A bit of forex: the Yen

Usually forex is outside the scope of this blog, but I will comment occasionally since we have many forex traders in Malaysia.  Furthermore, being Friday, not much is happening in Malaysia.  So I want to comment about the Yen.

Probably everybody and his mother is short the Yen at this point.  But One big reason not to be is the Euro.  Probably one of the bigger contrarian trades this year is to long the Yen.  or at least to take off the position.  Why?  After all Japan is still implementing QE, etc.

When everyone is doing it, it becomes the status quo.  What is different then, when the Yen started collapsing ,and now?  One major difference is Europe.  Europe hadn't implemented their QE program then.  Now that they have, the Yen is a lot more appealing than before.

As of the moment, the 10 year bonds from the US are also rising to an all time high due to QE from Europe.  The bear case for the Yen is no longer applicable unless Japan doubles its QE program. From a Yen standpoint Japan's QE program probably won't destroy their currency as badly as many people are anticipating.

Air Asia X woes

From the Edge:

KUALA LUMPUR: AirAsia X Bhd (AAX) ( Financial Dashboard), the loss-making long-haul affiliate of low-cost carrier AirAsia Bhd ( Financial Dashboard), plans to raise RM500 million via a rights issue and a private placement to shore up its balance sheets, according to a source close to the matter.

The proposed rights issue is expected to be discussed and approved in a board meeting that will be held today. 

The meeting will be chaired by AirAsia (fundamental: 1.3; valuation: 1.8) founder and group chief executive officer (CEO) Tan Sri Tony Fernandes, who is due to return from the 2015 annual meeting of the World Economic Forum in Davos, Switzerland.

Air Asia X just laid a doozy on its shareholders.  Considering the marketcap of 1.5 billion, 500 million amounts to diluting their shareholders by a third.

Overestimating capacity in the industry is a no-no, as I mentioned in an earlier post.  Only those really hardy investors would wait. But its growth trajectory may have plateaued as demand is falling short of the airline's lofty expectations.  If that is the case then the shares intrinsic value is worth a lot less than what people were expecting.

Yinson Technical Analsyis

Yinson is one of the current darlings of the KLSE with a very conservative business model.  It builds and oversees the initial process of shipbuilding and christening of FPSO, a large tanker that functions as an oil platform.  Then it matches the long term lease contracts with loans it will take out based on long term rates. 

They basically say, here is the US giving such good long term rates, lets take advantage and borrow money to build vessels for the oil and gas industry, then enter into long term lease rates, then make money off the spread.  They retain the vessel at the end of the day while gaining income off the spread between the rates they charge and what they borrow.

Their stock price has been on a tear the last few weeks with lots of profits oozing.

The analysis of this chart is relatively simple.

1.  The pullback at q2 in 2014 seems to be a turning point.  The market made a solid test below the consolidation point in q1 then moved higher immediately.  At this point the market is indeed bullish.

2.   Buyers were waiting for a pullback.  The buyers got what they wanted in the begining of Q4, but immediately sold off before breaking the Q4 consolidation's high, no doubt because of the severity of the drop at the end of Q3.

The market may encounter resistance at the consolidation over RM 3 a share as bears did manage to try and sell down just below the high of the Q3 consolidation box.  But a move above the Q3 consolidation will likely be another bullish turning point.  

If the market were to make a high past the Q3 consolidation box,  one of two things can happen, it can rocket higher to its Q3 high or it could pullback and consolidate once again.  At the moment, Yinson might range, but I wouldn't be surprised if it tends towards the bullish side as it's creeping up to RM 3 a share once again.

Zeti speaks on strong ringgit fundamentals

From the Star:

PUTRAJAYA: Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz says the ringgit is fundamentally strong and “it will reflect the underlying fundamentals when the global events settle down”.

She also said on Tuesday Malaysia’s financial system can ride out the capital inflow and outflow.  Zeti added Malaysia's GDP for 2014 was also within the forecast.

She also said BNM would not allow any “systemic” effect from any individual company to affect the country’s economy.

The Edge weekly also commented on a speech by Prime Minister Najib regarding the Ringgit fundamentals.  But if the fundamentals were so good, why is the Ringgit is suffering the most in the region?

Even Zeti is becoming more vocal about the "fundamental" strength of the Ringgit.  Is the Central Bank going to put its money where its mouth is and shore up the weakening Ringgit?  probably not.

It seems panic is spreading a bit as no matter what either leader says, the Ringgit just won't wake up.  Ever since the capital controls statement on Reuters by Zeti, the Ringgit has done nothing but tank.  It's as if the market says keep talking, I'll just keep pushing your buttons.

Reversing the Palm oil hedge

I have decided to do recant my blog post about the USD hedge innate in Palm oil.  While indeed palm oil is priced in US dollars in Europe, a large majority of palm oil customers are European and their currency is having a tougher time than even the Ringgit.  So they will likely turn to their own in state oil products as the palm oil is getting expensive versus the Euro.

