Saturday, May 31, 2008

Summer Reading

Just a very short entry. Got to take the whole family for Indiana Jones. If you have not been reading lately. Here are my favorite two to three books that I recommend, also recommended by the WSJ. I think I've been reading Reminiscences of A Stock Operator at least 3-5 times. It's a great book, down-to-the-earth and cover almost all the FAQ about speculating, stock tips, crowd psychology, etc. Read it, it will help you tremendously. Jesse Livermore is as influential as today's W. Buffet.
Reminiscences of A Stock Operator”: Edwin Lefevre’s account of the Wall Street adventures of the great speculator, Jesse Livermore. Written more than 85 years ago, but full of timeless lessons about Wall Street. Get the hardcover version with illustrations. A riveting read.

To understand risk, books by Nicholas Taleb are excellence.

Fooled by Randomness/The Black Swan,” NassimNicholas Taleb: I’ve listed both of his excellent recent books, although Fooled is the better read. Taleb’s books are about separating serendipity and success. They can also get a bit abstruse, but so what.

Friday, May 30, 2008

iCapital Rating

Just got off from iCapital website. I've been seeing iCapital revised many of its stocks to hold over last few weeks but I did not make efforts to count.

Quarter 1 earnings reporting season coming to an end. I thought just do some counting to relax my mind after gone through rather a very hectic day - running meetings after meetings. This is what I got, of 190 stocks they cover, most of them are local small caps. As of 30 May 2008, 54% rated buy, 39% hold, 4% sell and 3% pending review. I guess it is not easy for an Investment Adviser to downgrade so many recommendations to hold: 39%! Hold usually signaling earnings momentum is slowing down or an inflexion point - can flip either way. Either they have whole bunch of wrong calls or operating environments have been exceptionally challenging -- many could not deliver.

Thursday, May 29, 2008

Now Everyone Can Buy AirAsia? Q1 '08 Review

Is AirAsia financial results matter? When I overlapped a crude oil ETF which tracks the price of crude oil with AirAsia, the conclusion seems to be very simple: Oil Up, AirAsia down. Translation, financial results do not matter, sentiments matter.

Shall I end here? Obviously not. In case you still care about its financial results, here are a few charts that can tell a story.

(i) AirAsia is for really long-term investor that can ignore bumps, it's very very volatiles.

(ii) In case you are skeptical of AirAsia can cut costs, have faith in them. Look at the way they cut down fuel cost.

(iii) In case you are still worried about the scenario of fuel costs will double, its fuel cost is about 50% of revenue in Q1 '08. Fuel cost was US $ 110 in Q1 '08, if jet fuel was to double to US $ 220, it will have 50% impact on their bottom line, assuming they don't raise fares. To maintain margin they may need to raise price by 50%. In my yesterday post was based on the assumption that they raised 40% air fare, will you still travel AirAsia? Have you gone to LCCT to find out the answer?

From Bursa Malaysia filling: Commentary on prospects

The airline industry is presently facing one of the toughest challenges, with record jet fuel prices, tightening of the credit market and a slower world economic growth. A consumer slowdown is not necessarily a bad thing because low cost carriers traditionally benefit from a consumer slowdown. Passengers who would normally take a full service carrier are likely to trade down and fly with a low cost carrier.
We are driving this consolidation process as we continue to offer irresistible fares, stimulate new markets, encourage price sensitive customers and expand to new destinations. No one is certain how long this situation will persist, but it is inevitable that weaker competitors will have to reduce capacity and disappear eventually. In this period of uncertainty, there is only one assurance – and that is low cost airline will prosper. In the end, AirAsia will emerge even stronger reflecting our brand, our sound business model, our unmatched cost advantage, efficient fleet, strength of our route network and our hardworking people.

Since this is for a very long term investment. Next update will be 2/1/2010. Turtle, Turtle, why are you keep sticking out your neck for so many unloved stocks? Don't you have any other better things to do?

Wednesday, May 28, 2008

Pan Malaysia Industries (PMI) - Q1 '08 Review

I'm getting some comforts from Khoo's commitment to restructuring his companies. Commitment is being demonstrated in PMI. I'm seeing him paring down all the debts, wipe out negative reserves from -1.2 billion to -34,000. This has increased probability of MUI debts will be pared down soon, just be patient Turtle.

Parkson Holding Berhad - Q1 '08 Review

Don't be surprised by the big jump in Q1 '08. RM 231 mln was from dilution of retail operations. Excluding this item, EPS came in RM 0.125/share, be careful not to annualized Q1 '08 which is typically a high season due to Chinese New Year. This still represent almost 38% growth. I would think PE will drop to less than 20 times for 2008. Balance sheet is solid with net cash position.

I supposed some of the investors in Hong Kong are slightly disappointed with Parkson Retail Group as the EPS growth was around 40%, fell short of the market's expectations. Many of them has a target price around HK $70/share. That could be the reasons of selling pressures of Parkson Holding Berhad in the last few days, affected by bearish moods of Parkson Retail Group. At RM $ 6.50, Parkson Holding Berhad is selling at 40% discount. The time is ripe to buy.

Is AirAsia deserves to be a penny stock?

AirAsia dropped to $ 0.99 intra-day low but closed at RM 1.01. The nagging question is this: will you pull out your wallet and buy this stock? It's a very tricking question to answer, right?

Valuation model will breakdown right here because of "abnormal" and uncertain fuel cost. How much AirAsia worth if fuel cost is US$200/barrel, US $ 150/barrel, US $ 100/barrel, US $ 70- US $ 80/barrel? Let's say fuel cost to return to acceptable range of US $ 70 - US $ 100, will you pay between RM $ 1.30 - RM 2.00 for the stock?

Forget about analysts' report because no one will want to stick out their necks. Everyone will want to take a safe route - downgrade it to Neutral, if the financial results confirm is bad, then downgrade it to sell.

Now ask yourself these questions:

Will you still take AirAsia if your round trip from Penang - Kuala Lumpur fare increase from RM 190 to RM 266/person?

Will you go to Macau if your round trip(KL-Macau) ticket cost you RM 1,358/person? Current price is RM 970 for a round trip.

Go to LCCT airport and ask a few more people, let's see what are their responses. This will give us some feel of how much we are willing to pay for AirAsia. Buffet seated at a restaurant counting how many people still using their American Express credit cards during salad oil scandal, to get a feel whether the company worth buying.

Desperate times need desperate measures - may I also say crazy times need crazy valuation method. Have a nice day!

Tuesday, May 27, 2008

MUI - Quarter 1 '08 Review

MUI deliver an OK results but less exciting compared to previous quarter because of seasonally low trading quarter and also challenging operating business environments. Despite of that, losses cut by half compared to prior year. Comparing to previous quarter, Q1 '08 losses was RM 13 million vs. net income of RM 52 million. This mainly due to lower top line and lower contributions from associated company.

All operating units are profitable. If I owned the whole company, I should be quite satisfied with the company progress. The only complaint I have is they are slow to get rid of debts even though they are sitting on a pile cash. Those projecting using last quarter will be disappointed, let's see how the market react tomorrow(May 28,08).

