. So why isn't the stock price performing better?
Possible Reasons:
1) Market does not agree with company strategy. Even though Microsoft is doing all the growth / value strategies by the book, if investors are not convinced of the company's strategy going forward, that's it, no point holding.
2) What Gates and Ballmer has failed to recognise is that big investors see Microsoft as the defending / returning champion for the longest time. Its ability and stature depends on staying number one. If the big investors CANNOT envision Microsoft staying at #1 in 1,2, 3 years down the road, that's it. Hence Gates and Ballmer must read more into the share price movements - the big investors are saying your #1 days are numbered.
3) While management can harp on growth and value factors, it seems investors are very concerned still with Microsoft's ability to deal with Google and the overall trend of giving in to Europe's regulatory trustbusters.
4) This also means that investors are NOT willing to pay for the monopolies of Windows and Office anymore even though it keeps generating free cash of US$1 billion a month.
5) This also means their web strategy is not making sense to investors no matter how loud Ballmer yells.
I guess, to push the share price to US$50, I have a good strategy for Microsoft. Go and use the excess cash and buy a substantial stake in Google.... and how was your day?
Running Out Of Ideas
For the many investors who follow Microsoft's share price, it must have been a mind boggling 5 months. US equity prices have performed well for the first 5 months of 2006. Microsoft started the year just above US$30 and reached a high of about US$36 mid-Jan and have ben dawdling and dwindling all the way to US$23 in May.... what gives?
Microsoft is almost the exemplary company. Its got value in terms of dividends and dividend yield, the company pays a 36 cents a share annual dividend. To give back value to shareholders and raising EPS, the company is executing a US$30 billion stock buyback program. Core business units are still growing albeit in single digits. The company is also not backing down on R&D, it plans to spend US$2 billion in new investments in fiscal 07. Microsft has also risen in growth areas such as web advertising. It continues to reward employees with a combination of stock and cash bonuses. So why isn't the stock price performing better?
Possible Reasons:
1) Market does not agree with company strategy. Even though Microsoft is doing all the growth / value strategies by the book, if investors are not convinced of the company's strategy going forward, that's it, no point holding.
2) What Gates and Ballmer has failed to recognise is that big investors see Microsoft as the defending / returning champion for the longest time. Its ability and stature depends on staying number one. If the big investors CANNOT envision Microsoft staying at #1 in 1,2, 3 years down the road, that's it. Hence Gates and Ballmer must read more into the share price movements - the big investors are saying your #1 days are numbered.
3) While management can harp on growth and value factors, it seems investors are very concerned still with Microsoft's ability to deal with Google and the overall trend of giving in to Europe's regulatory trustbusters.
4) This also means that investors are NOT willing to pay for the monopolies of Windows and Office anymore even though it keeps generating free cash of US$1 billion a month.
5) This also means their web strategy is not making sense to investors no matter how loud Ballmer yells.
I guess, to push the share price to US$50, I have a good strategy for Microsoft. Go and use the excess cash and buy a substantial stake in Google.... and how was your day?
Asian Market Readings
15 May 4.00pm Monday Tarot Card Session
Asian bourses fell after a sharp-two-day fall on Wall Street. Singapore's Straits Times Index fell 2.54% or 66.51 points to 2,554.07, Japan's Nikkei 225 fell 1.04% or 172.60 points to 16,429.18 and Hong Kong's Hang Seng Index tumbled 1.74% or 294.24 points to 16,607.61. KLSE did a similar turn. Oil prices remained at over the US$70 (RM249.86) per barrel. Light crude oil for June delivery was at US$71.32. The ringgit was quoted at RM3.599 to the US dollar. While the bigger Asian bourses followed the US markets weakness, there is a prevailing under-current of weakness in the KLSE. The designation of Iris on Thursday, and the surprise request for suspension by Patimas and Iris today bears watching. Iris has shot up in market cap from RM100 million to RM1.1 billion in a matter of weeks. If it had traded today, even a 50% fall would only have wiped out RM500 million in value, which won't affect the market much. So, the fact that it dare not trade is even more suspicious. Today probably gave investors a good chance to lighten up on stocks everywhere. The signs are even worse for Malaysian second liners. Hence I would advise more caution for Malaysian stock players especially of lower liners. Best to stay away till more news unfold on Iris.
