And Now For Something Completely Different ...

Something completely different, ... well not really. I don't have something substantive on financials to post but I thought this is important enough for the majority of readers of this blog. I would like to introduce to you the next hottest actress/model from HK, besides Elanne Kong (whom I have featured frequently already). Her name is JJ and started out as a model and has acted in her first big movie, probably the biggest HK cult movie for 2008, La Lingerie. The movie poster is included here in the post, I only know three out of the five girls in the middle, Janice Man, Stephy Tang and JJ. Anyways, have a good start to the week.

Emerging Markets Valuations

There are many ways to value a market. The usual suspects are dividend yield, price/ book value, p/ cash flow and PER. On average, for emerging markets as a group, dividend yield is 4.2, P/BV is 1.9, P/CF is 9.5 and FY1 P/E ratio is 9.5. In comparison, U.S. dividend yield is 3.14, P/BV is 1.76, P/CF is 6.93 and FY1 P/E ratio is 11.8. On balance we can see that P/BV for US stocks are still lower than emerging markets average. The other danger is that price / cash flow is more attractive in US stocks. In valuation terms, I would see P/CF as the MOST important out of the 4 indicators because its real cash. Dividend yield while good, can be dramatically lower in future periods if earnings get pummeled. Price / book value is a comfort indicator and would only come into play in a liquidation potential or buyout potential, for on going market valuation, its not that important.

Just from the indicators alone, those critics who say that the emerging markets have fallen as hard as the US markets is wrong. Emerging markets may have some way to go to match US stocks' levels. That is not to say that emerging markets will head towards US valuations. But if the markets are at a premium, it may not recover as fast. For both emerging markets and U.S. markets, this level of fundamental valuation has not been seen in decades. You can also check my last post about stock markets valuation two months ago, just before global sell-off had been triggered. Green indicates attractive valuations, red denotes a sell.

Div.Y. P/BV P/CF P/E

Argentina 1.8 / 1.2 / 4.3 / 5.5
Brazil 2.2 / 1.6 / 4.6 / 6.7
Chile 3.5 / 1.9 / 6.5 / 12.2
China 3.3 / 1.4 / 5.8 / 8.2 ( looking OK on all counts, may be ready to rally)
Colombia 2.3 / 1.1 / 8.6 / 12.8
Czech Rep 6.2 / 2.1 / 6.7 / 8.8
Egypt 5.5 / 1.7 / 5.1 / 6.8
India 1.9 / 2.1 / 8.0 / 10.0 (may still have more room to fall)
Indonesia 5.3 / 1.6 / 5.4 / 7.2 ( its cheap, if the rupiah can get out of its rut, its a very good bet)
Israel 4.0 / 1.6 / 7.2 / 10.1
Jordan 1.7 / 1.8 / 6.1 / 15.2
Malaysia 5.6 / 1.3 / 5.9 / 9.6 (very decent on all counts, any further falls should attract sophisticated buyers)
Mexico 2.1 / 2.0 / 4.9 / 9.5
Morocco 2.8 / 3.8 / 20.8 / 20.5 (should have a lot of room to fall)
Nigeria 4.3 / 3.1 / 4.1 / 9.3
Pakistan 6.4 / 1.7 / 5.5 / 7.3
Peru 6.7 / 2.1 / 7.1 / 7.7
Philippines 4.3 / 1.3 / 5.1 / 9.9
Poland 5.4 / 1.3 / 5.5 / 7.5
Russia 2.7 / 5.8 / 81.7 / 3.5 (this market can totally collapse further)
Slovenia 2.2 / 1.5 / 11.5 / 12.8
South Africa 4.7 / 1.8 / 6.4 / 8.1
Taiwan 7.7 / 1.1 / 3.9 / 9.6 (very cheap, probably the best Asian market to go long)
Thailand 7.7 / 1.0 / 3.8 / 5.5 (even better than Malaysia)
Turkey 5.1 / 1.1 / 3.8 / 5.6 (had fallen enough, now to get the currency healthy again)


p/s photos: Tangmo Pattarathida

Recommended Christmas Holiday Readings

I could not become anything: neither bad nor good, neither a scoundrel nor an honest man, neither a hero nor an insect. And now I am eking out my days in my corner, taunting myself with the bitter and entirely useless consolation that an intelligent man cannot seriously become anything; that only a fool can become something. - Fyodor Dostoevsky

I don't really read fiction nowadays, but during my younger days I did, but then again Dostoevsky's fiction is so much about human psychology and human frailty that its like non-fiction. Favourite line by him is above (story of my life...lol), makes you stop, re-read it again and again. You know someone is a good writer when he can say so many things and make you reflect on so many situations, truths and half-truths ... in so few words. Something for the holiday reading menu - read some Dostoevsky. But if you are intent on impressing your friends, its not pronounced as Dos-toe-sky.

