How Is Your Credit?

Came across this in the highly reputable (and bloody expensive) Bank of International Settlements publication. The chart on the right is very interesting. It looks at per capita credit card balances. Korea went havoc in 2000-2003 and the jump then was hard to understand but it was like a battle cry among the consumers to spend more aggressively in order to get the Korean economy out from the Asian financial crisis. There was a rallying cry and it showed what people can do if they acted as one.

Economists tend to believe that every individual act for its own good - the Korean experience would have sent economists revising that line of belief. The Korea economy in that 3 years basically spent its way out of a recession, and it was the first country to come out of the Asian financial implosion. Instead of relying on the government to pump up the economy. The Korean public, either knowingly or unknowingly, rescued their own economy. What was even more surprising was they consumerism binge tapered off after the economy recovered, and not vice-versa. Korea has now managed to reduced their credit card outstanding balances significantly now that things are rosy again. This is a phenomenon worth studying over and over again. How to spend your way out of a recession. Of course the binge was not all due to the public deliberateness but also a confluence of factors such as bank's strategy and government's policies in allowing certain leeways to boost the economy. Having said that, the binge also has its consequences. The credit balances went to as high as 15% of Korea's GDP (compared to US' 7% of GDP) and was unsustainable. What followed in 2004-2006 was tighter lending by banks and also more bad debt being written down.

HK is steady and their per capita balances are highest but also its a reflection of their per capita income. Cannot run away from the link. You earn US$5,000 a month you have US$500 in credit card balances. You earn US$15,000 a month you will have US$5,000 in credit card balances. Its like that in life. The countries where growth in consumer finance has been the greatest were at HK, Korea and Taiwan. Following the Asian financial implosion, the loans to deposit gap has narrowed substantially, forcing banks to seek out other growth areas aggressively. Consumer finance was a big target. The growth was exceptional in Taiwan as well and credit card balances did reach a 9% of GDP in 2005, which was a big worry. Banks began to tighten and write down bad debts since then.

Singapore, Thailand and Malaysia are not in any trouble. It showed good restraint and planning from their monetary authorities and central banks. It also points to the level of lending standards being enforced. It also points to the level of asset quality and the risk inherent. Credit card balances is a big indicator on the "real consumerism aggressiveness" of each inherent economy - it indicates the multiplier effect when the country does well, and also the severe contraction when things go awry.

Per capita card balances has to be put side by side to per capita income of each country to make it meaningful. Putting credit balances as a percentage of total household loans would be even more meaningful as it takes into account country specific factors.
Credit Card Balances As A Percentage Of Total Household Loans
1) USA 37% (gulp!)
2) Taiwan 15%
3) South Korea 11% (during the 2002-2003 crazier times, that figure went to a ballistic 45%)
4) Thailand 14%
5) HK 8.2%
6) Japan 6.6%
7) Malaysia 6.1%
8) Singapore 2.1%

From that angle, HK's figure is not that bad. Taiwan's going through some tough times now in consumer finance downturn and tightening, bound to get worse before better there. Thailand's figure looks bad and this would put enormous pressure should the economy there goes into a slow down. Japan's figure is surprisingly high compared to historical trends - the main factor could be the very low deposit rates and the correspondingly not so high credit card interest rates (e.g. deposit rates at 0.5%, banks would be charging only 1.5%-2.0% on credit card balances there).

Singapore's figure is very low. I think that's not due to better cash management but rather the efficient link-ups of your credit to your CPF to your ID to your employment records to your passport to your asset file to your army records to your academic records - you don't want to fuck up anywhere along the chain line.

High-Yield Currencies

A regular commentator (Price chart), with good opinions, have highlighted the other high-yielding currencies since I have highlighted the NZD. They make for some interesting conclusions.

