So What Has Changed?

The volatility is numb minding, or rather mind numbing. To summarise, its about debt. When we had the subprime mess, the governments everywhere could still print money and stimulate their economies. When it is sovereign debt, those countries cannot just print. The outstanding debt looks too large and no is willing to buy new bonds unless its issued at very high yields. Trouble is the countries affected are mainly inside the Eurozone. The Greeks, the Portuguese and even the Spaniards cannot issue new debt in their own currency, they only have the Euro. You cannot be issuing in Euro as you have no way of controlling your monetary policies that is set by the ECB.



If they were still in their own currency, they still can devalue their currency, which is now no longer an option. The whole hoopla was due to rumours that the Chinese were about to sell their Euro bonds holdings. Now that they have denied it, the markets all rallied, but WHAT HAS CHANGED??? Nothing!!!

The entire scenario would have to see the Euro being depressed for quite some time. Though the EMU have stepped in aggressively, Greece is not the only one playing truant. Portugal and Spain, and maybe Italy will be the "me too" category. You cannot help one without helping the others. The more they help, the more downward pressure on the Euro. I can see the Euro going down to 1.1 to the dollar with fears of parity even by year end.

The entire scenario will cub the recovery process globally as the coming theme hitting the markets will be how the EU will have a lot less purchasing power, hence exporting countries to the EU will see a dismal scene playing out.



Some may take it that Asian and Latam may be hit as collateral damage, but I think the investors will actually pour more funds into the US and emerging markets as they will be the only bright sparks. The saving grace for the past 12 months have been that emerging markets have been relying a lot more on domestic demand and trading among themselves, and that underpinning would be sufficient to pull them back up.

But not yet, lets wait till the World Cup is over people, no rush.

What Could Endanger The Markets In 2010

What could cause problems in 2010, these are all IFs. Pays to keep track. If Bernanke gets itchy and push down 10-year US Treasury yields again, that could put more oomph to the already excessive liquidity in the system. Bernanke could be scared into doing so if jobless numbers do not show signs of improvement. The funds will try to play the liquidity game yet again, piling into crude oil, gold and this could really create a swift liquidity bubble again.

Japan is the best bet for calamity in 2010. Things may suddenly turn focus on their huge fiscal measures and their imbalances with respect to their public debt. Already the public debt is at a staggering 225 per cent of GDP. What could start the cascade is a big dip in the value of the yen, which may require stabilisation by raising interest rates. Any kind of rates rise will push debt service costs up the roof. The country will flip from deflation to early bouts of hyperinflation. The yen may crash to 130 yen to the dollar ... which will wreck their bonds market but actually sustain interest in Japanese exporters.

China may find that it is the only engine for growth, and shouldering global demand alone may reach its peak. Wild credit growth can mask the weakness of its export model for a while but only at the price of an asset bubble. Beijing must hit the brakes this year or store up serious trouble. What will Beijing do? Prick the asset bubble, the shares will also tumble, and its effects will be felt all across emerging markets.

The EU could be placed under attack as some nations complain bitterly for having to shoulder the weak ones. The weak ones complain that they need to revive their country's employment and wants the Euro much weaker and rates a lot lower. When rich nations spending power is under threat, the union may start to wobble. Rallies and protests may rage across Europe.

These are all IFs, but they could emerge as realities swiftly, hence its best to be on our toes.


p/s photos: Zhang Zhiyi

Important View On Dubai World Factor In Equity Strategy

Well, just as swiftly foreign money came into emerging markets, just as swiftly will they leave, and not even on something direct. An indirect scare out of Dubai seems to be enough reason to take the chips from the table. On Wednesday, Dubai World, the government investment company behind some of the emirate's most ambitious projects, said it was seeking to delay repayment on a tranche of its debt. The company has $60bn of liabilities from its various companies including Nakheel, the property firm behind the Palm Jumeirah, the world's biggest artificial island, and the Nakheel Tower, the world's tallest building at 1km high. It also owns DP World, the ports operator that bought P&O Ferries. Nakheel is due to make a $3.52bn Islamic bond repayment, plus charges, on December 14.

Traders feared that the request for a six-month standstill was a sign that the Dubai Government was struggling with its other debts – and that the full impact of the financial crisis globally may not yet be over. British bank stocks, that are among the most exposed in the world to the Middle East, were hard-hit. Royal Bank of Scotland slumped 7.75pc, Lloyds Banking Group lost 5.75pc and HSBC fell 4.4pc – all three are among nine banks who were book runners on an outstanding $5.5bn syndicated loan to Dubai World in June 2008. HSBC's interim accounts showed that the bank had a $15.9bn exposure to the whole of the United Arab Emirates.

The concerns for UK banks also hit sterling, which fell to its weakest point in a month against the euro and a basket of currencies, while gilt futures leapt to a six-week high, propelled by renewed fears about credit quality. Property shares fell sharply amid concerns of a fire sale of Dubai's UK assets, which include the Grand Buildings in London. Dubai has also been a major buyer of UK property.

The risk of corporate default in Dubai clearly shows that contagion risks have not disappeared and that perhaps the market has turned a little complacent about risk. Foreign money flew out of emerging markets yesterday and the cost of borrowing shot up as investors sweated over the prospect of a state-owned Dubai company defaulting and sending another round of shock waves through the global banking system.

Banks in Europe and North America are heavily exposed to the Middle East, and Dubai in particular, with its $80 billion of debt. The cost of borrowing money increased sharply with the increased risk in financial markets. Credit default swap rates (CDS) rising on debt issued out of the Middle East and emerging markets rose, and borrowing costs on Dubai's five-year loan jumped to 5.4 per cent, up 2.24 per cent in two days.

If you look at the emerging nations' stock market performances it gives you a feel of how quickly Western capital will flow out of these nations on default fears. That said, we have to acknowledge that this is largely not long term funds anyway. These funds will find some obscure reasons to get out, if it wasn't this Dubai World situation, it will be some other obscure factor. Thats part and parcel of the high risk of having carry trades into your system. You can complain when they exit, but somehow the same people never seem to complain when they arrive??!! (ala Mahathir).

If nothing is resolved for Dubai World in the next few days you could expect more of the same next week. Uncertainty will breed fear, in other words. However methinks the risk of contagion is relatively low this time around - plus it came at a time when most equity markets were quite robust, and were actually looking for a reason to correct. This would be a good reason to correct - but I would have to say that its a buy on weakness this time around, rather than a "go for a few months holiday" kind of correction. I think markets should have a few more days of weakness, and a good strategy would be to slowly build up positions.

One big thing which most of the Western media have neglected is the role of Abu Dhabi/UAE in this - many seemed to just gloss over this. Abu Dhabi won't allow Dubai's state-owned companies default on debt payments as the global banking crisis limits their access to funds. Dubai and Abu Dhabi are interdependent and one can't be isolated from the other. Abu Dhabi Investment Authority is the world's largest sovereign wealth fund with assets of between $250 billion and $850 billion, according to the International Monetary Fund. The emirate owns more than 90 percent of the U.A.E.'s oil reserves, nearly 8 percent of the world's proven total.

