BJ Toto needs to grab the low hanging fruit

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.

High income nation, what it'll take

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.

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

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.

Maybank Monitoring Dubai Situation closely

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.

Bursa Malaysia should look into Options

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

Who's going to buy the US government debt?

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.

Erroneous trade error, symptom of a stodgy Bursa Malaysia

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.

Malaysia ready for Retail bond market, why I don't think so, pricy stock transaction fees.

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.

Palm Oil may be in trouble

The Edge Malaysia weekly magazine also reported that the EU may have regulation that would effectively stop shipments of palm oil based products. The chances are notably slim, but that just illustrates the dependencies Malaysia has on foreign countries.

Like I said before, we need to have the ability to divert our own palm oil feedstock supply into the local market. Our government hasn't been able to initiate effective biodiesel policy. We need the downstream infrastructure to support the palm oil industry. We need to be able to use our own palm oil.

Politicians need to stop jockeying for votes and lining their pockets and make intelligent economic decisions for Malaysia. Not only that, they should implement it fast as well. The downstream alternatives are lacking and if a demand shock such as the US or EU stops importing biodiesel, Malaysia will be in trouble. Malaysia is such an advanced country, but we lack the foresight compared to a country such as lower ranked Brazil which has their infrastructure in place.