(From Wikipedia) Fyodor Dostoevsky (1821-1881) was a Russian novelist, journalist, short-story writer whose psychological penetration into the human soul had a profound influence on the 20th century novel. Dostoevsky graduated as a military engineer, but resigned in 1844 to devote himself to writing. His first novel, Poor Folk appeared in 1846. It was followed by The Double, which depicted a man who was haunted by a look-alike who eventually usurps his position.

In 1846 he joined a group of utopian socialists. He was arrested in 1849 and sentenced to death. The sentence was commuted to imprisonment in Siberia. Dostoevsky spent four years in hard labor and four years as a soldier in Semipalatinsk.

Dostoevsky returned to St. Petersburg in 1854 as a writer with a religious mission and published three works that derive in different ways from his Siberia experiences: The House of the Dead, (1860) a fictional account of prison life, The Insulted and Injured, which reflects the author's refutation of naive Utopianism in the face of evil, and Winter Notes on Summer Impressions, his account of a trip to Western Europe.

Between the years 1861 and 1863 he served as editor of the monthly periodical Time, which was later suppressed because of an article on the Polish uprising. In 1864-65 his wife and brother died and he was burdened with debts, and his situation was made even worse by gambling. From the turmoil of the 1860s emerged Notes from the Underground, psychological study of an outsider, which marked a watershed in Dostoevsky's artistic development. The novel starts with the confessions of a mentally ill narrator and continues with the promise of spiritual rebirth. It was followed by Crime and Punishment, (1866) an account of an individual's fall and redemption, The Idiot, (1868) depicting a Christ-like figure, Prince Myshkin, and The Possessed, (1871) an exploration of philosophical nihilism.

If you must read one book only by Dostoevsky, it would have to be Crime and Punishment. Followed by Memoirs from the House of the Dead and Notes from the Underground.

FDIC Insures GE Capital's Debt

A follow up to the auto sector and hedge funds write up:

General Electric said Wednesday that the federal government had agreed to insure as much as $139 billion in debt for its lending subsidiary, GE Capital. This is the second time in a month that G.E. has turned to a federal program aimed at helping companies during the global credit crisis.

Until September, GE relied on selling commercial paper to obtain more than 15% of the funding of the finance unit. But investors began shying away from commercial paper after Lehman Brothers Holdings Inc. filed for bankruptcy protection and several other big financial players struggled. GE has said it would reduce its reliance on commercial paper, but it wasn't clear how the company would replace that funding.

GE Capital is not a bank, but granting it access to a new program from the Federal Deposit Insurance Corporation may reassure investors and help the lender compete with banks that already have government-protected debt, a G.E. spokesman, Russell Wilkerson, told Bloomberg News.

“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Mr. Wilkerson said. Joining the program could make it easier for GE to issue new debt in coming months. In recent months, investors have worried about GE's liquidity, and the price it has to pay to borrow money.

The F.D.I.C. program covers about $139 billion of G.E.’s debt, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30. GE said Wednesday that under the program, the government will guarantee as much as $139 billion in long- and short-term debt through next June. But, Mr. Wilkerson added, "This does not mean that GE intends to issue this amount of debt."

With roughly $600 billion in assets, GE Capital is as big as some large banks. The finance unit last year supplied almost half of GE's profit. But GE Chairman Jeffrey Immelt this September said he would shrink the unit in response to the credit crisis. GE Capital issues loans for everything from aircraft engines to commercial real estate and restaurant equipment.

G.E.’s finance businesses are able to seek F.D.I.C. debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify. Last month, G.E. started using a new Federal Reserve program aimed at reviving demand for the commercial paper for a wide variety of companies.

Looks like the Treasury and Fed are making all the right moves and pushing the right buttons so far.

p/s photo: Nancy Wu Ding Yan & Sharon Chan Mun Chi

Financial Distress According To Francis Bacon

A Francis Bacon self-portrait failed to sell at auction in New York, in another sign the souring economy is having a crushing effect on fall season art sales.

Bacon's 1964 "Study for Self Portrait'' -- billed as a highlight of Christie's contemporary art auction -- was estimated to take in some US$40 million (HK$312 million).

But when the bidding stopped at US$27.4 million the esteemed auction house halted the proceedings, to a chorus of gasps.

A Bacon triptych went under the hammer in New York last May for US$86.2 million, a record for the British painter.

