National Service Part Deux

Saw Rocky Bru's latest postings on the speculations and movements involving the senior management of GLC top dogs:

Rocky Bru: Ismee Ismail, the group managing director and chief executive of Tabung Haji, is tipped to leave for TNB while Che Khalib, the current Tenaga boss, is said to be eying a Petronas job. Like I said, it's market talk. We've also heard that Amokh or Azman Mokhtar, the Khazanah boss himself, is keen on Hassan Merican's job. Never mind if Hassan's shoes may be many sizes too large, even for both of them combined! I won't rule out anything, especially after learning the other day that Kalimullah Masheerul Hassan had proposed to the NSTP Board to bring in Kamal Khalid, the PM's 4th Floor chief operative, as the new CEO! And when the Board turned this down, Kali, who is the outgoing NSTP deputy chairman and editorial advisor, had then proposed that a position of Deputy CEO be created for the PM's special officer! I'm not sure if Kamal even knew that his name had been dropped like that. Syed Faisal Albar, Kali's trusted friend, left NSTP to head Pos Malaysia. Syed Faisal's right hand man, Jezilee, is leaving his COO post at NSTP for the equivalent in Pos Malaysia. A couple of other top execs from NSTP are expected to leave and join Syed Faisal at Pos Malaysia, too, leaving Anthony Bujang, the new NSTP chief executive, a big hole to fill. Kamal Khalid may still find an executive's position in Media Prima (the international side, I heard). Another 4th Floor op, Zaki Zahid, is expected to head for MRCB. If this was a game of chess, someone's moving around his pieces in a desperate attempt to save the old King's reign. Perhaps Nor Mohamed Yakcop, the MoF ll, can shed some light on these moves, starting with his friend's attempt to put Pak Lah's chief press attache as the NSTP boss.

Comments:

a) Did we not learn anything from the past 12 months? Why are these senior management jobs only available to a select group of people? Why are these jobs only "given" or "appointed" when "kingmakers" make their chess moves?

b) I don't know about you, but there are very few Louis Gerstners in the world (Gerstner came from American Express, and then McKinsey, followed by his remarkable stint as CEO of RJR Nabisco, that food and ciggies giant, before ending up at IBM and then building up IBM a few levels higher in terms of strategy and sustainability of operations). But apparently, we have truckloads of Louis Gerstners running around in Malaysia. Apparently we have a huge number of them being able to run a newspaper one day, and then the national postal company, and then the national utility company, heck maybe even the national oil company.

c) These jobs ARE NEVER advertised. These positions need to be advertised and the selection process be transparent - come on, did we learn anything on transparency at all over the past 12 months? How do you think the young and upcoming smart, diligent bumiputra graduates are going to feel? They feel like crap because these jobs only circulate among those young upstarts who know the right Datuks and Tan Sris. Naturally you are creating a new multi level caste system among the bumiputras. (I am not even going into the bumi/non-bumi issue in GLC CEOs, just at least be fair and transparent to bumiputras from all ranks and "classes").

d) There has been a silly predisposition towards "giving" plum jobs to the people who have the right degrees. I think good degrees from high ranking universities are all good things to start with. Look at all the investment bankers from Stanford, Yale, London School of Business, Oxbridge, Harvard... yes, the degrees can only get you so far - a degree only tells me you know how to read and write in English, and maybe do a power point presentation - that's it. This kind of "preselection" in appointing top candidates in GLCs is OK, but do not let it be the determining criteria. That's because this preselection criteria naturally benefits the well to do and connected. I am not saying that you cannot go to Harvard on government scholarships, its rare.

e) The musical chairs have to stop. One must evaluate the requirements of CEOs carefully and appoint candidates that have proven themselves. I do not see how the NSTP top dogs for the past 5 years have proven themselves, but they still get posted to good jobs.

f) Khazanah and the powers to be seem to think that you can be the CEO of any industry as long as you manage by the metrics and ratios set up. As long as you have enough data on anything, you can manage them - that seems to be the new school of thought that is pervading the corridors of MBAs and the likes. Yes, I agree that a good CEO can probably shift to manage in another industry provided that he/she has a good handle on the new industry critical success factors and critical industry developments. We are operating AS IF ALL our top management have that ability... come on!!!

g) The corridors of power must not be arrogant. They must be open and be accountable to the people. I like some of the transparency measures and metrics management imposed by Khazanah over the last 5 years. I am also aware that Khazanah may be more than willing to push the envelope in transparency and accountability but is always "asked" to go a certain way by hundreds of "politically connected or politically important" people - by imposing strict transparency procedures, it moves the entire process beyond the reach of these so called "kingmakers". Do not ruin it all by leaving this stone unturned. It is the spinal cord of what is wrong with the system, it is the pink elephant in the room that pisses the broader nation, it is the 64,000 dollar question that everybody do not want to confront. Its just not cricket!

p/s photos: Shu Qi

Obama Ticking The Right Boxes

Paul Volcker, who helped tame runaway inflation in the 1980s during two terms as chairman of the Federal Reserve, has agreed to lead a new White House economic advisory committee, President-elect Barack Obama said Wednesday. He praised Mr. Volcker as one of the world’s foremost economic policy experts.

“Paul has served under both Republicans and Democrats and is held in the highest esteem for his sound and independent judgment,” Mr. Obama said, as the 6-foot 7-inch Mr. Volcker towered nearby. “He has a long and distinguished record of service to our nation, and I am pleased that he has answered the call to serve once again.”

Mr. Obama made the announcement at his third news conference in three days. The public appearances by the president-elect are intended to show Americans that his team is focusing on resolving the financial crisis, which Mr. Obama said Wednesday demands “fresh thinking and bold new ideas from the leading minds across America.”

Mr. Volcker, 81, has been providing Mr. Obama with advice on the economy for months. After briefly considering him for Treasury secretary, Mr. Obama instead asked Mr. Volcker to lead the President’s Economic Recovery Advisory Board, a new panel to be comprised of leading figures from a variety of business sectors. The group is supposed to advise Mr. Obama on how to jump-start the economy and stabilize the financial markets.

Austan Goolsbee, a University of Chicago economist who was a leading economic adviser to the Obama presidential campaign, will lead the staff of the advisory board, the president-elect said, calling him “one of America’s most promising economic minds, known for his path-breaking work on tax policy and industrial organization.”

Volcker gained an infamous reputation during his tenure as chairman of the Fed. He assumed the position amid a five-year run of inflation caused by an upswing in oil prices when the Arabs cut off exports into the U.S. as retaliation for our support of Israel. Volcker immediately took steps to reduce the total money supply. More importantly he changed the long-time Fed policy of controlling interest rates, and simply let interest rates float to their natural levels. Businesses and farmers were paying over 20 percent interest on their debt when irate farmers stormed Washington and blockaded Fed headquarters with Volcker inside. Volcker's moves as Fed Chairman did break the back of inflation as they were intended to do. Inflation peaked at 13.5 percent in 1981 and dropped to 3.2 percent in 1983. The price was a sustained unemployment rate of over 11 percent nationally during that same period, the highest since the Great Depression. Volcker's policies were good for creditors, especially his friends in Manhattan who owned bonds. But they were harsh on the American middle class and on small business.

