Two Tribes Go To War

There appears to be two investment camps in global equity markets. Who has more power? You decide.

Hard Landing Camp - This group believe that the US subprime shit will hit the fan and everyone will get some in the eye. They are bears and they keep shouting that we all need to be very afraid. Pessimists maybe but nonetheless they have more substance than Dr. Doom Marc Faber. They don't think US hosuing market has bottomed out, in fact it has a lot more downside to it. They also believe that sub prime lending has also crept into some prime lending areas over the last 12-18 months. They also think the housing recession will affect other areas of the economy. Most importantly, this camp believe the US hard landing will affect global markets as well. Believe housing bubble is a global problem. They see slowing growth and rising inflation which is stagflation in the US ... and to add a bummer into the works, a collapsing US dollar which can cause all markets to be in a tailspin as that would also cause the yen carry trade to reverse.

Soft Landing Camp - Believes the subprime is mostly self contained. Much of risk has been spread around to brokers, mutual funds and banks who bought the repackaged loans. Federal Reserve will now be pushed to reduce rates aggressively for the rest of the year. Believes a soft landing in the US and also the decoupling of US and global markets, especially Asia. While housing will slow and property prices may end 2007 down 10%, the firm labour markets will help ensure a soft landing scenario.

My Take - I am more in the Soft Landing Crap err.. I mean Camp. I do believe there is a problem in US housing and that a 10% dip in prices is almost inevitable, but seriously look at the comparative gains in housing over the last 3 years in the US, there's plenty of equity still. It is also a common fallacy to think that Americans have a poor savings rate, hence their trade deficit problem is magnified in terms of consequences. However, that does not take into account housing equity in the US, where the bulk of American savings is located. Sure, speculators on their second and third property will feel the heat but will be a limited grouping. The hard landing group seems to be made up of a lot of people who have MISSED out on the equity rally over the last 12 months, and now have their half-empty glasses to cry wolf over! There is a lot of fear in many of their opinions. Sigh!

Markets will decouple soon with the Fed lowering rates and the ECB raising rates again soon. This will give rise to an area where currency is strong, growth is strong as well - the emerging markets and Asia in particular.

Things that I am comfortable with (which I have oftened mentioned in my previous blogs): more private equity M&A activity bringing up valuations; same event causing a shrinking of scrips; an aggregation of funds in investing; company earnings growth and margins intact; a lowering rates environment; pre-election year... second stage of a super bull market.

What's Yuan Gotta Do With It?

giggsy said...
Quoted "Yuan will be allowed to appreciate more for the rest of the year. What a good investment option ... mind if I ask, what made you said that for the above statement? thanks, Jeff

p/s since you used the nick of probably M.U.'s all time best player next to Cantona, gotta try and answer your question ...

China's yuan has been pegged to a flat dollar within a narrow band (0.3%) around an official rate of 8.28 to 1 since 1995. Even though the yuan is still not entirely freely convertible, China has made deliberate moves to allow the yuan to appreciate in light of its enormous trade surpluses. Now the rate is 7.72, and more significantly even surpassed the HK dollar's 7.81 rate! The US is about the only country that can have a seemingly strong currency that leads to trade deficits is in its national interest in a global economy dominated by international trade. This is because a strong dollar backed by high interest rates helps produce a US capital account surplus to finance its trade deficit. The strong dollar scenario has been mentioned many times in this blog - it has to do with the rest of the world wanting to keep holding dollars: indirectly as a result of US's global military leadership (like it or not). However, even US lawmakers are now willing the dollar to go weaker as they know continuing trade deficits financed by an artificially held capital account is unsustainable. To keep paying down US debts by printing more US dollars, the rest of the world has to be willing to keep taking it up the ass. Maybe the rest of the world is feeling a tad uncomfortable in their nether regions; maybe more central banks are diversifying their currency reserves portfolio more; maybe more oil and gas won't be transacted in USD; etc... Its not the end of the dollar but things are starting to unwind.

Its What US Wants - Treasury secretary Henry Paulson told the Senate that the US should encourage China "fairly aggressively" to allow its currency to respond to market forces and appreciate against the dollar. US lawmakers think a stronger yuan is the main cure for their economic ills, in particular the unmanageable trade deficit. Of course, in my opinion, I think the yuan is the least of their problems.

A Reflection Of Competitiveness - The best reflection is in the trade surplus as more willing buyers, and the country can produce at attractive prices. It is unlikely we will see China registering a trade deficit, not for at least 5-10 years down the road.

Trade Surplus A Reflection Of Consumption - While China may have more than a billion people, not all are caught up in the economic growth cycle. This will reduce the consumption growth patterns, i.e. imports. However, to use the currency as the rebalancing lever in trade deficits and surpluses is myopic as it does not take into account the very different monetary system within China, plus the currency is only semi-convertible.

