Jeffrey Cheah, Pusing-boy Masterstroke!!!

Malaysian Insider: Sunway is expected to have potential market capitalisation of over RM3.5 billion, revenue of over RM3.3 billion and assets of over RM8 billion said Cheah. This comes as UEM Land and Sunrise have proposed to merge and IJM Land and MRCB have signed an MOU to explore a merge. The Sunway founder said that the merger was due to right market conditions and the need for size rather than as a response to the latest industry developments.

“I am not fearful of being taken over,” he said. “The size of the new company makes a difference rather than 2 separate entities. Size brings us opportunities. We will have access to larger markets and the ability to bid for projects with higher value, particularly in international markets," said Cheah.

He added that the larger merged entity should boost the company’s profile.

“We aspire and now with this merger, we are well-positioned to become a truly Asian brand, through one name and one identity,” he said.

Cheah and his daughter, Sarena Cheah Yean Tih, are the owners of Sunway and will have a stake of about 44 per cent stake in the company after the merger. They currently have direct and indirect stakes of approximately 43.68 per cent of SunCity and 46.53 per cent of Sunway Holdings. The Government of Singapore Investment Corporation will emerge as the second largest shareholder in Sunway with a 12 per cent stake.

The merger is pending shareholder approval and the acquisition will be satisfied by cash and shares and warrants in Sunway. Following the acquisition, Sunway Holdings and SunCity will undertake a capital repayment exercise to distribute proceedings to shareholders.

Sunway Holdings meanwhile reported a RM48.5 million net profit in the third quarter ended September 30 on the back of RM411.5 million in revenue.

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So how will the proposals be greeted? The structure and terms seem a bit convoluted, that can be understood only by the bloody lawyers and bankers who were part of the advisory team. I read and re-read it a few times, I will try to explain what "I think" they meant, but I could be wrong.

Offer Valuation for existing shares
a) Sunway Holdings 2.60
b) Sunway Holdings warrants 1.50
c) Sunway City 5.10
d) Sunway City warrants 1.29

The value will be exchanged at 2.80 new shares in the Newco, plus they will get 20% of it in cash, plus a 1 free newco warrant for 5 newco shares.

If I understand correctly, lets take the example someone owning 10,000 of each securities:

a) 10,000 Sunway Holding shares x 2.60 = RM26,000. 80% of it will be converted into Newco shares = 80% x 26,000 / 2.80 = 7,428 Newco shares. 7,428/5 = 1,485 Newco warrants. Cash 0.52 x 10,000 = RM5,200. Hence the owner will now get the highlighted components.

b) 10,000 Sunway Holding warrants x 1.50 = RM15,000. 80% into Newco = 80% x 15,000 / 2.80 = 4,285 Newco shares. 4,285/5 = 857 Newco warrants. 0.30 x 10,000 = RM3,000. Hence the owner will now get the highlighted components.

If I am correct, this is a highly attractive deal and a swift one as well as the last date for submission is 23 December 2010. It is attractive because:
- it values Sunway City relatively cheap at just below 1.0x Book Value (not even RNAV) when the big boys get at least 2.0x
- it values Sunway Holdings relatively cheaply considering the 20%-30% year on year EPS growth for the next 3 years
- the cash component basically is a generous capital/dividend repayment which would ensure a great acceptance rate
- the capital repayment extends to everyone, including warrant holders
- the free warrants is a good kicker
- its a swift deal, which will see the Newco being traded within 2 months

The merged entity will kick off trading at 2.80, do you think it will go up or down from there? Together, at 2.80, it will trade at around just 7x current year's earnings.Where the prices will go will depend on where investors think the newco will trade at when requoted.I think 3.20-3.50 is fair. So if you think likewise, where will you be buying the shares and warrants up to??? I provide the platform and ideas, you do the math.

In a brilliant masterstroke, Jeffrey and his advisors have basically revalued his two flagship companies closer to a genuine valuation. The often said drawback of his shares as lacking in liquidity can be almost eradicated now.