It is both these groups, the middle class and small business, that Barack Obama has promised not to forget with his economic recovery package. But Paul Volcker's history does not indicate a compassion for the little guy. The final Democratic economic recovery plan depends on how these two men reconcile their political and economic thoughts.

Why is Paul Volcker so important? In a speech he made in 2005, he already made some important points:

"Altogether, the circumstances seem as dangerous and intractable as I can remember."

"Boomers are spending like there is no tomorrow."

"Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security."

"I come now to the heart of the problem, as a Nation we are consuming and investing, that is spending, about 6% more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 Billion per day."

p/s photos: Han Ye Seul

Asia-Pacific Top Brands

Marketing Charts: Five of Asia’s top 10 brands are US-based companies, indicating the strong presence of US companies in the Asia-Pacific region, according to “Asia Pacific’s Top 1,000 Brands for 2008,” as determined by a TNS survey.

The survey, which expanded on previous years to include responses from consumers in a total of 10 markets in the region, presents an overview of the local and global brands that consumers think most highly of across sectors and geographies.

To determine the best brands in each of the product and service categories covered by the survey, participants were asked two questions:

• When you think of [product / service / category], which is the ‘best’ brand that comes to your mind? By “best,” we mean the one that you trust the most or the one that has the best reputation in [product / service / category].
• Apart from the brand that you have just mentioned, which brand do you consider to be the second-best brand in the [product / service / category]?

Some 3,600 people were interviewed, including for the first time consumers from Japan, Korea and Australia. Together with respondents from China, Hong Kong, India, Malaysia, Singapore, Taiwan and Thailand, they were drawn from TNS’s 6th dimension online access panels. The categories presented to each participant included alcohol and cigarettes; financial services; automotive; health; retail; food; beverages; electronic goods; media and telecommunications; and baby products, household products, toiletries and cosmetics.

p/s photos: Janet Hsieh (now there's the girl that I would marry immediately)

Rankings Of Yearly S&P500 Performance

As of the market close last Thursday, Nov. 20, the Standard & Poor’s 500-stock index was down 48.8% for the year to date.

Had the markets called it a year at that point, 2008 would have gone down as the worst year in the history of the S&P index, which goes back (in one form or another) to 1926.

The only year that even came close was 1931, in the teeth of the Great Depression, when the S&P lost 43.3%. Here are the 20 worst years in history, based on Yale’s NYSE index until 1925, and for the S&P from 1926 onward:

1941 -11.6%
2001 -11.9%
1893 -12.3%
1857 -13.2%
1837 -13.4%
1828 -13.6%
1831 -14.0%
1973 -14.7%
1920 -15.0%
1841 -16.1%
1917 -16.4%
1884 -18.5%
1839 -19.0%
1907 -21.8%
2002 -22.1%
1930 -24.9%
1974 -26.5%
1937 -35.0%
1931 -43.3%
2008* -48.8%
*Through Nov. 20.

The closest carnage to 2008 was 1974 when the S&P500 lost 26.5%, the next closest was 2002 when it dipped just 22.1%. Aaah!!! The good old days.

Many people have been saying that the current financial crisis will be at least as bad as the Great Depression. But I’m not sure many people realize that the stock market has already had the worst year in all of American history.Take from this what you may.

p/s photos: Elanne Kong Yeuk Lam

Branding & Malaysia

I agree that there is a shocking lack of branding awareness among Malaysian companies. In fact, many do not even know that its an important asset, or how a brand can be leverage for market penetration, market acceptance and improved margins. Many local companies do not appreciate branding as they never venture outside their own ponds. Having a good brand allows for scalability to expand regionally and globally.

Hence I applaud the initiative by 4As (the Association of Accredited Advertising Agents Malaysia) and The Edge.

Naturally the judges will have their own set of criteria in assessing which brands are valuable and they try to ascribe a figure on the brand's value.

Somehow when I looked at the list, I can only disagree with most of it. To me, the value of a brand is in:

a) the potential and positioning - the potential to be leveraged further and a strategic cohesive vision on how their products and services are to be positioned vis-a-vis the competition

b) the clarity of what it represents - a brand must stand for something, and it must be clear not jumbled

c) positive reaction - a brand must give the viewer, the listener or any potential client a warm, feel-good, positive attachments whenever they use/buy or even just visualise the product or services

d) management's strategy and vision - there must be clarity and deliberateness in the management's vision and strategy in promoting the brand, knowing fully well where they are headed

I don't have the tools or metrics to come up with my own paradigm, but here are my rankings:

Top Of The Class
1) CIMB
2) DIGI
3) Petronas
4) AirAsia
5) Parkson
6) Hong Leong
7) IOI
8) Eu Yan Sang
9) Sin Chew
10) Bank Negara
11) YTL
12) YNH
13) Zaid Ibrahim
14) Securities Commission
15) Mah Sing
16) MAS

Grossly Under-Leveraged Brand
1) Brand's Essence
2) F&N
3) Yeo Hiap Seng
4) Dutch Lady
5) Bursa
6) RAM
7) Public Bank
8) Raja Nazrin

Trying Too Hard
1) Bonia
2) Ogawa
3) Diamond
4) Padini

Don't Have A Clue What Branding Is
1) Lion Industries
2) Country Heights
3) B Group

Some companies have tried to improve their tainted brand image, and were successful like MAS and Mah Sing. Lion and Parkson have the same owner, but seriously, Parkson is run by someone else, which may explain the disparity in ratings.

Branding is too much associated with just companies. I always see branding in other things as well, in particular your own self. Like it or not, we are branding ourselves. Are we consistent, unpredictable, part of the crowd, never standing out or standing for something... mention your name among your colleagues, what does that convey, mention your name among your relatives, what does it convey ... I am not advocating putting up fronts here, I am asking that we should be aware we are judged all the time, we need not be slaves to them but we need to be aware of that. Be honest in your credentials and be consistent in the image you portray. Branding is highly essential in your career path.

Even my blog has a conscious branding strategy. Its all explained as the vision on the sidebar. I hope I have been consistent in selecting beautiful Asian ladies, it all becomes part of what is expected and you must deliver - that's branding. How's your own personal branding?

p/s photos: Carmen Soo

Temasek, Tide's Out, Skimpy Speedo

I usually do not bash Temasek (that much) except for when they irked the Thais and then the Indonesians. Temasek lost almost US$2 billion of a badly-timed US$3 billion in Shin Corp at a peak of 49.25 baht (Shin shares are now trading at around 15 baht) in 2006. The investment was not a bad one but the way they handled it (same in Indonesia) was appalling.

