Tuesday, June 30, 2009

Roubini comments about China

From Roubini's RGE Monitor:

Roubini had recently been in China and met officials there. We talked about the bind that the world economic slowdown had created for China’s leadership—not despite but because of its huge trade surpluses and foreign-currency holdings. Many Chinese commentators have blamed American overborrowing and excess for dragging them into a recession. But even they realize that the very excess of American demand has created a market for Chinese exports. Chinese leaders would love to be less dependent on American customers; they hate having so many of their nation’s foreign assets tied up in U.S. dollars and subject to the volatility of American stock exchanges. But for the moment, they’re more worried about keeping Chinese exporters in business. To do that, they want to prevent their currency from rising. And for reasons laid out in detail in a previous article (“The $1.4 Trillion Question,” January/February 2008 Atlantic), the mechanics of finance require them to keep buying U.S. dollars and entrusting their savings to the United States. “I don’t think even the Chinese authorities have fully internalized the contradictions of their position,” Roubini said.

I agree. But I can report that for these past six months, virtually every economic conference I’ve heard of in China and every special supplement in a Chinese business publication has been devoted to the changes the country would have to make in order to reduce its vulnerabilities.

This was released on June 25, 2009 coinciding with what I wrote on how I doubt the export model will change. From what I highlighted, it's obvious the Chinese are just huffing and puffing, even Roubini acknowledges. I think China will be all talk until they actually do something substantial which could involve lifting the currency controls and not buying so much US debt.

Lets see if they will be able to take the tough medicine. If not, I see no reason to change my outlook. All this talk about a new super currency may help, but it all comes back to whether China will continue to grow through pushing exports. Nothing wrong with growing through exports, but keeping output artificially higher by manipulation has consequences.

Furthermore, China has not shown signs of trying to stop securing cheap sources of commodities evidenced by their pursuit of large multi-national commodity suppliers such as Rio Tinto. They must think that they can buy entire value chain and keep all the profits for themselves! I think it's not so easy. This is a good thing because the world needs to help keep China in check from overproducing. The world needs sustainable, healthy growth as opposed to the binge-style of growth over the last few years.

Monday, June 29, 2009

AirAsia to place out 20pc of its shares

From Bloomberg:

AIRASIA Bhd, Southeast Asia’s largest low-cost airline, said it plans a placement of as much as 20 per cent of its issued share capital.

Looks like companies think that Malaysians are in the giving mood. They need financing badly and with the rise in stock prices, why not take advantage of the shareholder's fortunes? Never mind the 40% drop in the share market just half a year ago.

Investments in Malaysian Hotels Plunge

From the Business Times:

Transactions involving the buying and selling of Malaysian hotels have plunged fivefold, from RM1.2 billion worth of transactions in 2005 to RM205 million last year, as owners preferred to hold on to their assets as property prices appreciated.

Last year also saw no foreign interests unlike in 2006 and 2007 where more than 60 per cent of the hotel investment volumes were by foreigners.

However, the momentum is expected to pick up this year, said real estate agent Previndran Singhe.

"Prices have now stabilised and so owners are willing to sell," Previndran told Business Times yesterday.

"The foreigners are returning and they are willing to pay the market price, as they realised that they are unable to bargain since there is no property crisis here," Previndran said.

He added that this was despite the fact Malaysia is known to have one of the lowest, if not the lowest, average room rates in the world, which could take an investor a decade to see return on investment.

"They see a potential for an upside in terms of rates," Previndran said.

Unless you've been living under a rock, hotels have been getting rocked due to their exposure to the financial crisis. Take a look at Shangri la's latest quarterly report in May:

The Group’s profit before tax for the quarter at RM14.012 million was 60% below that of RM35.463 million for the same period last year. Group profit attributable to shareholders was RM10.129 million compared with RM25.561 million in the first quarter of 2008.

With profits like these, as if the prices won't drop. Owners are willing to sell because hotels have been taking the brunt of the financial crisis and they don't want to be dragged down by the hotels they've chained themselves with!

Saturday, June 27, 2009

US Personal Income and Outlays

Calculated Risk does a thorough analysis of the current situation regarding Personal Income, savings rate, and how this impacts the economy:

The saving rate was boosted by the stimulus package, but this suggests households are saving substantially more than during the last few years (when the saving rate was close to zero).

