Demystifying Hell - Exothermic Or Endothermic

I was reminded of the funniest email I got a few years back. It must have made its way a couple of times around the world and re-enter my mailbox again. It had to be a true story because it would take so much effort to think up one from scratch.


The following was an actual question given on a University of Washington chemistry mid term. The answer by one student was so 'profound' that the professor shared it with colleagues, via the Internet, which is, of course, why we now have the pleasure of enjoying it as well.

Bonus Question: Is Hell exothermic (gives off heat) or endothermic (absorbs heat)?

Most of the students wrote proofs of their beliefs using Boyle's Law (gas cools when it expands and heats when it is compressed) or some variant.

One student, however, wrote the following:
First, we need to know how the mass of Hell is changing in time. So we need to know the rate at which souls are moving into Hell and the rate at which they are leaving. I think that we can safely assume that once a soul gets to Hell, it will not leave. Therefore, no souls are leaving.

As for how many souls are entering Hell, let's look at the different religions that exist in the world today. Most of these religions state that if you are not a member of their religion, you will go to Hell. Since there is more than one of these religions and since people do not belong to more than one religion, we can project that all souls go to Hell. With birth and death rates as they are, we can expect the number of souls in Hell to increase exponentially. Now, we look at the rate of change of the volume in Hell because Boyle's Law states that in order for the temperature and pressure in Hell to stay the same, the volume of Hell has to expand proportionately as souls are added.

This gives two possibilities:
1. If Hell is expanding at a slower rate than the rate at which souls enter Hell, then the temperature and pressure in Hell will increase until all Hell breaks loose.
2. If Hell is expanding at a rate faster than the increase of souls in Hell,then the temperature and pressure will drop until Hell freezes over.

So which is it?

If we accept the postulate given to me by Teresa during my Freshman year that, 'It will be a cold day in Hell before I sleep with you,' and take into account the fact that I slept with her last night, then number two must be true, and thus I am sure that Hell is exothermic and has already frozen over.

The corollary of this theory is that since Hell has frozen over, it follows that it is not accepting any more souls and is therefore, extinct.... leaving only Heaven, thereby proving the existence of a divine being which explains why, last night, Teresa kept shouting 'Oh my God.'

THIS STUDENT RECEIVED AN A+.


p/s photo: JJ

China Heart Taiwan

What does it take for a country's stock market to rise 6% in a day? What kind of news can jump start that? Apparently, very little. China Mobile announced that it will buy a 12% stake in Far East Tone Telecommunications. The news raised hopes that there is a tacit approval from Beijing to encourage China firms to do more investments into Taiwan.

Besides being a good move politically, its a very good move economically as well. Just look at how Hong Kong's economy rely on China, its like a modern day umbilical cord. At the same time, it leverages on the advantages of each side to link up. A similar situation looks to be happening between China and Taiwan. Can you imagine the economic might of a Greater China economic grouping that has HK, China and Taiwan. Its pretty formidable. Its might and collective strength more than equates an ASEAN grouping.

Far East Tone is Taiwan's third largest telco. The deal still needs approval from Taiwan regulators, but it should be a done deal. If approved, it would be the first direct investment from China. This comes after another ground breaking development when China agreed to let Taiwan to send observers to the annual meeting of the World Health Assembly, the WHO's ruling body, next month in Geneva. Ties have improved significantly under Taiwan's President Ma Ying Jeou. The two sides have signed a series of agreements easing limits on investments between the two and establish the first regular two way air and shipping traffic.

President Ma Ying-jeou said that the 1952 Treaty of Taipei affirmed the transfer of Taiwan's sovereignty from Japan to the Republic of China. Ma's statement deviated from his previous claim that it was the 1943 Cairo Declaration that gave the ROC its claim to Taiwan. "While the 1952 treaty does not specify the legal successor government [of Taiwan], it was clear between the lines," he said. "Japan would not have signed the accord with the ROC if it did not intend to concede the territories to the ROC."

Ma said the 1952 pact had three meanings: It not only affirmed the "de jure termination of war between Japan and the ROC" after Tokyo's surrender in 1945, but reasserted the "de jure transfer of Taiwan's sovereignty to the ROC" as well as "restoring friendly and normal relations with Japan. Read this any way you like, its not the China Mobile story that pushed Taiex higher, its this statement by Ma.

