Possibly The Best China/Asia Play With Possibly The Best Mgmt In Asia

Readers of this blog will know that I have been an ardent admirer of Li & Fung from HK. It is possibly the "best China/Asia play" with possibly the best management in Asia. Trading company Li & Fung (0494) has entered into an agreement with Tommy Hilfiger to acquire the designer's global sourcing operations for HK$ 1.9 billion. Turnover of the sourcing operations for the year ended March was approximately HK$5.48 billion, while unaudited attributable adjusted earnings amounted to around HK$242 million, Li & Fung said Sunday. The deal is to be completed before March 28, with financing coming from internal cash resources. In September, the company raised around US$314.9 million (HK$2.46 billion), mainly for M&A activity and opportunity such as this. Tommy Hilfiger's buying offices in Hong Kong, Taiwan, India, Bangladesh and Sri Lanka will be integrated into Li & Fung, which buys consumer goods and manages supply chains for retailers and brands worldwide through its 70 offices in 40 countries and territories.

But why Li & Fung ... Li & Fung, one of Hong Kong's largest export trading company, has been an innovator in supply chain management. Its basic philosophy behind supply chain management is to reduce costs and lead times, allowing its customers to buy "closer to the market." Li & Fung has been a pioneer in "dispersed manufacturing." It performs the higher-value-added tasks such as design and quality control in Hong Kong, and outsources the lower-value-added tasks to the best possible locations around the world. The result is something new: a truly global product. To produce a garment, for example, the company might purchase yarn from Korea that will be woven and dyed in Taiwan, then shipped to Thailand for final assembly, where it will be matched with zippers from a Japanese company. For every order, the goal is to customize the value chain to meet the customer's specific needs. Companies like Li & Fung, narrowly focused and professionally managed, could be the trend for the next decade. Its edge:

1) Its integrated, one stop shop, squeezing out the savings due to economies of scale and leverage in purchasing due to its size
2) Its integrated, allowing clients to be involved or make alterations anytime along the supply chain line. This also allows for very speedy in-out from design phase to final product. The speed to market is a huge advantage.
3) The bulk of operations are in China, which has basically the most cost-effective labour production center in the world. Add that to a sophisticated tech driven supply chain at every level, it is hard to top.
4) Li & Fung is actually very high up on the supply chain due to the value-add they provide to clients.
5) Enjoys excellent margins due to unique business model. Clients will find it very sticky to be with Li & Fung once they have dealt with them. Margins in the region of 25%, well cushioned from external risks.
6) Excellent management. Clear vision, grand startegy witgh key performance indicators at every stage. Been ticking off these flags one by one with great execution. Extra point for Western mgmt philosophies coupled with very strong Asian roots and sensibilities.

It is clear the company has broken through their limited mindset from the 90s. In the 90s, the company was good but struggled to surge past the US1bn turnover mark. By improving and adding value all along the supply chain, they have become almost invaluable to more clients. In 2004 the company reached US6bn in turnover and last year, its hovering near the US10bn mark, and all that on excellent margins.

Its obvious due to the size of the company now, it cannot rely on organic growth anymore. Hence the recent acquisition of KarstadtQuelle International Sourcing for EUR60m and the purchase of Hilfiger's sourcing operations.

Li & Fung will be well protected even in an economic downturn as that would cause more companies to outsource more. Li & Fung is the classic company that jumps a few rungs of ladder every 3 years, and its hard to ride along with it as you cannot imagine any further growth for the company. So, at around HK25 currently, it should have no problems scaling above HK30 this year and beyond. Though its market cap is already US11bn, the company is on a good thing and their excellent management which tries to improve at every level with zero complacency bodes well for its future.