Seventy-five contemporary works were on sale. Among the most important lots was a Jean-Michel Basquiat painter of a boxer, owned by Metallica co-founder and drummer Lars Ulrich, which fetched just over 13.5 million US dollars but short of the record 14.6 million for a Basquiat.

The global financial tsunami has not spared the art market, and sales of impressionist, modern and contemporary works since the fall season kicked off November 3 have been well below previous levels. The number of unsold works has often exceeded 30 or 40 percent of lots this month, and barring a few notable exceptions the sales prices are on the whole lower than the estimates for the majority of pieces.

To be fair, Francis Bacon did not just do a couple of self portraits, he did plenty, I think close to a dozen - not a very good idea Frankie. I have included my favourite Francis Bacon piece, Study after Velazquez's Portrait of Pope Innocent X, absolutely dazzling, frightful and demands your attention. Actually, the painting should now be called "Caught Up In The Financial Mess Of The 21st Century", I think Bacon captured the entire essence and drama of that theme.

Why Things Will Get Worse First - November 30

Let me say that we are about 75% through the correction phase. Is it too early to go long on equities again, I would think so. There appears to be a few more shoes waiting to drop. We have the auto sector. There could a few more big corporate failures which could dent sentiment, e.g. GE Capital and a few big hedge funds, and some private equity companies as well. AIG is still in ICU and the bloody wound is not clotting properly, its still bleeding and the doctors are very tired.

The biggest shoe among the many shoes to drop will be the hedge funds. Yes, many hedge funds have sold down their positions as early as 2Q 2008. In fact, for Malaysia hedge funds and normal institutional investors have sold down Malaysia earlier than the rest of Asia due to our big political uncertainty, and the flip-flop policies on IPPs and CPO. The entire process of selling has seen its fury over the last two months in particular when funds of all kind had to de-leverage. Good stocks and almost all asset classes were sold down mercilessly. Stocks and bonds as well, even bonds of companies which are in no real danger of going bankrupt are now selling at distressed levels (e.g. 70-75 cents to the dollar).

Naturally there has been an oversold situation, but nobody is willing to come in to bat for these oversold situations yet. Thats largely because fund redemptions are still high and many are still expecting more redemptions. While up to 15%-20% of all hedge funds might have closed shop or is in the process of winding down, the actual number needing to close down by middle of next year could reach double that figure.

While many hedge funds and mutual funds have been selling down everything, there are still a huge number of hedge funds who have frozen redemptions temporarily. You can only freeze redemptions for so long. Unlike mutual funds which are traded daily, hedge funds clients can only request their money back on certain dates, usually once a month or quarter. Many have suspended the monthly dates, but they are unlikely to be able to hold out on the quarterly dates for redemptions requests. Guess the FINAL DATE for this year for most hedge funds investors to file to redeem their stakes. Yes, its November 30th.

Many traders are already shorting some stocks that are likely to to be affected. If you are close to Goldman Sachs, they have a list/index that tracks the top stocks held by hedge funds. Request the index stocks there from them. To get some insight on how hedge funds have been de-leveraging, the 3 weeks ending October 10th saw that GS index falling by a massive 34%, while over the same period S&P 500 fell only 28%. The lock up period is only a temporary haven, it might make for another round of selling. Only, this time it could be a lot worse as volume and bargain hunters may have used up some of their cash already over the last few weeks bargain hunting. 7,600 for the Dow looks more likely than 9,000 for now.

But like I said on the first line, its about 75% over, best to do nothing, best to give up the first 10%-20% in a bottoming rally rather than trading into a volatile market with a strong downside bias. Keep at least 70% cash.

p/s photos: Tracey Ip Chui Chui

I'm In Love With Olivia

You will fall in love with her. Then hear her sing, and then you will fall even deeper in love. What a face plus a nice voice. She is Singaporean and just 23. She sings in English mainly but her Japanese is very good as well. Signed to a Japanese studio, she moved to Japan for her studies and her singing career and is now with a Japanese pop group Mirai. Now she has a few solo albums.

An Improved Plan By Paulson

Nov 12, Paulson on TARP priorities going forward: "First, Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions. Second, the important markets for securitizing credit outside of the banking system also need support. Approximately 40 percent of U.S. consumer credit is provided through securitization of credit card receivables, auto loans and student loans and similar products. This market, which is vital for lending and growth, has for all practical purposes ground to a halt. Third, we continue to explore ways to reduce the risk of foreclosure. " Treasury Secretary Henry Paulson said Wednesday the $700 billion government rescue program will not be used to purchase troubled assets as originally planned. (Finally, some sensibility because buying the troubled assets will not help. If you buy at the market prices, it just means the banks will have to write down the losses with no hope of recouping them. This does not help shore up capital, which is what they need. To shore up capital the Treasury will have to buy them at a premium, which is no good also as it will lock the government into owning toxic assets, or the taxpayers actually owning them at a premium, whereby they could end up with huge losses.)

