CIMB's Callable Bull-Bear Certs - Nice One

CIMB yesterday launched the first callable bull-bear certificates (CBBCs) on Malaysia's national stock exchange. The initial four CBBCs start trading today and will allow investors to bet on four popular local stocks: AirAsia, Gamuda, Genting and Berjaya Corporation.



"Malaysia is the first country in Southeast Asia to introduce CBBCs," said Charon Wardini Mokhzani, deputy chief executive of corporate and investment banking at CIMB, in a speech. "Our launch of CBBCs today is yet another example of innovation in exchange-traded products, designed to give investors more choice. It is not a substitute but a complement to all the other exchange-traded products we have."

Hong Kong pioneered the trading of CBBCs in Asia back in 2006. At the time, few participants expected the contracts to be popular in a market already dominated by warrants, but the timing turned out to be perfect to catch the rise in volatility during the height of the financial crisis - which made it expensive to buy warrants.

CBBCs, which are a kind of barrier option, are also simpler than warrants. Investors pay a small premium to buy a fixed-term contract that represents a bet on the direction of the underlying stock or index - either up or down. Depending on how far the strike is from the spot level, the contract can offer leverage of six times or more, but the investor is only on the hook for his initial investment. The contracts are callable, which is to say that they can terminate early if the underlying moves too far in the wrong direction.



Hong Kong's move into CBBCs has proven a profitable one. Most exchanges around the world are struggling to make money with lower trading volumes, lower margins and reduced profits as a result of the global financial crisis and the introduction of alternative trading systems - and at a time when new regulations and risk management issues are likely to impose additional challenges.

At Bursa Malaysia operating revenues have dropped by roughly a third since the peak of 2007, but in Hong Kong the drop-off from 2007 has been somewhat mitigated by the addition of new products such as CBBCs, which together with warrants now account for about a quarter of the trading on the exchange.

Bursa Malaysia will hope to replicate some of that success, though it remains to be seen if investors will embrace CBBCs in a market that is becoming less volatile and more friendly towards warrant investors.

You've Gotta Be Kid-ding

When news broke a couple of years back in HK that a famous sportswoman Lee San San said that to raise a kid in HK would cost in the vicinity of HK$3mn, all hell broke lose. I tend to agree with her. Most parents know that its not cheap to raise a kid in the city, but no one actually sat down to tabulate the the actual cost. Now a new study in the US came out with equally similar conclusions, that it will cost US$291,570 for a middle income family to raise a kid. That's close to HK$2.3mn, so Lee San San was not that far off. Get this, it DOES NOT INCLUDE the cost of childbirth or college.

If you were to revert that to Singapore dollars, that would be S$417,994 ... which I am pretty sure is more than 90% of all CPF account holders have in their CPF at 55. You can still get by if higher education is largely subsidised, I guess. Imagine if your kid is neither brilliant enough to get a scholarship or a partial scholarship and you are not poor enough to qualify for special loans - that's Die Hard Part 4 ... Die Standing.

The amounts are a bit off the center when you talk about Malaysia as we have a different purchasing power model. I think you can even convert dollar for dollar, USD into ringgit, it would be closer to the mark, i.e. US$291,000 = RM291,000 (I am refering to a middle class family raising a kid in the city in Malaysia).

I have a married couple who are close friends and they have 4 kids, all smart buggers and will be college bound, but their joint household income is comfy but not excessively high at RM15,000 a month. They bought a new house two years back for RM650,000 and spent RM150,000 on renovation, and end up owing the bank RM400,000 still. I said to them, you know you are paying down the house to fund your children's education, and you better hope none of them turn out to be bastards as you probably need them to feed you in your later years. Its a stressful situation, can you afford to take the whole family overseas for holidays... probably not, gawd forbid if one of them should lose their job!!! Is that a dream or a nightmare in the making?

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WASHINGTON - A MIDDLE-INCOME family can expect to spend US$291,570 (S$417,994) including inflation to raise a child born in 2008 to adulthood, the government estimated on Tuesday, up slightly from the estimate made a year ago.

The estimate covers food, shelter and other necessities for a child to age 18, said the annual report by the Agriculture Department.

