Tuesday, March 31, 2009

Turtle Portfolio Update - April '09

Click on image to enlarge.

Quarter 1 is behind us. Summer is coming soon. Traditionally, it has a reputation of being a volatile period but it will be fun. The DJIA managed to carve out a first lower-high in the last quarter. The outlook is getting a little bit better or at least we are seeing the market begin to sort winners and losers and not selling indiscriminately.

Added $ 620 saving for April '09.

Retrenchment, VSS or No-Pay-Leave, Part I

KUALA LUMPUR: Malaysian financial services group CIMB has asked its 36,000 employees to consider taking up to six months of unpaid leave as it aims to cut costs in the global economic slowdown, a top official said on March 30.

CIMB is the first major Malaysian company to ask staff to go on unpaid leave.

Read more....

One of top most shitty jobs in management life is letting people go. I am going just "throw it" out so please forgive me today if this is a little bit unusual of me not organizing my thoughts systematically.

Do we need to carry out retrenchment or VSS? Employees that get million ringgit separation from a company will have very little to complain - you have no right to complain. What about long service non-skilled employee with 20,000-30,000 settlement? What about middle management with young family with 3 - 5 years of service, they probably out of job with 12,000 to 30,000 max. What about non-skilled workers separated or retrenched with only 1,000 or 2,000 in their pockets? Those with housing or car loans will probably run out of cash in 6 months. Those with 200,000 - 300,000 package settlement will have longer stamina to get through the storm but who is going to employ a 45 or 50 year old person when the economy is normalized? The picture is not going look pretty.

The old Japanese solution was let's suffer together, take pay cuts - permanent or non-permanent such as no pay leave. Or do it the old Western way: sacrifice a few so that there are enough jobs for remaining ones.

Yea, Japanese theory is wonderful if we all been raised like the Jap accepting what ever it is. Considering Malaysians are getting more and more vocal, do you think they can accept these pay cut? Initial gratitude will soon evaporate if pro-longed. What is the incentive for me to work hard?

Back to American model. If I tell you a company is going to run out of cash in a few months, should you be retrenching or offer VSS? Will this alter your view? I believe there is little argument the company should go ahead with workforce reduction.

How do you feel if a company is reducing workforce that once in 25% pre-tax dropped to 3% pre-tax cause by the recession ? Yeah, the company has no problem of going-concern but it will add another 3% to the bottom line post-reduced work force. Market value may increase by another 10-15%. Will you do it? Will you listen to their argument that to attract investment and capital - a creative destruction is a necessity ?

Monday, March 30, 2009

My view on Trend Following

It's seems like a few of trend following fans offended by my blog. I have been honest not claiming to be a turtle trader which displayed at top of my blog page. I don't even know who are turtle traders until a few of those guys started to blast me and led me to find out more why this group of people feels so supreme. They feel that my contrarian efforts trying to read the market minds will end up with futility - contradict principle of turtle traders: don't speculate what will happen but just let the price action tell them. They feel that their ability to cut loses very quickly and pounding on profit(up or down) make them feel very sucessful. Their mechanical system that takes emotion out of trading system is perfect. Micheal Covel did a good job creating a blog, writing books and keep publishing sucessful funds lead a lot of people to believe this is the best trading system in the world by spending a few thousand ringgit. A person keeps telling good points without bad points is flashing red light.

As a student of the market, I have respect for all models - sometimes one model works better than the other, in different times. It will be very foolish of me trying discredit turtle traders are not sucessful. They are sucessful people. I believe Richard Denise is a nice person. He gives away his trading system at free of charge. Unfortunately a small group of people trying labeling other people's method of investing is inferior or laughing at them not cutting losses. I hope they too be more emphatical and more liberal. The world ended up with war and grieves because of some people insisting supremacy with some twisted facts or truths or realities.

I learn a great deal of position sizing and volatility after reflecting on one of the strengths of their model. The other great strength of the model is their cutting losses discipline. I did learn some new things from researching who are turtle traders. So, I thank those who blasted me - I have nothing to lose really.

But be aeware of the model weakness. Return will be less spectacular when the market start to move sideway or consolidating. Currently, a lot of trend following funds are sitting on high pile of cash. I'm in opinion they are likely to miss the first 30-40%. For the record, I am aiming to move RM 1 - 2 k into commodity funds.

Last few words, if I know turtle traders are so famous, I would have not chosen this turtleinvestor888.blospot.com to reflect my slow and steady approach for this blog. I think I have explained myself quite enough. This will be the last time, I assure you.

Sunday, March 29, 2009

Random thoughts on commodity - I

After speculative funds exited the commodity complex, the world of commodity will have to be governed by supply and demand. Demand is depending heavily on the economic activities.

There is no need of me to point out the obvious fact of the worldwide economy is weak. IMF predicts global recession in 2009.


Weak economic activities impacted demand. US crude oil inventory swelled this week to highest level in 16 years - jumped 3.3 million barrel to 356 million barrel.

Supply cuts is quite rapid to match demand roughly to about 84 million barrel.

This week economic scorecard came in surprisingly stronger than expected. This has fueled further optimism the "worst is behind" us.

However, the bearish camp thinks the stronger housing sales was just a blip like in the past and still stuck in a down trend. After stuck in 16 months of recession, personally I think it's not a sin to be bullish.

To answer how sharp the price action can snap back from the bottom is depending on the shape of recovery - V shape, L shape or U shape ?