The yuan strengthened beyond 8 to the dollar for the first time in more than 12 years, prompting speculation that China's government is allowing faster gains to win U.S. support for its currency policy. This is just after the U.S. Treasury Department decided against accusing China of manipulating its currency in a semi-annual report. The currency strengthened 0.1% to 7.9980 per dollar as of 2:44 p.m. in Shanghai, bringing gains to 1.4% since July's revaluation - a very long way to go for the yuan. U.S. lawmakers are pushing for faster yuan gains to narrow a trade deficit with China that reached US$201.6 billion last year. That will not solve the US problems, a stronger yuan only means the Americans will buy from somewhere else. The yuan hasn't risen more than 0.15% intraday since China scrapped a peg to the dollar on July 21, in contrast with the maximum 0.3% the central bank said it would allow. The gradual appreciation of the yuan will force Bernanke's hand to raise rates in the coming months again unless he is willing to see a much weaker dollar. I think Bernanke don't mind a weaker dollar but not a collapsing one. The fact that almost all equity markets are rising to greet the stronger yuan, stronger emerging markets' currencies, and a weaker dollar is probably due to all parties are pleased with this "financial engineering" by the major players.
The yuan's development and the dollar weakness would probably recharge most of the Asian markets in the days ahead - the brief profit taking period is necessary. Overall uptrend still intact.
15 May 4.00pm Monday Tarot Card Session
Asian bourses fell after a sharp-two-day fall on Wall Street. Singapore's Straits Times Index fell 2.54% or 66.51 points to 2,554.07, Japan's Nikkei 225 fell 1.04% or 172.60 points to 16,429.18 and Hong Kong's Hang Seng Index tumbled 1.74% or 294.24 points to 16,607.61. KLSE did a similar turn. Oil prices remained at over the US$70 (RM249.86) per barrel. Light crude oil for June delivery was at US$71.32. The ringgit was quoted at RM3.599 to the US dollar. While the bigger Asian bourses followed the US markets weakness, there is a prevailing under-current of weakness in the KLSE. The designation of Iris on Thursday, and the surprise request for suspension by Patimas and Iris today bears watching. Iris has shot up in market cap from RM100 million to RM1.1 billion in a matter of weeks. If it had traded today, even a 50% fall would only have wiped out RM500 million in value, which won't affect the market much. So, the fact that it dare not trade is even more suspicious. Today probably gave investors a good chance to lighten up on stocks everywhere. The signs are even worse for Malaysian second liners. Hence I would advise more caution for Malaysian stock players especially of lower liners. Best to stay away till more news unfold on Iris.
The yuan strengthened beyond 8 to the dollar for the first time in more than 12 years, prompting speculation that China's government is allowing faster gains to win U.S. support for its currency policy. This is just after the U.S. Treasury Department decided against accusing China of manipulating its currency in a semi-annual report. The currency strengthened 0.1% to 7.9980 per dollar as of 2:44 p.m. in Shanghai, bringing gains to 1.4% since July's revaluation - a very long way to go for the yuan. U.S. lawmakers are pushing for faster yuan gains to narrow a trade deficit with China that reached US$201.6 billion last year. That will not solve the US problems, a stronger yuan only means the Americans will buy from somewhere else. The yuan hasn't risen more than 0.15% intraday since China scrapped a peg to the dollar on July 21, in contrast with the maximum 0.3% the central bank said it would allow. The gradual appreciation of the yuan will force Bernanke's hand to raise rates in the coming months again unless he is willing to see a much weaker dollar. I think Bernanke don't mind a weaker dollar but not a collapsing one. The fact that almost all equity markets are rising to greet the stronger yuan, stronger emerging markets' currencies, and a weaker dollar is probably due to all parties are pleased with this "financial engineering" by the major players.
The yuan's development and the dollar weakness would probably recharge most of the Asian markets in the days ahead - the brief profit taking period is necessary. Overall uptrend still intact.
Friday, May 12, 2006
An Open Letter To Securities Commission
Need To Rethink "Designated Securities"
Malaysia's Securities Commission has designated Iris Corp due to the stock's excessive speculation and unusual trading patterns. Iris Corp traded as low as 8.5 sen in September 2005. Yesterday, the share price hit RM1.36 or a 1,500% increase. When a counter is designated, trading in the counter will continue but buyers will be required to make payment upfront before buying the shares, and there must be a free balance of securities before selling. In addition, the SC and Bursa Malaysia would be requiring the company to make further disclosures to allow for more informed decision making by investors.