Both Sunway City and Sunway Holdings suffer from gross undervaluation. Please re-read my posting on both a couple of days ago. Hence the present offers still present very decent upside for the merged entity.

I think from the 3 property deals so far, UEM Land-Sunrise, IJM Land-MRCB and Sunway City-Sunway Holdings... If I can present in simple math: UEMLand-Sunrise is 1+1=3; IJM Land-MRCB is 1+1=2.5; Sunway Holdings-Sunway City is 1+1= 3.5 ... Jeffrey's deal is far superior. It now only unlocked value, it gives back a healthy bonus cash dividend which does not stretch the balance sheet, it prompts the market to give the companies a better valuation and sustains it. No one is left out, no minority should complain at all.

Why I Still Like EAH

I have featured EAH as an emerging company with good prospects, despite being a small ACE market company. If you are a regular reader, you will find that there are some companies that I will blog about a few times while others I will just cover once. The reason being, unless I have spoken with senior management and/or visited the company (with other bankers/analysts or groups of investors), I am not likely to write regularly about the prospects of the company. So far, those companies include Notion Vtec, QL Resources, Evergreen, CSC Steel, KPJ, Media Prima, Sealink, and EAH.

Its pointless to visit 100 companies if you haven't done your homework. Usually we would scan and select a few potential companies, run through their financials and business model, before even thinking of visiting them. There are plenty of "small" investors who do their private investing who go through this channel. Of course sometimes you have to tag along when there is an analyst briefing or when an analyst is going for a company visit alone. But you have to network well I guess.

EAH has just announced an attractive free warrants issue proposal. Its 1 free warrant for every 2 shares held. It is not a straight forward thing to get to issue free warrants. That should speaks volume for the corporate exercise. At an exercise price of 59 sen over 5 years, there's no danger of dilution, and the 59 sen exercise price would strongly indicate the upside potential for the share price.

One of the reasons for the exercise is to improve the liquidity for the stock as there is only 155m shares now. The second reason is that the company is bidding for at least RM200m worth of projects, which has a decent chance of being successful - hence the management probably does not want the "upcoming revenues stream" to overwhelm its share base.

Having visited the company prior to its listing and again two weeks back, I am comfortable with the projects they are bidding and I am of the opinion that they should get most of it. The projects are also of high value add which should bring in net margins of at least 35%-40%. The bigger of these projects are at least 2 years to 3 years in duration which will prime the recurring revenue.

EASS Sdn Bhd (formerly known as Excellent Affair Sdn Bhd) is a Malaysian Bumiputra ICT company with the Ministry of Finance as an ICT Contractor. EASS provides automated invoices processing, infrastructure integration services, business intelligence and ICT consulting services.

EA MSC designs & builds state-of -the-art Card Access Controller, Reader and Tag, and specializes in the R&D of world class innovative long range RFID technology. With the in-depth industrial professional experience our people are equipped with, EA MSC strives to be a onestop integrated solution provider of security and surveillance system.

CSS MSC Sdn Bhd formerly known as Concorde Solutions & Services Sdn Bhd, a dynamic company founded by a group of multi national experienced IT specialists, is prominent in delivering business intelligence, operational system, as well as accounting & finance management for mainly financial services Industry. CSS MSC’s strengths are built on expertise in profound e-business products, ITIL centric service management, integrating services for various technologies, total banking solutions, value business solutions, as well as Business Intelligence products.

Products and Services
1. Software solutions
• Business Intelligence and Data Warehousing
Traditionally focused on provision of Business Intelligence and Data warehousing
solutions as well as consultancy services for financial institutions, but not restricted to it. BI can be implemented in industries where business decision making is crucial. A data warehouse is a repository of an organization’s electronically stored data.
• Banking Applications
As at the LPD, ongoing R&D includes a banking system, namely Concordian System
• Automated Invoices Processing
In partnership with ReadSoft, customers are offered ReadSoft DOCUMENTS for invoices solution which is an automated invoices processing solution.

