Wednesday, December 31, 2008

Turtle Portfolio Update-2008 Closing

(click to enlarge image)
KLCI closed year 2008 down by 0.55%, 876.75. For the first year, Turtle is using KLCI opening based on the date of the portfolio started, 1417. Measurement of progress is kind of difficult as there is a constant $888 flow in monthly. I will take this a rough indication of Turtle net worth growth or Book Value in Buffett's universe. For 2008, Turtle portfolio has a 19% loss vs KLCI 38% loss. The blow is not that bad for a small guy that started investing this year as the base is relatively small and spread out the investment timing. For those has been investing and accumulating for years, if they did not manage to get out in time by around February 2008, the blow could be pretty severe - a potential loss of 40%. This bring home two points: a small guy has not much to loose but big guys who do not pay attention to market timing at top will suffer much greater damage to their net worth in 2008.

As private investor, I like the way Jim Rogers explained how he measured his performance when he appeared on the TV. I don't know, I have no investment committee to answer. All I know is I still have money to pay my bills and my holdings are fundamentally unimpaired. Cheers.

Monday, December 29, 2008

Good Bye 2008, Welcome 2009, Part I

I finally got permission to spend some time blogging in the midst of vacations.

2008 worldwide stock markets suffer decline of 40% or more is not something new, the rate of decline is something new. How can we suffered that kind of steep losses in less than 1 year? The demised of Lehman Brother, in my opinion, was the straw that broke the camel's back. That was the trigger of unsystematic/chaotic deleveraging unwinding that lead to forced liquidation from stocks, bonds, commodities to almost everything under the sun. That scared hell a lot out of governments around the world, they immediately took a stance of over reacting rather than sit back and relax to let the market sort out themselves. They competing for zero interest rate and announced humongous fiscal stimulus.

To those who has been very hardworking reading all over the Internet plus your "secret counsel sources", you will not find anything new in this summary. The themes are the same.

1. It is going to be government led economic economic recovery and NOT consumer led recovery. Spending is going into infrastructure, education, energy efficiency projects and etc. Trillions of dollars are in the pipeline. Good bye iPOD, cheap toys, camcorder, plasma TV, etc.

2. Low interest rates to encourage people to take risk again rather than benefiting the mattress manufacturers. But I doubt carry trade will resume anytime soon.

3. Competitive devaluation of currencies against each other. It is going to be a reverse beauty contest - nobody wants to be the Miss Universe. I would think currency market is going to be volatiles. I will simply avoid this area in order not to be caught bare-footed.

4. The big word of "Quantitative Easing" simply means "turning on the printing press", flood the market with liquidity and flare up the inflation to fight deflation. The Fed says buy the damn long term treasury to bring down the long term yield. Most of the people willing to chase after low yield 20-30 years bond is telling us they believe in deflation will last longer than most of us think or to bet the FED will be the greater fool(buy at higher price still). To borrow PIMCO, the stock market is pricing in a recession, the bond market is pricing in a depression. I can tell you that they are wrong! Short Long Term Treasury and buy GOLD.

5. Quantitative easing is creating a long term bond bubble, when deflates - it will be good news to equities and high risk assets but bad news for mortgage market - rising yield = rising long term borrowing costs. The Japanese was doing the same thing, when BOJ signaled the rate was too low in 2003, Nikkei 225 jumped 47 % from 7600+ to 11,000+. So it's a catch 22.

6. According to Fortune magazine, the housing pricing is still going to fall in 2009 by 15-20% for areas like L.A., Miami but it will stabilize by 2010.

7. Economy and financial markets must be distinguished. Most of the people anticipate a big rebound despite of anticipating more bad economic news - easing VIX ( close to 40% off from 80++), attractive tailing valuation, record cash level, etc.

8. Credit stress and confusing demand destruction create distortions in long term commodities supply. Farmers can't get credit to buy fertilizers, miners are closing mining and shippers got grounded(tight credit is one of the reasons). When demand returns, it will be sellers market.

9. Malaysia E & E sector will be affected. The good news is foreign workers will go first, less social problem but we still going to be affected somewhat. For example Digi, eggs manufacturers and etc will find themselves losing some revenue. Those crossing Singapore daily surely already find themselves out of jobs.

10. Lower oil price, lower commodities prices, shrinking corporate profits(domestic and overseas derrived) mean lower government revenue(taxes). It will be a challenge for the government to stretch their fiscal position. We have been running deficits during the commodities boom and it will get worse while waiting for recovery.

My biggest fear is government is still very complacent underestimating how bad things going to get when developed countries consumers reduce more spending. They are betting on us to spend our EPF money, sorry, many people have signed up paper asking to keep their contribution status quo - higher disposal income??, out you go. Equities and properties markets are not helping either(I guess I don't have to elaborate more). If the government wants to spend, looks like they either have to borrow money and live with higher deficits. Read in between the lines, higher future borrowing costs. Denial to keep confidence high while you have a back up plan is all right with us but what if they don't? That is the story of another year - 2009.

Friday, December 19, 2008

Christmas reflections

It's appraching year end, about the right time to examine and do reflections. As Socrates puts it:

"An unexamined life is not worth living"

What have I learned in 2008?

(i) I learned to give. Give my time and God given talents to analyze "stuffs" to those I have not met. Freely I've received, freely give so to speak.

(ii) I have no $ 30 billion to give away like what Buffett did in 2006. One thing I have learned from him, if you think you can compound the money, it will be more beneficial to give it away later. The question is will you keep the promise? W Buffett is such a man of his words. That's why no matter what happens to W. Buffett or Berkshire Hathaway, he will always be my hero. He will always be a working class hero. A confession to make, I do own Berkshire Hathaway and I will keep it forever even the value go down to zero for generations to come. This is the only exception I made I will not sell regardless of fundamentals. Don't get me wrong, he did a superb job managing every dollar I put in his company.