The below chart is still an unsolved Alfred Hitchcock story to me. Two ways of looking at this chart. Half full: supply did not response more than 87 million as it did fulfill the demand, the parabolic price was driven by speculative fund. The CFTC pricked the bubble that did not give us a chance to test the other half-empty theory. Half empty: 87 million barrel was the max, if supply went beyond that would have pricked the parabolic price action. I'm just curious to find out what will be the crude oil supply response when demand goes to 90 million barrel. Don't forget that we were lucky last round because the US economy was weakening but emerging economies were doing fine. If the next upturn with the US and emerging economies are running at full throttle, do we have sufficient supply? I'm really excited to find the answer to the half empty view.

(Click on image to enlarge)

Let me end part I with Jim's view:

I know it does because nobody has discovered any major oil fields for 40 years. The number of acres devoted to wheat farming has been declining for 30 years. Only one lead mine has been opened in the whole world in the past 25 years. The last lead smelter constructed in the U.S. was built in 1969. There’s just no capacity and it takes a long time to discover oil fields or bring mines on stream.

The world has a long way to go in this particular bull market. That’s not to say there won’t be setbacks along the way and consolidation. There always are in every bull market, and that has been true in every market throughout the world and throughout history, so we can expect more consolidation. But, on the other hand, there is a secular bull market in commodities and it is one of the few, if not the only, bull market I know of right now.

Friday, March 27, 2009

T. Boone Pickens sees oil at $75 by end-2009

Wanna bring on another guru that most people begins to ignore. It's interesting that media devotes only one to two liners on crude oil forecast. One of the most difficult things to verify an old-investment* theses is when everybody is bearish. It's very difficult to find materials. We got to respect a man like this as he was firmed with his conviction that oil is going to go up when it was at $ 40 but making a target of $75. I hope to spend some time look at commodity complex this weekend scouring whatever old materials that I can find to make my own observations.

*Turtle's definition of old-investment includes dramatic price collapse (60-70%)

SANTA BARBARA, California (Reuters March 05, 09) - Texas billionaire oilman T. Boone Pickens on Thursday said U.S. crude oil prices will hit $75 by the end of 2009.

Asked at a press conference where he expected oil prices to go, Pickens said, "Up ... $75 by the end of the year."

Pickens made similar comments in early February.

Oil settled on Thursday at $43.61 a barrel. Prices were also in the low $40s a month ago when Pickens made the similar comments, down from last July's record high over $147.


Wednesday, March 25, 2009

Old interview script of Jim Rogers

Jim Rogers has not been appearing on the Bloomberg or CNBC lately. When he speaks from his heart, those guys don't like what they hear. Thought of bring him back to talk about his investment ideas. Found this script of AsiaOne Business interviewed him back in Janurary this year. I like to read old interview and report for two simple reasons: if the thesis is still right and euphoria died down - I will sit up and roll up my sleeve to investigate whether it is worthwhile pursuing further.

(AsiaOne Business By Chew Hui Min)

"If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to Asia," investor Jim Rogers was once quoted as saying.

Voting with his feet, he did exactly that in 2007 when he moved to Singapore, where his two daughters can learn Mandarin.

When he spoke at the Global Forum on Intellectual Property (GFIP) on Jan 9, he was bullish about commodities and Chinese stocks, and pessimistic about the US dollar and US economic policies.

After the conference, he told AsiaOne what he was investing in and explained why savvy investors might want to start looking for farmland to buy.

Q: What are the commodities that you're buying?

A: I only buy indexes because my lawyer won't let me buy individual commodities. I write books about them, I talk about them all the time. If I say "you buy cotton" - and I own cotton - and it goes down, I'm going to get sued.

What I bought most recently is agriculture index and general (commodities) index.

Q: Do you see opportunities in alternative energy?

A: There are probably spectacular opportunities in wind power, in nuclear power and solar power and things of that sort if you can find the right entrepreneurs.

The problem is, everybody in the world knows that and thousands of people are racing in there - and you remember dotcoms.

Dotcoms had a fantastic future in 1996 and thousands of people went into it. Most of them turned out to be failures because you had too many people chasing the same things.

Q: How would you recommend a lay person invest in commodities?

A: No one should invest in anything unless they know a lot about what they're doing. It's better to put your money in the bank at very low rates of interest than to invest in things you don't know and lose money.

But if you decide that you want to invest in commodities, the study shows that the best way for most investors is to invest in an index.

Index investing has been proven repeatedly for decades to outperform active management, so most amateur investors should invest in an index fund.

Q: If I ask you to invest $10,000, what would you do?

A: I would go to the beach and I'd ask you to go with me. (laughs)

I've told you what I'm doing - I'm buying commodities, I'm buying Chinese shares. I would learn about selling short and I would learn about currencies, because some of the best opportunities in the next year or two or three are going to be in the currency market.

There may well be a currency crisis centred on the US dollar and, if there is a currency crisis, most stocks will go down.

Q: Why are you so down on the US dollar?

A: I don't like being down on the US dollar, but US is a horrible creditor nation, it's running up gigantic debts.

The United States government itself has tripled its own national debt in the last six months, the Central Bank in America has tripled the obligations on its balance sheet and has taken a lot of garbage, and they're printing a lot of money.

Throughout history, this has always led to a decline in the debasement of your currency. They actually want to debase their currency - that's their conscious policy.

But, even if it weren't their conscious policy, it has never failed to cause problems in the currency market and unless the world has changed somehow in the past 5,000 years, or the Americans are different - which I don't think at all - this is going to lead to problems with the dollar and the currency markets.

Q: Is yen the only currency you are buying?

A: Right now, because the yen is subject to the carry trade and has been beaten down unnaturally, so in my view the carry trade* will reverse and that's where the best opportunities are.

Once the yen goes up a lot - if it goes up a lot, like I think it will - then I will have to figure out what to do, as the Japanese have a serious fundamental problem down the road and unless they do something, I don't want to have anything to do with Japan in ten years.

