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.

TM mulling over EPL TV rights, country upgrade from CIMB for Malaysia, and thoughts on the effects of recent years' tax cuts

I mentioned last month that Telekom was possibly planning on offering television services with its HSBB infrastructure that it is currently deploying. It seems like this has come true with the possible bidding for English Premier League broadcasting rights for Malaysia as mentioned in the Edge Weekly this weekend.

Hardline infrastructure has so many advantages over wireless infrastructure that it's a no brainer Telekom Malaysia will have a leg up over the competition. For one, wireless signals can get interrupted by bad weather and weak transmission. Hardline or cable television will have no such problems. People will always get a near perfect picture with hardline televsion technologies.
The same goes for internet as well. But at the same time, I hadn't fully considered that TM would have to spend a lot of money in starting up its media division, buying rights, etc. I do expect the government to give TM a lot of support in forcing Astro give up exclusive TV channels like the Star channel, similar to what Indonesia did. After all, the government owns TM.

I'm not expecting the dividends to stay where they are now. The dividend payouts and policies are quite generous at the moment. I believe they will have to cut it soon as they start ramping up the HSBB and televsion divisions. They will most certainly take a hit to their stock price if they were to cut dividends.


I think the CIMB upgrade of Malaysia is silly. Moving to cyclical stocks will amplify profits and losses in stock returns. Yes, in that case for the short term, it might be a good idea as the market has been rebounding. But if the markets turn south, cyclicals will take the worst beatdown. In the longer term outlook of 6 months to a year, It's simply way too early to move into cyclical stocks.

We are only 9 months in this stock bear market. 9 months ago is when the markets really began to collapse by just looking at charts of the nasdaq and dow. And we're at a bottom already? Give me a break. The stock bear market in 2000 lasted for at least 2.5 years until 2003. And guess which recession is worse? Just because GDP may turn positive doesn't mean anything if growth is weak. In this case the markets will still deteriorate, albeit at a slower rate.

One of the things I've been mulling over is the effect of tax cuts from the government over the past few years. In my opinion, tax cuts can be used as an effective monetary instrument. Because the government cut taxes over the last few years during the good times, most of the money went back into the economy and people spent more as shown by gdp. During bad times, people will save money from tax cuts. But when things get better they have more options.

So, if taxes stay where they are now, we will recover in sync. If taxes go up, our recession will be more severe. Anyways, I believe the tax cuts are all done and won't be lowered anymore. So we had a chance if we didn't cut taxes a few years ago to cut taxes now and get out of this recession a bit faster or in better shape. So I think it was a bit of a failure from a view of fiscal responsibility. If we cut taxes now instead of then, we would not have had as much growth, but at the same time we would be in a good position when the recession ends. Anyhow, there are other things to consider, but that is my general view. But we are not alone, the US did the exact same thing. They aren't that much better.

Recent thoughts on the rally in the world markets

Malaysia has underperformed the recent rally to much avail. While markets in the US have rebounded nicely, why hasn't Malaysia done so?

The short answer is that the market is extremely illiquid. Malaysia has a very anemic stock market due to the investors generally shunning Malaysia as there are more vibrant markets in the world. It will take nothing short of genius for the world to see Malaysia as a fantastic place to invest. Clearing red tape is not enough. I'm talking about doing something really innovative for Malaysia to be a fantastic place to invest again.

But do not despair at the current market rally. It is a bear market rally. People are jumping the gun at thinking the economy will see the bottom. We have seen the explosions and smoke coming from the volcano, but the lava has yet to flow all the way down. Unemployment will continue to increase in the US. GDP will remain negative for this whole year as nonresidential investment gets trashed (it hasn't yet as long projects are still being completed). And if we get growth, it will be slow. It won't make up for inflation.

We are only some 9 months into this bear market. The stock markets only started collapsing about summer of last year. This bear market is being billed as one of the biggest recessions of all time so I think recovering in 9 months is slim. The odds look in favor of another bear market downturn off this rally.

Gross NPLs may hit 9%, says RAM

From The Edge:

RAM Rating Services Bhd expects the banking sector’s gross non-performing loans (NPLs) ratio to reach 9% this year at the worst-case scenario amid the global financial turmoil, said its head of financial institution ratings Promod Dass.

Currently, the sector’s gross NPL ratio stands at 4.1%, and net NPL ratio is at 2.2%, complemented by the financial institutions’ strong capitalisation and the industry’s risk-weighted capital-adequacy ratio (RWCAR) and Tier-1 capital-adequacy ratio at a respective 12.6% and 10.5%.