Being neighbours, Temasek should have known that certain assets will be viewed as sensitive and incursions will be seen as colonisation somewhat. You cannot stand behind the guise of being a professional asset manager when you are buying critical companies. Its the arrogance, its the attitude, we've got the money, so we can buy ... just like the way Singaporeans do not know how they appear in the eyes of their neighbours everytime they go traveling in the region ... we all cringe when some bloody tourists would exclaim "Waahhh, so Cheeaappp"... we know they have to be Singaporeans.

Its CEO, Ho Ching committed S$401 million in ASX -listed ABC Learning Centres at near the peak price of A$7.30 and then averaged down at between A$1.20 and A$4.00, bringing its commitment to over S$500 million. That investment is now essentially worthless although Temasek has yet to write it down. If you examine the biggest bust ups owing to the current financial crisis in Australia, its not the usual mining company or even the highly leveraged Macquarie or Babcock & Brown which are hogging the headlines. Its ABC Learning Centres - the company is not very big, but the audacity, excesses and sheer inept management in the company that brought about its implosion are now fodder for bar talk. Temasek does not have many Australian listed assets, hence it must be close to striking the lottery for them to be persuaded to pick ABC Learning Centres. What is galling is that with the many highly paid experts in Temasek, they did not manage to uncover anything in the due diligence. Though I was loathed to believe it when Buffett said "its dumb money", but I am persuaded now.

The company also bought 19% of LSE- listed Standard Chartered in 2006 only to see the market value of that stake melt 55% by November 21st. More bank stakes include a 975 million pound stake in Barclays Bank bought at the peak of 740 pence (with a further 100 million to subscribe for a rights issue at 282 pence), which have now sunk over 70% at 138 pence.

Their stake in Merrill Lynch got converted into Bank of America, that was OK, but there are rumours that Bank of America might not be able to go through with the buyout because Merrill's assets are too toxic. Most heinous of all is its US$6.88 billion stake in Citigroup bought with a minimum conversion price of $31.34. Citigroup has since plunged 88% to $3.71 (even though it has now rebounded to $6.30), single-handedly delivering almost S$9 billion of red ink to Temasek's books.

What all this showed is that NO ONE in the whole of Temasek saw the early subprime imploding, or the credit excesses, or the CDOs danger, or the CDS potential liability. NO ONE. You mean no one warned about even ONE OF THE ITEMS? Well, obviously not in the past 12 months, not in the past 24 months, heck, not even in the past 5 years. I am not trying to be hindsight harry here. The point I am trying to make is that Temasek has chalked up supernormal gains every year from 2004-2007 thanks largely to their global banking stakes. China, the US, India, Indonesia... you name it..they have a bank or two there. Many have lauded Temasek's superior performance then, what about now? This showed me one major fault with Temasek: its outperformance was largely the wave and trend which carried them rather than from superior stock-picking or market strategy.

If you cannot read sectors properly or have solid equity strategy or stock picking skills or market timing ... what have you then... just a bunch of overpaid people. Which is why I always say that most analysts, economists and investment bankers have one big fear when they go off to bed at night... they all have the same nightmare (I hope no one finds out how average I am!!!). Good night and sleep tight.

Overall, the paper loss on these investments has exceeded S$35 billion as of October 21st. On a population of 3m, that works out to be about S$11,666 for every man, woman and child - a household of 4 might have had S$46,666. Could be worse I guess, could have been from my country.

p/s photo: Son Dam Bi

Roubini Likes Something

NEWSWEEK: What are your thoughts on the team Obama assembled?

Nouriel Roubini: The choices are excellent. Tim Geithner is going to be a pragmatic, thoughtful and great leader for the Treasury. He has experience at the Treasury and the IMF [International Monetary Fund], then the New York Fed. I have great respect for both Geithner as well as Larry Summers. I think both of them in top roles in economics in the administration were good moves. I think very highly of them both.

What are the first things they need to tackle?
R: First one is the fiscal stimulus, because the troubled economy is in a freefall, so we really need to boost aggregate demand, and the sooner and larger the better. The second thing they should do is recapitalize the financial system. Most of the $700 billion is going to be used to recapitalize banks, broker dealers, finance companies and insurance companies. To do it aggressively and fast is going to be important.

The plan Obama has talked about includes spending on infrastructure and energy development to create jobs. How likely is that to produce long-term aid to the economy?
R: We need to do it because demand and spending and housing are literally collapsing. That will get a boost from public-sector spending: [spending on] infrastructure, unemployment benefits, state and local government aid, more food stamps. We're going to have to think larger, but I don't think you can pass most of it until January when [Obama] comes to power. We're going to have to wait, because nothing seems possible for the time being. But I expect most of his plans towill pass once the new administration is in power.

Obama is largely powerless for the next two months. What's your outlook from now through January?
R: The lame-duck session of Congress really needs to spend on unemployment benefits, aid to save the local governments and on food stamps. Those things are very short-run and are very important. It's really the most we can do for now.

Your view of the economic future is often a bit less than optimistic. What does Obama's team signal about what could be coming?
R: Look, he wants to get things done, so he's choosing a really terrific team. To me, it says that he's choosing people who have great experience. He's choosing people who are pragmatic and who realize the severity of the national problem we're facing. They're knowledgeable about markets, about the economy and the political process in Washington. These are the very best people he could have chosen. I can't look too far, but it's a very good signal of what he wants to do.

A few additional caveats on this interview, according to Roubini:

First, I told the Newsweek reporter – as full disclosure – that I had worked for Tim Geithner and Larry Summers when they were both at Treasury: I was head of a Treasury Office and the Senior Advisor to Tim Geithner in 1999-2000 who was at that time the Under Secretary for International Affairs while Larry Summers was Treasury Secretary. So some may that my positive views of the two may be biased/tinted by my working for them; on the other hand I know first hand about them and I have the greatest respect for their skills, intelligence, expertise, commitment to sound public policy and policy wisdom even if I may not always agree with all of their views.

Second, I have also to add that – as I argued in an interview with CNBC Monday morning - while I have the greatest respect for the new Obama economic team, they will inherit a huge economic and financial mess that will be extremely hard to fix even if they were to implement the most sound and consistent economic and financial policy package. This is going to be the worst US recession in decades as the strapped US consumer is now faltering. The recession train and the financial crisis train have left the station. What policy can do – at best – is to minimize the financial and economic losses and limit the extent and severity and length of the economic and financial crisis, not to prevent it.