Iris is involved in covert security for national type documents embedded in microchip. The company was listed at 30 sen in 2002 and now has a market cap of RM1.1 billion.
I am all for designating securities, but there needs to be strict rules and procedures in enforcing it. To allow for the SC room to determine when and which one to designate only opens up room for "bad things to happen". While I am not implying bribery or corruption happens, when there "room" to talk, there is room to manouvere by company management. We must eliminate the need to be judged unfairly, and eliminate vicious rumours. Why open yourself to room for query?
To designate a security can wipe hundreds of millions from a share's market cap, hence the rules must be visible and fair to investors who have bought, and those who have decided not to buy - now, holders of these shares are at the mercy of the SC, and buyers who bought yesterday would have be unfairly treated, don't you think!!
Some proposed rules for designating a security:
1) A stock should be designated if it has hit the 30% limit up twice out of three trading sessions. In KLSE, a stock can only move up 30% in one trading session. The rule would not apply to shares whose prices are below 30 sen. The rules would also not apply to the first 3 trading days of an IPO. If a share already moves up two times in limit up, the share price effectively could be:
1.3 x 1.3 = 69% gain.
Anything more than that within 2 trading days is certainly excessive.
2) A stock should be designated if it has risen by more than 100% in 5 trading days. This should be obvious.
3) A stock should be designated if it has risen by 200% in a month. Again, pretty obvious - a stock that has tripled within a month means too much inherent speculation is still apparent.
4) Above and beyond those 3 rules above, the SC would then have the liberty to step in. This is to prevent syndicates who try to "navigate around the above rules".
5) To be released from designation, it is after a fixed 2 week period.
Rationale:
a) These rules will be administered strictly, hence investors can be assured of the prevailing rules and goalposts (and not have these bloody goalposts shifted every now and then, sometimes not even knowing if the goalposts even exist, not knowing how much is excessive speculation each time in the opinion of the SC).
b) If the stock really has gained enormously in fundamentals (projects, prospects or profitability), a designation WOULD NOT and SHOULD NOT stop genuine buying. The rules are meant to rein in excessive speculation.
c) The proposed rules have already given ample room for stocks to move up. The lifting of designation is also fixed, so again no room for hanky panky.
d) Removes monitoring by SC, it is an automatic designation, no room for questionable practices. The SC would only step in if certain companies try to navigate above and beyond the proposed rules.
If we were to implement these rules, Iris Corp would have been designated a long time back. Investors would have known the price levels to avoid entering as they know Iris would have been designated if they bought close to certain price levels. The benefits of knowing when a stock will be designated is too high, .... even to get the SC to delay designation by one trading session would yield an enormous edge for those who knew. That suspicion has to be eliminated completely.
Need To Rethink "Designated Securities"
Malaysia's Securities Commission has designated Iris Corp due to the stock's excessive speculation and unusual trading patterns. Iris Corp traded as low as 8.5 sen in September 2005. Yesterday, the share price hit RM1.36 or a 1,500% increase. When a counter is designated, trading in the counter will continue but buyers will be required to make payment upfront before buying the shares, and there must be a free balance of securities before selling. In addition, the SC and Bursa Malaysia would be requiring the company to make further disclosures to allow for more informed decision making by investors.
Iris is involved in covert security for national type documents embedded in microchip. The company was listed at 30 sen in 2002 and now has a market cap of RM1.1 billion.
I am all for designating securities, but there needs to be strict rules and procedures in enforcing it. To allow for the SC room to determine when and which one to designate only opens up room for "bad things to happen". While I am not implying bribery or corruption happens, when there "room" to talk, there is room to manouvere by company management. We must eliminate the need to be judged unfairly, and eliminate vicious rumours. Why open yourself to room for query?
To designate a security can wipe hundreds of millions from a share's market cap, hence the rules must be visible and fair to investors who have bought, and those who have decided not to buy - now, holders of these shares are at the mercy of the SC, and buyers who bought yesterday would have be unfairly treated, don't you think!!
Some proposed rules for designating a security:
1) A stock should be designated if it has hit the 30% limit up twice out of three trading sessions. In KLSE, a stock can only move up 30% in one trading session. The rule would not apply to shares whose prices are below 30 sen. The rules would also not apply to the first 3 trading days of an IPO. If a share already moves up two times in limit up, the share price effectively could be:
1.3 x 1.3 = 69% gain.
