Bursa monitor

Property stocks hammered

2010-08-26T00:50:00.003+08:00

I've been a bull on certain properties, but certainly not all. Here is Sunway and SP Setia. I don't necessarily recommend these companies as their property mix is weighted toward the high end.

If we should see Sunway and SP Setia start to stabilize, then counters like SPB will have a bit of the sector stigma lifted.

SPB develops housing with a much lower price point than its peers.

Be patient until the property sector as a whole stabilizes before buying select property counters.

Checking the EWMs once again

2010-08-20T15:11:00.004+08:00

What we can gather from the EWMs and the market is most of the buying has been locally based. On the last 4 days, the market has opened higher while almost no buying has gone on during the US trading session.

Buying only occurring during Malaysian time

In fact, a lot of the US trading session has been about profit taking as indicated by the red lines.

US EWM traders have been selling down

Generally in a healthy market, we would want to see the international investors buy in through the EWMs as well as during the local hours. The selling makes me think the international investors have been early to the party and taking profits as local investors pile in the market.

The other possibility is that the international investors have been primarily out of the rally, but with the selling, it looks like they have taken part in the rally.

I'm not too encouraged by the technicals at this point.

Genting Party, MAS, Shell

2010-08-16T21:51:00.005+08:00

Genting apparently blew out earnings in Singapore. Look for MAS tomorrow might drop a bit. Revenues were up 26%, but reported a net loss.

Might be a value trap. Look out.

MAS

Look to see how MAS performs tomorrow. This will prove to be a test whether MAS has truly bottomed or not.

On Shell Refining, I'm pleased to say that the stock didn't fare too bad in light of the loss on stocks. Revenue was up and that seemed key to what investors were looking for. They did very well in fact. A rally on a loss in EPS is really an odd sight.

Shell Refining

Buying, but not from typical international investors

2010-08-14T01:39:00.006+08:00

Overnight Malaysian ETFs didn't produce the same positive jump in the FBMKLCI today. If you would have told me that the Malysian Index would closed up 10 points today, based on the previous nights' investor appetite, it's not a bet I would have taken.

Some money managers seem to be committing more money towards Malaysia through local brokers. Perhaps some of the emerging market hedge funds are receiving new inflows.

Lackluster price action on the Malaysian ETF based in US

Subsidy plays still has legs, Fed's message about monetization

2010-08-13T01:06:00.004+08:00

Plus highways' rally on earnings upgrades means that the subsidy play areas still have room to run or at least will stay resilient if the market pulls back. After looking at the price action and news of various subsidy plays, the subsidy theme still seems quite strong.

World markets have been selling down on the news that the Fed will not liquidate the assets acquired during the financial crisis. This would keep liquidity in the system at the current level.

The market would rather hear the Fed acquire more assets, unfortunately they put out mixed signals. The Fed indicated that they would not give new money and that it is basically in the government's hands to fiscally stimulate the economy. At the same time, they said they stand ready to help out when needed.

The market is looking for more direct monetary action. An individual has to look no further than the effect on the markets when the fed started acquiring mortgage assets in 2009. Anything less seems to be a disappointment.

Revisiting AHB holdings and Shell

2010-08-05T13:51:00.004+08:00

Looking at Shell's loss, especially after talking positively on the stock, I have to go back and take a look at what went wrong. I read that Shell Refining does most of its business in Malaysia. It has a massive industrial cracker which refines the oil. It has no stake in the retail ops, though I suspect that the Shell retail operations get most of their supply from Shell Refining.

Herein lies the issue. Prices are controlled at the pump and Pemandu pays out the petrol subsidies there. Shell Refining I don't think will get as much revenue upside as say the retail ops which will see an immediate upside in revenues as subsidies get lifted. Gasoline demand is ineleastic so a small price increase won't decrease consumption much.

So perhaps Shell isn't a great play on the subsidy lifting scheme but they are generally a well run company. They still pay dividends and make steady money. At any rate, subsidy lifting is a non event for the company.

ABH. Now this is stock for you risk takers out there! After a second look at the company, they do have a large number of receivables and land which probably could be securitized in the event of a liquidity crunch. If businesses are spending, which they are judging by the growth of business loans, this company should reap a massive windfall.

Current ratio is over 1.37 from the latest report. The directors costs are ridiculously high though, taking up half a million. Their employee wages run at 2.3 million.

The company has options in the receivables. It has not securitized those items. Inventories are higher year over year which means if revenue picks up, the company has the ammo to capitalize on increased business demand.

But the premise for buying ABH remains the same. If you are a company looking to spend some money on capital expenditure, and you don't want to fork over half a million for state of the art equipment. You would spend a much smaller sum on office furniture that would make your workers more efficient, or fit more workers in a smaller space, therefore making your office space more efficient.

Quiet time

2010-08-02T19:29:00.006+08:00

While we have had a combination of risk on and risk adverse trades, I'm still undecided on the direction. If one were to look at the overall strength in government bonds and Japanese Yen, I would be tipped in the bearish direction. Equities are hanging around at this level not giving up much ground either.

USD/JPY with yen strengthening and usd weakening

Bonds still resilient the last few days

Note the charts are in a 30 minute and day intervals top and bottom respectively.

Something tells me money mangers have put their money back in not wanting to miss the boat. But we all know the majority of money managers don't beat the market. Regardless of money being put to work by managers, the market will go where it wants to go.

The USD/JPY weakness is probably the most concerning event at the moment as the Japanese Yen reaching new highs does not inspire confidence for risk assets. If you are a trader that believes once the yen breaks to new highs against the dollar, it will put continued upward pressure, then this is the next target trade now that the EUR/USD has already quite handily breached the 1.30 mark.

Malaysian business services sector

2010-08-02T00:01:00.004+08:00

I'm not too hot on the Malaysian business services yet. Loan growth in the area is quite anemic but if you would like to play the business recovery, stay away from anything that requires massive amounts of capital spending.

Businesses won't be induced to spend a lot yet, but they will be wanting to do some small capital expenditures on items that are of good value. Companies still need services and may be induced to spend as products need replacement. I did come across an office supplier AHB holdings but I'm concerned about potential cash problems. They did an SPA sale and lease back for some of their land and this should allay their finances for a while.

Last quarter's revenue did double from the previous year. So it has revenue momentum.

The outlook is good if the company can solve its current liquidity problems, but the stock could very well be worth zero if it has no money to pay its creditors. Overall, though the environment is lacking for business services companies in Malaysia.

End of the month

2010-07-31T04:11:00.002+08:00

Today was a rather choppy day in the international markets. With the data out of US, I thought we'd be up past 1100. But you never know as we barely made it. GDP is backwards looking while ISM and consumer confidence are more forward.

People are too concerned with the technicals whether we finish above a certain number and not enough with how the market is doing overall. Today the bulls managed to pull something out of thin air. The macro numbers helped a bit but the bears are still strong. Three days in a row, I'm leaning towards the bear stance.

A couple of days may not make the market but we better be wary of whats going on. FBMKLCI still seems to be in a strong position given the market turmoil of the last few days. I'm not really all too joyous about the current situation, but props have to be given to the Malaysian market given the general weakness in international indexes.

Recap of this week's market action

2010-07-29T10:42:00.003+08:00

Monday for the S&P was bearish: good macro data, closed down. Tuesday was also bearish: bad macro data, closed down. Bulls did try to rally in spite of data but were promptly shot down. In a bullish market, you want to see the bulls rally in spite of bad data and vice versa for a bearish market.

Bears: 2, Bulls: 0. Bears could push the market down more but we'll just have to see. Perhaps they are waiting for tomorrow's macro and Thursday's job numbers.

I'd be moving to the sidelines temporarily. Get in the more stable names.

The EWMs didn't look too great either. No longs were willing to step in. Foreign investors are definitely selling down. I'd be moving over the sidelines at least. Today the FBMKLCI did hold even despite the sell off. But don't look for local investors to buy when foreign investors sell out.

Berjaya Retail sounds like an interesting counter

2010-07-28T10:19:00.004+08:00

Retail counters have certainly been lacking in Malaysia. We have Aeon and Parkson. Aeon lacks valuations at this level, although this part in the economic cycle would indicate increasing revenue for retailers.

Parkson has a lot of exposure to China. Depending on the situation, it could be a positive or negative: Positive if their stores in China do well, negative if they don't. The analogy is tongue in cheek, but that brings me to my next point. Invest in things you know and you'll get less surprises.

If you want exposure to retail, you would probably want it in a Berjaya Retail or a Suiwah. I do own shares in Suiwah just for disclosure purposes. We're in this patch of the economy where low end retail stores will most likely outperform. Seven-Eleven with low product prices compared to a Jusco or Parkson, stands to do well in this slow economy.

The Singer products are also not terribly expensive compared to many electronic products out there, so the brand fits in with catering to the low end consumer. Plus the 50% dividend payout isn't too bad either. This is a name I could look to get into.

Much ado about foreign investors

2010-07-27T12:04:00.006+08:00

Chart of the day for the EWMs, the easiest way for a foreign investor to get exposure to the Malaysian markets.

Thinkorswim EWM charts

Foreign investors haven't been net buyers or sellers during the pullback from $12 to $11.7. In fact, they have more or less been even. Yes, I'm surprised the market didn't back down off $12, but that just means we have upward momentum until we reach a price point where sellers come back in.

I don't think we are reaching new highs for the year for the overall indices. Malaysia may reach $12.30 which would translate to roughly an additional 1-1.5% or 1360-1370. The risk/reward trade off for ewm shorts are becoming more prevalent at this level and into the 1360s.

Uncharted territory

2010-07-26T18:40:00.007+08:00

The Malaysia FBMKLCI finds itself at uncharted territory but without the European and US markets with it.

What is disconcerting today is the high fliers of the FBMKLCI have not been leading the market higher. We are talking about an Axiata or a Public Bank. Public Bank came out with "stellar" earnings yet the market yawned.

We see Genting and MISC, one of the under-performers of the FBMKLCI finish as gainers.

Underneath, we see KFC, KPJ both having problems leading the market. KFC opened at 11.5 to finish at 11.1. KPJ also opened higher then closed lower.

Nestle, perhaps the most dramatic of the high-fliers closed strongly off the highs.

Then, you get an under performing stock like AMMB closing up .6%. While the US close on Friday showed a lot of strength, this is a new week and keeping things in perspective of where the FBMKLCI is in relation to the other indexes will be key. The FBMKLCI is trading at highs while other world indexes are not. Don't buy everything out there.

Subsidy Lifting plays

2010-07-25T19:34:00.006+08:00

If you want to get in the subsidy reduction play, companies like Petronas daganan, Shell, PLUS, Petronas Gas, Tradewinds, Tenaga are all ways to play the subsidy lifting scheme. When subsidies get lifted, inventories that the companies hold are now worth a lot more at market value. Not only that, future revenue will come in higher, which in turn creates chances for higher profits.

Certain names like Petronas Gas, Plus pay more of a dividend while people with more stomach for risk would certainly want a Tenaga or Tradewinds. A Petronas Daganan or Shell would certainly be a middle ground.

Sugar shortage news is bullish for sugar refiner Tradewinds. The market didn't trade up on the news, though. When the government lifted the sugar subsidy greater than expected, Tradewinds started to take off.

Bursa monitor to include local trading commentary

2010-07-25T19:15:00.007+08:00

Bursa Monitor will now have a "Fast Money" type feel of a trader in addition to the material on this site.

We will tell you what is hot and where the trading momentum is. Currently we are recruiting for contributors to the site. Email bursamonitor@gmail.com if you would be interested in a trader like commentary.

Fast Money is an American financial stock trading talk show that began airing on the CNBC cable/satellite TV channel on 2006-06-21. Since October 10, 2007, it has broadcast every weeknight at 5pm ET, one hour after the close of trading on the New York Stock Exchange.^[3] The show originates from the NASDAQ MarketSite in New York City.

China floating is more about the Euro than bowing down to US pressure

2010-06-28T13:21:00.005+08:00

From the WSJ:

A Chinese central bank adviser gave an upbeat assessment on the euro's long-term outlook and said global financial markets may have overreacted to the European sovereign-debt crisis.

Li Daokui, an academic adviser to the People's Bank of China, also told a financial forum on Friday that a major appreciation of the yuan is "impossible" because China's international payments are relatively balanced.

He repeated the official stance that the yuan float will be in two directions.

His views may not necessarily reflect the central bank's thinking, though he is at a position that his view can be heard by decision makers.

The comments came after the yuan rose to a modern-era high against the U.S. dollar on the eve of the Toronto summit of the Group of 20 industrialized and developing nations. Many analysts said the yuan would return to gradual gains in the week ahead, as Beijing won't be willing to see sharp rises in the yuan hurting local exporters.

A week ago, China removed its peg to the U.S. dollar, in place for nearly two years, returning the currency to a managed-float system that references the yuan to a basket of currencies that includes the euro. China's officials have said the move will help ease the pressure on the yuan to appreciate against the euro amid the euro-zone debt crisis.

China does what it wants for their own sake and doesn't really care about international pressure. They see the potential for the Euro weakening against the US dollar to threaten their exports. If they remained pegged to the US dollar, they lack tools to combat the Euro decline!

China moved to a float why? in order to have the flexibility to manage their currency against the Euro, NOT because the US wants to brand them a currency manipulator. Perhaps the Euro might rise in this case. I believe currency traders have caught on this idea. Euro shorts better be careful!

China's peg was released on the weekend, Wednesday Euro rallies while stock markets fall.

This is shaping out to be a battle royale! China and US versus the EU. Is China taking on more than it can chew in managing its currency against both US and Europe?

Malaysia won't go bankrupt, manufacturing exports!

2010-06-09T01:13:00.003+08:00

From The Business Times:

Malaysia will not go bankrupt like Iceland and Greece following the nation's success in maintaining its debt level under control and prudent measures taken to reduce debt rate, Prime Minister Datuk Seri Najib Tun Razak told the Dewan Rakyat today.

He said the federal government's financial position will be carefully planned, constantly monitored and strictly controlled with full responsibility.

"The deficit level is expected to dwindle while the debt level will be kept under control in the medium-and long-term.

"These measures will help ensure the debt level and the federal government's deficit will not increase to the extent of jeopardising the country's financial capacity to repay its debts," said Najib, who is also Finance Minister, in his written reply to Lim Kit Siang (DAP-Ipoh Timur).

Kit Siang had asked Najib on the actions taken to ensure Malaysia would not suffer a similar fate like Iceland and Greece and become a bankrupt nation, requiring a bailout from regional and international communities.

The prime Minister said Malaysia's debts dwindled to RM233.92 billion last year as compared with RM236.18 billion in 2008 although the percentage rose slightly.

I sincerely hope so! But asia in general is pretty lucky that their property prices aren't as bubble-like as Europe and the employment rate is pretty good. Wages are of course low, but looks like China's people are getting paid a lot higher. Operators in the factories here don't get paid that much. I'd say with the salary raises at a lot of factories, minimum wage here is starting to look up.

I would say that the electronics sector here in Malaysia is quite competitive and worthwhile now! come to Malaysia! You get a more electronics manufacturing capable work force than China! Not only that, more people speak English than your export-oriented manufacturing country!

Game Theory at work, US and Europe!

2010-06-07T01:57:00.004+08:00

Game Theory, more specifically the Nash equilibrium, Prisoners Dilemma is alive and well in the world. Europe is doing what is best for itself and US is doing what is best for itself. They can both cooperate for better gains but they won't even though it may be in their best interest to do so. (i.e. printing money the way US wants it done)

Apparently US needs help outside of itself to get the economy going again. If Europe won't cooperate with money printing, kiss Geitner's and Bernanke's money printing based solutions goodbye. Of course, they could print even more money, but it is hard to justify buying more assets to debase the currency as there is no crisis. Let's see where Bernanke goes with this.

Anyways, like I said before the US swap lines are open, but the ECB isn't using them. The swaps mean the US gets ECB bonds, Europe gets US Treasuries. ECB in turn, buys crap assets such as sovereign bonds with US money. If the ECB is gone sometime in the future, guess who will own the crap sovereign debts!

Positive on MISC and even MMHE (long term)

2010-06-05T11:56:00.006+08:00

When MISC lists MMHE, it will obviously be good for MISC shareholders, but overall I think both should do well over a long period. One of the most expensive parts of doing business in the natural gas business is the building of huge LNG ports to convert the natural gas to liquid form. This is no small feat and is very costly from a fixed cost point of view.

Recently, there has been a breakthrough converting the Natural Gas to LNG on a ship. The FLNG vessel will then offload the LNG to a tanker for transporting to places around the world. This platform goes from rig to rig converting Nat gas to LNG and offloading it to a tanker.

Some advantages include:

Smaller fields can be developed, that were previously unfeasible,
Less red tape
More share of the Natural gas pie for shipbuilders and rig construction.
Less fixed cost for ports on land.
More natural gas for everyone.

This is good for both MISC and MMHE. Petronas, MISC, and Mustang has also started a joint venturel on constructing a FLNG vessel. It will be expected to be in operation by 2013.

disclosure: long MISC.

BJ Toto needs to grab the low hanging fruit

2010-06-04T10:19:00.003+08:00

BJ Toto has quite a number of outlets around the country. They should leverage their assets by conducting other transactions outside of gaming (perhaps bill payment, etc), so they can increase revenue with little risk. Maybe perhaps they are not allowed to do that by the government, as I do not know their arrangement.

During certain non-peak periods of the day I'm sure they can accommodate other types of products using their wide distribution network.

disclosure: long BJ Toto.

Euro short Top kill successful

2010-06-03T20:52:00.003+08:00

Maybe BP should take a page from the short Euro FX traders on how to do a successful top kill.

Buffet's oil spill

2010-06-03T01:07:00.002+08:00

Warren Buffet is getting grilled on the Television. It's maybe coincidence of timing, but basically Moody is BP and the oil spill is the financial crisis. Now Americans can properly visualize how horrible Moodys has been! Short Moodys if the SEC has any gonads to go after them!

--------------------------------

Update: After watching the hearings, I've got to say that I'm less than enamored at Buffet's character. His oracle-ness aura has faded away. I remember one question concerning Goldman Sachs and "due-diligence." Basically the answer was we got to depend on the government I guess. I mean seriously, do you want someone like that managing ur money?

Someone who just chucks 5 billion on decent terms? who doesn't "check" the hood? But now, It's come back to haunt him in this hearing! Sorry, I'm not sure if the 5 billion was worth it if Berkshire drops 5% in market cap!

ECB slow pokes, get ur shorts on!

2010-06-02T18:03:00.008+08:00

From The NY times:

The European Central Bank said Monday that it had spent 26.5 billion euros buying government or corporate bonds since it began the debt purchases May 10, an amount that some analysts still consider inadequate to stabilize the euro zone’s financial system, Jack Ewing reports in The New York Times.

“The central bank has massive firepower but is not deploying it yet,” Silvio Peruzzo, an analyst at Royal Bank of Scotland, said in an e-mail message.

The disclosure Monday, in a routine announcement on the central bank’s Web site, indicated that the bond purchases in the week ended Friday were a relatively minor 10 billion euros, or $12.4 billion, after purchases of 16.5 billion euros the previous week. The bank has not disclosed what kinds of bonds it has been buying.

Yields on paper issued by Greece, Portugal, Spain and other highly indebted euro-zone countries have plunged since the central bank began the purchases. But though the purchases have achieved their goal of halting a sell-off of sovereign debt, the amount is still small compared with the total volume of bonds in circulation.

In a report issued earlier Monday, analysts at Royal Bank of Scotland estimated that European banks, insurance companies and other institutions hold some 2 trillion euros in government and corporate debt from the so-called peripheral euro zone countries.

LOL....I think every trader is calling the ECB on 25 billion in purchases so far for the month, cuz they are slow-walking the buying process. Come on, short Euros are going to come at them with everything they have. Still got 970 billion Euros to go!

This is the Fed Reserve Balance sheet.

Fed Balance Sheet (source: zero hedge)

You can see how ridiculously responsive the Fed was at QE. Thus we had a big rally! Come on ECB! Do it for the love of Money!

Euro FX futures

Central bankers play follow the bernanke, request liberal use of swaps

2010-06-01T11:30:00.006+08:00

From the NY times:

South Korea is proposing that central banks set up a permanent arrangement for foreign-currency swaps to help address the type of funding shortages that emerged during the global financial crisis.

“Broadening and institutionalization” of such measures could help establish “a global financial safety net,” the governor of the Bank of Korea, Kim Choong Soo, says in the text of a speech to be delivered Monday in Seoul at a conference of central bankers.

Mr. Kim’s proposal comes five days before finance chiefs from the Group of 20 nations are scheduled to gather to discuss strengthening efforts to prevent financial crises. The U.S. Federal Reserve chairman, Ben S. Bernanke, who is among the officials scheduled to speak at the meeting, has opposed currency swaps as a “permanent service,” seeking instead to pressure banks into better managing their funding needs across different currencies.

Mr. Kim said his proposal could reduce the need for emerging economies to hold large quantities of foreign-exchange reserves as insurance at a “substantial” economic cost.

Wow, we're talking about Korea suggesting to the US to use more swaps. Well, if they want to bail out Europe, other countries are going to ask for their share as well.

But Bernanke isn't in much of a position since he let the genie out of the bottle with use of swaps during his tenure. Not calling him rascist or anything, but what the hell, exports to Asia are just as much as exports to Europe. If Asia is in trouble, it is in US' company's best interest to bail them out. Asian countries won't need to hold as many reserves which is good for US exports.