There are many ways to court a girl. You can threaten, scream, shout and warn ... but those will never be as effective as cajole, serenade, being generous, showing respect and tenderness. China heart Taiwan.


p/s photos: JJ

Regulators Need To Fix Dividend & Share Buyback Schemes

Possibly my most important posting this year.... This is not the crux of the problem we are facing but is part and parcel of navigating the "compensation culture" of Wall Street and high-falutin' CEOs. Excessive risk taking has been the center of what brought the credit markets to its knees. The compensation culture is one where the base salary is only a fraction of these people's compensation packages, even though for many of them the base salary is already more than $1m. In Wall street, the culture is even more evident in that analysts and bankers get between $100,000-300,000 as their base salaries but there is a tacit understanding that their overall compensation will be in multiples of their base salary - and not in number of months like the rest of us. Hence many of them argue that the compensation cap by Obama will not work. Its like saying "don't throw us in prison as there are too many of us"...

An article by David Reilly, Bloomberg news columnist, wrote recently that there need to be a revamp of the way companies pay dividends and do share buybacks. I totally agree. Dividends that are steady, predictable and "high-ish" will always attract the longer term funds as solid shareholders, thus propping up share prices. As the CEO, your destiny is tied to the share price, thanks to the finance literature over the last 20 years which says that the CEO and senior management's goals, objectives and compensation must be tied to the share price performance - which indirectly implies that shareholders interest are served. BUT ARE SHAREHOLDERS INTERESTS BEING SERVED PROPERLY?

The compensation maniac rise over the last 10 years and the current crisis basically reinforced to us that shareholders interests are not best served under current system of tying in share prices to compensation.

The current system will make almost all CEOs to aggressively pay out strong dividends or have a strong dividend policy, and worse still, engage in frequent and at times excessive share buybacks. Share buybacks in the US are usually then canceled (unlike in Malaysia, which defeats the purpose) and that will improve the EPS by a corresponding amount, which will then move share prices higher if forward PER ratings and valuations stay the same. That is because the bulk of the CEOs and Wall Street compensation rides on share options.

The danger with Obama's pay cap is that much of the additional compensation will be paid via shares, although they will only vest after TARP money has been fully repaid. Thus, I can already predict what the CEOs will be doing once they get profits rolling again:
a) pay down TARP
b) improve dividends
c) buyback shares
The only difference is that they will pay down TARP as a new priority. It does not change the compensation culture. Especially in times like this any free cash flow should be used to shore up balance sheet and increase your capital standing and sufficiency, not paid back via dividends or doing useless share buybacks.

I can soften the blow for dividends, its good and essential to encourage long term shareholders to hold onto good stocks for a long time. I do agree that if a company can, they should pay good dividends, above the company's capital requirements for normal growth strategy. It would be prudent to have a proper dividend policy (e.g. percentage of profits that goes into dividend pool; or targeting a dividend yield year in year out). But do not do haphazard dividend payments one year from the next, it is unprofessional and unpredictable, and will cause valuations to be marked down.

Here is where we need more bite from the board of directors, especially the independent ones. New guidelines by the SEC should be furnished to the directors to ensure that dividends and share buybacks are backed by a solid grasp of business fundamentals and industry trends.

Share buybacks are only OK if shares are subsequently canceled, otherwise the CEOs have no fucking idea what share buybacks are supposed to do. Trashing share buybacks was my very first article for this blog, so its ranks very high on my list of piss-me-off-silly issues. However, owing to the compensation culture in Wall Street and among CEOs in the US, the share price is like their religion. Thus they will engage in excessive and frequent share buybacks, EVEN when they are not necessary - this will lead to a depletion of capital, and hello... what are really troubling the banks nowadays.... They have pushing a lot of free cash flow into share buybacks, depleting capital, pushing up EPS... and yet leveraged up even more on their remaining lesser capital.

Now, oops, they need more capital... We need a regulatory body to oversee the amount of shares each company is buying back and reassess them as normal capital requirements for the companies in those industry. For example, between 2003 and 2007, Citigroup paid out $44bn in dividends and spent $22bn buying back stocks. If they had slashed their dividends by half and not do any share buybacks, they would have an additional "capital" of $44bn. But noooo... the compensation culture is such that every time these buggers see some money flowing into the coffers, they will think of ways to use them immediately, always running on the edge, skirting between raindrops... maximising every dollar. Capital is there for a reason, ... to fund growth , AND TO HELP THE COMPANY RIDE OUT BUSINESS CYCLES & MAYBE CATACLYSMIC RECESSIONS.

Is there anybody out there???

p/s photos: JJ

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