Anything more than that within 2 trading days is certainly excessive.
2) A stock should be designated if it has risen by more than 100% in 5 trading days. This should be obvious.
3) A stock should be designated if it has risen by 200% in a month. Again, pretty obvious - a stock that has tripled within a month means too much inherent speculation is still apparent.
4) Above and beyond those 3 rules above, the SC would then have the liberty to step in. This is to prevent syndicates who try to "navigate around the above rules".
5) To be released from designation, it is after a fixed 2 week period.
Rationale:
a) These rules will be administered strictly, hence investors can be assured of the prevailing rules and goalposts (and not have these bloody goalposts shifted every now and then, sometimes not even knowing if the goalposts even exist, not knowing how much is excessive speculation each time in the opinion of the SC).
b) If the stock really has gained enormously in fundamentals (projects, prospects or profitability), a designation WOULD NOT and SHOULD NOT stop genuine buying. The rules are meant to rein in excessive speculation.
c) The proposed rules have already given ample room for stocks to move up. The lifting of designation is also fixed, so again no room for hanky panky.
d) Removes monitoring by SC, it is an automatic designation, no room for questionable practices. The SC would only step in if certain companies try to navigate above and beyond the proposed rules.
If we were to implement these rules, Iris Corp would have been designated a long time back. Investors would have known the price levels to avoid entering as they know Iris would have been designated if they bought close to certain price levels. The benefits of knowing when a stock will be designated is too high, .... even to get the SC to delay designation by one trading session would yield an enormous edge for those who knew. That suspicion has to be eliminated completely.
Thursday, May 11, 2006
The Case For Japanese Equities
Genuine Recovery Finally
Readers of my blog will know that I have been quite bullish on Japanese equities, and its performance have not been too bad over the last 2 years. Is there room for further upside or is this a bear trap? Having worked for one of the biggest broker in the world in Tokyo in the early part of my career has allowed me to watch the Nikkei index rise from 16,000 to above 30,000. Luckily I decided to switch markets after 30,000 and did not have to weather the fall to down below 10,000. The fall wasn't that excessive, its the length of time it took to correct. The bloody thing was like a tai-chi master constipated, it took well over 12 years to do that slow dance of death. The reluctance to write off bad debts and cross-holdings problems caused much inactivity. Till they cannot stand it anymore, and even allowed foreign companies to come in to help. A large part of the recovery is due to Mr. Lion Head Koizumi. Politics used to be collective and even the Prime Minister was largely carrying out party's policies but Koizumi was an individual bent on bending the rules and rubbing people the wrong way to get things done. His ability to push through legislation to privatise postal savings system is a highlight.
If your economy dips low enough, naturally it can only go up. The essence of a genuine recovery is to look at the guiding elements in the recovery. The sharp improvement in net exports over the last 3 years is largely due to the drop in Japan's real exchange rate and China's voracious demand for Japanese technology. From Jan 2000 till Dec 2005, Japan's real exchange rate has lost about 30% in value. Over the same period, exports to China accounted for 30% of the total increase in total exports. The recovery in Japan is not led by private consumption this time around. Real activity growth came from net exports growth, corporate investments (foreign and domestic) and government consumption.
The next phase is activating the huge private savings (about 30% of GDP) and the rising corporate savings rate (despite jumps in corporate investments). These two factors provide the potential to sustain the momentum for the Japanese economic recovery. We are talking of a huge economy recovering after the most horrendous deflation for over 10 years. The asset bubbles (especially in land and equity prices) caused huge sums to be evaporated from the financial system. In a recent study by Nomura, the loss suffered by Japanese economy is almost 2.7x the 1989 GDP - in terms of GDP ratio, the loss was even bigger than the loss due to the great depression in the US in the 1930s.
The improvements are not altogether spectacular. It is hard to change business and cultural ethos overnight. Cleaning up of balance sheets, focusing on R&D and return on capital, improving transparency, etc... all takes time. Indications of a genuine recover include banks' lending - they have been slashing and reducing exposure for the longest but have started lending again over the last 2 years. As the equity markets perk up, the overall mood for bank lending has also improved. Much activity can be seen in institutional property investing in Japan by local institutions and particularly foreign institutions - a sure sign of liquidity moving in the system, and the reactivation of the wealth creation cycle. Jobs market have tightened considerably with companies mostly increasing their hiring of fresh graduates last year and this year.