*where a speculator borrows funds at a low rate and invests these funds into higher yielding assets

Q: Which other currencies would you invest in?

A: I don't know what I'm going to do when I stop buying the yen. I own the Singapore dollar, I own Canadian dollar, but if you look around the world, it's very very hard to find a sound paper currency these days.

Singapore philosophically is the strongest currency in the world. The problem with Singapore is, if everybody in the world debases their currency, we can't sit here with the only strong currency in the world, because we're not competitive, it puts us out of business.

I own renminbi. In theory, it's going to be a great currency down the road but even right now, the Chinese are trying to hold their currency down for a variety of reasons.

Q: Besides China, are there other Asian markets that you would invest in?

A: No, I was interested in Taiwan because of the peace, but it's such a regulatory nightmare to invest in Taiwan that I've sold my Taiwan shares.

And South Korea, I was interested too, but these countries they still regulate insanely the free flow of capital. Both of them want to become financial centres, but it's a bit ludicrous to think that you can be financial centres if people can't move their money in and out freely.

So while there may be possibilities, I've given up on Taiwan and South Korea.

Q: How about Singapore?

A: I've moved to Singapore, my biggest investment is obviously Singapore, my personal investment - we live here, we're permanent residents, my daughter goes to school here.

But we're not buying property here, not yet - we're not buying property anywhere in the world. I certainly own Singapore dollars, and here I am!

I can't make a bigger investment than to move to a country. We looked at all the countries in the world and we decided the one we wanted to live in the most was Singapore for a variety of reasons. We voted with our feet.

Q: Are you willing to buy a house here?

A: Right now, we're renting. If we found the perfect place in the perfect location... we do not know yet where we want to wind up.

We've looked at a lot of houses, we're learning more about Singapore. Right now, we have to live within one kilometre of Nanyang Primary, so that our daughter can go to that school.

If and when we find the perfect house, we'll probably buy it. If you know of the perfect house, please let us know.

But, I don't think this is a great time to be buying property in much of the world. It's a great time to stay away from property, unless you're going to buy farmland, timberland or if you can find some land near some mines. Or buy yourself a lake house where there are a lot of farmers, it'll probably be ok.

Geithner's put

Remember I was mentioning the missing puzzle piece on how to value those toxic assets yesterday? It turns out my question was partially irrelevant because it is almost impossible to find out--just too many counter-parties to claim on each other. To quote Buffett "Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with." Most of them are mark-to-model or mark-to-myth. However, if you can draw enough speculators/investors that are good at playing probability - you may get it off the ground. Interesting post by Nemo on self-evident blog and also Paul Krugman.(Click on the links to read the their postings). Part of Nemo post is reproduce here.

The details of the “Geithner Put” have been released. It has two parts: One to deal specifically with bad loans, the other to deal with other legacy assets (securitized yadda yadda). In this post I will discuss the first part, dubbed the “Legacy Loans Program”.

The Treasury helpfully provides an example, which I reproduce here:

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.

Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.

Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.

Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.

Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Let’s flesh this out by repeating it 100 times. So say a bank has 100 of these $100 loan pools. And just by way of example, suppose half of them are actually worth $100 and half of them are actually worth zero, and nobody knows which are which. (These numbers are made up but the principle is sound. Nobody knows what the assets are really worth because it depends on future events, like who actually defaults on their mortgages.)

Thus, on average the pools are worth $50 each and the true value of all 100 pools is $5000.

The FDIC provides 6:1 leverage to purchase each pool, and some investor (e.g., a private equity firm) takes them up on it, bidding $84 apiece. Between the FDIC leverage and the Treasury matching funds, the private equity firm thus offers $8400 for all 100 pools but only puts in $600 of its own money.

Half of the pools wind up worthless, so the investor loses $300 total on those. But the other half wind up worth $100 each for a $16 profit. $16 times 50 pools equals $800 total profit which is split 1:1 with the Treasury. So the investor gains $400 on these winning pools. A $400 gain plus a $300 loss equals a $100 net gain, so the investor risked $600 to make $100, a tidy 16.7% return.

The bank unloaded assets worth $5000 for $8400. So the private investor gained $100, the Treasury gained $100, and the bank gained $3400. Somebody must therefore have lost $3600…

…and that would be the FDIC, who was so foolish as to offer 6:1 leverage to purchase assets with a 50% chance of being worthless. But no worries. As long as the FDIC has more expertise in valuing toxic assets than the entire private equity and banking worlds combined, there is no way they could be taken to the cleaners like this. What could possibly go wrong?

This program is for big guys who are running multi-billion or trillion dollar money management like Pimco or BlackRock. Since they have big amount money to buy a large cross-section of assets, odds may be in their favor to make some money. The question is still at what price buyers and sellers will strike a deal. 84? 71? or 50? on face value of $ 100. Bargaining power will depend how well capitalized a bank is, weak banks will have no choice to give in. Can I start shopping for champagne? Probably buy one small bottle before a big one like in Formula 1.

Tuesday, March 24, 2009

A Missing Puzzle Piece

The US market rocked hard yesterday, Dow racked up almost 6.8% gain. It has also helped crossing 7,500 convincingly. Dow closed at 7,775. The booster was Tim Geithner unveiled how they plan to handle toxic asset which I have been harping and hoping they will address it ASAP. Thank you for answering that concern - now you are doing not just talking.

You can read his plan at : http://www.financialstability.gov/

I am quite please overall. The most important part of it, they have decided on the philosophy - they must get rid of the toxic asset so that banks can raise private money and start lending again. They estimated about $ 2 trillion toxic asset and they put up a plan to handle the first $ 1 trillion.