Oil Speculation

There's an excellent piece of article written by F William Engdahl, the author of A Century of War: Anglo-American Oil Politics and the New World Order. The article appeared in the Asia Times. There is a strong believe that 60% of the current price is due to speculation. The oils future trading in ICE is not well regulated that give a wide open door for so-called "price manipulation". The author thinks there is a strong correlation between oil price and starts of ICE futures trading.

As usual, the big boys are involved. A-ha, one of them are predicting it will breach US $ 200/barrel, can you see it?

Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and numerous hedge funds speculate.

There was a panic buying last week sending oil price to exceed US $ 135 punishing those who shorting oils. With that punishment, I believe not many dare to stand in the middle of the track to stop this unstoppable train.

The oil future market rallied fiercely after a dose of steroid injected by IEA appeared in the WSJ on May 22. Yup - Supply Crunch was the magic word.

For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.

The implications will be wide and broad especially for emerging economies. Double-digit rates is back?

Jean-Claude Trichet, president of the European Central Bank, this week gave warning about the mistakes of the 1970s, when inflation was let loose at huge cost to growth. His words were aimed at rich-country central banks, but policymakers in emerging economies are the ones who should most take heed. In countries such as China, India, Indonesia and Saudi Arabia even the often dodgy official statistics show prices have risen by 8-10% over the past year; in Russia the rate is over 14%; in Argentina the true figure is 23% and in Venezuela it is 29%. If you measure the numbers correctly, two-thirds of the world's population will probably suffer double-digit rates of inflation this summer.

There is an incredible close link between loose monetary policy(too much liquidity) and inflation. There is no point predicting the trend, the trend will depend on how committed the central banks around the world to mop up the excess liquidity.

Look at the broad money supply in the emerging markets. It's three times of developed markets!. Central bankers around emerging markets must be determined to fight inflations or else .............

Turtle begins to ask: bubble bubble on the wall, which bubble is the biggest of all? Turtle is not trying to sound like Marc Faber but facts are facts. Fed and other central banks let all these Genies out, only them can get them back into the bottle?

Alternatively, Soros said both the US and Britain enter recession will make the bubble burst.

The billionaire investor said the money pouring into the oil market increasingly had the look of a bubble, but that it would not burst until both the United States and Britain were knocked into a recession.

Monday, May 26, 2008

Pan Malaysia Holding Berhad - Subsidiary of MUI

MUI controls about 68% of Pan Malaysia Berhad. PMH recorded RM 31,000 net income in Q1 08 vs RM 2.2 millions in Q1 07. Revenue is flat, aro RM 6 million from its Group's travel operations. Contribution shrunk from its broking associated company PM Capital due to weak market sentiments. This may create some psychological pressure on MUI's share price though it contributed to about 10% plus to MUI's 2007 earnings. Waiting for MUI's results to assess its earning contributions from retails, hotel and property. The main thesis of investing in MUI is to see it paring down its debt, revaluate its properties and some earnings momentum from its retail arms ( Metro Jaya and Laura Ashley). If the main catalysts are not happening within 2 - 3 years, SELL, I MUST.

Multi-billions FDI coming to Penang

As the old saying goes: Actions Speak Louder than Words. My sincere thanks to Guan Eng as a Penangite and Malaysian. I was thinking to make comments after 100 days of opposition taking over. I just can't help it but to acknowledge a very good job done. It's RM 1.2 Billion foreign direct investment from a Japanese company and more to come from an American firm! I don't know what the Star is trying to do, keep it at such a low profile - why highlight millions and not billions? Come on, facts are facts, just report as they are.

There is such a big contrast going on with our ruling government, UMNO is still quarrellings among themselves, the opposition already showing results. Rakyat is witnessing what is an effective government look like. Just like tortoise and hare race, tortoise is way ahead while the hare is still dreaming how fast and powerful he is, I hope the ruling party will be not surprise by everyone is cheering for tortoise to cross the finishing line.

US hi-tech firm to invest millions in Penang

GEORGE TOWN: An American high-tech company will announce its multimillion-dollar investment in Penang next week, said Chief Minister Lim Guan Eng.

He said that he would leave it to the new investor to reveal the details of its investment plan, adding that more foreign investments were expected to come to the state later.

"I hope the inflow of foreign investors to Penang will attract local investors including small and medium industries to the state," he told newsmen after opening Human Rights Training Programme on Sunday.

He described the assurance by Second Finance Minister Tan Sri Nor Mohamed Yakcop that the second Penang bridge project would proceed as a boost for Penang to attract more investors.

"We have to try catch on the wave before the global economic slowdown which is expected to hit us at the end of the year.

"It’s like one should catch all the fish when the tide is coming in and not receding," he added.

On May 22, Lim announced Japan-based printed circuit board maker Ibiden Co Ltd’s investment amounting to RM1.2bil.

Ibiden is investing the amount for the first phase of its new printed wiring board (PWB) plant at Penang Science Park. The facility, on an 18ha plot, would be developed in two phases.

Saturday, May 24, 2008

Gennie out of bottle - have you changed, Turtle?

Just to publish a reader's comment in case there are similar thoughts.

MaxTrend said...

These are the points that turtles would not bother:

, , I was a bit unsure whether it is right to call it a bear market rally when they have never dropped 20% from the top. If this is similar to 1973-1974, next 6 - 9 months are gone! , , - Turtle never predict. Turtles react to price only.

My comment

Prediction? Not my cup of tea. There are some people use analog technique by over-lapping certain past price trend to determine the length and height or depth of market rise and fall. Some guys predicted 1987 crash based on this technique. 1987 and 1929 crash were identical when you overlap the two periods.

Based on the similar technique of overlapping the current price trend, looks very similar to that 1974 bear market, corrected from top, rally powerfully and bottomed-out in 6 - 9 months later. Based on 1974 bear market, the market did rally quite powerfully after a while and eventually new lows were made.

Many people are quite complacent thinking March 18 was the bottom. That's why Turtle leave a room of possibility of people can be panic and sell shares again. That is the good time to buy at even cheaper price.

I don't really care whether this will happen or not, as long as price is right, I will buy but try not to fully invested, keep some money in case of big buying opportunity shows up.

, , KLCI is a bit difficult to read - we have plantation stocks to support but on the other hand we have some political uncertainty help to pull the bull's legs. , , - turtles never bother about 'funny matters' (fundamentals).

My Comment

Most of you will notice I am constantly commenting and writing a lot of "funny stuffs" which typically a value investor will not do. These "funny stuffs" range from politics, economy, treasury, commodities, what big boys say, etc. These stuffs are for traders and hedge fund fellas to read general investing moods.

The comments were my best educated guess what is on the minds of investors. For now, KLCI fluctuations is kind of neutral, people will continue to trade and at the same time will be cautious. So patience is required, wait for a real negative catalyst to catch them off-guard, giving up hope and sell irrationally.

Tracking these events is to enable Turtle to read how crazy is Mr. Market's mind.

, , For Turtle is simple, Parkson will make my day if it comes down to around $ 6.00 or FBM30etf around $ 7.90. , , - Turtles trader definitely cannot take it as turtles buy high and sell low.Besides, turtles react to price, not prediction.

My comment
Right, those are my target buying price that Turtle perceives as bargains. I'm sorry for those who managed to buy at around $ 6.00 for Parkson, when it comes down again make you feel no paper gains. Take it as another round of buy offer if you like it.