President Elect Obama and his top notch team will inherit two wars and the worst economic and financial crisis in decades. So expect very difficult times ahead for the economy and for financial markets regardless of the best effort of Obama’s excellent economic team in trying to address these problems. Even a massive fiscal stimulus, a more rapid and coherent plan to recapitalize financial institutions and resolve the credit crunch, an aggressive plan to reduce the debt burden of insolvent household, and more aggressive and radical set of unorthodox monetary policies will not prevent a global stag-deflation in 2009 and possibly longer.

p/s photos: Kou Shibasaki

Need Sobering Clarity On Malaysia

For the past 3 months we have heard many differing calls and views on the Malaysian economy in the face of the global financial turmoil. We have to be careful on what people are saying and their roles. Many of those who are the most vocal have vested interest, namely politicians and real estate developers. We have to regard those statements with a few bucket loads of salt.

I can understand it when property guys stay optimistic, they had to, you think they have any choice. No property guy will come out to say that they are doomed, they will first be lynched by fellow property players. There is probably an unwritten code among property players, when you have nothing good to say, shut up cause the rest are trying to reduce their inventory as fast as they can.

I would like to see a more sobering comment and leadership from the top politicians and top financial people in government institutions such as Bank Negara, MIER and even RAM and the like. I am not asking for them to give pessimistic views, I am asking them for clarity and realistic views. Do not try and instill a false sense of confidence in the people. I know that the rule book would call for a need to keep an optimistic view so that domestic consumption stays strong, but I also believe that a realistic view would help restore confidence that the people would know the government is handling the issue properly, and more importantly has a good handle on the issues we are facing. Time for sobering leadership.

Things are crumbling in the US and much of Europe. Many nations are already in a recession statistically, even some Asian countries. Malaysia is not in that boat (yet), but we also need to know why we are not there (yet). Is that inevitable? Can we dodge the bullet? Or are we deluding ourselves?

This is not 1997, it is not a financial crisis in our own backyard, hence we should not and will not feel the effects firsthand. For my life I cannot understand how those people out there can say Malaysia will not be affected or will be only marginally affected by this crisis. We will be affected because:

a) We do not have a big enough or strong enough domestic economy. If we had a population of maybe 80m-100m and domestic consumption makes up 65%-75% of our economy, maybe we can ride it out, but we are not.

b) If the turmoil is a short one, e.g. if the US and Europe will come out of this with positive growth by 2Q or 3Q 2009, then we can safely say we might only be marginally affected, but that is not the case here.

c) Our major trading partners are the US, China and Singapore. Of that, maybe China can still chug along and save us, but we are not supplying the right products in their enlarged fiscal stimulus (rail and infrastructure). We are rerouting a lot of exports normally to the US to China as partially finished products to be assembled or finished in China for exports. Well, some 60%-70% of China exports are really MNCs funded manufacturing / outsourcing concerns operating out of China - I don't think they will be unaffected.

Oil and CPO prices have crashed, and both help to boost our coffers. CPO prices affects CPO companies rather than the bulk of the population, hence we do not see great wealth effects when CPO is at RM3,000 and we will also not feel it that much if it goes to RM1,200. Oil would affect government coffers and the ability to fund our budget deficit. Some would scream that we are at a highish 4.8% deficit, but I am actually comfortable with that.

RM7bn stimulus is OK but will not be sufficient. I hope the government will add to it with another RM5bn at least, this time do it with a 2 percentage points cut in income tax. I know that will hurt government receipts but its a time to go further into deficit spending as the alternative is not nice. The other recommended measure is for the government to totally pay up on all bills and claims for work done within 2 weeks of invoice receipt. Governments (including state governments should lead the way to pay all bills, we all know that many bills are left unpaid or delayed for the longest time, bickering over amounts and maybe something else to happen... the trickle down effect will be substantive.

One big factor causing people to think things are hunky-dory in Malaysia is the stubborn property prices. I still think things will hit hard in the coming months when property prices start to come down. Property prices are already down substantially (about 15%-20%) in Singapore and Australia - granted thats also because the leverage and speculation there have been more rampant. The good thing is that speculation has been not as rampant in local property but that does not mean we are immune.

The biggest job losses will be in Penang with the high number manufacturing firms there, and watch the trickle down contraction. Oil and CPO price collapse does not hit jobs that much as the number of employees needed to run an oil company are not critical, or rather the revenue/employee is very high. Plus even at US$50, its still profitable and many suppliers and contractors are on long term contracts anyway. As for CPO, well, we know their cost is still around RM650-750 and you still need people to tend to plantations.

For impact, just take a minute to reflect on your job, how much does your company rely on strong foreign demand, how much does your company rely on domestic demand, now look at the demand outlook from both sides 3 months out and then 6 months out. Now take two of your close friends in different jobs, do the same exercise ... maybe you will have a better idea now.

Malaysia relies a lot on foreign investment and that will dry up over the next few quarters. Thankfully, Bank Negara has maintained good discipline and our reserves are at an enviable level, thus allowing the country many options to deal with this crisis better than many countries. For those who does not like a weak ringgit above 3.60 vs the USD, grow up, in times of global turmoil I'd rather have a weakened currency to maintain better competitiveness. A strong ringgit would have seen more industries collapsing outright. Plus we are in a deflationary environment, hence a weaker ringgit won't be importing inflation.

Lastly, while the stockmarket has lost substantial ground over the past 12 months, this time around the bulk of retail players have been able to sidestep the fall and is in fact quite cashed up. Nonetheless Malaysia has one of the highest percentage of GDP that is listed and stock prices have a large correlation to domestic consumption, we have yet to see the wealth effect coming through.

Do not be blinkered in that we have not yet seen the effects, by virtue of the makeup of this crisis, it will only hit us with a 3-6 month delayed effect.

p/s photo: JJ

Some Direction At Last, Some Market Leadership

Well, this post is written after the plan by FDIC and Treasury on Citigroup. So, where are we now? The first thing was Obama made the right choice in appointing Timothy Geithner (please reread posting on the new Treasury Secretary). The market basically rallied over 4% on Friday over the news. Can the appointment alone charge up markets? Yes, especially in the current market situation where there is little confidence, little direction, high volatility, basically no market leadership.

The best thing for Geithner to do is to grab the markets by the neck and tell them "This is the way ahead, follow me and I will guide you towards the light (no pun intended, obviously)". Geithner, as mentioned before is a market interventionist. He was critical in lining up the JP Morgan / Bear Stearns deal, he was instrumental in getting the funding for AIG, he tried to save Lehman but was dissuaded by higher powers ...

The market basically saw in Tim, a person who will not let things get blown out of his control. It was very easy to predict what he would do in a Citigroup situation. The new rescue package for Citigroup was assembled with Tim's input, and it was a package that tries to cover even the most extreme situation Citigroup could find itself in. Naturally there will be many naysayers that will criticise that the package will not work.