The second part was talking about how to finance/structure the deal on legacy loan and legacy securities.

On legacy loan, they structure in a way debt:equity not more than 6:1. The example given was how to get rid of toxic asset with $ 100 face value on/(off??) bank balance sheet. They will go through some kind of auction. For example, the highest bidder got it at $ 84, FDIC will provide a loan of $ 72 and leave equity of $ 12. Of 12 equity, Treasury will come out with $ 6 and private investors $ 6.

Legacy securities is structure differently, it's a 50:50 between Treasury and private investors. The leverage can go higher for private investor depending on a situation.

It's a smarter way to leverage without printing too much money. The real key to this is assuming toxic asset is really beaten down below Fair Value ( Warren Buffett in a CNBC interview earlier said probably is and I hope it is). The tricky part if how do you value illiquid toxic asset? Mark-to-market is hard as it is illiquid and rarely traded - so not sure how to mark to NO-Market really. Net Realizable Value? Boys, just agreeing on valuation part of it will take a lot of time. This is the last piece of missing puzzle. If Obama administration can solve this last piece -- we all can pop our champagne.

Sunday, March 22, 2009

Rethinking of market issues

During school holiday short break, our family gathers together doing some very simple things yet satisfaction is perfect 10. We work as a team on printed free Sudoku from the Internet and newspaper cutting. Sudoku has always been absorbing, set us free from rat race, makes time become irrelevant. We have so much fun. The young ones are much sharper and beaten me hands down. I conceded defeat gladly. We dropped by Taiping Zoo. Animal population seems the be shrinking, not as many compared to about 5-6 year ago. Fortunately, our Alex the lion king is still strong but a little bit over-weight. We remembered there were two Pooh sun bears but saw only one. There used to be a big flock of birds and animals in Savannah section, again it's seems to be a lot lesser compared to the last trip. We could not see any kangaroo, though the tag remains in tact. Hoping things will not deteriorate further even though this is much better than Ampang Zoo negara. Getting tired of outside food decided to cook ourselves home-cooked food Ampang yong tau foo, hand-minced Tenggiri fish meat with lots of garlic, onion, and some special ingredients. Yummy and no worry of cholesterol as we have been generous with ourselves deep fried with olive oil.

Playing Sudoku reminds me of Occam's razor rule.

(Wikipedia)Occam's Razor, also Ockham's Razor,[1] is a principle attributed to the 14th-century English logician and Franciscan friar, William of Ockham. The principle states that the explanation of any phenomenon should make as few assumptions as possible, eliminating those that make no difference in the observable predictions of the explanatory hypothesis or theory. The principle is often expressed in Latin as the lex parsimoniae ("law of parsimony", "law of economy", or "law of succinctness"): entia non sunt multiplicanda praeter necessitatem, roughly translated as "entities must not be multiplied beyond necessity."

If I were to apply Occam's principle, after eliminating a lot of noises, three important issues affecting investment strategy:

(1) Will the Fed wins this war on deflation ?

Short answer - YES ! The market thinks inflation will be the end result -- huge jump on Philadelphia Gold and Silver index and also inflation protected bond TIPS but S & P 500 muted -- on the day (March 19) the Fed announced to buy $ 1 trillion in Treasurys and mortgage-backed securities.

The Fed balance sheet dropped to US $ 1.8 trillion but rebounds back to US $ 2.04 trillion as of March 18, 09. Bill Gross thinks it may eventually hitting $ 5 - 6 trillion(click here to read more)

The fact that the Fed throwing so much money in the system suggest this debacle is far from over.

(2) Have financial and housing sectors stabilized?

If the market is a perfect discounting machine, both sectors have a bounce but has not been very affirmative.

The argument is though banks are profitable at the operating level but toxic assets are off-balance sheet items and there is no way you can declare victory now. The uncertainty will remain so long the toxic assets are not being removed. However, painting with a broad brush stroke labeling all banks are insolvent are wrong. The banks will build up their capital pretty rapidly as soon as they stop paying dividend.

Based on Roubini scenario, there will be more money needed for bailout but OK under IMF's scenario or compromise of Dr. Doom with IMF's sanguine scenario.

iCapital wrote a few good pieces analyzing the US credit problems. This table sums up quite nicely on implications of refusing to write-down the toxic assets quickly - slow growth, cost tax payer more money and prolong recovery.

Even the Fed wins the deflation war and averting a mini or "great depression", property price will not go back to pre-bubble level. Banks are still far from healthy level in next 2 - 3 years. Stablizing ? Probably. Rapid recovery ? No.

US housing inventory overhang ? On short to medium term

(WSJ -- By RICHARD S. LEFRAK and A. GARY SHILLING)The federal bailout forces taxpayers to subsidize overextended homeowners who bet on ever-rising house prices and used their abodes as ATMs, and it doesn't get to the basic problem -- the huge inventory of excess houses. We estimate that 2.4 million houses over and above normal working inventories are left over from the 1996-2005 housing bubble. That's a lot, considering the long-term average annual construction of 1.5 million single- and multi-family units.

Excess inventory is the mortal enemy of house prices, which have already fallen 27% since the peak in early 2006. We predict another 14% drop through the end of 2010 if nothing is done to eliminate the surplus.

Doing nothing to eliminate the excess inventory might well push the recession through 2010 and into a depression. Declining home values, for example, are eliminating the home equity that has funded oversized consumer spending for years.

Long-term outlook may not be as bleak and may not been as bad as Japan as it still have population growth of around 0.88%. Consider also demand from immigrants. 5 - 7 years from now will be OK.

(3) Will US $ tanks?