The heightened consumer confidence has even alerted Bank of Japan to start raising interest rates. The deemed liquidity in the system is more than sufficient and the rates rising is not an alarming signal but a sign that domestic consumption patterns are improving markedly. Growth in domestic consumption will not be overly aggressive because of declining birth rates and higher ratio of retirees. Hence annual growth of about 2% over the next 3-4 years is attainable and impressive at the same time.
When the very big sogo-soshas are recording billion dollar profits, that is a sure sign that the worst is over. These sogo-soshas (e.g. Mitsubishi Corp) have their fingers in every pie of the economy, and they were among the hardest hit group during the recession. To be able to restructure such a mammoth sized company based largely on Japan's economy is a clear indication of genuine improvements in almost every sector of the economy and more.
Another sign of the times was the recent winter bonuses which rose to a record high in December last year. This coincided with consumer confidence indicator at a 15 year high. As the recovery is not matched by huge jumps in CPIs, the quality of the growth is all the more credible.
Corporate restructuring will continue and the influx of foreign private equity has revitalised management behaviour and valuation, and reinforced the benefits of restructuring well. All added up is a phase of reflation for Japan, and the good thing is that it is doing it slowly (although the real estate side has sizzled up pretty swiftly over the last 12 months). Many Japanese companies have had to broaden their revenue streams to international markets over the last 10 years even more, and this will only reduce corporate vulnerability to being overly dependent on its domestic economy. To many of them, a revitalised domestic economy back in Japan only adds icing to the cake - I particularly like Toshiba and the top 5 big banks as exemplary exposures to have.
Genuine Recovery Finally
Readers of my blog will know that I have been quite bullish on Japanese equities, and its performance have not been too bad over the last 2 years. Is there room for further upside or is this a bear trap? Having worked for one of the biggest broker in the world in Tokyo in the early part of my career has allowed me to watch the Nikkei index rise from 16,000 to above 30,000. Luckily I decided to switch markets after 30,000 and did not have to weather the fall to down below 10,000. The fall wasn't that excessive, its the length of time it took to correct. The bloody thing was like a tai-chi master constipated, it took well over 12 years to do that slow dance of death. The reluctance to write off bad debts and cross-holdings problems caused much inactivity. Till they cannot stand it anymore, and even allowed foreign companies to come in to help. A large part of the recovery is due to Mr. Lion Head Koizumi. Politics used to be collective and even the Prime Minister was largely carrying out party's policies but Koizumi was an individual bent on bending the rules and rubbing people the wrong way to get things done. His ability to push through legislation to privatise postal savings system is a highlight.
If your economy dips low enough, naturally it can only go up. The essence of a genuine recovery is to look at the guiding elements in the recovery. The sharp improvement in net exports over the last 3 years is largely due to the drop in Japan's real exchange rate and China's voracious demand for Japanese technology. From Jan 2000 till Dec 2005, Japan's real exchange rate has lost about 30% in value. Over the same period, exports to China accounted for 30% of the total increase in total exports. The recovery in Japan is not led by private consumption this time around. Real activity growth came from net exports growth, corporate investments (foreign and domestic) and government consumption.
The next phase is activating the huge private savings (about 30% of GDP) and the rising corporate savings rate (despite jumps in corporate investments). These two factors provide the potential to sustain the momentum for the Japanese economic recovery. We are talking of a huge economy recovering after the most horrendous deflation for over 10 years. The asset bubbles (especially in land and equity prices) caused huge sums to be evaporated from the financial system. In a recent study by Nomura, the loss suffered by Japanese economy is almost 2.7x the 1989 GDP - in terms of GDP ratio, the loss was even bigger than the loss due to the great depression in the US in the 1930s.
The improvements are not altogether spectacular. It is hard to change business and cultural ethos overnight. Cleaning up of balance sheets, focusing on R&D and return on capital, improving transparency, etc... all takes time. Indications of a genuine recover include banks' lending - they have been slashing and reducing exposure for the longest but have started lending again over the last 2 years. As the equity markets perk up, the overall mood for bank lending has also improved. Much activity can be seen in institutional property investing in Japan by local institutions and particularly foreign institutions - a sure sign of liquidity moving in the system, and the reactivation of the wealth creation cycle. Jobs market have tightened considerably with companies mostly increasing their hiring of fresh graduates last year and this year.