2. RFID and Access Control Systems
• Active RFID
RFID stands for Radio Frequency Identification, it involves the use of an object (RFID tag) to track or identify the tag-bearing object using radio frequency. Active RFID is a new technology due to advancement in IC, has a high margin, high barrier to entry as it is their own intellectual property. Furthermore, EA MSC owns its own IP.
• Wireless Mesh Networking
This system utilizes a key IP and a routing algorithm is also programmed. In effect, the whole system integrates into one big unit. The pros of wireless mesh networking is such that there is no complicated communication wiring involved, thus effectively reducing commissioning time and implementation cost by roughly 40-60%. The network is also programmed such that if wireless communication fails, the Lattice Wireless Access Control will continue to work without any degradation as the database is kept in the controller. This technology is applicable to most existing equipment and adheres to IEEE 802.15.4 Standards.
• Long Range Active Tag
The Lattice Wireless Raintag and Rainsys Active Tag Long Range Reader both have a reading range of up to 5m. The Rainsys reader has 200ms response time, high immunity to noise, an integrated antenna, wireless communication design for retrofitting, long battery life and good penetration through a vehicle’s window tinting. The Raintag is equipped with a unique pre-assigned code, slim, easy-to-carry and durable.
• Lattice Wireless Access Control System
This system is designed for one door (with in & out readers) or two door (with in
readers). It operates on low power wireless network with mesh networking capability and inbuilt is a large memory capacity (data retention period of 10 years). It has an integrated battery management and supports most commercial readers in the market.
• LR1000 Series
In this series are contactless proximity readers. The readers will be able to read all transponder type, EM, Milfare, and provide door access security with time and
attendance application. The LSK 1000 and LSF1000 models exhibit cutting edge touch sensitive keypad with backlight and are designed and manufactured in Malaysia.
• Real Time Location System - Quatis
Quatis is a combination of wireless mesh networking and RFID technology. The location of a tag is calculated by knowing the distance to at least 3 beacons, which is estimated by using RSSI (Receiver Signal Strength Indicator) and TDOA (Time Delay on Arrival). Quatis is produced in accordance to IEEE 802.15.4 standards, hence lower battery size and chipsets as well as no wiring costs.

3. ICT Services
• Systems and Infrastructure Integration
With experiences in Data warehousing and web services technology, EA Holdings also possess the knowledge and competency to perform System integration services based on platforms by major technological principals such as IBM, Microsoft and SAS.
• ICT Consultancy
A team of experts from 4 key areas of expertise will provide ICT systems consulting services.
1. ICT infrastructure;
2. IT systems management
3. Project management; and
4. Mainframe services.
IT service management solutions. Based on the ITIL best practices, EA Holdings engineer turnkey businesses processes together with technology automation.

EASS was granted with bumiputera contractor status from the Ministry of Finance in 2007. This is a key catalyst for EA as it enables the company to bid for tenders reserved for bumiputera companies, giving it a foothold in the government and GIC sector. Any awards won could potentially increase its revenue substantially from a low base. CSS MSC has strong success tapping into the financial sector, with roughly 8 clients in the financial industry since 2005.

Therein lies the key to EAH's prospects, its bumiputra contractor status from the MOF allows them to make the shortlist of many of the more "demanding IT projects".

For the second quarter of the financial year 2010, EAH recorded revenue of RM5.149 million compared to RM5.438 million for the preceding quarter ended 31 March 2010. Notwithstanding the decrease in revenue, EAH’s PAT had increased by 16.2% q-o-q to reach RM1.621 million. Net profit margin stood at 31.48%. The previous quarter it made a PAT of RM1.395m.

Considering that EAH made a PAT of RM3.641m for the whole of 2009, if we were to annualise the last two quarters, the company is on track to record a PAT of RM6.032m for 2010 - which is a 65% year on year jump. I have to state that this does not include any of the RM200m projects being bidded for.