Price chart: "Since NZD is being single out, we can also look at others JPY crosses in order of yield differential. (central bank rates)
NZD/JPY 8-0.5=7.5
AUD/JPY 6.25-0.5=5.75
GBP/JPY 5.5-0.5=5
USD/JPY 5.25-0.5=4.75
CAD/JPY 3.75 (NET)
EUR/JPY 3.5

Now if you look at the monthly price chart of the above: NZ is all time high level. OZ is all time high. GPB is 8 years high (on the verge of breaking out a big base.) USD is at 5 years high. What can keep the motion going? As long as the big gap of yield dirrential exists. How can the tide turn?and When? Narrowing of yield differentials. Yesterday, the AUD/JPY went back up to high point and NZD recovered from the sell down. CAD/JPY is going strong while USD, GBP and EUR maintain strength against JPY.

BTW, some other countries that have equal or higher rates than NZD:
Brazil 12.5
Turkey 17.5
Iceland 14.25
Hungary 8.0
South Africa 9.0
Egypt 8.75"

A study by the World Bank on imploding emerging markets currency a few years back noted that there are a few leading indicators: current account deficit, budget deficit and a contraction in GDP growth. Right now, the above emerging markets currencies are riding on strong surpluses and a firm economic growth model, with the exception of Turkey, South Africa and Hungary in particular as their deficits are large. Let's just highlight the most vulnerable emerging markets currency according to the 3 cited leading indicators and their respective high interest rates:
Highly Vulnerable To Imploding: Icelandic krona, Turkish lira, NZ dollar, Hungarian forint
Vulnerable To Imploding: South African rand, Brazilian real, Polish zloty
Somewhat Risky: Phillippine peso, Indonesian rupiah

Owing to the previous financial implosions of the past, many emerging markets have been over-exuberant in trying to accumulate foreign exchange reserves to serve as a buffer in the event of any similar crises. These reserves can be used as an intervention tool. More importantly, it gives a good image on "good balance sheet management" to the world. Let's look at the current top 10 reserve holders (USD billions):
1) Japan 834
2) China 822
3) Taiwan 257
4) S. Korea 210
5) Russia 176
6) India 132
7) HK 124
8) S'pore 116
9) Mexico 74
10) M'sia 70

Absolute reserves is not as useful an indicator. It has to be as a percentage of something meaningful. If we were to make it a percentage of Short-Term Debt, China will be at #1 with more than 11x coverage, followed by Taiwan 6x, Russia 4.2x, India 4.1x, Malaysia 3x, Mexico 2.7x and South Korea 2.6x. The rule of thumb is that 1x is adequate already. Other indicators that could be used are reserves as a percentage of M2, reserves as a percentage of months of import coverage. On all these measures, the countries that come out tops are: China, Taiwan, Russia, Malaysia and India - in that order. Hence for these countries, the risk for an emerging markets currency implosion scenario is very minimal, almost non-existent.

Once, Twice, 3 X A Lady

Yes, I am still talking about bond yields going past 5% in the states. The chart showed that even the more super-charged internet bull run in 1999/2000 was eventually decimated by continuous rate hike. I believe the 99/2000 bull run was a few notches stronger than the current bull run, and may take less than 6.5% to reduce the run to a trot. I think my really danger level to get all out of equities is when yields reach 5.5%. Last week it hit 5.14% which was a relatively big jump aove the 5% threshold.

The chart also showed that one rate hike is not sufficient to puncture a bull. It has to be followed by successive hikes. As mentioned before, globally every country/zone that matter are about to raise rates even higher in the forseeable future: UK, euro zone, China, HK and Japan. In fact I don't see any major country contemplating NOT hiking rates for the rest of the year.

This bull is harder to be pricked because its a money supply growth driven rally. What that means is a lot of liquidity chasing after a reducing pile of assets and alternatives. I have been bullish since 2005 and have maintained that stance till now. I am still bullish but the signs are there that we are moving into the last stage of a 4 stage bull run which began in 2005.

In the US, a government report released last Thursday said labor costs are up more than anticipated, making it more likely that companies will raise prices and fuel inflation. Options traders raised the odds of a boost to 5.5% in the fed funds rate to nearly 41%. A month ago, the odds were zero. Those are big danger signals. Plus, any rate hikes by Japan, China or euro zone will immediately put very strong downward pressure on USD thus forcing the Federal Reserve's hand to raise rates in order to keep people holding USD.