Take all that into account, the risk of contagion and another credit crunch was low. Because seriously, the Middle East is not the engine of growth or a crucial part of the recovery we are seeing in the global economy. The sums that the affected banks will have to bear are not overly large, they can be written down safely, yes these banks' share prices will take a hit, but its nowhere as bad as the subprime situation.

p/s photo: Haruna Yabuki

Hoopla Over Maxis & Market Mood

I am happy that Maxis did not get whacked by retailers to stratospheric levels. I really think private investors have grown up a lot. They listened, they read, most of them know this Maxis is not the Maxis of old. I hope they also appreciate that the mobile penetration rate is vastly different from what it was ten years ago. I also hope they did not get fixated at the previous privatisation / sale at around RM15 (I think, I forgot). Most importantly, they refused to pay above fair value (deemed as having a properly competitive dividend yield) for what is basically a 70% dividend stock. By that, I mean they did not "take out the institutions" or gave them more gains than necessary. We all deserve a pat on the back. The players have grown up - if you lose enough money, you will learn, we all do.

What about the liquidity drain that Maxis was supposed to effect on the bourse? Yes, I have heard some selling their other shares to ready funds to buy Maxis, thankfully they have been few and far in between. Is there liquidity being soaked, yes of course, its not a small issue. A lot of funds had to rebalance their portfolio to accommodate Maxis. Due to the very tiny issue to the public, not an excessive amount of funds was tied up. In fact, the sluggish markets over the last ten days can be attributed to this liquidity being drained, or it actually scared many players into not participating in the markets owing to the fear of a possible down trending market.

So, if the US and China markets continue to behave, will the next few days be OK for local bourse? Most would believe that with Maxis out of the way, the markets should resume its uptrend to try for 1,300 ... will they be proven right. The markets have reached my target of 1,280 for the year. To me, it could overshoot that but it will be difficult to breach 1,300 this year, regardless of how well the US and China markets are performing. To conclude, the risk-reward is not particularly attractive. I have been scaling down holdings, and sticking to very selective stocks with near term catalysts only - in other words I would stay very selective and stick to diligent stock picking. As it is, I am finding it increasingly difficult to pick stocks to feature - the markets is trying to tell me something.

I do think there will another good round come January/ February 2010, but it will have to come down a bit first for that rally to occur. You cannot possibly have a good run for more than 3 months, it will over extend itself and be tired. One should always read markets like they view an athlete, they will show signs of fitness, strength, confidence, or weakness, tiredness, sluggishness etc. They way to read the signs is to monitor the top volume and top gainers, is there constant rotation or the same names, are the leaders moving with good catalysts or just simply goreng stuff. There will always be goreng stocks, the stronger they can do it, the stronger the underlying willingness of the market to participate, but when these stocks fail to attract followers, the answer is obvious. I would stick strictly with stock picking mode only and reduce mid-term or long term stocks.


p/s photos: Jessica C. (Wacoal's top model)

Where Are We Again In This Financial Crisis & Recovery?

http://paul.kedrosky.com/archives/2009/10/road_to_recover_1.html37875Road%20to%20Recovery%3A%20Yo%2C%20We%26rsquo%3Bre%20Good

I have posted this chart before from Paul Kedrosky's excellent site. As the chart only looks at the recovery from the aligned lows of each crisis, the first year's recovery was most pronounced, and as usual when it recovers the naysayers during each of these periods were vocal. What is more significant is that the recovery carried on into the second year just by looking at the various charts - and that to the naysayers would be unthinkable at the moment. Markets have a nice way of shocking us - are we all drilled to look at the wrong indicators? I am still thinking 10,800 to 11,000 is easy for the Dow by year end. I would term the most appropriate indicators for each of these crisis were:

a) how much cash was thrown into the system - this crisis wins it hands down
b) how widespread / global were the effects - looks about the same for all except the depression
c) how concerted was the global effort - this crisis wins hands down again
d) how did interest rates behave or were managed - the tech crisis saw Greenspan dropping rates quicker than a bullet (and was the start of the financial mayhem in properties, packaged loans, and the leveraged derivatives on those assets); this time, most of the global central banks are still keeping rates very low coupled with massive stimulus left, right and center.

As argued before, its not that the central banks want rates to be low as that will fuel the property side for the less affected countries, and indirectly push liquidity into stocks when risk aversion mood drops - but its for the greater good because corporate spending, hiring, investments in R&D are not recovering fast enough. Hence they all will tolerate a seemingly higher and hard to justify stock market valuations for the sake of the real economy. The real economy is expected to catch up to equity valuations, maybe they will, maybe they won't. But when you keep rates low enough and you have glimmers of recovery, that will set the momentum.

Are we putting ourselves into another bubble, ... yes... but this one will last some time yet. Its the making of a bubble, we are nowhere near boiling point yet.

CLSA Strategy Report

Its been some time since I have read Chris Wood's strategy pieces. I like him quite a bit and his views are worth following. He is surprisingly bullish on Malaysia, Indonesia, the Philippines and China. I don't know enough about the Philippines, but I would rank my bullishness: 1) Indonesia 2) China 3) Malaysia 4) Thailand. Unlike Wood, I do like Thailand as well as I believe political uncertainty is the norm in Thailand.

Indonesia because of the Susilo's factor and the continued restructuring of its economy which will be a strong point in luring in long and short term foreign funds. China because of its deliberate liquidity pump priming, although I do see liquidity traps in second half of next year, it should first reveal itself in higher stocks and property prices. Malaysia because of its resource based, low rates, and this round of financial crisis did not hit private pockets that extensively (do read my piece on the stock market effects for Malaysia and how it has differed from the 90s experience).

I disagree with Wood when he said that deflation is a higher risk.

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Rally will fail - The relief rally in Wall Street-correlated world stock markets should have one push higher. But it will fail in coming months amid renewed deflationary market action, as it becomes clear to investors that the Western world faces an extended period of structurally lower growth.

Deflation risk - Deflation, not inflation, remains the predominant risk in the West, as it follows the same mix of monetarist and Keynesian policies which have caused Japan to suffer 20 years of anaemic growth. But it will take time for these “orthodox” policies to be completely discredited.

Southeast Asia's emerging markets — Malaysia, Indonesia and the Philippines — should offer investors some of the best returns this year, given their strong corporate earnings and low interest rates, CLSA's equity strategist said in an interview yesterday.

Investors should steer clear of Thailand and Taiwan, which are riddled with political uncertainty, Christopher Wood told Reuters. He has a "zero" weighting on Thailand for his relative return portfolio, even though the index is at a five-month high.

"I'll get more bullish on Thailand if I see more local investors buying the market. Right now, all you see are locals selling," he said. "But if local confidence comes back, then there'll be a huge buying opportunity."

Wood, who joined CLSA in 2002, was top-ranked Asian strategist in financial publication Institutional Investor's annual survey in 2005 and ranked second last year.