Paulson said the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending. (That is a more sensible way. By owning stocks and maybe even sit on management committees of banks, they can hasten the lending part.)

He announced a new goal for the program to support financial markets, which supply consumer credit in such areas as credit card debt, auto loans and student loans. Paulson said that 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support. "This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.

The administration decided that using billions of dollars to buy troubled assets of financial institutions at the current time was "not the most effective way" to use the $700 billion bailout package, he said.

The announcement marked a major shift for the administration which had talked only about purchasing troubled assets as it lobbied Congress to pass the massive bailout bill.

Paulson said the administration is exploring other options, including injecting more capital into banks on a matching basis, in which government funds would be supplied to banks that were able to raise capital on their own. (This is smart. By voicing this out, it would theorectically DOUBLE the amount of capital injection, putting some onus on the banks to look for funding elsewhere as well. Instead of just $500bn of capital, suddenly it becomes $1 trillion. If banks are desperate, they will act fast. The source of capital will have to be largely from sovereign wealth funds. The fact that its on a matching basis should be an easier pill to swallow with the Treasury riding alongside them.)

p/s photos: Nozomi Sasaki

A man cannot choose to be born as part of a certain race or ethnic group...

The Jakarta Post Wed, 10/29/2008

The House of Representatives has unanimously passed a bill that terms ethnic and racial discrimination as serious crimes.

Deputy Speaker Muhaimin Iskandar, who presided over the House's plenary session to approve the draft law, said Indonesia no longer had any room for any form of racial or ethnic discrimination.

Chairman of the House's special committee deliberating the bill, Murdaya Poo, said the endorsement of the bill should put an end to the long-standing dichotomy between indigenous and non-indigenous people in the country.

"A man cannot choose to be born as part of a certain race or ethnic group, and therefore discrimination must cease to exist," said Murdaya, who is Indonesian-Chinese.

He said the House proposed the bill as part of its effort to ratify the International Convention on the Elimination of All Forms of Discrimination, which has been enacted since 1999.

Under the new law, leaders of public institutions found guilty of adopting discriminatory policies would face jail terms one-third more severe than those stipulated in the Criminal Code.
Citing an example, Murdaya said the governor or government of Aceh could not ban a gathering held by Javanese ethnics in the province.

He said the deliberation process had been delayed by a disagreement on whether imprisonment should be made the minimum punishment.

Jail as a minimum sentence is typically sought for serious crimes, such as corruption, terrorism, money laundering or drug abuse.

"We decided to set prison as the minimum sentence to deter people from committing racial or ethnic discrimination," said Murdaya, a member of the Indonesian Democratic Party of Struggle (PDI-P).

The bill was passed on the same day Indonesia celebrated the 100th anniversary of Youth Pledge, which Murdaya said should encourage Indonesians to uphold the diverse nature of the nation. -- JP

p/s photos: Coco Chiang

The Next Crisis Unfolding - Auto

On 15th October 2008, I posted on the upcoming demise of the US auto sector:


Watch for the auto sector - this is where the pain will shift to. Big companies will fail or be merged and job losses will be massive - the auto sector consolidation has been brought forward by the events over the last couple of weeks. The auto sector combustion will cause the media to focus away from the carnage on Wall Street to carnage on Main Street. Expect markets to be wobbled by this. Keep cash at least 50%, trade out on weak signs - the worst may be over, but the general conditions still shifty. Jobs is where we should really look at. We can expect more job losses in the coming weeks and even months. I forsee some industries will see MASSIVE failure - the first to go will be the US auto makers.... pension problems, no credit or loans for people to buy cars, consumers delaying changing of cars now, problems with unions... very difficult to refinance their lines of credit moving forward... watch for at least two of them being merged or absorbed by a foreign competitor at cut throat prices. The auto industry are big employers, and that will hurt employment, and drag property prices weakness in those states where auto industry is strong.
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General Motors Corp. stock fell to its lowest level since 1946 as concern intensified that the auto maker could run out of cash and be forced to file for bankruptcy protection. The stock's decline came as several analysts issued dire reports about GM and the company acknowledged in a government filing it could be at risk of violating the terms of some of its debt if it doesn't steady its deteriorating finances by year's end.