Relative Interest Rates & Growth Rates - China is entering its 10th year of growth. Its bank lending rate is a tad over 6% while Fed funds is closing in at 5% soon and lower in the medium term. All things being equal, funds flow to higher interest rates and growth rates.

Productivity Faster Than Currency Growth - If yuan is allowed to appreciate a few percent every year, wouldn't that hurt competitiveness. Usually yes, but in China the growth in productivity and cost savings outstrips the mild increments in the yuan. As long as productivity maintains the same higher path than the yuan's growth rates, yuan can appreciate for a very long time. Look at the way commodities and oil prices surged over the last 4 years, mainly due to China being a major consumer of those stuff to produce goods. China can stomach these higher commodity and oil prices because they can add a lot more value and productivity to the processes.

Outsourcing Capital - There is the cheapest price and there is the China price. Usually they are the same thing. The biggest phenom over the last 5 years is the outsourcing trend. Capital and jobs flow to China, and flows back to developed nations in the form of exports. Low labour unit cost and land cost all add up to China's benefit. Companies will outsource whatever they can in order to grow margins and remain competitive. Its the big paradigm shift.

China Has To Do It - China has to allow the yuan to appreciate to appease a whole truckload of people, from US lawmakers, to WTO, to United Nations, to regional trade groupings calling for a better and more level playing field ... The political overtones are not to be under-estimated.

The general feeling is that the central bank will allow for a 3%-4% appreciation in 2007 and another 5%-6% in 2008. Although I would not be surprised if the band was widened on the high side. A stronger trending yuan is very good news for its smaller Asian neighbours. Everyone is looking at relative competitiveness. A stronger trending yuan gives export driven nations such as Thailand, Malaysia and India more room to manouvere.

Other inherent traits for a strong currency such as high savings rate and strong FDIs are all there, what more do you want. However, it is also the very strong belief for a long term strong trending yuan that has led to a surge in liquidity into yuan assets. The biggest beneficiaries are stocks and real estate. A strong currency outlook attracts a lot of hot money. Hot money will circulate for good returns. Central bank frowns on hot money in the system. So, its the usual tug of war for China's central bank - good problems to have.

For those who are curious why I always whack the Anchor & Adjust decision makers, have a look at where the yuan peg was before. In 1986 the yuan forex swap rate was at 5.2 yuan to the dollar! In 1991 the forex swap rate was 5.9 yuan to the dollar. In 1993 the forex swap rate went to 8.7 yuan to the dollar!!! So after some 20-25 years, we are seeing a reversing of a trend, and in this case the trend can be a bloody long term thing.

The Games We Play

& The Politicians Who Celebrate Victories

Another gem has been spotted in one of my favourite blogs (which happens to be written in exquisitely expressive Malay language). The heading was a clever play on "sob-story" and shuttlecock, but I digress ...

Cerita Tangis dan Bulu Tangkis
Hari tu gua menangis. Gua dah lama dah tak menangis. Tidak pernah semenjak menonton cerita Sepet, yang membuatkan gua menangis atas kekayuan pelakonnya, bahagian-bahagian 'redundant'nya dan terlebih publisitinya....sorri, terlanjak pulak. Ok sambung cerita gua menangis. Ya, selepas lebih 20tahun, selepas melihat Razif dan Jalani menjulangnya buat kali terakhir, aku tak dapat menahan emosi bila beregu negara menang All England tempoh hari. Menang ada gaya la katakan. Sepanjang kejohanan tak pernah kalah satu set pun. Ini baru panggil Malaysia Boleh (tapi Koo, hang kontrol sikit keret hang tu. Janganlah joget kat depan net time dapat matchpoint. Ada ubi ada batas, ada hari Cina tu balas siut. Lain kali dia buat tarian singa kat depan hang baru tau!).

it gets funnier, if you can believe that, you can read the rest at:

http://dewan-karut.blogspot.com/

Malaysians love their sports, we may not be very good in most of them, but we love them. Though football may be our top passion, we are very poor at it. Due to our Asian build, we can only succeed in sports which favours low center of gravity, favours nimbleness and speed, and non-contact sport please. Hence our resources should go towards that. For a nation that spends so little in sports development, and for us to be tops in squash, badminton and bowling (and even lawn bowling) is a magnificent achievement. Plus we make it almost impossible for good sportsmen and women to make a living in the real world as well.

Great atheletes are left to fend for themselves when they retire from the sport after having represented the nation for years and years with little recompense. Many are left with just technician jobs at Telekom Malaysia or Tenaga Malaysia for the rest of their lives, barely making RM2,000 a month. That's how we treat our sportsmen and women. The worst example was the way Karamjit Singh was treated by the relevant bodies and authorities - why Asia's top rally driver can get ZERO support from the government when they can plan for a stupid and illogical training facility in England costing millions is beyond me. Let's see how far can we build a sports facilty so that no one can get there and that it will be the most expensive place on earth to train. Geez... you can do the same thing with better facilities in Canberra for a fraction of the cost, if its winter conditioning you want. We can pour millions every year into F1 racing where we always finish out of the points, and yet we cannot sponsor and support a Malaysian rally driver who's at the top of his game in Asia ... hmm ... could it be ... Please PM Badawi, somebody, do something right for once!