Wood expects China's booming stock market, which has more than trebled since the start of last year, to rise further, even though it trades at an expensive price-earnings ratio of about 50.

"A full-scale mania in China shares is inevitable unless the government becomes a lot more aggressive, more than what it's been so far," Wood said, referring to the Chinese central bank's monetary tightening measures announced on Friday.

But Wood, in Singapore for a CLSA conference, said China should instead accelerate the listing of A-shares - off-limits to all but a few foreign institutional investors - and increase the supply of listed companies.

Wood prefers stocks that cater to domestic demand, such as consumer stocks, banks and real estate, but warned that commodity stocks could falter, if the US economy slows.

In other asset classes, Wood said investors are best off buying Singapore hotels , "the biggest no-brainer in Asian real estate" as average room rates are still lower than those of international hotels.

He said investors should also buy the Singapore dollar amid a private banking boom in the city-state, adding these customers might use the Singapore dollar as a reference currency on their accounts, if they lose confidence in the US dollar.

"The Singapore dollar is a fantastic long-term currency story. It's basically cheap," Wood said. "It makes no sense for the government to try and artificially hold it down."

Investors who want to hedge risk should "short" US securitised consumer and corporate debt, as this is cheap, Wood said.Asian stocks are not overvalued, despite their recent record-breaking rallies, but could face a downturn if credit spreads rise, Wood said.

"What's overvalued to me is credit spreads, not stock markets," he said. "To me, the risk in the world is credit spreads rising, in which case, there will be collateral damage in stock markets."

His views contrast with some fund managers and strategists who have voiced concern that record-setting Asian markets, particularly China, Singapore, South Korea and Indonesia, have climbed far beyond their proper valuations. MSCI's measure of Asia Pacific stocks excluding Japan has risen about 12% so far this year, compared with an 8.4% rise in the MSCI World index over the same period.

Gold remains essential insurance for those investors who want to hedge the systemic risks caused by the increasingly panicky responses of Western policymakers to growing deflationary pressures in their debt-burdened economies. Such longer term risks include the discrediting of fiat currencies and hyperinflation.

— Reuters

p/s photos: Fasha Sandha

Where Are We In This Stock Market Rebound? - Deflation Or Reflation Trades

The key historical lesson from past U.S. recessions and severe bear markets is that the stock market tends to bottom out three to six months before the economic contraction reaches its maximum. From the recent economic figures, it is plausible that the U.S. stock market is possibly at a stage where the recession is passing its worst phase. If history is any guide, the stock market should have entered a bottoming process a few weeks back.

Cyclically-sensitive sectors and markets have outperformed as shown in my recent posts, which further signals that reflation trades could soon make a comeback. For instance, emerging markets have continued to outperform the global average. Early cyclicals, such as consumer discretionary and technology sectors, are also beginning to outperform the broad benchmark
equity index.

Finally, it seems that some segments of global financial markets are repositioning themselves for reflation trades. Commodity currencies have experienced a sharp rebound in tandem with the broad commodity price index as well as the crude oil market. In recent history, these moves have been a harbinger of a more broad-based return of the reflation trades.

The key point here is that the decline in stock prices has been the worst since the Great Depression, and has gone a long way to discounting a severe economic recession and financial fallout. Of course, at previous major bear market lows, valuations have been much better than today’s level so it is open to debate whether the worst is discounted – but we should not ignore that reflation this time around is much bigger than ever before, so P/E multiples may not need to go significantly lower than where they stand today. Monetary authorities and governments around the world are getting increasingly aggressive in combating the financial and economic hurricane, all of which means that deflation trades are very late.

The risk-reward tradeoff suggests that going forward, deflation trades are unlikely to reward investors and they should raise their exposure to stocks at the expense of bonds. All that points to a more stable market DESPITE the recent run up. It looks more solid than what I thought it was a few weeks back. A few weeks back, I tended to think it was a bull run with a chance for a 10% correction. But I have shied away from that conclusion, I do think there will be bouts of soft selling which will then attract fresh funds to reposition before launching up the next level. I see the Dow testing 9,300 sometime this year and holding. For KLCI I think 1,140 is possible.


p/s photos: Zhang Xin Yu

How To Interpret Market Commentary & Analysis

We all get to read market analysis and commentary on a daily basis. These are information which will help us assess the pulse of the markets. As in anything, the ability to distinguish useless information from critical information is vital in helping us improve on how to read market. Below is the latest market report from AFP, my thinking process in purple.

US stocks find strength

May 2, 2009 - 7:47AM

Wall Street stocks wobbled higher overnight as investors digested mixed economic data and braced for the results next week of "stress tests'' on the US banking system. (This opinion is a broadstroke, and is an opinion not an absolute truth. Commentators will try to interpret the market gyrations by attaching reasons to price movements. Not all price movements have logical valid reasons. Sometimes its really just a random walk on Wall Street. There are one hundred and one reasons why investors sell or buy, but we somehow always need to find a logical daily explanantion for why prices move in a certain manner. I would love it if a commentator actually come out and say "I don't know, its random I guess" because in many cases there are really nothing "market moving", prices go up because there are more buyers than sellers, thats all).

The Dow Jones Industrial Average rose 44.29 points (0.5%) to finish at 8212.41. The tech-heavy Nasdaq composite ticked up 1.90 points (0.1%) to 1719.20 and the broad-market Standard & Poor's 500 index rose 4.71 points (0.5%) to 877.52. (This has more relevance as it looks at sections of the markets that moved differently. This is more useful in ascertaining whether there are pockets of strong interest in certain sectors, size of stocks, etc. When the broader index charged up, its a broad based rally, which means everybody is thinking stocks in general are good and is not even discriminating between actual unique fundamentals particular to certain sectors or stocks. Broad based rally indicate "bull market sentiment", the need to buy stocks just to not be left out. If certain sector indices significantly outperforms broader indices, it show a rerating in specific sectors, and may not indicate a bull market trend but rather a rebalancing of exposure to more favourable sectors. It may means that there are particular developments within a specific sector that caused that.)

Economic reports provided conflicting recovery signals on the sick economy now in its 18th month of recession. The troubled manufacturing sector contracted in April for a 15th consecutive month, the Institute of Supply Management said, but the pace of decline was less severe than most analysts projected. (This is good information as it allows me to benchmark where we are in the recession. The average length of a recession is about 16 months and we have gone past that. It also tells me that its worth looking more closely on possible upturn in sentiment and a willingness to be long in equities. If we were in the tenth or eleventh month of a recession, I would probably not be too eager to look at stock investments in general and go for an extended holiday).

