Tuesday, September 30, 2008

The end of disinflation era, Part II

3. Disinflation cause by globalization is interrupted. We are going through a transition now. Following the argument of food and fuel inflations, China and India are no longer able to export deflation. Wages rise already putting pressure on inflations. Those of you running a China operations should understand this well, for RMB 20, your workers are willing to jump ship. You have been giving salary increments at least twice a year to retain your staffs. I was in Southern China recently and hearing many of operations begin to shift to Vietnam due to rising wages. The Chinese government already talking about linking roads to Indo-China, these smart Chinese leaders are seeing something and planning ahead.

4. Worldwide Central bankers are injecting liquidity to quell the threat going into a major slump. This will set a stage for commodities rally. We saw on week of September 18, The Fed, ECB, Bank of England, Swiss National Bank and Bank of Japan announced US $ 180 billion increased in their swap line to US $ 247 billion. Some of you may ask how the liquidity will flood the market? The answer is financial institutions are hoarding cash because they refuse to lend to each other and not trusting each other. When the situation normalizes, there are going to be tones of liquidity in the system.

With the potential additional US $ 700 billion from the US to remove illiquid and toxic assets from the market, boy this is going to be fun.

5. What the US has done will be a precedent to others. We now hear the UK lenders want the same thing – bailouts. Where do we draw the line? Bailouts are contagious!

I understand the argument of the house is on fire, you got to put it off first else everyone will turn into “char siew”, BBQ pork. But to rebuild the house will involve lengthy and painful process. Till then – be real careful with you asset allocations.

Monday, September 29, 2008

The end of disinflation era.....Part I

Those subscribe to theory of the end of disinflation is minority. The basic premise of arguments go something like these:-

1. The pressures on inflation are going to come from food and fuel. The basic facts remain the same despite of threat of global recession is getting more real. It does not matter whether we get it right or wrong. If no recession, we are more prosperous, then we have more money, then demand is going to pick up. Inflation will accelerate. If there is a recession, recession cannot go on forever, the train is going to wreck sooner or later - just delaying the pain only.

This is the most power fact we all need to remember - worldwide foodstuffs inventory drop to half and no significant supply is coming on stream. Take a look at this table.

Now you know why Jim Rogers continue to buy agriculture?

As many recalls, most of the CPI rise is coming from food and fuel. Food price is not going back-off in the long-term. These two devils were the same devils that causing sky-rocketed inflation havoc in the 70s.

The worldwide inflation on YoY change is quite telling -- no country can escape inflation when food and fuel rising prices hit the main streets. We already witnessing streets demonstration from Egypt to Indonesia.

The Fed said they understand more about inflation today compared to the past not letting longterm inflation expectations anchored. I am not exactly sure how he is going to "manipulate" masses to eliminate long-term inflation expectations. When demand exceeds supply, we are going to pay for it. This is Econ 101.

2. China factor is indeed a very powerful one. They are consuming significant of world's commodities - hard and soft. See chart. Consuming more than 20% of many of the world commodities it is not something we should take it lightly. Thank God they consume only 9% of the oil else this is going to put more pressure on us. This is the reason why I think we all should back-off a little from going long on oils. I don't think they are going to slow down their consumption significantly in the foreseeable future.

Saturday, September 27, 2008

Am I losing interest in Malaysian stocks?

I have been covering very little about Malaysian stocks lately, it is not that I lost interests in Malaysian stocks but the time has not really arrived yet. Many of the stocks are attractive but not sure whether it will get cheaper. Malaysian stocks will come back as I believe the commodity cycle is not over -- it is a matter of time, interest in plantations and O & G will be back. I will be back to cover Malaysian stocks when crude oil drop to around US $ 70 - 80/barrel. I believe, by that time, many of the commodity related stocks will reach quite pessimistic level.

IOI Corp for example, RM $ 3 - RM 3.10 will be a good entry point taking into consideration potential earnings to fall by about 30%. Let's wait for earnings report card for the next two quarters.

Parkson Holding Berhad is drown together with Hang Seng Index - could not even hold 23% retracement. If HSI could not bottom out, downside risks still exist - less than RM $3?

Click all images for larger and sharper image)

Those possibilities sound quite negatives and extremes but anything could happen. However, September and October will be a period of market bottom out, counter rally could happen but once it is fizzles out, be careful of new lows! Long-term buy-and-hold buyer needs to be careful for now. Traders with substantial cash in hand can afford to accumulate some and sell into strength.

Friday, September 26, 2008

Jim, what did you buy lately?

Jim Rogers appears on the Bloomberg TV. What did you buy lately? Well I am as confused like anybody else but I tell what I've done lately. I bought some agriculture, Chinese shares in Singapore, Hong Kong and Taiwan.

I covered my financial shares, I am not shorting Citibank, Fannie Mae, home builders, etc but I am still short investment banks. I bought airlines but not American airlines.

