My Name Is Bond, 'Bond Analyst'

These guys deserve a big bonus. As highlighted by Zentrader, there were early spotters of "something deficient" in Transmile even as far back as November 2005 by the people at Ratings Agency Malaysia. Kudos to the team.

Back in November 2005, analyst Wee Yee Tat, issued the report with the heading: "RAM reaffirms AA3/P1 ratings of Transmile Air Services’ RM150 million CP/MTN; rating outlook revised from stable to negative".

http://www.ram.com.my/custom.cfm?name=press.cfm&id=1194

To highlight the crucial elements in his report:

a) The change in outlook is premised on the Company’s weaker balance sheet and debt-servicing ability due to its expansion plan and heightened business risks. As at 30 June 2005, the Company’s total debt and net gearing ratio stood at RM1,040.90 million and 2.17 times, respectively, compared to RM327.73 million and 0.52 times as at the end of FYE 31 December 2004. The additional borrowings have been utilised by the Company to fund the purchase of 4 new aircraft, i.e. MD-11s, in tandem with its plan to extend its intra-regional (or short-haul) air-cargo transportation services to the long-haul section.

b) Transmile’s gearing ratio is projected to remain high at about 1.0 throughout the tenure of the CP/MTN. The heavier debt burden has also somewhat weakened Transmile’s debt-servicing ability; its operating cashflow debt coverage ratio is now expected to average at 0.20 times compared to the previous minimum of 0.60 times.

c) Although RAM is cognisant of the tremendous business opportunities offered by the Asia-Pacific routes, it is also noted that competition is stiff. At this point, it is premature to conclude whether Transmile will be able to secure sufficient and sustainable loads for its new aircraft in order to generate returns from its investment.

d) RAM highlights that the MD-11s boast a capacity of 90 tonnes each, i.e. 4.5 times larger than the 20 tonnes of the Company’s intra-regional aircraft. Meanwhile, Transmile’s profit margins are seen to narrow following the capacity expansion as profit margins from long-haul routes are generally lower. e) Going forward, the Company’s operating profit before depreciation, interest and tax (“OPBDIT”) margin, which has historically ranged around 28% - 34%, is expected to come in at 25% - 30%.

Of course we have to highlight the big differences in the nature of the beasts (equity analysts vs bond analysts). The latter is primarily interested in the ability of the company to pay over the duration of the loan. It is hence concerned with cashflow, debt servicing, net margins and balance sheet integrity. Nonetheless, it would have been very easy to give an "easy review" on such a great growth story. What's incredible was that even with the "jacking up of false revenues", RAM still managed to drive at the important stuff and the indicators did not add up even with the "staging effects". Even with the "staging effects" by the culprits responsible inside Transmile, RAM concluded that Transmile would have had some difficulty in paying back the loan sum on time.

That's not all, RAM did a follow up review in August 2006, which was about the time Transmile became a favourite of international fund managers. This time Thong Mun Wai came out with a report with the heading: "RAM reaffirms AA3/P1 ratings of Transmile Air Services’ RM150 million CP/MTN, maintains negative rating outlook".

http://www.ram.com.my/custom.cfm?name=press.cfm&id=1416

All said, it would have taken a lot of guts for the analyst and manager to stick to their guns on such a hot stock. The equity analysts would have found it near impossible to discover the "problem areas" if certain people inside were hell-bent on devising false figures to prop up profits. Nonetheless, RAM rises a few notches in my books. While the negative ratings were with regard to their ability to repay the loan in question, it still drove to the fact that RAM held tight to its strict guidelines in analysing companies, and did not waver in its principles.

The Good, The Bad & The Fugly

Transmile Group Bhd said on Wednesday a special accounting audit had found there may have been an overstatement in its revenue by 30 percent in 2006 and by 36 percent in 2005. In the financial year ended 31 December 2006, invoices were issued and recorded for purported services to 20 companies totalling 333 million ringgit and representing 30 percent of the consolidated revenue stated in the unaudited consolidated results. The special audit also found that in financial year 2005, invoices were issued to 19 firms totalling 197 million ringgit, or 36 percent of Transmile's revenue.

The company said that assuming provisions are made for the estimated overstatements, Transmile will post a pretax loss of 126 million ringgit, from a pretax profit of 207 million ringgit in 2006. Earnings of 120 million ringgit in 2005 would change to a loss of 77 million ringgit.

Reverberations:

a) Much worse than expected because there is a motive to inflate revenues, which means business model might NOT be as sound as it appears. If there was a a mis-statement of assets with no documentation that's not so bad. If it was theft, thats not bad at all. But jacking up of revenue is sinister and eats at the heart of the viability of Transmile's business model.

b) Fall out will drag on, there will be charges filed for knowingly misleading investors. There could be charges filed for misleading the new buyers into Transmile for misrepresentation. The top few guys are headed for some rough waters, and the auditors responsible during that period should be sued as well (we have to make auditors earn their fees, they cannot throw their hands in the air when bad things happen, they cannot have the cake and eat it and not get fat).

c) The losses means PER will be thrown out of the window, which means we will have to look at break up value plus some premium, no point looking at revenues anymore. Hence we can start at RM5.20 - RM6.20 as the bottom fishing levels. Well, if you can't sell Transmile now, you can always sell Pos Malaysia first.

d) The worst thing that can happen is Kuok getting out of the company. A bit unlikely as who will step in to buy? Plus, with new appointees to the company with Kuok's blessing, may indicate a willingness to rough it out. When fear surrounds the stock, must look at the intrinsic value of the company: its a viable business; great landing rights; great partnerships with international courier companies; important link up for Asia Pacific zone especially into China.

Genius On Sale

Finally, the out of stock album by Paul Ponnudorai is finally back in stock as of today. Click on link below to sample some of the brilliant songs, and you can order straight away - cdbaby is a safe internet retailer, can use almost any credit card. Remember to buy a few, makes for an excellent Christmas present.



http://cdbaby.com/cd/ponnudorai

Tale Of 3 Cities

Bangkok - Thailand may be declaring a state of emergency later today as the Constitutional Tribunal will be announcing its verdict in the dissolution of both major parties. Nine members of the Constitution Tribunal will meet this afternoon at the Supreme Court to express their individual judgements on the party dissolution case. The case involves Thai Rak Thai and the Democrats as well as three small political parties accused of legal violations in connection with the April 2 polling last year. The likelihood of mass protests being held in Bangkok prompted the Australian, British, Canadian, French, Japanese and US embassies to update their travel advisories to warn their nationals away from possible demonstrations in Bangkok on Wednesday and Thursday. Some 13,000 armed forces personnel have been mobilised throughout the country today in anticipation of likely protest rallies which could lead to violence.