Weak US $ implies a few things -

(i) the end of de-leveraging.

(ii) abandoning US $ means there are better alternatives out there. Euro, British pound, Swiss Franc, Yen or even Asian currencies are not supported by stronger economic fundamentals. Don't forget ECB, Japan and Britain are also carry out quantitative easing.

(iii) nobody wants to buy US Treasuries.

(iv) there is no need of liquidity haven.

(v) the Fed printing money will destroy US $.

(vi) commodities going to rebound - more fear of cutting consumer spending power. This is going to export inflation to emerging economies causing more severe economy contractions.

(vii) It's a spur of moment. When they regain consciousness, US $ is still going to be OK.

Just to sum up, the Fed will win the war on deflation, inflation will show up in 2010and beyond. Banking sector uncertainty will persist. Housing sector is not yet recovers. US $ is going to be stronger that most think in 2009 but I cannot say so beyond 2010.

Friday, March 20, 2009

Some Turtle mumbling(and rumbling?)

Posting will be light this week as I promised my family to spend quality time during school holidays. Most likely we will take some very light travelling cuti-cuti Malaysia. I probably will be back with posting on Monday or Tuesday.

Just have few things to mumble. Yesterday Dow slided right from the beginning from key magic number 7,500 that I mentioned. The market is just too keen to take profit. I am watching this pull back, if it pull back says 7 - 10% and rebound again, we still have some hope that it has some legs to run else like most of the bearish camps say we will see a new low.

The other small matter I have been thinking whether I should say it out or let the readers judge by themselves. I finally decided to clarify so that everyone will have a peace of mind reading my blog. Some chatters in chat room claim my blog to be theirs, regular readers should know that I will never chat in any chat room.

Secondly, don't believe anyone to claim to be Turtle to manage your money. Don't be fooled.

Lastly, this is not an investment service and I will never have any intention to set up any newsletter business. The reason is very simple, handling OPM(Other people's money) is a very heavy responsibility that my shoulder is not big and strong enough. I do not want some people to praise me like crazy when they make some money but make nasty comment you f%***$#@ cause me to lose money.

Last last one, I have been thinking whether I should make any disclosures whether I have long or short position in stock or ETF. After thinking long and hard about it, I think since I am not in any money management business, I am simply too small to make any impact to market or stock price movement. I have reasons to believe most of my regular readers are not a beginner because I have been using advance concept or investing language without much elaborations and yet I have not lost many of you. So, you are knowledgeable enough to make judgement. Verdict: stick with no disclosure unless if I feel some counters are really thinly traded that I have position.

Wednesday, March 18, 2009

Economic Reports push US market higher

(IHT)Unemployment may still be rising and the economy may be nowhere near a bottom, but Wall Street's manic mood bubbled higher on Wednesday.

Cheered by reports showing a surprising increase in home-building last month, stock markets climbed in the last half-hour of trading, with major market indexes rising to their highest levels since late February.

Construction companies like KB Home, the Centex Corporation and Toll Brothers paced gains in the broader financial markets after the government reported that new-home construction in February rose 22 percent from January to a seasonally adjusted annual pace of 583,000. It was the biggest percentage gain since January 1990 and the first increase since April.

(Click here for the whole article)

Last week rally was fueled by financials, this week is the US housing providing the battery for the market to charge. Will pundits be right - financial and housing are stabilizing? If indeed it is, this is a great news because housing and financial must stablize in order for the market to march higher. Dow target of breaking 7,500 will attract momentum players. Sit tight and relax - exciting times ahead of us. Back to my original question: is financial and housing stabilizing? This is a very important question I must ponder during the weekend.

Tuesday, March 17, 2009

Currency War

Today's entry contain adult content. By scrolling down you agree not to be offended, otherwise please come back another day.

The central bankers around the world not only printing money but they also devaluing their currency against each other. Who will be the winner? Some may find some of the below currencies as joke or insulting or outright illusion, but the reality is not too far, am I right?. Cheers.

Monday, March 16, 2009

Astro - Cost of misadventure

Astro mis-adventure in Indonesia cost shareholders tons of money. Over the last two years, market capitalization shed about 67% from high of $ 5.70/share. They lost about RM 7 bln market value and lost about RM 1.1 bln on mis-adventure in PT Direct Vision Indonesia. If you are a shareholder, you have a plenty of reasons to grief but what if you are not? Should you be rejoicing because the market punishes the stock to ridiculously low?

Outstanding shares: 1936 mln
Mkt capitalization : 3581 mln

Top 3 reasons people hates Astro

1. Legal battles on termination of Indonesia joint venture. Their previous partner PT AM sues Astro for unlawful service termination and ask for compensation. Astro took more offensive move by filling arbitration in Singapore to recover a sum of RM 880 mln for the services they provided since 2005. Once you get into legal mess, you are creating uncertainty and market hates uncertainty.

2. Indian JV loses of RM 60 - 80 mln for the next two years before break even. They have about 20% stakes in SunDirect TV. Most fear this will be another failure like PT Direct Vision (Indonesian JV).

3. Malaysian consumers are cutting spending - APRU erosion, higher churns, etc.

On its Indonesian venture, I believe that was a gross mistake. They should not have pursued with the venture when the law limiting foreign equity to maximum of 20%. Glad that they finally pulled the plug on the venture.

Astro began its entry into the Indonesian market in March 2005 via a joint-venture agreement with Indonesia’s Lippo group. Under the agreement, Astro and Lippo group would operate a pay-TV business via the latter’s wholly owned unit, PT Direct Vision (PTDV). The original agreement was for a 51:49 shareholding interest between Astro and Lippo group in PTDV respectively. But this was derailed five months down the road when a new ruling by the Indonesian government for all broadcasters came into effect to limit foreign equity participation to 20%, compared to the initial 51%. Subsequent negotiations between Astro and Lippo group to restructure the venture were held but both parties could never reach a solution up to this day.