The heightened consumer confidence has even alerted Bank of Japan to start raising interest rates. The deemed liquidity in the system is more than sufficient and the rates rising is not an alarming signal but a sign that domestic consumption patterns are improving markedly. Growth in domestic consumption will not be overly aggressive because of declining birth rates and higher ratio of retirees. Hence annual growth of about 2% over the next 3-4 years is attainable and impressive at the same time.
When the very big sogo-soshas are recording billion dollar profits, that is a sure sign that the worst is over. These sogo-soshas (e.g. Mitsubishi Corp) have their fingers in every pie of the economy, and they were among the hardest hit group during the recession. To be able to restructure such a mammoth sized company based largely on Japan's economy is a clear indication of genuine improvements in almost every sector of the economy and more.
Another sign of the times was the recent winter bonuses which rose to a record high in December last year. This coincided with consumer confidence indicator at a 15 year high. As the recovery is not matched by huge jumps in CPIs, the quality of the growth is all the more credible.
Corporate restructuring will continue and the influx of foreign private equity has revitalised management behaviour and valuation, and reinforced the benefits of restructuring well. All added up is a phase of reflation for Japan, and the good thing is that it is doing it slowly (although the real estate side has sizzled up pretty swiftly over the last 12 months). Many Japanese companies have had to broaden their revenue streams to international markets over the last 10 years even more, and this will only reduce corporate vulnerability to being overly dependent on its domestic economy. To many of them, a revitalised domestic economy back in Japan only adds icing to the cake - I particularly like Toshiba and the top 5 big banks as exemplary exposures to have.
Monday, May 08, 2006
Financial Decision-Making Mistakes
Premise For My Future Book
Investing is a life long experience and adventure, and sometimes a nightmare. Academic intelligence does not guarantee success. In fact rote-learning and ivy league MBAs mostly lead to decision by numbers or an aggregation of numbers and spreadsheets. By looking at how people make the most common decision-making mistakes in investing, we can know and understand better what makes good decision-making in investments. As I am still thinking through this, the list is not exhaustive:
1) Academic deduction does not equal right investing decision (the "trigger factor") - When the information in front of you and the amount of research you did agrees with you, it still may not be the right investing decision. Warren Buffet warned about US' trade deficit and put his money where his mouth is by betting heavily against the US dollar over the past few years. He has lost heavily on that bet, but may make some back this year. All the economic and financial indicators point to an unsustainable trade deficit and consumption pattern. Where did Buffet go wrong? Timing. Timing is everything, they say. Although you may not be doing it perfectly, you try to get as close as possible, not a few years off, because even a year off the mark will ruin some careers. Arriving at the right academic solution is having the "right thing to do" lever at your disposal. That in itself is insufficient for making a correct financial investing decision. What Buffet lacked is knowing the "trigger factors". There are many investing situations every day, every week, every month... we cannot make a decision on every issue. We can only bet according to what we know best. Even if we know Google is overpriced, we may not short because we do not know what the "trigger factors" will be for its correction. Having the opinion that Google is overvalued may be an academic conclusion, I might act on that if I have a few "trigger factors" appearing in the horizon... it could be: "valuation of Nasdaq tech sector has jumped 25% over the last 3 weeks"; or "there has been a sharp increase in insiders (senior execs) of tech stocks selling over the last 2 weeks"; etc... So for the case of the US dollars, I have argued in January that it will be resilient. However, last two weeks have made me conclude that all asset classes seem to be ganging up to whack the dollar down at least 15%-20% from current levels (read blog on Global Rising Rates Repercussions Apr 30), and that is sufficient enough for me to regard it as a "trigger factor" - translating the academic conclusion that can now be acted on. So, beware of what is written and said by experts, a buy may be a buy, and a sell may be a sell, but prices would not move in the "correct" direction if the trigger factors are not apparent. An undervalued stock will remain undervalued and not budge unless there are trigger factors.... jumps in liquidity, corporate exercise, insider share movements, jumps in coverage, jumps in volume, etc... Making a decision based on academic conclusions alone is a half-baked financial bet. Make sure you have the "trigger factors" covered.
