CPO Defaults

Well, thanks to the article below, the selling in CPO stocks will reach a climax. Defaults will happen when prices of any commodity falls too fast - who want to pay last week's prices that were 20% higher? Of course, there is the rule of law and contracts, but the news will spark fears and panic. As I see it, this is an EXCELLENT time to buy CPO companies especially when prices dip below RM2,400 this afternoon session. Defaults are not earth shattering, they just want better prices, they still have to buy.


Article from Reuters :

China defaults on 40,000 t palm oil -exporters Fri Aug 15, 2008 10:45am IST


SINGAPORE, Aug 15 (Reuters) - Chinese buyers have defaulted on at least 40,000 tonnes of RBD palm olein after a drop of more than 8 percent in prices on Friday, Malaysian exporters said.

"There is a default of 30,000 to 40,000 tonnes since morning today, but obviously defaults will be much more than that as prices have come down from 2,600 ringgit, to the 2,400 ringgit level," said one dealer at a leading export house.

Another Kuala Lumpur trader added more than 100,000 tonnes of contracts would be washed out as importers would be reluctant to take delivery after the price fall.

p/s photos: Pace Wu Pei Ci

USD Strength Is Temporary

Don't make the mistake of thinking USD strength is responsible for the collapse in commodity prices. The dollar DID NOT cause the collapse. To think like that would bring about the wrong investing strategy going forward.

There is very little to support a bullish dollar going forward. The connection is reversed, its not a dollar led sell down. Its the deleveraging by index funds and cut-loss by speculators in almost all commodity asset class which has brought about the cashing up. The dollar has been inversely correlated to commodity prices for the past 3 years. Its only natural for the inverse correlation to hold as well.

To many index speculators, to go long on commodities is one trade. If you wanted to enhance returns, you can also short the USD, its a double whammy. Plenty of hedge funds have taken on this strategy, and what we are seeing is the reversal of that. Hence the strength in USD is pretty fake.

Amidst a slowing US economy, the biggest determinant for USD strength would have to be the outlook for higher rates. Fed funds is at 2%. Even though July inflation was at a 7 year high, or was it 13 year high, either way that is expected to come down significantly owing to the sharp drop in oil and other commodity prices since then.

The biggest factor the Fed and the Treasury will be considering when thinking whether to raise rates is the amount of recapitalisation, the amount of mortgage resetting, and the various restructuring that is ongoing to help the smaller and regional banks to survive. Any rate hike would affect the above issues negatively. The Fed and Treasury cannot allow that to happen.

Hence, to me the fed funds rate has almost minimal chance of being hiked for the rest of the year. I see a 60% for it to stay at 2% for the year, and a 40% that it may go lower to 1.75% before the year is over. That being the case, there is very little chance for USD to maintain its rally.

Once the commodity prices flattens out, the USD should continue its slow downside weakness again. We are getting close to those levels, oil should stabilised just below USD110 and CPO's bottom range is around RM2,450-2,500. The proper investing strategy taking that in mind is a refocus on strong emerging markets with strong trade surpluses and foreign exchange reserves.

p/s photo: Onjira Lamwilai

Bursa Trading Hours & Corporate Announcements

REVISED (Don't know what I was thinking, got some facts wrong, apologies!)

Many are calling for shorter trading hours for Bursa. Right now we are open from 9.00am-12.30pm, and the afternoon session is from 2.30pm-5.00pm. Longer hours does not translate to more business, thats a fact. We need to think properly how things work. Let's look at competing markets for morning session, all local time (MY time):
HK 10am-12.30pm (10am)
Shanghai 9.30am-11.30am (9.30am)
Tokyo 9am-11am (7am)
Taipei 9am-1.30pm
Thailand 9.55am-12.30pm
Singapore 9am-12.30pm (9am)

The important markets to consider are HK, Tokyo, Singapore and Shanghai.
You would not have any value by opening
at the same time as them.

As we all know morning
sessions are basically trying to digest and discount what happened in Europe and the US
markets overnight. Bursa has no advantage to open at the same time. You cannot even think of opening earlier than Tokyo (7am our time). Why do you think Singapore opens at 9am? Because HK opens at 10am, and you serve no purpose to open at the same time as HK.