So, Nicol David, Koo/Tan, Shalin/Zandra/Esther ... get all the sponsorships and prize monies you can, while you can, cause things will look very different 10 years from now.

Somehow, badminton is the only sport that can rally our support and give rise to frenzied emotions in us Malaysians. I cannot remember a happier moment in sports in my life than the time we won back Thomas Cup in 1992. I was watching it on TV with two other friends. When the doubles started, we opened a bottle of Chivas and agreed to down a shot of Chivas everytime the Malaysian players got a point. Imagine a three setter would involve at least 45 points, there was not enough whiskey man... but what a night! Bring back the Thomas Cup!!!

And Now For Something Completely Different

ICC Cricket World Cup

After bitching all around about having to pay RM400 for the bloody broadcast of the ICC Cricket World Cup, the tournament is gaining momentum. You either love or hate cricket. Its 22 players waiting around for one ball for half a day, that's one day cricket; stretch it over 5 days its called Test cricket. For those who like American sports (high scoring, a buzz a minute) then one day Cricket World Cup is as close as it will get ... just remembered a brilliant American joke...

I hate American beer, when I drink them its like makin' love in a canoe ...

Cos its fuckin' close to water ...

Anyway back to the game. For the uninitiated, cricket is only played very well by the Test teams, sort of like a Champions League. Teams do get added as a Test team, but its like getting Singapore to legalise chewing gum (could happen, may happen, but will take a bloody long time). Current 10 Test teams include England, South Africa, Pakistan, Australia, NZ, Zimbabwe, India, West Indies, Sri Lanka and Bangladesh. However, even among the 10, there is a huge gulf in terms of ability. The bottom two Zimbabwe and Bangladesh are always considered not always fully qualified for Test status. So one can imagine in a World Cup when they include countries outside the Top 10 as part of the competition. They include countries like Bermuda, Canada, Holland, Scotland, Ireland etc... Most are called minnows, but an air of respectability is encouraged and they are referred to as associates during TV commentary sessions.

The minnows gap with the top 5 teams is like, say for soccer, comparing Brazil/Holland with minnows such as Malaysia or Singapore - I am not kidding. But it makes for a lot of fun scoring. Hence the two biggest upsets so far in the preliminary rounds was when Ireland beat Pakistan - so much so that the coach Bob Woolmer died sometime after the game in his hotel room (and the case is being treated as suspicious of foul play). Latest reports say that there could traces of poisoning, and the storyline gets entangled with speculation that Woolmer was about to lift the lid on Pakistani betting syndicates and match-fixing. As unfortunate and sad the incident was, it has the makings of a pretty good movie.

Another was Bangladeshis playing out of their skin to beat India. Even though Bangladesh is also a Test team, it hurts India a lot more as they see Bangladesh as an inferior, poorer, "how dare you whack my balls", you are not worthy- kinda neighbour.

I don't particularly support Pakistan or India cricket because their fans act like a-holes most of the time. Love you when you are winning, would burn your house down when you are losing - pretty f'cked up mentality. Its more than just a game in that continent, top players get treated like royalty, and will be "untouchable" by selectors - they stay around forever, cannot be removed just like the old English fart-bags judges no matter how slow/old they are. But lose a game or two, the fans will burn effigies, posters ... man, those players dare not go home for some time. What a f'cked up thing! Btw... happy that India lost. Man, I would love it if Sri Lanka beat India tonight and kick them out of the tournament. Trust me, the Indian players would be hanging around in Barbados for a couple of months more if that happens: nobody would want to go back home. One of the funniest scene from the World Cup was when Bangladesh was about half an hour away from overtaking India's runs total, the cameraman panned to a section of the stands where there were a huge group of Indian fans before, now its all empty but they left behind the posters and banners. One of the bigger ones read "India-Champions Of The World", it was so funny. I mean for them NOT to take the signs home with them. Its sad but that's not the way true fans of the game should behave.

The Australians still look clinical and has very deep batting to get them to the finals, and oldie McGrath still looks to be a match winner. Sri Lanka is playing extremely well, and I would bet on them to win if the Aussies do not make it.