EAH could very well have done a share placement to certain big investors but that would not have benefited all shareholders. This free warrants issue would be welcomed as rewarding long term shareholders.

Valuation

In terms of valuation, the free warrants would have an intrinsic time value of at least 25%-35%, translating to 16 sen to 22 sen, plus if it goes ex at 63 sen, you can add a further 4 sen to that. If it goes ex at 70 sen, you can add 11 sen to the equation. Thus you are looking at a warrant that is likely to be worth at least 20 sen to a high of 33 sen. That being the case, the shares of EAH may be fairly traded between 68 sen - 78 sen range.

Its ongoing business operations alone is sufficient to sustain valuations at 68-78 sen. If one is willing to hold for 2-6 months, I believe the upside will be better by going through the exercise, with the prospects of good upswing if/when the bidded projects are successful.

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 the masthead photo above is my dog, who is 1.3 years old now, her name is Dali ... that's why I have to keep telling my friends NOT to call me by that name ; )

Genting - Smells Like X, Looks Like X, IT IS XXXX

How many ways you can say "crap", "screwed", ... Nothing new .. while the company is still working down impairment losses from Genting HK and Walker Digital, here's another dubious one. It seems that any investments that did not turn out well, will be chucked to tap the cash from Malaysian operations.

What is 'untimely' is that they announced a bid recently for the New York racino beforehand, which in my view is a shot in the dark, but stoked up interest before the 1-2 punch. End result: punchdrunk.

Stanley made 6.6m pounds last year but lost 184m pounds for the first 3 months this year, ta-dah...

GENTING MALAYSIA BERHAD (“GENM”)
GROWING BUSINESS WITH UK ACQUISITION

KUALA LUMPUR, 1 JULY 2010: Genting Malaysia Berhad (“GENM”/“Company”) today announced that it will acquire Genting Singapore PLC’s casino operations in the United Kingdom (“Genting UK”) for a total cash consideration of £340 million (equivalent to approximately RM1,668 million).

Genting UK has the largest number of casino properties in the United Kingdom with 44 casino properties, including five located in London. Genting UK comes with established gaming brands such as Crockfords, Colony Club, Maxims, Circus, The Palm Beach and Mint. Crockfords, the world’s oldest private gaming club, has catered to the elite since 1828, while the Colony Club is recognised as London’s most stylish and contemporary casino.

The acquisition is in line with GENM’s strategy to grow its core businesses of leisure, hospitality and entertainment internationally, beyond Malaysia. With nearly 40 years’ experience in the gaming business, an established clientele and strong cash reserves, GENM will be well-placed to reap untapped synergies with the UK operations.

Dato’ Lee Choong Yan, President and Chief Operating Officer of GENM, said: “The acquisition of Genting UK presents GENM with an opportunity to grow, with the resources at our disposal. This acquisition will also provide us with access to established casino brands and an extensive network of casinos already operating across the UK. With our proven track record and decades of experience, we have the expertise to unlock the potential of Genting UK and grow the UK business.’’

The acquisition complements GENM’s long-term international expansion strategy, with plans to enter markets in Europe and the United States of America, where the Company had separately announced that it has submitted a bid for a video lottery licence.

(iv) the SPA is conditional upon the fulfillment of the following conditions on or
before 31 December 2010:
(a) the approval of the shareholders of GENS being obtained for the sale of the Sale Shares;
(b) the approval of the shareholders of GENM being obtained for the acquisition of the Sale Shares;
(c) GWWUK being reasonably satisfied with the results of the legal, financial and taxation due diligence audit conducted on the Acquiree Group;
(d) the approval of BNM being obtained;
(e) the approval of the British Gambling Commission being obtained;
(f) the consent from the creditors/lenders of the Acquiree Group, where required; and
(g) the approval/consent of any other authority/party, if required;

6. RATIONALE FOR THE PROPOSED ACQUISITION
The GENM Group is currently principally involved in the leisure, hospitality and entertainment business in Malaysia with its main focus in the operations of Resorts World Genting, a premier family leisure and entertainment resort at the peak of Genting Highlands. In addition, the GENM Group also has investments in foreign-listed companies and interest-bearing financial securities.