The Commerce Department reported factory orders fell by a seasonally adjusted 0.9% in March, in line with expectations after a surprise February increase that had snapped a six-month decline. "The data is still mixed and far from anything solid. While the common theme here is still a contraction, it keeps feeling like a slower contraction,'' said Jon Ogg at 24/7 Wall Street. (Economic data basically tries to confirm what we know. If the bad data is not as bad, it will not move markets immediately. Economic data and trends are like pouring water into a barrel. You need cumulative data to indicate collectively that a certain trend has appeared, e.g. recovering, or not as bad as anticipated, only then will markets be moved by the data. These bits and pieces of economic data needs to be entered into the C drive of our brain and ingested along with other recent economic data for us to form a picture of trend.)

Investors were on tenterhooks waiting for authorities to announce the results of stress tests on the biggest 19 banks that received public bailouts, now expected next Thursday. "The timing of the release of bank stress tests may be giving the market some jitters,'' said Al Goldman at Wachovia Securities. Bank of America dropped 2.6% to $US8.61, JPMorgan Chase shed 1.5% to $US32.49 and Wells Fargo lost 2% to $US19.61. (I have already posted on the likely impact of "stress test" for banks. On the surface it may be seen as negative for those banks being asked to raise capital - but the imposition of the test and its transparency should bolster confidence in the underlying strength of the banks, and may convince more that the worst for banks is coming to an end).

Citigroup, which is trying to raise capital to pay off $US45 billion ($A62.06 billion) in public aid, fell 2.6% to $US2.97 after announcing a deal to sell its Japanese brokerage Nikko Cordial to Japanese megabank Sumitomo Mitsui which was expected to generate $US2.5 billion ($A3.45 billion) in equity.

Among other stocks in focus, Alcoa added a hefty 6.8% to $US9.69. The aluminum producer said it was to sell to Platinum Equity most of its electricity equipment business, which employs about 17,500 people worldwide, for an undisclosed sum.

The market punished firms with earnings reports including credit card company Mastercard, down 5.7% at $US172.90, and insurer MetLife, off 7.7% at $US27.45.

Car stocks were under pressure after dismal April sales reports and Chrysler's appearance at a bankruptcy court hearing in New York a day after filing for Chapter 11 bankruptcy protection.

General Motors skidded 5.7% to $US1.81 and Ford fell 4.8% to $US5.69.

A strong surge in crude prices lifted oil majors. ExxonMobil leapt 2% to $US68.01 and Chevron rose 1.2% to $US66.87 after reporting a better-than-expected profit plunge in the first quarter.

"The earnings news continues to be somewhere between awful and really bad for most companies, but above expectations, which has given Wall Street a lift over the last month,'' Mr Dickson said. (The many corporate actions and earnings announcement should be kept in our C drive as well. Take note on market leaders, results from second and third liners are not as important. These are important in that earnings NEED NOT be rising for a market to turn. Earnings need only be NOT AS BAD as expected for market sentiment to turn).

April produced powerful gains, pushing the Dow up 7.3%, the Nasdaq a hefty 12.3% and the S&P by 9.4%, marking its best month-on-month rally in more than nine years.

The bond market dipped on Friday. The yield on the 10-year US Treasury bond rose to 3.174% from 3.124% on Thursday and that on the 30-year bond advanced to 4.088% from 4.044%. Yields and prices move in opposite directions.

AFP

p/s photo: Son Dam Bi

Upcoming Important Market Catalysts

It seems that the markets have gone into bullish mode. Still, the majority are still very cautious on this run. To me, the bull runs from here on will come in spurts and stop-start as confidence has to trickle back in. What is probable is that we probably would not retests the lows achieved recently but rather finding new levels to build on. Hence we have to be more vigilant to look for short term markets catalysts that can push markets higher or cause a mild correction to set it. Its still a trading market, i.e. more like a 3 steps forward 2 steps back. We should be clear that the markets will not get anywhere close to previous all time highs this year, so bear that in mind. If we can even get back half of the losses i.e. 25%, that would be very decent for this year. For the KLCI, I can see an upper range of 1,050-1,100 being the high range for in 2009. I doubt very much it will break down past 850 again this year, unless something out of the ordinary happens.

To get a better idea of the market's pulse in coming days and weeks, we have to pick out the likely important catalysts. I have already mentioned how the markets started this rally: Pandit's announcement, Geithner's new plan, AIG's generosity etc. The rally was boosted again by an early announcement by Wells Fargo that it made $3bn odd for 1Q2009. The banks dragged the whole market down, their fortunes will again pull the markets up. Hence, Goldman Sachs 1Q earnings to be announced on April 14 is vital, so too will be JP Morgan's on April 16, followed by Morgan Stanley on April21. The first two can be said to be the bigger and more healthy banks running around now. It is crucial that they post decent and positive results. If we take Citigroup and Wells Fargo as examples, it is likely that they will post stellar operating profits. What is more crucial is the amount of write downs - that has to drop significantly in order for the markets to continue its bull run.

Having said that, a very strong run this week may indicate that many are trying to discount the very good earnings of the banks already. Hence it may actually be a sell on news following the earnings. Even so, if the banks showed positive results and little write downs, the correction will be swift and shallow, the run will still be intact.

We also know that Goldman Sachs is raising $5bn as we speak. It is very likely that Goldman will be the first to pay back $10bn to the US government's TARP. That should be greeted as good news as well.

Japan's new additional stimulus is another positive, and the amount of new lending in China has continued to be mind boggling. It is hard to see negatives for the time being. It doesn't mean its safe. Even when the conditions are good, markets will find ways to correct itself by being overbought, but its likely to be 3 steps forward 2 steps back kind of market tango in the upcoming weeks.

p/s photos: Gao Yuan Yuan

Dead Cat Bounce Or Something Livelier?

While many are optimistic over the present short spurt in equity prices, does it really have legs to carry on for at least a few months? The Dow rose nearly 23% in 19 trading days as of last Friday. That was the best performance over 19 days since the Great Depression. The S&P was even better, it rose nearly 25% over that period.

Now, before we get all optimistic, we should remember that there was a very similar rally just a few months back, November 2008 to be precise. In November the S&P 500 rose 21% in just 17 trading days, matching the current stretch closely. We all know what happened after that rally - the markets went to record NEW LOWS even faster.

So, is this another dead cat bounce (its called dead cat bounce, have you ever tried bouncing a dead cat, it does not come back up)? I think there is more credibility to this rally than the November rally.

The November rally was triggered by the wishy-washy announcement that Tim Geithner would be the new Treasury Secretary, and the markets had faith that he would be able to rework new plans to lift the banks of its toxic assets problem. Just as gung-ho in giving Geithner the thumbs-up, the market was even more devastating in selling down the markets when they heard Geithner's actual plans which lacked details and cohesiveness.

So, the November - January period can be characterised in the history book as The Swift Rise & Fall Of Geithner's Credibility.

Since then, Geithner has revealed a more concrete and winnable plan that include professional managers from outside to activate the sale and pricing of toxic assets. Now, the updated plan has more substance and is more convincing, and that was the cornerstone of the rally in March-April. The trigger for the current rally has to be Pandit's Pandora Box, which many thought could only be holding scary items every time he opens it. The surprising announcement that Citigroup made money even in January and February lifted the whole market. Maybe the troubled banks were not that troubled after all.

