Japan's Double Barrel Luck

The Japanese markets have been in the doldrums for the longest, no thanks to the silly yen strengthening phase following the financial crisis as investors somehow still think the yen is a safe haven. The Japanese market has two things going for them this time: the Federal Reserve move which basically tells all that rates will be very low and they will keep printing liquidity into the markets, which negates the need for some to still park money in yen as safe haven; the LDP election victory which propels the markets to a "regenerative phase".

Following is the latest strategy report by Bank America Merrill Lynch on Japan:


LDP victory brings our bullish scenario closer   

With the LDP (294 seats) and Komeito (31 seats) combined (325 seats) now 
controlling a more than two-thirds majority (320) of the Lower House, it now 
appears more likely that the new Shinzo Abe administration will be able to 
exercise strong leadership. Though an LDP victory was widely expected, what 
has not been fully priced into the market is the degree to which the new 
government will be able to put through its legislative program relatively 
unhindered.  

Consequently, Shinzo Abe will need to act quickly to implement the policies he 
had set out before the election. Those measures we believe that have yet to be fully factored into the market are inflation targeting, and long-term fiscal 
expansionary measures including corporation tax cuts and a raft of spending 
measures included under the broad title of “national strengthening.”  


As the new cabinet is being drawn up, the focus is now on how and in what order of priority the new administration will put through its policy program, including drawing up a supplementary budget, expanding public works spending, reducing the rate of corporation tax and exercising greater influence over the BoJ’s monetary policy. For instance, if the government moves quickly to put pressure on monetary policy, we can expect the yen to continue to weaken, but if this is put off until after the new BoJ Governor assumes his post (April 2013), then in the near term we could see the market looking to lock in profits. However, at least we can say that waiting for weakness to seek buy-in opportunities is unlikely to be a viable strategy for the time being.  

Cut in corporation tax from 40% to 30% would raise ROE  

A reduction in the corporation tax rate from around 40% to 30% would, we 
calculate, raise TOPIX ROE from 7.8% (FY3/14 IBES consensus) to around 8.9%.  



Schedule  

The next BoJ monetary policy meeting is scheduled for 19-20 December, at 
which additional easing is a possibility. At this point, the market is not expecting explicit inflation targeting to be adopted. On 26-27 December, Shinzo Abe should be officially appointed prime minister at a special Diet session, immediately after which the new cabinet will be announced. Abe has expressed his intention to visit the US in January, so we expect significant diplomatic activity including related to China. From end-January to February we expect a supplementary budget to be unveiled comprising a boost to Apr-Jun GDP and confirming a hike in the rate of consumption tax. In March, two new BoJ Deputy Governors will assume their posts, followed in April by the new BoJ Governor. We expect government and BoJ links to become even stronger, and an increasingly dovish bias in central bank policy.  



When previously elected prime minister in 2006, Abe’s first visits were to China and South Korea to patch up relations that had previously worsened, and this time around we again expect him to take similar practical steps to deal with currently stained relations, though there is a risk of provocative statements being made.  

However, if the cabinet line-up is decided in order to balance factional interests, then the policy program implementation may not be as speedy as the market is hoping. If the cabinet includes a large number of younger politicians, as per the current shadow cabinet, it would strengthen the hand of prime minister, and consequently increase the possibility of the policy program proceeding in line with Abe’s intentions as indicated in speeches etc to-date.  

Why I Like Fajarbaru Builder

As mentioned before, investors have been to keen to look at big construction firms at the expense of the small-mid cap ones. I expect the stimulus plan to continue to be emphasised in the upcoming Budget, and it is likely that the bulk of the contracts be broken up into smaller size parcels.

Fajarbaru Builder Bhd (Fajar) is a home-grown contractor that has carved a niche in landing medium-sized government contracts of less than RM500mil in value.

1) Order book stands at RM550m to be completed in FY11. In their books include the RM108mil Low Cost Carrier Terminal (LCCT) in Sepang, LCCT Extension works (RM164mil) and Seremban-Gemas Double Tracking subcivil/ earthworks package (RM316mil). Some of the ongoing projects are Electrified Double Track Railway, LCCT expansion, and Tampin Hospital and KTM staff quarters at Batu Gajah. Fajarbaru is eyeing for at least RM1b contracts from LCCT and other government related projects . Currently bidding for some of the works for the new LCCT in KLIA which the Group is eyeing for at least RM500m worth of contracts.

