China Markets Extending Gains

China markets continued its strong showing after Chinese New Year holidays. The GDP growth rate was respectable at 6.8% in the fourth quarter and the expected government stimulus that should ensure a growth rate of 8% in 2009. Moreover, the Shanghai Composite Index was up an impressive 9.3% in January. That is impressive in comparison to the nearly identical 8.8% change in the Dow, though for the Dow it was in the other direction.

China's official purchasing managers' index (PMI) for January rose to 45.3 from 41.2 in December and a record low of 38.8 plumbed in November, the China Federation of Logistics and Purchasing (CFLP) said on Wednesday. A reading over 50 indicates an expansion of activity in the manufacturing sector while one below 50 suggests contraction. New orders, including those for exports, and production rose strongly. The only two sub-indexes to decrease were stockpiles of finished products and employment.

The January PMI indicates that China's economy is gradually bottoming out. The government's 4 trillion yuan ($915 billion) stimulus plan had started to have a positive impact on business, which was booking more orders for capital goods. Moreover, banks extended about 1.2 trillion yuan in new loans in January, a monthly record, in response to government calls to lend more to halt the economy's decline.

The stimulus plan is just as big as Obama's stimulus plan. One big difference, the China plan has a huge slant towards infrastructure. While Obama's plan is dissected into hundreds of pieces to satisfy various interest groups and to create a strong safety net for the poor. It is easier to marshal resources and get all provinces to work in tandem with government policies in China - and that is a huge advantage.

----------------------------------------------
previous posting on China in mid-January 2009:

1. The “smart money” is buying, not selling. Many foreign banks (including Li Ka Shing) have been selling down their Chinese banking shares in droves - the activity has been substantive over the last few weeks. We have to recognise that the foreign banks are selling because they are in trouble, not because the Chinese banks are in trouble. Secondly, the Chinese banks are the only kind of assets that can still get a decent price nowadays. Thirdly, the Chinese banks are the only kind of assets that there are plenty of willing money to buy them even now. Funds investing in emerging-market stocks raised their Chinese holdings to the highest level since 1995.
   
2. Chinese shares are very reasonably valued. If legendary investors like Warren Buffett really like US stocks trading at 12 times earnings, they should be rabid over Chinese stocks. Based on the MSCI China Index, the average Chinese stock trades for less than eight times earnings, and they do not have to contend with the massive de-leveraging.
3. Oil is much cheaper. One of China’s biggest challenges was to keep a lid on inflation, while still maintaining its breakneck pace of economic growth. That was no easy task with oil at $150 as the cost of shipping, food and fuel were increasing rapidly. Keep in mind, China imports a net 3.3 million barrels of oil a day. Now that oil prices are down considerably, the recently announced stimulus would see a more effective trickle through effect and multiplier effect, and not being "wasted" on oil prices. The risk of inflation in injecting the huge stimulus is muted as well.
   
4. The economy is NOT in a recession. Sure, it’s slowing down, but China is still on track for a solid 5%-6% expansion based on analysts’ estimates. And 8% if you believe the government statistics. Regardless of who ends up being right, compared to the contraction in most other economies, such a rate is downright explosive.
5. The last time Chinese stocks were this cheap was during the Asian financial crisis. Back then, most Asian countries were running huge deficits. But this time the roles are reversed. As of December, China boasts $1.95 trillion in foreign reserves. And counting. If necessary, the government can deploy these surpluses to keep economic growth humming along.
6. The consumer is just getting started. The country’s burgeoning middle class, now the size of the entire United States, is just getting started. The McKinsey Quarterly estimates that it will take two decades before these nouveau riche reach their full spending potential. As we know from our own experience and prosperity - 70% of GDP in the United States is attributed to consumer spending - the consumer is an engine of economic growth. In other words, the global recessionary headwinds are no match for the Chinese consumer. Like it or not, the global economy has grown by 70% in trade terms since 2000 till mid 2008. Much of that growth was due to globalisation and a huge new middle class of consumers being created in China, India and Latam - that middle class, while affected by the current crisis, will still be a force to be reckon with.
   
7. Locals are optimistic. We know consumer confidence plays a big role in the success of our own economy. It flat out stinks right now in the United States, And the economic conditions reflect it. But in China, it’s an entirely different situation. A recent survey from the Pew Research Center shows that most Chinese (86%) feel positive about where their country is headed. And that’s up from 25% just six years ago.
   