Company is helmed by Victor Fung. Victor holds Bachelor and Master Degrees in Electrical Engineering from the Massachusetts Institute of Technology, and a Doctorate in Business Economics from Harvard University. Victor holds a number of civic and professional appointments. He is a member of Chinese People’s Political Consultative Conference and the Hong Kong Government Judicial Officers Recommendation Committee. From 1991 to 2000, Victor Fung was Chairman of the Hong Kong Trade Development Council and from 1996 to 2003, he was the Hong Kong representative on the APEC Business Advisory Council. In 2003, the Government awarded Dr. Fung the Gold Bauhinia Star for distinguished service to the community. His brother, William Fung is Group Managing Director. WilliamFung graduated from Princeton University with a Bachelor of Science degree in Engineering and holds an MBA degree from the Harvard Graduate School of Business. He was conferred the degree of Doctor of Business Administration, honors causa, by the Hong Kong University of Science & Technology. He currently serves as a member of the Economic and Employment Council of the Hong Kong Special Administrative Region.

So, What's Really Driving The Markets?
Getting To The Core

You have equity markets gaining every single day for more than 10 days in a row. The record for US markets was, I believe a 10 day gaining streak back in January 1989. Since then, almost 18 years later do we see a similar phenomenon. Readers of this blog will be aware that I have been bullish since beginning of 2006, and even stressed that back then, all equity markets are going into, or even already in the midst of a bull market without most people realising it.

This bull run was cemented a few years back, the believers were few, which is why the level of participation rarely got to a prolonged euphoric state. This is clearly one of the quieter bull runs. But why are we in this bull run? Why are markets all so bullish?

If you cite earnings, lowering of interest rates ... it would be yes, and a maybe respectively. There must be some underlying reason for the hooplah. I think I must have touched on this before, but its worth mentioning again:

a) bull run part of rise in "commodity prices" - prices as in most commodities, what we have for the last 4 years was a stupendous jump in commodities, when they jump and its due to demand jumps, then it will be inflationary, ... but this time around, the demand was largely due to corresponding larger jumps in productivity (e.g. outsourcing in China), thus inflationary domino effects was muted ...

b) China - the impact of China alone in the global economy has been understated. More than 60% of listed US companies have some sort of outsourced operations, directly or indirectly, in China. What that means is by doing so, it raises productivity and results in a better allocation of resources. Hence you find many US companies finding it easier to maintain or even grow margins over the last 4 years, thus translating into a happy Wall Street and stock prices. And this is not a one to three year thing, I think the outsourcing resulting in growing margins can still be pushed for at least another 3-4 years before differentials narrow to the point of negligibility.

c) private equity - the pooling of funds into private equity over the last 3 years have been outrageous. PE firms have been able to register better returns than most equity indices thus the flow of funds are continuing. The rise of PE is partly due to the brilliance of many PE managers but largely to the existence of too many staid, large but undervalued listed companies. By taking them private and recharging the batteries, many PE firms have been able to improve margins and refocus these undervalued companies, and then relist them at higher premiums. They are doing something good, but they are basically just bringing up these companies to par valuation, nothing terribly fantastic. But PE activity will cause the valuation of sectors of interest to rise, even the mere whisper of a takeover will raise valuations of similar stocks in the same industry. The effect is higher prices for all, and the number of undervalued companies will see a gradual reduction in numbers, and even the quantum of difference in undervaluation will reduce ... = higher equity prices.

d) REITs - it frees up a lot of capital, an awful lot of capital, most of which went into good hedge funds or private equity. Who buys REITs, retail yes but more so are insurance companies who now have a better way to manage risk and returns better than just bonds. So, its not a zero sum game, effectively more bondholders are switching to REITs, and sellers of REITs have been raising cash like crazy, and sometimes you don't even have to lose control of the asset. A big contributor to liquidity in the system.

e) China again - the rise and rise of China have opened up a huge market place for a lot of US and European companies. Fees, commissions, joint ventures, projects have sprung up like nobody's business - just ask the top 10 American investment banks in China, and the IPO fees they are getting. To any big corporation, previously you have a 5% market share of a 100 billion dollar industry, now you have 5% of a 130 billion dollar industry with the emergence of China as a consumer. The more successful China integrates with the international market forces, the better off will the Chinese be, and the bigger the consumption demand for global goods and services. Looking at the per capita in China, even if per capita income rises by 10% each year, there is still enough excitement to last for 10 years at least before the vicious cycle gets ugly.