The feeling was that if these so called near-death banking giants were making money now, that means they are likely to survive, and if they will survive, the markets will NOT be getting another big-time crisis scare ala Bear Stearns / repeated bailouts of AIG / or total nationalisation of these banking giants. When you are able to take these "maybes" out of the equation, its silly not to rally.

Now that we know a bit more about AIG, we also know a bit better why the banks will probably be better off now than say six months ago. Many of the banks were huge beneficiaries when AIG kept taking bailout money. A lot of those funds went straight to the distressed banks which bought Credit Default Swaps on many of the CDOs (which got them into trouble in the first place). The sums owed by AIG to the banks probably was termed as "receivables" in the banks balance sheet, but in reality, the banks really did not know if they were going to get paid. IF AIG was allowed to fail, well, these so called "receivables" would be relegated to write downs. But Geithner and Bernanke knew what AIG was going to do with the money, and swiftly gave AIG the money, even though publicly both were blasting AIG for getting into so much trouble.

Both Geithner and Bernanke allowed AIG to keep scret as to where the bailout funds went, until recently. If they allowed AIG to reveal too soon, it could jeopardise the entire charade as too many could protest AIG's payments and may be stopped halfway, which will trigger a massive jump in counterparty risk. So, for all the hooting and hollering and charade, Geithner and Bernanke did a lot of things behind the curtains to save the global financial markets - and we didn't even write them a thank you note.

The November rally now looked as flimsy as paper as it was mainly riding on the appointment of Geithner, but this rally have more substance. Money went to the banks, CDS were paid out, banks made money, Geithner's new plan has more substance, future potential blind spots were averted smartly ... To add to the mix, we had a decent G-20 meeting which put in place major nations thinking and acting alike.

An even bigger factor was the tweaking of mark to market accounting rule by FASB. This has substantive repercussions, besides allowing the banks more leeway in treating these toxic assets, it will reduce their need to raise capital immediately. More importantly, the new rules will cause a lot more private equity and hedge funds to scramble to bid for these toxic assets as planned by Geithner. The new accounting treatment basically makes buying these assets more appealing.

So, how much legs does the current rally has? For one, I think we have lifted the market bottom to a new threshold. The market is unlikely to revisit 7,000 for the Dow, the new bottom should be 7,700-7,800 which will see many more willing to buy at those levels should it get there again. Looking at the current rally, the broader S&P 500 had a bigger rally than the Dow, which is to say its not a selective few which are moving the markets but a much broader class. This adds quality to the rally.

p/s photo: Deborah Priya Henry

Marky Mark On Markets

Well, we have two Marks. Marc Faber, the famous Dr. Gloom and Mark Mobius, the Yul Brynner wanna-be from Templeton Emerging Markets. Surprisingly, both sounded pretty similar this time around. I generally agree with both, but 20% in 2009 is a bit low to me.

Marc Faber: China and other emerging markets offer value over the next two years as growth picks up, investor Marc Faber said. Investors should buy stocks and other assets in China after the market falls to its 2008 low to profit from an expected recovery, Faber said in an interview with Bloomberg Television. China is the world’s best-performing stock market this year.

“Rapidly growing countries have setbacks from time to time,” Faber, the publisher of the Gloom, Boom & Doom report, said in Hong Kong. “I think we’re going to test the lows again, but over the next two years, it’s probably a good time to invest.”

The MSCI World Index has retreated 18% this year, extending last year’s record 42% slump, amid concern the widening financial crisis and global recession will sap corporate profits. The Shanghai Composite Index, which tracks the larger of China’s two mainland exchanges, has gained 16% in 2009.

China is betting that a 4 trillion yuan ($900 billion) stimulus package and interest-rate cuts will help it reach its 8% growth target this year. The global economy is expected to expand at a 0.5% expansion, according to the International Monetary Fund. Industrial and precious metals are attractive investments after the Reuters/Jefferies CRB Index of 19 commodities “collapsed,” Faber added. The CRB Index has dropped 8% this year, adding to the 36% retreat in 2008.

“Asset markets have already discounted a lot of the bad economic news,” he said. “ Some assets like commodities are very, very inexpensive.”

Faber had advised buying gold at the start of its eight-year rally, when it traded for less than US$300 an ounce. The metal topped US$1,000 last year and traded at US$932.78 an ounce today. He also told investors to bail out of US stocks a week before the so-called Black Monday crash in 1987, according to his website. He continues to favour gold, which has gained 19% in the past six months because currencies including the US dollar are “not desirable”. Stock markets are “not particularly expensive” and investors should consider buying them in anticipation of a recovery, Faber advised. The MSCI global index is valued at 11 times reported earnings, half its 10-year average multiple of 22.

“We also have a lot of equities that are not particularly expensive because they’ve collapsed,” Faber said. “These are relatively sound companies and whenever the recovery will come, they will be in a strong position.”

Mark Mobius: Veteran fund manager Mark Mobius sees a potential 20% rise in emerging market stocks in 2009 and views extreme investor pessimism as a signal to gradually start buying equities. "The danger we face now is being too pessimistic," Mobius, the executive chairman of Templeton Asset Management, a division of San Mateo, California-based Franklin Templeton Investments, said in a telephone interview with Reuters.

“We are seeing that slight bottoming out, that we have to be cautious of because if we are caught with too much cash, specifically when we are looking at very good bargains, then we are going to be in trouble with our investors,” he said.

Latin America and Asia are the two favoured regions with China and Brazil among the top country picks. Select countries such as Egypt and Turkey stand out among harder hit regions. “Eastern Europe is pretty much a disaster”. He believes China’s stimulus plan will help it achieve its 8% GDP growth target this year, helping pull up Asia which increasingly sells more of its goods to the world’s third largest economy. Brazil’s diversified economy and growing consumerism also make it attractive, he said.

Mobius manages roughly US$20 billion in emerging market assets out of the firm’s US$377 billion assets under management. Asked how high emerging market stocks might go by year-end: “If you really press me I would say 20% would not be unlikely, and the reason I would say that with some degree of confidence is that we have already come up.”

MSCI’s emerging markets stock index fell 54.48% in 2008. While the index is down 9.46% year-to-date, it has risen more than 15% from its four-year low in October. The Templeton Developing Markets Trust, the main US registered fund Mobius manages, is down 11.44% so far this year after dropping over 57.77% in 2008, according to Reuters data. Cash levels for his portfolio fluctuate between the preferred level of zero and 7% he said. He characterises them as “normal, or certainly not higher than normal”. During the 1997–98 Asian financial crisis, cash levels in his funds reached 20%.

While market volatility may not be over, a market bottom could be in place, Mobius said when asked at what point in the next 12 months investors might claim they’ve cleared a hurdle. “I’m saying that now. I'm feeling that now because of the incredible pessimism that you see everywhere. That usually is a pretty good sign that we are over the hump,” he said.