This is on the back of an announcement by the Finance Ministry yesterday of a cut its 2007 growth forecast to a range of 3.8% to 4.3% from 4-4.5% earlier as investment and consumer sentiment have remained weak due to political uncertainties. Private-consumption growth is now projected at just 2.3% this year, compared with 3.1% last year and the previous forecast of 3.7%. The overall scenario does not spell good news for Thai stocks at all.

HK - The three-month Hong Kong interbank offered rate rose to 4.567% on Tuesday compared to the 3.9% average in January. This suggests a higher funding cost for local lenders resulting from declining liquidity levels in the banking industry. When HIBOR reaches 4.5 percent, banks may have to raise their best lending rates to offset higher costs. Please refer to the posting on "HKD - The New Carry Trade" for more details of the backdrop. Hong Kong banks may raise the prime rate by 25 basis points in one to three months to protect profit margins amid rising cost of funds. The problem is in Hong Kong they need to keep lending rates low to boost loan growth. On the other hand, banks are facing a higher cost of funds and lower net interest margins, particularly for mortgage loans on which interest rates are based on the prime rate. Market watchers say the need to raise interest rates this time is more pressing than a few months ago, as the previous surge in HIBOR was due to several large initial public offerings that sucked out funds from the banking system. This time, the falling liquidity level could be due to fears of a bubble forming in the A-share market, which has probably caused investors to pull out their money from Hong Kong's equity market, which is 40% made up of Chinese enterprises. The rising yuan has also highlighted the weakening of the Hong Kong dollar. The mainland currency has risen past the 7.65 level against the US dollar. The three-month HIBOR has pushed up to 4.6 percent, rising 20 basis points in the past 10 days, while the Hong Kong dollar has weakened to just over 7.82 against the US dollar. This will put pressure on HKMA: right now investors are leaking funds into other currencies, just in case. If that drip turns into a torrential thunderstorm: things could look very nasty for HK stocks and HKMA will have to jack up rates very significantly (maybe to 8% or 10% even) in order to stop outflow of funds.

Shanghai - Authorities finally resorting to various fiscal measures. This time its raising the stamp tax on stock trading to 0.3% from 0.1%. In the 16-year-plus history of China's stock market, a stamp tax hike usually led to a slump. China started to collect a stamp tax on the Shenzhen Stock Exchange in July, 1990, but only on sellers at 0.6 percent. Four months later, the buyers were also subject to the tax. The tax triggered a downturn in the Shenzhen market, forcing authorities to cut it in half to 0.3 percent in October 1991. At the same time, the Shanghai Stock Exchange also began collecting duty on both sides of trades. On May 10, 1997, the tax rate was upped to 0.5 percent, partly blamed for a bear market that lasted until mid-1999. The rate was lowered to 0.4 percent in June, 1998 before being adjusted to 0.3 percent one year later and to 0.2 percent in 2001. Regulator further lowered the duty in January 2005 to 0.1 percent in order to boost stock prices during a market slump lasting from 2001 to 2005.

Still, based on yesterday's posting on China, the early 5% correction in Shanghai markets is likely to be erased by the end of the day. The move will not be enough to poke holes in the bull.

Can The Chinese Markets Correct?

Looking more closely on the Chinese equity markets: I can only see funds being poured in and nothing much in having a release valve to get out. Foreign funds invested in Chinese stocks have mostly sold down but are still parked in China to re-enter at lower levels. Bank deposits growth has been slackening considerably over the last 6 months as people take funds out of deposits in banks to play the markets.

Liquidity has been growing non-stop for the past 10 years in China. How many times have analysts called for a correction in China properties, especially in major cities. I think I have seen more than two dozen such reports just over the last 3 years. Till today, despite the many increases in interest rates and even land construction tax, we have not seen any sizable correction in properties.

Up till end-2005, Chinese equity markets have had roller coaster days. There were sustained periods of bearishness in the 2003-2005 markets: generally the markets in China behaved like a normal market then. 2006 was a significant year in that daily volume traded surged, and foreign participation via approved funds into China also surged. The froth from China property gains were looking around for the next asset class to speculate and stocks looked very good in 2006. This smacks of a magnet attracting surplus liquidity driven by a good story.

Why the heading "can China equity markets correct?" ... Its because there is NO outlet for the liquidity in the system. The yuan being not convertible outside of China exacerbated the situation. There must be alternatives and options for investors: right now, its just properties, stocks or deposits. The deposit rates are still way too low to be a viable option to attract funds, it has to be at 5% or 6% to start sucking funds from the stockmarkets.

The gap between bank lending rates and deposit rates is way too big - in a way Beijing has been subsidising bank profits this way for way too long, and way too generous.

Hence even with fiscal measures such as the recent 20% property gains tax, it is probably not enough to derail the bull. When there is no alternative or valves to allow steam to be let out, Beijing will have to resort to extreme measures to at least calm the markets down. Beijing cannot afford a 40%-50% meltdown, that will have enormous social repercussions and public reprisals. Neither will there be an alternative investment asset class to lure funds away. Hence it will have to be a devastating fiscal / monetary measure to prick holes in the bull: e.g. a temporary 25% tax on all stock trade gains ( no similar rebate on stock losses) till further notice; jacking up deposit rates to 5% or 6%; tightening brokers' capital requirements and leverage.

We all have to hope that the Beijing politicos are smart enough to know they are not so-smart when it comes to financial markets and financial economics. One must be humble enough to know: its the first time they are trying to go from a planned economy to a market economy; its the first time property and stocks have gone stratospheric; its the first time there is so much surplus and liquidity in the system. If Beijing is wise about that, then they will heed advisors from HK, Singapore and even Washington - the worst scenario is Beijing thinking it knows whats best and go its own way. This is not a new road, you don't need to reinvent the wheel or think that it will be different for China - it will be the same, just take options A, B or C... the rest of the financial world already know the consequences for each option. The thrill/fear now is to see which option China takes.

Tom, That's Not The Way Yum-Goong

I think Thaksin is a crook. I think Thaksin has taken advantage of his position and power for financial gain. I am happy he has been ousted. I think Thaksin has done some good for Thailand but the benefits accruing to himself were obscene. However, the ruling junta has made too many errors since then.

a) Too obsesssed with getting Thaksin or his family members in the slammer, by hook or crook. Just freeze their assets in Thailand and file charges, if they fail to show up and answer, repossess the assets, don't go to the press every couple of days to do this and that to Thaksin and his family. Be professional about it instead of going about it in a "gossipy-housewife-vendetta" (no slur on normal under-appreciated housewives).

b) Too paranoic over media control. Thai public welcomed the junta to get rid of Thaksin, and now most of the public feel that the junta has stayed too long and imposed themselves on some of the important liberties deserving of a democratic nation. The closure of a newspaper, and the silly battles with YouTube and now Thaksin's website smacks of "small-minded-ness" and "not attune to doing big-things". Don't sweat the small stuff. Also as we speak Thailand has blocked some 45,000 websites.

c) South Thailand problem not being handled properly. Failure to understand root of problem, moreover can suggest making Buddhism the official religion of the country at this sensitive stage??!! Watch the bombings going central and north Thailand to get more attention.