I am a long term bull for oil, oil is going go higher but it does not mean it can't go down by 40-50%, I am not going to sell oils.

Thursday, September 25, 2008

Government of Singapore Investment Fund Opens up a bit

Government of Singapore Investment Fund has more than US $ 100 billion, generating 5.8% average return for past two decades finally opens up a bit. The fund was set-up by Lee Kuan Yew since 1981 has been keeping a very tight lip but shed some lights to address some of the uneasiness of SWFs.

One of the very powerful trend to note is this :-

"(WSJ)Looking ahead, we see a more challenging investment environment than what we have seen since GIC's formation in 1981," Chief Investment Officer Ng Kok Song said. "The powerful trend of disinflation that propelled the global capital markets over 25 years seems to have ended."

The disclosures offered new details on what is considered one of the world's largest investors. GIC's first public annual report shows it has shifted away from fixed-income assets in recent years to focus on equity investments and alternative classes such as private equity and real estate. Fixed-income assets now make up about one-quarter of its portfolio, GIC said, compared with three-quarters 25 years ago.

Going forward, Mr. Ng said, the investment landscape will be burdened by financial firms as they deleverage, as well as rising costs of food and energy. However, domestic demand may be resilient in large developing economies.

Keyword: The end of disinflation. Translation: beginning of an inflation era.

Traditionally, companies with pricing power, properties, gold, (hard assets) will do well in the era of inflation era. So, there is no need to be so hardworking to follow on the proposed US $ 700 billion bailout as that is immaterial, the trend for inflation will be on uptrend though it can runs on up-and-down-path.

Will post more on this topic next week after I get my materials organized.

Wednesday, September 24, 2008

US Government biggest value investor?

Here's the deal, the US government has turned into the buyer of last resort with US 700 billion to 1 trillion in their briefcase. They have turned into the largest value investor, thinking buying assets on cheap. This will remove uncertainty from the market, and hoping it will recover, then they can sell at a profit. Then the US tax payers may make some money out of this, said Goldman Sachs Chief Economist Jim O'Neil. By taking aggressive steps will prevent the value to assets to continue to fall to worthless.

The proponents think this is similar to Swedish bailout. The taxpayers did make money at the end, so why not?

The opponents think since they may spend every penny that being approved to buy those toxic assets, the value of money will evaporate and eventually the Fed will have to print money - this will trigger tonnes of inflation and leading to devaluation of their currency since the deficit goes out of control.

Who is right? My bet -- opponents have higher probability to get it right. Look at this Case-Shiller 20-City index, it has not reverted to mean. It means, more to fall, the US government is trying to catch a falling knife. They are thinking with their mighty hands, they can stop the knife from falling. They are trying to manipulate market psychology -- hoping to get people to go long on housing.

Tuesday, September 23, 2008

How to invest in gold? Part II

Before you decide to invest in gold, there is something you should know. Gold is not a very great long term buy and hold asset. Between 1930 to present, gold rose from US $ 20.67 to US $ 850, annual compounded return of 4.88%. It will help to beat long term inflation rate but not a great return.

To bet on gold is betting on the Fed continue to increase money supply to a point trigger hyperinflation. It should happen in theoretical world but it they continue to manipulate the market, it may take a long time to happen -- so think carefully before you jump in. This is not a passive investment but if you buy gold between US $ 650 to US $ 800, downside is quite limited.

Once you have decided and if you have only about RM 2,000 - RM 3,000, you can open an account with Public Bank.

Buying and selling spread is about 3%, not a great way to trade but Ok as saving. As of 22 Sep 2008, Public Bank selling price per gm is 98.82 and buying price is RM 95.82. If you buy a minimum of 20 gms, it should cost you RM 1,976. What I like about this? Small capital and great way to invest in alternative investment and reduce your currency exposure.

I believe I have been spreading too much word of mouth for Public Bank which believe good products from good companies should be made known to many. Good luck.

Monday, September 22, 2008

How to invest in gold? Part 1

While I was on the plane, I almost did not believe what I read: US Treasuries bills, 3 month yield went to almost zero. Fear rules -- they don't even want to keep their money in the bank because they fear bank will bankrupt. No interest is OK as long as they can get back their money. Geez, what the hell is going on? We are talking about a very developed and most powerful nation in the world. A nation that envy of everyone and wish to model, what the hell is going on really?

(Financial Times)Senior Democrats signalled hard bargaining ahead on the Bush administration’s proposed $700bn bailout for the country’s financial institutions as officials met members of Congress over the weekend to seek bipartisan agreement on the package.

The plan to quell turmoil on the financial markets would allow the government to buy the toxic assets of any US institution for the next two years, raising the legal ceiling on the national debt from $10,600bn to $11,300bn.