“Almost universal pessimism is usually a very good time to be buying equities because equities lead the economy,” by six months to a year he said. Famous for his globe-trotting and “on the ground” research, Mobius said of a recent trip to Latin America that while companies were preparing for the worst, customer orders were still coming in and “a lot of them” are maintaining steady investment programmes. On the ground things look OK but with a slower pace. That is on the investment side. The valuations now are very very attractive, even if we do a big markdown on earnings,” he said.

p/s photos: Nia Ramadhani

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

Markets Can See Some Catalysts

US lawmakers are likely to hand Barack Obama the first major win of his week-old presidency on Wednesday, overriding chiefly Republican objections to pass an US$825-billion economic stimulus plan. The US House of Representatives was expected to approve the package, a centerpiece of Mr Obama's efforts to resurrect lost US jobs and kickstart stalled US growth, in the late afternoon or early evening largely along party lines. Key US Senate committees have begun shaping their chamber's version of the bill, as Democrats and the White House say they hope to speed the final measure through the US Congress and to the White House by mid-February.

The House vote was to come one day after the Democratic president made his first work visit to the capitol, wooing defiant Republicans with closed-door assurances that he hears their complaints and shares some of their worries. 'Nobody is more worried about the deficit and the debt than me. I will be judged by the legacy I have left behind,' Obama told House Republicans. The appeal came hours after Republican leaders, looking for more tax cuts and less spending, directed their troops to oppose the Democratic bill, which provides about US$550 billion in spending and US$275 billion in tax cuts.

Publicly, Mr Obama said he recognised 'legitimate' Republican gripes with his approach but argued waves of jobs losses and punishing economic news dictated urgent action and not political gamesmanship. 'I don't expect one hundred per cent agreement from my Republican colleagues,' Mr Obama said as fevered political maneuvering on Capitol Hill contrasted with the euphoria of his inauguration there a week before. 'But I do hope that we can all put politics aside and do the American people's business,' the president said in a time-honored appeal for Washington to overcome its bitter partisan divisions. Mr Obama may need Republican support for political cover if the stimulus plan, now widely popular with the US public, fails to achieve its sought-for effects.

The president wants thumping congressional majorities for the stimulus, the first big test of his presidency, to give him momentum for other priorities and to make good on his vow to be a bipartisan leader. Republicans lack the votes to defeat the stimulus bill on their own, but could slow its progress, especially in the Senate. The Congressional Budget Office estimates that $169 billion of the $825 billion in stimulus will hit the economy before the end of September and that the bulk of it will show up in 2010 and 2011. - AFP
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WSJ: A measure to allow judges to reduce the principal amounts of mortgages for troubled borrowers in bankruptcy cleared a key hurdle Tuesday when it was approved by a U.S. House panel. The legislation, which is progressing quickly in Congress, would amount to the most aggressive step yet by the federal government to help strapped borrowers avoid foreclosure. Proponents contend it will act like a stick, spurring mortgage servicers to complete more loan modifications. Meanwhile, the banking industry warns that it will raise mortgage costs for all borrowers.

The measure was approved on a 21-15 vote after its House sponsor, Judiciary Chairman John Conyers, D-Mich., agreed to changes that would narrow its scope. "While bankruptcy reform may not provide all of the answers to this crisis, surely it provides a common sense and practical approach to helping stop the spiral of home foreclosures," Conyers said in remarks before his panel.

Under the legislation, borrowers would be eligible to have a bankruptcy judge reduce the principal balance on their home loan - a move known as a "cram down." Current law allows cram downs for mortgages on vacation properties, but not for those on primary residences.

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CNBC: A Senate committee approved $342 billion in tax cuts on Tuesday as part of a larger plan to stimulate the economy. The Senate Finance Committee voted 14 to 9 to approve the legislation after amending the original proposal to make sure middle-class taxpayers aren't hit by the alternative minimum tax this year. All Republicans on the committee opposed the package except for Sen. Olympia Snowe, R-Me. The bill includes a $500 individual tax credit, tax breaks for businesses to hire workers and buy equipment, and tax incentives for energy efficiency.
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In Tokyo, the Nikkei Stock Average climbed 4.9% to 8061.07 Tuesday, also getting a boost from the Ministry of Economy, Trade and Industry, which said it is considering a plan to provide public funds to companies beyond banks that have been hardest hit by the financial crisis. The fact that governments are beginning to look beyond the banking sector to revive the economy is a major step to begin to understand the gravity of the issues.
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The biggest catalyst has to be the report that the government is creating a plan to buy up toxic assets from firms in an effort to stabilize the shaky banking system. What that means is that there will probably be a person in charge mediating on the price to buy off the toxic assets from the banks. Right now, no private funds are willing to buy as there is no certainty on the price. This is the 'bad bank" plan, the bad bank will end up with the toxic assets. In reality we are going via the RTC method whereby we are consolidating the toxic assets, we are just ONE step shy of nationalising some of the banks - which may not be a bad thing. In fact, if Geithner takes the nationalisation path, I am certain the markets would rise further.

p/s photos: Sara Malakul Lane

Its In The Price, Baby!

Things we know, some pretend experts will always say "its in the price". Is it really in the price already? Stock markets are forward discounting models, hence it would be silly to think that any known news would not be in the price already.

So when the banks started falling like bricks, markets fell. But when Lehman Brothers was allowed to fail (Paulson's gravest mistake), that was akin to saying all bets are off, that no one was big enough not to fail. That is why, in many ways, the collapse of Lehman Brothers paved the way for extreme risk aversion. Investors were calmed when AIG was rescued, followed by Fannie and Freddie. However when Lehman Brothers were allowed to fail, investors realised that other troubled entities might not be rescued.

Having realised his mistake, Paulson and Bernanke basically set about rescuing everything they could. Well, not everything, but every big thing. So, when something's in the price, it depends on the logical chain of events that follow - if that's the case, then its in the price. When something out of the ordinary pops out, then its not really in the price yet.

Markets globally collapsed by between 40%-60% over the last 13 months. One can say its in the price, right?! Well, yes and no. The fall is discounting the recession that will be pervasive. While earnings is expected to be bad, no one is certain how bad and for how long. While there have been extreme fiscal measures by most governments, investors will want to see the execution and implementation are done speedily and effectively (not drawn out over 2-4 years).

The markets was priming itself for a bear market rally stepping into the new year, but was halted by rumours of worse than expected losses by some major entities, e.g. Deutsche Bank, HSBC, Bank of America (having problems digesting Merrill Lynch) and Citigroup. The biggest factor has to be Citigroup as it was not just bad earnings but rather whether the entity will even exists. The losses for the latest quarter was not as bad as the rumoured $10bn. Still, steps have been taken to shrink itself down, so markets are calmed somewhat.