The Little Bull Terrier

Nusajaya's Mascot

As investors focus on UEM World, Gamuda, Mulpha, Tebrau... etc... now that the catalysts predicted are in motion, I would like to point out that investors should keep an eye also on the little bull terrier in Ekovest. A spv named Kota Selat Tebrau Sdn Bhd has been established to undertake the development of the Danga Bay project in IDR. Danga Bay Sdn Bhd holds a decent size 1,380 acres in a very prime area, and is controlled by Lim Kang Hoo. Kota Selat Tebrau will have Khazanah as the majority lead partner with Kumpulan Prasarana Rakyat Johor, and Lim will inject all or most of Danga Bay into the spv. If all of Danga Bay is injected, the transaction could be in the region of RM350-400m or around 20%-25% stake in the spv. Danga Bay is prime because the land actually faces Singapore.

Ekovest could be brought into the picture because Lim Kang Hoo controls Ekovest and if you look at the trading history for the past few months, it looks like most of the shares have been collected. In fact, in August Ekovest has proposed to buy a 30% stake in Danga Bay Sdn Bhd, but the deal was left hanging following the embargo by the government on all land deals in IDR (that has since been lifted).

Kota Selat will be a crucial vehicle as it will include land from Danga Bay and also from Tebrau (controlled by Kump Prasarana Rakyat Johor). The gross development value for Kota Selat is in the region of RM6-10bn just over the next 5 years. The deal is apparently quite advanced already as the famed British architectural firm Atkins Group (not the carbo group) has been roped in to do the masterplan for Kota Selat. Kota Selat has to make the first move as it has the best piece of real estate, and what it does will drive the surrounding developments.

Currently Ekovest already has RM3.2bn in outstanding order book, which include: land reclamation for Danga Bay (RM479m); Universiti Malaysia, Sabah, Phase 2B (RM366m); Kolej Universiti Teknologi Tun Hussein Onn campus (RM541m); construction for National Institute for Natural Product, Vaccines and Bilogicals (RM1,200m) are among the more prominent ones. When you add the 30% stake plus a chance to get some of the works for Kota Selat, its a bumper period ahead for Ekovest.

At below RM2.50, the stock only has 134.4m shares making its market cap at just RM336m. Last two years saw its pretax profit at just RM9.2m and 13.7m respectively for 2005 and 2006. A more important guide would be its P/NTA which is at 1.35 only, not demanding when you take into account what's in store. No debt and RM0.36 cash per share. This little bull terrier could surpass its bigger IDR-plays collegues in terms of percentage gains. Watch out.

China Calling Again

Similar to the blog posting below, I think there will be a lot more rapid pronouncements to tighten liquidity and regulations to prevent a complete bust-up. It is almost inevitable that there will be some form of substantial correction in stock and property markets in the future. All the government can do is to mitigate the impact and trickle down effects. I think it is excellent foresight on their part to start the tightening process even now.

China's Securities Regulatory Commission has now barred listed companies from using share sale proceeds to invest in stocks. Companies are also barred from buying derivatives and convertible bonds with the share sale proceeds. The move will force companies to reinvest wisely to build up business or return them to shareholders as dividends. Companies who are actively investing in stocks may be too dependent on gains from share trading. The contagion effect from a market crash could seriously weaken these companies' balance sheet.

To show how serious they are, China's cabinet has already approved a task force last month to clamp down on illegal share sales and other banned activities. While many retail players and even some institutional investors may not like what the authorities are doing, it is for the betterment of the market and to lessen the effects of boom-bust cycles. It is exactly this feeling of complacency among most investors which requires the government to execute "crisis-management" even now. Let's hope they are not too late.

China Calling

First, you had that stupid scare on rumours of a possible capital gains tax which started a markets' diarrhoea. Now that was proven to be untrue. However at the recent very big pow-wow (National People's Congress) a few major decisions were made.

a) China will allow a new agency to manage a portion of its US$1 trillion in foreign reserves, prompting fears that China may not be as aggressive in holding USD in the future. Yes, baby steps initially, but nothing much for the Fed to worry about initially. This may herald the start of the soon to be infamous long term decline of the USD. Just imagine how this decision will affect other central banks or the oil barons. Holding USD is definitely no longer fashionable. Anyway, back to the issue, it looks like China wants to put a part of the reserves to be managed similar to Temasek, and hence will be modeled after Temasek to do direct equity investments. The new company will be called Lianhui and will start with 250bn yuan (US$32bn).

b) China also raised rates by 0.27% thereby pushing the bank lending rate to 6.39%, the third hike in the last 12 months. The hike was more to rein in lending and the property market. Nonetheless, it would put a wet blanket on China stocks as well because the mood from the top dogs is that they want to be more aggressive this year to curb excessive lending and to tame the wild property market. While that might be the case, the actual deposit rate is only giving 2.79%, which is not highly attractive compared to the highly volatile and exciting China stocks.