This is clearly inflate or die kind of situation. What they have done is planting a seed of extreme inflationary environment to fight assets deflation. From historical perspective, this phenomenon is similar in the 1970s.

The US government was very reluctant to act in the 70s and essentially causing the inflation to go through the roof. Paul Volcker had to raise double digit interest to kill off the inflation in the early 80s. Gold went to US $ 2000 on inflation adjusted basis. While I agree that the inflation is at the cyclical peak due to weak global economy but the next up cycle is going to be very ugly, if you care to look into 2011 or 2012.

Can a small guy like us(shoe string budget) do something?

Saturday, September 20, 2008

Can you sleep at night?

There is no need to talk so much about this week. I have no idea yet. I assume it was a week full of twists and turns. Lehman Brother, a 100 plus year company, a company that Buffett once owned, is gone forever. I was wondering if Lehman was quick to admit they were full of shits and screamed for help, they probably will still be around today. In contrast, Bear Stern was quick to scream for help but Lehman was still in denial mood. When shit hits the fan - game over!. John Thain of Merill Lynch did the right thing too, very quick to recognize troubles and screamed for help as well.

It must be a nightmare for a lot of people but not me. I was traveling whole of this week and that was probably a blessing in disguise because I was spared from mental torture of looking at one day down 5%, the next day up 5% kind of things. I am still recovering from my trip exhaustion. Hoping to post more later when I am catching up with my readings. This kura-kura is really slow, isn't it? I am getting used to ignore the market noise, lightning fast will not make you money. Guessing how wrong the market can go wrong will allow us to make some money. Being slow will allow you to gain space and perspective and sleep well. If you cannot sleep well, sell it down to your sleeping level. Have a nice weekend.

Thursday, September 18, 2008

Lessons from Buffet surviving 70s-stagflation Part II

Part II - commmodities. Despite of violent corrections in commodity markets, he continues to scoop up steel stocks. They did produce handsome returns for him. He may observed that he picked up General Foods in anticipation of soft commodities to decline.

He held on to his commodity related stocks(Kaiser, Handy Harman, Cleveland-Cliffs, etc) despite of sharp corrections in late 70s into early 80s.

His star performers were GEICO and Washington Post accounted almost 50% of the unrealized gain.

He summed up nicely how he navigated the 70s in his 1976 letter to shareholders.

You will notice that our major equity holdings are relatively few. We select such investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business: (1) favorable long-term economic characteristics; (2) competent and honest management; (3) purchase price attractive when measured against the yardstick of value to a private owner; and (4) an industry with which we are familiar and whose long-term business characteristics we feel competent to judge. It is difficult to find investments meeting such a test, and that is one reason for our concentration of holdings. We simply can’t find one hundred different securities that conform to our investment requirements. However, we feel quite comfortable concentrating our holdings in the much smaller number that we do identify as attractive.

Our intention usually is to maintain equity positions for a long time, but sometimes we will make a purchase with a shorter expected time horizon such as Kaiser Industries. Here a distribution of securities and cash from the parent company is expected to be initiated in 1977. Purchases were made in 1976 after the announcement of the distribution plan by Kaiser management.

In short, he went for finance, service and commodity stocks to fight inflation and slow growth. He knows consumers will eventually spend money when recessions are over and commodity is a good hedge against inflation.

Tuesday, September 16, 2008

Lessons from Buffet surviving 70s -- Stagflation Part I

1970s is probably one of the toughest market to navigate with sky high inflation and a period of recessions.

In the late 60s to early 70s, while the market was complacent - enjoying daily gains and partying - not knowing a big bear market will broke out in 2-3 years time, he buried himself in bonds. He wrote to his shareholders in 1972.

We were most fortunate to experience dramatic gains in premium volume from 1969 to 1971 coincidental with virtually record-high interest rates. Large amounts of investable funds were thus received at a time when they could be put to highly advantageous use. Most of these funds were placed in tax-exempt bonds and our investment income, which has increased from $2,025,201 in 1969 to $6,755,242 in 1972, is subject to a low effective tax rate.

Our bond portfolio possesses unusually good call protection, and we will benefit for many years to come from the high average yield of the present portfolio. The lack of current premium growth, however, will moderate substantially the growth in investment income during the next several years.

In 1973-1974 bear market, stock market declined by almost 50%. Buffet has unrealized loss quoted securities of US $ 17 million at the end of 1974 and realized loss of US $ 3 million in 1975. I could not find what was his total investment as he did not state in his letter to his shareholders. I estimated he could have lost about 22% but still beating the market handily. I hope you find some consolations that even the best will lose money in extreme bear market.

He purchased a large block of Washington Post in 1974. I will not elaborate extensively as you can find this story in a lot of books. He stayed pretty defensive by buying California Water Service Company, retailers and aluminium company Kaiser Industries Inc and Kaiser Aluminium & Chemical Inc.

I noticed though has has been buying equities, his positions were built up gradually with the market recovery.