External Shocks

If we were to ignore the China equity markets (cannot read it anymore), the rest of the global equity markets are at a see-saw stage. Generally the undertone is still bullish, awaiting further signals from a number of US economic figures to be released towards the end of this week. All said, bulls and bears seem to have struck an understanding, and most equity markets are in a "safe" territory" (no comment on Chinese equities). Hence it is highly likely that any correction will be due some external shock to the global economy. That is very hard to grasp or discount properly. Due to the inter-connectedness of all markets nowadays, investors must constantly assess the probability of external shocks to the financial system. Just because its external, it is harder to predict, but its there.

Equity markets can discount future earnings; they can draw trendlines for PE ratios over the years and projected overselling and overbuying levels; you can incorporate the interest rate trends vis-a-vis earnings growth; even trends in commodities and soft commodities - but how do you incorporate external shocks to the equity model? Which was why the examples of external shocks can be debilitating. The February selldown by Shanghai on a silly rumour was felt from Tianjin to Timbuktu to Tanjong Malim. The US housing markets' weakness was NOT an external shock but a exaggeration of a fundamental economic factor. The yen carry trade was an external shock factor, which was exaggerated by the bears. Hence, every quarter it would be prudent to highlight the possible external shocks in the coming months on the global equity markets. As we cannot quantify properly, I can only do a guesstimate on the financial impact: $$$$$ being the most disastrous and $ having minimal financial negative impact.

a) Shanghai/Shenzen meltdown - a meltdown being a correction of at least 20%-30%. It will hit HKSE harder than most due to follow-on effects. $$$

b) A sharp correction in USD - the likelihood is there as a response to the yuan and to redress the deficit; and/or China diversifying away from holding USD; a reversal of the yen carry trade compounding matters. $$ (In fact, I think there could be more benefits for the overall global equity scene with a sharp USD depreciation over the longer term)

c) Oil price shooting above US$70 - nationalisation in South America and uncertainty in Nigeria. $ (if it goes above US$90, then we can be scared)

d) Sudden selldown in emerging markets currency and/or stocks - all it takes is one country to take a tumble, it could be Turkey, Brazil, South Africa ... and it could have repercussions on all emerging markets. $$$$

e) Hedge funds implosion - the markets should be able to absorb a few of them failing without too much worry, but more regulations are needed on this asset class. $$

f) Private equity implosion - will be triggered by a sharp succession of interest rate increases because their funding for deals depend on low rates, but should be able to see this from afar as it will not be an overnight thing. $$$$

g) Risk aversion mentality - Right now global investors still have a normal investing attitude but a risk aversion attitude will sharply lower all valuations, especially in emerging markets. Factors that could cause that: US bond yields rising above 5%; major default in an emerging market; plus any of the above happening will increase risk aversion mentality. $$$$

Its Elementary, Watson

The Singapore index plunged 400 points last Friday after a mistake which allowed a broker from DMG & Partners Securities to key in an order to sell 400,000 DBS shares at S$0.27. DBS' last traded price was S$24.50. The broker later said that he actually wanted to sell the warrants and not the parent company shares.

Any one who has been a dealer will confess that mistakes are part and parcel of the job. However, together with hordes of others, I am very shocked that the trading system in Singapore would allow such trades to get past the systems. A good trading system would have identified this as a human error, even the yahoo email will ask "are you sure you want to delete these spam files?". I find it very disturbing that SGX do not have in place these "circuit-breakers". There must be a limit in the volume to be entered and also a control on the price. The usual rule of thumb is that buys and sells cannot be more than 30% the previous day's closing price. However that can be allowed to go +- 50% if the exchange so desired. The usual rule of thumb is that for issues/shares or warrants trading below 50 cents, the rule does not apply. Even a +- 50% circuit breaker would have eliminated such human error. Its a bit embarrassing no matter how you cut it. Not for the broker but for SGX.

Apparently the SGX trading system only recognises the client's financial limit when deciding if a trade can go through - it does not recognise the price keyed in. For the 400,000 some 187,000 were matched - the buyer probably thought this was better than the lottery. In the end, all the trades were able to be canceled.

The ramifications of this are wide ranging. This is unacceptable, all trading systems, even KLSE, have proper limits and checks to reduce human error. The present SGX system is flawed. SGX should thank their lucky stars that this was highlighted with such a minor mistake. A bigger, well calculated plan would see somebody accumulating loads of warrants, options or futures and doing havoc on closing day price for certain shares, especially illiquid ones.

Wanted: A One-Armed Economist

One of the funnier stories I heard was a politician who was asked what was the first thing he would do if elected. The politician replied, "I will hire a one-armed economist."

I have always taken the piss out of economists. I did study the subject for two miserable years and if you take away the charts from economists, they would not have anything to talk about. Think about it!!! They always need to draw a chart.

A normal economist prediction would go something like this: " I think the US equity markets may have more upside in store as the prospects of lower rates by the Federal Reserve is still intact, though it looks more like 4Q rather than 3Q. On the other hand, the whole lowering rates scenario will be blown out of the water if future housing starts figures continue to surprise on the upside". Doesn't that pxxx you off, that's why we need only "one-armed economists" so that they cannot say "on the other hand..."

Again, going back to my favourite definition of an economist: Someone who tells you why their previous prediction went awry.

HK Dollar, The New Carry Trade

The HK dollar has been experiencing heavy selling even within its allowed trading band. So much so, the yuan has already appreciated past the value of the HK dollar and going further ahead on its own. Last year the yuan was still some 5% cheaper than the HK dollar. The HK currency is pegged to the US dollar. The economy was almost ruined in 1998-2000 when the island state management refused to devalue the HK dollar despite all other Asian currencies dropping like flies around them. That had the effect of pricing all goods & services in HK to be totally unsustainable and unfeasibly high. The secondary effect was that many industries had to be relocated out of HK to southern China in order to remain competitive. Even big HK listed firms had to outsourced as much of operations as possible NOT to be in HK in order to cut costs.

HK was lucky to recover as fast as it did, not so much because they did not devalue their currency but because of its proximity to China. Over the last 10 years China has stepped up to the plate and turned itself into the outsourcing capital of the world. Growing demand for professional services by Chinese mainland firms have jump-started many of the services sub industry of HK. Richer mainlanders visited and spent ferociously in HK. Without China, HK would have been in the doldrums still. The growth in listings of H-shares in HK have boosted financial services both ways. The surge of property prices and projects have given many in the sector something to diversify into during the down days.

The selling in HK dollar is largely prompted by the disparity between HK interest rates and US interest rates. There is a gap (HK rates lower), and since it is pegged fully to the US dollar: savvy investors are borrowing in HKD to invest elsewhere, or just park in USD deposits to lock in the gains. There is an additional chance that the HK Monetary Authority might repeg the HKD cheaper, so the HK carry trades would get a super boost should that happens as well.

