Reasons & Excuses

Business journalists, analysts, business presenters, fund managers, strategists ... all need to have reasons to explain market movements. The reasons had to be somewhat sensible and printable, and coming from the mouths of experts, it sounds more believable.

We sometimes go searching for reasons and excuses when there is really none. We are all brought up to pull out one of maybe twenty or thirty reasons from the basket everytime the market goes up or down excessively. Its like an objective test. The basket could include reasons such as:

a) the Fed is willing/ not willing to loossen

b) the BOJ is staying firm / raising rates

c) the market is overbought

d) the market has discounted the US$90 oil

e) the market is discounting the Turkish situation

etc...

Are we really picking the right reasons? We can only pick what is most plausible. Its a hindsight harry situation - you ask the "experts" after the event, not before the event, hence the "experts" will go through his/her usual bag of tricks (sometimes updated) and pull one or two reasons out of the basket. Chances are, markets sometimes goes up and down just because there are buyers and sellers, no big underlying reason.

Sometimes, markets go up and down based on the most unimportant news or excuses. How about more sellers than buyers? HK and China are down because I read everywhere the "direct train" (allowing Chinese to invest directly into HK shares may be delayed)... Please-lah... the HK market went up because of the disconnect with US monetary policy and USD peg. The China markets all having difficult days probably due to the huge amount of funds being tied up in Petrochina or those wanting to buy Petrochina-A shares in the secondary market, .. and/or huge amount of funds tied up in Alibaba.com IPO in HK.

Isn't that the main reason why Beijing wanted more A-share listings? To soak up liquidity and to offer more choices to mainland investors. Naturally index will go down a few percentage points just to accommodate such a popular and mega listing. Everyone wants to own a piece of Petrochina, its not cheap, the funds has to come from somewhere ...

Sometimes the reason for a swing is not as academic or ingenious. In fact, most of the time, the reasons are simpler. I get tired when the papers, the Bloombergs, the "experts" all tout the same diatribe of reasons ... because they have all been schooled the same way. Stick to people who can really add value, people who can be honest enough to say "I don't know, man"... instead of churning out the same old, same old without much thought or logical argument in their heads.

Beware of "experts" commentary, 99% of them come from the same bag of tricks, the reasons are all the same ... after a while they all learn to deliver each line of reason with much gusto convincingly. The more often you hear the same reasons, the more you believe its probably true, that's propaganda, the convenient truth, but usually not the truth because these group of people are too lazy to think properly or are just not market-savvy enough to understand the nuances of the markets.

People who read markets better are generally: willing to stick their necks out on a prediction; give well argued and well thought out points; not wishy-washy; and the reasons are persuasive and engaging.

Mahler vs Master O'Reilly
Too Young vs Too Long

Its Melbourne Cup again. Since my massive praises for Curlin about a year ago, the horse has gone on and should easily win Horse of The Year 2007 in the US. Having looked at this year's Melbourne Cup, it lacks stars, its an ordinary cup, which automatically puts the top 5 weighted horses out of the race. It will be a win because of handicapping.

My selections: the 3-year old Mahler (right) who have just been beating maiden class in the UK before winning the Ascot convincingly and looks to be the best weighted horse, has speed and will be well placed, has strong grinding quality towards the end. Hard to go past Master O'Reilly (left) as the winner of Caulfield Cup and a bunch of other recent races, sweeps from the back very well and the long track at Flemington will suit. The other maybe is Zipping, which nearly got Danny Nikolic suspended in the Mackinnon last week (not trying hard enough to win). Zipping could be the omen tip because when bad things happen throughout the year, a victory in the Melbourne Cup would be a nice resurgence from adversity - Danny Nikolic had been treated badly in HK this year, given dud rides and getting blamed when horses did not win. Well, Mahler's supposedly too young. Master O'Reilly is untried at 3200m. Zipping looks to be not trying too hard last win so as to not over-stretch the horse ahead of the Cup race. Hmmm!