Should governments bail out GM? If GM is allowed to fail, what are the repercussions? How far does it spread in terms of employment and loss of business activity? How far do GM bonds reach, and what are implications of default? The size of bonds outstanding for the entire US auto industry comes to about $250 billion. The good news is that most of these bonds are already at very junk status, most trading at less than 25 cents to the dollar. The loss to bondholders have already been triggered way way before today. Hence if any of them were to go bankrupt, it would not have strong repercussions on the actual bond holders. The bad news is that over the past few years, there is the invention of Credit Default Swaps, which has been the bane of AIG's demise. When actual companies do fail, these CDS clicks into action. How many holders of CDS are actually able to pony up the funds to pay back these bond holders? Thats why they trade at just a fraction of their face value. The market does not think that the CDS will actually be able to come up with the cash to pay back the face value of the bond (which is what CDS is designed to do). The worse news is that if say one-third of these bonds crumbles due to bankruptcy, the actual $100 billion losses is manageable, but many of these holders (think AIG) will also be holding many other CDS - a payout to a GM bankruptcy will have cascading effects on the "validity" and "viability" of the other CDS these people are holding.

This might make CDS totally unworkable and will collapse. Hence many more insurance firms will have to file for bankruptcy as well to avoid paying many of these CDS. Thats also why AIG keeps needing more and more capital infusion. Thats also partly why the government needed to bailout AIG, and the likes, in order for a properly functioning credit market to continue. Is the $125 billion into AIG sufficient?

Hence in all likelihood, the government is UNLIKELY to risk having GM go into bankruptcy. You DO NOT WANT TO STRESS TEST the CDS market to see if it would hold up. It might also unravel all the hard work done so far to keep AIG afloat. If the government pump money into GM, how much money is required and what is the direct purpose? By purpose, what will the money be used for? Will the initial injection be enough? Can any amount of money make the company a strong, viable competitor again? Will other national governments pump money into their car companies too, further increasing competition? If you look at how the Big 3 auto companies are operating, they are not financially viable over the long term.

I suspect Obama will not allow GM to fail so early in his Presidency as its not just the car maker, its the supporting sub industries and flow on job losses effect which is not what he would want at such a critical time.

The chart above shows average hourly compensation for the Big Three ($73.20) and Toyota ($48.00), compared to average hourly compensation for Management and Professional Workers ($47.57), Manufacturing/Goods Producing ($31.59) and all workers ($28.48). The auto industry in the US has long been crippled by the unions. We can argue till the cows come home but unions can kill an entire industry. They now have pensions that the company cannot fund, which in turn put unbearable claims on the company's balance sheet. At the end of the day, unless you make a much much better car, you cannot justify operating at cost per hour that is 70% higher than your competitors. The $73 and hour includes legacy costs. Union member don't make anywhere near that much money in reality. That number is at least $15-$20 high and includes benefits like health care. Well, you know what, no matter how you cut it, its still $73 and counting.

I think Obama will inject money into GM in exchange for control, and then institute a merger with maybe a foreign car maker - its pointless to merge an American car maker with another, it just compounds the problem. A foreign car maker will come in but with huge concessions and with a union that is willing to make huge sacrifices. Unions will have to be controlled and ask to forsake a lot in order to keep the company afloat. Job losses will be severe but it will be a lot less than allowing GM to fail. Allowing GM to fail is not an option owing to the flow on effects on the CDS and hence the entire bond market and credit viability.

The danger for financial markets is IF GM is allowed to fail, then you could get another freeze up in credit and sent all markets much lower. You could see the 7,000 being tested. If GM is being bailout, its still not blue skies. Things are still fluid and I see huge volatility in the coming weeks til end of the year at least.

p/s photos: Iwa Moto

Investment Banking Bonuses To Be Slashed

Bloomberg: U.S. taxpayers, who feel they own a stake in Wall Street after funding a $700 billion bailout for the industry, don't want executives' bonuses reduced. They want them eliminated. President-elect Obama cited the program at his first news conference on Nov. 7, saying it will be reviewed to make sure it's ``not unduly rewarding the management of financial firms receiving government assistance.''

While year-end rewards are likely to decline with a drop in revenue this year, industry veterans say that eliminating them risks driving away the firms' most productive workers.``There are instances where bonuses are justified, deserved, and in the best interests of the investment bank involved,'' said Dan Lufkin, a co-founder of Donaldson Lufkin & Jenrette Inc., the investment bank acquired by Credit Suisse Group AG in 2000. ``Your very best people are people you want to hold, and your very best people will have opportunities even in this environment to transfer allegiance.''