The local currency hit a 22-year low last Wednesday, trading at 7.8256 to the US dollar. HKMA is not certain for now how the market would react if the Hong Kong dollar continues to fall, and the authority will have to intervene with the market, ensuring the currency is traded between the convertibility zone of 7.75 to 7.85 against the greenback. The danger is that the market forces will probably force HKMA's hand. Imagine big asset holders getting more jittery, they would sell assets to convert their HKD to other currencies, in particular the yuan (if can find a bank to do it). Market forces can swiftly turn itself into a whirlwind and when sellers in properties and stocks start doing the same thing, the HKMA has to step in immediately. Talking about it now will only bring forward the inevitable. The HKD has been overvalued for way too long.

Plus, if the HKMA were to repeg to say 8.2, this would be a short sighted move. HKMA will have to:

a) disband with the pure peg to USD altogether because its trade portfolio is not entirely USD important now

b) free float, while excellent, it will not happen, case closed

c) repeg but to a basket of currencies more closely linked to trade profile of HK, e.g. 25% yuan, 25% USD, 25% euro, 25% yen as a start

If the HKMA were to repeg to 8.2 or 8.3 but still with the USD, they will have to redo it again very soon and the peg is not a true reflection of underlying economy. A mismatch here bring problems to the underlying industries in HK and plays havoc with their competitiveness. Hence even in a repeg to the USD, it is best to also widen the allowed trading band. For example, if the repeg was to 8.2, at the same time announce that the peg would be allowed to trade with a 0.3 HKD band either way. That means effectively the peg can be 7.9 to 8.5. It gives HKMA more room to move and manage their financial economics better.

We have to appreciate that the HKMA MUST always put up a front that they won't devalue (even if they are thinking about it). Just the hint that they are thinking of a devaluation would sent aunties selling stocks and properties and converting them to AUD, Euro or Canadian dollars. Current BLR is at 8.0% or even 8.25%, not exactly comforting. That's partly why HK properties did not mirror the surges in Japan, Singapore or China big cities. At 8.0% plus a weakening outlook for HKD, properties won't be going anywhere.

Stocks That Didn't Do So Well

Some of you might have come across a blogger (ichi) who was pretty pissed off with my recommendation on Naluri as I did not answer his queries and then took the post off my blog. My bad, my apologies. I was just 3 months into my blogging venture and did not fully appreciate the do's and dont's. Btw it was back in end-2005.

Doing a public blog is a thankless thing. You highlight the ones you think will do well. If it does, good. If not, they will haunt you back. If you take the posts down, it will haunt you even more. So, I leave them on whether good or bad. If the strike rate is bad, the don't read la, no point following, I am ok with that. If the stock rises and falls and rises, I won't be able to hold your hand and tell you when to go out when to buyback.

I highlight stocks I like, if they do not perform well, so be it. I think they should do well, maybe timing not so good, who knows. Counters which some have complained Epic, RB Land, UEM World, Tebrau, n2n ... to me what I wrote still stands. They may not have performed as well in that short duration but that does not detract from what I wrote. You can always choose not to read.

Notable Developments

US markets on a 4 day slide despite the Dow gaining more than 100 points in the opening period yesterday. More likely, funds are squaring off positions ahead of Memorial Day weekend. Data released recently suggests that the Fed may not lower rates by 3Q as previously anticipated.

On the plus side, oil prices have dropped significantly (Nymex crude eased US$1.50) over the last couple of days, which should be good for equity markets. However owing to the holiday ahead, much of the data has been ignored.

Now whenever Alan Greenspan speaks, nothing good seems to come out. First is the "recession" thing in the US. Now its the China overvaluation. I think Greenspan can comment on the China issue. I still think he overstepped his boundary when he said what he did on the plausibility of recession in the US, as that went into the territory of Bernanke and would impact how Bernanke's policy would work. Greenspan should not impose his views there as investors may read too much into whether Greenspan is a leading indicator or that Bernanke holds absolutely contrarian views to Greenspan. Must give your successor some semblance of professional courtesy. As for the China overvaluation thing, well, get in line Alan, you are number 999,999,999th person who believes the China markets cannot last.

Sometimes I dread to call for a correction in a specific market because its quite chicken shit. Heard of the phrase, if you are bearish long enough, eventually you will be right. Hence I am loathed to call for a sell on markets, unless I can feel that the correction is near. For the China situation, the more I look at it, the more resilience I can see in the upside, and that any correction will be swift and well supported by the deluge of foreign funds as well. The trouble is that most of the foreign funds managing China funds have sold out, and now is shouting for the markets to correct to allow them to buy back at lower levels. Its a strange situation.

Shorts are having a bad time in US markets. Most of them were quite short on Nasdaq stocks coming into last week and had to buyback before the upcoming Memorial weekend thus pushing Nasdaq much higher. I doubt shorts would want to retest the resilience of the bull anymore.

The 16% jump in sales of new homes in the US again underlines how wrong the bears were on the US housing slowdown back in March. Now all so quiet. The danger is that it now puts the Teasury bonds on the way to go past 5%, though still about ten basis points away. The 5% level could prove to be a significant figure to persuade more bulls to retreat to safety in the future.

Locally, the KLCI has retraced well to a safer level to build a base. As long as there is no sharp contraction in China, the uptrend for the ringgit will ensure that the bull run is intact. How far could the ringgit go? Actually I see 3.15 this year alone. By allow the ringgit to rise in value, it automatically restructures the economy and its well-being. Initially following the 97 implosion, it was necessary to accumulate trade surpluses and reserves, and keep the currency artificially low to gain FDI and competitiveness. The situation has evolved and thankfully Zeti is smarter than most by allowing this to happen. If we keep currency artificially weak, we will not be able to move up the value chain, and would be too exposed to exports. Now FDI views the entire country favourably with freerer capital flows, and strengthens Malaysia's trade supply chain.

Market's Prognosis

It is surprising to see the markets going up but accompanied by lukewarm volume. To technical analysts, that is never a good sign. To momentum players, that is a sign to get out. However, that is what has been symptomatic of almost every market over the last 6 months. The general investing community keep looking for reasons to go down, reasons to reduce their holdings, fund managers keep looking for justifications to lock up profits and go away in May - but they all can't do so in a convincing manner.

Even the US markets are showing similar signs, up but not excessive volumes. Rather than seeing this as a technical weakness, I would see it as a sign of uncertainty and investors being not entirely convinced of the bull run going further with conviction. Even in the US, a similar scenario is unfolding. Shorts will pile up but then they themselves get nervous as the market does not slip up much, then they have to cover pushing prices higher.