The saving rate will probably dip - the stimulus boost is unsustainable - but then continue to rise (an aging population usually pushes the saving rate higher) and a rising saving rate will repair household balance sheets, but this will also keep pressure on personal consumption.

Although PCE increased in May (compared to April), Q2 2009 is off to a somewhat weak start, with PCE in both April and May slightly below the levels of Q1. Although it is possible that PCE will pick up in June, it seems likely that PCE will be flat to slightly negative in Q2 (although not the cliff diving of the 2nd half of 2008). The two-month estimate suggests a real PCE decline of 0.7% in Q2 2009.

Usually PCE and Residential Investment (RI) lead the economy out of recession, and right now both remain weak. As households increase their savings rate to repair their balance sheets, it seems unlikely that PCE will increase significantly any time soon.

Personal Consumption through May

From the US BEA:

Personal income increased $167.1 billion, or 1.4 percent, and disposable personal income (DPI) increased $178.1 billion, or 1.6 percent, in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $25.1 billion, or 0.3 percent.

In April, personal income increased $78.3 billion, or 0.7 percent, DPI increased $140.0 billion, or 1.3 percent, and PCE increased $1.0 billion, or less than 0.1 percent, based on revised estimates.

The pattern of changes in personal income and in DPI reflect, in part, the pattern of increased government social benefit payments associated with the American Recovery and Reinvestment Act of 2009.

First off, I'll mention why the world economy is very important to Malaysia, specifically the US. Malaysia is an economy which relies heavily on exports. Like it or not, Malaysia will never disentangle itself from the world economy. Some of you may be wondering, how about China, won't they be the new engine of growth for Malaysia? People, who think China will replace the US, are sadly mistaken. China is tied to the US more heavily than any other nation in the world, so whatever affects the US, affects China, and in turn affects Malaysia. Hence, this blog will heavily feature events that involve the US and the rest of the world in addition to Malaysia.

Ok, on to the PCE data. The key points here are that we see the effects of the stimulus package. Unfortunately, it didn't increase personal consumption as most people were predicting. In fact Americans took the money, saved all of it and spent none of it. It's understood people would save, given the extra income, but this is quite ridiculous. 165 billion in extra income and only 25 billion increase in Personal Consumption for May. For April, 78 billion in extra income and only 1 billion increase in personal consumption.

We look at the savings rate:
Personal saving -- DPI less personal outlays -- was $768.8 billion in May, compared with $608.5 billion in April.
It looks like that extra 160 billion dollars in extra income all went to savings! Whatever new money Americans are getting, they aren't spending it. And furthermore, when the stimulus stops, we are likely to see a negative effect on savings and consumption. Stimulus is not a re-occurring program and once it stops, people will allocate some of their budget from consumption to savings.



Friday, June 26, 2009

As if Proton wasn't already in a hole

This should keep proton trying to dig its way out. From The Star Online, Proton loses 20m in China Joint Venture:

The failure of the joint-venture project between Proton Holdings Bhd (Proton) and Goldstar Heavy Industrial Co Ltd (Goldstar) in Dongguan, China, has resulted in an estimated loss of US$5.78mil (RM20.44mil) for Proton, Prime Minister Datuk Seri Najib Tun Razak said.

Najib, who is also Finance Minister, said that the losses included the revolving capital in the said joint venture.

“The joint-venture contract clearly states that all disputes must be referred to arbitration. Therefore, in line with the Arbitration Agreement signed July 6, 2007, Proton Automobiles (China) Ltd had started arbitration proceeding against Goldstar in Singapore,” he said in a written reply to a question from Lim Lip Eng (DAP-Segambut) in the Dewan Rakyat yesterday.
Ouch as if the contraction in Malaysia car sales weren't enough.

Islamic Banks have it hard as well

From the Business Times:

The industry saw strong growth in 2007 despite the start of the subprime crisis and was still expanding fast until the summer last year, when the credit crunch began to take its toll.

"This year the syariah banks are going to be exposed to the crisis the entire year. Those who survive this year will come out as winners, but others, especially the smaller banks, could merge, be taken over, or simply disappear," BMB Islamic UK Ltd chief executive officer Dr Humayon Dar said in a media interview in Kuala Lumpur yesterday.

Islamic finance is distinctively different from conventional banking in principles. But it does not operate in isolation from the mainstream financial market and hence is not spared from the credit crunch, Humayon said.