(iii) I'm now know how it is feels like managing money when everyone is watching you. Do you remember the day I bought iCapital again when it hit $ 1.20 for Turtle Portfolio? On the same day, I bought Parkson at $ 2.76 on my personal account. Parkson appreciated almost more than 40% but iCapital rose approximately 13%. I was trying to avoid further public humiliation so I avoided pain by taking a safer route. Now I know why fund managers performance more likely than not - AVERAGE.

All along I've been playing on a lone hand. Never tell anyone, not even close friends about my investment operations. I can think and act independently without giving in to peer pressures. This is what Buffet said, a successful investor needs to resist Institutional Imperatives. Sorry folks, I will not expound Instituitional Imperatives here, go read Warren Buffet essays.

I agree with Soros, be quiet and speculate. I will be back publishing my thoughts on 31 December 2008.

Wishing all a Merry Christmas and happy holidays!

Turtle receives dividend

Just updating. Turtle receives $ 25 dividend from Parkson.

Thursday, December 18, 2008

Hussman Commentary

Beside reading Bill Gross commentary, Hussman commentary is one of my very regular outlets. I believe he described the best about phases of bear market. I will make way and let him speak today. Go ahead, Hussman. The audience is all yours.

In the 11 trading sessions from November 20 to December 8, the S&P 500 gained 20.9% based on end-of-day closing values. It certainly has not felt as if the market enjoyed an advance in excess of 20% from its November low to last Monday's close, but it has been a material gain (from which some retracement is quite possible).

I continue to view the market as undervalued, but clearly 20% less so than a few weeks ago. Of course, a 20% difference is material. While our investment stance remains modestly constructive on the basis of valuation, we have somewhat less exposure to market fluctuations than we had a couple of weeks ago when prices were extraordinarily compressed. What bothers me about the recent rebound is the tepid volume and general lack of leadership. We certainly don't observe market action from any industry group that reveals investor expectations for an economic recovery. The advance we've seen is better characterized as a short squeeze, and a period where investors have “stepped back” from extreme panic, rather than something that reflects investors “looking across the valley to the eventual recovery.”

Our early measures of market action turned favorable a couple of weeks ago, allowing us to participate in a good portion of the recent advance, but those early measures are somewhat demanding in requiring follow-through from wider measures of breadth, trading volume, leadership and other factors. It's still possible that the market will recruit that evidence, but every session that passes without it makes us more skeptical about the tolerance of investors for risk. Our investment strategy is to always align our investment positions with the evidence available from valuations and market action, without forecasting where the market is headed, or how long our investment position will be constructive or defensive. Our discipline is to change our investment positions as the evidence changes (or fails to change as much as we need in order to maintain a constructive position).

My guess, and it's only a guess, is that the general tenor of the market may remain tepidly positive for a few more weeks, but that we will ultimately observe another frightening leg down in the first part of next year – possibly to re-test the November lows, possibly to new lows, depending on the evolution of economic conditions. The problem isn't that stocks are expensive – they're not. The problem is that the U.S. economy will probably not see the beginnings of a recovery until the second half of 2009, and while we've seen a good deal of fear, the stock market tends to go through a great deal of sideways action after panics like we've observed. It's likely that stocks will trade in a very wide 25-35% range for months. We have to be particularly observant as stocks approach the higher end of that range.

Bear markets tend to experience a series of separate lows on what I'd call recognition, fear, and revulsion. The first selloff of a bear market is on “recognition” – the growing awareness among investors that “boom” economic conditions are in question. Investors generally continue to deny the likelihood of a bear market or a recession, so the phrase “healthy correction” usually comes up a lot. Unlike true “healthy corrections,” however, these periods tend to begin from untenable valuations, overbought conditions, generally rising interest rates, and deteriorating market internals.

Strong intermittent advances are typical during bear markets, and can often achieve gains of 20% as we've seen in recent weeks, and sometimes substantially more. But the very existence of bear market rallies can be a problem for investors, because they clear the way for fresh weakness. The scariest declines in bear markets are typically the ones when investors think they are making progress and recovering their losses, only to see stocks go into a new free-fall.

The “fear” lows in a bear market are probably the most variable because they are the most tied to actual economic news and events. These lows are generally associated with distinct negative developments in earnings, the economy, or in 2001 for example, world events. The fear-type lows are damaging to the long-term discipline of many investors, because the negative news encourages them to question the viability of the economy itself. In 2001, the idea that “nothing will ever be the same” permeated discussions about the economy and investing, much like it did in 1982 and much like it does now.

Those “fear” lows are typically followed by powerful bear market rallies, which then clear the way for fresh declines. My impression that investors experience such declines as if they are additional major losses, even if they result in only modest new lows. In other words, if the market declines by 20%, followed by a 15% advance, and then by another 20% decline, the second drop may be experienced with the same pain as the first one was, even though it's little more than a retracement.

That cycle of decline, followed by hope, followed by fresh losses, is really what ultimately puts a final low in place. The final decline of a bear market tends to be based on “revulsion” – a growing impatience among investors who conclude that stocks are simply bad investments, that the economy will continue to languish, and that nothing will work to help it recover. Revulsion is not based so much on fear or panic, but instead on despair and disillusionment. In a very real sense, investors abandon stocks at the end of a bear market because stocks have repeatedly proved themselves to be unreliable and disappointing.