2) Fajar stands out as a small-mid cap construction player with a carved out expertise in interesting sub-sectors. It stands a good chance of participating in the new LCCT given its airport related experience. The other expertise in with the double tracking / earthworks electrified rail projects. Both are nuanced and make the company's resume more solid for similar jobs in the near future.

3) The company is on track for a 3-year earnings CAGR of 23. One of the better managed and cash rich construction company (that is a new thing to hear about a construction firm) with a net cash balance of RM0.62. That's 50% of the share price in cash.

4) Owing to its track record and expertise, Fajar has its noses in front to snatch upcoming airport jobs such as the new LCCT (RM2bn) and Penang Airport upgrade (RM250m). To repeat, in recent years, Fajarbaru has acquired much airport related experience, having worked on jobs at the KLIA, temporary LCCT and Penang Airport. The new LCCT contract will be broken up into 20 packages. Management expects prequalification tenders to be called within the next month and some packages could be awarded by early 2010.

5) This is the key factor for me on why I like Fajar, its the management. Fajarbaru is led by Dato Low, best known as the last Managing Director of Road Builder Holdings before it was acquired. Always bet on a proven winner and Low has the capability to steer Fajarbaru to greater heights given his 3 decades of experience.

Considering all that, it has no business hanging around at RM1.20. Again my pre-qualification is 30% within 6 month.

Shares Outstanding (million) 136.1
Market Cap (RMmil) 148.4
Book value (RM/share) 0.8
P/BV (x) 1.4

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

p/s photo: Kou Shibasaki

BlackRock Is Now The Biggest Asset Manager

Investors pulled a net $320bl from mutual funds in 2008, a record in both dollar terms and as a percentage of assets, in one of the biggest flights to safety the industry has seen. The move out of what were previously regarded as safe and stable investments followed a record year of investor inflows in 2007.

• Jun 12: Blackrock, started 21 years ago in a one-room office, agreed to buy Barclay's investment unit for $13.5bl to become the world’s largest money manager. BlackRock will pay $6.6bl in cash and the rest in stock for Barclays Global Investors. Barclays will hold a 19.9% stake in the combined company. The purchase, the biggest of a fund manager, creates a company overseeing $2.7tl in assets, more than the Federal Reserve. BlackRock will add about $1tl in investments that track market indexes, which are attracting clients at the expense of funds whose managers choose securities to buy and sell. It’s the first top-ranked firm to attempt to combine both types of businesses.
• Jun 08: BlackRock is a step closer to becoming the world’s biggest money manager after emerging as the leading bidder for Barclays’s fund unit. BlackRock has moved ahead of contenders for Barclays Global Investors including BofNYMellon. Barclays, the U.K.’s third-largest bank, is seeking more than $12bl for BGI, and may keep a 20% stake in the combined company.
• Mar 27: BlackRock, the biggest publicly traded U.S. asset manager, will participate in the U.S. Treasury’s programs to purchase troubled securities from banks. BlackRock will take part in programs outlined today by the Treasury that will purchase loans and set up funds to buy mortgage-backed securities. Bill Gross, co-chief investment officer for Pimco, said his firm also would participate in the bailout programs.
• Jan 20: SSgA reported a 27% plunge in assets under management for 2008, to $1.44tl as of Dec 31 2008, from $1.98tl a year earlier, and down 14% from $1.67tl in Q3.
• Jan 13: Fidelity Investments, Franklin Resources and Legg Mason suffered the biggest U.S. mutual-fund withdrawals in 2008, cutting their base of fee- generating assets. Investors pulled $40bl from stock and bond funds at Fidelity, the biggest outflow from a single company. Investors took $21.5bl from Franklin and $21bl from Legg Mason.
• Dec 30: Legg Mason's once-celebrated Value Trust fund is set for its worst-ever annual returns in 2008, and some investors grumble that time is running out for its manager, Bill Miller. The flagship stock mutual fund lost 57% in the year to December 29, the worst in its class and under performing the S&P 500 for the third straight year following the S&P 500's 39.4% loss.The losses are so big, the fund now trails the benchmark S&P 500 over not just one year but over three, five and 10 years. It is barely ahead over 15 years. Hemorrhaging assets, its size has shriveled to about $4.3bl at the end of November from more than $20bl in mid-2007. Miller's luster is fading. The 58-year-old made his and Legg Mason's name as the only manager to beat the S&P 500 15 years in a row until 2006 with bold portfolio picks that once characterized the Value Trust.
• Nov 11: As the financial crisis hammers fund returns, many managers are touting their stable long-term records to convince investors that their money is safe. However, that argument may soon vanish. The 10-year returns of many funds have held up in the face of recent losses in part because of huge stock market gains in the 4Q of 1998. As this year ends, those returns will reflect a new decade of 1999 to 2009, a period that could look miserable for some big funds like Bill Miller's Value Trust.
• Nov 4: In Europe, BlackRock is promoting fiduciary management — the outsourcing of the management of a portion or an entire pension fund – beyond its Dutch stronghold. In the last two weeks of Oct. 2008, BlackRock had been in discussions with four different U.K. pension funds to provide fiduciary management services.
• Oct 21: BlackRock's 3Q earnings fell 15% as investors withdrew from its money-market funds. The biggest publicly traded U.S. asset manager had withdrawals of $41.6 billion from its money-market funds in the quarter, mostly after the Reserve fund faltered. The withdrawals, which represented about 12% of BlackRock's cash-management assets as of June 30, and falling stock and bond markets pushed the company's net income down for the first time in two years.
• Oct 15: Pimco, the world's largest bond fund, was selected to manage the CP assets for the Fed as part of the government's Commercial Paper Funding Facility program. State Street will serve as custodian and administrator of the program.
  