f) Asia recovery from financial implosion - enough said, it took many countries at least 5 years since 1997 to get rid of the excesses, now most are just trying to get back to parity. If you remember correctly, the ringgit used to be 2.5 to the dollar in the 90s. Considering that we have gotten rid of excesses, improve productivity, reduce corruption, improve transparency... and US deficit is at even higher levels now, getting back to 2.5 is a no-brainer. But we don't want to get there too fast, we need exporters to feel comfortable. Hence Zeti has been smart enough to keep ringgit's rise in line with China's yuan. Getting to 3.3 or even 3.2 this year is a cinch for the ringgit. Export industries should relook into their margins and productivity seriously before screaming at eroded earnings - the ringgit has been helping you buggers for far too long. If you cannot operate at 3.0 to the dollar in 12 months time, you better just fold your business cause you cannot compete in the global markets. To rely on a weak ringgit to compete means you have a very weak business model and not much competitive edge. A country will depress its currency to gain export dollars to recover from a crisis/weakened state, its over now. We have to move up the ladder.

In conclusion, the recent gains may seem frothy but its not all hot air. Plus the fact that markets tend to be very bullish anyway in the FIRST QUARTER, I do believe the second and third quarters will be more volatile with sharp downside bias before perking up in FOURTH QUARTER again. Its really difficult to see the market correcting 10% even from here, any pullbacks will be in the region of 2-3% tops. On valuations, prices are high but not excessive levels yet to warrant a sharp correction.

In fact, the risks to all equity markets are largely EXTERNAL rather than within the markets itself. I see EXTERNAL factors being the largest risk poser, for example: a collapse of a small brokerage in China triggering a huge loss in some regional bank; unexpected austerity measures in China's property market (e.g. 50% deposit for purchases) triggering a sharp sector correction and mood change; Republican and Democrat parties elevate their differences and stalling on issues/laws progression; pockets of violence boils over globally requiring international attention; H5N1 outbreaks or new strains of the virus in parts of Asia (again); US dollar collapsing by 5% in a couple of days triggering massive capital flow changes (if that happens, the ringgit could go from 3.5 to 3.1 overnight, and that may trigger a collapse in KLSE as people perceive no more upside for ringgit and would want to lock in gains and leave) ... So, even when you can see no risk, there are still risks.

Hey Friend, Don't Talk Cock-Lah!
Anchor & Adjust Away

If there was one thing I learnt from this subject I took called Decision Making & Statistics, was Anchor & Adjust as a common form of decision making. Readers of this blog will be familiar with the concept as I use it all the time to bash the so called expert opinions.

A&A can hide incompetence and mask sub-par analysis. All you do is anchor to the most recent point of reference and adjust up or down according to available data. While that is not wrong, it is a chicken-shit way of analysis or offering an opinion. A bit like "after the horse has bolted", and all the expert is saying is "well, I think he went that way, and should continue doing so".

So it is certainly not surprising that many local and foreign research houses have come out with chest-pounding press releases in recent times. For someone to come out this week and saying "Bursa Malaysia is expected to surpass the Kuala Lumpur Composite Index’s (KLCI) all-time high of 1,332.04 in Januray 1994 based on the current rally, underpinned by the increased liberalisation of economy, accommodative fiscal and monetary policies and improving corporate returns on equity (ROE)" ... is pretty much talking cock-lah. Where was the prediction when the index was at 1,000 a couple of month's back (just a couple of months back)? These so called experts will A&A their predictions and think of new reasons to justify their existence and the desired levels, but will not stray from the pack, cause it is safe.