Bearing in mind the rate increase came right after the recent raising of the banks' reserve requirement ratio. The bureaucrats are really trying hard to send a message that they are really not happy with the current very liquid conditions. I would say that there will be more tightening from China in rapid succession until Chinese stock markets and property side can feel the noose around their necks. I would strongly advise to sell China stocks and stay sidelined for now, and just collect the very attractive interest rate in yuan currency. Yuan will be allowed to appreciate more for the rest of the year. What a good investment option.

c) Premier Wen Jiabao made the following speech, quite unbelievable really. You'd think a hardline Democrat or Al Gore was making the speech and not a communist leader. “China's investment growth is too high, lending growth too fast, liquidity excessive and trade and international payments very imbalanced. Energy efficiency and environmental protection issues haven't been properly resolved." Wow! Cool and highly responsible. These statements should not be taken as baseless regurgitations by a politician but rather the "new platform" where all major decisions and strategies for the rest of the year will be plotted on. Be afraid, be very afraid. It is highly likely that there will be a lot more unpopular and restrictive policies that will tighten liquidity considerably. Again, get out of stocks and property for now in China.

d) Now China don't need FDI so much. Also from the recent pow-wow, foreign companies will no longer be given preferential treatment. Chinese enterprises had long pushed for a unified tax policy, complaining that overseas firms enjoyed an unfair advantage over them. Foreign companies have been paying an income tax rate of 15%, while domestic firms were taxed as much as 33%. A single corporate tax rate of 25% is to take effect next year.

As China moves into its 10th year of uninterrupted growth, the lawmakers are now getting really serious about a lot of things. The bulging trade surpluses is very unhealthy. The slowly appreciating yuan will not do the trick. Unifying corporate tax may be more effective than at first perceived. The bulk of the trade surpluses are actually generated by foreign companies manufacturing in China and exporting back the goods rather than domestic Chinese companies' exports. This move will remove a good portion of the incentives, and will at least slow down the rate of FDIs.

d) China will raise its 2007 defense spending by 17.8% to 350bn yuan or US$45bn. Naturally Japan and the US voiced concerns. Bear in mind that at US$45bn, it is just 10% of US defense spending while China has a few times more people than the US. Bear in mind that despite the economic successes, you still have to protect the 1 billion over residents with some form military might. No matter how peaceful you claim to be, you never can know, the geopolitical military equation has to be balanced. You cannot seriously expect China to maintain a flat defense budget!!??

All the tightening moves could emanate from a possible US proposal to implement a 27.5% tariff on goods imported from China. Some nitwit senator probably is proposing that, and Paulson would have to set things straight and not allow that to get to the floor. Bear in mind that the majority of the trade surplus is by foreign companies based in China who are exporting goods. This is a little known fact as they are all shrouded in jvs. Bumpy road ahead in China.

Current Investing Insights

Consensus Estimates - If there are 20 research reports, or index predictions by experts, the general view is to take the average of all predictions and take that as the consensus. Consensus information is an overused thing when it comes to investments. It is very one-dimensional and blocks out a lot of useful information but still, reporters and the media will jump on earnings results and compare it vis-a-vis to consensus estimates.

If I have 20 experts predicting where the Dow Jones index will be come end-December 2007; and say the consensus is 13,000: I wouldn't be very interested in reading those in the middle of the pack but rather I would be very keen to get hold of the two extreme predictions. Say the person who predicted 16,000 and the other who predicted 9,000 because they are bound to be very convinced by certain factors/scenarios which caused them to make those predictions. It is up to us to assess the viability of their arguments but its refreshing to read up on people willing to stick their necks out - they are usually braver and smarter, and not afraid to be wrong. Though the extremes may not be correct all the time or even most of the time, it is very useful to understand why they favour certain factors. It could very well lead us to make better strategy or investment conclusions.

Rate Cuts - Rate Cuts 101 says that a rate cut will mean stocks rising in price, ceteris paribus. But does history validates that theory? This is an especially critical aspect now as the Fed is HIGHLY PROBABLE to start easing rates for the rest of the year. William Hester of the respected Hussman Funds noted that since 1955 there have been 11 periods where the Fed have lowered rates at least once after raising them multiple times. Following the first interest rate cut, the S&P 500 has advanced at annualized rates of 23.9% over the following 6 months, 18.3% over the following 12 months, and 18.7% over the following 18 months. However, that is not the full picture. The impact is vastly different depending on the valuations of the markets' then. One should read his cutting report here:

www.hussman.net/rsi/fedfundscut.htm

During periods where the S&P 500 price-to-peak-earnings multiple was less than 15, an initial rate cut was followed by annualized S&P 500 returns of 43.2% over 6 months, 26.1% over 12 months, and 25.4% over 18 months. In contrast, rich valuations have produced far more tepid returns. When the S&P 500 price-to-peak-earnings ratio has been above 17, the market's annualized return following the initial rate cut was a dismal –2.3% over the following 6 months, 5.9% over the following 12 months, and 6.2% over the following 18 months.