As it happens, that sort of revulsion can be very helpful to investors who pay attention to market action. Unlike panic lows based on indiscriminate selling, which generally characterize lows that occur within a bear market, the final lows of a bear market tend to exhibit a lot of “positive divergences.” Though some of the major indices may register new lows, it's usually the case that not all of them do. Unlike earlier lows, the final lows tend to be accompanied not by a spike in trading volume, but by diminished, almost exhausted volume. Some industry groups may hold up relatively well, and the number of of new lows tends to be smaller than on prior declines. In short, there is less negative information conveyed by a “revulsion” low, which is a useful signal that at least some investors are, in fact, finally “looking across the valley” toward a recovery.

On the subject of valuations, I believe that the peak level of earnings seen in the past market cycle was somewhat high, so I'd agree with Bill Gross at PIMCO in the sense that we're not likely to see that level of earnings as the “norm.” Prior peak earnings were, indeed, an artifact of unrealistically high profit margins and return on equity, driven by large amounts of debt-financed leverage. That is a point that I repeatedly made during the past cycle.

Where I depart from Gross is that while he believes that the economy in the future will diverge from the norms of the past, I believe that the economy of the past 15 years has itself been the outlier, and that we're likely to observe profit margins, returns on equity, and economic performance in the next several decades that are much more reminiscent of the longer-term historical record. That is an environment that investors should be very comfortable with, because it will be one based not on financial alchemy, but on real businesses that do real things. Despite the difficulties with old-line, capital-intensive manufacturing, I still believe that the U.S. economy has a promising future. Even if the cash flow assumptions of investors become more realistic, the fundamentals of disciplined, value-conscious investing will not change.

A number of investors have asked about the potential for bankruptcies to disrupt the long-term assumptions that we make about earnings and cash flows, especially for the S&P 500. The most important observation is again that the past 10-15 years were an anomaly from the perspective of profit margins and return on equity. We will almost certainly see some departure from those extremes, but the “normalized” figures we use have been well below those figures for quite some time. What's really happening now is that the actual figures are reverting to their norms.

Importantly, even the bankruptcies of the Great Depression did not materially disrupt the long-term earnings growth trend for a diversified portfolio of U.S. stocks (especially a periodically updated one like the S&P 500). My guess is that concern about bankruptcies corrupting the S&P 500 reflects confusion over the concept of “survivorship bias.” See, if you look at a list of stocks or mutual funds today, and analyze their historical performance, you'll tend to get a much rosier performance figure than an investor would actually have experienced, because any stock or fund that did not survive will not be part of the list. So if you do your return calculations but ignore the companies or funds that didn't survive, you'll create a survivorship bias.

However, for the S&P 500 itself there is no survivorship bias because the list itself changes over time and the index fully reflects the performance of a failing company up to the point that it is replaced. Every time that a component of the index fails, it is sold out of the index just as an individual would sell it, and another component is then purchased (subject to some reallocations of weight across the other members). So the earnings, dividend and performance figures for the S&P 500 already reflect the impact of companies that did not do well and were subsequently replaced. As a side note, the S&P 500 index also corrects for repurchases by adjusting the share figures (and thereby the dividend and earnings figures) accordingly. To count stock repurchases as if they are some sort of “hidden” payment in addition to dividends is double-counting.

Short answer – I do expect the deleveraging we're seeing here to bring future earnings much closer to their “normalized” values than we've observed over the past 15 years. But no, I don't expect that this economic turmoil will impair the general framework within which we analyze stocks or the market as a whole.

Presently, the price/peak-earnings multiple on the S&P 500 is just over 10, but that is based on peak earnings of about $86 for the Index. If we estimate a conservative level of normalized earnings for the S&P 500 in the range of $65-70, the current level for the S&P 500 would put it at a price-to-normalized earnings multiple of 12.5 to 13.5, which is in the undervalued range, but certainly not near a historical low. A multiple of about 9 times normalized earnings would easily form the base for a powerful multi-year advance in the market, and strong long-term returns. Unfortunately, that multiple would put the S&P 500 at about the 600 level. As I've noted before, I don't expect that we'll observe the 600 level in the current downturn, but we also can't rule it out, and we are very mindful of the potential to “overshoot” to the downside, which has historically occurred even in undervalued markets.

Where do I think the market is headed? I have no forecast, but I'll share my impressions. It's possible that the lows we observed in November were the lowest point that we will observe during this downturn, but I would not invest on that basis. It's possible that market action will improve further, and that we will recruit enough evidence to warrant removing a significant portion of our hedges, but at present, we don't have that evidence. My impression is that regardless of near-term prospects, we will observe a tone of “revulsion” at some point next year, which we should certainly allow for especially during the first half of 2009. At that point, we should not rule out a low that would compete with the November lows and perhaps break them, but we should also expect that the market will be more selective at that point, so there will be many stocks that hold above the lows that have already been set.

As usual, we don't need to forecast at all – simply to constantly align our investment position with the prevailing evidence from valuations and market action. At present, valuations are favorable, while market action is generally unfavorable – we have some tenuous signs of early improvement, but trading volume has been sluggish and the market is no longer oversold or compressed. As I noted last week, ambiguous evidence warrants moderate exposure. The Strategic Growth Fund continues to have a moderately constructive position, but primarily with call options overlaid on an otherwise significantly hedged investment stance.