8. The “mother of all stimulus plans.” While the Obama stimulus has yet to take hold in the United States, rest assured it will. Same goes for the $584 billion the Chinese government is pumping into its economy. China’s “got the mother of all stimulus plans” when you factor in the government spending, savings rates and the rapid decline in commodities prices.

p/s photos: KC Concepcion

Asset Class Returns As At 30 Jan 2009

It pays to keep a monitor on month to month performance of differing asset classes, especially in the current volatile times, as that will give us a leg up to get the pulse of risk aversion and shifts in investors investing strategy. For the first month of 2009, the best performing asset class was High Yield Bonds (+6.3%). That is extremely interesting. If we looked at the 12 month performance of High Yield Bonds, it is still down 17.5% (which means if we were to take out January's superior performance, High Yield Bonds would have recorded a yearly loss of some -23.8%. HYB got whacked royally in particular over the last 6 months as investors sold down HYB in preference for the safe Treasuries. Investors feared that many HYB corporates are either going to collapse or will have grave difficulty in finding fresh funding, and maybe that business conditions will be so bad that these HYB corporates will find it tough to service even the interest. The fact that buying has re-emerged in HYB in January indicates that there is some investors willing to re-look HYB, and that the bulk of the bad news may have been discounted or may have been more than priced into these HYB. Anyhow you look at it, its a good sign on less risk aversion.

REITs, in particular US REITs continued to be the worst performing asset class as invetsors totally ignore the yields and anticipate that many of the properties should be written down a lot more than what they are in the books. Commercial properties owned by REITs do not get much media attention as not many of them get sold down in the current market place. Even stretched owners with commercial properties will be able to get their banks to extend their grace period in these troubled times. Still, the continued selling in REITs indicate the overwhelming gloom surrounding the real estate arena in the US. Look for some gung-ho investor to start making a public offer for some of these REITs (ala YTL) as an indication of liquidity and confidence flowing back into the industry.

The fact that the only positive performers were all bonds indicate that risk aversion is still high. Stay tuned to developments.

Negative Equity In HK - A Precursor & Benchmark

The number of Hong Kong homeowners in negative equity quadrupled to nearly 11,000 in the last quarter of 2008 as the financial crisis took its toll on property prices. And analysts expect the figure to double this year as property prices fall by a widely expected 10 to 15 percent. Residential mortgage loans in negative equity increased to 10,949 at the end of December from 2,568 at the end of September 2008, according to the Hong Kong Monetary Authority.

What is negative equity: it means the amount you would still be owing after you sell the property and pay off your mortgage. For example, if you bought a house for 600,000 and you borrowed 500,000, which meant that you paid 100,000 as downpayment. Now the house is only worth 450,000 hence your negative equity would be 500,000 - 450,000 = 50,000. Negative equity is 50,000 but in actuality you have already lost 100,000 (downpayment) + 50,000 = 150,000 (not including the many monthly payments may have already made on the property).

HKMA chief executive Joseph Yam Chi-kwong said the increase was anticipated and that it will continue. "But I don't expect the situation will be as bad as in 1998 to 2003. Property prices are tending to remain stable at a certain level," he said.

While the developments are to be expected, what is more important is to see the negative equity figure as a benchmark as a severity of the recession. We must remember that Hong Kong saw a peak of 105,697 negative equity cases in June 2003 amid the SARS outbreak. So 11,000 is still very acceptable. But the the flip side is that the number in negative equity will rise exponentially and very swiftly if property prices were to slide in greater quantum for the next 6 months. Possibly another 10% slide in price would bring the negative equity figures close to the 2003 SARS level.

Pan Asian Mortgage Advisory economist Alvin Ho predicts the number of negative-equity homeowners will increase to more than 20,000 this year if property prices continue to decline. Real estate prices in the secondary market dropped 20 percent to an average of HK$3,410 per square foot in the fourth quarter from last year's peak of HK$4,251 psf, according to Midland Realty. The HKMA said the aggregate value of mortgages in negative equity rose 313 percent to HK$24.8 billion in the fourth quarter from the previous quarter. The unsecured portion of these loans rose to HK$2.7 billion. The loan-to- value ratio of the loans increased to 112 percent from 107 percent. The three-month delinquency ratio of negative equity mortgages fell to 0.05 percent from 0.08 percent.