I apologized for create some noise with your posting. However, I hope you understand that I am talking with the 'turtle' sense which I am very proud of all the while. So, if I am not welcome to comment, do let me know. No offend and I am all right with that. Cheers!

My comment

All comments are welcome - interaction is a great feature of blogging. I might not reply all the comments if I feel a reader already capable of making those decisions or they get the issues crystal clear. If you can ask a right question, you already have 99% of answers, 1% left is confidence issue.

Sometimes I don't answer if I feel a reader need to do a little bit of thinking or taking a bit more extra miles to find some of the very basic stuffs that they should know.

Have a great weekend. Cheers!

PS, Please don't misunderstand that this Turtle is not the Trend Following "turtle traders". The name of Turtle is chosen just to reflect the slow and steady approach in wealth building.

When to sell? Lessons from Buffett, Part II

Buffett bought 30 million shares of Ameriprise Financial, Inc in 2004 for US $ 183 million. The value rose 580% to US $ 1.2 billion in 2005. Hats off to Buffett. In his 2006 letter to shareholders, Ameriprise did not show up in his major holdings - he must had sold most of his shares.

However, recently(May '08) in a filling to SEC indicated Buffett cut his stakes in Ameriprise from 661,742 shares to 0 shares. Interesting, he still keep a small portion of it then.

Ameriprise Financial, Inc. provides financial planning, asset management, and insurance services to individuals, businesses, and institutions.

Taking a look at the financial performance of the company, the company is still fundamentally sound. Net income was growing steadily but SGA was ballooning. You can see operating income actually dropped sharply despite of rising Net income.

Valuation wise seems to be OK - no signs of extreme optimism. Geez, these investing stuffs are really confusing, Yup - I've told you so!. If it is not valuation, it must some other issues. What could the reasons of him sold the shares?

Buffett is seems like really wired to see future, you can see very clearly he exited in a big way before fundamentals deterioration become crystal clear to you and me. He deserves to be a billionaires for this.

Anyway, my take is the company was over expanding chasing for very limited or declining growth before sub-prime mess blow up. Separations cost will eventually show up if the company management decided to trim its workforce. It is a strong hint Buffett is quite bearish financial services sector. Another lesson learned - sell is permissible when growth prospect is dimming. You need to bet on the industry and company fundamentals momentum and not price momentum! Read the last sentence again.

Friday, May 23, 2008

Mark Mobius's luke warm feelings for Malaysian equities

Mark Mobius of Templeton Fund said on April 17 on the Bloomberg: Malaysian equities are not only attractive but getting more attractive.

Prime Minister Abdullah Ahmad Badawi last month vowed to proceed with infrastructure projects to promote growth and pledged measures to help the poor, seeking to reassure investors after the government's narrow poll victory.

Malaysian stocks are ``becoming more and more attractive as a result of these political changes,'' Mobius said. ``There has been re-awakening so to speak, reassessing that Malaysia should be doing well and prosper. I think that's good news and that could have good impact on the market.''

Slightly a month later, May 20 he finds our market is not as attractive compare to others. The market seems to be fairly valued when comes to plantation and property stocks(could be referring to sector leaders).

KUALA LUMPUR: Emerging markets guru Dr Mark Mobius said its fund is “definitely” looking at Malaysia and plantation stocks were “the obvious choice” for investors looking at the country, although there are also dampeners.

“The problem here is some of the good plantations are very illiquid. It is very difficult to get the stock, number one. Number two, pricing has now gone up a lot, so a lot of the growth and demand in biofuel and so on is already in the price,” Mobius, executive chairman of Templeton Asset Management Ltd, told reporters on the sidelines of the World Congress of Information Technology (WCIT) 2008 here yesterday.

“We fear that we’ve reached a peak (on Malaysian property prices). The choices are very wide so there are no particular bargains in Malaysia at this stage,” Mobius was quoted by Bloomberg as saying.

When I look at his statements in two different periods seems to be contrasting. He is kind of non-committal this time.

“We will definitely be looking at Malaysia, but it’s hard for us to find something that is compelling compared to what we’d find in India, China, the Philippines or elsewhere,” Mobius said.

For him to qualify as bargains could be at the level of 1100 - 1150 level, 1300 is getting expensive, I'm guessing 1400 will be out of question unless growth accelerates.

Thursday, May 22, 2008

Oil Rises Above $130 a Barrel as Banks Increase Price Forecasts

Just because Goldman Sachs analyst proven rightly oil did surpass US $ 100 prediction, everyone begin to believe they will be proven right again to surpass US $ 200. Some guys - very smart guys - bid up the price up all the way to 2016, 8 years ahead. I think I say it best when I say nothing at all, just like what the song lyrics say.

By Grant Smith

May 21 (Bloomberg) -- Oil rose above $130 a barrel for the first time after at least five banks raised price forecasts in the past week on expectations supply constraints will persist.

Crude oil for July delivery gained as much as $1.40, or 1.1 percent, to $130.47 a barrel, the highest since trading began in 1983 on the New York Mercantile Exchange. It traded for $130.22 at 11:56 a.m. London time.

Oil prices are likely to carry on rising, futures prices show. Crude for delivery in December 2016 surged $17.08, or 14 percent, in the three trading days after Goldman Sachs Group Inc. raised its forecast to $141 a barrel for the second half of the year. Yesterday, Societe Generale SA and Credit Suisse raised their forecasts for prices.

``You see more money going into the back end of the curve,'' said Olivier Jakob, managing director of Petromatrix Gmbh in Zug, Swizterland. ``The issue is not the fundamentals. What's bullish is the comments from people like Goldman Sachs.''

Brent crude oil for July settlement climbed as much as $2.08 cents, or 1.6 percent, to reach a record $129.92 a barrel on London's ICE Futures Europe exchange. The contract traded for $129.05 a barrel at 11:01 a.m. London time.

U.S. stockpiles of crude oil, gasoline and distillate fuel probably gained last week as refiners increased production and took delivery of crude imports, a Bloomberg News survey before today's Energy Department report indicated.

``You probably have more pension-fund type investment with a long term view that helped bid up the back of the curve as far out as 2016,'' said Harry Tchilinguirian, an analyst at BNP Paribas SA in London. ``This is supporting prices at the front-end in addition to current tight fundamentals in the oil market.''

The U.S. Energy Department will release its weekly inventory report at 3:30 p.m. in Washington.

Wednesday, May 21, 2008

Genie out of bottle

It has been a while I did not comment on the "markets". My regular readers begin to feel bored with a series of "lectures" on Buffett, Munger and Graham. So, let's do it for the sake of fun - predicting the future. Don't put down real money after reading this post.

There've been signs of the stock markets around the world are getting a bit tired. Some are looking to short S & P 500 around 1450. Correcting to 1414 while I'm writing this. I was a bit unsure whether it is right to call it a bear market rally when they have never dropped 20% from the top. If this is similar to 1973-1974, next 6 - 9 months are gone!

Hong Kong is testing downside - probably heading to 22,000 and there about. KLCI is a bit difficult to read - we have plantation stocks to support but on the other hand we have some political uncertainty help to pull the bull's legs. For KLCI to rally another 8-9% i.e. going to 1400 is a heavy lifting job especially many of non-plantation heavyweights have stones tied to their legs, how far and fast can they run?