Nevertheless, the full launch of the satellite pay-TV business went ahead in early 2006 under a trademark licensing agreement between Astro and PTDV that allowed the latter to use the “Astro Nusantara” brand in Indonesia. On top of that, Astro would be supplying broadcasting services and technical support to PTDV.

(Click here to read from the Star)

Well, forget the past, more important questions - do they have a future? Regulation risk is an important point to remember in this business, especially on overseas ventures. Their 20% stakes in SunDirect should not pose a major problem. Other JV in Brunei, China and Saudi are pretty minimal. I believe they will concentrate more on domestic operations going forward.

The business is hinges on one one important factor - can they continue to increase their domestic penetration?

I think as of Oct 2008, their penetration stands at 44%. They have a target to achieve 60% penetration by 2012. 2.6 million households subscribe to Astro out of total of 5.8 million TV households. Plenty of rooms for growth in a boring business like this. In 5 - 7 years from now, I believe Astro will have revenue close to RM 4 - 5 bln. Basing on cost of capital of around 12%, Astro worths around $ 3.20/share. I have seen analysts trying to discount the cash flow with much higher cost of capital - one of the very ridiculous that I came across was CIMB at almost 16%. Well, they are trying to justify for a lower value so they can either increase cost of capital to imply much higher risks. Not only CIMB guilty of this, OSK did the same thing too, they use 12% in January and recently increase it to 13% and discount another 20% on SOP to justify Astro only worth RM 2.20/share. I can actually also play with all kind of variables on a spreadsheet to jack up or jack down the value. Not trying to put down on analysts but just to show you a point how bearish they are.

Assuming their dividend payout same like FY 2008, DY is 5.4% {$ 0.10/RM 1.85}. They just need to cough out RM 193 mln for dividend which is very easy. They can easily spit out at least RM 400 - 500 mln Free-Cash-Flow per year for next 2-3 years. It's very easy to support 5.4% DY.

I believe Astro brand name remains unimpaired. I know the management has done some very dumb things but it is a solvable problem.

Sunday, March 15, 2009

Malaysia market commentary

After the second stimulus unveiled on March 10, 2009, KLCI lost 1.4 % ( Mar 10 : 855 & Mar 13 : 843) and Ringgit strengthened by about 0.6% ( Mar 10 : 3.7015 & March 13 : 3.6955). Despite of big RM 60 bln huh-hah announcement, the actual direct fiscal stimulus is more affordable of RM 13 bln to be deployed in 2009. Our budget deficit will still widen to 7.6% but Standard and Poor thinks our sovereign rating will remain unchanged, A- stable outlook, which is a relief to keep our funding costs low. Things seem to be all right at the macro level, so what is troubling the market?

Maybank and Public Bank were the punching bags - both lost 10% in the last 4 days. Right issues by Maybank to strengthen capital base triggered fear of coming potential massive write-downs soon. The new target price has been slashed to around RM 3.50 triggered the sell-off.

Maybank, JP Morgan, CLSA and etc downgraded Public Bank citing on over-valuation. One of the lowest target that I saw was from CLSA RM 6.20. We got another 13% downside from here. Luckily, we have not seen any bad remarks on CIMB yet, so stock price has been hanging there but the market already slaughtered them much earlier.

Weighing on bank downgrades, KLCI at 800 level is not a very far distant. With little bit of sympathy selling, it can easily slips below that. I am not looking to sell my holdings but keeping my powder dry on the buy side. Hope my readers will not mis-understood me.

Our Malaysia political opera soup still unreeling, getting interesting though. No real damage so far despite of some spicy stories managed to take up some of my spare time. Our political drama managed to break new export destination Europe aside from our traditional Singapore market. A week plus ago, a French journalist Arnaud Dubus writing on Altantuya appeared in French Daily Liberation trying to link N.A.R since the incident happened when he was the Minister of Defence. No smoking gun though.

Is Malaysia facing legal or constitutional crisis with the recent party hoping? I'm not in position to judge whether this is a legal issue, morality issue or simply amorality issue. If this country has true separation of powers, legal and constituinal issues should be resolved by the process itself. However, if this is amorality issue i.e. Macchievelli's move, outcome is easy to predict and I believe you know what that is.

Some quarters trying to connect the dots and trying to formulate a plan B - A.A.B should stay back as Senior Minister to counter N.A.R. Another plan B that I saw was, A.A.B and Pakatan should form alliance in case there is something bad happens. Of late, Dr. M has been fiecely criticizing N.A.R and warned him to pick clean cabinet or risking the end of BN in the next GE. Not sure who will win the Oscar award or Anugerah Bintang Popular.

Kopitiam talk asides, at this juncture, I am seaching for answers to the following questions

(i) are we facing a cyclical slowdown triggered by external events

(ii) when we reach at the bottom of the cycle, will our political and economic policy remain sound?

I am leaning towards cyclical slowdown for now but remain very worried mis-step or mis-management by politicians that can put all of us into basket case.

Saturday, March 14, 2009

Turning the corner?

Yesterday was 13th day of the month, a day that most people around the world regardless of religions associates it to bad luck. 13th day falls on Friday makes it even more scary, heck - the market closed higher for all three key indices 4 days in a row - Dow, S & P 500 and Nasdaq. Have we overcame the fear demons inside us and are we turning the corner?