Of more importance was Bank of America. The company just received another $20bn to ease their absorption of Merrill Lynch. So far, they have received $138bn in government aid. What is more noteworthy is that their market cap is only approximately $50bn. Technically speaking, you might as well fold it and restart 5 new banks with the $138bn. However, its not as simple as it looks. Allowing Bank of America to fail is not just wiping out $50bn in market cap, it will also trigger a domino effect of counter party transactions failing. The ramifications which could erase more than ten or twenty times the $50bn Bank of America is worth. The confidence issue will take much longer to return should that happen.

Jim Rogers and those market purists will argue that the weak should be allowed to fail, and that no one should be too big to fail. But the reality does not allow for textbook style economics to be implemented. There is the bigger picture to consider - governments have to contend with the aftermath and flow on effects. You may be able to handle a10% unemployment rate, but what if it escalates to 20%, the social costs will be too great. You may even have to go to war to keep employment up.

Markets have fallen 40%-60%, so some of the recession and poor earnings have been factored in the price. Whether the markets have priced in all is debatable. I am of the minority group viewing that the markets have more than priced in the decimation in demand, poor earnings, company failings (look at the yields on non-prime corporate bonds) and jobs losses. To be sure, I think job losses will continue to worsen and may only peak in March/April, and till then I expect even a few more big companies failing ala Nortel and possibly Motorola. Though not publicised, already more than a few hundred small regional banks and mortgage firms have already closed sop in the US. My biggest argument why the markets have over-discounted the weakness is the absolute non-existence of confidence, and the extreme risk aversion to assets of almost all types. The de-leveraging basically just sped up the entire process. have you see how fast and hard commodity prices and shipping rates have collapsed. This is not a slow death, it is a swift reaction, anything seemingly left standing got its head chopped off, within or without reason.

The committment by the Treasury in the way it is treating Bank of America and the likes shows that they will not let another big entity fail. While many will be pooh-poohing Obama's $1 trillion stimulus, saying that its in the price... come to think of it, its not really in the price considering the markets were at the same level it was 2 months back when Obama wasn't even elected??!! Why do they say its in the price? Its the bear's normal reaction - give me anything, give me any news... I will say the good news will be in the price already, and the bad news that appears are not properly discounted yet. Give the bears any news, it will be considered as in the price already for sure.

I am not saying the bears are totally wrong, but one must view the developments with a proper view of developments. All it takes is just a minor improvement in risk aversion and confidence, and you will find things moving quite fast already. Looking at the markets for the last 2 days, even when the Dow flirted with the dubious 8,000 level... there was sellers' exhaustion. I am not trying to talk you all into believing all is right with the world, but that its not as bad as things seem.

p/s photos: Haruna Yabuki

Waiting For Godot

After a few straight days of weakness in the US, Asian markets have basically adopted a wait and see stance. The underlying market sentiment indicates that most markets want to rally. I am not saying that these are terrible naive optimists, but your read markets and you call them as such. Its ripe for a bear market rally. Getting the rally done is no easy task as every now and then earnings disappointments will put a halt to it.

While attention has focused on Citigroup's likely $10 billion quarterly loss next week, we have had other bombs as well. Deutsche Bank's shares tumbled 12% after it expects to post a fourth-quarter loss of about €4.8 billion, or $6.33 billion, citing "exceptional market conditions." In Germany, Commerzbank fell 10% while Deutsche Postbank lost 15%. Swiss banks tracked the broader sector, with UBS shares falling 2.8% while Credit Suisse shed 6.4%. The news slammed the banking sector, which was already reeling from a Morgan Stanley note stating that Europe's largest bank, HSBC Holdings, may have to raise as much as $30 billion in capital and halve its dividend. HSBC slumped 8%, and Barclays followed, losing 6.8%. In Paris, shares of BNP fell 6.1% while Societe Generale stood 6% lower. Royal Bank of Scotland lost 4.5%.

Other key bellwether earnings reports due Thursday will be from JP Morgan, Intel and Genetech.

On the non earnings factor, Bernanke’s LSE speech was greeted as some comfort to be positive. The other comforting development was that Senate Majority leader Reid believes he has enough votes to get approval for the additional $350bn of the TARP.

On mainland China, the Shanghai Composite surged 3.5% to 1928.87. Earlier in the day, China revised its gross domestic product growth rate upward for 2007 to 13%, indicating it may have overtaken Germany as the world's third-largest economy. Crude oil prices rose 3% in electronic trade after Saudi Oil Minister Ali Naimi said the country would cut its February production by more than the target set by OPEC in December.

Certainly not an easy time to make money. But I can see Asian markets trying to decouple, albeit for probably a short period. Still its a dicey tug of war. I am of the view that Asian markets will rally harder when US and Europe put up some gains. If they continue to weaken, Asian markets are likely to be flat rather than following them south in this quarter. Not a particularly easy time.

p/s photo: Sandara Park

But She Is Screaming So Loudly

We are in a bear market rally, which kinda just started. One day of bad jobs data and balls also shrink back inside. People start to quote how bad the unemployment data is or will be.

Come on people!!! Do you expect jobs data to be good now, in December, January or even February???

Why do you think equity markets collapsed 6 months back???... precisely because we ALL KNOW jobs and the economy will be really bad in the first and second quarter of 2009 at least. So, what gives??? Use economic data properly, economic data tells you what has just happened and what is happening, not what will be happening.

I am not saying the numbers are not bad, but its way within even the most bearish estimations. Where is US unemployment now, around 6%? Ask any economist where they think unemployment will be peaking before recovering... many have said 7%, 8% and some even 9%... so how to get there without bad jobs data now???

You think the central banks and governments huge fiscal measures and liquidity injections were for fun? They precisely expected this scenario. Its like you know your wife has been wheeled into labour... midway, you start to tremble and fear and exclaim "but she is screaming so loudly"... duh... she is in labour la, not eating Haagen Das ice cream. Where do you think we are in the economic cycle??? Why act so surprised!?

Economic data is confirmation of what stock markets predicted a few months back. A bear market rally is confirmed by market trading indicators such as VIX, yen rate, ratios of new highs/new lows, corporate bonds/Treasuries spread, average volume buy/sell strength indicators...

Use proper indicators to make proper assessment. I am of the firm view the bear market rally has just started. Get a hold of yourself, its a bumpy ride but its Space Mountain baby, its fun.

p/s photos: KC Concepcion

Bad Data, Good Markets

As always, the most important indicator in my view, the yen rate. It has jumped again by a full yen to 94.5. Mark my words, the yen rate is big indicator of underlying market strength. As long as it keeps going up, more funds are actually being deployed back to equities of all types.

If we keep looking at latest released data, that would be pretty useless. The main reason why markets collapsed 6 months back was precisely forecasting the sluggish and depressing economic data we are seeing now and for at least the next 3-4 months. Bad data will not have the "negative impact" it had a few months back because the bad data 6 months ago was the trigger for a major re-evaluation of earnings and a down trending economy. The bad data now is largely playing itself out, hence much of it will not have the theoretical negative impact, or as bears call it "markets are ignoring the bad data at their own peril".