Oil is spiking to almost $ 130. Inflation expectation is rising which is more dangerous than actual inflation number itself. Once people feels like they are trapped in inflation, small guys feel the need to hedge inflation. The big guys will supply it. In Malaysia, you can hear in the radio in your car, Now everyone can invest in commodities. If all think alike - commodity seems to be heading to a path of least resistance. There you go, the vicious cycle will feed itself. Some says the cycle will run another 1.5-2 more years before massive corrections - do you trust this crap?

For food and energy security, I am not sure international conflicts will escalate. If you have wars, good for commodities again - very bad news for stocks. We have been enjoying relative a long period of peace, low interest, low inflation for a while. Things might change. Soros said forget about the day of fast creations of wealth, we might run into cycle of wealth destructions.

Long term bear will never make money. Don't be too sober over life. Enjoy every moment you have, money is not everything but everything is money. You can choose to own lesser things.

Just keep enough cash in the pocket, be ready when the opportunity comes. For Turtle is simple, Parkson will make my day if it comes down to around $ 6.00 or FBM30etf around $ 7.90.

Tuesday, May 20, 2008

Fuel subsidy revamp on the cards

In an article appeared in the Star on 19 May 2008, the government is planning to restructure fuel prices. I feel they are bias - to brainwash the rakyat - saying we are enjoying a very good life comparing to neighboring countries by benchmarking the prices of essential items. Nonsense.

What a convenient way! If you look at the table, based on a-dollar-earned-to-a-dollar-spent, Singapore prices are quite competitive. What our government has been hiding from us is the personal income tax. Singapore has such a low income tax rate. Additionally, their government distributes shares with regular dividends to their citizens returning their surplus. Two thumbs up from me!

What if we compare that to Malaysian personal income tax rates? It's almost day and night, isn't it?

Let me pick Thailand as another example. I am sure their allowances are much more generous compare to Malaysia on top of generous taxable rates.

What am I trying to say? Be fair - if you want to raise prices, please reduce personal income tax rate also! We cannot continue to pay the price of our government inefficiencies. Benchmark Singapore government - generate surplus - not taxing its citizens and raise prices. There are many ways to skin a cat. I'm not impressed - both government and opposition need to look at it harder.

Monday, May 19, 2008

Decision Tree - Buffett's Secret Weapon, Part I

Charlie Munger, Buffett's alter ego and partner, spoke to a bunch of university students in 1994. He said you need a lattice model - multi-models to be a successful investor. Please master elementary in mathematics, accounting, psychology, biology, economics and etc, said he.

I am particularly interested to highlight his speech on decision tree. This is one of his secret weapons that's rarely published in books or written extensively in anywhere - perhaps is too technical for most people. Don't worry, it's only a Form V mathematics, remember?

So you have to learn in a very usable way this very elementary math and use it routinely in life -just the way if you want to become a golfer, you can't use the natural swing that broad evolution gave you. You have to learn to have a certain grip and swing in a different way to realize your full potential as a golfer.

If you don't get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest.

You're giving a huge advantage to everybody else. One of the advantages of a fellow like Buffett, whom I've worked with all these years, is that he automatically thinks in terms of decision trees and the elementary math of permutations and combinations....

Many educational institutions - although not nearly enough - have realized this. At Harvard Business School, the great quantitative thing that bonds the first - year class together is what they call decision tree theory. All they do is take high school algebra and apply it to real life problems. And the students love it. They're amazed to find that high school algebra works in life....

An example of a decision tree. Let's say you have two choices of developing a new product.

Product A, Decision I: A smoke and fire detector. It can detect flames as well as smoke. It will cost $100,000 to develop. Potential $1,000,000 in revenue.

Product B, Decision II: The motion detector,which uses conventional household lighting, will cost only $10,000 to develop. Potential $400,000 in revenue.

Click for larger image

In decision I, you have an expected value of $ 400,000 and decision II gives us expected value of $ 310,000.

A natural instinct for most people will go for decision I due to higher expected value, even though they've a 50% chance of losing $ 100,000. Most will argues that a 50% chance for $ 900,000 pay-off is a worthwhile risk.

In decision II, though the payoff is lower, $ 310,000, we have a 80% certainty to generate a payoff of $ 390,000. You have only 20% chance of losing $ 10,000. With this, I will go for decision II.

I will show you in my future write up on how Buffett has been optimizing his portfolio based on decision tree principle. He always says: in high probability event, put down a big bet - a very powerful decision making principle indeed.

Sunday, May 18, 2008

Karl Marx and Investing

A bit of controversy today, let's talk about Karl Marx. I see you look very worried now, I am not a communist and not teaching his doctrine but something he said struck me. I was so surprised that he is such a first class capitalist. This was what he said

"To sell a man a fish, he can eat for a day, to teach a man to

fish, is to ruin a great business opportunity"

I'm impressed, are you?

On recent food inflation crisis, what he observed 150 years ago, is penetrating:

This is how cities began to thrive; all of the farmers moved to the city to make money instead of food.

Yes Sir and Madam, it's urbanization. Emerging markets Industrial Revolution - Act II . The problem is going to be solved by capitalism and not communism. Farmers need a lot of money to lure them to farms - to solve our problems. Are you still thinking of cheap foods?

Saturday, May 17, 2008

When to Sell? Lessons from Benjamin Graham

Assuming you found a stock that passed Benjamin Graham's criteria.

1. Adequate size - minimum US $ 100 million sales, US $ 50 million assets

2. A sufficiently strong financial conditions - current assets : current liabilities 2:1. Public utilities company debt: equity < 2 times

3. Earning stability - some earnings for the past 10 years

4. Dividend record - uninterrupted payments for at least 20 years

5. Earning growth - A minimum increase of at least 1/3 in EPS in the past 10 years.

6. Moderate Price/Earnings ratio - not more than 15 times

7. Moderate ratio of price to assets - not more than 1.5 times. A rule of thumb : should not exceed 22.5 times.

As you can see, the buy criteria is quite tough as it will help you to avoid a company that is too small, almost no debt, must have some growth prospect, low PE, low price/book, not losing money for too long to avoid stigma, etc. No wonder Graham was rejecting Buffett(when he worked for Gram) buy recommendations more often than not.

Again, assuming that you found a stock that worth about $ 30 /share and you manage to buy at $ 15 /share. The next important question is holding period, if the stock reaches your intrinsic value within 1 year, you pocket a very nice profit of 100%. It is still not too bad if the stock take 5 years to realize its intrinsic value. 10 years is patience testing but still is not too bad, 7% CAGR. However, the greatest fear is this:

What if the stock will never realize its intrinsic value ? This is what most calls Ghaham's dogs.

How long should you wait? His answer was 2 - 3 years. He reasoned if a stock would never realized its value in 2 -3 years, it probably never would. In this case, it is better to sell and reinvest in a new stock.

Friday, May 16, 2008

Investing : Beware of Illusion

This is a classic picture from a textbook. Beware of your illusion when come to investing. What did you see? Don't be disappointed a young lady you saw turned out to be an old lady. Ha...Ha....Ha.....TGIF!

Thursday, May 15, 2008

Wisdom from George Soros

CNN Money interviewed George Soros recently.
Just want to highlight three most important points to reflect:

1. The twin bubbles burst(housing and credit) are so serious that he came out of retirement.
When I saw what I considered the most serious financial crisis of my lifetime, I came out of retirement and set up an account to hedge their positions.