US Exports to the world by region

That is the main reason why Europe is getting bailed out. I say Asia should hold one currency together so they don't need to carry as many reserves and dump US dollars so Asia currency and wages can go up.

Then people in Asia can take holidays in Europe and US for Cheap!

Quantitative easing, everyone is doing it!

2010-05-31T19:07:00.004+08:00

I'm not bullish on US stocks for a major reason, I think growth will slow. The only avenue of growth for companies is through exporting (i.e. Weak dollar) which is what James Altucher of Formula Capital is arguing for a bull market. I agree with him in a perfect world where the world's interest is the US' interest...... however,

James Altucher of Formula Capital is a moron. I watched some of his videos on CNBC. His whole bullishness is predicated on what is going to drive stock market profits is the low dollar. He fails to consider one huge monkey in the room, China. China is NOT going to sit by idly while US and Europe trash their own currency. China will devalue their yuan and join in the race to the bottom.

So, until China decides to devalue the yuan, the markets will do alright. But, once the devaluation happens, the stock markets sell off. The US dollar will appreciate, and guess what, the profits of US companies will go with it. That is why I'm not bullish on US stocks. In this case, there is nothing the FED can do. They can ease even more, but I think they won't once China shows the US they have the gonads to wreck their own currency and go toe to toe with US in the trashing of their own currency.

In simple terms, the Yuan will not go up against the US dollar, stock investors will see this (they don't now) and slash their growth estimates for stocks, thus sending markets back down into correction or a bear market.

Honestly, I don't even think central governments care about gold. So what if it goes to ten or twenty thousand an ounce? Honestly, they will care more about what is happening with their economic well being and whether people are working than what happens if some shiny metal is worth ten or twenty thousand bucks an ounce.

Why housing defaults matter

2010-05-29T10:45:00.009+08:00

The US has a problem in over-leverage. The banks are leveraged on a capital ratio of 1:12.5, in other words, they keep some 8% in reserves. If a bank has 10% reserves, housing defaults that would decrease their reserves by 3% would put the bank in seizure territory. If the company is public, the stocks will go to zero when seized.

Looking at the following graph, we can see how quickly the default rate has jumped 2% in over a year. Say, 2% defaults result in decrease of reserves by .75% on average, then it only takes 6% of homes defaulting to get the 3% decrease in reserves. We have some major problems.

Housing default (source: calculated risk)

Bank problem list is at 767, up from 653 in March. This problem list has NEVER decreased. More banks seem to be eligible every time I see the FDIC's press release. They are slow-walking the bank seizure process.

If by now the banks can't get their housing delinquencies under control, this year, another wave of foreclosures is going to happen due to the second wave of housing interest rate resets. I doubt anyone believes with another wave of resets happening that the default rate will get lower.

As you can see, the loans which will experience payshocks start increasing around now, through June and July, then pretty much into next year and into 2012. Option Arms default rates are just as bad as subprime.

Banks will write these assets off..and when they do, rest assured their reserves will decrease, and stock prices will go down. Either that or we will have another 5 trillion of QE by the Fed.

To buy or not to buy, Malaysian stocks

2010-05-26T11:11:00.004+08:00

The market is around 1250 right now. I'm not a buyer at this time. Lets see where the next month goes. My feeling is three part-

ONE. Liquidity is still there, so eventually prices will run up in the longer run. Bailouts will keep coming, the second wave of housing problems are starting to hit (hence second round of Quantitative easing), the Euro is facing just the beginning of their member states' problems, and the US will likely need to bailout their states that overspent.

TWO. We will have had only the first negative month. Perhaps it will subside to the upside the next month, but maybe not if momentum players have anything to say about it.

THREE. Equities may not go up forever. They are capped by economic growth, dividends payouts, and input costs. The things that can go up, however are bond yields as investor concerns over the "stealth default" through inflation, and commodities as more money chases fewer goods.

Wow...KLCI down 22 points this morning

2010-05-21T10:34:00.003+08:00

The KLCI is down 22 points to 1281. 22 points isn't much compared to the heydays of 2008, but the market thinks it's time for people's memories to refreshed on what volatility is.

75000 S&P futures seller found

2010-05-15T23:15:00.003+08:00

Looks like they found the culprit. If you can't find it here, try zerohedge. A trader selling 75000 E mini futures. 75000 *50 *1150 = $ 4,312,500,000. It appears they found some counter party to then take the other side and sell short sell 4.3 billion dollars of S&P stock. That may be enough to do it.

It's a bit ridiculous. Anyways, you heard it here first how leverage can absolutely wreck the market. The truth is, if someone wants to sell the futures, how can it be manipulation? There's no limit on how many futures one can sell in one go, although the authorities maybe should put limits. Remember though, that if there is a huge unwinding of leverage from liquidity being drained, there's not much one can do.

A reluctant gold bull

2010-05-15T19:20:00.002+08:00

With the ridiculous money printing and moral hazard going on in almost every industrialized nation, I'm now a gold bull.

It's tough to love such a metal which has value only as people give it. It doesn't have much use besides jewelry, but I have to be alarmed by what in the world is going on with trillion dollar bailouts of countries, banks, and other corporations.

I doubt many of the gold pundits could have predicted how ridiculous countries have gotten with fiscal irresponsibility, but it seems everyone is pulling the nuclear option and monetizing debt these days, Euro, UK, and US. With this, I'm not surprised gold isn't even higher.

With this much money running around, metals, gold, etc seem to be the biggest no brain trade of a lifetime. I foresee the UK getting the shaft next as people tire of giving the Euro a beat down, that is until Spain, Italy, and the rest of the PIIGS fall under the same situation as Greece. Then we might see capitulation and the end of a currency.

The US has now reopened SWAP lines with other currencies in effect, also torpedoing the US dollar by helping bailout the Euro. Will the treasury recognize the losses when a Euro is gone?

disclosure: long gold.

Dow Crash of 10%

2010-05-11T21:32:00.003+08:00

While it is interesting how the media try to spin 10% drop in the DOW on Friday as an error or mistake, the truth is that it doesn't take much for the market to do that. The 1987 crash didn't really have many events causing the 20% drop.

The latest reason seems to be a huge amount of options were bought causing a major bank to sell a lot of stock when they wrote the option. This is one of the more likely reasons.

Another possible reason is the selling of futures which equates to the counter party hedging their futures position with stock. The counter party needs only put up some margin, while the seller buys the stock to hedge. A 20% margin would equate to 5 times the margin amount of selling power. This is another way to create some massive selling power.

I mentioned earlier that the buying of futures could cause a massive rally. I also mentioned what could happen if the futures weren't rolled over, massive selling power. Options buying and selling have the same dynamic. Writers buy or sell the underlying position to hedge against the buyers.

I would think the real reason behind the crash would probably be a dynamic of either futures or options. All this talk about high frequency trading, mistaken orders, failed circuit breakers probably are not the root cause despite what is mentioned in the media.

High income nation, what it'll take

2010-04-20T11:38:00.003+08:00

So, we want to be a "high income nation" as quoted from Najib. But unfortunately, this feat will take more than just a strong currency. Malaysia unfortunately doesn't have the intangibles of a high income nation.

Work culture. Generally the work culture here isn't much like that of a high income nation. Great work cultures are a thing of beauty which encourage and reward ingenuity and realize people have lives outside of work. It is no wonder why many Malaysians living abroad in western countries don't want to come back to work. All things equal, yeah working life in western countries is much better.

Can Malaysia "think outside the box"? in terms of workplace productivity?

Next, we have economic and educational policies. Malaysia's economic and educational policies still need major revamping. First, an even playing field needs to be out there. Racial divides need to be cut down in terms of business. Next, the culture of education needs to be stronger in terms of creative thinking and be neutral about racial issues, promote secular ideas.

Religion is something that should be really cut out of media and not encouraged to involve anything of national importance. It would also be nice if the mosques do not blast prayers on the loudspeakers. Religion should be private and or congregate within the confines of the religious facility. A lot of economic progress has been put in slow motion because people cannot make impartial decisions affected by race and religion.

On GST in Malaysia, blinded by other country's GST successes

2010-04-13T10:34:00.009+08:00

GST may be just another sales tax, but my opinion is that it is sort of an attack on small company formation and outsourcing. It is true GST is used in a few countries, and rational logic would say, ok it works there without the country going under, therefore, yes Malaysia should be fine.

But the truth is, GST hasn't really been tested in a developing country such as Malaysia which many of its industries are reliant on manufacturing exports. GST is used in Australia, New Zealand, Hong Kong, Singapore, and Canada where the income is relatively high on a Gross national income basis and the economy is fully developed. It is true, Australia and New Zealand do export quite a lot of items, but their products are mainly natural resources and agricultural goods, relatively low on the value chain of manufacturing.

Malaysia does not have a high national income per ca pita and the economy is not developed. Costs do matter as the country is a manufacturing export based economy and is in competition with worldwide exporters.

Services are built around the manufacturing sector. E&E exports are very dependent on the structure of the economy. In A GST structure, companies will outsource less and build up the value chain more to avoid the taxes. A lot of small time vendor services will be much more costly as companies toward the end of the value chain rethink their outsourcing strategy.

E&E will suffer the most cost increases as their whole structure is based on outsourcing. The number of parts involved in the products is quite dependent on outsourcing costs. If the products become too costly, the end manufacturers will vertically integrate, killing thousands of vendors which compete for their business.

If you are in the camp that small businesses drive economic growth, then yes, GST will hinder economic growth.

Astro shareholders should accept offer

2010-03-25T11:15:00.004+08:00

Astro is going private:

IT has finally happened. Astro All Asia Networks will be taken private, putting to rest rumours that have been been brewing over the last two years, with continuous denials from company officials. Not surprisingly, it has happened at a time least expected.

In a style similar to the RM16bil privatisation of Maxis Communications Bhd in 2007, Ananda Krishnan is taking his pay-TV company private at a price of RM4.30 per share, equivalent to a RM8.5bil deal.

The reason? The same as when he took Maxis private; going private would provide a more conducive shareholding and operating structure given the company’s future high capital expenditure (capex).

Astro’s estimated capital requirement is between RM3bil and RM3.5bil. Half of that will be for the domestic market, while the other half is for its overseas markets in the Middle East, Australia and North Africa.

The article came out a few days ago, but is significant for shareholders. Unfortunately, the shareholders will be bought out, many at a significant cut to the highs. The good thing is, they should take it, if Astro wants to lever up its balance sheet for future expansions into risky markets, then it's all good.

At this time when TM is coming into the market and offering HD quality TV to homes everywhere, (Word is they are coming out with 40 channels in the official trials) Astro wants to use its cash flow here to expand in services elsewhere. Ok! If they want it that way!

Shareholders should be glad Ananda is willing to buyout the Astro shares at a fair price. It's not horrible, but not great either. Perhaps Astro should be listed as a growth company instead of a dividend paying one. They might not get a huge IPO following, but at least there will not be any conflict with future shareholders who will know what they are getting.

Zeti hints at higher interest rates, why this is significant

2010-03-16T14:01:00.004+08:00

From the Business Times:

Bank Negara Malaysia said it may increase interest rates further to avert asset bubbles and discourage risky investments by people seeking better returns, even as inflation will likely remain "modest" this year.

"We will review the conditions at our next monetary policy meeting and work toward further normalising if necessary," governor Tan Sri Dr Zeti Akhtar Aziz said in a March 12 Bloomberg Television interview in Kuala Lumpur. "Inflation will continue to be modest and therefore it would not prompt us towards tightening, but that does not preclude that we will continue to normalise interest rates."

"Certainly the first half of the year, all the signs are pointing to stronger growth" as domestic demand and investment recover, she said.

Inflation of about 2 per cent would be considered "modest", Zeti said. Malaysia's consumer prices rose for a second month in January, climbing 1.3 per cent from a year earlier from an average 0.6 per cent in 2009.

Should price gains accelerate further to 3 per cent, for example, "we would begin looking at what are the sources of inflation because if it was demand-induced then" the central bank would look at "tightening" monetary policy, Zeti said.

Zeti refrained from raising interest rates in 2008 when consumer prices rose as much as 8.5 per cent in July and August amid soaring oil and commodity prices, saying inflation wasn't driven by higher demand and would ease as global growth slowed.

Malaysia's policy makers aren't "inflation targeters", she said last week.

While the rise in interest rates is not insanely surprising, given many other countries are currently tightening, the tone used in explaining the rationale of the interest rate moves point towards moving in a different direction that other central bank uber money printers.

For one, the bank has openly stated that it is not an inflation target-er, and is willing to repay back the savers who have been sitting patiently financing the Malaysian economy through this difficult time. This is excellent. This is a central bank that is willing to break from the crowd and not just follow inflation and economic data like a mindless lemming.

They are willing to raise interest rates and acknowledge savers which is fantastic given the ridiculous amount of money printing by everyone out there. Countries that have raised interest rates are doing so because of what inflation data tells them, following in the footsteps of the US; not because they want to compensate savers. While interest rate increases do give investors confidence, the knock on these central banks is that they will just as likely reverse actions if the data tells them to. Rarely is data ever stable especially given the current volatile economic conditions, so what currency investors crave is foresight on what a bank will do. Foresight that the bank will act accordingly to data is about as stable as an earthquake.

In a world where every central bank is hell bent tunneling in on economic growth, the Malaysian Central bank has taken a refreshing change in tone. This currency is going up, and the economy should be decent. If you want to break from the pack, Malaysia central bank is a prime example. Nothing says confidence like a country that is willing to acknowledge it will do something different from the money printing crowd and defend the savers and spending power of its currency, even if the economic recovery isn't as strong.

The Edge Malaysia v. Business Times v. Star Newspaper

2010-03-09T14:14:00.005+08:00

Frequently, I quote various publications for content fodder.

I use the Business Times for the majority of the posts v. The Edge Malaysia and The Star for good reason. The Business Times, in my opinion is the easiest to read Malaysian business publication. The Star news paper is next, but it gives you the runabout when going to the business section while the Edge has content but personally i don't think much of the way they present their information.

For instance, in the Business Times, I click on "Today's newspaper"and BOOM, I get the latest stories and yet do not get bogged down with too much content like the Edge. It's easy to scan their site. I feel their articles are generally more relevant and of greater substance than the Edge Malaysia site which just spits out article after article in the politics and business section. The headlines are not informative and sound quite useless.

The Star Newspaper, to be fair isn't a business publication, as they cater to many audiences. The business site is just an extension of the main newspaper. I would rate theirs better than the Edge Malaysia and not as good as the Business Times.

On the other hand, the papers of the Edge financial Daily and the Edge is quite good. Unfortunately the website leaves much to be desired.

Thoughts on high speed train travel, skybus might expand to Bandar Utama

2010-03-08T11:00:00.004+08:00

The Business Times posted an interesting article on the skybus service possibly expanding its services to Bandar Utama and Sunway.

"We have ferried more than 4.5 million passengers since LCCT was opened on March 23 2006," he said.

After one-and-a half years of service, SkyBus - which is one of two LCCT bus service providers operating from KL Sentral - was appointed as budget airline AirAsia Bhd's official bus.

The tie-up has enabled AirAsia passengers to enjoy an online bus fare of RM6.50 for one-way trip, instead of the normal RM9 one-way ticket.

SkyBus is now looking at carrying passengers from Bandar Utama to LCCT.

Chris said the service will start in the second quarter this year.

He said the company has also received invitation letters from the management of Sunway Pyramid and Genting Theme Park as well as other bus terminals to transport budget airlines passenger from their terminals.

Currently, SkyBus controls 20 per cent of traffic to LCCT. With more routes being opened in Klang Valley, its market share its expected to increase.

I've taken the economical route of going to kl sentral, sitting on the bus to the LCCT, and taking one of Air Asia's cheap flights to Penang.

Basically it costs me RM9.00 for the bus, RM15 for the taxi, and some 60 bucks for the flight. So this comes out to about RM85 for the entire trip. Not only do we have to consider the financial impact, but the opportunity cost in time taken. We're talking about 3.5 hours for a trip to Penang which normally takes about 4 hours to drive, not a great bargain there. (1 hour bus ride, 30 min taxi ride, 1 hour flight wait, 1 hour travel time)

High speed trains have a couple of interesting advantages that I only realized because of how ridiculous the costs I paid to get to the the airport in terms of time and money spent.

First and foremost, the high speed trains will most likely stop right in the middle of the city, at KL Sentral, so the only extra cost paid for is the taxi ride to the station. The bus trip is cut out, saving some one hour of time. You get to the train station 30 min before, one hour later you are in Penang or Singapore. (20 min taxi ride, 30 min wait for train, 1 hour travel = 2 hours of time spent)

In Singpore the train would arrive at a more convenient location so you would save on time spent traveling from the Singapore airport to your place of abode. Taxi costs in Penang are also outrageous, so you would save on costs there as well.

High speed trains have their demand for places with a 1-2 hour flight time. A 3.5 hour ordeal to fly to Singapore or Penang is quite ridiculous given that it equates to roughly half a working day. On the other hand, 2 hour travel time for train is much more tolerable. People commute 1 hour to work anyways, what is an extra hour?

If the US is stock buying futures, what does that mean?

2010-01-27T13:39:00.004+08:00

This is to follow up on the previous post that the US government may have been buying futures to artificially increase the stock market. In the following, I give a hypothetical scenario if the government had bought futures, and when the positions expired, what would happen.

Suppose the US government may have put bought index futures at some date a couple of years away. Given a margin requirement of say...10%, 100 billion worth of futures over 6 months would translate into some $1 trillion of buying power.

When people buy these futures, the sellers will have to buy the index to hedge their positions. They would buy 1 trillion dollars worth of stock so they might deliver these to the government some years away.

So, what happens when the government closes out their positions by offsetting at some earlier date. Well, the opposite happens, there will be no buying power and a lot of shorts. In fact, all the institutions which took the other side of the trade don't have to hold their stocks any more and will more likely sell the positions. As we approach the futures date, we will get a lot of selling, to the tune of a trillion dollars of selling power in the stock market.

When closing out futures contract, the government could theoretically take delivery, but that would translate them into putting up even more money for the basket of stocks they take delivery for. This won't happen. I don't know how the treasury could justify a hundreds of additional billions to congress just to purchase stock.

The last option is that they could roll over the futures position to an even further date. The government would close out, the counter parties sells one trillion worth of stocks, and reopen, the counter parties buy another one trillion worth of stocks. Nothing much except a flat and choppy market would ensue in this case.

Either the treasury/fed could perpetuate the positions or close them out.

Possible manipulation on the stock market by US government?

2010-01-23T18:54:00.005+08:00

Usually I tend not to write about this kind of speculative thing, but I find this rally fishy and evidence presented by zerohedge, although circumstantial, shows most of the rally since September 2009 has taken place in the after hours. The data might be coincidence, but yes, the US government boosting stock prices through buying futures would be a perversion of government intervention in free markets and this is showing the world that the stock market can be gamed through the futures market.

The world has believed that investing is something that is based on the performance of companies and economies. If they have to account for whether or not the government will buy or sell futures to game the market, then basically they will have wrecked decades of faith and trust by the public in markets. More people will know that the market is really a gamble and investing will have become a thing of the past. Why would people invest in the market if they know that it can be manipulated?

Of course, this after hours manipulation might just be nothing but an anomally but hopefully this thing gets sorted out or people will just lose faith.

Maybank Monitoring Dubai Situation closely

2009-12-18T15:24:00.004+08:00

From the Business Times:

Maybank's branches in Bahrain and London are monitoring the situation closely even though its loan exposure there is only a fifth of a per cent of its total.

MALAYSIA'S biggest lender Malayan Banking Bhd (Maybank) (1155) does not expect to be affected by the debt crisis in Dubai as its loan exposure there is only a fifth of a per cent of its total.

"Our branches in Bahrain and London are monitoring the situation closely. We are hopeful and believe the issues in Dubai will be resolved," said chief executive officer Datuk Sri Abdul Wahid Omar in Kuala Lumpur yesterday.

On November 25, Dubai sought a freeze on repayment of US$26 billion (RM89.44 billion) debt linked to Dubai World and its two main property units, Nakheel and Limitless World.

I quoted from an earlier post [1] that Malaysia should be proactive in the Dubai siutation. Finally, Maybank came out and said they are monitoring it closely. Islamic Finance as a whole is under scrutiny. It's a rather profitable niche for Malaysia, and it's ridiculous to take a lackadaisical approach. The government should send some people over there to keep track of the situation and lobby in Malaysia's interest as an Islamic Finance stronghold.

[1] Dubai bonds, what are the implications?

The public officials here should be mindful of the risks and take a proactive approach to the UAE handling of this situation. That means sending people over there to lobby the rulers not to screw up. We have vested interest.

Review of Poker Face of Wall st., Aaron Brown

2009-12-17T11:49:00.006+08:00

I just finished reading The Poker Face of Wall St. by Aaron Brown, by a professor of finance and ex trader who graduated from Harvard and University of Chicago in Applied mathematics and Finance. For anyone who is into statistics, poker, game theory, and trading; this is an excellent book.

I've always been fascinated by the game of poker, and not for the drama where people put millions on the line for a single hand. I find the way that people interact with each other given uncertainty is a bit mesmerizing.