Part of the reason why there is so much talking cocks and b.s. is also due to the very average journalistic ability and integrity exhibited in most Asian papers. To parrot opinions without "sifiting out the chaff from the wheat" give rise to empty headlines and little-value-add information in an era of information overload. Besides just reporting news (biz news in particular), to move from being mere reporters to journalists requires investigative journalism, thought-provoking commentary and hard line questioning. Need to move up the ladder, y'all.

Show me one person to predict 1,300 for KLCI in 2007 anytime in their analysis last year. ???? Where are the so called experts... hmmm... go fly kite lah with so much hot air around! I can safely say when index reaches 1,300 ... some other a-hole will come out and say there is a good chance for the index to reach 1,380 within the next 6 months ... OMG of course la ... don't say things which makes people KNOW how average and pathetic your mind is.

Seriously, a good analyst will be able to come up with a decent thesis for the KLCI to be at 900 or 1,200 or 1,500 ... all within 15 minutes. Give me a level and I will tell you a story, usually its called b.s. but if I do it persuasively well, you will nod along in agreement. Hence to sift out the really good opinions from mere stuff that smells of ammonia is to seek out:

a) consistency of argument and logic
b) ability to defend stance taken
c) correct short term views should be taken with a ladle of salt
d) correct long term views with solid big picture arguments should be given more weight
e) the ablity to locate market catalysts 6, 12, 18 months down the road
f) must be persuasive

People Say I Am Pretty!
Are You Prepared For Re-entry?

Many investors may be shaking their heads at the rise and rise of blue chips in most Asian markets. The trouble is once you have taken your profits, it feels silly to reenter at higher prices. For once in a very long time, foreign funds and research analysts think Malaysia (and Asia) is beautiful. Not just pretty but looking pretty even when compared to other Asian beauties!

Do we need people to say we are pretty? Ladies should know better, when someone says you are pretty, they usually want something from you (yes, they want to f___ and f___ over you). Before you get all hyped up, they stand for flatter and fawn.

When did Malaysia get to be so pretty? Are we really pretty? The truth is, we are what we are, country themes are just like fashion fads, they come and go. When you are hot, do not fight it, just join in the trend but gotta be careful when the party is over. Once the pretty one has been partied on too long, and the guests all have left, you are left intoxicated, feeling like a barf-bag, and wondering why no one calls you pretty anymore.

Why Malaysia is pretty now:
Currency - Everyone thinks it will have a good chance of reaching 3.3 this year. Even now, Bank Negara is having to buy dollar to keep it above 3.5 .
Plantations - Good outlook still.
GLCs - Many following KPIs and turning more professional and better managed.
Dividend yield - 12 months back, Malaysian stocks offered the best dividend yield but nobody bothered. Now, we still offerred the best dividend yield and that is touted as a strong point. Whether you are pretty or ugly, I can always think of reasons to support the opposing views (kudos to analysts).
M&A - Synergy Drive is more than just a trend setter. The size and ambition have made people notice that GLCs are jumping onto global best practices, and taking advantage of leverage and economies of scales.
Trend - Don't fight the trend. When the research houses have to find new "country themes", they seem to be running out of options. HK and Singapore while still good, looks a bit frothy. More are putting Malaysia as the new prom queen for 2007 - a lot like HK's music awards, its basically your turn, not that you deserved the award!

The most important factor to me is TIMING - foreign investors and analysts are not stupid, history have shown that the year leading to elections will have a strong positive bias on markets and projects.

There will be a pullback as the index has not even paused for any consolidation. Hence investors who have taken cash from the table should ready themselves on what to buy for re-entry. For re-entry purposes, I have highlighted good covered warrants to aim for. I believe there will be a healthy pullback soon to 1,190 to 1,200.

Hit List

Astro-CB 8/2007: Single digit premiums, stock has not really moved much. Indonesia no longer a story but a good potential, same as India. In-house production good long term strategy, becoming a content player as well. Buy when covered warrant nears 0.40 or thereabouts.

KL Kepong-CA 11/2007: Best exposure in oil palm as the IOI covered will be expiring soon. Story for CPO still solid. Covered warrant can be bought around 1.00 even now, with or without pullbacks.