If you were to look at the unbelievable NZ dollar, you will know that sensibility boundaries are being tested currently. NZD surged to a 22 year high early last week to 76.3 US cents. However late in the week, it had a minor collapse, dropping nearly 1.5% in value. NZD has been a big beneficiary of carry trades as investors borrow in yen and bought the kiwi dollar as it is now carrying 8% in interest rates. For a small economy such as NZ, 8% will stifle much of the economy, but it has to do that to keep the NZD steady. NZ's interest rates is the highest among all 30 OECD nations. Interest rates has to be high as there is ample liquidity coming in, and high rates are needed to stem inflationary pressures, currently running at 3% p.a. and pushing up. Billions of dollars worth of Uridashi bonds - issued to Japanese investors who borrow cheaply in yen, receive the bonds denominated in Kiwi dollars and earn New Zealand interest rates - have helped prop up the Kiwi dollar. Even the RBNZ was quoted as saying it regarded current levels of the exchange rate as exceptional and unjustified. The fact that te NZD has just broken a 22 year high at levels that their own reserve bank don't think is equitable should indicate troubling waters ahead.

Many factors could unravel the NZD: a) higher rates offered by other currencies relative to fundamentals (e.g. another hike by ECB may make holding the euro highly attractive relative to NZD as euro zone may have more stability and economic sustainability); b) yen carry trade holders panic and start getting out, prompting a rush for exit doors (as it is, NZD could easily go back to 68 US cents and still be considered fairly valued.) I have chosen to highlight the NZD as its the most visible for now, and an implosion in NZD could have some ramifications on global markets, especially emerging ones.

Why do I see rising rates as a determining factor? Because low bond yields and interest rates have been largely responsible for the two major factors which have been driving up markets over the past 2 years: a) private equity funding; and b) companies buying back shares. Higher bond yields and interest rates would make it much harder for PE firms to leverage and turn around companies (and PE firms feed on debt to enlarge returns and reduce capital commitments.) Higher yields and interest rates would narrow the gap between stock yields and risk-free yields, which will start to reduce the amount of share buybacks eventually.

OK, We Can Worry Now

If you remember in my previous postings, one of the major indicators as to when to start worrying about the present bull run is when US bond yields go past 5%. US Treasuries dropped for a second straight day Friday on expectations that accelerating economic growth and inflation will encourage central banks around the world to raise interest rates, causing the 10-year Treasury yield to surge to the highest since July and triggering a global equity sell-off. The yield on the 4.5 percent security due May 2017 now trades at 5.18 percent. Last Thursday and Friday were the first time since August 2006 it had breached the key 5 percent threshold.

The ECB also just recently raised rates thus putting a whole round of higher rates expectations which should start to work its way into global equities. The prospects of further rate hikes in the UK, euro zone and Japan are good to lure many into a risk aversion mentality. Risk aversion mentality will hit riskier assets harder, including commodities and emerging markets.

Though the sell-off on Thursday and Friday levelled off, and in fact got back some of the losses: we have to remember that risk aversion mentality grows on you and would be a roadblock for some time. Risk aversion mentality is not something you can digests and factor in and disregard after just a couple of days. Rates ARE headed higher in the UK, euro zone and Japan - make no bones about it. The US will have to follow or see a major selldown in the dollar. Risk-reward ratio for equity investments have turned sour, if you ask me, time to lighten up.

SC To The Fore

I am an admirer of Datuk Zarinah, the head of Malaysia's Securities Commission. While there have been certain things it could have done better (such as the long non-suspension of Transmile), overall the SC has been more proactive. As in any normal markets, accounting frauds, accounting irregularities and even outright CBT are part and parcel of the overall scene. Recently we have "special situations" at Nasioncom, Transmile and even Southern Bank. Now, probably the biggest hole relative to the company's market cap, we have Megan Media. Kudos to Where Is Ze Moola who has been harping on Megan's problems long before the situation became public. Megan Media Holdings Bhd., a Malaysian maker of computer storage products, said the Securities Commission has started an investigation into its accounts after the company discovered irregularities in a unit.