Meanwhile, Yam said companies in Hong Kong have more than HK$100 billion in syndicated loans that are due to expire this year. The HKMA will take appropriate action and "the government should keep an open mind" to help financing, he said. "Foreign banks based in Europe and America may have to handle their own problems at headquarters by deleveraging. Their foreign business will then be affected." However, Chinese University associate finance professor Raymond So Wai-man warned that the government will come "under great pressure if it helps companies refinance debt."

Yam said there is a risk that protectionism could spread from trade to finance. As an example, countries are no longer buying US Treasury bonds. The HKMA intends to cancel its temporary provision of additional funds to banks at the end of March but will review the facility at that time to decide if it needs to be extended.

Amidst all the planning and forecasting, HK should remember that its monetary policy, property price and hence stock market are tied to their currency peg. The USD has been injected with a huge array of new "fundamentals" over the last 6 months - HKMA should really reconsider the HK dolar peg because the "integrity, outlook and volatility of the USD" going forward will be more like a horror movie. You cannot have your currency tied to highly risky, highly indefensible monetary expansionary policies somewhere else... the USD by virtue of their actions over the last 6 months have basically sentenced the dollar to a long drawn out period of weakness and losing stature as a reserve currency.

Things To Ponder & A Cure For Depressing Economics

Things To Ponder:

a) Can you imagine if the Japanese Prime Minister was a Malaysian, we would have a field day with his name, Taro Aso.

b) There is a new proposal whereby the pay for CEOs and senior management of the banks that received US government funding be capped at Obama's pay of $400,000 a year (that includes the bonuses as well). While that is a populist idea, it will never work. Do you know how many staffers at each investment bank that makes more than $1m a year, they are in the hundreds. One thing which may work is capping their salary, but you will have to work out a formula for their bonuses and have claw back clauses inserted if future year losses eventuate.

c) Since the Chinese trade surplus is equal to up to 2/3s of the US trade deficit, this suggests that within the overall global balance China should, ideally, absorb about 2/3s of this contraction, roughly equal to 2% of US GDP. This is also equal to about 7% of Chinese GDP, which means that either
1) Chinese consumption is going to have to expand by 7% of GDP faster than production,
2) Chinese production is going to have to contract by 7% of GDP more than any contraction in demand, or
3) both will have to happen so that the sum is equal to 7% of GDP.

d) Germany now has a current account surplus of 7pc of GDP. It is hollowing the industrial core of Latin Europe. Germany is in breach of EMU’s implicit contract. The rules of the game are that surplus countries should boost demand. The Gold Standard collapsed in the early 1930s because they – then the US and France – refused to do so. The burden of adjustment fell on deficit states, who had to tighten yet harder. The downward spiral dragged everybody into depression. Germany and China are today’s violators. Their trade surpluses over the last 12 months have been $283bn and $279bn, respectively. They are exporting excess capacity.

e) The history of the crisis, starting in 1980s, when US policy encouraged securitization of mortgages, converting illiquid assets into highly liquid investments; US households shifted money into homes rather than savings accounts, and housing prices climbed; China, enjoying a trade surplus, collected US dollars and invested in US assets. A self-reinforcing cycle led US consumers to buy more, Chinese factories to produce more, banks in both countries to lend more.

f) The profits for Porsche in 2008 was $11.6bn, even higher than its turnover of just $10.2bn. Profits attributable to actual selling of Porsche cars was just 12% of the $11.6bn profits. The rest came from a shrewd financial strategy and hedging with respect to its purchase of Volkswagen, which killed many hedge funds who betted that VW's share price would collapse. Now Porsche sits on top of a cash hoard of about $20bn. That is even greater than the total sum granted to the US big 3 car makers in the bailout funding. Thats why Porsche is now known as the hedge fund company which has a car making subsidiary.

Following the spate of depressing business and economic news, it may be timely to try and release some stress and negativity. Check out the videos below for maximum belly laughter. The first video is the cast of Whose Line Is It Anyway, doing possibly the funniest sketch ever, Living Scenery with the highly 'dubious' but sporting Richard Simmons.

