KLCI/FKLI and FCPO technical update

The FKLI is in the midst of perhaps beginning a down trend.  But not yet,  due to the large volatility over the beginning of the month.  The market will still likely continue to trade in line with other markets until April, so a rebound is possible depending on how most markets react.

At the same time, the market isn't oversold, so buyers may want to wait longer, especially with the prospect of barely positive GDP in the oncoming year.

FCPO is also in the same boat as the market had the same volatility as FKLI.  Range trade is still the order of the day with wide supports and resistances.  200 day moving average seems like interim support as the market tries to turn the widely followed technical indicator upward.

More GST woes

It has been brought to my attention that estimates for Malaysia GDP are way too high with 4 percent GDP growth from the government and world bank.  We can see a -9 percent GDP growth when Australia first introduced a GST of 10 percent.  

Likely a positive GDP will be considered lucky with a hefty 6 percent levy in Malaysia.  Similar countries such as Japan also experienced -3 percent GDP growth at only a 3 percent increase in GST.  Extrapolating a similar ratio, Malaysia will be likely get -1 percent GDP going forward for 2016 (5 percent -6 percent = -1 percent GDP growth).  I imagine the end of 2015 will likely record a 1.5 to 2 percent GDP growth.

Australia is one of those countries who was a pioneer in instituting GST.  The stock market didn't do too well in the period following GST implementation.

Malaysia also has major problems with instituting the GST.  They've created almost a brand new GST system after studying a few countries' GST programmes and likely a new system will almost lead to major confusion.

Is our retirement safe?

Whenever government entities like the 1MDB get called into question, we tend to look take a harder look at our finances.  The Edge has called into question how Malaysia will pay its ballooning pension liabilities.

The Edge weekly in its latest edition said that tighter finances meant that pension reforms were inevitable and that such reforms were happening around the globe because a significant jump in the cost of caring for people in their old age — be it to put in place infrastructure that is more friendly to the aged or more expensive healthcare requirements.

The Edge’s Cindy Yeap, Kamarul Azhar and Kathy Fong wrote that while Malaysia’s population was still much younger compared with that of the developed countries where these pension reforms have taken place, one in 10 Malaysians will be aged 65 and above by 2035, according to projections by Malaysia’s Department of Statistics.

“That means 3.89 million people aged 65 and above — more than double the 1.43 million in 2010 — and this is projected to rise to 4.41 million, or 11.4% of Malaysia’s population, by 2040,” they wrote.

The Edge said that in fact, official projections show Malaysia would reach the 7% threshold The World Bankdefines as an ageing society in just six years, in 2021.

The question comes in if the pensions look suspect, so might our retirement savings.  It's possible.  The truth is the EPF seems like a black box.  It pays out dividends every year to all the account holders, but we never know what the net asset value of the fund is.   For all we know it could be a ponzi scheme.

Will we ever know?  probably not.  But if you ever thought the EPF is a bit shady when it comes to investment funds, moving the money to a genuine investment fund which holds stocks with net asset values and distributions will likely be the best bet.  Maybe you won't get the stable holdings like a normal bank account with interest, but at least you will have some idea what you are really holding.

I know some companies are already moving the EPF contributions to a private scheme.  See if the company you are working for offers this option.

FKLI and FCPO technical analysis update

The FKLI is slowly gaining momentum and is currently in an uptrend after a shaky start to February.  As long as overseas markets remain robust, the trend will likely continue.  The gap fill to 1860 looks like the target for the uptrend.  

The market remains slow moving due to the volatility early in the year.  Large trend moves are unlikely for now as evidenced by the small ranged days the market had for the last two weeks.

FCPO is a topsy turvy pattern, flipping from bear to bull almost in an instant.  Frequently markets don't flip, from bull to bear or bear to bull in such a short timespan, so FCPO will likely quiet down as well.

The market is still ranged, and the recent move to RM 2,221 shows bears still have a say in prices.  Likely the market will still range between RM 2,340 and RM 2,220 for the next few weeks.

1MDB just can't get a break

From the Edge:

Feb 24): 1Malaysia Development Bhd.’s bonds are trading like junk as investors seek greater clarity over the state investment fund’s plans to wind down and sell off assets.

Investors are demanding a 439 basis-point premium over similar maturity Treasuries to hold the Kuala Lumpur-based company’s securities, compared with an average of 415 for speculative-grade quasi-sovereign notes in the region, a JPMorgan Chase & Co. index shows. Its $3 billion of 4.4 percent notes due 2023 closed at 86.72 cents on the dollar on Feb. 16, a record low. They traded at 87.62 cents on Monday.

1MDB has been suffering blow after blow in the media.  The most recent statement by the CEO Arul tried to paint a profitable picture of the beleaguered investment fund by saying it made 400 million in profits on that deal.

Tony Pua, a state MP, begged to differ and stuck to his guns and asked where is the profit on this supposed profitable deal.  The market is also thinking that 1MDB may not be able to repay its debts and would need a cash injection from the government, as can be seen by the large premium over treasuries.