Market Climate

As of last week, the Market Climate in stocks was characterized by favorable valuations and generally unfavorable market action. We do have some tenuous signs of early improvement, but trading volume has been sluggish and follow-through has been more tepid than we would prefer. Moreover, the market is no longer oversold, and prices are no longer deeply compressed, which opens up some risk of a fresh decline. Accordingly, we tightened our hedges some last week, largely by raising the strike prices on our index hedges. The Strategic Growth Fund can be viewed as being hedged with slightly in-the-money put options, or alternatively, as having a full hedge, plus a position in slightly out-of-the-money index call options (because of how options work, those descriptions are essentially identical). This position provides a significant hedge against major downside risk in the market, but also retains the potential to participate moderately in the event that the market recovers further.

In bonds, the Market Climate was characterized by unfavorable yield levels and moderately favorable yield trends. I continue to view Treasury bonds as having a significant “speculative” component in that Treasury yields are far below levels that long-term investors are likely to accept over maturity, so despite good arguments for low yields on the basis of economic weakness, there is a great deal of price risk in Treasury bonds. TIPS are generally safer, with lower durations, and are priced to deliver real yields in the 3-5% range over multi-year horizons. Even with the prospect of a near-term easing of inflation and perhaps even some negative CPI inflation figures, the combination of strong real yields and principal safety makes these a good harbor for investors who want to sleep nights without accepting untenably low nominal yields (and the high associated durations – which I suspect many investors currently overlook). The Strategic Total Return Fund continues to hold just under 30% of assets in utility shares, foreign currencies, and precious metals shares (where we modestly clipped our exposure in response to very strong price gains in recent weeks).

Wednesday, December 17, 2008

Dollar fell to 13-year low

Bernanke-san announced to maintain interest rate between 0 to 0.25%.

Dec. 17 (Bloomberg) -- The dollar fell to a 13-year low against the yen and the weakest versus the euro in 11 weeks after the Federal Reserve cut its target interest rate to the lowest among the world’s industrialized nations.

The U.S. currency also declined after the central bank said it will expand purchases of debt securities to fight the recession. The yen remained higher after Japan’s finance minister said he is ready to take steps in the currency market. The British pound was near the weakest on record against the euro before the Bank of England releases minutes from its Dec. 4 meeting, when policy makers cut borrowing costs to the lowest level since 1951.

1. They believe the economy is really a lot weaker and longer than most think.

2. If things don't turnaround - hyperinflation or a lost decade for American. They are running out of arrows.

3. US $ has been inversely correlated with S & P 500 and commodities since September. US $ tanking will trigger short-term rally in oversold equities and commodities.

DJI 8924 +359/4.20%
S&P 913 +45/5.14%
Gold 842 +6.2
Light crude Oil 43.60 -0.91

Tuesday, December 16, 2008

John Maynard Keynes

I have neither Warren Buffet track records nor Wall Street experiences. On what basis am I publishing my thoughts or making market calls? None. This is my personal diary, in part talking to myself and in part talking to some imaginary friends. Instead of putting up some incomprehensible disclaimers, let me be straight forward. Take all my writings with a truck load of salt.

Having saying all these things in my grand opening, let me make a bullish case - a stock picker will survive this bear market(even a Great Depression). I have published my thoughts saying we will not see a Great Depression 2, it is just a severe recession. Let's pretend this is a Great Depression, will there be any man or woman perform spectacularly in the stock market? Assuming you can bring back some dead people to help, who will it be? Two persons came to my mind: Benjamin Graham and John Maynard Keynes. Neither Benjamim Graham nor John Maynard Keynes needs introduction. But today, I want to highlight John Maynard Keynes.

There is a lot of information about how he turned himself from a speculator to an investor in this website.

His investing philosophy changed over time - Keynes began to doubt his initial belief that he could profit from his broad understanding of economic cycles. He grew to favour making large investments in individual businesses. Keynes was a logical man and individual businesses had balance sheets he could study and they sold products or services whose value he believed he could objectively assess.

Keynes spent half an hour each day on stock market research - in the morning, still in bed - studying company reports, reading the financial sections of the newspapers and speaking to his various brokers by telephone.

The Chest's initial capital was £30,000. By the time Keynes died in 1946 the fund had grown to £380,000 - an annual compounding rate of just over 12 percent. This might not seem very remarkable but for the facts that:

* This performance was achieved during a period that encompassed both the crash of 1929 and the build up to World War Two, both of which proved disastrous for British stocks.
* In the same period of time, the British stock market fell 15 percent.
* The growth in the value of the Chest Fund was entirely due to capital appreciation. There was no dividend reinvestment because Keynes spent all of the dividends on the college. He believed the fund was there to provide money for the college and was scornful of the way other Cambridge colleges managed their finances, referring to them as "savings banks".

The performance of Keynes's fund from 1927 to 1946 is shown below. During these years the Chest grew at an annual compounding rate of 9.1 percent while the general British stock market fell at an annual compounding rate of slightly under 1 percent.

You are of course will be impressed by the rising chart. It's so beautiful and glorious. However, the devil is always in the details, if you put the chart under microscope, his fund did not break even until 1933-1934, a long dark 7 years. If he did accumulate regularly over these 7 years, his efforts were paid off handsomely next 11 years from 1934 to 1945. Please also note that his fund lost close to 50% in 1931. Just like Buffett always reminding us, if you cannot stomach a 50% portfolio decline, then you should not hold stocks.

The common argument is what if he started buying stocks in 1935, will the return will be better? Of course it will silly but the question is how good are you with market timing? For me, I am a terrible market timer.

Monday, December 15, 2008

New investment paradigm

I have been reading Bill Gross market commentary for a while. He is one of the several Gurus thinks we ought to embrace a new paradigm for stock market. I'm normally trying not to use big words like embrace or paradigm, but impress my readers occasionally may not hurt.