A probe into a unit showed ``substantial irregularities'' that may lead to a RM456m asset shortfall at the division. The financial position of Memory Tech Sdn., owned by Megan Media, has been ``materially misstated,'' Megan Media said, citing a preliminary report by accountant Ferrier Hodgson MH Sdn. The company said today it may consider legal proceedings to recover funds lost. The company has suspended its financial controller. The accounting probe discovered there was a ``deliberate falsification'' of performance, it said.

Since Zarinah's tenure, the SC has been more proactive. I know there have many phone calls to many companies and individuals behind the scenes from the SC, either to guide, question, warn, caution, remind these "special issues" people/company. The SC has done a lot of work behind the scenes, so its not fair to assume that they only appear when companies are already blotting the radar.

I believe the Sc has shown much more independence and now appears to NOT need "approval" to proceed with prosecution. This is an excellent opportunity to further elevate the status of KLSE in the eyes of global investors. Much will depend on: "how fast the SC prosecutes"; how successful are the prosecution; the level of transparency in the wrongdoings; the protection accorded to minority shareholders; and the proper punishment being meted out (not slaps on the wrists again, please). Another area which requires more attention is "profit guarantees" in propspectuses. Many do not meet these guarantees and we do not see much repercussions. Another issue worth mentioning is Mesdaq companies where the risk is much higher, and the profit projections seemingly much more "wildly optimistic" to lure in investors. I think a proper liability scheme should be shared by the investment bank bringing these questionable Mesdaq companies to list only to implode within 2 years: as that makes a mockery of the prospectus, profit projections and integrity of the business model. Investment banks should be made to earn their fees.

Ball Is Rolling - H-Shares

As mentioned in my previous posting, one of the driving factors why I view the recently listed China covered warrants favourably is the likelihood of them being brought back to mainland for listing. The mainland regulator has just opened the door for more Hong Kong- traded red chips to list on the domestic bourses. The net income requirement has been lowered to HK$2 billion over three years, from HK$1 billion annual profit. According to a draft document obtained by the Beijing-based Caijing magazine, new rules for red-chip listings have been finalized. The new requirements could make 22 red chips eligible to list in the mainland.

The major difference between the new draft rules and those that the state is that the net profit requirement has been relaxed. The criterion which prohibited companies whose parent is listed on the domestic market from selling shares has been removed by the China Securities Regulatory Commission.

These changes will make 22 Hong Kong- listed red chips eligible to apply for a domestic share issuance. In addition to blue chips China Mobile (0941), China National Offshore Oil Corporation, or CNOOC (0883) and BOC Hong Kong (2388) - seen as frontrunners for listing - other enterprises such as Shanghai Industrial (0363) and Lenovo (0992) will now be eligible. China Overseas Land (0688), which also becomes eligible, abandoned plans for a domestic float last month since the parent company is listed in Shanghai and would not meet prevailing criteria. Among other requirements, companies aiming to return to the domestic market are required to have been listed in Hong Kong for at least a year, with market capitalization of HK$20 billion or more. Half of their business and net profit should be generated from the mainland.

The CSRC has been encouraging big-cap red chips to return to the domestic market, as it seeks to improve the quality of the bourses. Initially, the CSRC aims to attract only large corporations and may not encourage small enterprises. Once things have been planned by Beijing, the rest just falls into place, the companies will have to toe the line. The CSRC sees this as a major step to improve choices for mainland investors - one of the main reason why Shanghai and Shenzen bourses are so frothy: the lack of good companies. The H-shares are regarded as a few rungs better run than those in the mainland, and would be given a better pricing when they go back.

I would expect the shares to move up gradually as this process gathers speed. This gives the China Mobile and PetroChina covered warrants another kicker.