Year / Cost / market value
1976 / 75 million / -
1977 / 106 million / 181 million
1978 / 133 million / 220 million
1979 / 325 million / 525 million
1980 / 351 million / 639 million

Sunday, September 14, 2008

Are you giving up commodities?

It's time for me to update my thoughts on commodities especially all the commodities are plunging. Crude oils take a hard hit, plunged to US $ 100 from all time high of US $ 147, no matter what threats you are talking about, hurricance, war, etc -- gravity rules.

CFTC released another report on Sept 11 blaming on index speculators.

The main argument was
$161 billion net notional value of commodity index business in U.S. markets on June 30, 2008, about 24 percent was held by ―index funds, about 42 percent was held by ―institutional investors, about 9 percent was held by ―sovereign wealth funds, and about 25 percent was held by ―other traders. The ―other category is largely made up of retail investors holding ETFs, ETNs, and similar instruments that are publicly traded.

While the net notional value of commodity index business in NYMEX WTI crude oil increased sharply over the 6-month period ending on June 30, 2008—by about 30 percent, the actual numbers of equivalent long futures contracts declined over that same period by about 11 percent. In other words, the sharp rise in the net notional value of commodity index business in crude oil futures appears to be due to an appreciation of the value of existing investments caused by the rise in crude oil prices and not the result of more money flowing into commodity index trading. This is illustrated in the following chart:

The recent sharp rise of commodity price is not something new. Look at this chart, there was a sharp rise in 1971 and subsequently continue to rise before reaching a peak in 1980. We got a big bang of 3.5X increased from 70s!!! Was there an index speculator then? NONE.

Generally commodity is correlated with economic outlook. In the 70s for example, when the annual % decline in 30 year Treasury bond lead to decline of commodity price. This is consistent with the expectation of poorer economic outlook.

In the commodity recession cycle from 1980 to 2000, you may observe a similar trend CRB is generally correlated with % changes of 30 year treasury bond yield.

The last chart that I want to show you is the last 10 years trend of long term bond yield and commodity. 30 year Treasury bond yield annual % change has been plunging since last 2006 which coincides with the US housing bubble bust, the rate of change in the CRB index has been staying high up but already turn south now to close gap with 30 year T-bond.

You may also note that commodity price is generally peaking before the headline CPI . With the recent plunging of commodity price, I am in opinion that we have reached a cyclical peak of inflation. Rates cut by central bankers will commence soon, when the market is finally get round this point, equities market will start to rally.

Don't fight the downtrend of commodity price now. When it reaches the bottom, it will create good trading opportunity like steel, oil and gas, plantation stocks but I will let the excesses to continue to shed.

Commodities and stocks bear market definition are different. 20% decline from top is a bear market for stocks. 50% decline from top is a correction in commodities world. Don't touch it if you don't have a stomach for it.

I have been wondering how did Warren Buffett navigated even more brutal environment from 1970 - 1980. I will be back, stay-tuned.

(click all images for larger and sharper image)

Ostrich effects

I'm always love to read Jason Zweigh column. This week he wrote about ostrich effects, no guts to face the fact their investments have gone down. He gives some good advice why you should not be running away and take steps to deal with it.

Experiments by psychologist Paul Andreassen have shown that the more news that investors get on their holdings, the more they trade and the lower the returns they earn. When your head is stuck in the sand, you can't open your mouth to trade.

But becoming completely information-averse isn't a good idea, either. Here are some prudent actions you can take when you would rather act like an ostrich.

Look ahead. Use your email or calendar software to send yourself a future reminder. Commit yourself to check the value of your accounts, not today, but one week or one month from now. When that day arrives, rebalance your portfolio, selling a portion of those assets that have gone up and buying a bit of those that have gone down. Also check whether you hold any stocks that you would not buy more of at their latest prices; sell them for a loss that you may use to reduce your taxable income.

Use the news. You should not, of course, stop reading this estimable newspaper. For an intelligent investor looking for timely buy ideas, the New Highs and Lows table in the Money & Investing section is alone worth the price of the paper; this Thursday, it offered a bumper crop of 656 new lows.

Be contrary. When the headlines are overwhelmingly negative, as they are now, the market tends to feel riskier than it actually is. (The time to worry is when no one seems worried, not when everyone does.) Take a few moments to go back in market history and see how stocks did after other periods of despondency like 2002, 1998, 1991, 1987, 1982, 1974 and so on. If history is any guide, your inclination to act like an ostrich is a strong indication that the market is about to turn into a phoenix.

Saturday, September 13, 2008

Don't call the bluff

Please don't call the bluff when you can't afford. The government is finally eating the humble pie by discontinue windfall tax on IPPs after seeing billion of Ringgit flowing out from Malaysian bonds market and equities shed a few billions of market capitalization as well. It has domino effects not only higher borrowing cost hit IPPs but the whole Malaysian bonds market as well. Malaysian Government bonds 10 year yield was up from mid-May 3.85% to 6.45% before easing to 4.85% on Thursday(after government announcement of scrapping the tax).