To me, its a very substantive package, watch the shorts try to stampede out of Citigroup in a hurry tonight. Why is the package so good? I did mention that Treasure could follow the UK prescription for Royal Bank of Scotland, whereby they injected capital for actual shares, thus controlling the bank. Instead a softer version was adopted, the Swiss version, on how they bailed out UBS. But in reality, the package is a Swiss UBS package with a subsequent evolvement to the UK RBS method as future losses, above the preset levels, will see the government absorbing the loss in exchange of an equity stake in Citi - so prediction stayed true.

First, there is the additional $20bn capital. Two, the guarantee on $300bn of toxic assets, phew. Thirdly Citi is only liable for the first $29bn of losses, as I mentioned earlier, without the package, Citi would probably have to incur losses totalling at least $50bn for the next 3 quarters. Now that has been largely eliminated.

Fourthly, most importantly, confidence is restored. Global bank run on deposits would now start to reverse. Fifthly, no dividends for 3 years (or just 1 cents actually) - this has to come from the government as management has no balls to say no more dividends (Alaweed no happy man, no feel like smiling).

The 8% payment on $7bn to Treasury is a cheap way to raise funds. This move will make it SO MUCH EASIER for Citi to go to sovereign wealth funds to tap additional capital. Mark my words, Citi will easily raise another $10-15bn within weeks, which will further boost its defence system.After the deal, Citi's Tier 1 capital ratio at Sept. 30, on a pro-forma basis assuming the October capital injection and the new capital announced on Sunday, is expected to be 14.8%. Its tangible common equity would be about 9.3% of risk-weighted managed assets, Citi said.

We have market leadership. Expect a sharp revival in Citi, and possibly a new bottom at 8,000 for the Dow.

p/s photos: Haruna Yabuki

Update On Fate Of Citigroup

This is probably not a politically correct joke, well not really a joke as it actually did happened, but hey....loosen up. A private banker called up a client telling him that Citi was a great buy below $5. The client half-jokingly said, "What, you kidding, I'd never buy an Indian bank". I guess its not just Vikram Pandit but a huge layer of the bankers at Citi happen to be Indians - I told you it was not politically correct!

Anyway, some updates on the probable fate of Citigroup. The shorts are doing it to Citi, make no bones about it. Will Citi go bust? Very unlikely. The bank has $2 trillion worth of assets, the question mark is how much will have to be written down. Hence even below $20bn in market cap, Citi may not find buyers for the whole bank unless they come with Treasury backing and guarantees.

Citi has kind of been off the radar when Lehman and Bear Stearns were collapsing because of their strong deposit base, in particular from outside of the US. It has some $880bn in deposits, but the scare over the last few days probably would have seen at least one third of those deposits being pulled out. I doubt very much Citi can function without some kind of help over the next few days.

The interesting bit was that the company bought back $17.4bn in assets it could not offload under the SIV. If you were really in trouble, would you do that as a priority? Citi saw Alaweed upping his stake from 4% to 5%, that didn't help. Citi got a $25bn injection from TARP, that seems to be insufficient. The estimated further writedowns over the next 3 quarters could come up to another $50bn. Take that with a much reduced deposit base, and Citi would find it very hard to raise funds or have sufficient capital to do business. While HSBC or even Royal Bank of Canada would have the muscle to buy Citigroup now, none will try as they will not get any special treatment from the US.

For JP Morgan or Morgan Stanley to buy, they would probably only do it with guarantees from the Treasury. Following the hoopla over the deal with JP Morgan and Bear Stearns, I doubt the Treasury would want to take that path again.

A seizure by FDIC would be bad news generally as Citi would be broken up and sold in parts. A most likely scenario now would be for Treasury to become the majority shareholder of Citigroup by pumping in at least another $50bn in exchange for new shares. Taking a leaf out of UK's experience with Royal Bank of Scotland, that seems to work. Treasury could then slowly sell down its stake when Citi gets out of trouble a few years down the road.

As it is, Citi is a unique animal. Its reach is far and wide. If it was Bear Stearns or WaMu, nobody outside the US would bat an eyelid. But mention Citigroup, it trades and do business with almost every corner of the globe. The international pressure on Paulson and Bernanke to "save" Citi would be overwhelming. If that route is chosen (as I think is most likely), we should see it trading back at $10 minimum, thanks also to the short squeeze on the shorts. For the time being, that seems to be a realistic solution.

p/s photo: Nozomi Sasaki

What Should Happen & What Is Likely To Happen

General Motors

What Should Happen - Allow the company to go into Chapter 11 or what we call bankruptcy. Then the company will have real negotiation leverage and the unions will really have to listen and make concessions. The government can then step in with some funding but call the shots. Force the merger of General Motors and Chrysler. All outstanding car warranties will be guaranteed by the government via a separate vehicle. Following huge concessions made by the union, the selling down and dismantling of parts, the reworking of cost savings with the 2 companies... maybe, just maybe they can survive.

What Is Likely To Happen - Democrats will probably approve a US$25bn bailout when they return on December 8, but a viable plan is expected from the automakers. Expect Chrysler to quicken talks with GM to hash a merger to get the US$25bn bailout plan approved. Short term feel good, but without bankruptcy, the unions and their demand swill stay the same. Its the liabilities and claims by employees on the company's balance sheet which will always bring the company down. The lifeline will give then a few months grace but the end result is bankruptcy. The trouble is that with the US$25bn bailout, the unions will not lower their rights and demands... you need to put the company into bankruptcy to leverage your negotiations. Sink or swim.

Citigroup

What Should Happen - JP Morgan or Morgan Stanley should step up to buy Citigroup, with the Treasury guaranteeing maybe US$30-50bn in losses. That will calm markets. Its not likely Citi will be able to remain independent for long on its own. The amount of toxic assets is US$80bn, and we haven't even looked at the fallout on funds being tied to Lehman Brothers. Citigroup has another shoe to drop, credit card debts, which will implode as well. A merger would see a bid of at least US$20 per share. It will further reduce counterparty risks in dealing with Citigroup.

What Is Likely To Happen - The company will be taken over by FDIC to prevent a bank run, especially from global depositers. Their liquidity ratios are seriously questionable at this point. The result would be a total break-up of the group. JP Morgan may still end up with the commercial banking side in a break up sale. As Citigroup is trading at barely 1/4 book value, a break up sale should see at least a US$10 value to its shares.

Other Potential "Bad Developments" In Coming Weeks & Days
a) GMAC running into deep trouble.
b) GE Capital running into deep trouble.
c) The merger between Bank of America and Merrill Lynch running into problems owing to ML's excessive exposure to toxic assets.
d) Nobody steps in to help Citigroup, and this time global effects will be felt as Citi's exposure is more pervasive globally.
e) Markets switch to look at credit cards implosion, dragging Citigroup and Amex into deeper trouble.