Islamic banks probably won't feel much from the subprime crisis, but will most likely feel the pain from their respective country's real estate. Oil rich countries have had property booms in step with the price of oil going up. It just so happens that Islamic banks are concentrated in these oil-rich countries with the exception of a few.

Hardly anyone in the oil business is investing in bringing new supply on stream. Investors in these countries are hit just as hard when oil comes down so they won't be as inclined to invest whether through Islamic banking or non-Islamic banking means.

Thursday, June 25, 2009

Fed keeping treasury purchases unchanged

From Bloomberg:


The Federal Reserve refrained from increasing its $1.75 trillion bond-purchase program, said the pace of economic contraction is slowing and predicted inflation will remain “subdued for some time.”

Chairman Ben S. Bernanke is watching to see how quickly the economy can recover from the deepest recession in five decades: Orders for durable goods unexpectedly rose in May, a government report showed today, while unemployment continues to climb. The Fed also wants to quell concerns that the $1 trillion expansion in its balance sheet will fuel inflation, pushing bond yields higher and crippling any rebound in the economy.

Today’s decision was unanimous. The Fed’s $300 billion Treasuries-purchase plan is scheduled to end in mid-September, according to the FOMC statement at the conclusion of the March 17-18 meeting, when it was announced. The Fed also committed to buy up to $1.45 trillion of housing debt this year. At its current rate, the Fed will reach the $300 billion of Treasuries by late August.

Total assets on the central bank’s balance sheet grew $1.17 trillion over the past year to $2.07 trillion as the Fed loaned to banks, commercial paper issuers, and purchased bonds outright to support the flow of credit to consumers and businesses.

The Fed will surely keep interest rates low, that's a bygone conclusion. I think the most important part of this meeting is the purchases of securities and whether it will go up or not. The Fed at this point seems to believe that we are in a recovery and are finally backing up their words with their actions by not lending anymore monetary help with additional purchases.

This statement of confidence is a bit speculative at this point in time. They should expand the purchases but not necessarily spend all of it. Make the purchases at their discretion. Unemployment needs to go down a lot more. I think they are now suddenly caught up with the current market hype of "green shoots."

Even though there are economic indicators showing that the economy is improving, I'm highly skeptical because the unemployment rate is still going up and an incredible rate. We are getting less job losses but higher unemployment. It's tough to predict when unemployment will turn because of changes in the mix of people looking for work.

Economic indicators are great, but unemployment is the bottom line. I won't be entirely convinced until it starts to turn. When people keep seeing 10% unemployment, I think they will think twice about spending. Lets see if the Fed is right or wrong in calling the bottom.

Wednesday, June 24, 2009

Why commodities will do well over a longer horizon (but not now).

Currently, China has been buying up lots of commodities. I believe they think that commodities is one of the most important investments they can make. But likely most of the purchases at this point is speculative and probably unneeded unless they are willing to let the supplies sit their for years.


The major reason commodities will do well over a longer period of 5+ years is mainly because nothing has really changed. China will continue to dump exports and piggy back on the the US and other developed nation's economies. They will find it harder to do so as time goes on as they will have to manage their currencies with other developing nations besides the US.

As you can tell, this is not a really healthy or effecient way of running an economy. By force feeding products to developing nations, we have a problem. The other economies don't really need the exports. By making exports cheaper than they are supposed to be through currency manipulation, quantity of products supplied to the world grossly exceeds what is effecient.

But alas, nothing is perfect. If nations can't play fair with each other, it will show with commodity prices. To keep this oversupply of products gravy train going requires an equally sizable oversupply of commodities. So this is a nice gutcheck against those countries who piggy back through export oriented economies.

The export model has taken a gut check, but there are no indications that countries will change their growth through exports philosophy so the picture for commodities is still strong. Also contritbuting to this is monetary abuses by nations. So once the monetary abuses abate or the world has an oversupply of commodities, we will probably see the commodity prices come back down.

The other way the commodity picture might turn bad is for world nations to start paying down debt. Most nations, though aren't doing the right thing as all they can think about is spending their way out of a recession. Most countries' leadership lack the mettle to take the tough medicine and would rather put it off for later. As long as we have this, the outlook for commodities looks good.