This turnaround was sparked by Citigroup on March 10, so called leaked CEO internal memo telling his employees that they are profitable for the first two months of 2009. Then came GE AAA status was stripped to AA+ stable which was not that bad. Fitch jumped on bandwagon and stripped Berkshire Hathaway AAA to AA+.

On the economy front, the US retail sales drop for first two months not as bad as most thought. Is consumer spending stabilize?. U.S. consumer confidence unexpectedly rose to 56.6 surveyed in early March which most expect it to drop to 55.0

1. Citigroup and JP Morgan claimed to be profitable. Citi says they no longer require injection from the government.

2. Fitch downgraded Berkshire Hathaway

3. US retail sales drop not as feared

4. U.S. consumers confidence unexpectedly rose

There was plenty of articles talking about capitulation in October and November but that same group was very gun shy. This is understandable because the market proved them wrong. Plus we have not seen anything rise above 20% from the recent low yet - Dow Theory, trend following or Elliot wave group have not seen any confirmation yet. If Dow is able to close above 7500, the momentum group will fuel the rally further. For now, I am hoping the group that relying on valuation or simply less bad news will push it beyond 7500 to spark a bull run or bear-market rally or what ever we want to call it. March Faber says, based on oversold condition, this rally will carry us through till end of April. Why end of April? Sell in May and go away again?

I hope to spend sometime to talk about Malaysia stock market this weekend because it has been very uninspiring especially after the second stimulus already been announced. I am seeing a few of my favorite stocks on my monitoring radar are being lelong.

Friday, March 13, 2009


Dear readers, Turtle is running out of ideas to blog after posting serious stuffs whole week. Thought of just pluck some jokes to wrap up this week. I've taken a few econ papers during schooling days, mostly passing one grade above 'F'. Despite of my uninspiring achievements, I still want encourage young man/woman to take at least one paper on economics. The top 10 reasons are:-

1. Economists are armed and dangerous: "Watch out for our invisible hands."

2. Economists can supply it on demand.

3. You can talk about money without every having to make any.

4. You get to say "trickle down" with a straight face.

5. Mick Jagger and Arnold Schwarzenegger both studied economics and look how they turned out.

6. When you are in the unemployment line, at least you will know why you are there.

7. If you rearrange the letters in "ECONOMICS", you get "COMIC NOSE".

8. Although ethics teaches that virtue is its own reward, in economics we get taught that reward is its own virtue.

9. When you get drunk, you can tell everyone that you are just researching the law of diminishing marginal utility.

10. When you call 1-900-LUV-ECON and get Kandi Keynes, you will have something to talk about.

For more advance readers:

Engineers and scientists will never make as much money as business executives. Now a rigorous mathematical proof that explains why this is true:

Postulate 1: Knowledge is Power.
Postulate 2: Time is Money.

As every engineer knows,

---------- = Power

Since Knowledge = Power, and Time =Money, we have

--------- = Knowledge

Solving for Money, we get:

----------- = Money

Thus, as Knowledge approaches zero, Money approaches infinity regardless of the Work done.

Conclusion: The Less you Know, the more money you Make.


Thursday, March 12, 2009

China's investment surges

I saw this piece of news on the Bloomberg on China's investment surges hoping to offset export slump. This is largely in-line with my expectations but I believe many will still be skeptical.

1. Urban fixed-asset investment climbed a more-than-estimated 26.5 percent in January and February combined to 1.03 trillion yuan ($150 billion) from a year earlier, the statistics bureau said today in Beijing. Exports tumbled 25.7 percent.

2. Railway investment tripled from a year earlier, agricultural spending doubled, and coal-mining expenditure jumped 59.6 percent, the statistics bureau said. The number of new projects climbed 28 percent to 18,533.

As the world’s second-largest oil consumer, China has approved and started at least $35 billion of energy projects since the stimulus plan was announced in November, according to data compiled by Bloomberg. The nation last month began building the eastern section of its second west-east gas pipeline, valued at 93 billion yuan.

3. “China’s economic growth may rebound strongly in this quarter and the next because of the investment expansion prompted by the stimulus package,” said Xing Ziqiang, a Beijing-based economist at China International Capital Corp. “However, slumping exports may drag down investment by manufacturers, so that growth slows again in the second half.”

4. Surging spending outweighs a slump in trade because fixed- asset investment accounts for 40 percent of China’s economic growth, versus 7 percent for net exports, said Sun Mingchun, a Hong Kong-based economist at Nomura Holdings Inc.

(Source : Bloomberg)

I do not like to get myself into troubles by commenting political games between the American and the Chinese. My pragmatic purpose is to remind ourselves - read in between the lines on political motives when decoding market news in order not to miss the big picture. The American has been pressuring the Chinese to strengthen Yuan to shrink their trade deficits. So, they will keep labelling them an export oriented economy to put pressure on China not to devalue Yuan. I believe China has done a good job to maintain their behavior in order not to get into trade war. It was Hu Jintao that placed a phone call to Obama after Geithner accused China manipulating their currency. I was glad that just that one phone call diffused the tension telling the whole world US and China oppose trade protectionism. That was a wise action.

The American will also find ways to pressuring China by keep supplying them credit line - buying their treasury. It was the same tactic that they did to Japanese when they were roaring. I believe China will oblige to do so as they don't have many alternative outlets although they have been making some loans to third world resource-rich countries.

I can see they are making all kind of right moves that will benefit the global economy.

They are pushing hard to encourage consolidation to avoid excess capacities in a lot of industries like textiles, ship building, electronics, manufacturing and etc. They understand well excess capacity could prolong deflation and recovery.

If we read carefully into China's stimulus, beside infrastructure, they are giving all kinds of incentives to go after higher added value products or environmental friendly or enegy efficient programs. 3G-lah, fuel-efficient car-lah, digital TV-lah, phase out old technology-lah, and......