A large amount of Malaysian investment is from the Eurozone.  So, a poor euro environment makes Malaysian operations more costly from their perspective.  This is probably one of the more subtle themes underpinning the Malaysian economy at the moment.  They are going to buy less of our exports.

Tenaga's craazzzy earnings

From the Star:

Tenaga Nasional Bhd’s net profit for the first quarter ended Nov 30, 2014, rose 34.4% to RM2.352bil from RM1.75bil a year ago, thanks to the increase in tariff and sales in the Peninsula and Sabah. 

Sales in the Peninsula grew 3.3%, while in Sabah it was 2.4%, which was an additional boost to TNB given the tariff hike in January 2014 of 14.9% and 16.9% respectively.

 Up 34.4% making 600 mil more PROFIT than a year ago, on top of the ridiculous profit they are making now.   They are getting so much money they don't know what to do with it.  With this money, surely Integrax is going to ask for a higher offer.

Unfortunately, everyone is paying higher electricity bill charges.  Whoever sold stocks because of GST, Tenaga is just rolling over the GST problem like a small little pothole in the road.

Sapura Kencana Technical Analysis SKpetro

Sapura Kencana was one of the darlings of the oil and gas industry.  Unfortunately with oil hitting all time lows, their outlook looks dim.  I won't mince words, bottom catching is usually a fools game, especially a stock with low dividends.  As goes the saying, if you look around the room and don't know who the sucker is, the sucker is you.

I'll just have you know, a few oil stocks have looked technically strong off a bottom, especially in the US, but technicals seem to have failed this industry as bottoms have not held up.  I won't be surprised if the same goes for SKpetro.  All in all I'd skip this stock, save your money for another rainy day.

But for you people who REALLY want to get into the stock, I don't mind thinking about a long position with play money of course :)

1.We seem to have found a bottom at RM 2 a share.  Is this a bottom that will hold up?  I think it may.  at RM 2.61 is a 30 percent rebound off the lows, and given the nature of the rebound at this particular price, I think the outlook would be good.  I'd cut and run from a long position at a price lower than RM 2 a share, but seeing how this is an oil and gas stock, bottoming technicals seem like having a 50-50 chance of holding.

SP Setia Technical Analysis from the begining

SP Setia is probably one of Malaysia's most loved property counters.  I'm going to try and attempt to do some technical analysis on this beast.  It's also one of those counters just when you think it is down and out, it just comes back rip roaring higher.

SP Setia is a company known for innovating in the property market.  Their developments are known for quality and even creation of a lifestyle.  Perhaps their most well known developments are in Shah Alam where they have a 2,500 acre development that has won rave reviews.

The national government investment arm, PNB has wanted to take SP Setia global with a redevelopment of the Londone Battersea Power Station.  It would make sense as living in UK's neighborhoods resembles something of a mish mash of houses put together.  SP setia community development could take London property to another level.

The share price isn't for the faint of heart.  Consolidations can last 3-4 years which tends to shake out the most steely focused investor.

1.  One of the pivotal periods in SP Setia's history was in 2002.  When the high broke above the red rectangle, it signaled a change of sentiment from the usual pump and dump stock plaguing so many counters in Malaysia.  About one year later, after a pullback, the stock jumped.   Investors could have goten in around 80-90 sen a share, above the stop out point at the low in 2001.

Asking investors to wait one year while the stock drops 40 percent is tough to swallow, especially form RM 1.30 to 80 sen a share, but those shareholders would have been rewarded with a double.  But with the double could have come a quadruple with a long consolidation period frrom 2004 to 2007.  Asking investors to wait 3 years while the share goes nowhere is a tough thing to do.  That is why this stock isn't exactly for the faint of heart.

2.  The next pivotal point is in 2010.  A break above RM 3.3 a share signals more bullishness.  But where is the downside?  Likely near RM 1.5 a share.  Investors need to wait for consolidation for a longer period in time due to the huge range of movement in prices.

It's five years since the break hgiher into RM 3.30 a share, but time has been long and a three to four year pullback seems to be the norm, but the risk is of course the stock were ot trade much lower to RM 1.5 a share.

For me, the risk is too much to bear, But I'd be a long around RM 2.10 a share.  But, for most money managers, this stock is just rough as their performance metrics are on a yearly basis.

I think the stock will go higher in the next 5 years, but in between then,who knows what will happen.  I'm bullish, but not willing to initiate a long at these levels nor able to stomach the long gestation periods the pullbacks always seem to bring.

FKLI/KLCI and FCPO technical Analysis update

The FKLI has seen a rebound as of late.  While nothing is set in stone, a few of the bombed out oil stocks are picking up, as well as the index.  Support seems reasonably good.  With the anticipated Eurozone QE program on the horizon, most equity markets seem to be picking up.