Still, we are seeing possibly the "peak in selling" here, expect 7,000-7,300 to be attract strong buyers for the longer term and should hold up well there. Asian markets should find good buying support now as there is almost zilch holdings by foreign funds - nothing left to sell now literally. Its not hunky-dory, but those with at least a 6 montn view may nibble.


p/s photos: Li Bing Bing

The ONE PERCENT's Significance

In August consumer prices dropped 0.1% from the previous month. In September it was unchanged. The just released figure for October saw a 1% drop from September. This one percent month on month decline is very significant. Firstly, forget about inflation, we now have to seriously talk about deflation. We are only starting to see consumer prices feeling the effects of months of real estate price plunge and stock price decimation. A trend once established is hard to reverse. You people know how difficult prices take to come down. When it goes up, it goes up quickly.

When trade slows, when inventory builds up, consumer prices are very sticky in coming down. The fact that it did not just ease down is highly critical. One percent month on month decline has never been registered in the US, except during the Great Depression. Take a few seconds to reflect on that one percent now.

Proper tracking of consumer prices only started in 1947, and this one percent was the largest ever since tracking started. Deflation has many implications - the one percent decline shows how serious every sector is facing the crisis, it is felt in every sector basically. Consumers are delaying purchases in a deflationary environment. That's no good. The Fed is now setting its interest rate target at 1%, and there is a very good chance we could see zero interest rates before things turn around.

When I studied economics, zero inflation is not a good thing. It indicates that things are not moving, things are dying, industries will constrict, there will be cost cutting, there will be layoffs, there will be a great incentive to hoard and save.

The positive would be the one percent will cause the Fed to speed up spending policies. The Fed would be moved to lower rates faster than it need to. The Fed will have to pump liquidity into the system with more urgency.

Usually even in a downturn the consumer prices would be easing down month on month, not by the one percent we just saw. That indicates that the trend has just started and will see at least a few months of negative consumer prices month on month. That one percent will be enough to cause all commodities producers to drive down inventory, sell at all cost, even at losses, stop plants functioning, even if it means lowering capacity utilisation and incurring losses. 7,300 here we come. CPO prices, Rm1,200 here we come.

p/s photo: Grace Park

Citi-Morgan???

You heard it here first, the next biggest bank in the world, Citi-Morgan ... it makes a lot of sense for JP Morgan... but investment bankers on both sides will shudder because there is almost an exact replication, thus any merger will see at least 30%-40% of investment banking staff being cut. JP Morgan would value possibly the best global commercial banking franchise... provided the Treasury steps up and guarantee one or two hundred billions in losses (ala Bear Stearns). But I am getting ahead of myself, it may happen only.
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$34.48 billion

Citigroup’s current market capitalization.

$126 billion

Citigroup’s market cap in April 2008.

$178.59 billion

Citigroup’s market capitalization one year ago.

$80 billion

The value of risky “legacy” assets that Citigroup is moving off its trading portfolio and into its investment portfolio or marked “available for sale.” These assets include collateralized debt obligations, leveraged loans, mortgage securities and auction-rate securities, according to Bernstein Research. They likely would have qualified to be bought by the government under the first TARP plan to buy troubled assets.

$8 billion

The value of legacy assets Citigroup kept in its trading portfolio.

$3.5 billion

The estimated fourth-quarter writedown that Citigroup might have to take on those $80 billion of assets when it transfers them, according to Bernstein Research.

$2.8 billion

Citigroup’s most recent loss, in the third-quarter.

$2.2 billion

Citigroup’s loss in the second quarter.

$9.83 billion

Citigroup’s loss in the first quarter.

-$54,155

Citigroup’s net income per employee.

-17.51%

Citigroup’s return on equity — a measure of management effectiveness — as of Sept. 30.

15.23%

Citigroup’s return on equity as of Sept. 30, 2007.

$800 million

The price that Citigroup paid to acquire Old Lane, Vikram Pandit’s hedge fund.

$165.2 million

What Vikram Pandit earned from the sale.

$202 million

Citigroup’s first-quarter writedown on Old Lane. The bank closed the fund in June.

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Yesterday alone, Citigroup slumped a record 23 per cent to US$6.40. This beat the 21.7 per cent drop it registered during the Black Monday crash in October, 1987. Citigroup just a few days back announced it was cutting 52,000 jobs reduced its workforce to around 300,000 worldwide. When we see share price collapses in Washington Mutual, Countrywide or Wachovia, we watch things unfold as spectators. Those things don't hit Asia. But Citigroup does.

In January, the Government of Singapore Corporation (GIC) had invested US$6.88 billion in Citigroup via a convertible bond issue. Today regional Asian banks were whacked. Just considering the massive bank transactions between Citi and other banks is sufficient to make investors reconsider about counterparty risks and systemic risks. Will Citibank survive??? Citibank has an unquestionable franchise globally in banking, possibly only surpassed by HSBC. It still has enormous deposits, though much of it is from outside of the US as invetsors have pulled much of their deposits from any and every US bank. The developments yesterday will probably cause a substantial number to yank their Asian deposits out of Citigroup now. Things can snowball very fast. Fear is the worst thing when it comes to potential bank runs, then suddenly you cannot get any credit lines and things freeze up.

The selldown in Citigroup was due to Henry Paulson changing his TARP plans. Now he is not going to use the funds to buy toxic assets (as well he shouldn't because that does not add to the banks' capital at all). Hence the credit default swap market where CDS premiums on Citi has now widened to 360 bps – meaning that investors are willing to pay more to get protection against possible default on Citi. A CDS spread of 360 bps means that an investor must pay US$360,000 to get US$10 million protection on Citi.Citigroup has about US$150 billion - US$200 billion worth of distressed financial assets. Remember that Citigroup still has a lot of shit tied up with Lehman Brothers (please re-read Lehman Brothers, The Rosetta Stone posting). Now that was supposed to be taken off its book, but has since been thwarted by Paulson.

The bigger reason for Citigroup's share price collapse was the announcement that it would buy about US$17.4 billion in assets from structured investment vehicles, or SIVs, that were affiliated with Citi. It said that the move — which it called a “nearly cashless transaction” — would complete the bank’s wind-down of these troubled investment pools. Citi was a pioneer in the business of SIVs, which once made lots of money by issuing short-term notes to invest in longer-term securities with higher yields. They traditionally resided off the balance sheets of the banks that created and advised them. This meant that the banks are now starting to unind the SIVs on their own as no help is now forthcoming from the Treasury.

Citi now worth only US$34 billion, looks like JP Morgan could make a bid for Citigroup as well.... again with Treasury standing behind JP Morgan probably guaranteeing losses of up to US$100bn... one winner, many losers. After Paulson's mistake to let Lehman Brothers fail, they will not let Citigroup go down.

Cash is king, but bloody hell, where to put the cash... certainly not in a bank!