Result	Win	Place
6 Efficient	$22.60	$7.40
12 Purple Moon		$1.80
24 Mahler 9 Zipping		$3.30

Now That's An Invention!

As reported in SMH: How do you like to have your existing internet connection boosted 100x with no additional charge? Talk about a revolutionary idea. Well, its no longer just an idea. This could change absolutely the communications and networks platform for everybody. An Australian researcher is on the road to riches after discovering a way to make broadband connections up to 100 times faster.

University of Melbourne research fellow Dr John Papandriopoulos is in the throes of moving to Silicon Valley after developing an algorithm to reduce the electromagnetic interference that slows down ADSL connections.Most ADSL services around the world are effectively limited to speeds between 1 to 20Mbps, but if Dr Papandriopoulos's technology is successfully commercialised that speed ceiling would be closer to 100Mbps.

Stanford University engineering professor John Cioffi, known by some as the "father of DSL", was one of the external experts reviewing the research, which made up Dr Papandriopoulos's PhD thesis. Professor Cioffi, who developed the computer chips inside the first DSL modems, was so impressed he offered the 29-year-old a job at his Silicon Valley start-up company, ASSIA, which is developing ways to optimise the performance of DSL networks.

Dr Papandriopoulos, whose efforts also earned him the University of Melbourne's Chancellor's Prize for Excellence, said he would leave for the US in about two weeks. He has already applied for two patents relating to his discovery.Melbourne Ventures, the University of Melbourne's commercialisation company, is now shopping the technology around to vendors of DSL equipment and modems. The vendors would then sell the supporting equipment to internet providers worldwide for placement in their exchanges.

Richard Day, commercialisation associate at Melbourne Ventures, was optimistic about the technology's licensing prospects but said it was too early to tell how lucrative it would be. "That's a question which is impossible to answer, simply because we don't yet have a feeling for the extent to which it could be adopted ... [but] it has the potential to be adopted worldwide in any country that has a copper network," he said.

"Many years ago people used to pick up the phone and make a phone call and you'd be able to hear a faint or distant telephone conversation taking place, and that's called cross-talk," Dr Papandriopoulos said when attempting to explain how his algorithm worked. "That is not an issue for voice calls these days but it becomes a problem when you're trying to wring more bandwidth out of these existing copper telephone wires [which power ADSL broadband connections]. This cross-talk in current day DSL networks effectively produces noise onto other lines, and this noise reduces the speed of your connection." Dr Papandriopoulos said his algorithm served to minimise that interference and thus maximise the line speed.

Final Words On Petrochina

waited for nirvana, came and gone... people now trying to do bottom fishing do so at their peril .... the fat is gone, its a normal trading stock now, not the chosen one anymore

take yr time to pick up cnooc, buy on weakness, but should start accumulating

petro-h shares whacked and disfigured as many punted on the h-shares ... expect h-shares to regain at least some of the discount back end of the day and tomorrow

shenhua, a similar industry leader now trades at 60% of A-share, petrochin-h is now only at 45%, expect it to at least go to 55%, you do the math, so trade on your own risk threshold

After Merrill Lynch, Citigroup's CEO "Resigns"

The surprising downfall of Stan O'Neal at Merrill Lynch & Co. has caused the CEOs of Wall Street's biggest banks to start updating their resume, or spruce up the holiday home in South of France for an extended break coming up. We are seeing the remnants of CDOs mess finally catching up with the big guys. O'Neal became the first chief executive to be shown the door after leading the world's largest brokerage to a US$2.24 billion third-quarter loss — and he is unlikely to be the last. Chuck-eeze Price finally calls it quit. The funny thing was that O'Neal was a respected figure within Merrill Lynch but most employees really do not like Prince at Citigroup. Hence popularity is not a factor. Following Prince should be Bear Stearns Cos.' James Cayne, but could be saved by the swift deal with Citic Securities as the board there feels they will need some follow through with the joint venture.