p/s photos: Kou Shibasaki

The New Compensation For Investment Bankers?

This will be a good point of discussion during the Financial Markets Career talk. The present global financial crisis may actually result in some changes in how salaries and bonuses are to be paid. The following are the latest information from Royal Bank of Scotland. Base salaries for 1st- 3rd years bumped by $10K. Their starting pay now will be:
1st year base: $70k
2nd year base: $80k
3rd year base: $90k

3rd years promoted to Associate: Base: $100K- no signing bonus

Numbers out today for Global Banking and Markets. All bonuses are 100% deferred- over 3 years, subject to clawbacks. Terms still not defined.

Bonus Ranges:
1st year: $40k-$50k
2nd year: $50k-$60k
3rd year: $60k- $70k

What that means is that these bonuses are declared only and can be clawed back within a certain period if performance of the unit or company does not match up to predefined criteria.

Example, a second year RBS employee may be on $80,000 a year ... I think their year end is June, so the declared bonus for this employee may be $55,000. The terms are not clear yet but if there is a clawback, it will mean that the employee won't get to see the bonus for a certain period, say 2 years. Within that 2 years, the employee's performance, his/her department's performance and/or company's overall performance must match up to predefined criteria - then and only then will the employee get his/her $55,000 bonus. That amount may be lesser if any of the predetermined criteria were to be not attained.



p/s photos: Kou Shibasaki

Why People Still Listen To Cramer & Kudlow

Yes, its true unfortunately. The article by New Scientist confirms my suspicions.

Humans prefer cockiness to expertise:

Ever wondered why the pundits who failed to predict the current economic crisis are still being paid for their opinions? It's a consequence of the way human psychology works in a free market, according to a study of how people's self-confidence affects the way others respond to their advice.

The research, by Don Moore of Carnegie Mellon University in Pittsburgh, Pennsylvania, shows that we prefer advice from a confident source, even to the point that we are willing to forgive a poor track record. Moore argues that in competitive situations, this can drive those offering advice to increasingly exaggerate how sure they are. And it spells bad news for scientists who try to be honest about gaps in their knowledge.

In Moore's experiment, volunteers were given cash for correctly guessing the weight of people from their photographs. In each of the eight rounds of the study, the guessers bought advice from one of four other volunteers. The guessers could see in advance how confident each of these advisers was (see table), but not which weights they had opted for.

From the start, the more confident advisers found more buyers for their advice, and this caused the advisers to give answers that were more and more precise as the game progressed. This escalation in precision disappeared when guessers simply had to choose whether or not to buy the advice of a single adviser. In the later rounds, guessers tended to avoid advisers who had been wrong previously, but this effect was more than outweighed by the bias towards confidence.