The companies, which set aside revenue throughout the year to pay bonuses, haven't commented on plans for year-end awards, typically decided this month or next. A study released last week said the firms are likely to cut bonuses for top executives by as much as 70 percent. Cuomo is expected to go through the bonus proposals from these investment banks, and is likely to cut the bonuses a lot further to appease the public's fury. I think Cuomo could further halve the actual bonuses.

``Even really sober people are saying this is the worst financial crisis since the Depression, and they're saying bonuses are just going to be reduced?'' said a 53-year-old retired merchant marine in Seattle. ``Oh my God, you read that and your jaw drops.''

Wall Street firms' pay has traditionally been tied closely to performance of the companies, which is why employees receive most of their compensation at the end of the year after final results are known. Depending on seniority and performance, bonuses for traders, bankers and executives can be a multiple of their salaries, which range from about $80,000 to $600,000.

The nine banks that was pressed to detail their bonus plans asked for more time to respond. They've been granted an additional two weeks. The original deadline was yesterday.

Goldman, the largest and most profitable U.S. securities firm in the world last year, paid Chief Executive Officer Lloyd Blankfein a record $67.9 million bonus for 2007 on top of his $600,000 salary. That was justified, he told shareholders at the company's annual meeting in April, because of Goldman's superior financial results. ``We're very much a performance-related firm,'' he said. ``If those results don't come in, I assure you at Goldman Sachs you won't see that compensation.''

Goldman's profit is down 47 percent so far this year and five analysts expect the company to report its first loss as a public company in the fourth quarter that ends this month. The stock price has dropped 67 percent this year and Goldman received $10 billion from the U.S. government in the bailout last month.

``The executives in companies that get bailout money should have their base salaries reduced by 10 percent for 2009 and they should pay back a substantial portion of their 2007 bonuses to the government for the financial devastation they oversaw, fostered and, in some cases, directly caused,'' said a 57-year-old lawyer in Baltimore. ``Their sense of entitlement is appalling.''

In addition to Goldman, Morgan Stanley and Citigroup, the companies that received the first round of money from the U.S. government's Troubled Asset Relief Program were Merrill Lynch, JPMorgan Chase & Co., Bank of America Corp, Wells Fargo & Co., State Street Corp and Bank of New York Mellon Corp.

Some needed the money more than others. Citigroup and Merrill haven't been profitable since early last year. Earnings at each of the other firms, except Boston-based State Street, have been dropping.

``Bonuses and severance packages will obsess the American public'' and become ``a humiliation and embarrassment,'' said Arthur Levitt, a senior adviser to the Carlyle Group, former chairman of the Securities and Exchange Commission, and a board member of Bloomberg LP, the parent company of Bloomberg News. ``Compensation committees, believe me, are paying close attention to this.''

Several of the companies -- including Citigroup and Wells Fargo -- have said they won't use federal funds to pay bonuses. That's disputed by some. ``The argument of saying we're not using the bailout money is just crap because money's fungible, money's money,'' said Crystal, who writes the newsletter graefcrystal.com. ``It exposes them to ridicule.''

The bailout is only part of the reason that people object to Wall Street bonuses this year. The financial industry worldwide has taken more than $690 billion in writedowns and credit losses this year and cut more than 150,000 jobs. A decline in lending has caused the wider economy to contract: the U.S. gross domestic product shrank at a 0.3 percent annual pace in the third quarter, consumer spending fell at its fastest pace since 1980 and unemployment jumped to 6.5 percent, the highest since 1994.

Attention is most focused on the top executives at the banks that are receiving federal money. They'll have to take the steepest pay cuts because their pay is disclosed in proxy filings, according to Alan Johnson, managing director of Johnson Associates, the compensation consulting firm that estimates bonuses will decline between 10 percent and 70 percent. ``I'd advise the CEO to say he can't take anything if it's one of these firms getting bailed out by the government,'' said Crystal. ``I think he's just going to have to go down to just his salary.''

That's probably not the case for employees whose pay isn't disclosed, even those who get bonuses that exceed $1 million. Top performers should receive bonuses this year or companies risk losing their best workers. Of about 600 people who responded to an online survey on the eFinancialCareers.com Web site, 46 percent said they would be unwilling to take any pay cut this year.