Though stocks in each exchange may be different, but they all have a high correlation to overnight equity markets. By opening at differing time slots, each exchange can capitalise on what happened in other bourses. Traders can move in and out of certain exchanges at various time intervals - not all at the same time. Hence 9.30am should be the better opening slot for Bursa, its a very nice spot. I would even advise that the closing time for morning session be at 12.15pm instead of 12.30pm. Yes, you may be opening at the same time as Shanghai but Shanghai is not so open to international traders and foreign institutional investors.

The afternoon session is way way too long. 2.30pm till 5.00pm. HK closes at 4pm, Singapore at 5pm as well. Following the same argument, 4.30pm would be a nice slot. Collectively we are shaving 75 minutes of trading, which will yield much better results all around.

Announcements

While we are on the hours thingee, Bursa should revamp completely the timing and release of corporate announcements. As things now stand all announcements must be submitted after 5pm for same day release later. However the actual release to the public is all over the place, some are released at 5.30pm, some at 6.00pm some even later, why? Don't give me the bs that the technology cannot handle it, is the Bursa using Windows 92?

Why force journalists and analysts to guess and stay later than they need to to see if there are material announcements? Do a cut off time for all corporate announcements to be only accepted from 4.30pm till 5.00pm. If you failed to make the time cut, tough titties, yours will be released tomorrow. ALL corporate announcements to be released to the public from 5.15pm till 5.30pm, certainly you cannot jam the page loads with such a wide 15 minute slot right!

Plus at the end of the final corporate announcement, put in a line that says "This is the last corporate announcement for the day", so that we all know we can leave. So no more having to wait past 6.00pm or 6.30pm to see when, if, should there be fresh announcements after that 5.30pm threshold. It allows for better efficiency among people who have to work on the announcements for a living.

p/s photos: Im Soo Jeong

Milli Vanilli All Over Again - Deplorable!

I have to state firstly that the Olympics opening ceremony was highly creative, a wonderful experience for the senses, and captures China's cultural heritage and contribution in many important inventions.

But this has to be highlighted, not to slight Beijing in any way - just that it is absolutely very wrong. The beautiful girl in the red dress singing was just miming the song. It was supposed to be sung by Yang Peiyi. Zhang Yimou in his creative brilliance would have no problem using Yang (even though she may not be as cute as Lin) and he did notmake the change, but apparently a high ranking politburo official saw the rehearsals and made the decision to switch. Why so artificial, why the need to package, why rob Yang of her talent and moment in history. It is exactly this kind of shallow thinking that cripples the spirit of humanity and mocks human frailty (not everything is replaceable or should be replaced). Maybe we should also change the politician who does not look right or sound right. Maybe we should terminate a baby's life who did not look quite right as well. Life is already unfair enough, what kind of values are you instilling in the young when you do such things?

The Age & SMH: LIN MIAOKE, 9, the Chinese girl in the red dress who captured the world's hearts when she sang solo during the Olympic opening ceremony, is the hottest child star on the planet.

However, the voice the world heard singing so sweetly was not Lin's. It was a pre-recording of another child, Yang Peiyi, 7, who was dropped from the opening ceremony at the last minute in the "national interest". The switch happened at the behest of a member of China's politburo.

The general music designer of the opening ceremony, Chen Qigang, told Beijing Radio he owed the nation an explanation and he wanted to ensure Yang's contribution was recognised.

Mr Chen said the original choice for the lead was a 10-year-old girl, who was used throughout the rehearsals for Friday's opening extravaganza but she was dumped after the director, Zhang Yimou, deemed her "a little too old".

A group of younger girls was then shortlisted, including Lin and Yang. After recording them, Mr Chen's team unanimously decided Yang's sweet voice was "flawless" and that she would sing the lead. However, at the final rehearsals a member of China's ruling nine-man politburo made his dissatisfaction with Yang clear.

There were rumours at the time of the rehearsals that unspecified, last-minute changes had been ordered by the senior leadership.

"We had been through several inspections; they were all very strict. When we rehearsed at the spot, there were spectators from various divisions, especially a leader from the politburo, who gave us his opinion: it must change," Mr Chen said.

"The reason was for the national interest. The child on camera should be flawless in image, internal feelings, and expression. Lin Miaoke is excellent in those aspects, but in the aspect of voice, Yang Peiyi is flawless, in each member of our team's view."