In relation to its core business of leisure, hospitality and entertainment, the GENM Group is looking to expand internationally beyond Malaysia, with a current focus on Europe and the United States of America. The Proposed Acquisition represents a good opportunity for GENM to grow its earnings and revenue base.

The Proposed Acquisition also provides the GENM Group with an opportunity to inherit the legacy of the Genting UK Businesses’ experience of over 30 years in the UK gaming industry, largest network of casinos throughout the UK, established brand names and operating track record.

GENM Group intends to enhance and fuel the Genting UK Businesses’ growth through synergies created from the Proposed Acquisition by leveraging on GENM Group’s strengths. These strengths include the GENM Group’s large Asian clientele, its international sales and marketing strategies, as well as strong membership marketing and data base management.

The GENM Group also expects to be able to further improve the Genting UK Businesses’ operational efficiencies through automation and the sharing of information technology. With its financial resources and vast experience in the leisure, hospitality and entertainment business, the GENM Group believes in its ability to successfully undertake new projects in the UK, through the Genting UK Businesses.

Upon completion of the Proposed Acquisition, the GENM Group will own leisure, hospitality and entertainment businesses in Malaysia and the UK.

(Sooooo, keep it at Genting Singapore la ...) As this is a RPT the controlling shareholders cannot vote, OMG minority shareholders do yourselves a favour, vote properly. Trouble is many would have been so disgruntled that they would be selling the shares from hereon.

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.