2) Expert talk (Anchor & adjust mechanism) - Many experts will say the same BS over and over again. Analysts, strategists and especially economists will come up with figures to justify their conclusions and opinions. Mainly, the figures are based on "anchor & adjust" decision making and not really sound in most cases. If you ask an expert what Bank of America's share price will be end of the year - the expert will take current price and adjust upwards or downwards according to what he knows (banking outlook, company strategy, etc...). The problem with anchor & adjust mechanism is that you can only take in finite number of variables. In any projection, we will take in 3 or 5 variables, sometimes even less. Whereas in reality, most actually require 20 or 30 variables, some experts may not even be able to note the 3 or 4 crucial variables in their estimation. A&A methodology automatically rules out "out of range volatility", they are not able to cater to that. For example if the GDP growth of Country A was 3.5% in 2005, an expert cannot readily commit to projecting 9.5% for GDP growth in 2006 - the variables under his justification table is not there to support such a hypothesis. Plus you will stand out like a sore thumb. That is also why if 100 economists predict the growth of US economy - I would not care about the weighted average but I would be very interested to know the two extremes' prediction and their arguments. Consensus is BS, only the ridiculed is worth noting.
3) Intellectual integrity and muscle - Many experts do not have the intellectual integrity or muscle to support their opinions or platforms. Shouting and volume alone (especially by American business commentators) do not add to credibility. Good conclusions are always defensible, always persuasive and usually sheds some "new light" on the matter.
Are We Bubbling Yet?
Are Asian Markets Frothy...
Inflows into Asian markets are accelerating as central banks around the world deploy stimulative monetary policies in the face of growing pressure to let their respective currencies appreciate. Yet all this is happening in an environment where interest rates are also rising. Regional stock indices should continue to rise in the near term, but is it getting to a bubble stage yet?
Well, the inflows are not altogether the same for all markets. Singapore, HK, India and Japan have been having a bigger boost for a much longer period followed by Thailand, Indonesia and Taiwan, while Malaysia has only started to move out of first gear a few months back after Bank Negara finally allowed the ringgit to appreciate. Some fund managers are comparing the latest fund inflow with that of 1993, when investors poured huge amounts of money into Asia. This led to a phenomenal rally in the second half of 1993, followed by a major crash in 1994. That being the case, most rallies in Asia have not yet fully made up the lost territory following the 97/98 financial implosion. So far this year, foreign investors have bought stocks worth more than US$18 billion in the six regional markets of India, Indonesia, Korea, Philippines, Taiwan and Thailand - almost 50 percent of the total inflow seen in 2005. Inflows into these markets in April alone were especially strong, totaling more than US$6 billion.
As in my previous blogs - the investing environment is a bit unique over the last 6 months - there is the hedge funds effect (more funds setting shop in Asia); there is the preference to "small caps rather than large caps movement; there is the rise of huge private equity interest in major Asian countries (albeit a large number of American private equity funds have been particularly active in Japan, Korea, China and India already - what these funds do when they buy a company is that it causes a rerating in valuation in the same subsector); room for Asian currencies to appreciate (following the yuan's trend) thus reducing inflationary fears and improves overall potential gains for equity holders. These factors have translated into retail funds pouring into market momentum, earnings momentum, net fund-flow and directional market turnover.
International fund managers remained net buyers in Hong Kong, which saw a net inflow of US$544 million in March - the fifth positive month in a row. So far this year, US$1.2 billion has entered the local market. These inflows cannot last forever, and in fact should continue for a few months still. While these inflows will inventually lead to over-valuation, at least these funds are not used to finance the Asian liquidity cycle like the last time (in 93-97, cheap foreign funds were funding everything in Asia from buyouts to retail finance which were getting riskier by each passing day). So far, what I am seeing is that it is still mainly the funds controlling the market and not retail forces. There is a bit of quality in most rallies this time as most of Asia is just coming out of the difficult 1997-2003 period. This is not an earnings growth story at all, sure earnings are there and improving but its more of a recognition of undervaluation which is moving the rallies. The currency factor is important also.
Valuation wise, it is not excessive at the moment. Of course if we were to rate the equity markets on stretched valuations, it would look something like this (10 + very ripe for a correction; 8+ valuations are stretched and investors should be exiting; 6+ still some room upside; 4+ just started to come under investors' interest; 2+ undervalued).
India 8
Singapore 6
HK 6
Thailand 5
Indonesia 5
Malaysia 4
Taiwan 7
Japan 6
The Philippines 4
South Korea 6
China 7 #
# Almost every bourse cited looks appealing for the rest of the year with the exception for China (please read blog on China's interest rates for a better appreciation of a dullish year for Chinese stocks).