“Net NPL involves a lot of other calculations. Perhaps net NPL would be half of the gross NPL, but we will stick to gross NPL as it is the key indicator,” Dass said at the release of RAM Rating’s Banking Bulletin here yesterday.

RAM Rating said there had been a gradual shift from corporate to retail lending, as banks had been focusing mainly on residential property loans and lending to small and medium-sized enterprises (SMEs).

The major concern here is, will retail lending hold up? Will the consumer buckle under these conditions? Looking at the way jobs have been disappearing in Malaysia, I think not.

The Edge and new charting software

Wow, finally, The Edge Malaysia has charting software. It really puts The Star's chart to shame. Thank goodness someone came up with some decent free charting software. The Star Online's one is staying out its welcome after all these years.

Plantation stocks still lack push factor

From The Edge:

After an initial strong showing in early trading, plantation counters ended the day mostly lower, and leading industry observers said the sector is expected to remain weak in the near term, as the recovery in demand and prices are not expected anytime soon.

"There is still no upside potential in the near term for this sector, and we would advise investors to stay on the sidelines for now until there is better guidance as to the direction of CPO (crude palm oil) price movement.

"We think that the current price level of above RM2,000 per tonne is unsustainable as this price is being supported by production shortfall in Indonesia," said Alvin Tai, a plantation sector analyst from OSK Research.

In the latest research report, OSK said the shortfall in supply led to inventory declining faster than expected, with Feb 2009 inventories dropping to only 1.56 million tonnes or a 14.7% decline month-on-month (m-o-m).

The lower-than-expected inventory was mainly due to lower production, which fell by 10.7% and higher domestic consumption that went up by 31.9% m-o-m despite weaker exports, which declined 7.2% on a monthly basis.

Tai said the research house was keeping its projection of CPO prices to hover at between RM1,500 and RM2,100 per tonne. The closing price yesterday was RM2,011 per tonne, down RM11 or 0.54% from last Friday.

Another industry observer from a local research house said the focus was now on the demand side of the equation, where recovery in prices was not expected anytime soon.

"There are signs that while palm oil demand for food production is holding up, industrial use of the commodity is still sluggish," he said.

OSK's Tai remained concerned that palm oil prices could come under pressure when Indonesia's production recovered, which could be as early as second quarter (2Q09) of this year.

Moreover, Malaysian production should be exiting its seasonal low next month. The speed of mandatory biodiesel implementation holds the key to preventing a collapse in palm oil prices.

Bio diesel capacity still needs to be developed due to Malaysia's high palm oil exposure, similar to how Brazil which is able to divert about half of its sugar output to make bio diesel. Malaysia is nowhere near that. Crude is the most stably priced energy product out there.

Lack of alternatives for the use of palm oil will cause its price to fluctuate and be more volatile than crude oil. As hyped up as palm oil is as a product, it still lacks some major upstream production alternatives. Malaysia needs to take up this responsibility as one of the major producers of palm oil.

Not only does bio diesel capacity need to pick up, but it must be able to be able to scale its output from high to low with as little cost as possible.

EPF declares 4.5% dividend for 2008

From The Business Times:

The Employees Provident Fund (EPF) Board had on March 16 declared a dividend rate of 4.50% for 2008, but this was lower from 2007 due to higher investment provisioning resulting from the sharp fall in global equity prices. In 2007, the dividend was 5.8%.

“Despite the financial meltdown, the EPF recorded the highest ever earnings of RM20 billion in gross income for 2008. This represented an increase of 9.36% over the previous year’s gross income of RM18.29 billion,” said a Bernama report.

EPF chairman Tan Sri Samsudin Osman said EPF’s investment portfolio for the year performed better at the gross income level compared to 2007.

“However, due to the sharp decline in the equity markets, a large provision had to be made resulting in a marked reduction in net income,” he said.

Net income for 2008 was RM14.26 billion, after deducting allowances for diminution in value of equities and doubtful debts, dividends for withdrawals, investment expenses, operational expenses, and death and incapacitation benefit payments.

This represented a decrease of 15.47% over 2007 net income of RM16.87 billion.

Equities accounted for 34.82 per cent of the EPF’s total gross investment income. The EPF earned RM6.67 billion from equities which was the second largest contributor to income in 2008 compared to RM5.37 billion in 2007.