Like it or not, the same factors driving this bull run are still around:

a) money supply growth over the last 4 years resulting in the present liquidity in the markets

b) benign inflation and interest rates (though US inflation has somewhat perk up of late but not dangerously so yet)

c) emerging markets responding well to stronger currency and trade surpluses, and corporate reforms of the past

d) private equity money keep taking big companies off the table, and at the same time raising valuations of same industry stocks (e.g. you try to take Dow Jones private, somebody tries to take Reuters, then otehr related same industry stocks get revalued upwards as well)

e) listed corporates are still awash in cash, the highest levels ever, hence the consistent buybacks and canceling of shares to boost eps - now in the US about 5% of shares are being taken off the table annually

f) corporate earnings are still good vis-a-vis interest rates, no competing alternative for good investments

g) the danger is whether markets overshoot on the high side like China

h) dangers of yen carry trade and US housing slowdown have been exaggerated as argued before

Still, when you can so no danger, the danger is external usually. Some external event is the more likely source for scaring the markets. Other than that, its hard not to stay bullish. Have to stop commenting on the China markets, it seems the only ones thinking it is excessive are all foreigners. It will correct, let it take its own route.

Local stocks looking good:

YTL Corp - Still like the upside (not the owner) for the stock. Trading pattern excellent still.

CSA - Independent directors calling for higher bid from parent, that's a very crucial call and chances are 75-25 that the parent will at least have to up the bid. May not get RM4.20 but at least 10% higher than the RM3.50. The fact that its the independent directors making these statements is highly significant and rare in Malaysia.

HLFG and Hume Industries - Things are brewing there as well but am still digging for the time being.

AMMB & AIGB - Almost as attractive as the above twins.

Paul Ponnudorai - Simply The Best

Been to many of his gigs around Malaysian pubs, shared many a Black Label on the rocks with the man. Know him only casually. As we both came from the same hometown, there was instant familiarity. Paul is easily the most gifted musician from Malaysia. Unfortunately the country is not ready to recognise greatness in his form of musicianship, neither is Singapore. I can also lump Indonesia, Thailand, South Korea, Japan and HK into the same group - all victims of pop culture to the detriment of recognising real musicianship and musical integrity. The only country in Asia which I think has a higher level and more varied base of appreciation is Taiwan. If Paul were to ply his trade in Australia, UK or US, I think he can achieve a similar level appreciation akin to John Legend or Norah Jones. Still, I think Paul would stand a better chance of getting the right exposure by playing at the various music festivals in Singapore. I believe great things will come for those who have been blessed with significant gifts at birth, at the proper time, in His time.

That's the thing, we need an international magazine like Time to highlight what we should know ages ago. Why do we need a foreign source to tell us that someone in our local shores is great? Is that the validation we need before we recognise real ability? Please don't be crass by awarding a Datukship to Paul now!

Readers in Singapore should try and catch his gigs, I think he might still be playing at Harry's Bar. Paul's brilliance is taking any song and making it different, new and refreshing. His guitar playing is like a pandora's box, its amazing to see what he can do with it. In 2002, lengendary trumpeter Wynton Marsalis showed up at a performance and was so taken by it, he grabbed his instrument and went onstage to play alongside a Paul. Marsalis said "Ever since I got off the plane I've been hearing about nothing but you". The pair jammed together for the next two nights.

Paul is a bit like Jose Feliciano coupled with Tommy Emmanuel, but with the jazzy dexterity of Earl Klugh. Plus he can sing as well, not the American Idol type, but from the heart. Available album, Right On Time. Go to cdbaby and have a listen to all the songs on his album, order a few and give them as gifts, your friends will love you for it. Listen to Killing Me Softly, an instrumental that haunts you even more without the words. The melody lines taken and the phrasing grab your heart and soul and demands to be listened in totality - you just have to surrender. Listen to his rendition of 500 Miles and you can feel that he has walked the bloody "500 Miles" on his own terms.

http://cdbaby.com/cd/ponnudorai

Article in Time magazine:

http://www.time.com/time/nation/article/0,8599,1619102,00.html

Play Nice

G-8 meeting this week in Germany. The finance ministers will be discussing 3 main issues: 1) how to make hedge funds more transparent; 2) aid to Africa; 3) climate change issues. There is apparently no mention of excessive valuations in financial markets or excessive money supply growth ... hmmm! They obviously think that market intervention is not the correct strategy, and also the current global bull run in stocks is OK. and within limits of sensibility. Other than that, better and stricter regulation on hedge funds is long overdue. The adoption of more regulations over hedge funds will go a long way to cushion the time bomb.

Wolfowitz finally out of the World Bank. Surprisingly, Henry Paulson will not be attending the G-8 meeting. Something more important on his calender, the Chinese visiting Washington on May 23 onwards. I don't think Paulson is giving a lot of face to the Chinese, rather I think he wants to stay around to help pacify the "anger and rants" by certain lawmakers on China's role to help redress the US trade deficit.

The hedge fund issue is contentious with some G-8 members. Britain, the United States and Japan are still uncertain over any strict guidelines. The systemic risks are getting higher as these funds can also leverage. At the end of 2006, around 9,400 hedge funds operated worldwide, controlling assets of some US$1.4 trillion. That's more than twice as many hedge funds as operated five years ago, while funds under management have nearly tripled during the same period. While I am basically for free markets, the developments of the global economy over the last 5 years have made each and everyone connected. When there appears significant players within a group with substantial capital and leverage, it could cause a systemic implosion, that is what we want to guard against.

Already China's Vice Premier Wu Yi has already signaled some offerings prior to the visit by widening the trading band for the yuan. He also said that the China-U.S. business and trade relations are of win-win in nature., and that China's exports brings incontrovertible economic benefits to the U.S. Just to preempt the inevitable anger and protests, Wu noted that "attempts to politicize trade issues should be resisted." About half the cabinets of China and the US will meet in Washington tomorrow for their second in a series of meetings. And the focus will be on how to head off American pressure for a full-blown trade war with China. While there isn't much being written for the time being, I think certain members of the congress will make radical statements and even antagonistic claims against China over the trade issue. Mind you, they also need to stand out with the elections next year. I believe some American lawmakers will try to capitalise on the issue to win political points. Look for all presidential candidates to give their two cents on the issue - again, when placed against contenders, everyone will try to outshine the others, expect some fiery comments. It will not be an easy week for Wu Yi and Paulson. Morgan Stanley chief economist Stephen Roach told a hearing of three House of Representatives subcommittees last week that "by going after China, you in the Congress are playing with fire". Throwing the gauntlet down to China will result in the US imposing restrictions or duties on trades with China. China will still survive. The US needs to appreciate the delicate balance of a planned economy trying to adopt a capitalistic free market economy, with loads of inefficiencies still in the financial system. Got to work with, not against the big wigs. Roach rightly pointed out that Congress's case relied on flawed macro-economic analysis "focusing on a large bilateral trade deficit with China rather than on an unprecedented domestic savings shortfall that gives rise to a large multilateral trade deficit". Sanctions on China "could quickly impact the rest of Asia, which has become increasingly integrated into a China-centric pan-regional supply chain". Its high time address the US savings rate, and not just look at the external party to blame your woes on.