His commentary is rather long, so it is not convenient for me to post the whole article here. This is his real punch line:

My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.

You may read his whole article by clicking this link:

Coincidentally, I saw this chart:

We can see Dow is getting cheaper in Dow/Gold ratio but not as cheap as 1982. You may note that from 1982 to 2000, commodities stuck in a recession for almost 20 years. It also means that post 2000, commodities have a lot of room to appreciate. That is why most believe the commodities bull run is not over until 2018 - 2020.

Is this the death of equities? No, if you are a first class market timer or a stock picker. Will talk more about this later.

Saturday, December 13, 2008

Bernanke says crisis 'no comparison' to Great Depression

Don't get me wrong by posting whole of this article here. I am not a huge fan of Ben Bernanke but out of objectivity I should post all the conflicting views here. I'm constantly reading the most pessimistic and optimistic views - throwing myself into confusion. If I can get myself out of confusion, I know I have understood the subject and ready to make the conclusion for myself. We must constantly talk to our foes and friends which requires a lot of courage and security. We must debate with ourselves constantly to check whether we have blind spots. Blind spots are dangerous in the world of investments - sins of omissions(miss investment opportunity) or commissions(lose money).

His premise of printing money is this:

the Fed chief said lessons learned from the Depression may still apply today, including the "excessively tight monetary policy" that led to higher interest rates and deflation of about 10 percent a year over the first three years of the 1930s.

There is no doubt that Alan Greenspan loose monetary policy and lack of oversights created this mess. Whether Ben's prescriptions to do damage control are working, only time can judge him. He is either going to go down in history as hero or zero!

WASHINGTON (AFP) – Federal Reserve chairman Ben Bernanke said Monday the current economic situation bears "no comparison" to the much deeper crisis of the 1930s Great Depression.

"Well, you hear a lot of loose talk, but let me just ... say, as a scholar of the Great Depression -- and I've written books about the Depression and been very interested in this since I was in graduate school, there's no comparison," Bernanke said in a question period after an address in Austin, Texas.

Bernanke cited "an order-of-magnitude difference" in the current situation compared to the 1930s.

"During the 1930s, there was a worldwide depression that lasted for about 12 years and was only ended by a world war," he said.

"During that time, the unemployment rate went to 25 percent, at least, based on the data that we have. The real GDP (gross domestic product) fell by one-third. About a third of all of the banks failed. The stock market fell 90 percent."

Bernanke said the situation at that time represented "very difficult circumstances," because "we didn't have the social safety net that we have today. So let's put that out of our minds; there's no -- there's comparison in terms of severity."

He added, "We're very lucky to live in a country as rich and diversified as the one we have. And I hope that we will have a quick and rapid recovery from the current slowdown."

Still, the Fed chief said lessons learned from the Depression may still apply today, including the "excessively tight monetary policy" that led to higher interest rates and deflation of about 10 percent a year over the first three years of the 1930s.

"We have learned from that experience that monetary policy has got to be proactive and supportive of the economy in a situation of difficult financial conditions," he said.

"The other part was -- the other error, the big mistake that policymakers made in the early '30s was they essentially allowed the financial system to collapse and they didn't do anything about it. The Federal Reserve did no action as the banks failed by the hundreds and the thousands."

In a related matter, President George W. Bush said in an interview released Monday that Bernanke and Treasury Secretary Henry Paulson warned him weeks ago that bold action was needed to avert a new Great Depression.

"I can remember sitting in the Roosevelt Room with Hank Paulson and Ben Bernanke and others, and they said to me that if we don't act boldly, Mr. President, we could be in a depression greater than the Great Depression," Bush told ABC News.

Bush said the conversation came four to five weeks after the government began mulling rescue plans for insurance giant AIG and other companies.

"And that was right before we went to Congress for the 700 billion dollars" in rescue funds, Bush said.

"And my attitude is, is that if that's the case, this administration will do everything we can to safeguard the financial system. And that's what we've been doing."

Friday, December 12, 2008

Good news and bad news 2

As promised, I am going to tell you the bad news today. It was not about Detroit auto bailout thrashed by senate - I don't have that gift to be so prescient. It was about China. China GDP growth can slip to around 7% but the more pessimistic calls for 5%. The export and import activities have just collapsed and even more severe than 2001.

Trading partners related to China will be dragged into severe slow down - Taiwan for example. Taiwan exports to China shrunk tremendously in November.

Sometimes, we need to be careful what we wish for. Many months ago, many worry about China inflation, now we got to be more fearful - deflation !

With deflation running around, it will create some road blocks complicates recovery. Deflation will cause people to hoard cash and not spending. That will create downward spiral to the economy, the bad news that I am talking about. The world is already running out of covers for too many woks, if China gets into trouble, we will be in real trouble.

This is one of the pretty significant developments that we need to pay attention.

Thursday, December 11, 2008

Good news and bad news

I have two news: good news and bad news, which one first? Head good news, tail bad news. The good news is good news. I am done for today.
A chink of light in the credit markets?

BNP Paribas this week became the first European bank to raise capital on the bond market without a government guarantee since October. It has now been followed by Societe Generale and Banco Intesa, which both announced new bond issues on Wednesday. But don't put the champagne on ice just yet.

First, the banks are paying a high price for these deals. BNP Paribas paid a margin of 160 basis points over the benchmark euro swap rate, while SocGen is likely to pay a margin of around 185 and Banco Intesa 195-200. That's a far cry from the single-digit margins banks paid back in early 2007. It's also a lot more than banks have been paying for guaranteed deals. HBOS recently issued a U.K. guaranteed bond at a 30 basis-point margin.