With high borrowing cost, companies refuse to issue bonds that lead to liquidity contraction. Broader economy will suffer. It's a evil vicious cycle will just feed onto itself, don't play play.

Now we all know how difficult it is to make structural change when this IPP agreement was drawn up many years ago. U turn policy for this windfall tax has far reaching implications. For example, I doubt the government has strong will to reduce petrol subsidy as well. If they continue to slash price at the pumps, we can expect inflation to be suppressed again. I am also doubting we can reverse many of bad agreements and policies that being drawn up by the previous and present administration.

At the end of the day, we are still living with subsidy - living with status quo. On the political front, the government is using ISA again. Sigh....................

Friday, September 12, 2008

Carry Trade Unwinding

What a memorable day of Sept 11, 2008. I saw the whole world is crying, shedding red tears on their equities board. Then I remember I saw Jim Rogers on the Bloomberg TV, this out-spoken old man saying he is taking advantage of the victim of carry trade.

Then I ran some charts on Japanese Yen against some high yield currencies like New Zealand, Australia and Euros. This is clearly an unwinding of trade carry that ripples through the equities market. When New Zealand central bank cut 0.5% to ward off recession, this triggered and confirmed the global economy slowdown. This will diminish growth gap between the rest of the world and the US or Japan. They are rushing to sell high yield currencies and repay their Japanese loan.

The market is the process of pricing a global slow-down. I am not sure what will be the next thing that the market needs to re-price. I think you may notice my tone has changed considerably compared to beginning of the year. I got many of the things right and luckily did not put in more money after June. This has saved me a lot of money realizing I don't have to do too many smart things but to avoid doing stupid things. Have a nice weekend.

Thursday, September 11, 2008

China record surplus of about US 29 billion

Despite all the gloom and doom, China surplus swells to 29 billion. Export is still humming but many will be cautious.

BEIJING - China posted a record trade surplus of about US$28.7 billion in August, according to calculations based on partial figures issued by the customs administration on Wednesday.

Economists had expected a US$23.5 billion surplus.

Customs said exports in August were US$134.87 billion, up 21.1 per cent from a year earlier. Imports were US$106.18 billion, up 23.1 per cent from a year earlier.

The surplus for the first eight months was US$151.99 billion.

China had a trade surplus of US$25.28 billion in July and US$25 billion in August 2007.

August's reading took the rolling 12-month trade surplus to about US$253.6 billion, compared with US$249.7 billion in July.

The European Union remained China's largest trading partner with two-way trade up 26.9 per cent in the first eight months.

Trade with the United States, China's No 2 trade partner, was up 13.3 per cent in the first eight months, customs said. -- REUTERS

China Aug CPI, PPI and Fixed Asset Investment

Great relief on CPI, fell to 14 month low 4.9%, fixed asset investment is still robust but PPI is still putting pressure -- stubbornly high at 10%. This is still not a all clear sign the Chinese government will ease their monetary policy. Will have to watch their GDP growth, any sign of weakening to 8-9% will trigger some easing.

BEIJING - China's annual consumer price inflation fell to a 14-month low of 4.9 per cent in August from 6.3 per cent in July, the National Bureau of Statistics (NBS) said on Wednesday.

It was the lowest reading since 4.4 per cent in June 2007.

Economists had expected a rate of 5.3 per cent.

Food prices, which make up a third of the consumer basket, rose 10.3 per cent in August from a year earlier, compared with an increase of 14.4 per cent in July.

Non-food prices rose 2.1 per cent in August from a year earlier, the same pace as in the 12 months to July.

The CPI in the first eight months rose 7.3 per cent from the same period a year earlier.

On a non-seasonally adjusted basis, the CPI fell 0.1 per cent in August from July.

Producer price index
Annual producer price inflation rose to 10.1 per cent in August from 10.0 per cent in July, the NBS said.

Economists had expected a rate of 9.8 per cent.

August's reading was the highest since producer prices rose by 14.9 per cent in 1995. The government did not compile a monthly PPI until 2001.

Food prices rose 7.4 per cent in August from a year earlier, while prices of raw materials, fuel and power were up 15.3 per cent.

The PPI in the first eight months of 2008 rose 8.2 per cent.

Urban fixed asset investment
Urban fixed-asset investment rose 27.4 per cent in the first eight months of 2008 from a year earlier, compared with 27.3 per cent growth in the first seven months, the NBS said.

Economists had expected a 27.2 per cent rise .

Urban investment covers things such as roads, power plants and apartment buildings. Figures on overall fixed-asset investment are released quarterly.

The bureau did not issue a figure for August alone. -- REUTERS

Buffett: Never mis-price risk!