Time To Gamble

Genting's share price has reached great value levels. In fact, the valuation is as if they did not get Sentosa IR project, thats the kind of valuation Genting is at now. There are a few things which may be bugging the stock price:

a) Cost overruns at Genting International's RWSentosa IR project

b) Strong likelihood of being whacked with a rise in casino tax in the upcoming Budget

c) A sharp slowdown in share buybacks at Resorts and Genting which may be taken to mean there are issues just beneath the surface

Genting International, the Singapore-listed subsidiary of Malaysian gaming giant Genting Berhad, has invested a fresh S$400 million to beef up the capital of unit Resorts World at Sentosa Pte. Ltd. (RWS), which is developing a S$6-billion integrated resort and casino - this happened two months back. Genting International said it, through unit Star Eagle Holdings Ltd., has subscribed to an additional 400 million new RWS shares, raising its investments in RWS to S$1.5 billion. The investment was funded from the proceeds of Genting International's S$2.2 billion rights issue in August last year. RWS is building one of two integrated resorts in Singapore. The company also announced that the 49-hectare Sentosa resort, slated to open in 2010, will house a S$340-million Hard Rock hotel that will be built by construction firm Low Keng Huat (Singapore) Ltd.

Getting To The Pulse

a) There seems to be a deliberate strategy to be a pure gaming company. First on the
chopping block will be Genting Sanyen IPP which should net RM3.6bn. The focus on
gaming will bring about better valuation and would be seen in a positive light by
institutional investors.

b) Even Asiatic may be up for sale soon. Asiatic may fetch RM3.3bn.

Just cashing out of these two major assets will bring the share price much closer
to its RNAV of RM9.30. Even if Genting or Resorts World were to be asked to
subscribe to new shares in RWSentosa (to beef up spending and capital), it will
still be fairly arm's length and same concentric sector investment. Currently
Genting owns 54% of Genting International.Any further fund injection could be
done by Genting subscribing to new shares in RWSentosa.

Its very obvious institutional investors are scared of the cost overruns at 
Sentosa. Its a S$6bn project and judging from developments over the last 2 years,
it is likely that you can lump another S$1.2bn at least to the overall
construction cost. That would severely affect payback calculations. Still, i 
think the discounting had been a tad overdone already, unless the real overrun
figure is above S$1.8bn, then the stock should trade lower. I doubt very much.

Genting should also make known to all how their cost and budgeting have been. You
should not and cannot keep such information away from investors and expect them to
buy on faith alone, its not a religion. The sooner Genting's management come out
with a clear estimate of cost overruns and how they will source for additional 
capital, the sooner will the stock move to fairer valuation. Right now, its
grossly oversold.

The stock is now even trading close to the lowest 10% of its average PER band.
Obviously pink elephant in the room which many are not saying is the huge cost
overruns in Sentosa and that will affect payback calculations, but it appears that
the worse case scenario has been discounted already.

As for the Budget tax, every 1% hike will hit Resorts World's net profit about
2.2% while it will only knock 1% off Genting's net profit. Great value to pick up
below RM6.00, but will have to ride out the pessimism surrounding local bourse.
Stock should perk up after Budget day and on the actual sale of Genting Sanyen.

p/s photo: Vivian Hsu

Events Searching For Reasons

The conflict between Russia and Georgia isn’t pushing crude-oil prices any higher, even though Russian attacks hit very close to an oil pipeline that carries crude to Western markets. The pipeline stretches through Georgia, from Baku, the capital of Azerbaijan, to Ceyhan, in Turkey. Yet earlier this year, geopolitical worries and pipeline bombings in other parts of the world contributed to crude’s three-digit tear.

Some were expecting the escalating war in Georgia would provide for a smart rebound in oil prices, and hence other commodities as well. Well, that happened for about a couple of hours and then the selling continued. It seems that analysts are saying that this time oil prices won’t get a boost unless fighting spreads because the idea of falling demand has taken such firm hold in the market lately. That to me is pure BS. When oil price rocketed from US100 to US$145 barely taking a pause, any slight incursions in Nigeria, Iran or Iraq would be flashed in headlines as very troubling for supply side - hence justifying the price rally.

I along with many have put forward speculators as the main culprits for driving prices higher. That of course was criticised heavily by plenty as well, in particular chartists and traders. I remember reading Jim Rogers even saying that those who are blaming the speculators don't know anything about the markets. I thought OK, the man is rich, successful but please la, don't make such big statements, it make the person sound very silly indeed.

Crude futures set a record just above $145 in early July, but have since receded as demand indicators worsen and as recession worries multiply. Some even link the stronger USD as directly causing the commodity prices to weaken. In actual fact, its the reverse cause effect, its the weaker commodity prices that is causing the USD to rally. The natural negative correlation between the two has been confirmed over the past 3 years.