Naturally its not all "bad for the US", as a matter of fact China needs to address a few issues as well:
a) removal of state subsidies in the form of tax deduction and fuel costs
b) anti-dumping issues
c) much stricter imposition of patent, IT and trademarks

At the end of the day, the US congress has to realise that at least 60%-70% of the exports from China are funded or owned (or partially owned) by MNCs, many of them US companies. They are just relocating the production side to China and re-exporting back. You kill the outsourcing, you kill the cost savings for the MNCs (which I think is a significant factor driving profits for MNCs over the last 5 years). Its certainly not black and white, but many shades of grey.

Its Curlin!

I have ranted that the horse blundered in Kentucky Derby and the jockey did a poor navigational job which only saw Curlin rattling home for 3rd. The second leg of the Triple Crown saw Curlin show its true colours. A depleted field meant little traffic problem this time for Curlin. Curlin nipped Kentucky Derby winner Street Sense by putting his head in front on the final stride, winning the Preakness Stakes in a riveting finish Saturday and ending any chance for a Triple Crown this year. Street Sense seemed to have the race won after another of his long rallies, taking the lead in the stretch. But the colt was unable to hold off Curlin's late charge thanks to a much better ride by Robby Albarado.

Curlin came into the Preakness with just four career starts, including a third-place finish in the Derby just two weeks ago. Curlin won his first three races by a combined 28½ lengths, and was well back in the field of nine. As Hard Spun swung into the lead with a three-wide move, Street Sense started to roll under Calvin Borel. Street Sense went to the outside in the stretch and moved into the lead, and the crowd began to cheer in anticipation of a Triple Crown bid in the making. But Curlin came flying along the far outside, and took dead aim at the Derby winner. He caught him on the final jump and, just like that, Street Sense was a beaten horse.

Curlin, who did not race as a 2-year-old, was purchased after his first race: a 12½-length romp at Gulfstream Park in February. The price was a reported US$3.5 million by a group that includes Kendall-Jackson Wine owner Jess Jackson, Padua Stables, George Bolton and Midnight Cry Stables. The colt hit a US$650,000 jackpot by winning the 1 3-16th-mile second jewel of the Triple Crown, boosting his career earnings to US$1,652,800. The winning time was a lightning-quick 1:53.46. The record time is listed as 1:53 2/5, which converts to 1:53.40. The record is shared by Louis Quatorze in 1996 and Tank's Prospect in 1985.

The likelihood now is Curlin will win the final leg, the Belmont Stakes as well. Even though its no Triple Crown, its amazing for a horse in his fourth start to achieve what he did, and it looks like Curlin is still learning to race well. The pity is that after the upcoming Belmont Stakes, there is a high chance that he might not run again to save him for stud duties. Thats because its difficult to have an entire (not gelded) that has won significant races. Colts are usually gelded to improve their performance, particularly if they perform badly in its first few races. Well, if somebody who can do horse talk lets them know their fate, I think they would try harder.

Curlin can basically print money by having sexual encounters day in day out. No more danger of running around the track on wafer thin legs, with the possibility of shattering any one of the legs everytime it runs - and then have its nice little brains blown to bits. The owners are unlikely to risk the horse by running him a few more times. Curlin can probably get US$25,000 to US$50,000 per successful mating. Why would you want to risk running him on the track? Plus if its early sons and daughters perform well on the track, Curlin's stud fee later on could balloon to even US$100,000. Of course, his stud fees would fall if its progenies fail. Currently some common stud fees for guaranteed live foal for some popular studs:

A.P. INDY , 1989 Seattle Slew--Weekend Surprise, by Secretariat

2007 Stud Fee: US$300,000 Live Foal
ARAGORN , 2002 Giant's Causeway--Onaga, by Mr. Prospector
2007 Stud Fee: US$30,000 Live Foal
DIXIE UNION , 1997 Dixieland Band--She's Tops, by Capote 2007 Stud Fee: US$50,000 Live Foal
DIXIELAND BAND , 1980 Northern Dancer--Mississippi Mud, by Delta Judge
2007 Stud Fee: US$50,000 Live Foal
GULCH , 1984 Mr. Prospector--Jameela, by Rambunctious
2007 Stud Fee: US$30,000 Live Foal
MINESHAFT , 1999 A.P. Indy--Prospectors Delite, by Mr. Prospector 2007 Stud Fee: US$100,000 Live Foal
ROCK HARD TEN , 2001 Kris S.--Tersa, by Mr. Prospector
2007 Stud Fee: US$50,000 Live Foal
SMART STRIKE , 1992 Mr. Prospector--Classy 'n Smart, by Smarten
2007 Stud Fee: US$75,000 Live Foal

The most popular in southern hemisphere is Zabeel with a fee of NZ$100,000 a pop. But the top gun is Redoutes Choice who gets A$250,000 per serve. His sire Danehill was A$210,000 and that was a private fee. But why would people pay so much. well, the 35 Redoute’s Choice sold last year for an average of A$710,000.

Of course, first Curlin has to win the Belmont Stakes. If anyone knows horse talk and tells him what's in store should he win the Belmont Stakes as well, I bet he'd run like he has never ran before! Incentives, man!

Two Steps Back, One Step Forward

The People's Bank of China said on its Web site late Friday that it will raise the benchmark lending and deposit rates by 18 basis points and 27 basis points respectively. This will be in addition to another 50-basis-point rise in the reserve requirement for banks. The PBOC also announced the widening of the yuan trading band from 0.3 percent to 0.5 percent against the US dollar.

Now it appears the PBOC is getting serious trying to halt the China stockmarkets. However, the widening of the appreciation band for the yuan will actually provide good support. PBOC had to do something with the yuan as there is a big visit to Washington this week by some Chinese big wigs. This is to provide some solace for Paulson to pacify the threats of American lawmakers. The rumblings are that there will be more tough questions asked during the visit. Unfortunately by allowing the yuan to gain more ground, it stokes the stockmarkets in China even more (currency gains in outlook).

Finally PBOC is doin something with its deposit rates, it is still too low vis-a-vis the lending rates. Deposit rates need to go up even more aggressively so that it can present as aviable counterbalance to soak up speculative funds.

Initially we may see a drop in the China markets but it is difficult to envision a dramatic correction as the yuan issue will perk up bottom fishers.

Rumblings At YTL Corp

Not many analysts like to research the group because they tend to keep too many things very close to their chests. A number of foreign research houses will only give a cursory view on the group, with little conviction going forward. As I am in favour of stocks with probable catalysts in the near term, I am beginning to warm to YTL Corp.