The findings add weight to the idea that if offering expert opinion is your stock-in-trade, it pays to appear confident. Describing his work at an Association for Psychological Science meeting in San Francisco last month, Moore said that following the advice of the most confident person often makes sense, as there is evidence that precision and expertise do tend to go hand in hand. For example, people give a narrower range of answers when asked about subjects with which they are more familiar (Organizational Behavior and Human Decision Processes, vol 107, p179).

There are times, however, when this link breaks down. With complex but politicised subjects such as global warming, for example, scientific experts who stress uncertainties lose out to activists or lobbyists with a more emphatic message.

So if honest advice risks being ignored, what is a responsible scientific adviser to do? "It's an excellent question, and I'm not sure that I have a great answer," says Moore.

p/s photos: Kou Shibasaki

Market Strategists See Markets Rising By 46% By Year End!

Strategists at top houses are still seeing a much higher market closing by end of 2009. In fact the average prediction is an average of a further 46% bull run by end of 2009. Funny, if it was any other market conditions, calling for a year end closing that is 46% higher would have been a very major bullish call. But you don't hear of any trumpeting, I think everybody have been wrong so many times, they are quietly stating their predictions... but believe you me, if the markets surge 10%, all these strategists will be yelling their lungs off that their calls were prescient.

Click on link for the funniest and sarcastic take on trusting market experts and their predictions by the always funny Jon Stewart.

http://www.thedailyshow.com/video/index.jhtml?videoId=220252&title=cnbc-gives-financial-advice

It is hard to trust the strategists who are paid huge sums of money to be wrong so many times. Its the world's best bullshitting job. No matter how wrong you were, as long as you can b.s. your way to justify why you were off, you still get to keep your job. You don't even have to get it remotely close. Its mainly a PR job to meet up with clients - much like the nightclub girls who will schmooze you and tell you all lies, but still many of clients like to be schmoozed that way. Good b.s. artists still get paid very well, just like good nightclub ladies (or gigolos) are also well paid for their services - hard to find the difference. We are all prostitutes in the end for the right price!!!

p/s photos: Kou Shibasaki

EIU's Bleak Prognosis Of Malaysia

Economic Intelligence Unit / Dec 14 — Political uncertainty and instability are unlikely to dissipate in the months ahead, despite an expected orderly transfer of power from the prime minister, Datuk Seri Abdullah Ahmad Badawi, to the deputy prime minister, Datuk Seri Najib Razak, in March.

The leader of the opposition alliance, Datuk Seri Anwar Ibrahim, will continue with his campaign to destabilise the ruling Barisan Nasional government by persuading BN legislators to switch to the opposition. The Economist Intelligence Unit expects the BN coalition to remain in power in the forecast period. The BN still has a sufficiently large majority to pass the bulk of new legislation unchallenged.

We expect real GDP to grow by just 1.5 per cent in 2009, reflecting Malaysia's exposure to the global economic slowdown. We expect world trade to shrink by 0.5 per cent in 2009.

Inflation is forecast to moderate markedly in 2009-10, from an estimated average of 5.7 per cent in 2008. Domestic demand growth will be sluggish, and global prices for oil and industrial raw materials will fall sharply in 2009.

The merchandise trade surplus will fall to US$22.9 billion (RM82.4 billion) in 2009, from an estimated US$35.3 billion in 2008. The current-account surplus will also shrink in the next two years.

The slow pace of judicial reforms has led to growing concerns in the past month that the next prime minister of Malaysia will clamp down on critics and members of the opposition.

Bank Negara Malaysia reduced the overnight policy rate by 25 basis points on Nov 24 to 3.25 per cent, the first reduction since 2003. The government unveiled a package of fiscal stimulus measures in early November. It also revised its economic forecasts for 2009.

Malaysia's economy grew by 4.7 per cent year on year in the third quarter of 2008, a marked slowdown compared with the second quarter, when the economy grew by 6.7 per cent. The annual rate of inflation fell below 8 per cent for the first time in three months in October. Inflation, as measured by the consumer price index, increased by 7.6 per cent year on year in October. Merchandise exports grew by 15.1 per cent year on year in September, bolstered by still high global prices for oil, palm oil and liquefied natural gas. But prices for all three commodities have declined sharply during the fourth quarter.

p/s photo: Kou Shibasaki

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