The plunge in oil prices and other commodity basically confirms the amount of speculation which resided in the market place. What we are seeing now is commodity index funds unwinding, deleveraging and taking money off the table. If you are genuinely concerned over oil running out, why the sell down? If the tons of new money rushing into the commodity markets was fundamentally based, we would not have seen this rapid sell down. Hence suffice to say, much of the new funds which entered the markets went long and rolled over and over, a strong cumulative effect. If this is not signs of over speculation, I don't know what is. There will always be people who can justify prices at every single level. Oil at US$160 sure, the old reasons will come out, go and project 5 and 10 years down the road how demand will outstrip supply. Give them US$80, a new set of reasons will come out as well.

I am not a bear on oil prices because I think the era of cheap oil (i.e. below US$60) is over. I still think oil will stay at around US$105 for the rest of the year, before moving to US$125 as the average for next year. At US$105, we must remember that that is still a huge year on year hike.

p/s photos: Michelle Saram

Budget Victims & Outlook

The Budget Day will be on 29 August, just before National Day celebrations. Interestingly enough, Budget Day will be held 3 days after the Permatang Pauh's by-election on 26 August. Hence many are of the opinion that this Budget could have a lot more goodies for the general public, following the upset in March's General Elections and the bitter medicine of the fuel price hike (and the electricity price hike as well). Bank Negara already stated that growth is a more important consideration compared to inflationary pressures.

Can we also see a Budget that is geared towards growth and not so much to quell inflation? The amount of revision that will be going into construction projects will make the spending budget look big, but in actual fact, just to keep up with building material price hikes will put many billions into the construction budget.

Simple political strategy that should not escape our eyes: GET OUT YOUR UNPOPULAR MOVES FIRST, let the people moan and groan, then give them PRESENTS & CANDIES, they are all like little kids, they will forget the pain very quickly. We saw the windfall taxes, we saw the fuel hikes, we saw the electricity tariffs hike - there were no goodies at all. Hence I believe strongly it will be a Budget that is not only feel-good, but one with ribbons and bows as well. Primary concern: put more money into people's wallets, make sure jobs are there, make sure domestic demand is well supported, make sure price inflation is contained, hence some big projects may be on hold.

In order to bring about a people friendly and people-happy budget, there must be cutbacks from some areas, better tax collections and a dramatic reallocation of resources.

Things that will make the people happy:
a) Increase tax free threshold from RM35,000p.a. to RM40,000 at least.
b) Reduce top personal tax rate from 28% to 26%.
c) Reduce corporate tax rate gradually to 25% by 2009 and to 24% by 2010.
d) Release bumi quota properties after 6 months of project launch or when 50% of project has been completed.
e) Fuel price to be dropped to RM2.40 with immediate effect, with a quarterly review, and to maintain the 30 sen/l subsidy (maybe).
f) Raise the low-cost housing ceiling from RM42,000 to maybe RM65,000-RM70,000.
g) Will make REITs dividends to be tax exempt.
h) May shelve or postpone a few mega projects, which will free up some resources for reallocation.

Unlikely to:
a) Reduce employees contribution to EPF because savings via EPF is already considered to be insufficient to meet most people's retirement needs.
b) Reduce property stamp duty for house purchases (at 2%-3%) as the housing prices appear to some element of speculation already.
c) Allow funding or borrowing cost for housing to be tax deductible (for same reasons as above).
d) Provide relief for manufacturers or any companies for that matter over the fuel, gas and electricity hikes - if anything it is exactly this group that should have the "subsidy" taken away from them, with so many things favouring them by operating in Malaysia (low cost of land, labour and logistics), they certainly need to compete with gas, fuel and electricity at global prices.

The Budget Victims:
a) Tobacco companies will be lumped with at least a 10%-15% jump in excise tax, which will translate to 2-2.5 sen per stick, which will mean for a box of 20s the hike will be 40 sen to 50 sen.
b) Casino will definitely kena. The casino tax is at 25% and may be hiked to 26% or even 27%. Each percentage point hike will shave Resorts's net profit by 2% roughly. The corresponding effect on Genting is roughly half of Resorts' impact.
c) Brewery companies may actually escape with no excise tax hike or just a minimal 5% hike, and not the 10%-15% as predicted by many. Reasons for that are that: Malaysia's excise duty is already the second highest globally; consumption has fallen since the sharp 50% cumulative hike from 2004-2006; and brewery companies already a victim of the commodity price hikes.