Suffice to say that the group is well managed. It would be a bit boring to hone in on the wonderful power generation, YTL-e's Wimax, YTL Cement's good outlook, etc... that everyone knows. The RNAV of the stock is anything between RM8.50-RM9.80 depending on which report you want to read. I can see two catalysts in the very near term:
a) Leveraging on Wessex Water's technical expertise to allow YTL Corp to get a foothold in Malaysia's water industry. There is estimated to be RM10bn worth of contracts to be announced soon for the water industry and the related fields. May get a a sizable bite there.
b) The on-off bullet train project. Catalyst timing looks very good now. Green light supposedly obtained from Cabinet already, only awaiting Singapore's green light. The meeting with Singapore PM last week caused a jump in IDR fervour, I tend to think that Badawi will not let such an opportunity go by without getting Singapore PM's nod for the bullet train.

Almost all reports do not include the bullet train project, fair enough, cause they haven't gotten it yet. However, surrounding circumstance and timing look good, and the project is around RM12bn. Construction net margins are estd. at 10% over a 5 year period. This could translate to an additional RM230m-240m profit a year. That works out to be at least 20%-25% jump in 2009 projected earnings.

Best In KL & Some Say Batam As Well

I don't believe I have posted anything on food. Being from one of the northern states makes me a finnicky eater. Finding a decent place that serves good food in KL is like finding real stuff in Pamela Anderson's body. Nothing is as satisfying as discovering a place where really good food is served.

Came across this only a few weeks back even though this place has been around for ages. Reason for many people missing this spot is that it is open only for lunch (or early lunch) and at Lucky Garden , Bangsar to boot, not exactly near for office folks. Usually when friends say that they have to take me to the best fish head curry place, I end up disappointed. This place, you gotta go there early. They say lunch but people in the know come at 11.30am and if you arrive later than 12.15pm, be prepared to queue 10-person-deep to give the man his deserved money. If you arrive at 1pm, might as well forget it, all the good stuff taken.

Must try to come with at least a group of 3 cos the single fish head serving is huge. Come alone you end up with the doozy fish head curry sauce and lotsa crunchy fresh okra only to start your plate. This man knows his food is good, there is only rice and a few things to go with it:

a) fish head curry - everyone will ask what he puts in it, its the right tanginess and thickness, just the curry sauce gets you halfway to heaven, the fish is fresh and you want to suck the fish and bones and sauce over and over again, know your fish heads cos he puts a few diff heads in there

b) fried chicken - freshly deep fried, each wokful of about 20 pieces go from the wok to the serving table in less than 1 minute, very good fried chicken

c) fried fish - again freshly fried mackerel, even better than the chicken

d) fried sotong - this is on par with the fish head, in fact sometimes I come for the sotong only, its freshly fried, batter/marinade mix just exquisite, hard to find a better way to enjoy sotong

The cook has decoded the beauty of fried foods, must be fresh and there must be something tangy in the batter. In fact, good fried stuff does not need any marinade, next time just fry the best fish and serve with loads of lime juice, its the right way to eat fried stuff.

Go early and try to decode whats in which dish, and which is your favourite. Its pricey, Bangsar-mah, but hey who cares when its this good. Cannot miss it, behind TMC, its the smallest hawker stand on earth around 6' x 3'. Its small but quaint, in fact slightly romantic to have the tables placed winding up a mini slope where tables should not be placed, underneath tree coverage makes this place balmy and airy as well, excellente`. The head honcho is a nice mamak man with a deep voice and speaks excellent English, imagine a skinny bald Punch Gunalan + moustache-less Sammy Davis Jr. (minus the jewellery).

Bangsar Fish Head Curry (first in row of food court stalls), 2 Lorong Ara Kiri 3, Lucky Garden, behind TMC wine/spirits shop. Reservations - fergetaboudit. Mon-Sat lunch time 11.30am onwards.

Syndicates 101

1. a group of individuals or organizations combined or making a joint effort to undertake some specific duty or carry out specific transactions or negotiations.

2. a combination of bankers or capitalists formed for the purpose of carrying out some project requiring large resources of capital.
3. a group, combination, or association of gangsters controlling organized crime or one type of crime, esp. in one region of the country.
4. to sell shares in or offer participation in the financial sharing of (a risk venture, loan, or the like): to syndicate a racehorse among speculators; to syndicate a loan among several banks.

From the start, I want to stress that the word syndicate may have a wider meaning in most, and in most countries the word is not immediately linked to something sinister. There is nothing inherently bad about syndicates, its just a gathering of a few like minded capitalists bent on making some money. But mention the word syndicate among stock investing folks and they regard people in syndicates as being just inches from a prison cell. However, not all syndicates operate on bad stocks, there are some who engineer trading with the gradual release of good fundamentals. Sometimes the gathering of a few institutional funds acting together in cahoots is also term as a syndicate.

Professionally managed firms usually do not get their hands tainted with "syndicates", they do not want to see artificially managed run-ups. If mgmt lacks real ability and professionalism, they are very likely to associate themselves with syndicates, or may act as one themselves. Even among syndicates, there are "good" and "bad" ones. Good as in the sense that they know what they are doing and are "successful", bad ones rely more on "hopes" and usually on a badly thought out strategy (or no strategy at all).

Syndicates 101 - Mantra: Collect, spread news, push, consolidate, distribute, hold, push, hold, distribute ... Hence its not as easy as it looks, even with strong capital backing. It requires a good understanding of market psychology, appreciation of technical resistances and support lines, ability to lure and retain participation, in other word 'how to make a dog stay as long as possible' ... stay... I said stay, good boy.

Bad syndicates do the above badly, and when they get lucky with market sentiment, they tend to dump all shares and let it slide. That is poor syndicate strategy because there will be a dramatic shortage of followers when the same syndicate tries to push up again or tries to do that to another stock.

Understanding markets' and investors' psyche is the 64 thousand dollar question, or should I rephrase as "the 6 million ringgit question". A good syndicate knows how to continually give followers hope, and comfort to continue to hold the stock. Examples of current syndicate plays and their report cards:

"A" = KNM, DNP

"B" = Jaks, Faber

"C" = PA, Eden

"F" = Nextnation

You cannot stop the existence of syndicates, so got to understand them better... and not easy for syndicates to do what they do.. well.

H-Shares As A Precursor Of Things To Come

Hang Seng Record Turnover - Following the news on QDIIs the HSI surged to an intraday all time high of 21,065 and ended up 2.5% yesterday. Turnover was a record HK$95bn (US$12.2bn / RM41.4bn). The previous record turnover was, wait for it, yes its February 28 this year just before the mini collapse, at HK$80.5bn. The H-shares, thought to be the prime beneficiary of the QDII ruling, rose 5.36%. The estd. US$7.5bn injection into H-shares in HK actually only makes up 1% of total mkt cap of all H-shares currently, so the market is running ahead of fundamentals on expectation of future releases.