The trend line has adjusted downwards to the new support at the low set a few weeks ago.  At this point the market may or may not see new highs.  It's anyone's game.  But below 1730, the market will look weak.



FCPO looks reasonably strong if it stays above RM 2,297, but the uptrend is all but stalled for the current period given the last few down days.  Given the predominate downtrend over the last few years, the market probabilities lend towards the bearish side.

Finance Minister Zeti speaks up on Capital controls

From the Edge:

 Malaysia has "moved on" from using controls to manage capital flows, its central bank said on Friday, signalling it would not resort to such measures amid a falling currency and slowing economic growth.

"Extreme measures such as capital controls are for extreme periods. We are certainly not experiencing such extreme conditions," the central bank said.

"This is a marked contrast to the experience in the late 1990s," it added, responding to a Reuters query on whether capital controls — a measure Malaysia employed during the Asian crisis of the late 1990s to staunch capital outflows — were once again an option.

"We are now in a period when the economy has been on a steady growth path with a low level of unemployment for several years," the central bank said. 

Because talk of capital controls dominated Russia's economic rumour mill, this rumour also got people to think how safe their money is in Malaysia.  The depreciating Ringgit isn't helping to quiet the rumor as well.

This statement probably is positive on the Ringgit as nothing has really been said before regarding Malaysia on the possibility of reinstituting capital controls within the last few weeks.   I say the last few weeks because that is when the whole Russian currency fiasco started dominating headlines, then that is when people started to worry.

  But it is sort of a double edged sword.  The conditions she gave are certainly far away from what is happening now, but it is a possibility.  If Malaysia has unemployment reaching 8-9 percent, people may start abandoning the country in droves.  Careful what you say.

We can interpret her statement as we are so far away from capital controls at this point even with the Ringgit at 3.6 to the US dollar.  Markets will like this for sure.

How to draw trend lines part 1

If someone were to ask me what should you know about technical analysis?  I would say if there was one thing and or one thing only, it would be know how to draw trend lines.

Trend lines are dynamic supports and resistances that change everyday.  A trend is set in motion by a big buyer or seller.  Thus, trend traders must know which direction the big buyer or seller is going.    Depending on the performance of the market against the trend line, the big buyer or seller will likely stop.

If you want to know how to draw trend lines CORRECTLY, because 90% of market technicians get it wrong, read the following.

Rules for Trend Lines

Rule 1:  trend lines start from either the top of a consolidation or the retest of the consolidation.

Rule 2:  trend lines start from the point of a break in a trend line that hasn't been retested.

Lets start with the basic method to draw a trend line from a consolidation:

How to draw a Trend line from consolidation

1.  Pick an area that is ALREADY in a rally.  We are not so concerned with the base of the consolidation, but just the top.  (for a bear market, we are concerned with the base, and not the top of the consolidation)

2.  Pick out a consolidation in the rally.  Then draw the start of a trend line from the top of the consolidation where the breakout occurred.  Connect each trend line to a significant support.  (there is no hard fast rule, just use your judgement to ascertain what is a good support)

3.  If the market drops below your breakout point, then the trend for that point is over.  It is now a new consolidation box.

4.  Keep your trendlines that are broken because they can act as support or resistance later.

Here is an example:

There are two consolidation boxes with the top consolidation box having no retest,  the bottom one has one retest.  Both have trend lines starting from the top of the consolidation box.  The only difference between the two is the bottom one starts the trend at a later time.  

The blue lines are the point where the trend is over and at that point area above the breakout becomes a huge consolidation area. 

Palm oil stocks as a hedge against a falling currency

It's no secret that palm oil is an international commodity.

From the Edge:

LA LUMPUR (Jan 14): Palm oil output in Malaysia may fall further this month as the aftermath of monsoon flooding takes its toll on yields that are already low for seasonal reasons, while growers in Borneo were now braced for the monsoon, which has shifted to that region.

Malaysia's weather office forecast better conditions over the peninsular region in the coming week, dispelling fears of a fresh wave of flooding in the coastal states of Kelantan, Terengganu and Pahang, which were hardest hit by last month's rain.

Palm oil is generally seen as a boring commodity, but it does have certain desirable properties.  For one, although it is priced in ringgit, Europeans buy the palm oil in US dollars.    The truth is,  it's kind of a running joke to have palm oil priced in ringgit as most of it is sold to foreign countries.

So, the net effect is that Palm oil companies won't be affected much by a weakening currency, with costs in Ringgit, while their revenues are in US dollars.  The majority of palm oil companies will see a bit of tasty profit.

RHB and CIMB abandon the merger

From The Edge

CIMB Group Holdings Bhd. ( Financial Dashboard) and RHB Capital Bhd. ( Financial Dashboard) are planning to scrap the three-way merger that would have created Malaysia’s largest banking group, said people with knowledge of the matter. 