p/s photos: Fiona Xie

HK Property Confidential

• Hong Kong's home sales fell 58% y/y in volume and 63% in value transacted in October as local lenders tightened mortgage lending amid a slowdown in the economy - this is the largest drop since 1999 and the fourth consecutive monthly decline. Bank lending rose 13% in September, the slowest in over a year, and almost half the 24% increase in August. Office rents in Hong Kong may experience a 20% drop by the end of 2009.
• Banks have not lowered their prime rates along with the 0.5% cut in the US interest rate and are adopting more conservative mortgage lending policies (loaning less and scrutinizing borrowers more).
• Prices have been sticky downwards in HK (even stickier in Malaysia as many sellers are waiting for firmer prices with arrogance) as many home-owners have only just
  woken up to the fact that the market is heading into a protracted downturn as
  opposed to a brief correction. Average prices have only fallen 14% from the peak (Prices have already fallen 14% in HK and probably the same in Singapore... in Malaysia, it has not budged much yet... watch for first out best dressed action soon..). The high-end segment is still outperforming and faces more downside risk. home-buyers may be canceling transactions by forfeiting the deposits and delaying completion date of the transactions.Equity prices remain above their historical lows.
• Citigroup: downward spiral in the Hong Kong property market will continue for the next 12 months - potential push back in completions and the lack of new land sales by the government will result in further declines in construction activities, leading to rising unemployment in the sector, and deal a further blow to the economy (through other industries like property agency, interior decorations, furniture and fittings, consumer electronics) which in turn will adversely affect housing demand.
  
• Hong Kong's prime office rents surged 33% in the 12 months ended May 2008 (Colliers) but most assume that their growth will slow over the next year
• During the 2nd quarter of 2008, prices fell in several segments of Hong Kong’s property market. Smaller sized apartments were especially hit badly but property prices were strongly up over the year. The overall index rose 25.4% (19.4% in real terms) to end Q2 2008.
  
• Strong consumption growth has been propelling residential and commercial property prices upward while negative real interest rates have been supporting the creation of new development.Robust labor market has kept demand for commercial space tight (PREI) But with credit costs rising and slowing economic growth, Hong Kong's property market could be vulnerable.
• PREI: total housing transaction value in the second quarter fell by 4.6% from that of a year before.
• Decline in global shipping on higher costs/slower demand for raw materials might have negative effect on warehousing demand which has been a driver of retail property demand.
• Jones Lasalle: despite slowing consumption growth, leasing costs have been rising. Sales volumes have fallen but so far prices are holding up so far (through mid Q3).
  
• Residential property prices were accelerating early in 2008, from 10.1% yoy increase in June 2007 to 27.7% in January 2008. Prices at the luxury end of the market are already back at 1997 levels. Low borrowing cost at 2.5%, high property yields at 4%-5% made property investment more attractive.

p/s photos: Fala Chen Fat Lai (Men love fast powerful cars like Lambros, Ferraris, Aston Martins and Porsches... not because they really appreciate the engine specs and mechanics... but because they have never seen an ugly woman get out of one)

Opinion On CPO

CS view: The 1985 recession in Malaysia led to a 23% and 37% drop in new planting in 1986 and 1987. The 1998 recession and the sharp drop in palm oil prices in 1999 led to a 73% drop in new planting in 2000. Historical cycles for palm oil prices (trough-to-trough) lasted from 37 to 46 months. If history repeats itself, we should be close to the trough for palm oil prices, as the current cycle is in its 44th month. CS assumed that palm oil prices will average RM1,400 for the rest of the year (FY2008 - RM2000) while FY09 forecast RM2,250 and RM2500 for FY10.

Macq view: Our expectations of improvement in the stock-to-usage ratio of edible oils as well as strong CPO production growth in Indonesia in the coming years, we believe that CPO prices will continue to decline over the next two years, as the market increasingly factors in the strong supply outlook. Long term price for palm oil at about US$400/t or RM1,400/ton

JPM view: CPO prices traded at a trough level of M$660/t (US$190/t) historically since 1996 to mid-2006. However, higher cost of production currently we believe will likely help keep CPO prices above the historical trough level. we see a floor in CPO prices at the M$1,500/t level (US$440/t). This is close to the long-term 10-year average CPO price stripping out the bio-diesel impact of the past two years, and is also close we believe to the production cost per ton for the marginal CPO player.

UBS view: CPO price assumption for 2009 US$450/t, 2010 US$480, 2011 US$510, long-term CPO price assumption lower from US$740/t to US$570/t.

Production

CS view: Slower production growth due to cutback in expansion plans, tree stress due to higher fertilizer cost.

Macq view: We expect Malaysian production to stagnate at 17.6m tonnes next year due to a decline in the yield cycle. For Indonesia, we expect a jump of 2mt; we also expect world production to increase by ~2.4mt. Further, if we assume consumption growth will slow to 2.5mt (vs 3.8mt previously) due mainly to the slowdown in biodiesel and oleochemical usage, we expect the stocks-to-usage ratio to potentially rise from last year's level. Post 2008, we expect CPO production growth to slow in 2008–09 to 2.4mt from 4.9mt in 2007–08 due to expected biological stress cycle on the trees after a record production year. Other industry sources such as Oil World expects palm oil production growth to slow to as little as 2mt next year.