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p/p/s ... actually Citi is a very very good bet now at $6.... after Lehman Bro, Treasury will NEVER let another inv bank fail ... which means.... merger or bailout.... merger = ppl like JP Morgan will have to pay btw $15-25 per share, close to BV.... with Treasury guaranteeing a couple of hundred billions.... so there is a 200%-400% upside, its a calculated bet
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p/s photos: Aya Kiguchi

Why Ken Heebner Is Better Than Buffett

The best mutual fund manager around is Ken Heebner of Capital Growth Management. The statement above is a big one. Everyone worships Warren Buffett, I am not saying he isn't good, Buffett is very very good, right at the top. Unfortunately, Ken beats him in a poker heads-up match.

Fortune: Just how good has Heebner been? We may well be witnessing the most dazzling run of stock picking in mutual fund history. Since May 1998, Focus has an average annualized return of 24%, the best ten-year record of any U.S. mutual fund, compared with only 4% for Standard & Poor's 500. Focus, which has $7.4 billion in assets, is already up 15% in 2008 (as of May 19), but it is 2007 that will be remembered as Heebner's pièce de résistance. Fueled by big bets on energy, fertilizer, and metals, Focus soared 80% last year, vs. 5% for the S&P 500. "I told Ken it was like he was walking between the raindrops," says CGM president Bob Kemp, who oversees sales and marketing at the firm, of the year Heebner had in 2007. "It amazes even us." Last year marked the fourth time since 2000 that the fund returned 45% or better. And it's not as if Heebner has needed the big years to make up for a lot of losses: Launched in late 1997, Focus has had only one money-losing calendar year (2002).

Peter Lynch's 14-year tenure at Fidelity Magellan has long been the gold standard for mutual fund excellence. During Lynch's best ten years - August 1977 to August 1987 - Magellan recorded an average annual return of 36%, according to fund tracker Morningstar. It's a remarkable achievement, but even Lynch acknowledges that he was backed by a strong tailwind. The S&P 500 returned 19% a year over the same period. In other words, Lynch beat the market by 17 percentage points a year during his heyday. Ken Heebner has beaten the market by 20 points a year during his.

And Focus isn't the only Heebner-managed fund that's excelling. CGM Realty (a sector fund), CGM Mutual (a balanced fund that owns stocks and bonds), and CGM Capital Development (closed to new investors since 1969 and soon to be merged into Focus) have been standouts too. Realty boasts a 22% annualized return for the past ten years, sixth-best in the mutual fund universe, according to Morningstar. It's also the only fund in its category that's been bucking the real estate slump. Realty's one-year total return: 34%, vs. 6% for its nearest rival.

In December 2000, he began buying homebuilders like D.R. Horton and Lennar, convinced that falling interest rates would be good for housing. The stocks went on a tear, and by 2004, Heebner's stake in the sector accounted for 19% of assets in Focus and 79% in Realty. But toward the end of 2004 he grew uncomfortable with the spread of what he termed "funny-money mortgages," and by January 2005 - mere months before the industry started to collapse - Heebner had sold off every homebuilder share he owned. Heebner used his homebuilder profits to load up on oil and coal stocks, positions he'd started to establish in 2004.

In August 2005, Heebner doubled down on commodities by taking big stakes in copper miners Southern Copper and Phelps Dodge. The price of copper - and of copper stocks - doubled in a little over a year.

In November 2006 he built large positions in fertilizer companies Mosaic and Potash Corp. of Saskatchewan. This time the stocks quadrupled.

In October 2005 he shorted mortgage lender Countrywide. Heebner was early on that one, but he stuck with the short for two years, and his conviction was rewarded in 2007 when Countrywide collapsed from $40 to $8. By then, Heebner had short positions in three more drain-circling mortgage lenders: BankUnited, IndyMac, and FirstFed Financial.

Heebner actually began 2007 with a quarter of Focus's money invested in five Wall Street banks: Bear Stearns, Citigroup, Goldman Sachs, Lehman Brothers, and Merrill Lynch. The holdings could have proved disastrous, but by June - before the credit crisis really snowballed - he was out. "How do you explain genius?" muses Douglas Pratt, a former Invesco fund manager who was an analyst at Loomis. "Ken just sees things others don't."

For better or for worse, the hyperactive trading has always been one of Heebner's calling cards. The turnover rate in CGM Focus, which typically holds 20 to 30 stocks at a time, was a whopping 384% last year, which in theory means he traded enough to buy and sell the entire portfolio nearly four times.

To be fair, we still have to see how Ken's funds performed over the critical Sep-Nov 2008 period. I checked and the fund was down about 1/3 since June 2008, its bad but not that bad. Fair is fair, even Buffett's stock is down, though not by as much. Its not fair to take a 3 or 6 month window to assess someone's performance. Ken's track record is proven over 11 years, and has ridden out the LTCM shit, the internet implosion, the Enron combustion, and now this.

Why Heebner is better than Buffett:

a) Warren Buffett is a pure buy-and-hold kind of person. He uses time to his advantage. Not that its bad, its just not as savvy and pure like Heebner.

b) Ken Heebner not only pick stocks and sectors, he maxes the bets by timing as well. Everybody knows that to pick a good sector or a good stock is easy, market timing is near impossible. Ken has been able to get them right probably 4 out of 5 times and usually within a 6 month time frame.

According to a significant article in WSJ, Buffett did spectacularly well in stock picking in his first 20 years. However, that magic wand seems a bit deflated since then. Much of the outperformance had been due to his "brand name" and its ability to negotiate super-duper deals ala the recent Goldman Sachs and General Electric deals.

WSJ: For the first two decades of his career, Mr. Buffett built the bulk of his fortune through his investing prowess, producing one of the best long-term track records of any money manager in history. More recently, however, Mr. Buffett has succeeded not through investing prowess alone, but also through exclusive deals that have come to him because of it.

Only a part of Mr. Buffett's market-beating performance has come from stock-picking. Even more of his edge has been generated by the operating subsidiaries of his Berkshire Hathaway Inc., like Benjamin Moore paint and Geico insurance. "There's no question about it," Mr. Buffett told me during the week. "Certainly over the last decade at least," the earnings of Berkshire's operating businesses "have grown at a much faster rate than the [value of the] marketable securities per share."

It is a lot harder than it used to be to measure just how good a stock-picker Mr. Buffett is. When I asked him if he knew how well Berkshire's stock portfolio has done in recent years, he answered: "I've no idea what the rate of return would be. But, knowing myself how hard it would be to do the calculations right, I'm suspicious of anybody's numbers."

An outsider, then, can barely get in the ballpark. Since the end of 1988, Berkshire's stock portfolio has grown from $3.56 billion to $69.51 billion. That is a spectacular average annual increase of 16.5%, far surpassing the 10.5% annualized return of the Standard & Poor's 500-stock index. Of course, this calculation is only a crude approximation, since it ignores the cash that Mr. Buffett added in -- and moved out -- along the way.