The scale of the write downs is no joke. Write-downs across Wall Street have wiped US$25 billion from the income statements of investment banks. But analysts have begun to speculate that more pain is left — and that Merrill Lynch might have to write-off another US$4 billion after a US$7.9 billion third-quarter charge. The big banks had been delaying biting the bullet as the top guys busily lobbied for Paulson to step in to create a US$100 billion Superfund to bail out the current credit mess. Well, at least the Fed and Paulson did not do a LTCM bailout this time. You reap the profits and took the fees, now thre is a slashing of asset values of the paper you hold, you cry like a baby asking to be rescued - you are a big bank now, in fact they are among the biggest in the world, so take your medicine and be quiet.

Don't think that these CEOs are like the Japanese CEOs who would perform corporate seppuku should they find themselves in similar financial straits. No, no ... these CEOs went straight into action when the credit problem exploded, and started ascribing blame and chopping heads, to offer to the "gods" as "offerings" to save their own jobs. Bear Stearns Chairman and CEO Cayne dump Warren Spector, who ran two hedge funds that imploded from subprime losses. At Citigroup, investment banking head Thomas Maheras was cut. And, O'Neal swiftly showed the door to fixed-income head Osman Semerci. Ken Lewis, CEO of Bank of America Corp., also swung the axe. He slashed 3,000 investment banking jobs, fired a number of top executives, and stopped offering home mortgages through brokers. Sometimes, even the "gods" are not easily swayed. Ok, let's rearrange the chairs, and put the music on again.

Before anyone starts to feel sorry for the CEOs, let me remind you that Stanley O'Neal got US$160 million as his severance package. Prince should get a similar sum. The Citigroup board was highly likely to name Robert Rubin, the former Treasury secretary and an influential adviser to its embattled leader, as its interim chairman at an emergency meeting yesterday. Gawd, now Goldman Sachs really, really controls Wall Street & the world (Rubin and Paulson were ex-Goldman Sachs clones).

What pulled the trigger for Citigroup was a SELL report by Meredith Whitney from CIBC World Markets (ranked #2 stockpicker in 2007 Forbes survey). The report said that Citigroup needed to raise US$30 billion to resore its cash cushion for payments to investors. Citigroup' share price lost about US$3.00 or 7% of its share value following the report.

Petrochina Reaches Nirvana

After hyping and broadcasting about Petrochina for the past 4 months, this baby has finally been delivered by the golden stork as planned. Its the chosen one because there is only one Petrochina. China investors have accorded a much higher premium for A-shares of companies that are top in their industry. How do you value, what pricing for Petrochina? It is not only top of its industry, its valuation would put it firmly to be the second biggest company in the world, and pretty soon the biggest. It is also in the most explosive sector possible - oil.

Despite the unsuccessful funds being returned to investors in China, many have not reinvested back into Shanghai or Shenzhen stocks with gusto, the word on the street is that most want to buy and keep some Petrochina shares. The average estimate by market players is 40 yuan which would give its H-shares a 50% discount. Methinks its possible for the share to run up to 46-50 yuan. Bearing that in mind, and keeping the 50% discount, the H-shares should close firmer today (closer to HK$21) and may trade between HK$21-HK$23 on Monday and Tuesday. Anyone holding Petrochina covered warrants on the H-shares should be happy to hold on because I doubt very much that Petrochina A-share will ever dip below 40 yuan from here on judging from the amount of potential buying available for the shares. If it won't fall below 40 yuan, it shouldn't fall below HK$20.50.

As if all the news about the share is not positive enough, Beijing decided to raise gasoline and diesel prices by 10% yesterday to stop the erosion of refiner's margins and to guarantee the supply of fuel amid public discontent over shortages. Car owners now have to pay 0.4 yuan (5 US cents) more per liter of gasoline. This will increase the operating cost for rail cargo, public transportation and aviation immediately. The increase will boost the prospects of the already bleeding pure refiners such as Sinopec.