“Up until September last year, the EPF was doing well in equities. However, following the effect of the global financial meltdown, our performance in equity investments recorded a drop of less than 20%, which impacted our dividend payout.

A grid of what percent of the investment allocation of the epf from their website:

The major concern here is that the loans and bonds exposure have been creeping up. The equity allocation has been relatively low at 20%. During the boom days of 1996, the equity allocation was up near 30%. But still, a loss is a loss.

Though they are declaring dividends, I'm not surprised if they have seen their overall portfolio dip by 5-10%. Especially if some of the loans and bonds have lost a bit of value due to market rates or defaults. 20% drop in equities is a 4% drop in overall portfolio. Say the value of the bonds and loans dropped 10%, that would equate to another 4% drop in the overall value of the portfolio. We're talking a 8% overall drop in the portfolio for 2008.

And yet the headline numbers are still paying 4% dividends. Where are the headlines for the principal performance? Sounds a bit ponzi-ish to me.

Stimulus plan fails to ignite market

From The Edge:

The government’s RM60 billion stimulus package unveiled on Tuesday to stave off a prolonged recession failed to ignite investors’ interest in local equities yesterday on concerns of more downside for the stock market.

Despite the initial surge in the morning session, interest faltered in the afternoon as investors were quick to lock in marginal gains.

As investors digested the details and effectiveness of the measures in the mini-budget, concerns amid a heightened aversion to risks include an economy teetering on recession, a ballooning budget deficit, continuing lack of corporate earnings visibility and political uncertainties.

While the huge stimulus package of 60 billion ringgit did surprise almost everyone, the reaction was an even bigger surprise...another yawn by the stock market. Can't dig ourselves out of a hole!

Exports drop 27.8 pct

From Bloomberg:

Malaysia’s exports fell the most in 15 years in January as the Asian economic slowdown worsened amid slumping global demand for electronics and commodities.

Overseas shipments dropped 27.8 percent from a year earlier to 38.3 billion ringgit ($10.3 billion) after slipping 14.9 percent in December, the trade ministry said in a statement in Kuala Lumpur today. The median estimate in a Bloomberg News survey of 16 economists had been for a 22.4 percent decline.

“It seems that there is no end to the onslaught of the global headwinds,” said Joanna Tan, a regional economist at Forecast Pte in Singapore. “Exports are likely to be pressured further in the coming months as the global economy gives little to hope for with regards to growth prospects.”

It's pretty isnane the numbers. While 27.8 pct isn't the worst, it isn't the best either. Malaysia is in the middle of the pack and probably should do around average, especially with its "balanced" manufacturing, commodities, and services industry.

New innovative finance options from developers

From The Edge:

Developers, hit by fallen sales, are scrambling to roll out new and innovative financing packages to move units, especially those already launched but not sold.

Sime Darby Property Bhd will up its ante on the competition with the offer of yet another round of attractive schemes under its third Parade of Homes campaign to be launched in conjunction with its participation at the three-day Malaysia Property Expo (MAPEX) beginning on March 6.

In addition to a “guarantee buy back” scheme, first introduced and for a limited period under its second Parade of Homes held last year, Sime Darby Property is going further this time round with the offer of a “special down payment scheme”.

Under the “guarantee buy back” scheme, the developer will buy back properties bought at 95% of its cost with no questions asked. The scheme will go on till June 15 this year, managing director Datuk Tunku Putra Badlishah tells The Edge Financial Daily.

The usual remedy for low sales is discounts. Lets see those prices drop!

Malaysia may face full blown recession

From The Star:

There is a 50% chance Malaysia will fall into a “full-blown” recession this year, said Malaysian Institute of Economic Research (MIER) executive director Prof Datuk Mohamed Ariff Abdul Kareem.

“Technical recession is almost certain. The 1.3% (real gross domestic product (GDP) forecast in January) is considered optimistic. In fact, I think the best-case scenario will be 0.5% growth this year.

He expected the fiscal deficit to increase to more than 6% of GDP if the second stimulus package was RM30bil, which is about 4% of GDP. Financing the deficit budget was not a problem as there was a lot of liquidity in the local financial market, which funds 93% of the government deficit.

However, he said it was “not about how much you spend, it is how you spend that matters.”

Looks like people are starting to get realistic. But the question on the stimulus is where will it go? Most likely to waste. Huge white elephant projects, lining corrupt people's pockets.

What makes people think that this stimulus will be any different from other past spending catastrophes?