In most gambling games, black jack, roulette, craps, etc; people bet against the house, there is no uncertainty and only odds, and over a large number of hands, you will more than likely lose money. Poker is the only game which combines both uncertainty of people and odds to make a wonderfully unpredictable game.

The human involvement in the game brings ways to make money and make it consistently. Why do you think the house never have their dealers play poker? They aren't sure if they can win over a large number of hands. Even if they give themselves an edge, its not certain as there are so many unknowns. They only get a cut of the winning pot. This isn't the best way to make money for casinos.

First, the book talks about how almost every economic activity takes on a gambling twist. The author gives examples and dispels common notions about securities and investments that they are mainly a gamble, and not the safe instruments we are spoon fed by sales people. He even asserts that major stock market crashes were more of an unpredictable event, there were no real big news events before or after that just caused the plunge. This lends credence to the unpredictability in markets. He then talks about how gambling played a pivotal role in providing capital to those who needed it in business such as Bill Gates who used poker money to start up Microsoft.

He talks about trading, poker, bluffing, and game theory and asserts some major pitfalls of practitioners of game theory. He thinks that knowledge of game theory is more useful as a way to win over people who use game theory. I think so too. Game theory works better in one on one games but horribly in Poker games which involve groups of people. People who use game theory will generally lose over time especially when they continue to meet people who are better than them.

He also says that people need to take risks to make real money in the world. When you've got a good hand, you have to have the guts to take risks. I believe he doesn't say that people should take dumb risks. For me, a person who thinks he should run a business when he sees so many successful people running a business is a dumb risk. Most people fail. Don't believe me, believe in the statistics.

On the other hand, if they got nothing to lose, yes it may be a worthwhile risk much like a lottery ticket or a business. For those with money it's a horrible bet. Humans also have this false confidence that say "I will make it work" which is a fallacy. They read all these books which give them confidence that they too can do it, they follow the advice to the letter, and fail. In running a business, a lot of it is luck. Don't believe all the hype out there about the Warren Buffetts or Bill Gates and their stories.

Definitely, this book is food for thought. I also read Nassim Taleb's Fooled by Randomness, which is an excellent complementary read to Poker Face on Wall st. Reading both will give you a greater understanding than if you were to choose just one as both books talk about fairly difficult abstract concepts.

Bursa Malaysia should look into Options

2009-12-11T01:49:00.003+08:00

The KLSE needs more financial innovation within a "structured" manner. Options are an excellent way to produce arbitrage opportunities that could make the market more efficient. Fisher Black, nobel prize winner and one of the creators of the Black-Scholes theory for option pricing reasoned that options were another instrument that could aid in price discovery and arbitrage.

For the Malaysian securities market, we need more ways to derive daily prices. Options will create volume in stocks and securities. At the same time, with these extra revenues, Bursa Malaysia and the Government stand to cut some of the taxing stock transaction fees. This will also create a more liquid finance system.

So to summarize:

1. Better price discovery for stocks.
2. Extra revenue will bring in room to cut current commission rates.
3. Higher security volume resulting from lower commissions and hedging activities.
4. More liquidity and efficiency.
5. More foreign investor interest as a result

Astro to launch HDTV services

2009-12-10T09:31:00.003+08:00

From the Business Times:

ASTRO All Asia Networks plc will launch high-definition television (HDTV) in Malaysia on Friday, said Astro TV chief executive officer Datuk Rohana Rozhan.

HDTV is a digital television broadcasting system with higher resolution than traditional television systems.

"Astro TV is now available to some 2.875 million residential subscribers who will be able to subscribe to its next generation of services, commencing with HDTV and high level interactivity and connectivity," she said.

"The roll out of these services is estimated to cost some RM200 million, including marketing and operating costs of approximately RM150 million, over the next financial year, ahead of revenue and earnings from these services," she said in a statement today.

Rohana said Astro TV will continue to focus on evolving content and technologies ahead of consumer trends, to lead by innovation in response to demanding and sophisticated customers.

Astro All Asia Networks today announced a higher pre-tax profit of RM195.69 million for the third quarter ended Oct 31, 2009 compared with a pre-tax loss of RM212.37 million in the same quarter last year.

Its revenue grew to RM863.49 million from RM744.54 million due to a strong growth reported by Astro TV.

"Astro TV delivered a strong set of results this quarter on the back of a price increase, the introduction of new packages, net subscriber growth of 94,000 and disciplined cost management," Rohana said.

The direct-to-home TV joint venture business in India, Sun Direct TV, reported strong subscriber growth with some 500,000 new customers activated for the quarter ended Oct 31, bringing the total to 4 million customers, she said.

It also announced an interim tax-exempt dividend of 2.5 sen per share for the third quarter, bringing total dividend to-date to 7.5 sen. - Bernama

From what I heard from my Astro installer, HDTV won't actually be available for some time. This launch seems to be merely a formality. In addition, not all channels will be HD, the electronic HD box will cost more, and HD channels will cost more. We're looking at a year or two away at least.

Disclaimer: This is just what I heard from my Astro installer, who knows, Astro could change its mind at any time or my installer could be lying.

Goldman Sachs in Malaysia

2009-12-08T21:23:00.003+08:00

From the Business Times:

MALAYSIA has given U.S. investment bank Goldman Sachs licences to set up fund management and advisory operations in the country, as the Southeast Asia nation competes for foreign investments.

The licences were given as part of the liberalisation measures announced by Prime Minister Najib Razak earlier this year, the country’s securities regulator, Securities Commission Malaysia , said in a statement today.

Goldman Sachs’ entry “demonstrates the group’s confidence in the growth opportunities available in the Malaysian capital market,” said the SC.

Other global financial companies such as JPMorgan and Credit Suisse already operate in Malaysia.

“We look forward to playing a larger role in their development,” Leissner said in the SC statement.

Malaysia in June unveiled a raft of measures to boost investment in the slumping economy and lift a laggard stock market, including waiving the condition that local companies should reserve 30 per cent of any post-IPO share sale to Malay investors.

Corporate activity in Malaysia is expected to rise next year and bolster the stock market, analysts say.

Malaysia this year saw Southeast Asia’s biggest ever IPO after the US$3.3 billion offering by Maxis Bhd the country’s biggest mobile provider.

Malaysia is the worst-performing market in Asia so far this year, up just 44 per cent, compared to Indonesia’s more than 80 per cent gain and Thailand’s 56 per cent rise. - Reuters

Wow...looks like Goldman Sachs is coming to Malaysia. I think competitors should be scared. The great vampire squid is coming to town:

The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

That doesn't paint a pretty picture. Well, after all the bad media, they try to paint themselves in a better light in that they are doing God's work. Oops, just a little too bright. Now they are declaring themselves holy to the world.

When it comes from their CEO, the statement will almost be certainly taken out of context. Seems to me he seriously misjudged how many people still felt betrayed by the government with their tax payer dollars paid out in bonuses to Goldman Sachs.

Anyways, with so much notoriety, they feel like they can be accepted in a country such as Malaysia. Perhaps, maybe they'll be welcomed with open arms as people generally go to those who can get them the most money. Go with Goldman, their reputation to win at any cost, and you can't lose, or can you?

Dubai bonds, what are the implications?

2009-12-02T10:53:00.003+08:00

I've heard some interesting stories from my friend about doing business in Dubai. He sells jewelry and regularly makes trips over there. His customers over there buy jewelry in large and lucrative quantities and he has built the contacts and relationships so that it is worth it for him to hand carry his jewelry from Malaysia and sell it in Dubai.

Sometimes, when my friend would call up, they would tell my friend they were busy and then out of the blue tell him to come NOW. They treat him like a dog. That example speaks a lot about the over cocky style of business over there. So it doesn't surprise me when Abu Dhabi tells Dubai to handle their own problems.

But now, the world is placing a huge microscope over the situation and how it is handled. This also has huge implications for Islamic finance. If the bond holders pull the nuclear option and take the assets over in court, we will see how the UAE responds as they probably will not be prone to letting foreigners come up and take over nationally backed companies. Further opaquing the situation, the Islamic Sukuk bonds may not give holders the legal strengths of bonds as they are considered a form of equity and bonds. Although, I'm sure the sukuk holders would prefer bond power in re-organization. I think a lot of people buying the Sukuks believe they are a type of bond.

The law system in in the UAE is also suspect as the courts basically do what the rulers say if they so deem it. For small cases, I think re-organization is not a problem, but for something like Dubai World, international investors will scrutinize their decision.

Even if Malaysia does not have a lot of interests directly affected by Dubai's crisis, their future growth and confidence in Islamic financial instruments are under scrutiny. They are affected as an Islamic finance hub. Future slow down in growth from this area will cut valuations of players in the Islamic finance arena today. A dubious ruling will definitely see the financial arena in Malaysia drop in value to investors. The public officials here should be mindful of the risks and take a proactive approach to the UAE handling of this situation. That means sending people over there to lobby the rulers not to screw up. We have vested interest.

Malaysia property bubble in the making?

2009-12-01T03:13:00.003+08:00

This is a conundrum that I've been debating. I've yet to see very many housing articles, data, and research seriously critiquing the housing market here.

When I look information such as household income to price, I see a lot of houses overpriced. Consider the average household income is RM4000. How can they afford houses that run in the RM270 to RM300 per sq. ft range. I see young people going for new properties running at RM400, RM500+ per sq ft price. Not only that, the standard down payment here is 10%. Most people can't put up the 20% equity.

In fact, I've been hearing that consumers can get around that 10% down payment with a measly 3% down payment (7% covered by the contractor)! A lot of the practices such as option arms, almost no down payment, and interest rate resets into the second and third year that doomed the US are prevalent here. People should use the low rate period to pay down the amortization on the house and instead are spending it on consumer goods as evidenced by the growth in consumer loans and consumption.

The government isn't doing much to curb the risk although they mentioned that they are concerned. We have the housing capital gains tax supposedly to cool down the market. But we all know the main purpose of the tax is for revenue. There are far more effective ways on clamping down on the housing market. For one, increase the down payment and ban all these shady teaser rates and zero down payment ideas.

Dubai Debt default, Malaysian companies with exposure to Dubai

2009-11-26T21:36:00.006+08:00

From Finance Yahoo(AP):

Sentiment in stocks has been dented by the news that Dubai World, which is thought to have debts totaling around $60 billion, has asked creditors if it can postpone its forthcoming payments until May. That has stoked fears of a potential default and contagion around the global financial system, particularly in emerging markets.

"Certainly the Dubai debt debacle and the uncertainty that it has created has had a severe knock on effect," said David Buik, markets analyst at BGC Partners.

Kit Juckes, chief economist at ECU Group, said the developments in Dubai and in the currency markets are related as the fall in risk appetite has pushed money into government bonds and into safe haven currencies such as the Swiss franc and the yen.

This, he said, is "testing the tolerance of central banks to see their currencies cause further damage to their economies."

Even if Dubai were to get a bailout from the UAE, the Dubai CDS would be paid in full. Malaysia is majorly affected by this debacle. A big part of the Nusajaya development is with Dubai World! Whoever said islamic debt was safe, weren't affected by the crisis must be really smoking something.

In addition to direct effect, Malaysia is the top country for Islamic Finance. The financial industry will surely be affected.

Who's going to buy the US government debt?

2009-11-20T12:47:00.012+08:00

One of the biggest questions that deflationists have to answer versus the inflationists is:

who will buy all the debt issued by the government to keep interest rates down?

Inflaionists say that no one will buy this government debt and thus rates will go up and we will have inflation.

Deflationists have had trouble giving a credible sounding answer to this one. But it is important to address as low government rates are a basic tenant of the deflationist camp. I've had difficulty coming up with a reasonable answer to this myself and I'm skeptical of all ideas on deflation as well as inflation. I'm concluding that the debt issued by the government will be financed by savers.

The next question is when will this happen as it hasn't happened yet? Well, we have to consider China and foreign buyers of US debt. From Barrons:

the real question isn't whether the U.S. will pay back what it's borrowed from abroad. In essence, can foreign purchases of Treasuries keep up with the widening deficit? That's the question posed by Greg Blaha and Ryan K. Malo of Bianco Research in a note to clients.

Back in September 2007, foreign purchases of Treasuries equaled 270% of new issuance, they note, as they sucked up the available supply of U.S. government securities in sight. That was before the budget deficit exploded last year owing to the economic collapse and the cost of the federal bailouts. By September 2009, foreign investors were taking down only 16% of Treasury issuance.

Obviously, foreign purchase of debt is way down and will not be enough. Next, we consider the consumers/savers. The main reason why they have not been putting their money in treasuries is that some of them have been compelled to spend on cars and houses. They've been liquidating what little they have saved. Q3 GDP showed consumers saved 3.3% of personal income as opposed to 4.9% of income in Q2. [1] (Personal savings as a percent of income on line 34)

Anyhow, now we look at the other buyer, the Federal reserve.

The 10 year treasury rates have been going higher as the fed slows their treasury purchases. The Fed ended their treasury purchase in August. The fed's balance sheet also reflects this action. An inflationist would say once the Fed stop purchases, the rates will go up and inflation will soar. This has been happening as of late, probably why gold is up and proving inflationists right so far. But this is only somewhat true for a short period while the consumer transitions to saving again. This is an inflation "head fake."

Fed Balance Sheet (notice the treasury purchase portion of assets has flattened)

Coincidentally, gold has gone a lot higher during this void where the fed ended their buying and the thrifty part of the consumer is spending. Make no mistake, though that consumers will soon return to their saving ways. Of course not all savers turned to consumers at the government's incentive. They are probably the ones to thank for keeping the rates as low as they have been. I imagine after all these stimulus measures have taken effect, the consumer will revert back to saving and de-leveraging and buying treasuries. When the consumer/saver returns to increasing their savings rate, the treasuries will once again increase increase in value.

While I'm not too sure when this will happen, I can't imagine it will take too long, maybe a couple of months. When we see people stop buying into stimulus programs, saving more in the BEA personal income and outlays reports, and the prices of treasuries start to firm up is when we will have the treasury asset class strengthen again for quite a while unless of course the government manages to whip out another carrot. Even then the US government has only so many bullets before people start to lose patience.

Steve Keens, an original look into the financial crisis

2009-11-20T11:32:00.006+08:00

Recently, Zerohedge wrote and article on an Australian professor, Steve Keen. The professor did correctly predict the financial crisis and is vocal that the US and Australia is still not in the clear.

One of the key points I got from his talk is that the current model of money supply is flawed. We should think of it like reservoirs and dams, with the dam controlling the flow of money to other reservoirs.

His idea is that dumping trillions of dollars in the reservoirs of banks will just make the water level higher and the rate of flow will not increase to the debt holders. The current economic posture of all this easing of monetary policy to the banks with tarp and asset buying with the fed is basically having little effect.

So, in the end, his conclusion is to actually give the money to the debtors, who have increased their flow the the creditors. This is the most simplest method of debt reduction. Basically he is saying, no pain, no gain. At some point when banks and restrict their flow of money, conventional monetary policy of increasing banks reserves do not work.

Intuitively, this probably explains why government programs like the cash for clunkers and home buyer tax credit had a major bang for your buck effect (money went to debtors), while the TARP program (money went to banks) looks like a failure.

There are some spillover effects of the current government monetary easing in that it does put extra income into consumer's pockets but not that much as many homeowners are on fixed loans. Generally, though the effects are not enough.

This idea does confirm the deflationists' point of view in that if the money is not flowing any faster to the debtors, you will still have the debtors de-leveraging. We should give the money to the debtors and wait to see if the economy will start leveraging up again, then we will have more sustainable growth. But again, this kicks the bucket down the road until another debt crisis hits us.

Takeaways from Lee Heng Guie, CIMB head of economics.

2009-11-04T18:25:00.007+08:00

Two presenters: Head of economics, Malaysia and Equity Strategist

Key items:

The RPGT will be enacted on the opening date. As long as the property sold is before end of this year, you will not get taxed.
They see a higher chance for a slow recovery than a w or v shaped one.
Foreign investing in Malaysia is basically a small portion for big fund managers. Despite the insignificant FDI, we still tend to trade in line with other asian economies.
They see the economic recovery slow but equities are in a bull market but take some profits at this time.
Malaysia will decouple from the US and world economy at sometime in the future.
Credit Card service fees will likely stick: service tax of RM50 per card.

From my view, they are somewhat inconsistent at times. For instance, they are a buyer of equities but conclude that economic recovery will still be slow. They predict a decoupling from the world economy at sometime in the future, but I imagine they don't have a time frame on that.

My view is that we are in bear market rally and will bounce between highs and lows much like Japan did after their bubble burst. The decoupling will take a long time to happen, and will not happen for years, at least not as quickly as they are predicting. In the mean time, there is still money to be made or lost for a medium term investor.

Three WiMAX licensees fined, MCMC is a joke

2009-10-28T13:17:00.003+08:00

From the Star Business:

Three of the four WiMAX licensees have been slapped with fines for not rolling out their networks on time, industry sources said.

The Malaysian Communications and Multimedia Commission (MCMC) is said to have issued letters on the fines to the WiMAX operators more than a week ago.

The players fined are YTL e-Solutions (RM1.9mil), AsiaSpace (RM1.7mil) and REDtone International (RM200,000) for failure to meet the 25% population coverage by the end of March.

The quantum correlates to the level of coverage achieved as at the deadline. However, all three players are appealing against their fines.

Tan Sri Francis Yeoh, head of the YTL Group, told StarBiz that YTL e-Solutions would appeal against the decision on the basis that the company would be ahead of the next roll-out target of 40% by mid-2011.

“We believe in having an extensive network up and running as we don’t see the point in having incremental coverage.

“We take this business seriously. We will have 60% coverage (more than the needed 40%) by the next deadline,” he said.

Another industry player, who declined to be named, said his company had faced a myriad of issues in rolling out its network, especially in relation to obtaining approvals and the land needed to put up the base stations.

“It takes a long time for these government approvals. And if the land is privately owned, prices can be prohibitive for us. This makes it almost impossible to roll out.

“If we were helped with these issues, then it would be fair to impose a fine on us. But these problems are beyond our control,” he said.

Last December, then Energy, Water and Communications Minister Datuk Shaziman Abu Mansor said the Government would withdraw licences from players who could not show good reasons why they are not able to roll out according to proposed plans.

More recently, Information, Communications, Culture and Arts Minister Datuk Seri Dr Rais Yatim said the MCMC should ensure that providers had delivered on what they had promised.

YTL plans to invest up to RM2.5bil over the next five years for its WiMAX roll-out while AsiaSpace is looking at raising RM300mil, having invested close to RM100mil so far. REDtone is looking at raising RM40mil.

It has also been questioned whether the authorities had been lackadaisical in enforcing deadlines and withdrawing the spectrum rights from those who did not use them.

However, as this case indicates, rolling out a telecommunications network can be fraught with difficulties and complications.

It will be just as challenging to manage that spectrum.

I mentioned before that wimax is basically fool's gold. It's an entry into the already crowded wireless arena. The wimax providers are in fact competing with the established telcos in providing wireless internet services. Furthermore, they are handicapped as they don't have the infrastructure built. Betting people would not gamble on wimax competitors taking a substantial market share from the telcos.

The logistics problem of wimax is a pain and an experienced telecom provider would have an easier time implementing than the current batch. The MCMC is another joke of an telecommunications body. How can they have picked so many failing companies? Not only are there infrastructure problems, but the companies have no experience in telecommunications. If I am a government body, I want someone who will have the best chance to build up capacity for the nation. If that means another telco company winning wimax, then so be it.

In light of all the follies of both companies and the MCMC, the only people who will really be affected is the investors who ponied up the capital for this costly wimax infrastructure. Talk about building bridges to nowhere.

2010 budget reflections, property taxes, financial industry goodies

2009-10-26T11:59:00.006+08:00

From the WSJ:

Malaysian Prime Minister Najib Razak promised to curb a burgeoning budget deficit while still supporting economic growth with a personal income-tax cut.

Mr. Najib told Parliament in his 2010 budget speech Friday that the government will cut the individual income tax rate by 1 percentage point to 26%. But in addition to the surprise cut, he announced a 5% tax will be imposed from Jan. 1 on property gains. Mr. Najib also delivered an annual report that forecasts the trade-driven economy will contract 3.0% this year -- better than an earlier forecast of a 4.0% to 5.0% decline -- before rebounding next year to growth of between 2.0% and 3.0%, thanks to previous spending measures and low interest rates.

The government is in the final stages of studying a goods and services tax, Mr. Najib said, but offered no timetable.

The government will fund its 51.12 billion ringgit deficit entirely through domestic borrowings and a shortfall of 40.48 billion ringgit in 2010 will be met "primarily from non-inflationary domestic sources."

The report also predicts average consumer price inflation at 1.0% this year, slower than the forecast of 1.5% to 2.0% made by the country's central bank in March. Exports may shrink 19.2% this year, and may rebound to growth of 5.1% in 2010.

The budget also vows to let foreigners own 100% of Malaysian corporate finance and planning companies, up from 70% now, and relax rules on the sharing of commissions between stock brokers and commission-based dealer representatives.

The WSJ got most of the article correct, but failed to mention property gains are as much as 30% for the first year of ownership reducing gradually until 5% in the fourth year. Taxing unfortunately is quite a blunt instrument, but it will curb the rampant property speculation in Malaysia.

With the average household salary of malaysians being some RM4000 per month, I do not see how most could afford properties of RM300 per square feet. It just boggles the mind. A 300k place would cost about RM2000 in payments and that is not a reality for most Malaysians. 50% of household income is just nuts.

