No Value Added In 8 Years?

While many are taking the opportunity to look at what has transpired since the Lehman's collapse a year ago, the folks at Bespoke Investment Group put up a more pertinent piece on the Dow Jones Index component stocks. Eight years have now passed since 9/11, and the Dow is essentially unchanged since that horrible, sad day. On 9/11/01, the Dow was at 9,605. The index is currently trading just 15 points below that level at 9,590. That literally meant that in 8 years, no value has been added by these component stocks (minus dividends paid out). Of course a more plausible explanation would be mispricing. That means 8 years ago the markets were too expensive and now they are not, or 8 years ago the markets were fairly valued and now it is grossly undervalued - which hypothesis is 'more correct' has a lot of bearing on how you view the state of markets and the potential value and upside or downside. I tend to believe that the latter view is more correct, i.e. the current market values brings about more "value and opportunity" going forward.

Bespoke - The stocks that made up the index that day have had big moves, however. Hewlett Packard (HPQ) is up the most with a gain of 157%, while General Motors is bankrupt. Caterpillar (CAT), McDonald's (MCD), United Technologies (UTX), Exxon Mobil (XOM), and Procter & Gamble (PG) are all up more than 50%, while Alcoa (AA), General Electric (GE), Eastman Kodak (EK), and Citigroup (C) are all down more than 50%. Coca-Cola (KO) and Microsoft (MSFT) are currently trading the closest to where they were on 9/11/01.

p/s photos: Eva Huang Sheng Yi

The M'sian X-Files - Intricacies Of The New FBM KLCI

There is a lot of new information that one can get on the new index, which will help us to understand the index and the markets better. It will also help to get a better grasp as to the "integrity of the FBM KLCI" when it rises and falls.

a) Its just 30 counters instead of the old KLCI which had 100 counters.

b) The new index addresses issues such as liquidity and free float, and let's face it funds in general are really looking at just the top 30... heck throw in another 20 stocks and that's their universe.

c) There is a good chance that the 30 stocks will start to be traded at a premium to the rest as these are the must haves for all indexed funds, by all the big and small local funds, and by most of the foreign fund managers managing Asian portfolio so as to not be under performing the Asian benchmarks.

d) Having said that, part of the rise in the FBM KLCI over the last 2 weeks may be attributed to some of these sustained 'enforced buying' activity rather than by genuine equity players.

e) The new index is a skewed index. Banks and plantations alone have a total weighting of 55%. If you have banks, plantations and telco = 63%. If you add banks, plantations, power, gaming and telco = 85%. So, technically a fund manager need only look seriously at these FIVE SECTORS alone to do well, forget about the rest.

f) The new index will also affect how research houses form their analyst teams. They must cover the 5 sectors, there are 9 sector that are not covered by the new index. It is very likely that analysts in the following sectors better start covering a more important sector in order to stay relevant. The following are the 9 sectors that are deemed as "irrelevant", "need not exist", "unimportant to the Malaysian economy", "unnecessary to look at in order to gauge the overall health of the economy": technology, transportation, property, timber, insurance, construction, building materials, hotels and industrial products. Go figure!

g) The new index will make it that much "easier" for the index to be controlled - conspiracy theorists will agree with me whole-heartedly that this is to allow PNB-EPF-MOF-EPU to control the index better. So, the next time we see a major market correction, we may be able to withstand it better with the new index as all it takes is to mop up the 30 stocks ... even though those stocks outside of the top 30 may be seeing their share prices tumbling like a rock. Managed perception more important la... than real effects to the economy. Hey, like that, we may never ever see a major correction in the FMB KLCI... ever... especially if we keep launching new big funds to mop these buggers up. But I am only guessing here.