Ringgit intervention speculation by Bank Negara

From the Business Times:

The ringgit headed for the biggest gain in more than a week as some traders said Asian central banks in the region entered the market to defend their currencies. The weaker exchange rate isn’t unique to Malaysia and reflected the strength of the US currency, Bank Negara Malaysia Governor Zeti Akhtar Aziz said in Kuala Lumpur today.

Bank Negara Malaysia intervened in the foreign-exchange market to ensure orderly market conditions, Zeti said in August last year. Such actions were not meant to affect its underlying trend, she said. She didn’t comment on intervention measures today.

Malaysia’s central bank has spent US$34.5 billion of its reserves to support the ringgit, causing a 27 per cent drop in the holdings since the end of June, HSBC Holdings Plc estimated in a report on Feb 18. In percentage terms, Malaysia was the most aggressive among Asian central banks in defending its currency, it said. - Bloomberg

Zeti says that currency intervention was not made to affect underlying trend while the data shows they are considered one of the most aggressive in defending their currency in Asia. Retardedness! Who are they fooling? They just keep throwing good money after bad.

Update on the US markets, AIG and more, DOW at 6800

From Finance.yahoo.com:

A relentless sell-off in the stock market Monday blew through barriers that would have been unthinkable just weeks ago, and investors warned there was no reason to believe buyers will return anytime soon.

The Dow Jones industrial average plummeted below 7,000 at the opening bell and kept driving lower all day, finishing at 6,763 -- a loss of nearly 300 points. Each of the 30 stocks in the index lost value for the day.

Investors were worried anew about the stability of the financial system after insurer American International Group posted a staggering $62 billion loss for the fourth quarter, the biggest in U.S. corporate history -- and accepted an expanded bailout from the government.

Big-name investors are just as cautious. Billionaire Warren Buffett predicted in his annual letter to investors Saturday that "the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond." He cautioned that did not determine whether the market would rise or fall.

First, its amazing how badly the US markets are deteriorating. Second, AIG 60 billion dollar loss. Who in their right mind can lose so much money? Third, Warren Buffett directly contradicted Ben Bernanke's statements. Bernanke is looking like a stooge who keeps screwing up.

A little insight on possible investment ideas

From Brad Setser's Follow the money:

Update: Jon Anderson of UBS argues that China’s electronics exports have collapsed in line with the exports of the rest of Asia. However, China’s low-tech exports — shoes, textiles, toys, furniture — have held up well. To put it just a bit differently, he argues that a lot of the press coverage about the fall in China’s low-end exports and the resulting fall in employment has the story wrong. China’s low-end, labor-intensive exports are doing (relatively) well compared to China’s electronics assembly business. He also argues that the fall in investment in Chinese real estate and related materials has added to the woes of other Asian exporters.

It's absolutely true that the lower end goods will be more sustainable than their more expensive counterparts. Overall, people will spend a much smaller portion of their income on lower value goods.

And from basic economics, we know that goods which claim a higher portion of a person's income are very elastic, while goods at the other end of the spectrum are inelastic. In other words change in income won't affect how much consumers behave towards the good. At this point, a good dividend payer which can make a reasonable amount of money in the low value goods department might be a reasonable bet to do well in this recessionary environment.

Of Toll Hikes and IPPs

From the International Herald Tribune:

Malaysia's government has reversed its decision to increase toll rates for five key highways following a public outcry amid an economic slowdown, officials said Saturday.

But consumer groups, truck and bus associations as well as opposition lawmakers had slammed the move, saying it would burden Malaysians.

Deputy Prime Minister Najib Razak was quoted as saying the Cabinet decided Friday to defer the hike in toll rates. Under contractual obligations, the government has to pay 287 million ringgit ($78 million) this year to compensate the companies that maintain and operate the routes, he said.

Road Tolls and the IPP contracts have put Malaysia under the microscope as to how investor friendly it is. Until now, I was under the impression that only if the current government loses popularity the risk goes up. But just as well, in economic hard times, the risk goes up as well. While I'm all for the prices of tolls and electricity being more "fair," from an investor's view I have to take into account the risk the government will change the rules midway through.

With the recent instability of the government, we are witnessing exactly how horrific it can be for an investor who bought into the government's promises and word as a sovereign nation. In effect the current government is the nation.

If the government loses power and another one replaces it, anything is up in the air. Even if the current government is losing power but has not yet lost out, it is a liability. They will resort to desperation to keep from losing power. This is the risk when dealing with developing countries that investors should be compensated for.