My assessment is whether the present markets' valuations are expensive. I think its in between, and not as expensive as most would think. Remember the previous blogs on liquidity, and demand & supply of scrips. Still, the first cut would not do much, its the second rate cut that would work wonders. At the end of the day, the data shows that a rate cut is better than none at all.

RPGT To Be Removed

Guess The Motivations - Bending Over Backwards

It is very likely that an announcement will be made during the Invest Malaysia 2007 conference later this week. It is felt that the abolishment of Real Property Gains Tax will help draw real estate investors to the Iskandar Development Region in south Johor. The RPGT structure was last revised in the mid-1990s amid a hot property market. The RPGT is presently assessed based on a percentage ranging between 5% and 30%, depending on how long the seller has held the property. For Malaysian individuals, there is no RPGT if the property is disposed of after five years. For foreigners, a flat rate of 30% is applicable within five years from the purchase of the property, and 5% on the sixth and subsequent years. As such, it is easy to see why it has been argued that a relaxation on RPGT can trigger a re-rating of the property sector.

The Government has been easing restrictions on foreign buyers in recent times. As an indication, foreign purchasers will be allowed to buy houses and condominiums priced above RM250,000 per unit without the approval from the Foreign Investment Committee. On top of that, foreigners will also not be subject to any conditions in terms of usage or limit on the number of properties purchased. It looks pretty obvious that the ground is being prepared for the IDR as regional Asian investors need to be lured by similar tax conditions to partake in the IDR. Its also probably a precondition by HK and Singapore companies before they plonk down funds and resources to develop IDR.

That's probably the last hurdle for Asian property retail investors, no RPGT and a bullish outlook on the ringgit, the IDR would look very attractive to HKers and Singaporeans, particularly if they also see Cheung Kong and Capitaland moving to IDR in a big way.

Bears Making A Ruckus

A trend is your friend they say, and when the going gets tough, bears come out to hunt. Herd mentality, I guess. We have to filter out the noise made by the bears and just look at things in its proper perspective. If we were to look at the current bull run, it is not a massive one. In fact it ranks just seventh out of the nine bull runs in terms of scope and magnitude. Its hard to be over-exuberant or grossly over-inflated when you are #7.

Does anybody remember the global scenario a year ago? Corporate valuations are about similar but oil was some US$13-16 higher per barrel, we didn't see the edginess then as we do now, did we? Yes, there are worries in the market, the liquidity situation: as in all bull runs, it is generally fueled by strong liquidity - too much liquidity chasing assets creates bubbles, I doubt we are at a bubble stage yet.

But what is liquidity? It is certainly not just yen carry trade, its just a simple demand and supply equation. Liquidity has been growing, no doubt about that. Supply as in supply of scrips have been shrinking - either from being privatised/LBO or companies buying back shares and cancelling them. Remember that US companies cash balances have never been healthier and buybacks have been very good. Liquidity has been growing well via aggregation as well: thanks to the success of private equity and hedge funds popularity, a large amount of fund have been raised over the last few years. This kind of aggregation allows for a larger group of more-focused buying liquidity in the system, and don't forget the leverage factor in the present benign interest rate environment. Just in 2006 alone, the amount of actual equity supply decreased by 5% in the US alone. (On a totally different plane, the private equity expansion will ultimately lead to a few big bust-ups, that will signal the tapering off of growth in private equity. It will probably happen in a rising interest rate scenario... not just yet, a bit later.)

Bears will be right if we have in our hands new information which is highly negative and surprising. But the subprime worries appears to be a bit late and overdone. If we look at US GDP growth for the past 3 quarters, the combined growth was just 2%, well below the previous year's 3.7%: which means to say that housing slowdown was already evident more than 6 months back. Investors were not terribly worried then because of the firm labour markets. Six months later, its the same scenario, yes a few big firms related to subprime appears to be in trouble - that to me signals the peaking of worries, not the start.

Nusajaya Dreamin'!

All The Leaves Are Brown & The Sky Is Grey

Some readers have been making wisecracks at my call on UEM World. Fair enough. RM14-15 might be a stretch for now with the repricing of risk into equity markets but I am still confident that the stock can at least get close to RM10 inspite of the troubled waters globally. The stock has fallen from above RM4 to nearly RM2.5 during the recent selloff and has since rebounded to RM3.20 or thereabouts. Hence my call is quite huge, a bit like George Bush Jr being tipped to win the Nobel Peace Prize, or HK having a genuine and truly democratically elected government, or NOT hearing a Singaporean tourist in other Asian countries commenting "waah... so cheap-one" all the time ...