The hike in gasoline and diesel prices in China have checked the stock prices in China a bit - however, I think people are reading too much into the hike. Soaring food prices have caused inflation to jump this year, although the increase in the benchmark consumer-price index slowed to 6.2% in September from 6.5% in August. Underlining official caution about inflation, the government issued an estimate shortly after revealing the fuel-price increase, saying it will have a limited impact on inflation, likely adding only 0.05 percentage point to the consumer-price index. The share price weakness in China yesterday and today are not really due to "inflationary scares" or "fuel/gasoline price hikes" - it is because almost all investors are cashed up to ready themselves to buy Petrochina A-share come Monday - I know this sounds like a sidewalk Chinese medicine oil salesman, but go and do a survey by phone in Beijing, Shanghai, Tianjin, etc... you get the same response.

There are concerns that these could have a ripple-on effect across other industries and could halt the uptrend of China's stock markets. Everyone would always slip in a question as to how and when the China stock market bubble will end. I have heard the Shanghai being called a bubble (including by me) since it was 4,000. A re-examination and study of Beijing' persuasions have led me to be a bull a again (even though a cautious one). I agree it is bubblish but its not extremely over valued. As for any super bull (and this IS definitely one), the momentum, liquidity, fundamentals all are converging. Year on year profit growth is still in the 20%-30% range, though there should be some concern still that some 30% of all profits are from investment income (stock market investments and holdings). Shanghai is trading at 38x forward earnings - frothy, yes... bubble, yes ... more upside, also yes... If we all examine super bulls of the past such as Nasdaq in 1989 or the HK market back in 1973 - they all went as high as 50x -60 x forward PER before crashing. If we were to use that as a guide, the Shanghai markets still has another 35% upside from here before we really should call the cops on ourselves.

Oil Prices & Ramifications

Even though we saw US$93.80 for oil, in real terms, the price is not an all time high as its still below its all-time inflation-adjusted high of US$101.70 back in April 1980. However, Crude has climbed 47.3% over the past 52 weeks, and since 2001, it is up 511%, from US$18 to US$93. We have examined the reasons why & potential ramifications, here's a repeat:

a) Increasing Global Demand: Booming growth in China and most of Asia-Pacific. Add India, Korea, Russia, Brazil, and Australia to the equation as well. Even old E.U. is moving in the right direction.

b) Correcting U.S. Dollar: The dollar is at 15 year lows versus a basket of currencies. The Fed is engineering a cheaper US stocks scenario amidst credit problems in the US. The correction in USD is reflecting itself in oil prices.

c) Under Invested: We are reaping the consequences as many big oil companies and state controlled firms have under invested to replenish natural production declines.

d) Money Supply Growth: What we are seeing is not just oil prices but almost every single commodity. The growth machinery cited above coupled with aggressive money supply growth policies undertaken by most developed nations over the last 5 - 7 years have resulted in a load of liquidity swishing in the system.

e) Shift In Balance of Power: Due to the dependence on oil and their record prices, the producers have minted a lot of surplus cash. Russia has used its proceeds wisely, effectively bankrupt in 1998, now Russia has more than US$450bn in reserves. Russia is also using petro money to "control" the surrounding small countries via joint ventures and questionable deals. China, realising its vulnerability has deliberately courted African countries with proven oil and gas reserves.

f) USA May React: USA being USA will be facing untold problems if oil prices stay at US$100 for a prolonged period (say a few years). Politicians will work feverishly to control the consequences of living with US$100 oil. Push comes to shove, USA may fight certain wars for the oil - if you know what I mean.

g) Petrodollars Balance Sheet: Used to be 100% in US Treasuries - this way the US can continue to consume as the petrodollars were recycled back to lend to the US via Treasuries. Over the last 2 years,many countries with hefty trade surpluses have started huge sovereign funds to invests in foreign companies. These companies are a mask to move funds away from buying Treasuries. I don't see this trend reversing, hence I see further downside for USD.