2. Don't trust yourself. The only paranoid survives.
It's important in life and in investing always to question yourself. Understand that you may be wrong, especially when you believe too firmly that you're right.

3. The secret of happiness: Mind over money.
I'm reasonably happy, but the money's not the point. It's an indication that I've succeeded in the grand adventure of understanding reality.

Wednesday, May 14, 2008

It's Free-Cash-Flow Stupid!, Part II

Finding a company with strong free-cash-flow is great. This is a beginning of evaluating a company and let me assure you, it's certainly not the end. What a company does with the free-cash-flow is something that I want to watch closely. Some of the companies will be very reckless and go for stupid acquisitions, diversifying into some unrelated businesses, playing the stock market, etc. Many of the small caps companies have these problems. It's probably will do more harm to your portfolio than anything else if you start buying based on my yesterday post.

Once I find a company with strong free-cash-flow, I will look for Return on Equity(ROE), to satisfy myself whether the management is doing a good job with the money. Good management will do one or a combination of the following four things:

(i) plow back the money into the business. A highly profitable one will be manifested in good ROE or ROIC. Parkson is a good example.

(ii) pare down debts. Tenaga was doing that but don't buy the company just for this reason.

(iii) buy-back shares below its intrinsic value and not at any price!

(iv) in a mature industry with very slow growth, returning money to shareholders is very common, so that investors are free to reinvest in other higher returns companies.

Let's pick a company that we are familiar: Nestle. The table below is the financial information. Will you want to pay for 10x P/BV, 22 times PE, 4.5% earning yield for 4-5% earning growth and Free-Cash-Flow yield of 4%. ROE is excellence: more than 50%, that is because they return almost all the money to you. However, since they retain so little earnings, you cannot enjoy the compounding power despite of high ROE. Re-read the last sentence again, this is the secret of ROE that nobody wants to teach you and me.

If you discount all the free-cash-flow perpetually, according to an analyst, Nestle worth about $ 28/share. Based on my own calculation, I would probably will want to pay up to $ 26, discount all the FCF at 7%. Why 7%? For me, it's a return expectation that I am getting by putting money into a bond fund.

To be a value investor, the word value is already implying you need to have some valuation skills to determine value of a stock. If we cannot determine the value of a stock, how do we know a stock is undervalued? Even someone have done a valuation for you, you need knowledge and skills to interpret the results. It is not as simple as looking at PE, P/BV, FCF yield, etc.

You need multiple valuation models for different kind of situations. It is not as simple as buy when a stock is plunging like sh***(Transmile example). I will spend a bit of time to write about Graham's dogs over the weekend.

If this sound too frustrating to you: adopt index investing, it will beat most of the professionals ( click to see my other entry: Common Sense About Dollar Averaging).

After I buy Parkson, I am going to put FBM30-etf into my portfolio just to demonstrate my will to go for a simple approach.

P.S. A note to Nestle shareholders, please don't sell your stock after reading this post. You will still probably will get a decent 8-10% CAGR returns over a long period of time.

Tuesday, May 13, 2008

It's Free-Cash-Flow Stupid!, Part I

This is what I like in every crisis and downturn: people are finally talking get back to basics. They give up sophisticated valuation methods, earning surprises and etc. Like prodigal sons going back to the father, they finally going back to what Warren Buffett preaches all along: it's Free-Cash-Flow. The table above speaks very clearly, those with highest free-cash-flow yield are able to withstand selling pressure because it has something very solid to offer: CASH!

Just to share with you further, I extracted part of article published in WSJ on 12 May 2008.

Headline earnings numbers -- typically net income -- can be massaged by perfectly legal accounting tricks, such as changing depreciation schedules or the way revenue is recognized. Cash flows -- how much actual money a company spits out -- are by no means immune from shenanigans, but many analysts consider them a cleaner way to assess a company's health.

There are other reasons to search out companies with strong cash flow. A company generating extra cash can avoid the costly proposition of raising money in today's unsteady markets. It also gives companies the flexibility to boost dividends or stock buybacks.

Operating cash flow is the amount of cash a company creates from its operations, unvarnished by earnings that come from things like asset sales. Free cash flow -- considered an even purer measure of a company's true profitability -- subtracts from operating cash flow the money going into capital investments. It's "as close as there is to a silver bullet when it comes to sorting out good companies from the pretenders," says David Sowerby, a portfolio manager at Loomis Sayles & Co.

Mr. Sowerby tracks free-cash-flow yield, or a company's free cash flow divided by its shares outstanding. He likes Hewlett-Packard Co. The computer and printer maker sports a free-cash-flow yield that is double that of the Standard & Poor's 500-stock index's 4% and has seen its cash flow grow by more than 30% over the past three years. H-P's shares are down 2.5% this year, but they are up some 9% in the past 12 months.

Among companies with weak cash flow is Goodyear Tire & Rubber Co. Its earnings are expected to grow 80% this year, according to Thomson Reuters. But its cash flow has been negative in part due to heavy capital expenditures. The stock is flat in 2008 and down 16% in the past year.

Cash flow isn't a new idea on Wall Street. In the past, some consultants and Wall Street firms turned it into a fad and even marketed variations of the idea as a measure of business performance.

Monday, May 12, 2008

When to sell? Lessons from Buffet, Part I

I am going to pick a company that Buffet bought and sold. He bought Petrochina for about $ 500 million or 1.3% ownerships between 2002 and 2003. It is very rare that Warren Buffet disclosed how much a company worth - a golden opportunity to learn something from him on how to value a business. The valuation method was quite simple, he said he can calculates at the back of an envelope, is it so?

In 2002, the owner's equity was about RMB 316 mln which was quite closed to about US $ 35 to US 37 billion. That was what the market valued the company (It is very rare that market capitalization is almost equal to owner's equity). Buffet and Charlie felt that the company worth close to about US $ 100 billion. How did he arrive at US $ 100 billion? Why didn't others see it as US $ 100 billion, selling for about 63% discount? The answer? He sees things 10 years ahead vs. analysts project 1-2 years ahead.

Valuing a cyclical commodity stock can be difficult. If we were to value based on ROE of 15% for straight 10 years, the company worth about US $ 165 Billion. I supposed he discounted ROE to around 10-11% to get around US $ 100 Billion, to give himself a huge margin of safety.

He sold down his holdings between July - September 2007 for $ 4 billion, nice 600% or $ 3.5 billion profit. I wish I can do that. Some speculated it was due to moral reasons. PetroChina is doing business in Sudan which is well known for violations of human rights.

Looking at the chart in retrospective, I agree with him, it was purely based on fundamentals. You can see that Shanghai Composite Index already peaked around that same time, the bubble was waiting to burst. However, the price of PetroChina continued to climb(he said he left a lot of money on the table), the stock just way too popular and overtook Exxon Mobil as the largest capitalized stock in the world with about US $ 400 - $ 500 billion. Well, the party did end, some people committed suicides and some jumped out of windows. PetroChina peaked out in October and fell almost 40% from the top.