This is another classic about W. Buffett. He will never under-price risk, now cutting back insuring bank deposits in event of bankruptcy. He will cut back under-writing capacity when risk does not match with reward.

Funnily, after Freddie and Fannie bailed out, people are more nervous about the financial crisis. They should be nervous, it is perfectly legitimate to get nervous. Look at these big banks, risky assets are almost double of shareholder equity.

After Katrina, when everyone was so fearful, W Buffett insured super-cat aggressively by betting the lightning will never strike twice. He does think the lightning will continue to strike in this financial tsunami -- more small banks will fail -- banks are afraid to borrow and customers are afraid to deposit, liquidity crunch is not getting any better despite of three bail out so far.

Warren Buffett's Berkshire Hathaway Inc. has told one of its subsidiaries to stop insuring bank deposits above the amount guaranteed by the federal government, dealing a fresh blow to the financial-services industry as it tries to assuage anxious customers.

The subsidiary, Kansas Bankers Surety Co., is notifying about 1,500 banks in more than 30 states that it will no longer offer a program called "bank deposit guaranty bonds." KBS is an 18-employee subsidiary of Berkshire Hathaway, according to the parent firm's 2007 annual report. It is one of a handful of firms that offer such insurance, a big selling point for banks trying to attract wealthy customers.

Two people briefed on the matter said the order was made Monday by Mr. Buffett, Berkshire Hathaway's chief executive. Chuck Towle, a senior vice president at KBS, declined to comment on why his firm was leaving the business. "We have decided to do so," he said. "We'll work with each individual bank and work it out with them."

Mr. Towle wouldn't confirm or deny Mr. Buffett's involvement, calling it "strictly rumor." Mr. Buffett declined to comment.

Eleven banks have failed this year. Seven have fallen since July 11, a concentration not seen since the savings-and-loan crisis of the late 1980s and early 1990s. The Federal Deposit Insurance Corp. backs deposits of as much as $100,000 on most accounts or $250,000 on some retirement accounts.

That Mr. Buffett is withdrawing from this insurance market is an indicator of how many in the industry are worried about future bank failures.

In some cases, companies that acquire failed banks will buy all the deposits, making the government insurance limits irrelevant.

But customers with large deposits can lose money if the acquiring bank doesn't take on the extra deposits. When Columbian Bank & Trust Co., of Topeka, Kan., failed Aug. 22, there were about 610 accounts with $46 million total that potentially exceeded government insurance limits, the FDIC said.

KBS insured some deposits at this bank and lost money in the failure, people familiar with the matter said. Mr. Towle declined to comment on whether the bank was a customer.

Rodney Sargent, CEO of BancInsure Inc., a KBS competitor, said many firms are expected to compete for KBS's customers because the company has a large network across the country.

Tuesday, September 9, 2008

2Q in-line but no one cares

Good, we are finally getting into indifference, "tidak apa", "mai phen rai" attitude.

(TheEdgeDaily)2Q08 earnings reporting ended with no major surprises. It may have come a tad short of consensus’ more bullish numbers. For Citi Investment Research, we have been cutting our numbers since 4Q07. About 71% of companies met expectations and only 10% exceeded.

Will need to review consensus numbers over the weekend. Are they still on the optimistic side after cutting their numbers?

Freddie and Fannie give new hope to equities?

CNN Money brings you the Freddie and Fannie bailout.
NEW YORK (CNNMoney.com) -- Federal officials on Sunday unveiled an extraordinary takeover of Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back.

The move, which extends as much as $200 billion in Treasury support to the two companies, marks Washington's most dramatic attempt yet to shore up the nation's housing market, which is suffering from record foreclosures and falling prices.

The sweeping plan, announced by Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency, places the two companies into a "conservatorship" to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.

"A failure [of Fannie and Freddie] would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," Paulson said at a press conference in Washington. "And a failure would be harmful to economic growth and job creation."

Asian stock markets started the week with a bang but KLSE was a bit less impressive. Does the markets have more legs to run -- or -- just "hangat hangat tahi ayam" rally?

KBW Bank Index has been recovering since July 2008. KBW Bank sector is a capitalization-weighted index composed of 24 geographically diverse stocks representing national money center banks and leading regional institutions.

The market perhaps already anticipated both of these giants will be nationalized by judging on the price action two months ago. Bill Gross of Pimco has been calling the bluff on Paulson two months ago.

Is this a market event or an economic event? If this is a market event, then confidence recovery - lending to each other again - will lead to loan growth and spurs growth. If this is an economic event, then we need a bit longer for recovery for people to price growth in the stock price.

S & P 500 is still expensive(market goes down but PE goes up not a good sign) and it will be difficult to have an overall rally. However, stable market will give chance to oversold stocks to recover.