Susilo Ensures More Stability & Better Economic Prospects

# July 8: Exit polls show that current President Susilo Bambang Yudhoyono won the Presidential elections by winning twice as many votes as his competitors. Yudhoyono got over 60.9% of votes which gives him the majority count to defeat the two opponents and lead to a single-round victory. Indonesia held its second direct election after ending the authoritarian rule. His competitors included former President Megawati Sukarnoputri and the President's deputy Jusuf Kalla who won over 25% and 12% of votes respectively.
# Yudhoyono's win will seal political stability and will be a positive for the booming equity and currency markets. He has selected Boediono (the former central bank governor) as his running mate, raising credibility in running credible macroeconomic policies. Improving regulation, reforming labor laws and tax policies to raise foreign investment will be his challenges. Continuing with his anti-corruption and anti-extremism approach, and targeted policies for the poor will also boost investor sentiment.
# Given Yudoyono's Democratic party's majority win in April 2009 Parliamentary elections, he will have enough support to implement policies. President Yodhoyono's Democratic Party won over 20% seats in the April 2009 Parliamentary elections which is enough to nominate Yodhoyono as the Presidential candidate without forming a coalition. Parties had to secure at least 20% of seats in the House of People's Representatives (DPR, the legislature) or 25% of the vote to be eligible to nominate presidential candidates for election in July 2009.
# Factors benefiting Yudoyono: Under Yudoyono's rule, GDP growth has risen from 5% in 2004 to 6.5% in 2008 which has benefited job growth and consumer spending. Indonesia is among the few Asian countries to avoid a recession in 2009 and having strong domestic demand. Capital inflows into stock and debt market have boosted these asset markets and raised investment. FDI has improved. Resource sectors and rural incomes have benefited from the recent commodity boom. Government has used fiscal stimulus measures (tax incentive for firms, spending on infrastructure, public services, job creation) to reduce impact of recession on the economy and job losses. Government cut fuel prices in January 2009 and has offered targeted financial support for the poor. The ruling party and President Yudhoyono have encouraged a democratic and secular system and tried to reduce extremism and violence. Yudhoyono has also helped reduce corruption.
# Reform challenges: Foreign investment in resource based sectors has been a point of debate due to impact on poor and social implications. Domestic and foreign investment is also deterred by regulations and red tape, poor infrastructure and investor protection, especially in commodity sectors. This has constrained the much needed foreign investment and technology transfer to develop the commodity sector. Labor laws have led to high structural unemployment and deterred investors. Tax system is also a negative for investors. Fuel subsidies burden the fiscal deficit.
# Indonesia has the potential to achieve higher growth rates provided Yudhoyono emerges with a strong mandate to cut regulations that hinder companies and investment.
# The election has helped consolidate democracy in Indonesia. Yudhoyono and his Democratic Party (PD) is the strongest force in parliament. This will deepen and quicken the pace of reforms and help Indonesia attain higher growth.
# Yudhoyono is considered positive for business and foreign investment, partly on perception of anti-corruption strategy and tendency to appoint qualified policymakers.
# Reform expectations could prove unrealistic. The PD will still require the support of other parties to pass legislation, ensuring that policy-making frustrations will persist during Yudhoyono's second term. Yudhoyono has pledged to double infrastructure spending, privatize state-owned companies and improve Indonesia's attractiveness to foreign investors, which can raise Indonesia's medium- and long-term growth. This will also require additional investments in infrastructure, curtailing corruption and bureaucracy, regulatory reform and stabilization of the currency markets.
# The result of presidential elections will not be a big event for the market as the market-friendly incumbent was expected to return. Nevertheless, removing political uncertainty will further boost capital inflows.
# Yodhoyono seems to have made the best of the tools at his disposal. Small fiscal deficit can provide more fiscal stimulus. Strong private consumption, buoyed by tax cuts and handouts, supported GDP growth in Q1 2009. Rupiah, appreciated against the U.S. dollar since November 2008, has been steadied by various stand-by-loans and currency swap agreement. Stock market has boomed in 2009.
# Golkar and PDIP parties might unify and pose challenge to Yudhoyono, not in the presidential race, but as a challenging opposition to legislative reforms in parliament.
# As long as Indonesia continues to be led by secular parties and leaders who do not pose threat to ethnic minorities (e.g. Chinese business establishment), the investor community is unlikely to be concerned.


p/s photos: Pace Wu Pei Ci

Looking For The Next Sell Sign

We all know markets come and go, and as keen as I am on the bull run, I also know that there should be some form of downtime for the markets. While I do not think we will revisit the lows anytime soon, I do think that there will be periods of prolonged weakness. Always keep an eye out for things that could evolve into a Sell signal.

US banks are ok now, so too are the automakers - when I say ok, I meant them not needing further bailouts over the next 6-12 months, not the real health and viability of these companies for the longer term.

An interesting development was when S&P warned that it could downgrade the UK government's credit rating because of its heavy debt burden. Seriously, shouldn't S&P be saying that to the US??!!!

The looming danger with that kind of statement is that it will cause some sell down in UK and US bonds, especially since the UK and the US are preparing to issue truckloads of bonds. Maybe not so much in the US case as they sell truckloads of bonds regularly. In the UK case its more significant because one can expect any new bond sale will come at much attractive yields, owing to UK's not so good balance sheet going forward. Sell current ones and wait to buy the new ones.

Even though UK's gross debt at 63.6% of 2009 GDP, which is still lower than France's 76%, the USA's 78% and Germany's 66%, UK's public finances are more exposed because of the higher risks that international investors might be forced to sell UK bonds. International investors hold some 40% of UK bonds and many might have to sell if the downgrade actually comes through because many are not allowed to hold debt that is not rated AAA.