Maybank-CA & CB 1/2008 & 11/2007: Rotational play will pick up on Maybank as it has lagged the rest. Look for Maybank-CA around 2.80 and CB around 2.00 .

Tenaga-CB 10/2007: Probably the best covered warrant around. Low premium, great upside for the stock in 2007. Buy now or later, its great if you can get them below 2.00 .

TM-CA 11/2007: The sceond best covered I guess. Tenaga, TM and Maybank are likely leaders to push the index higher over the next few weeks and months. Very low premium. Great if you can get them below 1.60 .

Wanted: Investment Expert, Must Have Humility
As Reported In Bloomberg

If you are Mark Cahart, you almost have it all your way for most of your life. Mark Carhart looks out over the packed New York conference and tells investors that Warren Buffett has it all wrong. Carhart, 40, co-head of the quantitative strategies group at Goldman Sachs Group Inc., uses his July speech to poke fun at Warren's penchant for investing in market-leading brands like Coca-Cola and Gillette. He cites study after study showing that big-name companies with high price-earning multiples or rapid growth rates make poor bets. Traditional stock pickers like Buffett, a fabled raconteur, do have one redeeming quality, Carhart jokes: ``They tell great stories.'' (Lesson - Don't fuck around with people who have done better and longer than you)

Carhart is one of the world's most successful money managers, a mastermind behind Global Alpha, a US$10 billion hedge fund for wealthy clients and employees of Goldman Sachs. In 2005, Carhart and co-manager Raymond Iwanowski, 40, notched a 51 percent gross return at Global Alpha. Posting that kind of gain requires taking risks -- and last year, Alpha lost 6 percent, its first deficit since 1999. Carhart, a former assistant professor of finance at the University of Southern California, helps oversee other hedge funds, four mutual funds and scores of separate accounts. In all, he and Iwanowski have US$101.5 billion at their command. Carhart and Iwanowski use math-heavy trading tactics that fund consultant Sol Waksman likens to counting cards in a casino. The two lead a corps of computer-loving traders, statisticians and finance and economics Ph.D.s. (Lesson - If you have the scores of Phds, math wizards and other brilliant minds at your disposal, you should generate superior returns... NOT! Be humble with financial markets, once you think you have mastered it, you are fucked. If you approach with the attitude that the more you know, the less you know of it, you stand a better chance of not have egg on your face, and live to fight again.)

Their team makes -- and sometimes loses -- millions of dollars a day. At the heart of their empire is Global Alpha, which generated about US$700 million in fees for Goldman Sachs in fiscal 2006. This money machine hums mostly behind the scenes. Carhart and Iwanowski, friends since their days at the University of Chicago Graduate School of Business, oversee about 10 other Goldman hedge funds, too. Together, they trade everything from Japanese stocks to U.S. soybeans, to Israeli shekels. Global Alpha is part of the richest hedge fund empire the world has ever seen. Last year, Goldman Sachs eclipsed D.E. Shaw & Co. and Bridgewater Associates Inc. to become the largest hedge fund manager, with US$29.5 billion in assets as of Dec. 31, 2006. That figure excludes Goldman's proprietary-trading funds and its funds of hedge funds.

Carhart and Iwanowski hunt for market variables called risk factors that often lead to excess investment returns, or premiums, according to people familiar with the fund. Some, such as a measure called the value premium -- the difference between the return of a group of stocks with high book values relative to their prices and that of a group with low book value-to-price ratios -- have been used by other money managers for years. Goldman Sachs has identified more than 20 new risk factors, which it doesn't disclose, even to its own investors. Carhart never reveals the secrets. Old friends and people who've invested in the fund say they're not really sure how it works. (Lesson - Once you think you have found the key, it will evaporate right in front of you.)