They say our housing markets are strong, but yet they come in with teaser rates just like options arms in the US. News flash, the housing industry encourages a lot of questionable loan practices in Malaysia as well! When the teaser rates adjust, will home buyers be able to pay? 2.5% adjusted to 7%...ouch. comes in at about 70% increase in monthly payments!

Ever since Najib won the election in April, I mentioned that given his affinity to the financial industry through personal ties as well as having a background in economics, the sector would benefit during his tenure. While the budget lacks any "big bang" policy movements for the financial industry, liberalizing regulations is always effective.

MASkargo sees China revenue falling, China's hard asset binge

2009-10-22T18:11:00.002+08:00

From the Business Times:

Malaysia Airlines Cargo Sdn Bhd (MASkargo), the air cargo unit of Malaysia Airlines (MAS), has warned that revenue from its operations here could fall 20 per cent this year on lower yields and capacity.

Shanghai is the second biggest contributor to MASkargo's overall revenue, after Kuala Lumpur, accounting for some 30 per cent contribution.

The Chinese station saw revenue drop 50 per cent in the first half compared with the same period last year.

It handled some 50,000 tonnes of cargo last year.
Parent MAS' capacity cuts on passenger flights in the first half of the year also affected MASkargo's bellyhold capacity.

MAS reduced its flights here to eight times a week from 14, while MASkargo trimmed its freighter service to 10 times a week from 13.

Song said that things were looking up now, based on China's trade figures which show signs of a recovery since September. This has enabled air cargo companies like MASkargo to gradually raise their freight rates again.

Quarter-on-quarter, Song expects MASkargo to post 35 per cent revenue growth in the fourth quarter.

The article had me fooled for a moment into thinking MAS will see china freight continue to decline, when in fact, it already has. Mostly, I see a recovery in growth q-o-q as pointed out by the last sentence. This is hardly newsworthy. If the Baltic Dry Index is any indicator, freight rates will not be as good going forward. China has been reported going on a massive commodity buying spree and while they mean good, it is way too early as this economic downturn has still a prolonged period to go.

It would not surprise me, next year, to see the same headline again as China retracts from its recent asset buying spree and realize that they have bought way too early in the economic cycle.

Removal of brokerage fees likely: Kenanga

2009-10-20T20:41:00.003+08:00

From the Business Times:

The government is likely to remove or reduce minimum brokerage fees to boost the equity market in the 2010 Budget, according to Kenanga Research.

It will be tricky for the government which has projected to cut 15 per cent of its operating expenditure to maintain a moderately high development in spending, said Kenanga in a statement today.

"Realistically, we expect the operating expenditure to be reduced by no more than five per cent, largely by way of reducing or restructuring subsidies which had ballooned to about 22 per cent of total operating expenditure from just 8.5 per cent in 2007," it added.

The government will need to allocate more than RM50 billion in development expenditure for 2010, said the research house.

The 2010 Budget is also expected to include the removal or reduction on stamp duty for properties above RM250,000 to stimulate property purchases, according to Kenanga

I've left in some other items outside of brokerage fees for those who are interested in the 2010 budget. The reduction in transaction fees are a boon to the financial sector. If they could set the fees at a flat rate instead of a percentage, then the change in plans could benefit many financial companies.

The way of commissioned brokerage should go out of fashion. For those that don't need or want personal brokers taking a share of their profits, they should get the right to lower fees. Not only is it good for the retail investor, but the stock market benefits from higher liquidity resulting from investors worrying less about making up the transaction costs in buying and selling securities.

Public Bank nets RM639m profit in Q3, trouble brewing?

2009-10-16T10:57:00.003+08:00

From the Business Times:

Public Bank Bhd (1295), the country's third largest bank, reported a 3.7 per cent higher third-quarter net profit as it earned more from loans, despite a weak economy and even as it has set aside more money to cover potential bad debts.

Net profit for the three months to September 30 2009 came in at RM639 million, although revenue fell 12.7 per cent to RM2.4 billion.

The bank has put aside RM176.4 million of allowances for loan losses, 65 per cent more compared to the same time last year.

Managing director and chief executive officer Tan Sri Tay Ah Lek said Public Bank is on track to achieve a 14-15 per cent loans growth target this year, driven by demand for loans to small businesses, mortgages and car loans.

Despite a difficult economy this year, Public Bank's net profit has expanded consistently in the first nine months this year.

Net profit in the second quarter grew 3.6 per cent to RM611 million from RM589 million in the first quarter, and improved further by 4.6 per cent in the latest quarter.

Loans grew by 14.3 per cent on an annualised basis, while deposits expanded by 19.5 per cent. This compares with the industry's 6.8 per cent growth for loans and 6.3 per cent for deposits.

Public Bank is considered the best bank in Malaysia and is substantially increasing allowance for bad loans. I loathe to see what the other banks in Malaysia have to say. Loan growth profits seem to be what is holding up the bottom line. I imagine that the loan growth will taper off as demand for houses, cars, and mortgages wane from the initial rebound after the financial crisis.

If loan growth profits were to come down and bad loans were to increase, this would not bode well.

Malaysia's economy needs only a mild increase in western countries' consumption to put the country on much better footing, but if that's not helping, I don't know what will.

MIER expects tax cuts in Budget 2010

2009-10-15T01:05:00.002+08:00

From the Business Times:

CORPORATE and individual taxes are likely to be reduced by one to two per cent in the 2010 Budget, according to the Malaysian Institute of Economic Research (MIER).

The reduction would not affect the government's revenue, MIER executive director Datuk Dr Mohamed Ariff Abdul Kareem said at a press conference in Kuala Lumpur today.

"Since 2010 will be a better year than this year, then shaving off the tax rates may be offset by increased income base. So I don't think it will affect government's revenue," he said when presenting a report on MIER's economic outlook for the third quarter 2009.

Corporate tax is currently at 25 per cent while individual income tax is at 12 per cent for chargeable income exceeding RM35,000 to RM50,000.

Mohamed Ariff said the tax reduction would have positive impact on the economy as well as investors.

Asked whether such a reduction was in preparation for the introduction of the Goods and Services Tax (GST), Mohamed Ariff said: "It could be."

He said GST taxed on consumption and not income, thus providing an incentive for people to work harder and earn more.

"In Malaysia, there is a need for GST because the number of people paying tax is small, so everybody will chip in. Everybody is contributing because everybody is consuming. So the tax base gets bigger," Mohamed Ariff said.

To me, I don't know if MIER has inside information into the PM's agenda, but a tax cut would be fine in tandem with an imminent GST implementation in the next few years. I'd rather not have a tax cut because the huge stimulus needs to be paid down and the only way that is going to happen is through tax revenues.

I doubt that the "future" revenues from the recovery will be enough to sustain. If the recovery is weak, cutting taxes is a fiscally irresponsible move especially considering government revenues took a nosedive this year.

Maxis IPO could turn off investors

2009-10-12T23:54:00.005+08:00

From the Business Times:

But at a fund manager briefing by CIMB in Kuala Lumpur last week, investors questioned why Maxis, stripped of its prized assets in India and Indonesia, deserved to be valued at the figure of two years ago. Malaysia is a fully saturated market in terms of SIM penetration.

“People have talked about 14 to 16 times (price to earnings ratio),” said Aberdeen’s Jalil. “I think at the lower end of the range it does look OK but if it’s in a late teen or something, it might put off certain people.”

Maxis, which earned RM1.14 billion in the first half of 2009, said it plans to pay out 75 per cent of its net profit as dividend. CIMB Research said Maxis had a dividend yield of between 5.3 per cent and 5.9 per cent in 2010, compared to the 4.6 per cent yield of the FTSE Bursa Malaysia KLCI.

But investors were not impressed.

“If I want to buy for yields, I may as well buy a bond, that way I am not subjected to the ups and downs in the market,” said the CIO of a fund management firm. -- Reuters

I concur as well with the article. The yield of 5.3 to 5.9 pc is not bad, but there are other dividend stocks that may be more attractive in less competitive markets. We have a mature telecom market where revenue growth will most likely amount to GDP growth. The only area which it could grow is in data services but that market is also highly competitive.

For instance, gaming and tobacco stocks are excellent yield stocks in less than competitive markets. Their games and cigarettes have built followings. Telecoms can't distinguish their products from one another easily and usually leads to high attrition as one provider offers better deals.

My take is that Maxis will be priced similar to Digi differentiated only by the customer mix they serve. Digi serves the lower end consumer and therefore might be cheaper with lower margins while Maxis might be a little pricier with higher margins.

MAHB to invest big in retail services

2009-10-09T16:54:00.004+08:00

From the Business Times:

Malaysia Airports Holdings Bhd (MAHB) is planning a substantial investment to beef up its retail shopping and services to capture the higher revenue potential.

Its chairman, Tan Sri Dr Aris Othman, said a major renovation of its satellite building at the Kuala Lumpur International Airport (KLIA), is nearing completion.

According to Aris, MAHB will now focus on renovations to the main terminal building at the KLIA to enhance and modernise the retail facilities there.

"We realise we cannot rely on airport charges alone as it tends to remain stagnant or low, due to the competitiveness of many airports around the world," he said during the graduation ceremony of 194 airport security staff in Sepang today.
Aris said with the completion of the new low cost carrier terminal (LCCT) by the fourth quarter of 2011, a more enhanced shopping experience would be available.

Works on the new LCCT, he said, will commence next month and the total construction cost is RM2 billion.

He also said there would be no compromise in terms of airport security, despite the economic slowdown.

I actually think the new LCCT terminal will be a huge earnings boost for MAHB. The current LCCT seems built as cheaply as possible wihtout much regards to profit strategy. With the volume of passengers going through the LCCT, the profit potential of the airport is brought down by lack of retail space. The new LCCT should solve this problem and be a huge profit opportunity for MAHB.

Erroneous trade error, symptom of a stodgy Bursa Malaysia

2009-10-06T15:30:00.010+08:00

From the Business Times:

Bursa Malaysia Bhd has rejected a request from a market participant to cancel an erroneous trade that caused shares of Kuala Lumpur Kepong Bhd (KLK) to soar yesterday.

Analysts and dealers were stumped when the plantation firm's share price rose 24 per cent to RM17 in the last 10 minutes of trade, on heavy volume, for no apparent reason.

Even a company official seemed surprised by the sudden share movement.

Not long after the market closed, however, Bursa Malaysia said it received a request to cancel a trade for the stock, arising from a "participant's error".

It later told brokers that it had reviewed the request and decided not to approve it.
Dealers believe the dealing error came from a foreign brokerage house.

Bursa Malaysia, in a press statement, said KLK's sudden share price jump was brought about by "matching of market orders at the pre-closing phase of the day".

This resulted in a change in the benchmark FTSE Bursa Malaysia KLCI Index which was not reflected until after the market's close, due to "verification measures" taken on the increase in KLK's share price, it said.

The exchange clarified that the index's closing yesterday was 1,216.45 points.

The huge volume indicates perhaps the dealer bought too many shares, possibly at market price. This could come from a key entry error. For example, say I want to buy 2000 shares, which is 20 x 100. In the box for the order entry, I would need to key in 20. Sometimes I would key in 2000 by accident. This is prone to occur when someone has to key in pre-calculated numbers from a spreadsheet.

It's just not intuitive. If I want to buy 2000 shares, I should put in 2000 in the box right? Bursa should move with the times. They could get rid of the lot system in favor of the US system of buying individual shares. I've always been a fan of dealing with more numbers on the left side of the decimal than right. I think a lot of people would prefer that as well.

Natural gas supplies, effect on Malaysian companies

2009-10-06T00:50:00.006+08:00

From Politics Daily:

But natural gas has suddenly emerged as both a factor in this year's energy debate and a potential game-changer on the political landscape for the long term. A few facts, dramatic new supply projections, and a geological map help explain why.

First, natural gas is up to twice as clean as coal and 30 percent cleaner than oil when it comes to carbon emissions that contribute to global warming. Second, because of new drilling technology and shale gas discoveries in the last few years, America now is estimated to have a 100-year supply of natural gas at current consumption levels (see page 7 of the linked document). And third, check out where that gas is located. It's in Rustbelt states where senators are worried about how the energy bills would affect polluting industries, and in conservative states where they are concerned about how the measures would affect the cost of electricity.

Malaysia is a very large producer of natural gas. The companies that would have problems with the currently over abundant resource are MISC and Petronas. Petronas Gas could see some problems if prices keep falling. MISC is exposed through its large LNG shipping fleet. These tankers basically are made for LNG shipments only. They can't easily be converted to anything else. If countries like the US don't need as much gas shipped to them as indicated by their 100 years supply of gas, then MISC will surely suffer.

This oversupply of natural gas has caught many countries by surprise. For instance, the US is now only incorporating natural gas as a big part of their energy plans. They are in the law-writing stages only and infrastructure will take years to come online to make use of this over supplied resource. In the mean time, exporters of natural gas will have problems on what to do with all the supply.

Views about the stock market and economy

2009-10-03T03:27:00.003+08:00

First, the most important point we must establish is that of inflation and deflation. We will probably see a period of deflation, the contraction of credit. Recent headlines (1 , 2) point to contracting debt in spite of the government taking on trillions in debt.

Furthermore, with capacity slack we will unlikely see the tightness in production needed for producers to raise prices. The final piece of evidence is that of rents in the United States are decreasing. This will show in the OER which is a huge weighting on the CPI. This will counteract any CPI increase due to commodities.

Most likely, the path of least resistance is that of deflation. But whether consumer prices go up or down a lot is not the main driver of the market. The main driver is the contraction of credit. We're going to see credit contract and a lot of these debts won't be paid off due to people can't pay for their homes and businesses going bankrupt. This debt destruction will suck up all the extra dollars the fed has pumped in and more. We can see this happening already despite government actions to take on more debt.

What does this mean for the markets? Simply, demand for dollars is outpacing supply due to debt destruction. The dollar will most likely increase in value, and thus risky assets will have a hard time in this environment.

In the future, I don't see the Fed able to increase liquidity without backlash. Already the public is skeptical of the Fed creating more dollars so any more money created will be met with scrutiny. Short of another systemic failure or economic recession, I don't see massive credit creation in the future. Keep in mind, the Fed in it's most recent meeting has indicated that it will be stopping purchase of treasury securities, so it seems as if they are starting to slow down the liquidity programs.

Credit given to MAS for working within their means

2009-10-02T14:37:00.004+08:00

From The Edge Malaysia:

KUALA LUMPUR: MALAYSIAN AIRLINE SYSTEM BHD [] (MAS) recorded RM2 billion in savings in the past three years and is targeting to reduce costs by another RM700 million this year.

MAS managing director and chief executive officer Tengku Datuk Azmil Zahruddin said on Oct 2 the national carrier would continue to pursue structure cost reduction.

"There is a lot more room for cost savings," he said at a briefing in Kelang Jaya as he update the media on the progress of MAS's business transformation plan.

Azmil explained that a 62-year-old legacy carrier inherited a lot but the aggressive cost savings measures was to get rid of "bad costs such as those that don't add value or give poor returns".

"A significant portion of our savings is returned to customers in the form of lower fares and better services," he explained. "We will continue to invest in good costs," he added, such as inflight food, safety and regulatory requirements and to generate third party revenue.

He said MASkargo aims to return to profitability next year while MAS Aerospace Engineering aimed to achieve revenue targets of RM1 billion by 2010 and RM3 billion by 2013.

On its fleet renewal, he said it would take delivery of 35 firm B737-800 planes with delivery starting in the fourth quarter of 2010. It has another 20 plans on option.

"These planes will be deployed in Malaysia, Asean, South Asia and China," he said.

To MAS' credit, they've not been grabbing shareholder's money like AirAsia recently. Their cost cutting method seems effective and looks to be continuing under the new ceo, Zahruddin. He seems to be picking up exactly where Idris Jala left off. No doubt as a full service carrier, MAS is hurting compared to AirAsia as consumers trade down; but credit is given to MAS for working within their means.

Berjaya Hotels wants to hive off some foreign assets

2009-09-29T01:22:00.002+08:00

From the Business Times:

Hospitality group Berjaya Hotels & Resorts plans to sell off its properties in Seychelles, Sri Lanka, Singapore and London to concentrate on its more profitable markets in Asia-Pacific.

Chief executive officer Joseph Won said the group wants to sell Berjaya Colombo Hotel and Berjaya Singapore Hotel, exiting entirely from Sri Lanka and Singapore, despite the two being in Asia-Pacific, to focus on bigger markets.

Won said if prices are right, it would also dispose of Berjaya Beau Vallon Resort and Berjaya Praslin Resort in Seychelles and Berjaya Eden Park Hotel in London.

He said the group is in discussions with a few parties for its properties in Seychelles and London and hopes to sell them within the next two quarters.

Locally, the group operates Berjaya Langkawi Resort, Berjaya Tioman Resort, Berjaya Redang Resort, Berjaya Georgetown Hotel, Colmar Tropicale and Berjaya Times Square Hotel in Kuala Lumpur.

The properties, including those overseas, are worth a combined RM900 million.

"We have made a strategic decision to be Asia-Pacific focused. We are transforming ourselves in such a way to become one of the biggest hotel groups in the region," Won said in an interview with Business Times.

He added that the plan for Asia-Pacific would be to open up to 20 new hotels and resorts in Japan, South Korea, Vietnam, Maldives and Malaysia over the next six to seven years.

The list would include Berjaya branded properties, which the group would own and operate on its own, and hotels operated by third parties.

Berjaya Hotels & Resorts will use proceeds from the sale of the foreign properties, and its own reserves and existing cash flow to finance the expansion.

In addition to opening more properties, the group will also be looking for management contracts in Asia-Pacific.

"We are getting offers from China and Vietnam to operate their wholly-owned resorts and hotels, under the Berjaya brand. This is something we would be doing on a big scale," Won said.

The group, in a 70:30 joint venture with a local Vietnamese firm, is currently constructing Berjaya Resorts Phu Quoc Island in Phu Quoc Island for US$45 million (US$1 = RM3.48).

Won said the new resort is targeted for opening in the second or third quarter of next year.

"This is our first property in Vietnam and I wish to do more. I am bullish on the market. We will be expanding there aggressively," Won said.

The group is also looking to open a city hotel in Ho Chi Minh City and a beach resort in Da Nang, within the next four to five years.

Meanwhile, Won said Berjaya Hotels & Resorts may be listed in the future to expedite its expansion and unlock the value of its properties.

"Listing is a possibility that everybody is talking about. My (immediate) aim is to take the group global after we have opened the new properties," he added.

To me, the Berjaya's plans seem a bit all over the place. They want to concentrate on Asia, but yet sell off in Sri Lanka, a potentially extremely prosperous area in the near future due to reconstruction efforts. They want to get rid of the hotel in Singapore, but want to expand to Japan, South Korea. This is a joke. I could argue that Japan and South Korea are tougher places to do business than Singapore.

Berjaya doesn't seem to have a coherent strategy. They could be just selling these places because they are under performing. A hotel in London and Seychelles would likely be pulling some major losses due to the hotel recession in developed economies. In that case, well they might take a loss. If I were a shareholder, I'd be wondering what the hell are they doing over at the company.

Goldman Gears Up in China, with a margin of safety

2009-09-25T00:07:00.003+08:00

From the WSJ:

Chinese car maker Geely Automobile wants to be taken seriously. It now has one seal of approval: Goldman Sachs Group's private-equity arm is investing $245 million through a convertible bond.

Geely will use the money to expand in China as it continues to reinvent its image. Its current reputation is of a company producing cheap, unreliable -- and sometimes eccentric -- vehicles. At the Shanghai auto show it unveiled a Rolls-Royce look-alike with only one passenger seat.

This has left it trailing a frothy Chinese market. Its sales this year were up 22% by the end of August, far behind the sector's 32%, JDPower figures show. The company is 10th in China, with a 2.9% share -- hence its multiple of 11.5 times expected earnings, even after Wednesday's 19% stock jump. Rival BYD, with Warren Buffett's backing and a hopeful future in electric cars, trades at 65.2 times.

Geely's investment in research and development and recruitment of overseas executives seem to be paying off, with better feedback on its pipeline of models. The next planned step could be bidding for Sweden's Volvo through Geely Holdings, Geely Auto's unlisted parent.

But Volvo would be a big bite, given Geely's small acquisitions to date and the challenges of cross-border auto deals. While Goldman is betting on a red-hot market, Geely still has to prove it can put the money to good use.

The Goldman Sachs investment seems like a smart bet. Convertible bonds will ensure that the investment doesn't suffer the same volatility of stocks yet will have the potential upside of a cyclical stock entering a strong earning phase. Convertible bonds seem a popular way to go about investing in this turbulent time. Buffett used it on Goldman and now Goldman is using it on others.

Of course the downside risk is that Geely hits some snags in its acquisitions or China changes the rules, but probably those things will not happen.

Anyhow, companies with a lot of convertible bonds would be wise to remember there are two sides to every coin. The cost of capital goes up as the shares get converted. Excessive use of convertible bonds may weigh on share prices and cause under performance.

Wynn ups size of Macau IPO to US$1.6b

2009-09-23T01:48:00.003+08:00

From The Edge Malaysia:

HONG KONG: Las Vegas casino company Wynn Resorts has raised the size of the initial public share offer in Hong Kong for its Macau unit by around 25 percent, according to sources familiar with the matter, seeking to raise up to US$1.6 billion, according to Reuters.