HK and Singapore seems to be moving in tandem as they have very strong property sectors, and that seems to be funnelling a lot of interest in wealth creation, property sales and REITs projects.
A good way to monitor effective risk levels of equity is to look at bond rates - gauge the risk free rate and sub-par rates, look at the trends, the differentials, and you will get a good idea of capital flows, excessive / healthy risk taking, liquidity in the system - all important factors when assessing market's volatility, inherent risk, and the quality of the rallies.
Are Asian Markets Frothy...
Inflows into Asian markets are accelerating as central banks around the world deploy stimulative monetary policies in the face of growing pressure to let their respective currencies appreciate. Yet all this is happening in an environment where interest rates are also rising. Regional stock indices should continue to rise in the near term, but is it getting to a bubble stage yet?
Well, the inflows are not altogether the same for all markets. Singapore, HK, India and Japan have been having a bigger boost for a much longer period followed by Thailand, Indonesia and Taiwan, while Malaysia has only started to move out of first gear a few months back after Bank Negara finally allowed the ringgit to appreciate. Some fund managers are comparing the latest fund inflow with that of 1993, when investors poured huge amounts of money into Asia. This led to a phenomenal rally in the second half of 1993, followed by a major crash in 1994. That being the case, most rallies in Asia have not yet fully made up the lost territory following the 97/98 financial implosion. So far this year, foreign investors have bought stocks worth more than US$18 billion in the six regional markets of India, Indonesia, Korea, Philippines, Taiwan and Thailand - almost 50 percent of the total inflow seen in 2005. Inflows into these markets in April alone were especially strong, totaling more than US$6 billion.
As in my previous blogs - the investing environment is a bit unique over the last 6 months - there is the hedge funds effect (more funds setting shop in Asia); there is the preference to "small caps rather than large caps movement; there is the rise of huge private equity interest in major Asian countries (albeit a large number of American private equity funds have been particularly active in Japan, Korea, China and India already - what these funds do when they buy a company is that it causes a rerating in valuation in the same subsector); room for Asian currencies to appreciate (following the yuan's trend) thus reducing inflationary fears and improves overall potential gains for equity holders. These factors have translated into retail funds pouring into market momentum, earnings momentum, net fund-flow and directional market turnover.
International fund managers remained net buyers in Hong Kong, which saw a net inflow of US$544 million in March - the fifth positive month in a row. So far this year, US$1.2 billion has entered the local market. These inflows cannot last forever, and in fact should continue for a few months still. While these inflows will inventually lead to over-valuation, at least these funds are not used to finance the Asian liquidity cycle like the last time (in 93-97, cheap foreign funds were funding everything in Asia from buyouts to retail finance which were getting riskier by each passing day). So far, what I am seeing is that it is still mainly the funds controlling the market and not retail forces. There is a bit of quality in most rallies this time as most of Asia is just coming out of the difficult 1997-2003 period. This is not an earnings growth story at all, sure earnings are there and improving but its more of a recognition of undervaluation which is moving the rallies. The currency factor is important also.
Valuation wise, it is not excessive at the moment. Of course if we were to rate the equity markets on stretched valuations, it would look something like this (10 + very ripe for a correction; 8+ valuations are stretched and investors should be exiting; 6+ still some room upside; 4+ just started to come under investors' interest; 2+ undervalued).
India 8
Singapore 6
HK 6
Thailand 5
Indonesia 5
Malaysia 4
Taiwan 7
Japan 6
The Philippines 4
South Korea 6
China 7 #
# Almost every bourse cited looks appealing for the rest of the year with the exception for China (please read blog on China's interest rates for a better appreciation of a dullish year for Chinese stocks).
HK and Singapore seems to be moving in tandem as they have very strong property sectors, and that seems to be funnelling a lot of interest in wealth creation, property sales and REITs projects.
A good way to monitor effective risk levels of equity is to look at bond rates - gauge the risk free rate and sub-par rates, look at the trends, the differentials, and you will get a good idea of capital flows, excessive / healthy risk taking, liquidity in the system - all important factors when assessing market's volatility, inherent risk, and the quality of the rallies.
Friday, May 05, 2006
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.
Wednesday, May 03, 2006
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.
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.
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