On any given day, Carhart's team of 50-60 investment professionals uses Global Alpha's factors to deploy 20 trading strategies in markets the world over, according to an investor in the fund and Global Alpha documents. During 2006, the fund's picks ranged from Japanese and Dutch stocks to bets on and against the Polish zloty. At the center of the Global Alpha story are Carhart and Iwanowski, devotees of quantitative analysis, or quants, who came to Goldman Sachs from opposite ends of the financial world.

Carhart first turned heads in money circles as a doctoral candidate at the University of Chicago and later as an assistant finance professor at the University of Southern California's Gordon S. Marshall School of Business. Iwanowski, by contrast, has spent his entire career on Wall Street. What unites them is that they're quants, who put their faith in data, rather than human judgment, when deciding what to buy or sell. To money managers like them, what you think about a company's management or products doesn't matter much. ( Lesson - Quants take the human element, the human judgment out of the equation.... well, you can't and shouldn't.)

Jokes aside, Carhart would do well to heed two Buffett rules. No. 1: Never lose money. No. 2: Don't forget rule No. 1. In 2006, Global Alpha went wrong when just about everything else at Goldman Sachs went right. After a roller-coaster ride that included a 10 percent August plunge, Global Alpha ended the year down 6 percent, according to an investor in the fund. The loss, the first since 1999, came in a year when Goldman earned US$9.54 billion, the most in Wall Street history. The investment bank made headlines by earmarking US$16.5 billion for salaries and bonuses, including a record US$53.4 million bonus for Chief Executive Officer Lloyd Blankfein. Carhart and Iwanowski declined to comment for this story, as did other Goldman Sachs executives. It was a rare misstep for Global Alpha. The fund skated through the 2000-02 U.S. bear stock market without a down year and posted an annualized return of 19.75 percent, after fees, from Dec. 4, 2001, to Dec. 31, 2005, according to Global Alpha's 2005 annual report. The average hedge fund returned an annualized 9.1 percent from Dec. 1, 2001, to Dec. 31, 2005, according to Hedge Fund Research. Shares of Buffett's Berkshire Hathaway rose a mere 5.9 percent during the period.

Only now, Carhart and Iwanowski are in a hole. Like most hedge funds, Global Alpha charges an annual management fee of 1.5 percent or 2 percent and takes a 20 percent cut of any profit. Before the fund can take its 20 percent in 2007 -- assuming it makes money -- its quants must first make up the 2006 loss.

One of the most-surprising things about Carhart is that for a guy in an industry known for big money and bigger egos, it's hard to find anyone who'll say a bad word about him. Former colleagues, classmates and teachers remember him as one of the smartest people they've known. After graduation, Carhart headed for Yale University, where he majored in economics and served as managing editor of the Yale Economics & Business Review. He also began dabbling in the markets as a director of the Yale College Student Investment Group. After Yale, Carhart set to work on a doctorate in finance at Chicago. He studied under finance professor Eugene Fama, best known for his work on the efficient-market hypothesis, which holds that prices reflect all there is to know about stocks or other securities.

Global Alpha doesn't merely bet on the direction of stock or bond prices. It bets on differences between those prices. Global Alpha employs seven strategies in the bond markets alone, according to Goldman Sachs Global Alpha Fund Plc's June 30 semiannual report. The simplest of them is to buy government bonds of one country while shorting those of another. In the U.S. stock market, Global Alpha might buy oil and insurance stocks and simultaneously bet against semiconductor shares. The fund also allocates part of its US$10 billion to something called ``global event anomalies,'' according to a November 2001 prospectus. With this strategy, the fund attempts to make money from corporate stock buybacks and divestitures and from changes in how market indexes like the S&P 500 are calculated. Carhart and Iwanowski also employ a commodities strategy and an asset-allocation strategy that bets on various mixes of investments: stocks, bonds, currencies and beyond.