H-Shares As An Indicator - H-shares are China mainland companies having a dual listing in HK. Similar shares in China have always traded at a huge premium to H-shares owing to the lack of choice in China. H-shares are generally the bigger caps and better run companies, hence China local investors accord an even bigger premium in Shanghai and Shenzen exchanges. The premium has always been around 20%. This premium has surged significantly over the last 3 months, an indication of the froth in China markets vis-a-vis the HK exchange primarily, and also the rest of Asian exchanges to a lesser extent. At the beginning of 2007, the discount was 26%, which was on the high side already. Just before the QDII ruling, the premium was a silly 46.5%. Even with the surge yesterday, the premium is still 42%.

Those who look at the figures may think H-shares are a great buy owing to the huge discount, but that is assuming the mainland shares will stay at present levels for the longest time. The surge in premium for mainland shares is a very good indicator of the froth in China markets. 42% is a huge premium, and one of two things has to happen: one, the H-shares rises more than mainland shares to narrow the premium back to 20%; or two, mainland shares to correct substantially to narrow the premium back to 20%. Place your bets, of course the latter would be the wiser bet. That is also why, even at 42% discount to mainland shares, HKers and funds are not stupid enough to think H-shares are at an attractive discount to mainland shares.

Nasdaq vs Shanghai

There is not much you can say about Nasdaq and Shanghai Index in the same statement. Not much you can say about the kind of companies in each of the exchanges. Looking at the chart, the trading pattern is eerily the same. Basically choosing the start dates are important. Some differences include some really spectacular earnings announced by a large number of Chinese companies in 1Q2007 (please read previous postings) while the Nasdaq Internet crazed was on hearsay and projections - but seriously folks, every excessive bull run will have their strong valid reasons at that point in time. Take from the chart what you will, or want to believe or conclude. To me, there are more similarities between the two markets than there are justifications for Shanghai index to break away from the fatalistic pattern of Nasdaq in 98-2000. When you look at the charts, it does not matter if it was Nasdaq to start with, it could be the chart for chillies or wagyu beef. What matters is the correlation, hence instead of finding justification for Shanghai index to move away from Nasdaq's fate, there are too much inherent similarities within both chart trends and underlying market forces. We have to be aware that sometimes we seek explanations and justifications for chart movements, which comes first? Many a times, the explanantions come after the chart movements.

What's QDII?

Its important to know because it sent Hang Seng index up by more than 2.5% today. They stand for Qualified Domestic Institutional Investor. This will expand the investment scope of the QDIIs. Now the banks may use up to 50 percent of their existing QDII quotas to invest in overseas equity markets. H shares traded on the Hong Kong bourse are the ones which saw frenetic activity today. The move will take some heat off the A-share market as H shares will attract funds because most of them are trading at a substantial discount to their A-share counterparts. This move will narrow the discount gap, and that could very well propel Hang Seng index to 21,500 without much of a problem. This diversion could help release some steam from the bubbling Shanghai and Shenzen markets, and at the same time allow QDIIs to spread their risk better.

There is a bit of markets' self-validation by looking in the mirror currently. When the US markets look at Asia, they are up and running. When the US starts to fear for the Shanghai market at 4,000 Asian bourses stayed steady and Shanghai seems to doing more base building at 4,000 and looking to go even higher. Asian bourses look to the US for US interest rates, and they come back good (going lower soon). Each is feeding off each other's positive energy - can easily start a self-help book here.

The smarter ones would be able to spot that the central government are now resorting to fiscal measures to tame the China stockmarkets. By allowing QDIIs to invest outside (50%), it helps to spread the risks for QDIIs. However, before evryone jumps the gun, the scheme for QDII involves US$15bn and they can only invest in fixed income currently. Hence the QDII scheme is not that popular at the moment: with the new ruling wecan expect the full allocation to be utilised very quickly. Thus we can expect to see about US$7.5bn going primarily into H shares in HK. Not a lot but its a good start, and we should see more sums being allowed under QDII in the near future.

The Emperor Is Very Naked

Naked is naked, how to be very naked?! Much like the fairy tale, it seems only the townfolk themselves pretend that the Emperor has clothes on. All foreigners visiting the town can see that the Emperor is very naked. Of course excesses won't deflate itself immediately based on fundamental arguments alone. Excesses tend to overshoot before collapsing. Shanghai at 4,000 does not look to be the peak yet. Maybe 5,000 ... lol ... cry also no tears then. That's the difficulty trying to predict a correction.

Already the foreign research houses are churning out reports on the dangers. Goldman Sachs have urged the central government to take prompt action to curb the bubble forming in the equity market in order to prevent possible impairment in individual balance sheets and setting back years of progress on capital market reform. The risk of market euphoria is building up.

The domestic A-share market has risen by 50 percent in value this year so far, on top of the 130 percent rise last year, pushing domestic share prices up to 50 times their 2006 earnings. To get a grip on how robust the gains are - let's assume that KLCI at Jan 2006 was 700 points, and by end of 2006 the KLCI index reached 1,610 ... dream on further as of today if KLCI mirrored the Chinese markets, the KLCI index would be trading at 2,415! OK, even if you ignore the 130% gain in 2006, and take the KLCI at 1,117 beginning this year, a similar 50% gain ytd would see the KLCI trading at 1,675! Wouldn't that be wonderful?

The combined total turnover of both bourses reached 310 billion yuan (HK$315.08 bn / US$40.38bn / RM137.3bn) yesterday. Despite the index rise slowing, new A-share account openings reached a record 4.78 million last month alone, surpassing the total number of new accounts opened for the whole of last year. The survey also revealed market capital locked in the A-share market amounted to 980 billion yuan as of end of last month, with both incoming and outflowing capital reaching record levels. Capital inflow per day has soared to 11.2 billion yuan (RM4.9bn), from 3.2 billion yuan (RM1.42bn) two months ago.

Standard Chartered chief economist Stephen Green said market capital is now worth more than 70 percent of China's gross domestic product. "This means there will be a major economic impact if there was a correction of 30 percent today, with the pain concentrated among small investors," Green said. He said the action taken will be more significant when the Shanghai Index moves toward 5,000, which he predicts can be reached in one month.

Naturally the bears have stated their case, but to be fair the bulls would have to have their say as well. Their main justification is absolute real earnings. If one looks at the valuation using the 2007 1Q results, one would see an entirely different picture. Out of the 1364 companies reported so far, the average earnings per share went up 78.1%. Big companies are carrying the flag waving with record profits being announced daily. Bao Steel last week reported a 154% earnings increase. China Life Insurance, CITIC Bank all reported record earnings. That's also why its easy to convince local Chinese investors to continue to pour funds into an overheated wok. This is also why it may not be so easy to kill the bull run, not when record new account openings are being registered each passing month. Willing sellers find even more new willing buyers, so much so the people who sold had to buy back again. Not a nice recipe, so enjoy while you can while the rest of the world watch Scary Movie 4, waiting for the shock (its coming, its a scary movie after all, it has to come.)