The second and third videos are Part 1 & 2 of Jacky Wu's No-Laughing Allowed classroom. Enough said, crass but food spittingly funny.

http://www.youtube.com/watch?v=CTxkxG3DF4k


http://www.youtube.com/watch?v=jdZWPjWQ_j4

http://www.youtube.com/watch?v=diqNBeU59fs&feature=related

Must Get This David Foster CD/DVD

For RM45, you get a CD which include 12 songs selected from the grand concert DVD. You also get the second disc, the DVD disc which is worth the price alone. The DVD is a concert celebrating David Foster's genius with artistes he has written and/or produced for, Its a magical concert spanning about 26 songs.

In the concert, you will see Katherine McPhee (gorgeous), Renee Olstead, Michael Buble, Josh Groban, Babyface, Andrea Bocelli (his throat is made of honey wax), Brian McKnight, Peter Cetera, Boz Scaggs.. to name a few. There are others that I don't quite care for, but some will like them: Celine Dion, Kenny G.

To me there are four highlights:
a) Seeing the now 16 year old Filipino talent Charice singing I Have Nothing
b) Seeing Andrea Bocelli dueting with Katherine McPhee on The Prayer
c) Seeing the gorgeous Katheine McPhee sing Somewhere
d) Seeing Boz Scaggs performing my all time favourite love song Look What You Have Done To Me

In case you are not familiar with the song, here's Boz Scaggs doing the song live, and wait till the end to hear the exceptional vocals of the two backup singers:

http://www.youtube.com/watch?v=tOyMpQQriY0

Go get the CD/DVD already!!!

'Rain' On My Kimchi... Deep Problems With South Korea

Hold the kimchi... South Korea's exports tumbled by a record 32.8% in January, foreshadowing a deepening slump in Asia's export-driven economies. Shipments fell by the most since figures were first compiled in 1957, and at almost twice the pace of December's 17.9% decline. I don't know about you, but for exports to drop by ONE-THIRD is as big news as it can get, as if Rain died literally. OK, we can understand some of the slowdown from global demand but what are the specifics which is unique to South Korea that caused such dismal business conditions. In fact, South Korea is probably the hardest hit among all Asian countries. Why so bad??? It mainly has to do with the currency.

Heavy investment by the Korean Government in Fannie, Freddie and other US-related agency bonds has left a potentially huge liquidity problem - perhaps $50 billion - in the foreign reserve portfolio. Some believe that Seoul might have no ammunition left to prevent a significant flight from the won. Fruitless currency intervention by South Korea - increasingly desperate-looking verbal and financial measures to fight the market trend - cost more than $30 billion over the last 12 months already and the trend is not abating.

Attempts to prop up the won come as South Korea’s household and corporate sectors are wincing from the pain of high energy prices and inflation. Though energy prices have fallen but the downward adjustments have been slow. A summer of strikes by lorry drivers and mass street demonstrations calling for President Lee to resign reflect rising public concern that the economy is in trouble. The situation has worsen dramatically nearly $10 billion of Korean bonds have matured over the last 8 months, potentially creating vast downward pressure on the won if a large part of that sum immediately flees abroad.

Korea’s foreign exchange reserves stand at less than $180 billion and dropping, it was $247 billion 6 months ago. The International Monetary Fund recommends that emerging market economies should hold nine months’ worth of import cover, which would be about $320 billion.

More worrying is the level of Korea’s foreign exchange reserves relative to its short-term debt ratio. Korea’s debt maturing within a year has shot up to $215.6 billion because of hedging against the oil price. While that is nominally within the 100 per cent coverage by forex reserves deemed necessary, the Fannie and Freddie crisis in the United States raises the question of whether any sense of security is illusory.

A large part of Korea’s foreign reserves are not government bonds but the kind of US-based mortgage-related bonds that once looked so solid. All added up, South Korea's problem is the country’s hefty current account deficit.Things would not have been so bad if foreign investors did not start to flee the country in anticipation of graver problems on the won, and that has exacerbated all problems. Soaring inflation and a legacy of massive borrowings by households add an additional, potent layer of instability.

Analysts predict a rising tide of nonperforming loans, delinquency ratios and bankruptcies and some of the country’s large mutual savings banks are expected to go bust. The global credit crisis basically quicken the process and magnified South Korea's deficit problem.