h) Now let's consider the sin stocks, gaming and tobacco, they account for 12% of the new index. This is an important consideration as most of the big local funds will not be touching these stocks. Can you "not be in control of the 12% of the index" and still manage funds that is compared to the FBM KLCI benchmark? If these 12% of the new index starts a bull run on its own, most of the local funds will be under performing the new index. Can you all see a danger here??? Staring at you in the face!!! The danger is ... if there ever occurs a situation where you get the gaming and tobacco stocks to be in a strong bull run outperforming the rest of the new indexed stocks ... could we safely say that the EPU-MOF will not be strong-armed or "influenced" by certain parties to "whack down the sin stocks" with excessive punitive measures ( additional gaming and duties above and beyond what is normally expected in a financial year)???

g) If you take Khazanah, Petronas and PNB as the investing triumvirate ... the 3 already control 12 out of the 30 stocks in FBM KLCI. If you are a nasty anti-government critic, you have enough loose thoughts to take this factor to the next level. I am not saying its a negative or a positive, but its a fact that is worth remembering. Be careful, as the greater the influence one has, the greater the responsibility to be prudent, transparent and professional.

h) Though most fund managers will want to stick to the FBM 100 as the benchmark for their performance, it will not be so easy. The drivel, the propaganda and focus have all been set to make FBM KLCI the index to watch, and because it was kinda close to the level where the old KLCI was, most will tend to take to this new index. Its much harder if you switch from a 1,100 index level to a 9,500 one ... kudos to the planners.

i) Of course detractors will point to the fact that the venerated Dow Jones Industrial Index is only made up of 30 stocks, and is an often quoted barometer, even though most professional funds benchmark their performance to the broader S&P 500. The big difference is that it will be a hundred times easier to try to "manipulate" the FBM KLCI than the Dow Jones Industrial Index. Actually, pick just any two stocks in the Dow Jones, I am VERY SURE the market cap of any two stocks will be bigger than total market cap of ALL stocks listed on Bursa - in fact just any ONE stock in the top 10 of DJIA will be enough to cover the entire market cap of Bursa. Not to belittle FBM KLCI but to put things in perspective.

Can I have my Datukship now??!! (yea, I don't really need one or want one... but I want to get on and off my plane faster la...).


p/s photos: Yukie Nakama

The More Things Change, The More We Stay The Same

What a difference 10-12 years make... well, not much of a difference really, the more things change, the more we stay the same. Events that happened in 1997 in BLUE; similar events happening now 2008-2009 in RED:

Hong Kong returns to Chinese rule; Hong Kong very happy to be under Chinese rule which basically gave them an economic lifeline

O. J. Simpson found liable in civil suit; Bernie Madoff probably committed a bigger crime

O.J. Simpson was freed later on; The ratings agencies did better, they were never charged and carry on business as usual despite conclusively being deemed as the main culprit for "starting and exacerbating the CDOs by giving them basically fraudulent AAA ratings, and later being so very slow to downgrade the same papers when the horses have bolted"

Nobel Prize for Economics is won by Long Term Capital Management stars Robert Merton and Myron Scholes; Long Term Capital Management collapsed a couple of years later and needed a big bailout by Treasury

President Clinton bars federal funding for any research on human cloning; President Obama bars federal funding for any research on investment banker cloning

HK begins to kill all chickens within its territory to stop the spread of a deadly influenza strain; HK still killing chickens within its territory today

Morgan Stanley and Dean Witter Reynolds announces a $10bn merger; Mitsubishi UFJ bought a 21% stake in Morgan Stanley

Titanic hits theaters — other notable flix include The Full Monty, Good Will Hunting, and L.A. Confidential; Slumdog Millionaire hits the theaters - other notable flix include Doubt, Mamma Mia, Nixon, Red Cliff (read btw the lines on the movies selected)

Ellen DeGeneres outs herself; John Thain outs himself

Eric Clapton wins a Grammy for Change the World; Obama wins the Presidency for Change, Yes We Can

Skynet launched a nuclear attack on mankind; Facebook launched a dumbing down fad attack on mankind

The Dow Jones Industrials hit 7,100; The Dow Jones Industrials hit 7,100.

p/s photos: Misaki Ito