Can't have your cake and eat it too in export dependent economies

"Live by the sword, die by the sword" prevails as a prominent theme throughout the recent financial crisises. China has its part to blame in fattening the US economy by providing cheap exports and fueling their consumption binge.


No one should really depend on China to bring their economies back from the brink. China's prosperity depends in large part on the US prosperity. Their whole financial system is basically built on exporting everything they possibly can to the US. So whoever would depend on China utlimately also depend on the US. I can think of several southeast asian countries that fit the mould.

The countries which piggy back on others through exports enjoyed some fantastic propserity will also share some fantastic pains during this global recession. Those countries will never be decoupled from global growth as long as exports make up a large portion of their gdp.


Prime Mortgages downgraded

From Marketwatch:


S&P said it lowered ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004. The rating agency also affirmed ratings on 669 classes from 32 of the downgraded deals, as well as 34 other deals.

"The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said in a statement.

Oops, looks like subprime isn't the only problem, the whole housing market is!

Tuesday, June 23, 2009

UMW plans RM800m Islamic paper sale

From the Business Times:

MALAYSIAN auto-to-energy group UMW Holdings Bhd has set up a programme to sell up to RM800 million (US$226.1 million) of Islamic paper to refinance its borrowings and for working capital.

The paper will be issued under the musharaka concept, UMW said in a statement.


Looks like UMW picked the wrong time to re-finance. In this market, you've got to be quick to re-finance. Look at the American banks. They were quick to raise private money weeks ago during a time when financing was much easier to get. If the markets tank in the next few weeks, say good bye to lower rates. Their finance officer is a bit slow to the game.

10% unemployment expected in a few months

From the AP:

The White House says double-digit unemployment is coming sooner than previously acknowledged.

White House spokesman Robert Gibbs says the president expects the nation will reach 10 percent unemployment within the next few months.



In an interview with Bloomberg last week, President Barack Obama said he expected the nation to reach 10 percent unemployment sometime this year.


The current unemployment rate reached a 25-year high of 9.4 percent in May.

President Obama is at least starting to realistically assess what happens when the unemployment reaches at least 10 percent. So, with this expectation, the next obvious question to his advisors will probably be how will things look with 10 percent+ unemployment. It's a step in the right direction at least. Stress tests will need to be re-done as well.

Sunday, June 21, 2009

Templeton Investment's view on possible hyperinflation

Excerpt from Barrons:


Some economists fear excessive stimulus will lead to hyperinflation in coming years. Does this worry you?


Although the size of the stimulus programs and injections of liquidity around the world are cause for concern, and commodity prices have moved sharply higher. Excess capacity still exists in many industries. This, combined with high unemployment rates, should act to contain inflation for the foreseeable future.


I'm going to agree with this, and to add to this we are still going to see a decrease in prices for the housing portion of inflation. This will suppress the cost of living. But low inflation or deflation doesn't mean that commodity prices will be low as well. Their prices can act on their own individual demand and supply situations.


Capacity is a tricky thing as well. Certain industries that haven't really gone through a big growth cycle might not have excess capacity. Any industry related to housing probably has lots of excess capacity. Perhaps tech might not have so much excess capacity as their boom years happened in pre-2000 and they probably have worked a lot of it off.


So, this is my point, when looking at inflation from this kind of a "surgical" perspective, due to all this liquidity sloshing around, we will see certain industries and commodities outperform relative to others.


This outperformance will not necessarily be due to growth of the industry or demand for the commodity, but relative lack of capacity to produce more combined with the excess liquidity being channeled there.

Friday, June 19, 2009

Faster streamyx broadband on the way?

TM as a company so far has dragged its legs in providing reasonable broadband service for Malaysia. But as an investment, their opportunities are endless. So far, they've gotten themselves in a hole by not anticipating the demand of current users by signing up more than their bandwidth can handle. The speed is almost unbearable at times. But read this from the Business Times:

Zamzamzairani added that
the emergence of wireless broadband service provider, such as the WiMAX players and mobile phone operators, would not be a threat to its fixed-line broadband business, like HSBB services and Streamyx.

"I believe that people in the office or at home would still prefer to surf the Internet using fixed-line. Wireless broadband will be useful for those who are on-the-go," he said.

Meanwhie, the Asia America Gateway (AAG) cable - in the consortium of which TM has a stake in, will be operational in August.