A regular reader of this blog commented wisely that there are many similarities with the Nusajaya (IDR) project and the Multimedia Super Corridor. For those who are uninitiated, the MSC started off as a field of dreams to mirror the successes of Silicon Valley. MSC still exists but what we got in the end was probably just 5% of the stated goals. We did not have sufficient feeder universities and research bodies to generate ideas/innovations for it to be converted by VCs into cutting edge companies. We did not manage to lure a critical mass of innovators, students and companies as a mass incubation mix. We ended up as basically a pretty good outsourcing center with decent tech infrastructure. Remembering that the advisory group for MSC was this huge gathering of big wigs including Bill Gates: suffice to say that the reader did point out the similarity to the inclusion of Andrew Fung and Robert Kuok in the IDR advisory team.

The one thing I can say for my enthusiasm in IDR is that the MSC goals were mostly far fetched. However IDR is basically just a huge property/township development, it does not require too many Phds to figure out the concept and push it to fruition. C'mon, its just a property project not rocket science. This field of dreams, you don't even have to build ... they are coming already! You start to build, they will buy off the plan!

Even if the global markets were to be flattish for the rest of the year, I believe UEM World to start diverging positively much as the way plantations stock took on a life of its own in 2006. Anyone who has visited UEM World the company will be able to tell that the corporate culture is one of very high energy, and many of them have lucrative stock options to keep them motivated. UEM World will probably generate the most number of new millionaires per company after Microsoft over the next 2 years. It is not a staid GLC anymore. You go there, you'd think you are at a GE subsidiary, no kidding! My biggest fear is in the execution process, however, Khazanah seems to have laid down the catalysts to trigger the right responses from the company.

What if I tell you:

a) that there are already long term funds still accumulating shares. Legg Mason may have more than 5%, and the other institutional buyer include Kuwait Investment Authority. What if Goldman Sachs starts to appear as an investor?

b) that a few very significant companies have ALREADY signed deals to buy land for development in IDR, and all are in jvs format with Khazanah. What if I tell you that the companies already include Cheung Kong, City Developments and Capitaland. What if I tell you that Singapore's MRT has been roped in to do IDR's monorail infra?

c) that a couple of very big investors from Middle East are in the bag, just waiting for the right timing to annouce?

d) that Khazanah will want UEM World to stay away from the "in-house" relational projects awarding system, and to go for best bid-best developer basis? That UEM Builder will be spun off? That maybe UEM World will give away UEM Builder shares to UEM World shareholders as bonus so that it has no more links to UEM Builder? (UEM World holds 51.7% of UEM Builder, a bonus issue will mean 1 UEM Builder for 3 UEM World shares, good bonus if it happens).

These are all IFs. Your assessment will have to be on how reliable are my IFs. I can tell you here that my IFs are actually very high probables already. All that also hinges on Khazanah's masterplan and execution ability via UEM World. It appears Khazanah has already prepared the catalysts one by one, waiting for the right timing to roll out the barrel one by one. Just imagine the effect and impact when all my IFs above are announced one by one for the rest of the year!

Despite the 'fear' epidemic surrounding global markets, the timing is getting riper by the minute. Last week the government has lifted the ruling on "no more land deals within IDR" which was in effect for over 6 months past. You should hazard a guess on why there was an embargo, and now why the embargo was lifted. Last land deal was in October 2006 when UEM Land sold 4,500 acres in Nusajaya to Khazanah at RM7.30 psf. At RM8 psf, UEM World's NTA will rise to RM3.00. This is a big IF, if it matches Shah Alam's psf price of RM20-22 psf, you can do the math. If all my IFs turns into a reality you should be looking at RM30-45 psf. Its not going to happen overnight, but its looking mighty good.

I have already mentioned on the critical success factors for IDR. You may have the integrated townships, industrial clusters, the logistics hubs, Islamic finance hub, educity, healthcare hubs and leisure side; at the end of the day its the proximity to Singapore that counts. Its also the success in redeveloping Macau plus the potentially successful Intergrated Resorts in Sentosa and Marina Bay which will draw international investors to IDR.

From One Baseless Scare To Another

We Like To Scare Ourselves Shitless

Let's take a few steps back and look at the developments over the last 2.5 weeks. It seems all global investors have decided to see The Exorcist at the same time, followed up by a double screening of Salem's Lot and The Omen. After every movie, we come out with shivers, recounting some of the scenes, ... its just a movie but were scared shitless for a couple of hours anyway. Are we having that kind of experience in global markets? You be the judge.

First scare, rumours that there will soon be a capital gains tax on stock trades in China sent Shanghai tumbling by 9%, causing a rippled effect across all time zones. The next day, phew, its rumours only.