His original value assessment of PetroChina was $ 100 billion, he did not sell a stock simply because it had reached its fair value. He sold it when it was really expensive and stretching it too far when market capitalization reached $ 275 billion based on crude oil at US $ 75 per barrel and increased oil reserves. I speculated he considered overall sentiments of China market reached almost triple digit PE. Things do not seem to make sense when an economy of China is 4 times smaller than the US(though China is growing at 8-9% a year), how could you have a company with the largest capitalization in the world?

The more I'm researching about Buffet, the more I'm amazed with his business acumen's, valuation skills, common sense, crowd sentiments reading and almost perfect timing to enter and exit. He also tries not to leave too much money on the table but nobody is perfect.

Sunday, May 11, 2008

Emptying My Cup

It's weekend, hope to get away from serious stuffs.

A university professor went to visit a famous Zen master. While the master quietly served tea, the professor talked about Zen. The master poured the visitor's cup to the brim, and then kept pouring. The professor watched the overflowing cup until he could no longer restrain himself.

"It's overfull! No more will go in!" the professor blurted. "You are like this cup," the master replied, "How can I show you Zen unless you first empty your cup."

Reflections. One of the hardest things beside doing nothing is unlearn i.e. emptying my cup: Efficient Market Theory, High Risk High Return, Low Risk Low Return, No Risk No Gain, Buy and Hold Forever, Commodity is only for trader, The earth is flat, The sun circles the earth, The Invisible hand, Free Market, Christopher Columbus found America, etc.

Warning: Some of the items mentioned in the list are outright wrong and dangerous. Have a great week ahead.

Saturday, May 10, 2008

Commodity price inflation, should I follow the crowd?

WSJ says
The global surge in food and energy prices is being driven primarily by fundamental market conditions, rather than an investment bubble, say the majority of economists in the latest Wall Street Journal forecasting survey.

Is it true that prices are driven by fundamentals? Take oil for example, there was evidence leading to that, reported by Xinhua(April 29) and Reuters

According to statistics released Tuesday by the China Petroleum and Chemical Industry Association (CPCIA), China's apparent consumption of oil products composed of gasoline, diesel and kerosene rose by 16.5 percent year on year to 52.73 million tonnes in the first three months, and crude oil, rose by eight percent to91.8 million tonnes.

ROME, April 21 (Reuters) - Indian oil demand is expected to grow by 8-10 percent this year, a rate which is unsustainable, said Sarthak Behuria, chairman of state-run Indian Oil Corp (IOC.BO: Quote, Profile, Research), on Monday.

Indian oil demand growth is outpacing growth in refining capacity to meet domestic demand, Behuria said.

"India is building a string of new refineries but much of the new supply has been earmarked for exports," he told Reuters in an interview.

Most the economists think demand-supply responsible for about 60% of the price run up.

We actually can lump others into policy category because lax monetary policy destroys the dollar value, caused flight of the dollars, caused more speculation and etc. In short, this is the 40% contributors.

The question is: are we having an asymmetry cause-effect situation? Could 60% of demand-supply contributes 20% while 40% of policy related cause 80% of inflation? or just any other ratio which is nothing but a guesswork. It's intellectually entertaining.

Something looks very similar to me, government will start to intervene, giving warnings and etc but they can only feel helpless because the crowd will just ignore it. Crude price seems to be on one way street: only UP, UP and Away.

NEW YORK ( 09) -- As part of their plan to tame record oil prices, lawmakers are urging the President to stop putting oil in the nation's Strategic Petroleum Reserve. But some analysts say that won't do much to lower gas prices.

Crude oil is really getting expensive in relative to gold. There were not many occasions we have this situation. Gold used to buy 15 times oil but now drops to 7 times. Either gold is way too cheap or crude oil is too expensive. Either one has to give in - I will be real careful chasing after crude oil.

Friday, May 9, 2008

You must be mad, why Pakistan?

I was like most people thinking it must be crazy thinking to jump into Pakistan stock on the recent blog entry, consider to buy Maybank if it's reaches bargain or steal level. Unless I have too much money or no other investment choice why taking such a risky proposition?

Turtle was not alone, Templeton too invested in this market.

In Pakistan, a market shunned by most institutional investors but which accounted for 5.3 percent of Templeton's Asian Growth Fund's portfolio, Mobius said the country's stocks were attractively priced at forward price-earnings ratios of less than 10.

Pakistan's stock market is Asia's top performer this year, up almost 10 percent on top of a 40 percent rise last year. Economic growth has averaged about 6 percent in the last five years, but the South Asian country has been plagued by political instability and militant attacks.

A Templeton spokesman said the firm's Pakistani investments included CB Bank, Oil & Gas Development Co (OGDC.KA: Quote, Profile, Research), Faysal Bank (FYBL.KA: Quote, Profile, Research) and Pakistan Telecommunication (PTCA.KA: Quote, Profile, Research).

"It's working out for us well," Mobius said, noting that recent elections had replaced an unpopular military-backed government with a civilian government that was likely to retain the previous administration's pro-private enterprise policies.

Risk comes with what we don't know. I feel it was less risky after gaining more knowledge about the subject. Beside watching what the expert is doing, the other factor affecting my thinking was there is a shift of economc prosperity from indstriaIized to agricultural and resource-based nations. Truth is the last 5% was from experience and gut feels but like Soros always says: I am fallible, I could be wrong, Investing emerging market is risky and volatile, however given enough time, these markets can provide satisfactory returns. I leave it to you to judge Templeton track records.

Thursday, May 8, 2008

Be Patient, Never Run out of Patience

I'm hitting the road. Will keep things brief. I really wanted to laugh on the plane reading the papers. Most of the pros behaved worse than average investors. They cann't keep their arguments straight. Productivitiy up, Oil Up, Copper UP, Aluminium UP but Gold DOWN. Productivity gains equal to strong economy equal to strong demand but not equal to strong dollar, so where is the argunment of flight of the dollar? Those arguments sound like a kid tries to have it their way, justifying the price to go up or down.

Switch subject. Most agree that capital market is stabilizing. Consumer credit market is the shoe to drop. This view is consistent with what Buffet said last Sunday, capital market is stabilizing but the average consumers feel they are less well to do today compared to six to eight months ago i.e. recession. I'm going to be patient, just let the markets sort out itself.

Wednesday, May 7, 2008

Maybank takes stake in Pakistani Bank, Part II

What I like about the deal: Maybank paid RM 2.2 billion for 15% stake in MCB.

(i) A bank with a 60 years of history, established since 1947.

(ii) Low loan-to-GDP, 30%. Ample opportunity for growth

(iii) Excellent ROE, 38%. Solid profitability and balance sheet strength.

(iv) Well managed - winners of Euromoney Awards and Asia Money Awards.

(V) Opportunity to expand into consumer and Islamic banking.

What I don't like.

(i) It's expensive, 5 times book value

(ii) 50% of the loan base is from corporate

(iii) Political risks even though reformation is in progress.

(iv) Currency risk is if energy cost continue to soar beyond reasons.

Looking at the market today, investors punished Maybank by sending price to $ 7.70, down 4%. Some already switching to Public Bank or AMMB. Most of them are concerned about dividend cut or fear of earning dilution from potential fund raising. Let's put it another way, assuming this $2.1 billion investment is declared as dividend equivalent to RM 0.43/share. Unless you think MCB is going to lose money, or else the most severe punishment is shave off RM 0.50/share from its fair value.