Monday, September 8, 2008

EPF Shocker

I think I did not over exaggerate EPF did not investing its members money purely based on commercial basis. Look at the companies they have large positions. MBSB? MRCB? DRB, you don't need a genius to figure out these are politically linked companies.

Based on the data, are you convinced EPF invested in highest possible qualities companies? Where are IOI Corp, Public Bank, etc? I mean in large position.

Second bullet, 2006 quoted securities of 44 billion but has impairment provision of 2.7 billion or 6%. 2005 also has about same percentage. Bursa Malaysia was doing pretty good for that two years, why???

Third bullet, invested in unquoted securities in 2006 at cost of 514 million but dimunution provision is almost 135 million or 26% at risk!

If Khazanah has 50-70 billion portfolio generating 17% return from 2005 to 2006, why can't EPF? If ASB churning out 8-10% ROI, again why can't EPF? I don't even want to go near there........have the highest qualities companies gone to that two funds?

Some other interesting behavior of members withdrawal, most like to buy high-sell low. More money pouring into stock market during rising market.

Last chart for your reference on EPF historical dividend payout since 1952.

(Click images for larger and sharper image)

Saturday, September 6, 2008


SWF has been gaining a lot of attentions lately. Are they commercially or politically driven? Blogger S. Dali wrote a piece about SWF appears in the Star newspaper today. He opined SWF acts as a new lender of last resort and stabilizing force in the financial markets. That does not sound like not many of them operate purely on commercial basis.

Let’s talk something similar in nature, EPF the institution that managing our hard earned money. EPF ranked 8th largest fund of its kind in the world with US $ 94 billions or RM 320 billion assets under management in Q1 2008. Are they commercially or politically (nations development) driven? They allocated about 32% of their assets in Malaysian Government Securities, 39% in Bonds and loans, 20% equities and 9% others. Essentially, almost 70% plus invested in fixed-income securities.

Average dividend has been around 4-5% per annum. With that kind of asset allocation, we should actually expect them to deliver around 6-7% in the long run. They are under-performing in my opinion. Why? fixed income market should generate 5-6% while equities and others with passive investment strategies should yield around 9-10% per annum. Given ratio of 70% fixed income and 30% on equities and others, returns should be 6-7%.

Their elephant size fund should not be an excuse of non-performance. You know where I am leading to, they could be bailing out some companies or financing low return projects.

We have a choice whether we should keep complaining or do something. If we decided to do something, make sure we have enough discipline. Most of people withdraw their money when the market is at the peak and essentially destroying their wealth – buy high sell low. We may end up getting worse than EPF 4-5% return.

If I decided to withdraw, I will go for equities funds to cut fixed-income exposure. There is no point going for money market or bond funds as EPF investment in MGS is quite conservative and safe. No point paying your agent and fund manager money for nothing.

The other consideration is loading fees of 5.5 – 6.5%, it will cost you 1.1% - 1.3% per year if you invested for 5 years but 0.55% - 0.65% per year if you stay invested for 10 years. This is not counting your annual fund management fees. Picking a wrong fund manager will destroy your wealth. You got to evaluate risk-reward hurdle, I will take it if a fund manager has a track record of generating at least 9-10% annual compounding return.

Friday, September 5, 2008

Hedge Funds Returns

Hedge funds supposed to deliver in bad times and good times by their ability to go long or short. In reality, not many winners. I spent some time look at the winners background to understand why they win.

1. Paulson & Co - they detected sub-prime was going to blow up in early 2007 and taken massive short positions. Now bet on corporate debt to blow up.

2. Breven Howard - specializing in global macro investing by betting on interest rates and currencies.

3. D.E Shaw - Quantitative investing with emphasis on statistical arbitrage.

4. Bridgewater Associates - Diversified Alpha. Diversified implies almost into everything from bonds, inflation-linked bonds, equities, commodities.

5. Winton Capital - Emphasize on trend following

6. Caxton - Global macro strategy

7. Tudor Investment - Emphasize on trend following

8. SAC Capital - A trend follower.

Why they win ? They got the big picture right - sub-prime, inflation and commodities - and have taken courages moves. Only a very brave one can be a short-seller because you are really going against the whole world, especially during red hot 2006 and 1H2007. Not many Quant makes it. Three trend followers make it are impressive. Macro guys riding on trend is similar to trend following except there could be some slight variations in their executions.

Hedge-fund managers with true ability to go long/short on the right big picture are a very rare breed.

Thursday, September 4, 2008

Worst monthly return for DOW - September !

A Chart speaks a thousand pictures. Have a nice day!

Wednesday, September 3, 2008

Asian currencies and stock markets hammered

I think the best thing to do now will be switching off the notebook and head to Batu Ferringhi beach. I suspect even the most optimistic person will also be infected by strings of bad news. Take a look at this from the WSJ:

1. The Korea Composite Stock Price Index, or Kospi, dropped 4.1% to 1414.43, its lowest closing level since March 14, 2007, and the steepest one-day percentage decline since Jan. 22. The index has lost a quarter of its value since its highest close so far in 2008, in mid May.