The problem in a lot of these "investments" 1MDB does is that it is very opaque, something like a private equity fund.  Winding down an investment like this will likely come at a significant cost as its projects are not finished yet.  Furthermore, ability to make payments on its debts is really difficult as coming up with money to hold the fund over has met many challenges.   The delayed IPO really saw how close 1MDB was to bankrupting the Malaysian banks as 1MDB was not able to pay back its loans on time.

Will investors buy into the IPO?  I'm not so sure as a couple of Malaysian government backed IPOs have not done too well.  Look at Felda and Gas Malaysia.  Confidence isn't as high as before.  Only time will tell.

Anonymous blogger wielding some serious power...not really

From the Edge Financial Daily:

Much has been made of the "anonymous" blogger who has criticized many authoritative figures in Malaysia.  Just who is this blogger?  is there an ulterior motive?

I think there is, it is money.  Money from advertisers who pay the blog because of the huge amount of hits that are generated.  People in Malaysia love conspiracies.  Blame who you want, but as long as a few hundred thousand hits are generated, the "anonymous" blogger will come up with lots of blog posts, true or not.

By poking and prodding some of the largest news agencies, the anonymous blogger has in effect gotten free publicity.  Now even more people will go visit his blogs generating thousands in revenue, if not, tens of thousands.  All he has to do is come up with creative blog posts.  

If there is one thing I know about the blogger, is that the blogger has blogged somewhere before, probably well known.  To generate the amount of content that consistently requires a lot of will power that not everyone has.  The content seems similar and consistent, indicating not much variation in the people that write the blogs, thus a singular blogger and not a huge group.    Beginner bloggers don't generate this kind of content overnight.

He's familiar with the style of "online" investigation although "online" investigation can seem legitimate, it really isn't.  Lots of holes can be found in these "online" investigations.  Don't read too much into the "anonymous blogger", I won't.

Why crude oil affects Malaysia so much

From the International Energy Agency in the US:

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

Crude demand is a commodity unlike any other.

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

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

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

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

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

FKLI and FCPO technical Update

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

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

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

Ringgit to USD hits 3.50

From the edge daily

The ringgit is leading a retreat among Asia’s emerging-market currencies as oil prices slide and strategists predict Malaysia’s worsening current account will lead to further losses.

BNP Paribas SA, Macquarie Group Ltd., Malayan Banking Bhd. ( Financial Dashboard) and Skandinaviska Enskilda Banken AB are all in the process of cutting ringgit estimates, with the French lender saying Malaysia is set for the first deficit in its broadest measure of trade since 1997

I mentioned earlier in previous posts that the market collapse the last few weeks was due to oil price weakness. Now we see analysts who are late to the party.  The budget deficit was something I mentioned earlier, but the trade deficit is what is really hitting the market.  I'm not sure what Malaysia can do to stem a weakening currency.

The central government could raise rates, which would be detrimental to companies.  On the other hand they could lower rates which would spur capital investment and economic activity which in the long run is good for the currency.  In the short run though the currency would take a hit.  I advocate plan c.  Keep rates where they are.  Let the currency fall where it will.  Keep it simple.  Keep rates normal.

I suspect though that because the country doesn't want to have a trade deficit, the country will raise rates to bring imports in line with exports.

What will be the central bank's next move?  Zeti has received accolades as a central bank chairwoman.  For me, I don't think its deserving, as she largely has done nothing over the last few years.   I would say if she saw this coming, she could have

1) Lowered interest rates when the currency was strong.  Doing so would raise the economic output and build more foreign reserves.

2) With the lower rates already factored in and crude oil thus putting pressure on the currency, she now can raise rates without an extreme effect on the economy, For example starting from a lower base rate of 1.5 percent to a rise of 2 percent would put the economy on decent footing than a 3.5 percent to 4 percent increase in interest rate hike.

Long term technical outlook for FKLI, and the stock market and updates to FCPO.

The FKLI is one of the more difficult charts to plot trend lines for and interpret, My interpretation is that the uptrend is still in tact, set back in 2011.  But is losing steam especially with the current short term up trend over the last few days  fizziling out.

Given the weakness in oil price, I believe Malaysia might not be as attractive an investment destination as it once was due to the country basing its budget on higher price oil.  With all those dividends from Petronas used to fund the budget federal, There could be a shortfall.

But, the country also gains on subsidy savings, so perhaps it's not so bad.  The weakness in the ringgit tends to lead me to think Malaysia will be hurting more from lower oil prices than subsidy savings though.

If we are to consider the FKLI as an uptrend market, yes, the uptrend is still in tact.  But I actually think that we might hit down towards the 1400-1600 area some time in the future.  We certainly have the catalyst with lower oil prices.  If the market is able to come down, the next test of the trend line near 1780 could be a massive failure.

The trendline at 1770 in October is running at an increasing rate of about 8 points per month for those wanting to predict where the trend line will run in the near future.

Short term Outlook

Palm oil did an about face to the downside, pretty much at the area which i mentioned last week, the July breakdown point.  The resistance zone just took the uptrend and smacked it on its head.  Support is at RM2,220



The FKLI looks to be ending the upward movement after 3-4 red days.  Usually uptrends have just one down day followed by reversals higher.  This uptrend looks dead.  When we zoom in on the micro trends, we have two areas, the lower box and the middle box as possible support points.

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

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.

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

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?

To buy or not to buy, Malaysian stocks

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.