Of course, whether the banks are getting a good deal depends on the price of a guarantee. The French government has never disclosed the terms of its guarantee, so it is impossible to calculate a breakeven cost of financing for BNPP or SocGen. What's more, unusually under the French scheme, the banks do not issue bonds under their own name. Instead, the state raises the money and hands it on -- invariably in smaller sums than the banks would like. That has given them an added incentive to go to the market directly.

Meanwhile, the Italian scheme has so far not been used by any bank. That's because the Italian government has a lowly credit rating and its bonds are not widely traded. As a result, its guarantee is not thought to be worth much.

Still, the fact these three banks were able to raise money at all is good news. It shows that credit investors are regaining their risk appetite. The investor base for nonguaranteed bonds is different to that for government paper. An important new pool of liquidity has reopened just as the government paper market is starting to risk becoming saturated.

Not all banks are as strong as BNP, SocGen and Intesa. And not all will feel the need to pay a premium for their capital to prove a point. The real test of the market will be when U.S., U.K., German and other European banks decide to tap the market too. But the success of these latest issues surely brings that moment a step closer.

The bad news? Will tell you tomorrow, if it ever comes.

Wednesday, December 10, 2008

Only the Paranoid Survive?

The trust in the financial community has broken so badly. No one trust anyone - not even Warren Buffett? Many people underestimated Buffett, he is still the master of generating float. He received cash upfront by selling derivatives that will expire beginning of 2019, which is a form of float that he can take advantage of the current crisis to fund his "shopping spree". If many of his "retail" chicken little got frightened by "short sellers", that is just too bad.

Dec. 9 (Bloomberg) -- Short selling of Warren Buffett’s Berkshire Hathaway Inc. rose to its highest level in six years on speculation that costs tied to derivative contracts will drive down the insurer’s stock price.

Short-selling increased by 1,013 shares, or 29 percent, to 4,495 between Nov. 14 and Nov. 28, the most bet on Berkshire’s decline since 2002, according to data compiled by Bloomberg. That’s equal to 0.69 percent of all Berkshire shares available to trade, compared with the average 3.38 percent for insurers listed on U.S. stock markets.

Short sellers were circling Omaha, Nebraska-based Berkshire as concern increased about the firm’s derivative contracts, which may cost the firm as much as $35.5 billion beginning in 2019 if markets don’t recover. Prices on credit-default swaps that protect against a Berkshire default rose to record levels last month before Buffett promised more disclosure about the company’s derivative holdings early next year.

“The derivative issue came to the fore in that period of time, and may have caused a few people to think that where there is smoke there’s fire,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Greenwich, Connecticut-based hedge fund Ram Partners LP. “There may be some folks who thought there was a chance this thing could get worse.”

In a short sale, traders try to profit from a price decline by selling borrowed shares in the hope of repaying the loan with cheaper stock. Berkshire stock, which sold for $104,000 on Nov. 28, closed at $107,500 today.

The stock fell as much as 27 percent in intraday trading from its Nov. 14 closing price in the two-week period before Buffett pledged to provide more information on how he calculates losses on the derivative bets. Berkshire spokeswoman Jackie Wilson had no immediate comment today when contacted by e-mail.


He said the firm’s annual report for 2008 will disclose “all aspects of valuation.” By the end of November the stock had risen 3 percent from the last time the number of shorts was reported by the New York Stock Exchange. The Nov. 28 figure was released today.

“It’s an indication of the fear and uncertainty that people feel when you have someone with as much transparency and a track record of trust as Warren Buffett telling us the derivatives are a good deal and there are still some people who don’t believe him,” said Michael Yoshikami, the president of YCMNet Advisors in Walnut Creek, California, which holds Berkshire shares. “People simply don’t believe anyone at this point, not even Warren Buffett.”


Buyers of the derivatives could be entitled to billions of dollars from Berkshire if the four stock indexes, including the Standard & Poor’s 500 Index, drop below agreed-upon levels on dates beginning in 2019. The indexes would all have to fall to zero for Berkshire to be liable for the entire $35.5 billion that’s at risk. The sum was estimated at $37 billion as of Sept. 30 in a filing and shrank because of fluctuations in currency exchange rates, Buffett said in an e-mail Nov. 21.

Buffett sold the derivative contracts to undisclosed buyers for $4.85 billion through Sept. 30. Until the derivatives come due Berkshire can use the cash to make investments or acquisitions.

Investors also were concerned that Berkshire might have to put up collateral, draining cash and setting off a chain of events like those that brought American International Group Inc. to the brink of failure this year. In his e-mail, Buffett said the collateral requirements are “under any circumstances, very minor.” Berkshire had $33.4 billion in cash at the end of the third quarter.

Tuesday, December 9, 2008

A Bull run technically ?

My post today is trying to provoke our thoughts so that we all don't have to think with one track minds. I sometimes use this half-full glass technique to keep myself out of trouble especially we are reading too many the end of the world stories. The word BULL almost disappear in a dictionary of many. Let's see what you can get out of this.

(1) Dow Jones Industrial Average / Closing

Nov 20, 08 / 7,552
Dec 08, 08 / 8,934

Change = + 18 %

A definition of a bull run is + 20 % from a low. That is just 2% away to fit that definition.

(2) Hang Seng Index / Closing

Oct 27, 08 / 11,015
Oct 31, 08 / 14,329

Change + 30%

Dec 08, 08 / 15,044
Change ( Oct 27 to Dec 08) + 37%

It has never pulled back more than 20% after the rebound. Technically, the bull run has started in Hong Kong market.

Whether this is a whimper-bull or macho-bull, is a different story.