Having said that, the markets are already adjusting itself to pacify the concerns over UK. The pound will be weaker till the time they issue the bonds, by then the yield would be enhanced in the eyes of foreign investors via a weaker currency exposure when buying in. As long as that happens, the big sell down will not be there. Still, this development bears watching. To a large extent, the S&P news has been priced in via the UK bonds yield and the sterling's weakness. The danger to be wary is if this is just the beginning of a series of downgrades - i.e. next might be France or even Germany, then it could turn into a tsunami of risk aversion again - better be aware and follow developments closely. No danger for now.



p/s photo: Pace Wu Pei Ci

Asset Class Returns As At 30 April 2009

For the month of April 2009, REITs finally recovered and outperformed other asset classes, but on a year to date basis, it is still the worst performer, having lost more than 50%. There is indications that things might be bottoming in US real estate. Despite a large number of foreclosures still, there were more bidders for those auctions. Home builders in the US have staged a similar rebound last month. Emerging market stock have outperformed other equity markets, still on a year to date basis, the losses were still bigger than developed markets and the US equities. What is more interesting is the very flat performance of commodities. The bottoming of markets may tie in with a working down of inventories in commodities. I expect commodities to outperform the other asset classes in the coming months.







p/s photo: Pace Wu Pei Ci

FASB's Move & The Aftermath

OK, we can have our disagreements over what is fair value accounting. But since its been passed and will come into effect as soon as the second quarter, lets look at the real effects on companies and markets. The first area is to look at the Credit Default Swaps for the affected banks. CDSs are basically insurance one can buy to insure against a certain company going bust. Hence if I bought Bear Stearns, and it went bust, the writer/issuer will be paying me the full sum I insured/hedged.

Now, with the new FASB ruling, the CDSs of the banks will reflect whether there was real effect or just a cosmetic effect on these banks' risk of failing following the new rules.

- Citi is in about 40 bps but is just back to where it was on Tuesday
- Bank of America is lower by 50 bps
- Wells Fargo is lower by 30 bps
- JP Morgan is lower by 15 bps, all back to one week lows
-Morgan Stanley and Goldman Sachs are each in about 30 bps

Well, the effect is only minimal at best. The ones in real danger would be Citi and Bank of America, hence the narrowing of risk would be more pronounced there. Other banks which may have a lot less toxic assets in their books, would only see a very marginal reduction in risk. That means that the new rules DOES NOT really help to put the shaky banks out of the risk of possibly going bankrupt. It was the same level of riskiness as things were a few weeks ago.

That would be a correct consequence because the treatment of the "impairment" may be changed but the substance of the impairment is still in the books - hence the risk of failing should be the same or nearly the same as before.

The difference, the really big difference as I have mentioned yesterday is in the capital adequacy side. They will not need to hold so much capital or raise much new capital. That lightens the bank's dilution danger, and eliminates the big danger of failing badly should they fail to get a truckload of new funding over the near term. The supposed new capital is to plug the hole in the toxic assets write downs, and will not actually help to fund business activities going forward. If they do not sell the toxic assets, they will not be taking the loss in effect - hence I like the amortisation rule of the losses. Thus the reduced need to raise new capital will NOT affect existing operations going forward.

Its not like the new capital will be used for expansion, it was dead money to plus a hole in the balance sheet. Another consequence will be that many of the banks that received the TARP money will be looking to repay the sums back much quicker. Again, a confidence issue will work its way to boost optimism in the eyes of investors. You cannot imagine how much liquidity still resides on the bylines. Its a confidence issue and moving market back up by 10%-20% over a few weeks is not that strange in extreme market conditions.

Will the markets rally be shortlived? I think this one's got some legs. This bear market crisis was predicated on a significant loss of confidence in the entire financial system. What has come out of the G-20 and the new FASB ruling showed a more sobering and concerted view to address the issues. We are not out of the woods in terms of real economic activity, jobs will still be lost.

However, stock markets are forward discounting models, hence in the eyes of investors, the real economy are looking brighter 1Q2010 and 2Q2010, it is with that foresight that that the Dow Jones could scale above 9,000 and try to consolidate there over the next few weeks. Will we revist the lows??? ... pretty unlikely.

p/s photo: Pace Wu Pei Ci