Guys and gals, I know it is easy to get emotional with all the headlines. Let's focus on Maybank itself, I think most have gone too far punishing Maybank by sending it down to less than 2 times book value, 12 times PE with a decent dividend yield. I know a company under pressure to acquire tends to overpay but investors that over-reacted selling irrationally provide us some margin-of-safety.

For those with long-term investment time horizon, $ 7.70/share is attractive , $ 7.00 is a great bargain, $ 6.50 is a steal but I don't think it will get down to that low.

Tuesday, May 6, 2008

Maybank takes stake in Pakistani lender, Part I

Before investors can feel better and recovering from negative reactions of Maybank acquiring BII, they will possibly need to brace for one more round of bungee jump. Though the acquisition price seems to be high, 5-6 times book value, this bank, Muslim Commercial Bank (MCB), is better managed than BII(wait for my Part II).

(Financial Times) Maybank of Malaysia is set to pay as much as $1bn for a minority stake in Muslim Commercial Bank of Pakistan, a purchase welcomed by Pakistan’s new finance minister as evidence of renewed investor confidence in his politically-troubled country.

Let's take a look at Pakistani economy since performance of banks is generally tied in with the overall economy. See below two tables.

It is seems that Pakistan may continue to benefit from the recent soft commodities boom. You can see agriculture contributes quite a bit.

'Pakistan is the world's largest producer of oranges varieties, and is also the fifth largest producer of milk having some 50 million dairy animals, the world's third largest herd. It ranks in the top five producers of the world in mangoes and dates. Additionally, the potential in crops like cotton, rice and sugar has earned directly or indirectly more than 70% of total national exports, inclusive of bi-products and the processed foods value chain. This means tremendous potential in contributing towards the global food chain.(LINK)'

Mining and manufacturing is another significant contributor to Pakistani economy. They export quite a lot cotton related stuffs, which is an excellent substitute material given the current high oil price.

Political risks aside, currency risk is also something needs to worry. Pakistan Rupees (PKR) has been depreciating against Ringgit given its ever growing current account deficits. One of the reasons is high crude oil and coal prices since they are a net importer.

If you buy the story of food inflation over the next few years, big picture looks Okay, still there are many things to worry. Assuming there is a big sales on Maybank, at what level of price are you willing to take the risk assumed?

Monday, May 5, 2008

Link Exchange.....Thank you

Dear readers, blogger, friends,

This is not an Academy Awards speech but just to express my gratitudes and clarifying a small issue. My sincere thanks to all for keep coming back, your moral support matters. I also want to thank blogger who makes a link to my blog despite of a very short history. As an Asian, I understand very well about reciprocal that put me in a dilemma: should I link everybody who makes a link to my blog? After I deliberated on the matter deeply, I think I owe everyone an answer.

I believe in focus. Research has shown our mind cannot handle more than seven things at one time. This is where the concept of positioning comes from. Therefore, the maximum links I have in mind are 10. This will bring maximum benefits to readers.

I believe in independent opinions. Blogging gives new meaning to democracy and freedom of speech, in a responsible way for sure. I will try to link up friends and blogger who can maintain independent minds. We enjoy rational analysis and thinking process more than just giving opinions.

This also means I will adopt no advertising policy so that I can speak with no fear.

Timeliness and relevance. An active blogger cannot be complacent, they will watch happenings around them like a hawk.

It's free. I don't expect anything in return, I hope you can be a better informed investor, exploit the same information available for big boys made available to you.

I believe in sharing knowledge with those who want to help themselves(small guys that I am referring to) - improving knowledge, mastering emotion control and money management. Those hoping to get rich quickly will be disappointed quickly, this blog and his friends have nothing to offer.

With that, let me explain why four of my friends made it to my links.

S. Dali of Malaysia Finance has an excellence independent minds, he speaks without fear. He said he has seen enough screw ups in the financial worlds. He is trying hard to help us to swim in the investing world without eaten by sharks. Watch out for some of his Black Swan warnings, he will save you a lot of troubles. I want to thank him for his tremendous faith in me, he linked me up after reading less than 10 of my entries.

Moola has been passionate giving warnings about small companies. Many of them are not worth investigating further. But he takes the troubles to explain the obvious - those companies are not worth your time. If you look at the financial tables he produces, you can make a conclusion in less than 5 seconds, they are shitty companies - please walk away, sorry not walk, please run away.

Boon of BHC Investment. I like his work, highly sophisticated. He does his homeworks, once he reached a conclusion, he will execute regardless of what other think, even against the best. Watch what he does will give you a very good idea what is going on in commodities, currencies, debts and stock markets around the world.

Bursa Trading Ideas, a good resource blogspot. Though they don't write their own opinions, readers will be able to benefit from a diverse collection group of authors. I make an exception to include them in my link.

I am sorry for not able to include everyone. Thank you for your support.

About me: pretty much like the rest of you, a salaried man working from 8 am - 6 pm. A man hope to raise a family and accumulate enough to survive after retirement. A book worm and a self-taught investor.

Sunday, May 4, 2008

Buffet: Don't invest based on macroeconomy forecast

In an article appears on CNN Money prior to shareholders meeting, Buffet continues to emphasize one should not invest based on macroeconomy forecast.

The good news is that Buffett continues to insist that no one should invest on the basis of a macroeconomic forecast; his point is that the investor's task remains the same no matter what the markets are doing around you. You should continue to look past stock prices to analyze whether the underlying business can continue to grow, paying special attention to whether customers would continue to want a company's goods and services if it had to raise prices. That's one of the main reasons he found the Wrigley/Mars deal attractive, even though (by conventional measures like Wrigley's P/E ratio) it did not come cheap.

I agree with him if one has a very long view but most would agree that he does timed the market quite well though not buying exactly at the bottom. Look at his Kraft purchase last year, he bought it around 10% from the bottom, extremely well timed in my opinion for a big block of shares acquisition.

Berkshire took a hit on $ 1.2 B losses on derivatives in first quarter 2008. Most may start to raise eye brows but not many dare to confront him: what the hell are you doing? Don't over-react, read on.

(Financial Times)The investment losses at Berkshire, an insurance-to-sweets conglomerate, were concentrated in two areas. The company recorded a $1.2bn unrealised loss on put contracts on the S&P 500 index and three other indexes.

Under these contracts, Berkshire will have to pay investors between 2019 and 2028 if indexes are below a pre-determined level. The recent decline in world stock markets forced it to take an accounting loss on the contracts.

OK, it's put contracts. It's very far, between 2019 and 2028, long term trend of stock market is up, he knows it very well. Knowing Buffet, odds should be on his side though I did not have a chance to look at the S & P index target. Why? He will always exploit others irrationality under uncertainty. Most will be extrapolating pessimistic outlook (prior to March 2008) into the future. The result? Miscalculation. How do I know? Because it's Warren Buffet, the master of risk management. Don't play poker with him. You will lose all your pants(skirts)? He will not do it if odds are not on his side.

Saturday, May 3, 2008

Morgan Stanley Says Sell Asian Currencies on Growth Concerns

I made an entry in the beginning of April: Forget Subprime, In Asia the big fear is Inflation. Things start to pick up steam, Morgan Stanley recommends their clients to sell Asian currencies. Translation: bonds and equities will have some headwinds.