The figure does not include the cost of childbirth or college.

Housing accounts for one-third of expenditures on children. Food accounts for 16 per cent, the same as child care and education, said the Expenditures on Children by Families report. Last year, the USDA estimated it would cost US$269,040 to raise a child born in 2007 to age 18, including inflation. The USDA has made the estimates since 1960, when the estimated cost was US$25,300.

The department said it planned to have an updated 'Cost of Raising a Child Calculator' on the Internet soon. Annual spending for child-rearing ranges from US$11,610 to US$13,480 for a middle-income, two-parent family, the USDA said. Families with lower incomes will spend less and families with higher incomes spend more.

Expenses are highest in cities in the US north-east, followed by urban areas of the West and Mid-west. They are lowest in rural America and cities in the South. -- REUTERS


p/s photos: Son Dam Bi

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

Privatisation For KNM?

Sometimes its better to keep your thoughts to yourself. I cannot believe it when the report came out in Bloomberg and New Straits Times on KNM's MD wanting to take the company private. The article kind of confirmed my suspicion that something is not quite right. IF YOU ARE SERIOUSLY CONSIDERING A BUYOUT, THE LAST THING YOU WANT TO DO IS ALERT THE MARKET. If you are alerting the market, you could very well be paying a much higher buyout price in the end. Why would you do that? Smoke and mirrors???.., mainly smoke and baloney really. This tells me things are really not quite right at KNM, don't you think so?

Bloomberg: KNM Group Bhd managing director Lee Swee Eng said he will consider leading a management buyout of the Malaysian oil and gas services provider as long as banks can raise the funds. Investment bankers have approached Lee, who owns 25 per cent of KNM, and suggested he buy the remaining shares, though none has made a proposal that includes financing, he said. KNM has lost 71 per cent in the past six months in Kuala Lumpur trading, cutting its market value to RM1.31 billion (US$354 million).

“We are very undervalued,” Lee, who set up Selangor-based KNM in 1990, said in an interview on March 13. “The opportunity for privatisation is a good opportunity, but it’s the source of funding. There’s no offer on the table.”

Lee, 53, has seen the value of his stake plummet as the global recession, tumbling oil prices and a selloff by foreign investors combined to make KNM the second-worst performer on Malaysia’s benchmark index in 2008. He said he probably needs between RM1 billion and RM2 billion to fund any takeover. KNM was unchanged today at 33 sen at 9:28 am. The shares reached a record RM2.48 in January 2008.

Cashflow at the Selangor-based company would be sufficient to service any borrowings after a buyout and associated cost cuts, Lee said. Annual profit at KNM has climbed every year since 2004.

“With our earnings, we should be able to handle that,” he said. “I don’t think that would be an issue.”

Tighter Credit

Banks worldwide have restricted lending during the financial crisis, and Malaysia’s government last week pledged RM25 billion in guaranteed funds to help businesses obtain credit and raise money on the bond market in the Southeast Asian nation. Even so, Lee said it’s not clear whether banks, foreign or domestic, would be willing to lend funds for a management buyout.

KNM’s business prospects are tied to the price of crude oil because exploration projects, for which producers hire companies such as KNM, become less viable as prices fall. KNM has had to reduce its bids for most of the projects up for tender, Lee said.

The Malaysian company, with an order book of RM3.9 billion, won about RM300 million of orders between December and January, Lee said. The revised value of all the contracts that KNM is seeking is RM18 billion, he said.

“The business has been a bit slow because of the volatility of the price” of oil, Lee said. “We’re expecting the second quarter onwards to be better. Most of the rebidding has taken place. We will sail through this with flying colors.”

Crude oil for April delivery fell as much as 5.2 per cent to US$43.85 a barrel in after-hours electronic trading on the New York Mercantile Exchange after the Organisation of Petroleum Exporting Countries decided against deeper output cuts. Crude, which has slumped 70 per cent from its July record, was at US$44.58 at 10:37 am Singapore time.

Lee said he expects oil and gas producers to proceed with more exploration projects if oil rises beyond US$50 a barrel, or stabilises at a level between US$45 and US$50.

p/s photo: Son Dam Bi