Faltering exports suggest the economy is headed for its first recession since the Asian financial crisis a decade ago and increases pressure on policy makers to accelerate stimulus measures and interest-rate cuts. Korea's won, the region's worst performing currency last year, slipped 0.9% to 1,392.5 per dollar in Seoul.

Exports to China, the nation's biggest overseas market, tumbled 32.2% during the first 20 days of January. Shipments to the US declined 21.5%, exports to the Europe Union plunged 46.9% and sales to Latin America dropped 36%. Exports to the Middle East fell 7.5%. South Korea has allocated about 140 trillion won ($150 billion) in extra liquidity, tax cuts and spending, and the central bank has reduced interest rates to a record low. South Korea's exports of semiconductors plunged 47% in January from a year earlier, and those of automobiles declined 55%. Sales of ships rose 20%.

Samsung Electronics Co., the world's largest maker of memory chips, liquid-crystal displays and televisions, reported last week its first quarterly loss as the global recession drove down prices. Confidence among South Korean manufacturers remained close to a record low, a central bank index showed last week. A report today may show consumer prices rose by the least in 10 months in January, giving the Bank of Korea room to lower borrowing costs further to spur growth. The central bank cut its rate to a record 2.5% on Jan. 9, the fifth reduction since October. The bank has signaled it's ready to act again when the board meets on Feb. 12. Korean households, struggling with record debt, are losing confidence as unemployment rises and as falling stock and property prices reduce their wealth. Employment dropped in December for the first time since October 2003.

p/s photos: Ayawawa

Implications Of T+3 & Suggestions To Bursa

Below is the piece on how many have overlooked the implications of T+3 which came into effect after the 97 crisis. Prior to that the market was on T+7, and had very little requirement on deposit as well. The article which I had written looked at the impact on property prices, but there are broader implications as well:

a) Remisiers - Safe to say that the 90s saw a lot of dealers and remisiers turning themselves into millionaires. Unfortunately many also saw their deposits being wiped out by the client losses. The superbull run of the 90s saw many turning in their day to day jobs, even doctors and engineers, to become a remisier. Everyone can do their math well. One percent commission and on a 30%-40% share, you need very little turnover to start making serious money. When so many people have a few trading accounts with various houses on little or no deposit, it was so easy to have maybe a few hundred thousand ringgit worth of stocks on contra at any one time. Each one hundred thousand was worth 1% in commission or RM1,000 to the remisier, and being contra trades, you know the bugger (including me) will have to sell it by T+7, thus doubling the commission. Plus they are not strict on the T+7, you can actually drag it for at least a couple of days more as the backroom systems at most brokerages were archaic still. Takes a couple of days before the staff could cover the mountain of paperwork to clear the contra positions. Can you imagine if a remisier had 20 of such clients, you would be rolling in it... in a superbull run. In many ways, that situation was even worse than than the credit bubble in the US. No money down but can buy a couple of hundred thousands worth of stocks - where else is that possible.

We all know the downside to that. Now we have too many remisiers with not enough business. Rates have also come down a lot, and will go down some more in the future, believe you me. The future of the industry lies in internet broking. Each passing day, more and more people will be switching to internet broking. The only ones left are those who are not computer or net savvy enough, and they are a dying and diminishing breed. Soon, rates for normal trades will have to come down very close to internet broking rates in order to compete. That will only mean needing a lot more turnover just to maintain the same level of commissions.

When you enter an industry it was based on the industry fundamentals, and after a few years the fundamentals have changed dramatically. We really have to reassess if that is still a viable industry to be in. In many ways, its a lot like working for the US auto industry, things looked good 10 years ago, heck, it looked even better 20 years ago. But now.... We all have to plan our career the way we read markets, things never stay the same, industry evolves and changes, all remisiers have to ask themselves seriously if its worth staying on. Of course, some will be at a roadblock as they may think it might be too late to change jobs now. If you are still below 40, its not too late, heck, if you are below 45 its still not too late cause the future is not that attractive. Its an industry that does not fire you, its self-employment, you have to fire yourself. If you were running that as a business, be objective, you may have to close shop already.