JPM view: Oil World is forecasting global supply growth to moderate from 13% in 2008E to 6% in 2009E, just slightly below demand growth of 7% estimated for next year.

UBS view: Inventory remains persistently high because of weaker demand—we think demand will continue weak and therefore it will take longer for inventory to clear.

Demand

CS view: Global edible oils consumption has never contracted, even during global recessions, but the growth rate is normally lower than during boom times. Demand for edible oils increased by 2 mn to 4 mn tonnes per annum (t.p.a.) between 1980 and 2004. Between 2005 and 2008, edible oil demand grew 6 mn to 8 mn t.p.a., boosted by rising demand for biodiesel.

Macq view: The USDA data for the past 30 years indicate that on average, there is fairly stable consumption in food items such as coffee and palm oil in volume terms. Consumption of palm oil has grown on average by 9%, soy oil by 5% and produce such as coffee by 2% pa for the past 30 years. Even during periods of weak economic conditions, contraction in volumes, if any, is small.

JPM view: Based on Oil World''s forecast, global palm oil demand growth is forecast to moderate from 10% in 2008E to 7% in 2009E, During the previous Asian crisis in 1998, global demand growth for palm oil still rose, but at a much slower rate of 3%.

UBS view: The significant cut in our assumptions is based on new lower global GDP growth and crude oil forecasts made by UBS on 30 October 2008. UBS's crude oil forecast for 2009 was lowered from US$105/barrel to US$60/barrel, a cut of 43% compared with our CPO price assumption cut of 31%. UBS also lowered global GDP growth from 2.2% to 1.3%.

Comments: If you look at too many indicators, you would end up being confused. Best to isolate a few that really matters. Predicting a price for CPO for the next 12 months is difficult and largely a moving target. On the way up, CPO price had a high correlation to oil price jumps - there is a strong involvement by hedge funds and commodity funds in ramping up long positions in all soft and hard commodities. On the way down, it looks like a positive correlation as well but that isn't really true because its a de-leveraging process. I believe oil price and CPO have decoupled and now trades on purer fundamentals of supply and demand. CPO price may see some volatility as producing nations try to bolster the supply-demand equation with new regulations.

To spot good entry levels, we need to monitor the monthly inventory levels. As at end Sep 08 the inventory was at a historic high of 2m tonnes, with a similar situation in Indonesia. Octo and Nov should see inventory rising further to 2.2m tonnes. Hence there is NO HURRY to go long on CPO stocks, you can and should trade them but not buy and hold yet. CPO should only start a genuine recovery trend when inventory reaches around 1.6m tonnes. As it gets closer to that level, you can start buying. Hence we may very well see RM1,300-1,400 for CPO as the bottom of the barrel.

The present discount gap between soy oil and CPO was at a staggering US$300, far from the average US$100 per tonne. Watch the spread closely, if it starts going below US$200, that is a sure sign that genuine buying has resumed. Right now end users are keeping a low buying inventory as they expect demand to be uncertain and CPO prices volatile with a downside bias. They can only keep a low inventory for so long.

The measure to blend 5% of palm biodiesel with diesel is a good move but MUST be properly thought out. The move is good because it takes 500,000 tonnes of CPO a year. It would be bad if its not a permanent strategy as that would hurt the biodiesel industry again. Has the government given sufficient consideration if CPO price were to be at RM3,000 again, would the 5% still make sense. Theoretically it should as with CPO at RM3,000, the price of oil should also be higher, maybe at US$110. But, what IF CPO price were to hit RM3,000 and oil stays at US$70... does it still make sense. If its to be a good long term strategy, I would make the ruling permanent. Stress test it with various combinations of both prices, and stick to it through thick and thin. Only then can investors and entrepreneurs invest properly into a viable and sustainable biodiesel industry, and valuations be properly accorded. Implement and then take away is not sound for business. Having said that, the policy will only take effect in 1Q2010, which will not play any part in the demand supply equation for the next 12 months.

I expect a high low of RM1,900-1,300 for the next 12 months, with a higher bias further down the road, and a bias towards the low end in the short term. That being the case, its pointless to look at P/BV or ROE. Just look at CAGR, PER and dividend yield going forward. Under those measures, the Malaysian CPO firms are not attractive compared to regional players in Singapore and Indonesia. Astra Agro and Golden Agri both looked much more attractive. Best among the locals are IOI Corp and Hap Seng Plantations.

p/s photo: Elanne Kong