U.S. casino operators, grappling with high debt levels and a recovering economy, are hoping to boost valuations through spinoffs in China's gambling hub, Macau, the former Portuguese colony located an hour away from Hong Kong by ferry which now hosts the world's biggest gambling market that raked in record bets in August.

Macau casino offers from Wynn and its rival Las Vegas Sands come amid an expanding pipeline of other Hong Kong IPOs.

Wynn Macau previously sought to raise up to $1 billion, but after positive feedback from investors it has raised the offer and the company now plans to sell 25 percent of the division, up from the 20 percent it originally expected to sell.

The price range of the offer is expected to be HK$8.52-10.08 per share, the sources said on Sunday, with at least 1.25 billion shares being sold. The sources have direct knowledge of the offering but were not authorised to speak publicly about the deal yet.

The IPO has attracted a combined US$250 million from several so-called "cornerstone investors," or investors who take a substantial stake in the company before the offering, one of the sources said.

Among them is Thomas Lau, the billionaire managing director of Lifestyle International, the retailer that operates the Sogo department stores in Hong Kong's Causeway Bay and Tsim Sha Tsui districts and the Jiuguang Department Store in Shanghai.

Another is Walter Kwok, of the Kwok family-run Sun Hung Kai PROPERTIES [], Asia's largest property group by market value. Malaysia's wealthy Guoco family is also investing in the IPO.

Wynn's second resort in Macau, called Encore at Wynn Macau, is scheduled to open in the first half of 2010, the company said in the IPO prospectus. The total budget for the CONSTRUCTION [] is about $650 million and so far construction costs have totalled about half that amount.

The company is funding the construction through existing cash balances and cash flow from operations, it said in the filing.

Wynn's archrival Las Vegas Sands which has filed an application for a possible listing on the Hong Kong stock exchange, aims to raise $1 billion to $2 billion through the sale of a minority stake in its Macau operations at the end of November or early December.

But analysts say Wynn's offering in Hong Kong could be better received than the Sands one due to its lower debt levels and its strong brand name.

Wynn, which had shelved its plans to list its Macau assets late last year amid the stock market plunge, will kick off its roadshow for the deal on September 21. The shares could be priced on October 2.

JP Morgan, UBS AG and Morgan Stanley have been designated to handle Wynn's Hong Kong listing. - Reuters

Looks like liquidity in Asia is live and well. The stock markets have given a way for companies to get cash despite tough credit markets. Liquidity eventually will overflow from the market to the company's coffers, but not in the most effective way. Money raised through ipos and rights issues are expensive in terms of cost of capital but investors haven't gotten the memo yet.

August vehicle sales up 2.8% on-yr, down 6.5% on-month

2009-09-17T20:18:00.003+08:00

From The Edge Malaysia:

Sales of passenger cars and commercial vehicles in August rose 2.8% on-year to 48,538 units, but compared to July this year, it was down by 3,390 units or 6.5%, according to Bernama.

Malaysian Automotive Association (MAA) said on Sept 17 the on-month decline was due to lower sales reported by Proton.

It said sales of passenger vehicles in August rose to 44,099 units from 42,864 units a year ago while that of commercial vehicles rose to 4,439 units from 4,363 units.

For Janaury-August, total industry volume fell to 351,550 units from 379,184 units in the previous corresponding period. Sales of passenger vehicles in the eight months fell to 319,424 units from 345,917 units a year ago.

Sales of commercial vehicles dropped to 32,126 units from 33,267 units previously.

MAA said production of vehicles in August fell to 44,476 units from 46,316 units a year ago.

Passenger vehicles production in August fell to 40,865 units from 42,309 units a year ago while that of commercial vehicles dropped to 3,611 units from 4,007 units.

For Janaury-August, production of passenger vehicles fell to 293,175 units from 329,557 units previous corresponding period, while that of commercial vehicles dropped to 28,216 units from 31,512 units.

MAA said sales volume for September was expected to be maintained though it will be a shorter working month due to the Hari Rara festive holidays. - Bernama

The month on month growth rate has gone negative which indicates the rebound to normal is starting to end. Proton having lower reported sales is a surprise and may indicate that people are comfortable spending more on autos than I previously thought.

Bank Negara throwing caution into the wind on inflation

2009-09-16T16:59:00.004+08:00

From The Business Times:

Malaysia has room to press ahead with economic stimulus measures this year and next given sound levels of government debt and the need to counter the global crisis, the head of the country's central bank said on Monday.

Asked about the bank's recommendations to rein in the country's budget deficit, officially expected to hit 7.6 per cent of gross domestic product (GDP) this year, Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz said: "This is a period where the fiscal stimulus is still important."

Speaking on the sidelines of an event, she added: "Any premature exit from the fiscal stimulus would affect the sustainability of the recovery that we are seeing now and Malaysia has the potential to continue with the stimulus for 2009 and 2010."

While fiscal discipline was important, Zeti said government debt was still within prudential levels, allowing stimulus steps in 2009 and continuing next year, if necessary.

"But it is always important to exercise fiscal discipline and to maximise the potential for the high impact, high multiplier expenditure," she added.

Zeti declined to comment on the central bank's projections for the size of the budget deficit in 2010 and expectations for bond issuance on a net and gross basis next year.

The budget shortfall of 7.6 per cent of GDP forecast by the government for this year would be the biggest since 1987.

Zeti said steps to exit supportive stimulus measures would tend to be conducted on an individual country basis in the Asian region although information would be shared among a number of countries.

Turning to consumer price trends, Zeti said that recent declines were no sign of damage to consumer demand.

"Consumer demand is gaining momentum and in the second quarter, we saw a recovery of small positive growth," she said, adding she expected this to persist into the second half 2009.

Price declines did not give rise to concern given that they were largely due to a lingering base effect from last year when petroleum and commodity prices spiked, she said.

"We believe, going into the subsequent months of this year, that inflation will turn positive but it will remain low."

Analysts polled by Reuters expect Malaysia's consumer price index to have fallen for a third straight month in August. - Reuters

It seems like Bank Negara will be supporting a much more lenient monetary stance and rates probably will not rise any time soon. I don't think they will be raising rates so easily despite the threat of inflation and blatantly acknowledging consumption is still going strong.

Inflation will probably creep up faster in Asia than anyone expects. Remember that change in commodity prices have an amplified effect on inflation in south east Asia than in Europe and US.

AirAsia share sale to raise up to RM665m

2009-09-15T15:18:00.004+08:00

From The Business Times:

AirAsia will sell 400 million new shares, representing 16.8 per cent of its share capital, at RM1.33 to RM1.40 a share

AIRASIA (5099), Southeast Asia's largest budget carrier by fleet size, is expected to raise up to RM665 million in a new share placement as it seeks to cut its debt.

Demand for full-fare carriers has been hit by the economic downturn, which has given a boost to discount airlines.

AirAsia said last month that proceeds from the share sale would be used to reduce its debt, which has risen sharply following aggressive capacity expansion.

AirAsia will sell 400 million new shares, representing 16.8 per cent of its existing share capital, at RM1.33 to RM1.40 a share, according to the deal term sheet obtained by Reuters, to raise up to RM560 million.

However, the sale also has an upside of 75 million shares on top of the 400 million shares offered, the term sheet said, meaning that AirAsia could potentially raise a total of RM665 million.

CIMB and Credit Suisse are joint placement agents for the exercise and bookbuilding will be completed today.

AirAsia stock closed down 0.7 per cent yesterday at RM1.41. Stock exchange regulator Bursa Malaysia Bhd said that AirAsia shares would be suspended today pending an announcement.

Regional budget carriers such as AirAsia and Jetstar Asia Airways have either added capacity or increased flight frequencies to cope with higher demand.

Analysts in Malaysia said last month that AirAsia's tight cash flow and high debt level was worrying given its commitment to fund aircraft deliveries.

Last month, it deferred the delivery of eight Airbus A320 planes to 2014 from next year, which analysts said signalled potential overcapacity in the future. - Reuters

Most likely, Air Asia must be having trouble getting loans/bonds issues to refinance. It's tough being an AirAsia shareholder. I only hope this share placement is an update of the previous one. If not, we're talking about major shareholder dilution of a billion plus this year!

Air Asia is really milking Tony Fernandes' rock star status and reputation as a savvy businessman. Does he really know what he is doing? I don't think investors are so easily swayed now and the con game won't last much longer. People are realizing Tony Fernandes is starting to look very ordinary.

Government seen to cut stakes in GLCs

2009-09-14T15:56:00.002+08:00

From The Business Times:

KUALA LUMPUR: Khazanah Nasional Bhd is expected to gradually reduce its large stakes in government-linked companies (GLCs) after disposing of 5% of Malaysia Airports Holdings Bhd (MAHB) last week.

Analysts said this long-overdue development bodes well for the Malaysian equity market as it would enhance the participation of foreign institutional investors.

They said the Malaysian government investment arm could afford to reduce its shareholdings while still retaining strategic stakes in the GLCs.

Already Permodalan Nasional Bhd and the Employees Provident Fund, which are viewed as friendly parties to Khazanah, hold huge chunks in the GLCs.

CIMB Investment Bank Bhd last Friday confirmed a report in The Edge Financial Daily that it had placed out 55 million shares, representing a 5% stake in MAHB, to institutional investors at RM3.30 apiece the day before.

The bank said the transaction price was a tight discount of 2.37% to the closing price last Wednesday. The off-market deals reduced Khazanah’s stake in MAHB from 72.7% to 67.7%.

The Edge Financial Daily report also noted that the transactions would be the start of a government paring down programme to attract foreign participation into the local market.

Following the report last Friday, POS MALAYSIA BHD [] saw a total of 25 million shares transacted in off-market deals at an average price of RM2.30 apiece. However, no buyer and seller details were known.

According to Khazanah Nasional’s investment holdings structure, it owns 32.21% of Pos Malaysia.

I'm not surprised that the government is reducing its stakes in GLCs. I mentioned that the Najib government will probably be pro-investment bank oriented. It's important to understand that this may or may not benefit the economy, but a liberalization of the financial sector is considered a general positive for the stock market.

Also the fact that the Prime Minister's brother, the head of CIMB, will probably benefit the most from these initiatives spells vested interest in Najib to pass more investment bank friendly policies and deals.

Recovery in Property?

2009-09-12T11:03:00.003+08:00

From The Business Times:

HwangDBS Vickers Research Sdn Bhd said there are clear signs of recovery in the property sector extending to the high-end luxury segment.

These are seen in the take-up rate for The Binjai on the Park condominium project at the Kuala Lumpur City Centre, which has picked up from 10 per cent in July 2009 to 35 per cent out of its 171 units.

"Compared with the initial launch in August last year that coincided with the onset of the global financial meltdown, the average sale price (of The Binjai) has been reduced from RM2,800 per sq ft to RM2,400 per sq ft for units measuring 3,200-3,700 sq ft, while the smaller units (2,200 sq ft) were released at RM1,700 per sq ft," HwangDBS Vickers said in a report yesterday.

However, the average sale price of The Binjai is set to rise after its take-up rate exceeds 40 per cent. The project is expected to be handed over by December this year.

"This is positive for (property) developers with ready-to-launch products to capitalise on this early recovery," said HwangDBS Vickers, naming DNP Holdings Bhd, Eastern & Oriental Bhd (E&O) and SP Setia Bhd as its top stock picks.
In a separate report dated September 4, HwangDBS Vickers also revealed that the Penang property market is heating up.

"Recent launches were well received with new price benchmarks being set - catching up closely to Kuala Lumpur's," it said.

These included E&O's Seri Tanjung Pinang link houses, SP Setia's Reflections condominiums at Setia Pearl Island and IJM Land Bhd's Light Linear condominiums.

"Developers are also looking to gradually pull-back incentives and raise selling prices. Buyers are mainly locals and Penangnites working outstation or overseas," it added.

HwangDBS Vickers said despite the current financial crisis, land prices in Penang have remained "sticky" and huge contiguous parcels are hard to come by.

"Therefore, developers with large prime landbank will hold an upper hand in riding on the strong demand for Penang properties," it said.

E&O is the largest landowner on Penang Island with a total of 1,123 acres, including reclamation rights to 740-acres Seri Tanjung Pinang Phase 2 and 365 acres at Gertak Sanggul.

I imagine there will be some people who will have to get some property early in the recovery. I see some advertisements requiring 10% down payments instead of the usual 20%. Credit seems to be quite loose given the current circumstances. But, I dont' expect the property sector to stage a massive rebound. Consumers are trading down and foreign property interest will be in the trough.

Cigarette prices Malaysia probable to rise, Maybank IB neutral on tobacco sector

2009-09-10T01:47:00.003+08:00

From The Edge Malaysia:

MAYBANK Investment Bank (Maybank IB) is staying neutral on the tobacco sector, ahead of the government’s announcement of the budget for the coming year.

The research house is expecting an excise duty hike of at least 11% or two sen to 20 sen per stick.

“This is partly because consumption has been resilient and mainly because government collections from excise duties grew 18.8% in 2008.

“It could be higher if the government chooses to simplify the masses of duties and taxes on cigarettes in view of the upcoming Asean Free Trade Agreement (Afta) statutes that will result in lower import duties,” stated Maybank IB.

Of the two listed tobacco players, it expects JT INTERNATIONAL BHD []’s (JTI) prospects to be largely unencumbered by the impending changes in the sector.

“On a 12-month moving average basis, JTI sales have stayed largely resilient,” said Maybank IB, adding that JTI’s resilience was due to the performance of its Winston and Mild Seven brands.

“Mild Seven recorded its eighth consecutive quarter of advance on a 12-month moving average basis up to 2QCY09. This made up for the continued decline of JTI’s leading premium brand, Salem... it appears that Mild Seven’s emergence has ensured that margins overall for JTI are no longer as pressured,” it added.

Maybank IB has a buy on JTI with a fair value of RM5.30, and a hold on BRITISH AMERICAN TOBACCO (M) [] Bhd (BAT) with a fair value RM44.75.

“BAT might fare less well but should still offer decent dividend yields, of 8% to 9% gross dividend yields over 2009 to 2011,” it said.

Maybank IB noted that sales of tobacco were on the decline according to the players and the Confederation of Malaysian Tobacco Manufacturers. Industry sales volumes for 2Q09 fell by 13.8% year-on-year, its sharpest decline since 3Q06.

However, it pointed out that while sales were on the decline, total consumption of tobacco had not.

“The difference between the Big 3 (JTI, BAT and unlisted Philip Morris) tobacco sales and total consumption is made up of two components.

“First, sub-value local manufacturers that sell their products at below the price of the ‘Big 3’ value brands are contributing an increasing proportion to total consumption. Second, illicit sales including sales of smuggled cigarettes, counterfeit cigarettes and duty-not-paid cigarettes now make up to as much as 33% of total consumption,” it added.

At yesterday’s close, both JTI and BAT were unchanged at RM4.74 and RM45.56 respectively.

Personally, I don't smoke, so a ruling wouldn't have much of an effect on me. But what Maybank is saying does make sense with consumption being relatively unaffected. The government could probably raise taxes quite a bit. In the sense that tourism might be affected, I think that alcohol prices are much more a factor than cigarettes. For instance, a tourist can buy a carton of cigarettes and it would probably last him 10 days at a pack a day compared to alcohol which is large and can't be carried around so easily.

What next, KLCI at 1300? FBM KLCI surges above 1,200

2009-09-08T18:59:00.003+08:00

From The Edge:

Share prices on Bursa Malaysia, particularly blue chips, rose strongly on Tuesday, Sept 8 with the FBM KLCI closing above the psychologically important 1,200-level for the first time this year.

There were no major leads from overseas, where Wall Street was closed for the Labour day holiday on Monday. Regional markets were generally steady on Tuesday, although with more modest gains.

Investor confidence has been boosted recently by China’s strong stock market recovery over the last week after earlier sharp falls, and Wall Street’s relative resilience – and indeed ability to chart continued gains – despite having risen substantially over the past few months.

Even last week’s August US poor jobs report – where unemployment unexpectedly rose to a 26-year high of 9.7% did little to dampen sentiment as investors looked towards the broad range of US economic indicators, which point to a recovery in process, especially in the manufacturing and housing sectors.

Nonetheless, a weak labour market suggest US consumer spending, which accounts for 70% of the economy and much of Asia’s exports, will remain weak. Similarly for the strength of the economic recovery ahead – even though the recession is likely over.

On Tuesday, the FBM KLCI was in positive territory throughout the day, with much of the gains coming in after 3pm. The index closed 11.7 points higher at 1,202.1. Gainers beat losers by a roughly 3-to-2 ratio on volume of 791 million shares.

Blue chips were the centre of attention, and accounted for most of the actively traded stocks. These include Genting Malaysia, Axiata, Gamuda, YTL Power, Genting and AMMB. Genting Malaysia’s shares saw active trading on news that its integrated casino resort in Singapore will open ahead of schedule, in 1Q2010 although some expect it to open at the end of this year.

Major gainers include Sime Darby, Proton, Tanjong plc and IOI Corp. Losers include Padini and NCB.

The FBM KLCI could hit 1300. You could take the risk, but the risk/reward scenario is dwindling in favor of little reward for a lot more downside risk. A gambling man would tell you to take some money off the table.

AEON seems greedy, Cash-rich AEON scraps REIT plan

2009-09-07T13:56:00.007+08:00

From The Business Times:

RETAILER and mall operator AEON Co (M) Bhd (6599) has scrapped its plan to set up a property trust, one of the company's options to raise funds, as it has enough cash to expand.

Managing director Nagahisa Oyama said it has enough money in its coffers to grow its business without having to raise funds.

"AEON has money to open two to three outlets each year ... so we do not need to do a REIT (real estate property trust)," Oyama told Business Times in an interview.

Companies with a lot of assets can form a REIT as a way to raise funds. Typically, they sell some of their assets to the REIT which in turn will raise funds from an initial public offering.

As at June 30 2009, AEON has RM33.3 million in cash. The group has also seen its net profit growing each year for the last five years. For the year ended December 31 2008, it made a net profit of RM120.6 million on revenue of RM3.43 billion.

AEON chairman Datuk Abdullah Mohd Yusof first announced that it was looking at a REIT as an option in April 2007.

However, in 2008 the company said that it was in no rush to set up the REIT as it thought the local property trust market was still in its infancy.

AEON continued to keep tabs on the industry and was also studying the REIT.

It identified seven properties valued at about RM700 million to be sold to the trust vehicle. Four of the properties are located in the Klang Valley namely Alpha Angle Shopping Centre in Kuala Lumpur, Jusco Metro Prima Shopping Centre in Kepong and Aeon Cheras Selatan Shopping Centre and Bukit Raja Shopping Centre in Klang.

Two outlets are in Johor - Jusco Taman University Shopping Centre and AEON Tebrau City Shopping Centre. The seventh outlet is Jusco Melaka Shopping Centre.

In 2008, its property management division made an operating profit of RM62.17 million and a revenue of RM308.86 million.

Today, it operates 25 outlets, four of which are MaxValu supermarkets. About 10 shopping centres, where the 21 Jusco department store-cum-supermarkets operate, are owned by AEON.

It will also own two of the three new confirmed store openings - the Mahkota Cheras and Bandar Permaisuri. It will lease the space in Bandaraya Melaka.

Why not realize value for these assets? It's not about having enough cash to grow the business but returning capital back to shareholders. If the assets are mature and can realize close to their full value, it is a good thing to proceed with the REIT. The market currently is on good footing to handle quality IPOs. For instance, take the recent successful listing of Handal Industries.

I believe AEON's portfolio of properties is a little bloated at 25 outlets and could use some pruning.

YTL power making a bad move for shareholders, AmResearch downgrades YTL Power to Sell

2009-09-05T21:43:00.003+08:00

From the Edge Malaysia:

AmResearch has downgraded YTL POWER INTERNATIONAL BHD [] (YTLP) from Hold to a Sell with a lower sum-of-parts (SOP) based fair value of RM2.05 a share on concerns over funding risks for the group's WiMax investment.

The research house also said YTLP's share price had risen 25% over the past 12 months and outperformed the 30-stock FBM KLCI by 17%.

"We have lowered our FY10F-FY12F earnings by 6%-7% to impute potential losses arising from the new start-up wireless broadband service (WiMAX - worldwide interoperability for microwave access).

AmResearch said while it was generally comfortable with the group's existing operations in power generation and water/waste management services after a meeting the YTLP management recently.

"But we were surprised by the possibility that YTLP may be used as a vehicle to fund the group's venture into WiMax," it said.

In June this year, YTLP made an inconspicuous announcement that the company was buying a 60% stake in YTL Communications Sdn Bhd (formerly known as Y-Max Infra Sdn Bhd) for a mere RM300,000 - from YTL E-SOLUTIONS BHD [].

YTL group plans to invest RM2.5 billion over a five-year period on launching its WiMax service - with RM1bil to be spent over the first year.

"While no further financial details have been revealed yet, we note that YTLP's capex plans are two times more than Green Packet's proposed outlay of RM1 billion over four years," it said.

AmResearch said it believed the higher capex is earmarked for a greater number of base stations throughout the country to ensure that its WiMax services provide faster access and wider coverage.

Hence, the group likely needs the cash from YTLP to fund the WiMax rollout given YTLE's minimal resources.