China Covered Warrants - Essentials

p/s did not factor in the exchange rate earlier, end result still good

PetroChina-C1
5 covereds to buy one share
Conversion Price: RM10.40 / HK$10.40
CA Price 0.195
Expiry 9 months from issue date
Yesterday's Closing Mother Share: 10.72
Premium: 5 x 0.195 = 0.975 + 10.40 / 10.72 = 14%
Gearing: 10.72 / (0.975 / 0.43) = 4.76x
Verdict: Good value, good upside, low premium

ICBC-C1
2 covereds to buy one share
Conversion Price: RM4.38 / HK$4.38
CA Price 0.175 Expiry 9 months from date of issue
Yesterday's Closing Mother Share: HK$4.10
Premium: 2 x 0.175 = 0.35 +4.38 / 4.10 = 27%
Gearing: 4.10 / (0.35 x 0.43) = 5x
Verdict: Good leverage, good value

ChinaMobile-C1
50 covereds to buy one share
Conversion Price: RM76.10 / HK$76.10
CA Price 0.16
Yesterday's Closing Share Price: HK$72.85
Premium: 50 x 0.16 = 8.00 + 76.10 / 72.85 = 30%
Gearing: 72.85 / (8.00 / 0.43) = 3.9x
Verdict: The best stock for upside, leverage still good, good value

The 3 covereds traded unlike the last bunch on Malaysian stocks where premiums went haywire and leverage does not make any sense. Due to the uncertainty, lack of information and understanding: these covered are priced nicely. Before investors get all panicky over the correction in Shanghai and Shenzen, these covered are pegged to the H-shares traded on HKSE: a very different thing altogether. Please re-read all postings on H-shares in my previous postings. The key here is that H-shares always traded at a huge discount to their counterparts in China. Before the big run, the discount has been averaging slightly above 20%. However, when the China markets went berserk over the last 12 months, this discount has shot up to over 40%. You cannot arbitrage because H-shares is convertible only in HK and vice-versa. This, as explained before, is a reflection of how frothy the China markets were. For example, ICBC in Shanghai-A closed yesterday at 5.08 yuan, even not taking into account the stronger yuan, the discount in the H-share in HK is 5.08/4.10 = 24%. Not all H-shares are listed back in mainland China, so the H-shares is indicative only. Thus you can say that the excesses in Shanghai and Shenzen are not translated totally into H-shares in HK. So, investors are not necessarily buying into the bubblish China market by buying these covereds.

There are two more important factors why investors should gobble up all the 3 covereds at current prices:

a) QDII (please read previous postings on QDII and China divesting out of USD) - Beijing has allowed more funds to invest outside of China via QDIIs, this is to allow for a valve for funds to move outside of China. First destination is buying into H-shares listed in HKSE, especially PetroChina and China Mobile, as they are not yet listed in Shanghai or Shenzen. They have just allowed US$400m and more will come.

b) There have been strong calls from Beijing for some of the H-shares to move back their listings to Shanghai. China Mobile and PetroChina will be under great pressure to do so. A move as such will move both shares much higher in anticipation of higher valuation back in Shanghai.

Hence, you heard it here first, all 3 covereds are good value. Strong buy and hold regardless of whether Shanghai tanks or not. This is probably the most significant blog posting for a long time.

Kudos to OSK for being first off the blocks to put these covereds here. Can start issuing more as appetite will grow by leaps and bounds.

Note to Yus-baby/Bursa/OSK/CIMB - From just this posting, I found it quite cumbersome to calculate the premiums and gearings, don't even mention coming up with implied volatility. Please try to ensure that investors can ACCESS information easily to value these issues easily, or have a live board monitoring the live prices of the respective shares in HKSE, and a table indicating the premium, gearing and implied volatility. Maybe you guys should have planned ahead instead of throwing these issues into the market and expect all investors to be savvy and informed. We all know how difficult it is to get live share prices from other exchanges. Please take note.