Stocks will have to be the first to move. Commodities will lag as the turnaround will take a bigger u-turn. As this is a risk aversion/confidence oversold market, substantive market gains will ease a lot of worried holders of corporate bonds. The other indicator to watch is the narrowing of corporate bonds and Treasuries spreads, which is also narrowing. Of course all this will not be a one way traffic, there will be stop-start all along the way. But I am of the view that the markets are OK for the first quarter of 2009.

Looking at the table, we are well on the way to being in the longest recession since the Great Depression. I foresee the recession ending by end of 3Q2009, which would make the recession about 21 months. In fact I am optimistic that we could be out of jail by July 2009 even, thus making it around 19 months. Considering the vast sums of liquidity and fiscal measures being handed out. The swiftness in response by almost all central bankers. The not-so-shy fiscal measures meted out. We are addressing the issues at a rapid rate. Fair to say that this credit crisis is a massive one as well. There is no playbook or textbook, but I do think the measures are already more than sufficient. We just need confidence to filter back to allow the liquidity to work its way.

BTW - More digging on the IJN-Sime Darby-EPU-MOF saga revealed that Sime Darby has finally called off the proposal. Interestingly, no one was really interested in running IJN, but rather it was attractive as it was sitting on about 12 hectares of reasonably prime and very flat land. Remember that IJN is on Jalan Tun Razak. Twelve hectares is very sizable. Hmmm...

Type	:	Announcement
Subject	:	Sime Darby Berhad’s interest in IJN Holdings Sdn Bhd (“IJN”)
Contents	:	We refer to Sime Darby Berhad's ("Company") announcements on 17, 18 and 23 December 2008 on the above matter. The Company wishes to announce that it will not pursue its plan to acquire an equity stake in IJN. The Company arrived at this decision after taking into consideration the public sentiment and feedback received since the Government announced that it had deferred its decision to allow Sime Darby to begin negotiations with the Ministry of Finance on taking a 51 per cent stake in IJN. The Company, nevertheless, will continue to look for opportunities for expansion in the healthcare sector. This announcement is dated 6 January 2009.

p/s photo: Fan Bing Bing

Defending The Prognosis

The prognosis was an unhedged opinion. After criticising economists and analysts for being wishy-washy, ... "on the one hand, however if the other thing happens..." , so i am glad some readers realised it was a straight out opinion. I do not expect many to agree, so thanks for the feedback. Its much easier to continue to be bearish, just regurgitate whats in the media - but of course I could be wrong. I will try to clarify some of the concerns, not to sway you, but to explain further my views.

Toxic assets too huge - It seems too big because its a one way traffic. It seems too big because of the unwinding and de-leveraging trends. It seems too big because everybody wants to be first out best dressed. What we have to be aware is that sometime soon these cash and liquidity will have to be placed out in some form or other. It seems too big because of risk aversion, rather than the inability to deal with the issues.

It will take a much longer time - Let's get the facts. Even during the Great Depression, we saw recessions lasting 22 months, and to me, its largely because we did not have the fiscal or monetary knowledge or tools to deal effectively and immediately with the issues then. In other views, some will argue that Japan too more than 10 years to work itself out of its 90s credit bubble. Well, thats because Japan did nothing for the first 10 years, seriously folks. If you compare to the immediacy of the many moves to tackle the issues during the current crisis, we would have a better appreciation of the comparison.

There are still time bombs - The greatest thing about this American financial markets, is their transparency. When the proverbial stuff hits the fan, everybody will be clamoring to rip open all wounds, especially the affected firms. The affected firms had to lay it all down as its pointless to try to hide. In fact, it would be a very shrewd move to let it all out so as to be part of the bailout. The transparency thing is very good because their firms are so large, i.e. no one main owner operated financial behemoth. Usually the largest shareholder holds less than 10%. The scrutiny is magnified with independent directors trying to save their behinds, not to mention the vulture bond holders trying to see if the firm is worth anything at all.

Is Roubini wrong then? - You all know I think the world of Nouriel Roubini. I have highlighted many of his opinions and he is by far the most astute and correct economist on the current financial turmoil bar none. By his accounts, he still sees some pockets of danger in the economy, but he is not as bearish now as he was a few months back. We also should note that a number of things are very fluid - Roubini worked with Timothy Geithner and Lawrence Summers many years in recent years. You can bet that the 3 of them will be discussing intimately on ways to address the issues. You cannot get better advice than from the man who predicted the carnage step by step, can you?

The new team - Well you have Geithner, Summers and de facto Roubini, throw in Paul Volcker as well - is that a more credible team than Paulson and Bernanke? The team has been planning the actual fiscal stimulus and various remedies for the issues at hand. What started out as a $350bn plan has morphed to $600bn and now is likely to top $1 trillion. They are not shy about it, and they want to stamp their mark the moment Obama takes office come mid January. On actual economics data, each $1bn spent on infrastructure will create 35,000 jobs. The team is also wary that the stimulus will not go overseas immediately to create jobs outside of the US, hence expect more on healthcare, education and infrastructure spending.

Too giddy on Obama - Some may be questioning that I have gone overboard on the optimism riding on the Obama factor. But I have been following articles and interviews on him and how he has been picking his team members. The more I read, the more convinced I am that we have the best person to lead, he is also an astute and well prepared manager. He is, in a single word, competent. If you look at how he organised his campaign for the elections, it was a focused and effective. Above the fray, above the meanness, focused on the issues and getting to the heart of the matter. Oratory skills aside, he exhibited high intelligence, a general amount of ego and deserved self-confidence. The so called goodwill riding on him when he takes office should not be discounted - anyways what better way to deal with esoteric problems such as risk aversion and irrational fear than to match it with unmitigated goodwill laced with competence.

What about demand destruction - Exports are down, shipping rates have plunged, oil price is nearing $30... surely there must be demand destruction! Or is there? There is a fundamental price for everything based on demand and supply. The irrational peaks in commodity prices has more to do with liquidity surplus, the rise of commodity centered funds, the rise of hedge funds playing trend and momentum investing, the unquestioning acceptance of analysts far fetched supply inadequacies years ahead of us... Read the EIA's weekly US oil import data. In the week ending Dec. 19, total US oil imports were 12.780M/day, versus 12.907M/day in the same week a year ago. That's only a 1.0% drop - where is hell is the demand destruction? The global credit crunch resulted in forced liquidation of global supply chains, as every one liquidated their inventory to raise cash in order to survive. The inventory sales flood the market to create a false over-supply situation while supply destruction is playing out at break-neck pace as unprofitable mines are shut down. That tells me that for many resources, we are forced to work down a lot of inventory rather than seeing a genuine demand destruction. Commodity prices were artificially high 6 months back, now its the other extreme. Very soon, we will see shipping rates on the upswing again as not only is inventory very low, but many have mistakenly shut down mines and harvesting as well.

p/s photo: Anna Tsuchiya

pps: Over the next few days I will blog on the recommended international stocks, local stocks and a high-risk portfolio selections, all based on my global market prognosis. Its been more than 6 months since I have made stocks recommendations.