May 2 (Bloomberg) -- Investors should sell Asian currencies against the U.S. dollar on prospects the region's central banks will let their currencies weaken to revive faltering growth, according to Morgan Stanley.

Asian central banks from China to Singapore, which have allowed stronger exchange rates to battle inflation in recent months, may soon reverse their currency policies to bolster growth, Morgan Stanley's London-based analysts Stephen Jen and Charles St-Arnaud wrote in a note yesterday. The region's currencies have risen 3 percent against the U.S. dollar since August, according to the Bloomberg-JPMorgan Asia Dollar index.

``As soon as growth decelerates, policies should shift to protect growth'' as Asia is not single-minded about inflation risks, the analysts said. ``For the first time in two years, we are recommending that investors be cautious about short U.S. dollar-Asian ex-Japan positions.''

Not all Asian currencies are hopeless though. They said the winners are:

“The `Greater Chinese' currencies, the Singapore and Taiwan dollars, along with the yuan, may ``outperform most other currencies,'' Morgan Stanley said, without elaborating.”

Yuan = Ringgit also? And most perceived we are a mini Brazil. When they are bearish on commodities, our plantation sector took a beating yesterday ( IOI Corp slipped below $ 7). So it is hard to say. We still need to be cautious about regional and contagion effects.

The big boys begin to get bullish with the US dollars as the economy data from the US seems to be encouraging, Q1 ’08 GDP growth of +0.6% and job losses came in better than forecast that reinforced the Fed reserve will halt cutting rate further – good news to US $.

WASHINGTON (MarketWatch) -- Job losses decelerated in April, suggesting that the nation's economic downturn may be short and shallow rather than long and severe.

Nonfarm payrolls fell by 20,000 -- far fewer than the average 80,000 jobs per month lost during the first quarter of the year, Labor Department data showed.
The decline was much less than expected. Economists surveyed by MarketWatch expected job losses of 78,000.

Looking at the sector of the job losses, factory (mostly durable goods) and construction payrolls fell quite a bit but offset by service producing industries (health care, professional services, tourism and leisure industries). Many will argue, the housing and consumer spending sector did show some weaknesses but not weak enough to pull down the whole economy. The decoupling camp will get their champagne glasses ready.

If you are in Jim Rogers, George Soros and Marc Faber camp, you will find the argument is not making any sense. Why react with just with a few data like that? They believe we are in a de-leveraging environment - not a normal recession, we talking about credit crunch and a recession. Consumers are afraid to borrow. Banks are afraid to lend. Credit costs are rising despite of the Fed has been cutting rates. Businesses are afraid to expand and loan growths are slowing down significantly. All these will eventually hit the economy.

If what they argue turned out to be true, when can we see the full-blown crisis? Many saw the credit crunch will one day blow up in 2003 itself. The Fed did not raise the rate fast enough when the 2001 recession was over but it did not hurt the stock market until late October 2007.

Jim Rogers has been saying out loud experience tells him to short more US $ when US $ rebound.

The other point is they think most analysts are quite complacent. Many have not cut their earning estimates yet, still keeping double digits growth. When credit costs continue to rise, the earning disappointments will catch most off-guard – especially those bought financial stocks.

My dear readers, as you can see, the above arguments are quite complex if one wants to adopt market timing approach investing. It is a shifting goal post. When will it happen? Nobody knows, that's make market timing difficult - but one thing for sure - be careful when others are greedy and be greedy when others are fearful like Buffet has always said.

Thursday, May 1, 2008

Turtle Portfolio Update - May 2008

Turtle added $ 888 savings for the month of May. While it is seems to be gratifying and a boost to ego to mention MUI Industries is still up by 23%, I realize that this is meaningless. If I really want to take a longer view then I should stop measuring performance by quoted stock price alone. The alternate measurement will be business performance. The companies shall remain in my portfolio as long as

(i)it is well manage or

(ii)did not lose any competitiveness when facing difficult conditions like recessions.

(iii) no extreme optimisms - prices running way ahead of fundamental

Those companies showing signs of mismanagement or any industry dynamics is no longer favorable will be on my watch list - a candidate to be sold at anytime.

$2,800 cash in hand would warrant for one purchase, however, if I did spend this amount, I will have to wait until early September for the next purchase.

Traditionally, May - October is the weakest period for equities, this is where the saying comes from:Sell In May and Go Away. However, given the pessimisms of equity market for the last few months, the US Institutional money has turned bullish for equities and the US dollars but bearish on commodities such as gold and oils. Also, bearish treasuries. Have this feeling earlier for short term market rally and oil price due for corrections.

This is a bad news to Turtle because he will no longer able to buy at cheaper price. Looks like I may have to sit and wait again until the price come down to my target.

Is subscribing iCapital worth your money?

iCapital started with publishing stock market newsletter and managing money for discretionary accounts and later ventured into fund management. The CEO is Tan Teng Boo, he attracted many fans and subscribers. He became even more popular after his closed-end fund managed to double its net asset value since its inception in 2005. AGM usually will be packed and most of the 2000 plus shareholders will turn up to listen to his market outlook. When he conducts seminars, he claimed that the seats will always sold out.

Of late, some of his subscribers have been voicing out their discontents toward iCapital of being too rude, too cocky and humiliating others to drive home a point that he predicts no US recessions of which against all other famous investors and gurus. Hard feelings and emotions aside, let's ask a realistic question: is subscribing to iCapital worth your money? How accurate is his market calls? I sampled randomly from 2003(the oldest on-line archived that was accessible), I know this is not a very scientific approach but randomness of sampling can help to eliminate some biasness.

iCapital was bearish from 1998 to mid 2003. In that sense he did not take a contrarian stand for the sake of against the grain.

By mid of 2003, iCapital called for maximum bullish for KLCI. The KLCI did continue to perform according to his call. By early of 2004, KLCI went into corrections, he maintained his bullish call. He said in 2-3 year KLCI will surpass 1200 when the market were around 800+ points. 50% increase was a bold call. That call turned out OK, KLSE did surpass 1200 in early 2007.

I picked up one of his calls randomly in 2005, he called for range bound between 880-940 for next 8-9 months, of which was quite OK too: the market was half dead.

In early 2007, he still called KLCI to break 1200 in the next 2-3 years, he was dead wrong, the market surpassed his target right after his announcement. By mid of 2007, he called for 1500 to happen in next 8-9 months and revised to a new target: 2000 point for KLCI in the next 2-3 years. The market did break 1500.

He continued to make bullish call in early of 2008 right after the market topped out in October 2007 due to credit implosion. He was still expecting for 1600 to happen in next 8 - 9 months. He was of course wrong, you could lose 20% of your money bought at 1400 level and sold at 1150.

Just last week, 24/4/08, iCapital still think it will hit 1450 in next few weeks and breaking 2000 points in the next 2-3 years with a qualifier if Malaysia can show some sort of political stability.

Well as a whole, you have a chance of 33% of losing money and 67% chance of making money by listening to him. So far, he made his bottom call quite accurately. He made the right call in 2003 was the bottom but his March 2008 bottomed-out call will remain to be seen especially there were some bad calls recently. My advice is don't take my advice, you be the jury - think and decide whether you need to subscribe to his stock market newsletter.

Happy Labor Day!