Damage Done May Require Bigger Moves

I have highlighted what George Soros said about the end of American consumptions and leverage last Sunday. I saw a related article today, on the WSJ regarding the housing bubble and stock market evaporated wealth will change Americans for a while though not forever. You can see from the chart household debt/disposal income % is turning down. I have been sending subtle messages to all, our old investment models and paradigms need to be replaced.

(WSJ)So far in this recession, fiscal and monetary policy has been an effective antidepressant. But it may not be an effective stimulant, given the pain consumers have suffered.

The government is committing trillions of dollars in various bailouts and lending programs. The Federal Reserve has slashed its target interest rate and is buying debt to lower other rates, too.

These moves likely have helped prevent a depression. Together with sinking energy prices, some observers think they will eventually also spur a quick, V-shaped recovery.

If such a sharp rebound were on the way, then the 14% rally in the Dow since Nov. 20 might possibly be the start of a lasting bull market. It could also mean inflation risks are building that could send superlow interest rates on government debt soaring, as the bond vigilantes fear.

The response may not be quite so dramatic, however, in part because so much damage has already been done that might have lasting effects on the psychology of businesses, investors and, most importantly, consumers. That means the policy response has to be even bigger.

"We have created a very big hole," J.P. Morgan chief economist Bruce Kasman said on Friday. "The challenge is not just getting a recovery but one that allows us to dig out of that hole."

And it isn't clear how much stimulus will goose consumer spending, which makes up more than 70% of the economy. Consumers have already enjoyed tax rebates, low prices and other stimuli in this downturn but haven't responded with much gusto. This suggests the problem isn't just a lack of cash or spending power.

In recent decades, Americans eagerly borrowed and spent when policy makers gave them the chance and let bull markets and housing bubbles repair their balance sheets.

After two equity implosions and a housing collapse in less than a decade, they may be getting more cautious, and future stimulus measures might do little more than bolster savings.

"What we're undergoing is a generational change in risk preference," said Howard Simons, bond strategist at Bianco Research, "just like the generation that lived through the 1930s never could embrace risky investments again."

Battered stock and housing markets erased $2.7 trillion in household net worth between the fourth quarter of 2007 and the second quarter of 2008. Fed flow-of-funds data due Thursday will probably show net worth suffered again in the third quarter.

The Fed data will also likely show that household debt as a percentage of disposable income fell for the second straight quarter from a record of about 139%. That ratio may keep shrinking for some time as consumers cut spending and debt in response to falling income and net worth, and as lending remains tight. Perhaps it won't go as low as the 60% to 70% range it inhabited between the 1960s and the early 1980s, but the era of exorbitant leverage is over.

That is a healthy development for the long run, but it means the economy's healing process may not be quick.

Sunday, December 7, 2008

George Soros explains the current financial crisis

I still find George Soros explanation of 2008 financial crisis the best. Keeping these three videos for future reference.

Key points:-
1. The cause :
a) failure of market fundamentalism thinking(market will correct itself and there is no need of government interventions).
b) excessive credit expansion for the last 25 years.

2. The end of an era : American consumption and leverage.

3. The cures : Stop the foreclosure, recapitalizes the banks, new world order - investment to deal with global warming as next sources growth and no longer American consumption.

Saturday, December 6, 2008

Benjamin Franklin's Virtue 13.

Benjamin Frankin did not start out rich but worked his way up. He is a brilliant statesman, inventor and writer. He wrote 13 values guiding his life, one of them is humility.

Virtue 13. Humility: Imitate Christ and Socrates.

To navigate successfully in financial markets, this is one of very important values I am trying to master. Many people life dashed by greed and fear which are very true, may I also add "over-confidence". Never let successes get into my head.

Those with leadership position needs to realize that if they are dead wrong, they are not only destroying their own life but followers as well. I am talking about religious fans of iCapital. Recent declaration by NBER that the US was in recession since December 2007 proven them wrong. They admitted that they are wrong saying that the US was not in recessions. Those reliant on their objective advice could have lost money. The punishment on them could be harsh - subscriber base and iCapital share price can be depressed.

Admitting they are wrong, repent, learning from mistake and move on should be the way to go. Let's monitor whether they are still wasting our precious time defending themselves - if they are, be very careful of them. Like Buffett quoting this when he supported the bailout:

"Every saint has a past, every sinner has a future."

If they did repent and be more careful, depressed share price will be a profitable investment. After all, I am a Capitalist - take emotion out of the equation, buy and sell profitable proposition.

Friday, December 5, 2008

Call a spade a spade

Why US $ rally despite of all the condemnation of cutting rates and printing money by Bernanke-san? Many reasons but the major is because other countries fundamental begins to breakdown as they were in the denial mode much longer than the US.

When other governments realize that they are behind the curve, we may have to pay a bigger price.

(Bloomberg) Bank of England Governor Mervyn King discussed the possibility of lowering the U.K. rate to zero for the first time on Nov. 25 and said the biggest challenge he faces is renewing the flow of credit in the economy.

The ECB’s decision to accelerate the pace of rate cuts signals the governing council may be prepared to breach the 2 percent level it last reached in 2005, said Erik Nielsen, chief European economist at Goldman Sachs Inc. in London. The ECB lowered borrowing costs by 50 basis points in October and November.

Once interest rates reach zero, central bankers have to resort to other measures to stimulate the economy. Such steps may include expanding money supply and using it to finance government deficits or buying securities such as bonds or stocks, former policy maker Willem Buiter said this week.

Closer at home, Malaysia-Finance, S. Dali posted a good piece today, building on a false hope can be dangerous. I hope policy makers will wake up.