Second scare, yen suddenly begun to stregthen as investors preferred to see more horror movies, causing investors to assume a huge yen carry trade reversal is in the offing. This was followed by a sequel and then a prequel, the yen carry trade caused panic attacks on viewers over an extended period. At the end of the day, it is still just a scare because:

a) bulk of yen carry trades is by Japanese investment trusts and companies, and not international hedge funds or something similarly sinister.

b) Japanese investment trusts' holdings of overseas assets rose for the 9th straight month to a record high in February despite the doubling of interest rate to 0.5% in mid-February. Actual increase was US$6.36bn to US$254bn.

c) The bulk of the yen carry trade is actually not in exotic securities or emerging markets' equities but rather the staid US Treasuries, and maybe a dabble in Kiwi and OZ bonds. Suffice to say that the Fed would have its fair share of burden to ensure that there isn't an implosion in the yen carry trade as that could sell down US Treasuries significantly.

d) Estimates by banking experts say that if there was a wave of reversal in yen carry trades, the yen dollar rate would have gone to 100-105 and not at current levels. Plus there are too many investment factors ensuring that yen carry trades are a viable investing option. The scare also caused a dribble of actual reversal which is good for the overall situation.

e) After two horrendous but empty scary movies, investors were hooked, they looked for the next one. Hah! Subprime in the US!!

While I am not trying to play down the dangers, its still looks like a marathon horror movie expedition to me. (Readers should download the bearish CSFB report by going to www.billcara.com then look for the March 13th posting on Research on US Housing & Mortgages). Housing stats weakness is a given in any cycle, its inevitable as housing works in a cycle, but investors /analysts and strategists act as if its the FIRST time they have come across problems in housing starts or subprime lending!!! Come on, grow up, we have seen this before, and on a firm labour markets in the US, I am not that concerned. In every cycle there will be weaknesses and downturns, we don't have to go out to catch a horror movie everytime it comes around, do we? Don't forget that with housing weakness come rate cuts as well. Coupled with firm corporate earnings, its not a catastrophe, just an apostrophe!

What have we learnt so far? First wobble, scary movie. Second wobble, scary sequel movie as well but with some real blood and gore. Now, it still looks like a scary movie, in fact, the prequel was not as scary as the sequel, if you ask me!

Corruption In Asia

The figures below were from the respected Political & Economic Risk Consultancy unit in HK which has been supplying yearly corruption perception index data on all countries. Ten being the worst score and zero being the best, the figures are for the 2007 study,bracketed was the country's score back in 2005:

Philippines 9.4 (8.8)

Indonesia 8.03 (9.1)

Thailand 8.03 (7.2)

Vietnam 7.54 (8.65)

India 6.67 (8.63)

South Korea 6.3 (6.5)

China 6.29 (7.68)

Malaysia 6.25 (6.8)

Taiwan 6.23 (6.15)

Macau 5.1

Japan 2.1 (3.46)

HK 1.87 (3.5)

Singapore 1.2 (0.65)

Some Observations:

a) Phillippines and Thailand have worsened significantly, and have taken on the roles as top of the heap. It used to be that no one can beat Indonesia, Vietnam or China when it comes to corruption. However, these are not hard and fast conclusions as these are still just perceptions, but the study has been done yearly with a good cross section of sampling, it does give a good overview of trends. Is it a coincidence when countries with political leaders grasping at straws to stay in power, usually deteriorates as well in corruption perception index - I tell you, its no coincidence.

b) Indonesia, Vietnam and India have all improved significantly in ratings. Especially Indonesia, I think anyone who has visited the place for business over the last 3 years can vouch for the changing business climate. The petty corruption still exists but the more corporate business is done at arm's length. Vietnam and India are the same, and all 3 have experienced good jumps in FDIs over the past few years as well - chicken or egg thing, more economic opportunities, less corruption, or vice versa. I think the former has more weight.

c) You could say the same for China, but the improvements in China is more broadbased in that there are: more jvs; more incentives to list abroad; more incentives to compete internationally; more scrutiny in financial regulation; adoption of more global best practices owing to the influx of Western educated management; peer-to-peer competition with HK; etc...

d) Malaysia has improved as well - how do I say what the reasons are without ending up in prison?? Hmm! New PM. Not as many "favoured sons" corporate scenes being played out now than say 5 or 10 years ago. A lot less mavericks in the financial markets - 10 years ago names like H Saad, T Ramli, Yahya-DRB, Teh SS, ... would roll off your tongues .. Now you'd be hard pressed to come up with names, even if you say Syed Mokhtar, he has shown more credibility in building up businesses than just opening up his hands for favours. Also, more progressive appointments in GLCs, especially at Khazanah which also filters down to the rest of the GLCs.

e) Its interesting to compare Macau and HK. That's why despite the proximity, things are always very different in Macau. Besides the new casinos and "entertainment sub-sectors", Macau also have probably the most corrupt and rigged horse race betting in the world, and I am not exaggerating. Mind you, horse racing in Malaysia would probably be in number 2 or 3 in terms of being rigged, with Singapore close behind.

f) I wouldn't look too much at HK and Singapore's numbers as they are way up there. Any fluctuations in yearly numbers are usually abberations. Only big difference between HK and Singapore corruption is offenders in HK usually end up in jail but in Singapore they usually commit suicide first.