"Once the cable comes on stream, it will make Malaysia attractive for content providers to host here, to provide services to their customers in the region," Zamzamzairani said.

The AAG is a high-bandwidth fibre-optic submarine cable system linking Southeast Asia to the US. Other ope-rators in the AAG consortium include AT&T in the US, Australia's Telstra, India's Bharti and Telkom Indonesia.

So we can hopefully expect faster broadband come the end of the year. I hope the gateway really helps and we get the broadband we pay for. This project is well behind schedule. So at least TM has something coming in the pipeline for broadband relief.

Better times for steel makers?

From the Edge:


Despite the difficult market condition for steelmakers, Malaysia Steel Works (KL) Bhd (Masteel) expects to be profitable this year in anticipation of a recovery in demand for long bar and steel billets in the coming months.

I'm not really holding my breath. China has been buying lots of commodities as of late, but for what? to make stuff that the US doesn't want? I'm a bit skeptical.

Thursday, June 18, 2009

Checking out US CPI data




First, I'd like to note that energy and transport prices have more or less settled. But transport can be viewed as a derivative of energy prices since the main cost in transport is energy. So basically, energy prices have seemed to stop dropping. It's a good thing, so we will have inflation in the future right? I mean, it looks like all commodity related prices have hit bottom. It's seems so to me.

Wrong! Look at housing! that hasn't dropped at all! It's dropped the least of all the categories for the last 3 months. Last I checked, prices of houses in the US have dropped some 50%. The prices Americans spend on housing/rent will surely follow once people realize that there are other places out there that rent a lot cheaper than their current mortgages and rentals. Housing seems to be like a semi truck, slow to move but once moving, it will be very hard to stop.

Of Measat, Maxis, and Astro

This potential deal is interesting. Other sources have been decrying this report as total malarky, which I agree somewhat because the timing is premature. I mentioned three months ago that TM seemed extremely confident of its future and why not? They will be able to offer triple play services, broadband, phone, and tv in the next few years.


TM has this in mind as evidenced by some of the "combo" deals they have been offering of phone+internet.

Maxis could possibly compete better by offering phone+intenet deals, but I haven't seen them come up with anything of the sort. If they were to incorporate Astro, they would be able to offer phone+internet+TV and be on similar footing with TM, hence why I would think a merger would be possible. But again, I don't see their business model moving towards packages so I think the merger is speculation at this point.

Check back again if Maxis starts promoting combo deals such as what telekom is doing. If they go in that direction, I would say a merger is definitely possible.

Wednesday, June 17, 2009

May CPI up 2.4%

From The Edge:

The Consumer Price Index (CPI) for May 2009 registered a 2.4% increase year-on-year from 109.1 to 111.7, said the Department of Statistics Malaysia.

On a month-on-month basis, the index rose 0.2%, it said.

In a statement June 17, the department said the CPI for January to May increased by 3.3% to 111.7 compared to 108.1 in the same period last year.

"The index for food and non-alcoholic beverages for the month of May 2009 compared to the same month in 2008 showed an increase of 5.2%, while the index for non-food registered change by 1%," it said.
Inflation would seem to be showing up in Malaysia despite the recession. Can BNM afford to keep interest rates low? With food being such a large part of the overall basket of goods, we should keep an eye on it more so than developed countries.

Additional thoughts to the Recent Rally (previous post)

The uproar against US policy will probably give way once the rally subsides. The US dollar will go stronger and bond yields will go down again. Only in the next true expansion will we start to see more backlash, but that is still quite a ways away. There is still massive capacity in the system.

Tuesday, June 16, 2009

The recent rally

I'm thinking that the recent rally has run its course. It's semi obvious from the way news anchors and websites have been advocating the rally as the real thing.


But the tipping point is the way everyone is critizing the US dollar and debt being worthless, etc now that economic recovery has begun to sink in. Even some of the fed governers are a bit spooked by the fall in long term bonds and have openly said that they should think about raising rates.

Most people now have decried that US debt is now worthless. US debt has its problems we all know, but this stupidity that people criticizes the hand that feeds them is almost more than I can bear.

Back a few months ago, when the financial crisis gripped everyone in fear, the US was the only one really doing enough to help the world with massive montetary stimulus. No one was criticizing them. Now when everything is begining to look fine and dandy, everyone wants to take potshots at the US monetary policy.

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