Luckily the financial market is not that complacent.

(TheEdgeDaily)KUALA LUMPUR: Malaysian stocks succumbed to selling pressure till midday as investors reacted to news on the the country's weaker export performance.

At 12.30pm, the 100-company Kuala Lumpur Composite Index (KLCI) fell 0.66% or 5.62 points to 841.24, pulled down mainly by plantation and banking stocks. Plantation entities Sime Darby Bhd fell 10 sen to RM5.05 while IOI Corp Bhd was down six sen to RM3.10. Malayan Banking Bhd and Public Bank Bhd shed five sen each to RM5.15 and RM8.15.

Across Bursa Malaysia, there were 213 decliners versus 94 gainers. A total of 115.45 million shares valued at RM205.11 million changed hands.

"The declines reflect the impact of recessions and slowdowns in key export markets, worsening conditions, and outlook of the electrical and electronics industry, as well as the plunge in the prices of major export commodities like crude oil and crude palm oil.

"Overall, the latest external trade data supports our view of a further slowdown in 2008's fourth quarter (4Q) real gross domestic product growth to 2.5% year-on-year (y-o-y) (3Q08: +4.7% y-o-y) due to the expected contractions in exports and imports of goods and services, as well as the export-oriented manufacturing sector," Aseambankers Malaysia Bhd wrote in a note today.

Thursday, December 4, 2008


It's sharing time, a friend sent it to me, so I sent it to you. I hope I am not turning this into chain letters. Have a nice day.

UBS Investment Research tried to break the "financial crisis" ice this week, distributing to clients some of the many credit crunch jokes that are making the rounds in the office towers and board rooms across North America:

Q: What's the definition of optimism?
A: An investment banker who irons five shirts on a Sunday evening.


An investment banker said he was going to concentrate on the big issues from now on. He sold me one in the street yesterday.


A man went to his bank manager and said: ‘I'd like to start a small business. How do I go about it?' ‘Simple,' said the bank manager. ‘Buy a big one and wait.'


The credit crunch is getting bad, isn't it? I mean, I let my brother borrow a tenner a couple of weeks back, it turns out I'm now Britain's fourth biggest lender.


Q: What is the difference between an investment banker and a pigeon?
A: A pigeon can still make a deposit on a BMW.


Q: What is the difference between an investment banker and a large pizza?
A; The pizza can still feed a family of four.


Q: What does a hedge fund manager with no fund to manage say?
A: Would you like fries with that sir?


Q: What is the capital of Iceland?
A: About $3.50

I tried to get cash from the ATM today but it said “insufficient funds.” I don't know if that meant them or me.

Mark Twain was ahead of the curve: “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

Wednesday, December 3, 2008

It's official now - RECESSION !

NEW YORK ( -- The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy .

Well there is no need to argue whether we are in a recession or not in a recession. It's official now. By the time NBER announced this, normally it's too late, recession is over.

The average US recession post WWII is about 10 months, if the recession started in December 2007, we are right in the 12 months - we are outside that average now. One of the longest recession period is 16 months(73-74 and 81-82), which mean there are 4 months to go. We can get more pessimistic by saying there is no history to refer as this is going to be longer than 16 months. If you listened to one of the more pessimistic outlooks from RGE, it could last up to 24 months - December 2009.

Stock market typically rallying the strongest 3 months before recession end. If this recession were to end by Q2 '09, it should start to rally by December or January. If it were to end by December 09, it will only start to rally sometime in late Q3 '09 or early Q4'09.

The market will continue to be volatiles as they are trying to assess the length and depth. Historically, by the time you see happy faces on the front page, it's too late already, market normally already rally about 30-40%. That's why Buffett says If you wait for the Robins, springs will be over. We just need to pay attention to value and bad news which are our best friends.

A little marker for future reference.

Dow 8149, down 7.70%
S & P 816, down 8.93%

Tuesday, December 2, 2008

Turtle Portfolio Update - December 08

(Click for larger image)

Turtle received $ 888 for December. Portfolio down by 23% but businesses intrinsic value continue to grow at reasonable rate.

Parkson did not disapoint me yet. QoQ EPS grew by 42%. At $ 3.40, annualized FY Q1 '09, Parkson is selling for 15 times earning. Assuming they can grow at the rate of 10-15% for next 10 years, it does not take a genius to conclude they are undervalued today. For Parkson price to recover, all three stars must align - Hang Seng, KLSE and SSE(Shanghai Stock Exchange). Either one of them wobbles, investors knees will jerk.

MUI recorded profit in Q3 '08. They continued to pare down debts, Dec 07 to Sep 08, down from 900 mln to 736 mln. Repaid almost 30 mln in last quarter alone. Expect some pressures on retailing and hotel segments but hoping material deflation to help on the food segment. However, assuming they take next five years to get rid of their debt and assume no profit growth, EPS will be in the region of $ 0.05/share, with 10X PE, it should worth at least $ 0.50/share. It is a reasonable bet to get at least 10% return over a period of 5 years with my cost of $ 0.27/share, averaging down will enhance my return further. So just ignore the noises between quarters when they flip between positives and negatives due to interest charges.

iCapital continued to be undervalued. So no changes to my portfolio.

As long as I continue to use my saving of $ 888 / month to buy stocks, with right stock selections, I believe I can grow at a reasonable rate over a long period of time(This portfolio is only 9-month old, 14 years 3 months to go). Continue to buy at lower level has not done any damage to me(yet). Time and value are in my favor. It is very easy to recover 23% loss when the bull is charging again. You too have 15 years advantage regardless you are 24 or 50 today. Happy investing.