Global Alpha quants have designed their fund so that if things go wrong, the probability is low that the 20 strategies will lose a lot money at the same time. That, anyway, is the idea. In the 2005 report filed with the Irish exchange, Global Alpha reported a gross return of 51 percent for the year. The report says only two strategies -- global anomalies and the country bond selection -- suffered losses of more than 1 percent. During the first quarter of 2006, Global Alpha rose a net 9.5 percent. The next quarter, a bunch of the fund's strategies soured. Global Alpha lost 3.5 percent during the period. Its ``developed equity country selection'' fell 2.5 percent, hurt by bad bets on Japanese and Dutch stocks. Its developed country currencies strategy sank 1.9 percent, whacked by a wrong-way wager on the dollar and another against the pound. Emerging market currencies strategy sank 1.7 percent, nipped by short positions in the shekel and zloty.

Piecing together the second half of 2006 is harder. A Global Alpha investor who asked not to be identified says the fund's roughly 10 percent slide last August mostly reflected bad bond market investments. Global Alpha also bet that stocks in Japan would rise while those in the rest of Asia would fall -- wrong; that U.S. stocks would stumble -- wrong; and that the dollar would rise -- wrong again. Global Alpha finished November down 11.6 percent in 2006.

Trees don't grow to the sky. Neither do hedge fund returns. Superman exists only in comics.

RSS/SBL, Same Smell

Bullshit - The word "bullshit" is most often applied adjectivally to deprecate a statement or an action. Bullshit (as a culturally based activity) commonly occurs in situations where truth and accuracy are far less important than the ability to achieve a suitable response in the audience. In many cases, such a response helps to gain popularity or favor (often needed in politics, religion or advertising). More mundane examples of bullshit often involve the lives of ordinary people. For example, it is not at all uncommon to hear of people "bullshitting" a job interview, or attributing their performance in an examination to their ability to bullshit. In this sense, bullshitting walks the line between extemporaneous speaking and lying outright. It is also common for people to bullshit friends or acquaintances, by spinning an elaborate tall tale. The object here is to make the bullshittees look foolish by dint of their gullibility in accepting the bullshit as fact. Bullshit does not necessarily have to be a complete fabrication; with only basic knowledge about a topic, bullshit is often used to make the audience believe that one knows far more about the topic by feigning total certainty or making probable predictions. It may also merely be "filler" or nonsense that, by virtue of its style or wording, gives the impression that it actually means something. To discourse upon the contexts, frames of reference and points of observation which would determine the origin, nature, and meaning of data if one had any. To present evidence of an understanding of form in the hope that the reader may be deceived into supposing a familiarity with content.

Don't really know why they postponed introducing RSS (short selling) for KLSE listed stocks? Because the bloody end result is and will be the same... I thought that they may tweak the structure and hence the postponement... but its the same load...

As reported in The Star today: "Since the launch of RSS and SBL, only 62,500 Bursa Malaysia listed shares have been lent out to the short-selling pool. So far, there are no takers.

Short-selling is not without risks and the regulators are mindful of this. The framework for RSS and SBL comes with rules and regulations (hence “regulated”) to prevent abuse by speculators aiming to depress share prices and the broader market. The authorities are obviously treading carefully, delaying the launch of RSS more than once since Bursa announced in March 2006 its intention to reintroduce it.

While the rules are intended to prevent abuse, they inadvertently tend to be prohibitive, too. Due to the many conditions, the timeliness of trades may be compromised. For example, to initiate a short-sell, the borrower checks the availability of the securities with the dealer at the borrowing agent who forwards the request to its SBL desk. The SBL desk would verify the borrower’s collateral and submit the borrowing request to Bursa Clearing, which acts as the central lending agent (CLA). The CLA will match the request with the lending pool and allocate the securities and confirm the match with the borrowing agent’s SBL desk, which then notifies the dealer, who informs the borrower. The borrower can then place the RSS order.

Typically, one would prefer to short on the spot to maximise returns. Having to go through many steps and parties may cause the short seller to lose precious minutes and profit. AmSecurities Sdn Bhd and HSBC Bank Malaysia Bhd are the two approved lending agents. AmSecurities is also the sole approved borrowing agent. The rigid rules complicate short-selling and puts off those unfamiliar with it. With a clear understanding of the process, even those with shares to lend out may be unwilling to do so for a mere less than 2% return. As investors familiarise themselves and Bursa relaxes the rules, perhaps investor interest will eventually emerge, especially when the bear returns.

as posted on 11th October 2006 ...