"In our view, this is a negative development as YTLP will be extending its business - which provides stable recurring income streams - to uncertain revenues of a TECHNOLOGY [], which has yet to fully kick-off even in developed countries.

"Clearwire Wireless - YTL's technology partner - and Nextwave are currently loss-making and registering negative EBITDA. Green Packet,the first to introduce WiMax in Malaysia, is also suffering losses currently.

"Even with the potential cash outlay, we note that the group's free cashflow of RM2 billion annually could comfortably service its annual dividend payout of around RM500 million. But the potential of a slower than expected take-up or any cost overruns in its WiMax services could possibly constrain the group's acquisitive growth strategy over the longer term," it said.

YTL power is sitting on a good thing in the power infrastructure business. WiMax is untested and has to compete with competitions from mobile operators. They should look to acquire what they know.

If they are looking to inject a little higher growth in its revenues, they should find a business with a little more risk reward and buy something that is tested. It is very cheap to buy companies at this point in time. There are plenty of cyclical industries right now which will benefit in a recovery and are cheap now. Best of all, they have predictable revenue streams that are tried and tested over time. YTL power shows no sensibility in regards to the WiMax venture.

RON95 petrol, fuel subsidies

2009-09-03T23:18:00.002+08:00

From The Star:

“The price of RM1.80 for RON95 will be capped at this level for the rest of the year,’’ Zain told StarBiz, referring to a statement earlier by Minister Datuk Seri Ismail Sabri Yaakob. “It moves within an active price range, depending on the price trend of oil gauged over a one-month period.’’

All this while, consumers have been using RON97 which is too powerful for cars today. “Take a look at car manuals and one will often find that RON95 is recommended,’’ said Zain, adding that RON97 had stronger ingredients that were more suitable for higher powered cars.

RON (research octane number) measures the octane quality of fuel. It refers to the fuel’s ability to resist premature and uncontrolled combustion that occurs when fuel pre-ignites before ignition by the spark plug.

The newly-introduced RON95 fuel is priced at RM1.80, five sen higher than that of RON92, which is leaded petrol. Concurrently, RON97 has been upgraded as a premium product and its price has gone up to RM2.05 from RM1.80.

Ismail had said at a press conference on Tuesday although the price of RON95 was higher, the Government was still subsidising 33.81 sen per litre, which comes up to about RM304mil monthly.

Currently, the Government is subsidising 42.72 sen per litre for RON97.

While consumers who were using RON92 are required to pay more when they upgrade to RON95, those using RON97 and are able to downgrade to RON95 will save 25 sen per litre.

The Ron95 petrol appears to be less powerful and therefore might result in better mileage. But under the mask of the new petrol, the government is using the confusion to raise the price of gasoline and cutting off more subsidies. I'm not too sure if it's a good idea to raise prices and pass it off as a new petrol mixture. We'll have to see if people are fooled by this. I don't think they are.

Quek family sells 3.6% stake in Multi Sports, The Problem with China stocks in Malaysia

2009-09-02T22:07:00.004+08:00

From The Edge Malaysia:

The Quek family, who is a major shareholder of Multi Sports Holdings Ltd, has sold off a chunk of its equity stake in the Chinese shoe sole-maker.

According to filings to Bursa Malaysia last Friday, the Quek family, via its Cayman Islands incorporated vehicle GuoLine Group Management Co Ltd, had disposed of a 3.6% stake comprising 12.97 million shares in Multi Sports on Aug 24.

The Quek family had held about 15% of the company before selling down the shares. It now owns about 11.4% stake or 41.03 million shares in Multi Sports.

It is not known why the family decided to sell down its stake in the company.

Yesterday, Multi Sports fell to a historical low of 55 sen since its debut of 85 sen on Aug 19. At its debut, Multi Sports closed 10% down to 76.5 sen from its offer price of 85 sen.

Multi Sports, which operates in Jinjiang city in Fujian province, was the second direct listing of a Chinese company on Bursa Malaysia Securities on Aug 19, following the first by Xingquan International Sports Holdings Ltd on July 10 this year.

According to its prospectus, Multi Sports is one of the five largest shoe sole-makers in Jinjiang currently, with a 1,929-strong workforce, of whom 64% or 1,241 are skilled workers.

The group has 300 customers, including Guohui, 361 degrees and Xdlong, owners of well-known local sports shoe brands. Between 2005 and 2008, its annual production grew from about 4.9 million to 22.1 million pairs of shoe soles, with some 300 designs across four main product lines.

Both Multi Sports and Xingquan have seen their shares spiralling on a downtrend since being listed. Since listing, Xingquan’s share price has fallen 22.8% to close at RM1.38 yesterday from its offer price of RM1.78. Multi Sports has fallen 35.3% to 55 sen yesterday.

Currently, Xingquan and Multi Sports are trading at a price earnings ratio (PER) of four times, which is about half the PER of shoemakers listed on the Singapore and Hong Kong stock exchanges.

Industry observers said Chinese companies’ listings had not been as well received by investors here as initially thought they might be. One of the reasons was because investors here lacked understanding of the Chinese market, an industry observer said.

Chinese stocks are prone to the Chinese markets. The major problem now is that Chinese stocks have run quite high compared to what they should be. In fact, most stocks in China are down from their peak by some 20%. Of course Chinese stocks listed in Malaysia will trade a discount in step with Chinese markets.

I doubt that Chinese stocks will add a lot of mix to the KLSE. Also it depends what kind of mix you would like. If you'd like stability, I doubt these stocks will do that. I'd argue KLCI needs a mix of companies which have more stable earnings and revenues. The stock exchange needs more stable companies, not riskier ones. Chinese stocks are notoriously speculative.

Perhaps if the Chinese companies in the Malaysia market had more of an attractive growth story, they would be a success, but a shoe manufacturer and second tier sports brand isn't exactly what most people would call attractive.

Investments into Penang shrink to RM1.3b

2009-09-01T17:39:00.002+08:00

From The Edge Malaysia:

Penang recorded inflow of investments of only RM1.3 billion in the January-June period this year, as investors turned cautious about the fallout of the global financial crisis.

This was a stark contrast to the RM10.3 billion recorded for the 12 months in 2008.

InvestinPenang Bhd chairman of the executive committee Datuk Lee Kah Choon said on Sept 1 the plunge in investments had to be viewed in a wider perspective and the flow of investments in other countries.

Lee said there were investors still adopting a wait-and-see attitude as it was unclear if the financial meltdown was finally over.

The 1.3 billion, annualized is roughly 75% decline from last year. It goes to show that the fixed investment portion of investment in Penang is huge and extremely vulnerable to the world recession. The island's economy can't survive on consumption and services alone. It still requires massive investment from individuals. Another down year like this, I imagine asset prices will start to crumble.

Happy Merdeka Day everyone, local observations

2009-08-31T21:24:00.003+08:00

Not much in the news, but I was out on the town in Penang and saw relatively little celebrating going on except for mat rempits and police chasing them down. Traffic was noticeably lacking.

Upscale, large establishments were generally quiet compared to the relaxed, laid back, and more reasonably priced entertainment areas. Clearly this year will be a hard as the economy is still stagnant.

Shopping malls were full as many days of rain have the tendency for people to postpone their shopping trips. Add to that the Merdeka day sales, shopping malls showed their resiliency. I could not even get a parking spot in the shopping mall's garage.

Axiata investment opportunity follow up

2009-08-29T14:02:00.002+08:00

After reading the CIMB report on Axiata, they point out that 50% of revenues come from Celcom and another 40% from the Indonesia subsidiary. I conclude there is probably little investment opportunity because revenues largely rely on a recovery in exports and Asia. Sure if Asia recovers exceptionally well, Axiata will go up but so will lots of other stocks. But most likely, Axiata is priced correctly at this time and not much of an opportunity as I first thought.

2009 Q2 US GDP

2009-08-28T19:31:00.002+08:00

I've been looking at some of the Q2 numbers for US GDP and I was probably expecting somewhere along the lines of -1.0 GDP.

Federal expenditures are compensating for the drop in fixed investment. More so than is needed, helping to give the GDP numbers a boost. I find that state spending has rebounded rather strongly, surprisingly.

The good news is that the free fall in the fixed investment area seems to have stopped. But we still have weak CRE spending at -15% as anticipated.

Equipment will probably not drive a recovery unless something happens like companies get more credit. Credit spreads are quite narrow but still doesn't mean much if banks won't loan money out.

Overall Fixed investment looks like it will continue to put downward pressure on GDP. The key now will be to watch out for residential construction spending. I feel nonresidential equipment spending will increase while structure spending will decrease, having a net result of zero. The subcategories will cancel each other out. So, now we will need to have residential construction spending go down to zero for Fixed investment to have a neutral effect on GDP. I don't foresee this happening for at least six months as there is too much inventory on the market still.

It looks like we could have positive GDP next quarter as the expenditures from the government and the recent cash for clunkers probably boosted consumption a good amount. If consumption is positive, GDP will probably be positive.

Axiata Q2 pre-tax profit up 57.9pc

2009-08-27T21:41:00.005+08:00

From The Business Times:

AXIATA Group Bhd's pre-tax profit for the second quarter ended June 30, 2009 rose 57.9 per cent to RM878.621 million from RM575.382 million in the corresponding quarter of 2008.

Its revenue increased eight percent to RM3.163 billion from RM2.930 billion previously.

For the six-month period, its pre-tax profit fell to RM1.070 billion from RM1.214 billion in the corresponding period of the previous year.

Revenue, however, rose to RM6.030 billion from RM5.651 billion previously.
In a filing with Bursa Malaysia, Axiata said its revenue for the second quarter, grew due to the higher contribution from Celcom and Axiata (Bangladesh) Ltd (AxB).

In local currency, Axiata said its Indonesian operations recorded a positive quarter-on-quarter revenue growth.

But in terms of ringgit translated results, XL’s revenue in the current quarter declined by two per cent against that of the corresponding quarter in 2008 due to the depreciation of the Indonesian rupiah against ringgit.

In local currency, its Sri Lankan unit, Dialog, and Telekom Malaysia International (Cambodia) Company Limited (TMIC) recorded a quarter-on-quarter revenue decline of 3.5 per cent and 17.4 per cent respectively.

A downward tariff revision by Dialog in the fourth quarter 2008 continued its adverse effect on revenue in the second quarter of 2009, it said.

TMIC’s operations continued to be challenging with nine operators in the market.

The major operators face intense competition on pricing and new operators are offering free SIM cards and minutes to capture market share, it said.

The strengthening of the ringgit against domestic currencies of operating companies (OPCO) has unfavourably affected the Group’s translated revenue in the second quarter 2009.

At constant currency, the second quarter 2009 revenue would have registered a growth of 8.6 per cent, it said.

On prospects, it added the macro backdrop for 2009 is one of weakening economies and uncertainty.

It stated that as such, the Group would adopt a prudent approach by focusing on cost management whilst continuing to lay the foundation towards achieving long term aspirations of becoming a regional champion.

The Group also indicated it would continue to have a strong focus on continued operational efficiencies at the major subsidiaries whilst preserving the momentum of sequential improvements.

Bangladesh is an anomaly for a country export oriented south east Asia. Personal consumption takes up 75% of GDP. Personal consumption generally isn't as volatile as exports. Therefore it does make sense that Bangladesh would not be as affected in the downturn and would rebound strongly.

Sri Lanka has been trying to get itself out of a civil war and may also have incredible growth potential. Cambodia is more of the typical run of the mill export oriented south east asian economy and therefore has suffered. Overall for Axiata, it is hard to say, I haven't looked deep into where their revenue comes from. Although, it's hodgepodge of companies may actually perform better than at first glance.

Most people will say, Axiata's southeast Asian telecoms will all do horrible. South East Asia is hit the hardest in the crisis. But looking at the favorable outlook for Indonesia, Sri Lanka, Bangladesh, Axiata might perform better than expected.

Malaysia Q2 GDP shrinks 3.9pc on year

2009-08-26T20:08:00.002+08:00

From The Business Times:

Malaysia’s economy contracted by 3.9 per cent in the second quarter from a year ago, less than expected, and pace of decline slowed from a 6.2 per cent drop in the first quarter, signalling the start of a slow recovery for this export-dependent country.

Economists in a Reuters poll had forecast gross domestic product would drop by 5.1 per cent due to poor demand for Malaysian exports, which account for 110 per cent of gross domestic product.

Central bank Governor Tan Sri Dr Zeti Akhtar Aziz told a press conference that the budget, due in October, would see a revision to government forecasts that the economy would shrink 4-5 per cent for the full year and that the drop would be less than that.

“We expect gradual recovery, and that this would be sustained,” she said.
Asia’s economies are still feeling the effect of the global economic downturn and Indonesia’s economy grew 4 per cent in the second quarter from a year earlier, while Thailand contracted 4.9 per cent, easing from a 7.1 per cent drop in the first.

Malaysia is Asia’s only exporter of oil and gas and also has large commodity exports and the prices of both have fallen sharply from a year ago.

The government has said that it expects growth to pick up in the second half of 2009 with positive growth in the fourth quarter as a RM67 billion package of government spending and loan guarantees spread over two years kicks in.

The 6% rate of contraction in Q1 overshot due to inventories not being replenished. Q1 had a inventory loss of RM14 billion. Q2 inventories look more normal compared to the last eight quarters at a loss of RM 4 billion.

The good news is we will have inventory replenishment going on and will push up future GDP numbers. It could go to -3% in the following quarters. The bad news is we don't have a lot of upside until about 4Q of 2009. I expect negative growth for Q3 and maybe even growth for Q4.

Malaysia Q2 GDP seen down 5.1pc on year

2009-08-25T21:47:00.004+08:00

From the Business Times:

Malaysia’s economic recovery looks set to lag that of its peers, with economists saying gross domestic product likely shrank by 5.1 per cent in the second quarter from a year ago, a Reuters poll showed.

In addition to a steep fall in exports, Malaysia has seen capital spending stagnating as well as an inventory destocking to the tune of US$15 billion in the first quarter, retarding a recovery, according to a recent report from BNP Paribas.

Malaysia posted its first drop in output in seven and a half years when first quarter GDP fell 6.2 per cent from a year ago, and the poll of 12 economists showed that Malaysia’s central bank would hold rates at 2 per cent until there was firm evidence of an economic recovery.

The central bank’s next policy meeting is on today, with the GDP data to be released on tomorrow.
Malaysia’s central bank and the government are expecting growth to return only in the fourth quarter, whereas in Indonesia growth has already picked up and is expected to return in Thailand when it reports second quarter data next week.

Japan, Hong Kong and Singapore also pulled out of recession in the second quarter, but the recovery is seen as fragile as long as consumer demand in Asia’s key Western markets remains weak.

“While central bankers are often prompted to ’take away the punch bowl just as the party gets going’, the degree of uncertainty and prolonged nature of the recovery could prompt Bank Negara Malaysia to leave the rate (steady) until end-2010,” said Standard Chartered Economist Alvin Liew said.

Economists say that a fiscal stimulus package of RM17 billion this year has yet to have a major impact and the economy has also sunk into deflation with consumer prices falling 2.4 per cent year-on-year in July.

The central bank has cut rates by a cumulative 150 basis points in its recent easing cycle in a bid to ease the domestic fallout from the global financial crisis.

Malaysia is Asia’s third-most trade dependent country. June exports fell by 22.6 per cent on an annual basis but rose 5.1 per cent increase from May on a seasonally unadjusted basis.

I think the -5.1pc is a reasonable number. We are still seeing massive drop in exports and last year's Q2 gdp growth was incredibly high at 6.6%. We still have a ways to fall numerically speaking.

Malaysia GDP 2007-2009 from The Department of Statistics

Pinpoint Funds Beat Peers With China Stocks, Bonds. The power of China's command economy

2009-08-25T14:00:00.002+08:00

From Bloomberg:

Pinpoint Investment Advisor Ltd., a hedge fund manager of $560 million, returned as much as four times its Asian peers this year through July with profits from a rebound in Chinese stocks and debt securities.

The $70 million Pinpoint Opportunities Fund, which gained 85 percent in the period, invested about half its assets in convertible and high-yield bonds, including those of Chinese property developers, said Duanmu Yongshan, Pinpoint’s Hong Kong- based chief marketing officer. The $300 million Pinpoint China Fund returned nearly 51 percent in the period, he said.

Stock-focused hedge funds, the hardest hit in Asia amid last year’s market slump, are leading the recovery in 2009. The Eurekahedge Asia Long/Short Equities Hedge Fund Index returned 19 percent this year through July, the best-performing strategy among eight tracked by the Singapore-based data provider. The index fell 22 in 2008, the worst since at least 2000.

“We think fundamentals will play an increasingly more important role relative to liquidity for the second half,” said Duanmu in an interview on Aug. 24.

The China Fund, which targets companies with a market value of more than $2 billion in Greater China, bet on a recovery in Chinese property and banking stocks it bought, he said. He declined to name specific companies.

One thing we can learn when we look over this fantastic bull run (although I believe the market still will retract.) is that most people underestimated the power of China's ability to get its banks to lend. When China says its going to do something. The speed of which it can achieve that goal is unbelievable. US has been trying to get its banks to lend for the last year plus and still to no avail.

China Loan Growth

The FBM KLCI only a reference, incomplete and important information left out, FBMKLCI volatility.

2009-08-24T17:12:00.009+08:00

From The Edge Malaysia:

THE 100-stock KLSE Composite Index (KLCI) was replaced by the FBM KLCI from July 6 onwards. As the new index replaced the old index, it commenced from the same level where the old index ended. This is made possible by choosing a base such that the market cap of the FBM KLCI divided by the new base equalled the KLCI.

The old KLCI used the total market capitalisation or market value (denoted by MVold) of all the 100 component stocks divided by a base (denoted by Bold). MVold is computed by multiplying the number of stocks issued by the share price. For the closing value of the KLCI, the closing prices of component stocks were used. In this way, stocks with the higher number of shares will have a higher influence on the index for every 10 sen change in price. Looking from another angle, stocks with higher market capitalisation will have higher impact for every 1% change in price. In this way, KLCI is said to be size-weighted as bigger stocks having bigger market value will have stronger influence on the direction of the index.

When the KLCI was instituted in 1977, the base was chosen such that the index commenced at 100 points. Over the years, due to changes in number of shares issued, the base was adjusted regularly.

The new FBM KLCI does not use all the shares issued in computing the index. It only uses a portion of the shares issued depending on the freefloat in each of the component company.

Prior to July 6, the KLCI closed at 1,108 points, and this is computed by the formula:

1,108 = MVold/Bold

As the formula used to compute the index remains the same, the ratio of MV/B for the FBM KLCI should also be 1,108 after taking over from the KLCI. The new index, the FBM KLCI, has its own market value, MVnew, based on certain weightings of the 30 component stocks and the corresponding closing share prices such that,

1,108 = MVnew/Bnew

A simple rearrangement shows that:

Bnew = (MVnew/MVold) x Bold

FBM KLCI — new benchmark

From July 6, 2009, onwards, FBM KLCI becomes the key benchmark representing Malaysian stock market. Everyday, commentators and newspapers worldwide will quote the performance of the FBM KLCI to denote the performance of the Malaysian market. When we look at other foreign bourses, we will also look at the performance of the key benchmark like the Hang Seng Index for Hong Kong, the Nikkei 225 for Japan, the ST Industrial for Singapore etc.

Using a single benchmark to denote the performance of a market is a simple and convenient method to monitor a stock market. It provides the direction and relative performance of a market compared with other bourses. However, investors should always take note that a benchmark is as good as what it contains.

For the new FBM KLCI, it is a much narrower 30-stock index compared with the predecessor, the KLCI, which encompassed a more extensive 100 stocks covering a wider range of sectors. Some of the sectors not included in FBM KLCI are CONSTRUCTION [], property, timber, IT etc.

Performance comparison

It is not uncommon to compare a portfolio return with a reference benchmark. The most convenient benchmark is the FBM KLCI which is also a fully-invested portfolio with no cash component and have different weights on each of the 30 component stocks. From the explanation above, it is now clear that the FBM KLCI may not provide meaningful comparison for most investors due to different sets of stock invested. While the FBM KLCI contain the biggest stocks listed on Bursa Malaysia, many individual investors will likely have a small portion invested in these stocks.

While it is true that more money are invested in big-cap stocks and the return of big-cap stocks are important, retail investors are unlikely to be invested only in the big-cap stocks alone. Even most fund managers will not restrict themselves to the 30 stocks in the FBM KLCI. Unless a fund is an index fund linked to the FBM KLCI, most funds will have a much wider spectrum of stocks to invest in. As such, many fund managers find the FBM KLCI to be too narrow for benchmarking purposes.

Use relevant benchmark

A portfolio should compare against a relevant benchmark depending on the objective of the fund and type of stocks to be invested in. Unfortunately, there is no perfect benchmark for most funds. The next alternative is to use the closest possible index as the reference index.

This article by Philips Capital fails to emphasize the effect of free float. They barely glance over a critical part of the the FBM KLCI that all investors need to know. The index is weighted by free float factor. This is why in the index, BCHB is the most heavily weighted stock although it doesn't have the largest market cap.

Why is free float market weight important? Well, if I have a 100 billion market cap company with 15% of shares in free float, how does the index treat it? My company is only considered a 20 billion dollar market cap company in the new index.