b) Superbull run - All remisiers will comfort themselves, well I just need to have one more bull run, then I will quit. Well, the trouble is that we think the bull run will be like the bull run of the 90s. That will never happen again. The rules have changed. In 94 and 95, there were some trading days when our trading volume surpassed America, can you believe that. That is possible because of the no deposit requirement. That is never going to happen again. Can we get back the 1 billion shares per day trading average.. maybe, but it won't be for an extended period like in the 90s.

c) Multiplier effect - The Malaysian stockmarket has one of the world's highest % of GDP that is listed. Every time some businesses starts making RM2m-3m a year in profit, there will be ripe for bankers to come and try to list them. Thats why our % is more than 80%, whereas in places like Germany only half of their GDP is listed - i.e. a lot of wealth and businesses are still kept as private entities. What that means is that in a bull run, our broader economy will benefit from a much higher multiplier effect, the velocity of money will be stronger. The reverse is true, if there is a bear market, we will experience a sharper contraction. We are very much like HK and Singapore in that respect, except that our multiplier is even higher.

This round of bear market has not seen a similar contraction because of the T+3 in Malaysia, and also that most private investors can see the long slow death of the markets coming from a mile away. Thanks to the T+3 rule, all economists worth their salt will have to adjust their forecasts as the experiences of the 90s and even the 80s will not apply totally.

d) Bursa/MOF - The authorities need to wise up, T+3 is good for the well-functioning and integrity of the markets. But you should also look at the net effects on volume and turnover which affects the livelihood of remisiers. One way is to introduce more liberal trading rules to boost volume and participation levels. I have had meetings with officials from the Bursa and mentioned that you can boost daily volumes by at least 20% by implementing two new rules:
1- allow for day-shorting. That means, all investors can short stocks for the day but must cover by the end of the day. Failing to do so will incur the same buy-in penalties. The only glitch to that proposal is when a counter is suspended during middle of the day. I am sure you can come up with a reasonable solution to that. I would suggest that counters that are suspended in the middle of a trading day, those who have shorted the counter should not be penalised, but will have to cover the day the counter resume trading.
2 - reduced commission for day trades. That might seem to reduce commissions for remisiers, but this is necessary to encourage day traders. Implement this together will allowance for day-shorting will definitely yield more net benefits. Volume, liquidity and total aggregate commissions will be enhanced. I would suggest day trades commission be reduced from the current 0.5%-0.75% to 0.3%-0.55%. You will definitely get the other side of the commissions by the end of the day anyway.

------------------------------------------------------
The stock market effect in Malaysia - If you were to look at the financial turmoil in the past, namely, the mid-late 80s, the blip in 1994, the major monster of 97, the internet bust, the SARS effect, the tsunami effect and now the credit implosion... you can chart a very useful multiplier effect from losses in the stock markets. Prior to 2000, any kind of financial bust ups will see a lot of havoc and bad debts, ask any remisier... Following moves to limit contra and contango trades, this has removed a HUGE "leveraged disaster" from the domestic economy.

I can give you the excellent example of my 6 analysts working with me in mid 90s, their monthly salaries between RM3,000-10,000 and basically under 30 and real net worth probably zero. But each and everyone of them will have zero deposit with 2 or 3 remisiers, but personally will have a contra position of between RM100,000-300,000 in a few stocks depending on the mood of the market. This is not unique to my team of people, everybody everywhere were doing it. Naturally we always see a huge multiplier effect when the market corrects 10% over a week.

Since 2000 every major financial calamity has not seen similar catastrophic personal financial aftermaths. Now you try to buy RM50,000 worth of share with zero deposit, your remisier will ask you to fly wau. This market correction was also unique to the majority of retail stock players. Many were able to sell down most of their stocks or just stop playing stocks when the market retreated from 1,400 to 1,200... sure some will still hold a few stocks in their portfolio but many have been able to avoid the carnage. When a market falls from 1,400 to 850 its the holders of the shares that bear the brunt.

This time around retail players have been able to sidestep much of the disaster movie, its the funds that got whacked royally this time, ... local, hedge and foreign. Thus this will further help explain why most Malaysians are still relatively cash rich and under invested. Fewer job losses and fewer after effects from the stock markets = less likelihood to need to sell properties in desperation.

Hence market commentators should keep this in mind when comparing similar wealth effects prior to 2000 and after. The magnitude of the above financial effect on the broader population should not be underestimated.

p/s photos: Dian Sastro