Over the same period, the growth in Berkshire's book value per share, which reflects all of Mr. Buffett's activities, not just his stock-picking, was 19.9%.

In other words, Mr. Buffett's skill at picking publicly traded stocks pales alongside the value he has added to the company through other means.

As recently as 1995, 73.5% of Berkshire's total assets consisted of a portfolio of publicly traded stocks that (at least in theory) any investor could have replicated. As of June 30, though, Berkshire's stockholdings made up just 25% of its total assets.

Mr. Buffett's stock picks used to drive the train; lately, they are more like the caboose. He has been buying private firms outright and landing "sweetheart" deals in public companies.

Since the beginning of 2006, Berkshire has spent nearly $17 billion buying private companies lock, stock and barrel, including an Israeli cutting-tool maker and a distributor of electronic components.

Meanwhile, on the sweetheart front, in 2008 alone Mr. Buffett has sunk $5 billion into Goldman Sachs, $3 billion into General Electric Co., $3 billion into Dow Chemical Co. and $6.5 billion into the merger of Mars Inc. with Wm. Wrigley Jr. Co. -- all with preferential terms.

Twenty years ago, Mr. Buffett struck similar bargains with companies whose quality ranged from purebred Gillette to mutts like Champion International, Salomon Brothers and USAir Group. His results were mixed. The lesson here is that even Mr. Buffett learns lessons. In his latest round of sweetheart deals, he gets a generous upside and virtually eliminates any downside, a "heads I win, tails I win" structure that other investors can only dream about.

Whether he buys stocks in what he calls the "auction market" or private businesses in the "negotiated market," Mr. Buffett tries to secure a margin of safety. That term, defined by his mentor Benjamin Graham, means that the price is so far below a business's underlying value that severe loss is improbable.

"We do try to buy our businesses like we buy our stocks," Mr. Buffett told me, "and buy our stocks like we buy our businesses." By that he means, among other things, that he wants to understand how the enterprise generates cash, how well-managed it is and whether its customers would stay loyal even if it raised the prices of its goods or services. Note carefully: None of these factors are contingent on the current price of the stock.

"Being a businessman makes me a better investor and being an investor makes me a better businessman," Mr. Buffett explained. "Most businessmen limit themselves to their own field, and most investors don't really think about businesses. And many businessmen are semi-oblivious to the yardsticks other people use outside that field. I'm always comparing everything to everything else. The question I want to answer is. 'Where do we get the most for our money in something we can understand?'"

"I prefer, and [Berkshire Vice Chairman] Charlie [Munger] prefers, the permanent ownership of [private] businesses," Mr. Buffett added. "That's been my focus for well over 20 years. But it's just that sometimes, marketable securities are so much more compelling." Mr. Buffett didn't say whether he thinks now is one of those times, but he did state publicly earlier this month that "I've been buying American stocks."

Any investor who picks stocks can try to think like Mr. Buffett and, as he pointed out, "the individual actually has an advantage over us, because their costs of buying and selling [stocks] are a helluva lot less than ours." But that advantage applies only if you actually can think like Mr. Buffett. Above all, there is much more to his success than stock-picking alone. Throughout Mr. Buffett's long career, he has changed tack repeatedly. At this point, he is on a course most investors will no longer be able to follow.

p/s photos: Warattaya Nikulha

Fallen Idols

If you have been losing money over the past 12 months, fear not, you are in good company. People getting paid huge six figures have been performing just as badly, if not worse. This has been Wall Street's year of the fallen idols.

WSJ: Marty Whitman, the legendary septuagenarian who co-manages Third Avenue Value, has seen crises come and go. There are few you could trust more in a panic. But his fund has almost halved this year. Bill Miller, the famous manager at Legg Mason Value, has fallen by nearly 60%. And that's not even the worst of it. Miller's more flexible, go-anywhere fund, Legg Mason Opportunity Trust, is down by two-thirds since the start of the year.

Ron Muhlenkamp at Muhlenkamp, Wally Weitz at Hickory, Manu Daftary at Quaker Strategic Growth, Richie Freeman at Legg Mason Partners Aggressive Growth, Ken Heebner at CGM Focus, Christopher Davis and Kenneth Feinberg at Davis New York Venture Fund, Will Danoff at Fidelity Contrafund, Saul Pannell at Hartford Capital Appreciation: They've all lost about 40% or more. Some have nearly halved.

It is a shocking bloodbath. These are managers with some of the highest reputations on Wall Street. They have beaten the Street over many years, even decades. And even they got shellacked. What chance did you have?

Even most of those who anticipated a crash got pummeled. Bob Rodriguez at FPA Capital has been very bearish for years, and was holding large amounts of cash in the fund. But he's still down 36%.

The picture for Warren Buffett looks somewhat better, although he swung from $3 billion investment profits to $1.4 billion losses in the first nine months of the year, while net earnings more than halved. Shares in Berkshire Hathaway have fallen about 31% since Jan. 1.

Those who look good include John Hussman at Hussman Strategic Total Return, who is down just a few percent. And Jeremy Grantham at GMO, who predicted much of the meltdown. His GMO Benchmark-Free Allocation Fund, an institutional fund that has a pretty free rein on what to hold and what to avoid, has still lost 11% so far this year.

There are three long-term lessons here for ordinary investors.

The first is that if the smartest and best fund managers can't successfully anticipate a crash with any degree of confidence, you can't either. Time spent trying is time wasted.

The smart money rarely spends much time very bearish, and with good reason. In practice it is almost impossible to predict a crash. And even if you are right about the direction, you will probably get the timing wrong. That may end up compounding your losses instead of preventing them. John Hussman is among very few who have gotten this one right. I know at least two superstar managers who correctly anticipated a blow out, and moved heavily into cash… in the fall of 2006, a year too soon. Markets soared instead.

I also know of at least one portfolio manager who's been predicting the U.S. credit implosion for at least seven years. Prudent Bear has been betting on falling shares (and rising gold) for a long time. It's finally getting its reward: It's up about 37% so far this year. But investors actually lost money between 2003 and the end of 2007, while the rest of Wall Street rose 70%.

And remember that investing is a long-term game. This has been the worst financial bloodbath since 1929. Yet Ken Heebner (p/s: to me he is much better than Warren Buffett) is still up more than fivefold over the past ten years, even after factoring in this year's carnage. Mr. Daftary has more than doubled investor's money. Many others are up 50% or more over that time.

The best an investor can do is to look for value, prefer unfashionable assets over fashionable ones, and avoid chasing past performance.

As previously observed here, everything has now fallen. Inflation-protected government bonds. Munis. Gold stocks. The whole shebang. Eighteen months ago, every single asset class was expensive. Today it's possible that almost every single asset class – with the possible exception of regular Treasurys - is cheap.

p/s photos: Elanne Kong