If I have a 20 billion dollar company with 75% or more shares in free float? It's considered a 20 billion dollar company in the new index due to the free float methodology. Free float market weight makes a HUGE difference. If I do not consider free float and build based on market cap, my effort to recreate the index will be completely wrong! Furthermore, the top 10 stocks would only compose of 61% or so of the index weight, compared to the 70% officially listed on the FTSE website in June.

Not only is the index composed of fewer companies to 30 as correctly mentioned, it weighs heavily the companies with the largest number of free floating shares, which happens to be the top 10 stocks of the FBMKLCI.

What else would you like to know? 4 out of the largest 10 stocks of the FBMKLCI have a 1-year-beta of over 1 as reported on Bloomberg. In addition, 2 of the stocks have the beta listed as undefined but am reasonably sure the beta is over 1. Sime and Axiata are incredibly volatile stocks. When you have 6 stocks in the top 10 with a beta of over 1, with a heavier weighting on the top 10, you can be reasonably sure the free float market weighted index will be much more volatile compared to the normal market weighted index.

Warren Buffett needs to realize when he's a jerk, he should come clean.

2009-08-24T01:07:00.009+08:00

I'm referring to a blog post by Rolfe Winkler:

Buffett was kind enough to respond to my letter, thanking me for it and inviting me to his company’s annual meeting. I was hooked. Today, Buffett remains famous for investing The Right Way. He even has a television cartoon in the works, which will groom the next generation of acolytes.

But it turns out much of the story is fiction. A good chunk of his fortune is dependent on taxpayer largess. Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money. The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt.

Without FDIC’s debt guarantee program, even impregnable Goldman would have collapsed.

And this excludes the emergency, opaque lending facilities from the Federal Reserve that also helped rescue the big banks. Without all these bailouts, the financial system would have been forced to recapitalize itself.

Banks that couldn’t finance their balance sheets would have sold toxic assets at market prices, and the losses would have wiped out their shareholder’s equity. With $7 billion at stake, Buffett is one of the biggest of these shareholders.

He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had “confidence in Congress to do the right thing” — to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

Without FDIC’s debt guarantee program, even impregnable Goldman would have collapsed.

And this excludes the emergency, opaque lending facilities from the Federal Reserve that also helped rescue the big banks. Without all these bailouts, the financial system would have been forced to recapitalize itself.

Banks that couldn’t finance their balance sheets would have sold toxic assets at market prices, and the losses would have wiped out their shareholder’s equity. With $7 billion at stake, Buffett is one of the biggest of these shareholders.

He even traded the bailout, seeking morally hazardous profits in preferred stock and warrants of Goldman and GE because he had “confidence in Congress to do the right thing” — to rescue shareholders in too-big-to-fail financials from the losses that were rightfully theirs to absorb.

Keeping this in mind, I was struck by Buffett’s letter to Berkshire shareholders this year:

“Funders that have access to any sort of government guarantee — banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella — have money costs that are minimal,” he wrote.

“Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that … are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.”

It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

Elsewhere in his letter he laments “atrocious sales practices” in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

I find Buffett a little mean spirited and also not realizing how moronic he sounds here. All these other companies are also fighting for their survival, yet Buffett says these guys should be shown the door. He's one to talk as his companies have benefited from bailouts. There's enough to go around for everyone, Buffett. Have a little common courtesy and integrity.

Here's an analogy: If I got unemployment benefits and cashed the checks, then I found a job and no longer needed unemployment benefits, then I criticize the fact that those people are moochers who are getting benefits, I'd be wrong to criticize because I took the help. If I didn't cash the checks, I'd be fine. Buffett in this analogy took the cash and is wrong to criticize.

I've got nothing personal against Buffett, but I agree wholeheartedly that Buffett shouldn't be talking and keeping his mouth shut.

UMW 2Q net profit slumps 47% to RM79.4m, a look into the auto segment

2009-08-21T22:44:00.004+08:00

From The Edge Malaysia:

Automotive-oil and gas company UMW HOLDINGS BHD []'s second quarter net profit slumped 47.6% to RM79.43 million from the RM151.73 million a year ago, as spending by consumers and industrial sectors shrank.

The company said on Aug 21 group revenue of RM2.58 billion for 2Q ended June 30, 2009 was RM987.1 million or 27.7% lower than RM3.568 billion a year ago.

"Decline in spending by consumers and industrial sectors due to the global economic downturn resulted in the lower revenue recorded by the automotive, equipment and manufacturing and engineering segments," it said.

UMW said group profit before taxation for 2Q of RM185.5 million, was doen 47.4% or RM169.5 million from RM355.0 million. The weakening of the ringgit against the US dollar and yen also affected profit margins.

"Despite the challenging economic environment, the O&G segment registered a positive variance for both revenue and profit before taxation for the second quarter as contributions from our new local and overseas investments started to flow in," it said.

Delving deeper into the numbers, taking a look at the auto segment, we see the revenues dropping some 25% from 5 billion last year to 3.745 billion. This is a 25% drop in revenues.

This is a genuine catastrophe for UMW. I don't see them recovering so fast as I mentioned a few days ago in the article about Proton. The Toyota part of sales will overwhelm the revenues, although it does have its low cost manufacturer in Perodua.

The fallacy of diversifying products is one line protects you from less risky lines. UMW has gone into the arguable more risky oil sector while expecting its revenue from autos to hold up. The acquisition my prove to be horrible for shareholders.

Actually, they should have acquired a slightly less riskier business line, to balance out the risk that auto revenues should fail. It's widely known that the auto industry is quite a risky industry by itself. This is a lesson for UMW not recognizing what kind of company they are.

PLUS Q2 profit up on higher revenue, lower cost

2009-08-21T10:14:00.002+08:00

From The Star:

Toll highway operator PLUS Expressways Bhd’s net profit rose 5.7% to RM281.32mil for the second quarter ended June 30 compared with the previous corresponding period on higher toll revenue and lower operating costs.

Its revenue increased 4.6% to RM72.24mil. For the first half, its net profit gained 3.4% to RM559.87mil while revenue was up 3.6% to RM1.51bil.

The company said in a filing with Bursa Malaysia that toll collection was 3.3%, or RM18.6mil, higher than the same quarter last year due to higher contribution from Projek Lebuhraya Utara-Selatan Bhd (PLUS), which operates among others the North-South Expressway.

PLUS’s toll compensation recoverable from the Government increased to RM2.18bil as at June 30 this year from RM1.91bil as at end-December 2008. It said total revenue for the quarter under review was also higher due to higher toll compensation of RM15.4mil.

PLUS managing director Noorizah Abd Hamid said in a statement that despite the economic downturn, traffic volume for all expressways for the first half had shown good growth.

She said from January to June, PLUS achieved traffic growth of 4.6%, Elite 3.5%, Linkedua 9% and Konsortium Lebuhraya Butterworth-Kulim 0.3% compared with the same period last year.

Cost-reduction initiatives would “continue to be a primary focus for the group” and would encompass all efforts to manage costs and enhance process efficiencies, including prioritising expenditures and embarking on various cost reduction initiatives, she added.

Things seem to be looking good for toll operators. Revenues seem unaffected by the recession. Volume for traffic for the north-south highway showed plenty of growth. This indicates that most parts of the country are seeing the effects of recovery.

Mah Sing Q2 net falls 38 pc y-o-y, housing may be slow to recover

2009-08-21T00:01:00.002+08:00

From The Business Times:

PROPERTY developer Mah Sing Group Bhd (8583) posted a 38 per cent drop in its fiscal second-quarter net profit from a year ago, as last year's gain was boosted by a large property sale.

Its net profit was RM23 million in the quarter to June 30 2009, which is a slight improvement compared to first-quarter net profit of RM22.6 million.

"The group believes the property market is gaining momentum for a likely up cycle in the second half of 2010," Mah Sing said in a statement to Bursa Malaysia yesterday.

The company's revenue for the second quarter was RM167.2 million, down from RM195.4 million a year ago.

Sales for the period were driven by residential property projects like Kemuning Residence, Hijauan Residence and Aman Perdana in the Klang Valley, and Sierra Perdana and Austin Perdana in Johor Baru.

For the first six months, Mah Sing made a net profit of RM45.7 million against RM59.6 million in the same period a year earlier.

Revenue was down 5.5 per cent to RM317.5 million.

However, the company has made sales of RM543 million in the first seven-and-a half months this year, which is more than its full-year target. This was mainly due to the sale of a building in its Southgate project in Kuala Lumpur for RM226 million.

It has also yet to book RM818 million of sales of residential and commercial properties as at June 30 this year.

"The strong take-up for our projects is evidence that the property market is resilient, and niche products with good branding coupled with the right concepts and designs in prime locations will continue to do well," group managing director Tan Sri Leong Hoy Kum said in a separate press release.

I'm not too sure if the last statement makes sense. but for a high volume property developer like Mah Sing, they can't make money on niches alone. I don't see property sales being a driver for real estate recovery. Growth in Property stocks will be anemic at best.

In this environment, positive loan growth alone won't see property developer's sales accelerate. Developers need a full blown bull market economy to realize their profit potential. People feel we are in a recession and will probably forgo the more discretionary and pricy items such as housing and jewelry.

Proton's Q1 Net rises, an interesting investment opportunity

2009-08-19T11:12:00.002+08:00

From the Business Times:

Proton Holdings Bhd's (5304) net profit in the first quarter to June 30 2009 rose marginally to RM54.55 million from RM52.03 million a year ago despite the slightly lower sales volume.

Group revenue increased 8 per cent to RM1.85 billion from RM1.71 billion, the national carmaker said in a statement yesterday.

The improved performance was attributed to a better mix of products although it was affected by a 2 per cent sales drop to 39,888 units during the quarter.

Still, the drop was less than the 11 per cent recorded by the overall industry during the period.

Proton sold 69,977 vehicles from January to June this year, accounting for 27 per cent of the total industry volume.
In June alone, its market share increased to 31 per cent on strong demand for the Exora multi-purpose vehicle.

"We have seen a strong take-up for the new Exora with its attractive value-for-money features," Proton chairman Datuk Mohd Nadzmi Mohd Salleh said in the statement.

He said Proton's gross profit of about RM59 million in the first quarter helped reverse the pre-tax loss of RM374 million in the preceding quarter.

Domestic sales volume rose 12 per cent compared to the preceding quarter, he added.

Proton managing director Datuk Syed Zainal Abidin Syed Mohamed Tahir noted signs of recovery in the world automotive industry and improved consumer demand.

"Our prospects of better domestic sales volume and market share are encouraging, driven largely by sales of the increasingly popular Exora.

"Internationally, the group will focus on introducing the Exora in the Asean region," he said.

To be clear, this is not an investment recommendation. Here, we are in the midst of a global financial crisis, and I doubt anyone is feeling richer. But in Malaysia, loans are still growing at a reasonable pace and thus consumer spending. Exports are still down horribly.

Proton is one of those companies which produces cheap cars. Consider them the Air Asia of the car industry, with the exception that Air Asia has a much better reputation than Proton. So we are in this precarious situation in the economy where we are bottoming out, we're not getting much growth, but loan growth in Malaysia has kept on going compared to some other coutnries. So what is an investor to do?

If you can stomach the deficiencies of the national car maker, Proton fits in the sweet spot of the current situation. In the position of the economy we are in now, the lower cost goods producers will likely see their revenues stable or modestly increase as people trade down to cheap goods.

There is a caveat here, however. If loans were decreasing in growth, Proton would surely see declining revenues despite being one of the lowest cost producers for cars. The auto industry is quite dependent on people getting loans. Proton fits this bill as their revenues have been relatively stable and loans are still increasing in growth.

Now that we have established some positives, let me say, Proton doesn't have a lot going for itself. The government wants to wean Proton off its tax subsidies and the ASEAN agreement on car taxes will eventually see the tax advantage currently enjoyed by Proton reduced to zero.

UMW would not be an ideal play even though they have a 38% stake in low end car producer Perodua due to its other brand, Toyota, taking up a large percentage of overall sales for the conglomerate. UMW's results would be horribly skewed by its Toyota segment, a generally premium brand in the Malaysian auto industry.

MIER asks the government to look into tax reform, why the VAT won't get implemented so soon

2009-08-18T09:25:00.003+08:00

From the Business Times:

THE government must look seriously into tax reform and announce it in the upcoming Budget 2010, says a senior economist.

"I think we need a serious tax reform in the country. We need to introduce a goods and services tax (GST) or value-added tax (VAT) as soon as possible," Malaysian Institute of Economic Research (MIER) executive director Prof Emeritus Datuk Dr Mohammed Ariff Abdul Kareem said.

Mohammed Ariff believes tax collection this year will fall short of government target.

"If tax collection is lower than the planned target and expenditure is higher than the proposed amount, then the chances are, we are going to run into a bigger deficit than the 7.6 per cent the government is hoping for.

"The deficit will probably touch or exceed 8 per cent this year, but the problem will be far worse next year because this year's tax collection will be based on last year's collection and next year's will be based on this year's," he said in an interview in Kuala Lumpur yesterday.

With growing government expenditure, including development expenditure and declining revenue, we may have a double-digit ratio of debt to gross domestic product (GDP).

"Of course this is a wrong time to introduce GST, simply because the economy is contracting, but it is important that we plan now for the introduction later.

"We should have a clear timetable. We don't seem to have one at this moment," Mohammed Ariff said.

The government should aim to implement VAT by 2012, at the least, when economic recovery is hopefully in place, he added.

"We need a lead time to prepare. We cannot just implement it overnight. We need at least two to three years preparation."

He noted that those countries which had introduced VAT took two to three years of preparations.

"This is because VAT is a very complicated and complex tax. It is collected at different points in a long supply chain. We also have to reimburse tourists who have paid the tax when they leave the country.

"Tourism is such an important activity. We have to put in place an impeccable machinery first."

Mohammed Ariff said VAT needed serious planning.

"I think the government should start doing it now. It should think of introducing VAT by 2012 but start the ball rolling by preparing for it. Don't think about it after economic recovery because we need two to three years of preparations."

Malaysia has already planned to implement the VAT for quite a long time. The infrastructure should be in place, ready to go but we all know our government, the right hand doesn't know what the left hand is doing, so don't get all hyped on the VAT so soon. Plus, with the precarious economic and political situation, a VAT would probably be something that the current government won't risk.

Malaysia ready for Retail bond market, why I don't think so, pricy stock transaction fees.

2009-08-17T12:45:00.011+08:00

From the Edge Malaysia:

Malaysia is ready to open up the bond market to retailers towards providing another alternative investment option for the individual investors, said CIMB Group’s deputy chief executive officer (group treasury and investments) Lee Kok Kwan.

With the persisting low interest rate environment, the discussion about opening up the bond market to retail investors has been heating up, although not everyone is in agreement that it should be done.

Criticisms range from the affordability of bonds to the complexities involved in bond trading, which can arguably be beyond the grasp of the average retail investor.

Bonds, with their fixed return rates, are typically considered safer investing instruments than equities, although the relative ratings of the instruments must be taken into consideration.

Moreover, the fact that the United States subprime and the eventual global economic crises originated from structured investment products has also cast further scepticism on the viability of opening up the fixed income market to the general retailer.

Speaking to The Edge Financial Daily recently, Lee said the next major step forward for the local debt market would be to implement retail-side service. “The next big step is the retail bond market,” Lee said. “Typically, you don’t want to let retailers invest in credit ratings that are too far down the credit curve to protect them because they are not in the same position as a big unit trust or big fund manager to study the credit terms.

“You would want to have some minimum standards and credit rating they can buy into. Having said that, once you allow them access into the bond market, the yield is much higher than bank deposits.”

As with most other countries, interest rates in Malaysia have come off since the onset of the economic crisis. Presently, the 12-month rate for fixed deposits in almost all major banks has been set at 2.5%, 50 basis points higher than the benchmark overnight policy rate (OPR) set by Bank Negara Malaysia.

Although the stated return of Malaysian Government Securities (MGS) might not be that much higher than FD rates — the three-year benchmark MGS maturing on August 2012 has a coupon rate of 2.509% — investors could see greater returns through the trading of their bondholdings.

Moreover, there is an argument to be made that the papers of some corporates, or private debt securities (PDS), which are highly rated — AA or higher — are safer investment instruments than some of the equities available on Bursa Malaysia presently.

In addition to better returns, access to the bond market also allows retail investors to diversify their investment portfolio, which is presently limited to the equities market, unit trusts and banking products.

“In countries where savings rates are very high, there’s a need for it,” Lee said. “In the US, where the country’s savings rate is very low (about 6%), you don’t need it — you can route it all through the mutual funds. The individual deposits in the bank system here are about RM500 billion.”

There have been some criticism from certain quarters that retail investors simply cannot afford to invest in bonds, which are presently sold in RM5 million denominations. While the process of dividing up the denominations might be straightforward, Malaysian Rating Corporation Bhd (MARC) CEO Mohd Razlan Mohd said the cost might be prohibitively high.

“It’s a function of cost. At what cost do you want to open it up? In theory, we should let the bonds be traded in smaller denominations. But the cost might be prohibitively high to divide up the bonds and it would become costlier for bond issuer who has to pay Bank Negara Malaysia to maintain the system,” he said.

Razlan added that existing bond funds already provided the same kind of diversification and exposure to bonds, although he cautioned that the viability of those funds would depend on the bond manager.

Lee demurred. He said the bond market did not need to incur additional costs, but could use the same existing platform of the equities market.

“When you develop a retail bond market, you don’t want to create unnecessary costs. Just piggy-back on the stock exchange infrastructure and use the same platform. Instead of quoting equities, you list the bonds there. Instead of dividends, you have a coupon. Singapore to some degree has done this, which has worked quite well.”

Hong Kong and Singapore currently have a system that allows the purchase of bonds denominated in one thousand units of their local currency through automated teller machines (ATMs). The banks providing the service take a cut from the transaction, of a few basis points, as their service fees. Supporters of the move also say that the introduction of retail investors will lend greater depth to the bond market as it provides greater diversification in the investor base. This would then boost stability and allow for greater trading in the secondary market, which will also improve the pricing mechanism.

Currently, only high net-worth individuals with RM3 million or more can directly purchase bonds.

The fact that retail investors are interested in purchasing bonds is plainly evident from the overwhelming response to the RM2.5 billion three-year Sukuk Simpanan Rakyat issued by Bank Negara Malaysia in January, which was fully taken up within two days.

The bond market here should be traded in smaller denominations. But there are other absurdities at work in the market. For instance, the liquidity of bonds here is non-existent. What happens when an investor wants out of a bond fund?

The bond fund uses its existing supply of cash or tries to find other investors to take the spot of the one that just left. I'm not an expert, but when a person leaves, does he get cash worth the Net Asset Value of the bond fund? Because if the fund were to actually take his portion and sell it on the market, the fund might not get the NAV price as desired. So who loses out? the one that left or the remaining investors of the bond fund? I say the losses are subsidized between the remaining investors of the bond fund.

The big problem with bonds here is that the minimum cost of a corporate bond is RM250,000. The average household income in Malaysia is about RM3200 based on a 4% growth rate from 2004 data from the Department of Statistics compounded to 2008. Here, I assume 70% urban/30% non urban population distribution (from the CIA world fact book).

Assuming this average income, it's hard to see how an individual investor could ever hope to buy the cost of a bond. I doubt very much so that the average Malaysian household will get to RM250,000 based on salary alone. Even if they were to put away a portion of their income (20%), they would probably be able to save RM500,000 at the end of 30 years and buy only two bond issues. That's an absurd number. Forget about diversifying bonds on your own.

Theoretically, there are not a lot of reasons why they should trade in such large amount per unit. First of all, debt issues aren't huge compared to stock market listings. If investors can buy in smaller lots for stocks, why can't they do the same for bonds? The banks just have to write checks from the bond payouts to a larger pool of investors which shouldn't cost that much. It's more bond holders to handle, but financially, it does not cost that much more.

But alas, the market here in Malaysia is much more developed for stocks than for bonds. First of all, when I tried to sign in to the BPAM website, guess what? I couldn't even register properly. It wouldnt' even send my verification link to my email address. That's just horrible. There is very little information on bonds out there. Most of it is centered around stocks.

While i'm on this subject of criticism of capital markets in Malaysia, the transaction fees for purchasing and selling stocks are incredibly high. In order to buy and sell a single stock, the transaction fees are 1.4% (.7 to buy, .7 to sell). Effectively, this makes liquidity in the market horrible. In countries like the US where transaction fees are $10 per trade so (RM35 to buy, 35 to sell), with just a trade size of RM5000, the US will be on the same price as Malaysia. Over RM5000, it will be even cheaper!

They should have a cap on the transaction fees because this policy is making liquidity poorer by taxing large transactions. They will try anything and everything under the sun to increase liquidity, but capping the transaction fees. It's obvious the reason why, profits. All these stories about increasing liquidity by having the FTSE index the markets are merely cosmetic.

US recovery to happen in 2012, MIER director looks to US recovery for Malaysia's hopes

2009-08-14T13:57:00.003+08:00

From the Business Times:

THE recovery of the US economy, the key to the world economic revival, will probably happen in 2012, says Prof Emeritus Datuk Dr Mohamed Ariff Abdul Kareem, executive director of Malaysian Institute of Economic Research (MIER).

"Recently, there were some signs indicating that the crisis is easing, but it is still on. What I am saying is the world economy is still contracting at a slower pace.

