Islamic Banks have it hard as well

From the Business Times:

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

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

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

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

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

Fed keeping treasury purchases unchanged

From Bloomberg:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Prime Mortgages downgraded

From Marketwatch:

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

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

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

UMW plans RM800m Islamic paper sale

From the Business Times:

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

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

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

10% unemployment expected in a few months

From the AP:

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

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

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

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

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

Templeton Investment's view on possible hyperinflation

Excerpt from Barrons:

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

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

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

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

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

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

Faster streamyx broadband on the way?

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

Zamzamzairani added that

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

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

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

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

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

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

Better times for steel makers?

From the Edge:

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

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

Checking out US CPI data

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

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

Of Measat, Maxis, and Astro

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

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

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

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

May CPI up 2.4%

From The Edge:

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

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

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

"The index for food and non-alcoholic beverages for the month of May 2009 compared to the same month in 2008 showed an increase of 5.2%, while the index for non-food registered change by 1%," it said.

Inflation would seem to be showing up in Malaysia despite the recession. Can BNM afford to keep interest rates low? With food being such a large part of the overall basket of goods, we should keep an eye on it more so than developed countries.

Additional thoughts to the Recent Rally (previous post)

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

The recent rally

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

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

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

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