2. Prime Minister Yasuo Fukuda abruptly resigned Monday less than a year after taking office, prolonging a period of political deadlock as the world's second-largest economy flirts with recession.

3. The city's(Hong Kong italic mine) private-sector economy shrank for the second consecutive month in August, hitting its lowest level since late 2004 as output fell at its fastest rate in more than five years, Markit Group Ltd., compiler of a purchasing managers index, said Monday.

The Hong Kong PMI fell to 48.5 in August from 49.4 in July, Markit Group said. August's PMI level was the lowest since the 48.4 reading in December 2004.

4. Value investors are known for buying low and selling high, but some big-name mutual-fund managers who thought they bought low are now selling far lower and are posting big losses because of the credit crisis.

So Legg Mason's Bill Miller, John Rogers at Ariel Investments and Oakmark's Bill Nygren and other value managers are unloading some traditional holdings that have disappointed.

"The sudden downside moves are something I've never seen before" and are difficult "to research and predict," says Mr. Rogers, Ariel's chairman. According to fund tracker Morningstar Inc., large-stock value funds are down 11.8% overall this year, worse than the market. The Standard & Poor's 500-stock index's total return is off 10.2%.

You have leaders resigning, foreign exchange reserves declining, Asian economy slowing down and even big value managers are throwing towels. Gloomy, huh?

If Asian has been supplying credits to put off some of the fire in the US and Europe credit crunch for a while, what will happen if these credits begin to disappear as their foreign exchange reserves are drying up – defending currencies, slower export and etc ? Tightening of global liquidity will be negative for all asset class???


(Business Times) ADBI dean Masahiro Kawai, who told the conference that 'global financial turmoil may continue longer than hoped for', suggested to BT that a flight from Asian property market investment by banks, investment funds and various stock market vehicles could damage these institutions as the property boom unwinds.

The warnings came as a sobering counter to the widely held view that Asian markets and institutions are likely to escape relatively unscathed from the sub-prime credit crunch that has wrought havoc upon major investment banks and others in the US and Europe. The theory of a 'decoupling' of Asian economies from outside problems has similarly been shattered by recent events.

Recent weeks have seen the collapse of a series of property development firms in Japan as US and other investors pulled funds from them. The most recent collapse - developer Urban Corp - marked Japan's biggest corporate bankruptcy this year and the implication of yesterday's warning at the conference was that firms elsewhere in Asia could be facing a similar fate.

Mr Chung told BT that property markets in China and Vietnam are especially vulnerable, while South Korea's property market is also facing problems along with those of other East Asian economies. 'There will be another round of credit crisis in developing economies', as money is 'pulled', he said. Foreign direct investment as well as portfolio investment in many Asian economies has been directed into property, added Mr Chung, who is now chairman of NEAR.

The cause of the US dollar's strength in recent weeks has been partly to do with the repatriation of investment funds from overseas, and this process could accelerate now as a fresh credit crunch threatens, in spite of injections of financial liquidity by the US Federal Reserve, Mr Chung commented. 'This will lead to a further correction in asset markets' in Asia and elsewhere, he suggested.

'We have been planting the seeds of the current crisis for many years,' said Mr Chung, who noted that Asia had supplied much of the financial liquidity that fed asset bubbles in the US and elsewhere. Now that US credit markets have seized up, the Fed is having to pump liquidity but this 'can only jeopardise the anchor position of the dollar' in global financial markets.

Is this dawn or mid-night?

Tuesday, September 2, 2008

Portfolio Update - Sept 08

Turtle received $ 888 for the month of September.

I sometimes wonder whether people that went through the darkest days in their life will value life, money and margin of safety principle much better than those with smooth sailing in their whole life.

George Soros for example. "I have touched bottom," he told himself, "and I am bound to rise." He was poor, broke and constantly exposed to threats during era of Nazi when he was young.

Benjamin Graham, started fund management in 1926 during irrational exuberance years but 1929 crashed brought him down. I supposed he value margin of safety so much because it was personal, he got wiped out. His wife went back to work as a dance teacher, can you imagine that?

The famous Vanguard founder, John Bogle, experienced humiliated experience as well. He founded the company in 1975 right after Go-Go funds era went bust. Go-Go, keep pushing - up of course. Go-Go funds return spectacularly from 1965 - 1968 with cumulative 40% plus within a short span of time. Those funds were invested in growth stocks like hot technology stocks. Assets went from 43 millions to 2.3 billions - Wow!. The funds then collapsed to 660 million from 1969 to 1974. A group of fund managers came together had soul searching sessions and finally found Index low cost fund was the way to go.

Stay defensive -- no need real expensive experience to learn the lesson of don't lose money big time.