"The US, in particular, showed some signs of let-up in the sense that the second quarter registered a much lower contraction than expected," he said in an interview.

The forecast was -1.5 per cent growth in the US but it turned out to be -1 per cent but the fact remains that the economy is still contracting.

Mohamed Ariff said the story is pretty much the same every where else.

"Europe is also contracting, albeit at a low and slower pace. The situation is the same in Japan, South Korea and many East Asian countries.

"This has led some people to say the worst is over and that there are also the so-called 'green shoots' (indicators of economic recovery) here and there which are very promising.

"But to me, the worst will be over when the economy stops contracting. (Currently), the global economy is still contracting.

"Of course, there are a few cases like India and China, where growth is positive. Indonesia is also having positive growth but their growth is way below the big crisis level," he said.

Mohamed Ariff said China showed some improvement in the second quarter, registering 7.9 per cent growth, above the 7 per cent growth forecast.

He said the recession may end but the recovery will not begin. "A recovery to me is getting back to growth trajectory which I think probably will take two to three years. So 2012 is probably the best bet for the world economy to be back on track."

Mohamed Ariff also warned that there are serious limits to stimulus packages that a country can put up and there are also interest rates that have been pushed down.

As to where Malaysia fits in this kind of a global picture, Mohamed Ariff said Malaysia is a trade-dependent country, noting that 3 per cent growth in the US will "help our economy a lot more than the double-digit growth in China".

"This is because China's growth does not spill over to the rest of the world like the US does. So this is why I think China's growth is largely internalise.

"It is not externalise like in the case of the US. This is why I think we really have to wait until the US economy recovers," he added.

Looks like someone in the economic board here in Malaysia is on board. Compare this with Mr. Tan Teng Boo who proclaims China's growth will bring Malaysia out of a recession. It's straight forward math, if one part of your growth engine takes a big hit, other parts need to make up for it. But if that part is a very significant part of your growth engine, the other parts need to make up a lot more in percentage terms to cover the loss.

Last I checked with 20% y-o-y in trade decreases, China wasn't making up for it.

Air Asia posts better than expected results, not to speculate in oil markets for now.

2009-08-13T16:05:00.003+08:00

From the Edge Malaysia:

Air Asia has beaten expectations in its second-quarter (2Q) results, posting a net profit of RM139.18 million in an operating environment where many airlines are in the red.

Its chief executive officer Datuk Seri Tony Fernandes anticipates even stronger earnings in the current third quarter ending Sept 30, in view of the robust sales in July and August.

Yesterday, the low-cost carrier announced its 2Q net profit, which was significantly higher than the RM9.42 million in the previous corresponding period. Its core operating profit soared to RM128.42 million, up 328% year-on-year (y-o-y) from RM29.98 million.

Fernandes said via teleconference that the performance actually exceeded his own expectation.

“I am very pleased with the results. In the first half (of 2009), we are one of the few airlines around the world that posted true operational profit,” he added.

AirAsia’s operational profit rose to RM399.96 million, up more than twice the RM154.47 million reported for the same period last year.

He added that the dramatic increase in its earnings was largely due to AirAsia’s strategy of cutting passenger fares, which were offset by higher volumes. Cost cutting such as the removal of administrative fees also helped, he noted.

Fernandes said that average passenger volume had grown 24% to 3.52 million passengers from 2.84 million y-o-y, while fares had come down by 19%. Its load factor remained unchanged at 75%.

Meanwhile, ancillary income had increased by 3% to account for about 14% of its profits. AirAsia’s margins, he added, were an industry-leading 21%.

“This shows that our strategy of lowering the price works,” Fernandes said, adding there had been no impact from its competitor’s sales campaign.

As for its operations overseas, AirAsia’s Thai operations managed to narrow losses to RM8.2 million. Indonesia AirAsia also reported a loss of RM21.8 million although it managed to grow its passenger load by 47%.

Fernandes said AirAsia’s overseas operations were poised to become an important contributor to the group’s bottom line, noting that the “tide has changed”. The delivery of new Airbuses to the two destinations would help to turn those businesses around, he added.

Commenting on the delivery of new aircraft, he said AirAsia might further defer delivery of another eight aircraft in 2011 if the proposed new LCCT terminal is not ready by then.

Due to the insufficient space at the current LCCT, the low-cost carrier has decided to postpone the delivery of eight aircraft next year.

Fernandes added that he expected most of the growth next year to come from Thailand and Indonesia. AirAsia is also developing its Penang hub to ease the congestion in Kuala Lumpur.

As to whether AirAsia would hedge its fuel given the present level of US$70 per barrel, Fernandes said: “No, there’s too much volatility.”

“We spoke with two major oil companies and they said that supply and demand does not match the current price. There’s so much volatility and we don’t want to play in that game yet.”

For the second quarter, AirAsia wrote back some RM18 million to RM20 million as banks released collaterals AirAsia had deposited as security against its hedges. The figure also included savings from lower handling fees charged by airports.

That's good. At least Air Asia probably fired their oil hedging strategist. The main problem is that they need to hedge to survive, and not hedge to speculate. Any paper profits derived from hedging short term, has a chance of hurting them in the long run. Even at 70 dollar oil, unhedged, Air Asia can still make a profit.

Anyways, I hope Air Asia won't return to its old ways, but we will have to see. Quoting "we don't want to play in that game yet" doesn't exactly inspire confidence.

A look into the life of a trader

2009-08-12T15:47:00.003+08:00

From the Wall Street Journal:

Steven Schonfeld has nothing to worry about from the new U.S. executive-pay czar. The 50-year-old owner of trading firm Schonfeld Group Holdings LLC is living it up like the financial crisis never happened.

He says he made $200 million last year and just moved into a mansion near the Long Island Sound with its own nine-hole golf course. He has spent $90 million on the home, he says, and is currently erecting a poolside cabana designed to look like the Cove Atlantis resort in the Bahamas. "I don't think it's putting anyone's face in it," he said recently while showing a visitor around the property. "I live in this house."

Many of Wall Street's A-list firms are retrenching, but plenty of B-list firms like Mr. Schonfeld's are prospering and hiring. In Mr. Schonfeld's 27 years in the business, his small, little-known firm never had much success hiring traders from Wall Street's biggest firms -- until the financial crisis battered the industry last year. Since then, he has hired more than 20 traders from big banks, and he wants a dozen more.

Mr. Schonfeld isn't trying to rein in the every-man-for-himself culture that churned out big profits on Wall Street during the boom but even bigger losses at some firms during the bust. He provides seed money for new hires and gives them freedom to decide how to trade. Traders keep a percentage of their profits. His best ones make $5 million to $10 million a year, he says.

The firm, founded in 1988 with six employees, hasn't always focused so heavily on trading. Over the years, it also has handled trades for day traders and institutions, among other things. These days, it is betting more of its own capital than it once did, just as firms such as Morgan Stanley dump businesses that don't fit the lower risk profiles it adopted when it converted to a bank-holding company last year.

Last year, Mr. Schonfeld's trading strategies -- some are based on short-term market moves -- generated 35% of the firm's profits, says Mr. Fishman. Schonfeld Group expects revenues of $250 million to $350 million this year, down from $590 million in 2008, when volatile markets generated better trading opportunities. Mr. Schonfeld says he expects profit growth to bounce back as the firm's newly hired traders get established.

Mr. Schonfeld got his start on Wall Street in 1982 as a broker at Blinder, Robinson & Co., which got into trouble over its sales practices for penny stocks. He says he steered clear of those securities. In 1987, he left for Prudential-Bache Securities Inc. and began trading, but soon quit to trade his own money full time.

In the 1990s, he built a business around training day traders. When the Internet bubble burst, he acquired several struggling rivals. In 2006, he sold a majority stake in the day-trading business, but held onto the traders who were operating with the firm's capital.

Mr. Schonfeld developed a reputation for obsessing about statistical probabilities and making rapid-fire decisions. He sleeps just four or five hours a night, and often emails trading ideas to lieutenants between 3 a.m. and 5 a.m. At one dinner with traders, he said that anyone who looked at the menu for more than 90 seconds was in the wrong business.

In mid-2007, Mr. Schonfeld noticed that many traders using math-based strategies were notching losses. Figuring such losses wouldn't persist for long, he began trying to lure such traders away from big firms, an effort that gathered steam as Wall Street's troubles deepened last year.

In January, Ashwin Kapur, 33, left a Barclays PLC trading desk in New York to join Schonfeld. A veteran also of J.P. Morgan, Credit Suisse Group and Royal Bank of Scotland Group PLC, he is working on a trading system to exploit discrepancies between prices in stocks and derivative contracts such as futures and stock options. Schonfeld executives say they plan to bankroll the venture, called Systematic Trading LLC, with as much as $250 million in capital, and will split any profits with Mr. Kapur. If there are losses, the firm will have to bear them.

Mr. Kapur initially will have less capital to trade with than he did at Barclays. But he says he could earn more money because his compensation won't be affected by Barclays's various nontrading businesses. Working at Schonfeld "directly ties my take-home to my performance," he says. His contract entitles him to a few million dollars in bonuses if he generates consistently positive returns.

Mr. Schonfeld is rarely seen in the firm's Manhattan office. He runs his own trading strategies from the company's headquarters in Jericho, N.Y., near his mansion in Old Westbury.

Three or more times a week he keeps right on wagering at the gin-rummy table after the markets close. Playing cards, he said, is a lot like playing the markets. He doesn't like to play games where he doesn't have an "edge," he explained one recent afternoon as he stepped into a card-playing room in his home to sit down with five other players.

Wearing a gray sweater, faded jeans and white Nike sneakers, he settled into a chair embroidered with playing cards. Michael Sall, author of the book "Gin Rummy: A Predator's Guide," says Mr. Schonfeld can match up with the best gin-rummy players in the U.S., sometimes walking away with six-figure winnings.

The game broke up for dinner, and Mr. Schonfeld's chef served veal medallions and halibut. (At high-end restaurants, Mr. Schonfeld has been known to order one of everything on the menu, with his party leaving much of the food uneaten.) Over dinner, Mr. Schonfeld mused about, among other things, the odds of getting the same two gin partners twice in a row in a six-person game (10%, he says), and the chances that the Dow Jones Industrial Average will rally after a sharp decline (55%, he says).

Mr. Schonfeld has also become an avid golfer. No one is allowed to use his golf course if Mr. Schonfeld, a nine-handicap player, isn't at home. "It's not a private golf course," he explains. "It's a personal golf course."

I thought it would be interesting to do a post of the life of a trader. Apparently most, if not all traders use some kind of mathematical model to trade. The amount of money traders can make is incredible and the job is taxing to some degree. In another article, some of the mathematical trading models are developed by autistic people.

Apparently, a strong grasp of math and probability are prerequisites for the job. Some of the algorithms that traders use are incredibly predatory such as baiting other traders and taking their money. Some are self learning and never static. Trading strategies are always changing and can become completely obsolete at any time.

It's super interesting as their job isn't mundane like the typical day job of most people. Their life is a constant up and down depending on whether they make or lose money.

Taiwan-Malaysia trade suffers, asian economies won't recover without US

2009-08-11T16:03:00.003+08:00

From the Business Times:

TRADE between Taiwan and Malaysia is expected to be at US$10 billion (US$1 = RM3.50) this year, a decrease from the US$12.3 billion posted in 2008.

According to the Taipei Economic and Culture Office in Malaysia, this is due to the global financial crisis.

"The decrease is not much as the Taiwanese government has been trying to help local manufacturers continue exporting while providing opportunities to promote their products," director of the economic division, Lin Min-Li said yesterday.

In 2008, Taiwan's imports from Malaysia were at US$6.8 billion while exports stood at US$5.5 billion.

Besides that, Lin said the Taiwanese government was also helping and encouraging investors to look at five important markets in South East Asia - the Philippines, Indonesia, Malaysia, Thailand and Vietnam.

"Among the five countries, Malaysia is the most successful for investment. We prefer Malaysia due to the stable political climate, as well as good manufactured products.

"There is still room for Taiwanese investors to come to Malaysia," he added.

According to Lin, Taiwan ranked number three in terms of foreign direct investment in Malaysia for the first five months of this year.

We see a 20% drop in trade between Malaysia and Taiwan. When you look at Malaysia's largest trading partners, Singapore, US, Japan, China, and Thailand, each one of them have based their policies on growth through exports, with the exception of US. Even worse, each one of these countries' largest trading partner is the US. Like I said before, this is exactly the reason US needs to recover first for Malaysia to recover. It takes more than talk to say the world economy has diversified itself away from the US, especially Asia.

US Unemployment, Autos, will a car rebate program work for Malaysia?

2009-08-09T19:31:00.009+08:00

With the latest employment report from the US showing some positives, I'd just like to point out that the unemployment numbers have been showing job losses but the unemployment rate has decreased from 9.5% to 9.4%. This number can vary month to month but over a period of a few months, will straighten itself out. I don't think people should be jumping for joy just yet.

Some people have been criticizing auto sales in the cash for clunkers program to be just a subsidy for a short time. This is true for the specific industry, next year, the car sales will certainly fall without the cash for clunkers program. But people have been failing to realize how much economic windfall comes from a single car sale. Getting car sales up could be one of the most cost effective ways to help bring the global economy and American economy on track.

A single car involves thousands of parts from all over the globe. The heavier, more expensive parts will likely be made in the United States. I can think of no single purchase which has positive effect on so many industries than autos. Houses by comparison, involve mainly building materials and have a larger price tag, but the sheer number of components pales to a single car.

This brings me to my next point. It is likely a general rebate program such as the one the US uses in it's "cash for clunkers" program will not work in Malaysia. Why? Malaysia doesn't have a huge auto industry and mainly imports most of its auto component needs. The market is too small. Such a program won't do much to help the Malaysian economy. Also, large components can be made by nearby countries and shipped at a relatively low cost, thus increasing the economic leakage of such a program to other countries.

Of course, they could give an even bigger rebate to the Malaysian car manufacturers. That would work much better. It is important though, that the more expensive components are manufactured in Malaysia. Given the high tax rate of autos here, and that a lot of used cars are still worth quite a lot of money, much higher than RM5000 the government is refunding, it is just too small for people to seriously consider taking up the offer. They should probably up the rebate to 20% of the cost of a new car.

Glovemakers shares up on rising demand

2009-08-07T11:22:00.004+08:00

From The Business Times:

OSK Research has an 'overweight' rating on the sector, raising its target prices on some rubber glove stocks

SHARES of rubber glove companies are on a roll right now and will continue to move up, riding on the global outbreak of influenza A (H1N1).

OSK Research Sdn Bhd has an "overweight" rating on the sector, raising its target prices on some rubber glove stocks, in line with recent developments in the industry's spurring demand for rubber gloves.

The local research house organised plant tours to four rubber glove companies last month, namely Top Glove Corp Bhd (7113), Supermax Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd.

"For Top Glove, we recommend a buy with a target price of RM8.50 from RM7.40 previously and Supermax, also a buy with a target price of RM3.85 from RM2.69 previously," it said in a report yesterday.

"We are also recommending a buy on Kossan, with a target price of RM4.98 from RM4.48 previously as well as on Adventa, with a target price of RM1.87 from RM1.31 before," it added.

While it has revised its target price upwards to RM5.45 from RM4.10 for Hartalega, the research house has downgraded its call to "neutral" from "buy" previously, given that Hartalega's share price has caught up with the valuation.

OSK Research said demand for rubber gloves from the medical industry remains strong, especially from developing countries.

"But glove supply is still short. Since the H1N1 outbreak has been raised to a pandemic level, the governments of developed countries like the US and Europe have urged all healthcare multinational corps to stock up on rubber gloves, which has created short-term demand.

"Over the longer term, demand is expected to come from developing countries like China, India and Russia, which are gradually increasing their use of gloves," it said.

Also, with the US tightening its Food and Drug Administration regulations effective December 2008, the number of glove defects per batch would need to be reduced to qualify for entry to the US market.

This would reduce the supply of rubber glove exports to the US due to the retention of "unqualified"' gloves at the ports and hence create new sales opportunities for the established rubber glove manufacturers, said OSK Research.

Glovemakers have been making the news recently as stocks to own. Lets keep things in perspective. Lets take a look at the number of H1N1 cases as reported by the WHO worldwide. The following charts are based on that data.

First Chart is the average growth rate of H1N1 cases per day. This tells you over each period, the average number of new cases of H1N1 per day. This chart shows we may have hit the peak of new H1N1 cases in early june. The number of new cases per day may have topped out. It has been declining ever since.

The second Chart shows the percent growth rate of H1N1 cases. This tells you how saturated we are in terms of H1N1 growth. As we get further into this epidemic, we will reach saturation compared to a previous time period. This doesn't tell you much about the number of new cases, but as time goes on, we have a decreasing growth rate which means we are getting into a more mature growth and into inevitably into a decline of H1N1 cases.

This is confirmed by the following compounded daily growth rate between each time period in the third graph. The last graph clearly shows we are not having an increasing compounded growth rate. The compounded growth rate per day is declining.

While there will still be demand for gloves due to the H1N1 epidemic, my feeling is that we have already seen the peak in sales, and the euphoria over the glove makers will die down much quicker than most people think. We are already reporting fewer H1N1 cases per day than in June, so the glove makers probably won't do any better than the current quarter in terms of top line growth due to the H1N1 flu.

E&E, gas sales help cushion decline in June exports

2009-08-06T10:43:00.004+08:00

From the Business times:

MALAYSIA'S exports fell at a slower rate in June, helped by a slower deceleration in the exports of electronic and electrical (E&E) products and a rise in liquefied natural gas (LNG) exports.

Exports in June fell 22.6 per cent year-on-year, beating a 25.47 per cent contraction forecast in the Business Times poll.

Together, E&E and LNG accounted for 46.2 per cent of the overall exports.

Imports also dropped 20.8 per cent from the same month a year ago, while total trade shrank by 21.8 per cent to RM81.09 billion.

The International Trade and Industry Ministry (Miti) said month-on-month, exports rose 5.1 per cent in June to RM45.1 billion from May, while imports rose 9.4 per cent to RM35.99 billion.

Economists said the decline in the country's exports is easing, but improvement is likely to be gradual because exports still register a sharp drop year-on-year.

"The month-on-month trend shows that the contraction in global demand is stabilising, but we are not expecting a V-shape recovery in exports because major developed economies are still in recession in the first half of the year," RAM chief economist Dr Yeah Kim Leng told Business Times yesterday.

"Some are projecting a recovery or slight growth in the US economy in the third quarter, but not a robust recovery," he added.

Yeah said at a 20 per cent contraction, Malaysia's exports are still better than other Asian countries such as Singapore, Japan and China, whose exports have shrunk between 30 per cent and 40 per cent since the onset of the global financial crisis.

MIDF Research head Zulkifli Hamzah said the month-on-month recovery in exports was in line with regional trend, driven by intra-Asian trade.

"The Western economies of US and Europe are still weighed down by weak demand and overcapacity. As Malaysia is an open economy, a meaningful recovery needs to have the participation of the US and Europe," he said.

Zulkifli said while Asia has the capacity to drive demand, probably until the end of the year, the momentum must be supported by the Western economies. Otherwise, the recovery would not be sustainable.

He really means that Malaysia is an export-oriented economy. We probably won't see the export numbers get much worse, but I believe we are getting used to the news that exports are improving only a little bit. It's not really telling us anything new at this point. Reality will sink in that we have a long ways to go and probably won't see the numbers of last year for a very long time.

Axiata unit proposes rights issue to raise US$300mil

2009-08-05T10:55:00.003+08:00

From the Star:

XL plans to raise US$300mil to reduce borrowings

PETALING JAYA: PT Excelcomindo Pratama Tbk (XL) of Indonesia, which is a unit of Axiata Group Bhd (formerly known as TM International Bhd), has proposed a rights issue to raise some US$300mil to reduce borrowings and improve its capital structure.

In a filing with Bursa Malaysia yesterday, Axiata said the rights issue would consist of equity and mandatory convertible notes (MCNs).

The size of equity and the MCNs, final issue price of the common shares as well as the conversion price of MCN will be determined later.

XL’s major shareholders, including Axiata and Emirates Telecommunications Corp International Indonesia Ltd, have committed to fully subscribe to their rights entitlement.

“This financing process demonstrates Axiata’s full support and backing to XL, and will provide XL the financial ability to continue investing in its business and strengthening its market position,” said Axiata president and chief executive officer Datuk Seri Jamaludin Ibrahim in a statement.

XL president director Hasnul Suhaimi added that the cellular operator’s operating performance was strong last year as both revenue and earnings before income tax, depreciation and amortisation grew by almost 50%.

With the proceeds to par down debts, XL will be able to reduce financing costs and improve its balance sheet to allow further investing for growth.

It was reported earlier that the Indonesian mobile operator required about RM2.1bil this year for its capital expenditure and that a rights issue was in the pipeline.

Jamaludin said Axiata was committed to increasing the free float of XL when market conditions improved. Axiata via Indocel Holding Sdn Bhd currently owns 83.8% of XL while Emirates holds 16% and the public 0.2%.

The proposed rights issue is subject to shareholders’ approval at an EGM to be held sometime this year and is expected to be completed by the fourth quarter.

It's simple, with this market being so buoyant, companies have been taking advantage of shareholders' good graces and raising money. We are obviously still in a defensive posture given the amount companies these days are asking from shareholders. I don't want to even mention the more ludicrous rights issue of 20% from Air Asia.