Terms for the deal, announced in October, no longer make sense as the industry outlook worsens, said the people, who asked not to be named because deliberations are private. 

An announcement could come as soon as this week, one person said. The proposed combination also included the acquisition of smaller lender Malaysia Building Society Bhd ( Financial Dashboard).

The news that RHB and CIMB have abandoned the merger is good news for CIMB in particular, the shareholders.  Now, the only way to get those two entities to merge is for the EPF to offer an MGO for the shareholders, but that won't be cheap.  Shareholders have voted, leave them to their own devices.

From day one, the RHB and CIMB mergers were seen as rough for CIMB shareholders, especially in the view that RHB would take over the banking business.   The merged entity would mostly be merged from CIMB to the RHB banking entity.  Thus the reason why arbitrageurs  decided CIMB should gravitate towards RHB's book value.

CIMB is known as a relatively high performing bank culture.  Merging is all and well, but most shareholders would rather not do the merger considering CIMB already has their plate full with integration of banks from overseas.

Why crude oil affects Malaysia so much

From the International Energy Agency in the US:

December cut the outlook for 2015 global oil demand growth by 230 000 barrels per day (230 kb/d) to 0.9 million barrels per day (mb/d) on lower expectations for the Former Soviet Union and other oil‐exporting countries.

Crude demand is a commodity unlike any other.

I'll compare it to another commodity well known Malaysian commodity, palm oil.  Palm oil has applications such as food.  It's doubtful that people will stop making fried chicken or oil based foods no matter what the price. Without cooking oil, fried foods aren't possible.  The demand is  long term sticky and technology doesn't change it much.  People can use less oil but it doesn't taste the same.

Crude on the other hand, demand changes a lot due to technology.  Now people are driving hybrid cars, governments are building more public transport (Mass rail transit) and thus the demand for crude now is anemic.  Is it going to change in the future?  undoubtedly, no.  People aren't going to change their newly developed habits for two reasons: it's cheaper to run a hybrid, and a car isn't something that will change hands quickly.

For new public transport projects, it goes without saying governments aren't going to stop with billions invested in their projects for nothing.  They are going to run their lines whether or not oil is at a cheap price.

This is the "new normal" and what oil producing countries have to live with until population growth and vehicle growth overshadow the current demand situation.  This may happen in 5-10 years, but not in the foreseeable future.

With Petronas dividends contributing 40 of the 200 billion ringgit budget, next year's budget revenues will fall heavily.  At an average of  50-60 usd a barrel for next year, I'll be surprised if Petronas contributes more than 20 billion ringgit a year.

FKLI and FCPO technical Update

The outlook for the FKLI has been erratic with sentiment just flipping from one direction to another.  It's a symptom of a hot and cold market with  a lot of uncertainty.  Trend reversals can be seen by the the trend lines flipping from bull to bear and bear to bull quite violently.  Now of course, the FKLI looks to be in this lower 1700s territory for the next few months.

FCPO is gaining ground over the last few weeks.   The sentiment is bullish with the directional trade indicator indicating more upside movement.  Most of the longs were shaken out a few weeks ago when the market traded crazily between RM 2,100 and RM2,200 a tonne.  Also we have had a v-spike test lower just two days ago which saw the market vault up yesterday.

Expect any spikes downward not to last very long as bullish sentiment is still with palm oil.

The ringgit outlook and just how bad can it get

Malaysia seems to have received a lot of accolades due to its resilient economy, having recovered  from the asian financial crisis without a bailout from the IMF.

I'm not so sure it's really well deserved, because when we look at the Ringgit, the currency isn't far away from all time lows versus the US dollar.  If you recall the peg rate, it was fixed at RM 3.8 to the US Dollar and we are now at RM 3.53 versus 1 USD.  Perhaps economists have not looked at Malaysia over a long enough time frame.  I'ts been roughly 10 years, surely the Ringgit is worth a lot more now than back in 1997, but according to the markets it's not.

The major problem I can see is confidence.  If most markets are doing well, inevitably international investors will invest in Malaysia, but it won't be a without reservations because at any time, Malaysia can re-instate capital controls.  

Ultimately, the capital controls of 1997 still haunt the country today.  Investment in Malaysia has never been quite the same since then.  In order to purge the stigma of capital controls, the government would need to be controlled by the opposition.

The current ruling coalition will always have investors anxious as they are the ones who instituted capital controls.  But even then, the saying goes "the genie is out of the bottle."  I think even the opposition will consider capital controls if they are desperate.

The Ringgit has two distinctive down trend lines.  It will need to get past these two trend lines with some authority.  It's likely that prices will dither around these levels for at least the next 6 months.  Note that the currency is 1 MYR will buy x amount of USD, hence the small values.