Regulated Short Selling Will Fail Dismally (Again)

Bursa will not like to hear me on this. They'd probably think I have a deep vendetta against them. First, Bursa is too greedy to try and act as the Central Lending Agency. Brokers, custodians and investors all have to go through Bursa to things done. This creates an unecessary layer which adds to cost.

Secondly, Bursa failed to appreciate why an OTC market would have been better. Not all lenders want to lend shares at 2%, some may only lend at 5% or even 10%. Take Google shares for example, at US$500, probably a lot of people would want to short it, hence the lenders could actually ask for a higher rate before lending out. A transparent and free-market OTC makes for real activity and better returns for both sides. I am not sure if Bursa even have the mechanism to change the lending rates?? (..what, change the rates... every now and then ... so much work la...).

Thirdly, too much red tape, inteference, scrutiny... blah blah... Having said that, as long as people can make big money, they can withstand the trouble to invest, if they can make 30% in a month in Timbuktu exchange, you can betcha they will try to get there. But it probably won't happen in Bursa's RSS - limited shares for shorting, do you think there will be 1 million of a company's shares for shorting? Chances are, it will be sporadic and insignificant, which will turn people off. That is why an OTC would have stood a better chance to survive. Imagine the current scenario, with Genting jumping on the Macau news, I think its a good time to short Genting shares, but no one wants to lend at 2%, so I put up a willingness to borrow 50,000 shares at 4% or even 6%, I am sure someone will bite. The failure to allow for a free flowing capital markets.

The shallow thinking that by being the Central Lending Agency, somehow that could prevent disasters needs to be re-examined. You mean, the 1997 implosion was due to short sellers??? Please grow up, that shows how naive the current crop of people in unthinkably high positions are... sigh... You cannot molly-coddle a capital market, it has to be relatively laissez-faire ... look at global best practices... please...

p/s btw, I totally agree there should be short selling, just do it better ... man...

Don't Look Down!

There are bull runs and there are bull runs. The ones in HK and Singapore have been very exuberent, carrying one and all along with them. A fellow commentator added that it may be due to their vibrant derivatives market - totally agree - which leads me to conclude that "although you may not agree with the current stock prices, you cannot but participate with the leveraged gains via derivatives".

The big picture is relentless, it causes institutions to keep parking their funds in stocks, plus its the usual 1Q, and everyone will jump in because they always expect the 2Q and 3Q to be quite quiet. Brokers worldwide will be pumping up the good news to get in a solid 1Q and hope to end with a solid 4Q to maintain appearances. For a strategist to call a sell or reduce now would be tantamount to career suicide.

Hence we can say that liquidity is ample and having a faster velocity in HK and Singapore, while the situation is quite different in Malaysia. We do not have as much derivatives and liquidity. Local funds have been gradually selling down and not willing to repark funds into the rally. We must be fair, most local funds registered annual gains of between 15% to 30% in 2006. In the first month of 2007, they are already up 10% for the year, what would you do if you were them? Lock in profits for most counters except the very solid dividend yielding ones. Wait for better entry prices.

In KLSE, its mainly foreign funds playing among themselves. They have gone through the plantations, the solid blue chips (Maxis, gaming, YTLs, and even the construction)... now they are really rotating out of ideas to include my prediction... the GLCs or near GLCs such as Maybank, TM, Tenaga, UEM World, MRCB, etc... Even so, you still do not find local funds or retail in the market currently in a similar big way. While Yusli has been trying to bully retail players to join in now, its not a convincing storyline.

So, what we have now are foreign funds playing a mini musical chair, passing blocks of good shares at highish prices to one another. The music is still playing and the person who is supposed to stop the music has temporarily left the room - but its not an exactly comforting scene, is it?