What I am alluding is China is pursuing progress and better quality of life for her people. They have caring leaders actually. I believe they will continue to reform and reform until they catch up with the advanced countries. This will a long time to do that but also means we are going to enjoy the spin-off effects of China for a long time to come. I believe the Western media will over-amplifying on the export headlines or speculate Yuan devaluation - to make our minds narrowly focused. China recent years export boom did generate a lot of trade surplus that attract a lot of jealousy. But with the American saving more, the tension should reduce down the road.

Wednesday, March 11, 2009

Portfolio Update - Public China Select

(Click on image to enlarge)

Updated Public China Select Fund.

Tuesday, March 10, 2009

My views on China, Part II

3. The lending activities are artificial. Bankers are putting back off-balance sheet in 2007 and 2008 when they were constrained by the Chinese government lending quotas. Banks may loosen their lending standards - some are finding its way into stock market, property market and etc. Bad debts are going to show up later. Lending for the sake of lending(making Beijing smiles) will not help to boost fixed-investment.

A bit of reflation is good to stop deflation. Confidence will rise when they see stock market are property market are rising.

Purchasing Manager Index is rebounding suggesting the situation is not bad as we thought. I am still hoping it will break above 50 marking an expansion. So, I will still give a benefit of doubt money did flow into real economy despite of some negatives. In environment like this, perfect solutions are very hard to find.

4. Even if Chinese economy rebounds, Shanghai stock market rebounds - the rest of the world will still buries their heads in the sand. Decoupling is dead.

The tape says Shanghai Composite Index, Morgan Stanley China closed end fund (NYSE: CAF) and A50 China Tracker Fund (2823.HK) decoupled from S & P 500, Hang Seng Index and Hang Seng China Enterprise Index. Morgan Stanley China closed end fund and A50 China Tracker ETFs are tracking closely on A shares listed in Shanghai market. The door is not totally shut, still got a bit of hope. Good day.

Monday, March 9, 2009

My views on China - Part I

I have been reading here and there over the last few months on others views on China. It's about time I stitch my random thoughts together. I want to apologize if I am not able to cite any sources as you may know blogging is less formal but I will still try my best if I can recall them. Here are the common themes and my views.

1. China cannot pull the world out of global recession. Correct, China cannot pull the world out of recession physically. The size of China economy of about US $ 3 trillion which is no way to offset the global economy contraction.

When global economy slipped by 4% of roughly a size of US $ 50 trillion, it will translate to about US $ 2 trillion loss. Even China GDP grow by 8%, it will be a drop in the bucket. Sorry folks.

Yes, China will not be able to help the world physically but it will help the world psychologically. Confidence crisis is part of negative downward spiral now. China will be able to give some moral support to battered world. China restocking at least putting a floor to some of shipping rate, commodity price like copper, iron ore, etc. This will help the emerging economies that produce real stuffs.

(Source : http://www.minyanville.com/articles/dow-CHINA-shanghai-pmi-Indices-Export/index/a/21459/p/1)

2. Crushed export segment and soaring unemployment will impact consumption and investment. To shift from an export-oriented economy to consumption-led economy will take about 5 - 10 years because this is structural.

Some already criticizing China top leadership being caught flat-footed as they did not see this was coming. The first 4-trillion Yuan stimulus was reactive rather than pro-active.

I am no professional economist but by looking at data alone, I feel the premise of labelling China is an export-oriented economy itself will nullify the argument itself. I show this chart about a year ago. Can you see investment is actually a big chunk of that growth contribution? The good thing about China, unlike some countries like India or Eastern Europe where their investment boom is largely depending on foreign investment, I believe China has more money than ideas. Those in export sectors will be the losers but there will be new winners from other sectors like infrastructure, agriculture, mining, etc. The big picture will remain intact but there will be some shifting from left to right pockets. One more point, it was export that push China GDP beyond 10%, that was just a recent phenomena started from 2004. Prior to that, China was still doing fine around 8% without big contribution from the export sector.

Some more thoughts on Warren Buffett letter to shareholders

It would be incomplete and bias of me if I don't tell you this. My yesterday entry mentioned that there are some subtle changes in Warren Buffett's strategies. He diversify a bit and taking smaller size bets but his old habit of taking a big swing is still there. I choose to highlight first - he takes smaller swings on high payout bets but inherently higher risks of certain business, country, currency, management, and etc - will determine the size of his bet. Most of the retail players, including myself, taking far more larger size in relation to investable fund for riskier bets but under weight safer bets. We tend to misquote Warren Buffett or abuse his strategy. With that I hope my points are getting across now. I also hope I manage to unfreeze your mind. Let's go back to his famous focus investing strategy.

When he sees good opportunity of business that will be around for decades like oil, food or transportattion, he will take a big swing. In 2007, he has about $ 1 billion stake in Conoco Phillips but in 2006 he put in another $ 6 billion, tally to $ 7 billion. Unfortunately $ 7 billion at cost left him with $ 4 billion market value. There is no doubt he is sucking his thumbs now but I believe based on 10 billion BOE proved reserve alone will provide him a lot of margin of safety. At US $ 40/barrel crude oil, market capitalization/market oil of proved reserve = 52/400 = $ 0.13 which is very cheap. We are buying a dollar with US $ 0.13!!! [ Click here if you are interested to know on how dirt cheap are resource-based companies]

This is a good lesson that I picked up. Like most value investors, we tend to anchor our purchase price based on the intrinsic value that we derrived from the business. It is very cheap fundmentally but Mr. Market is still willing to sell his business far cheaper than we can imagine. Technical group on the other hand tends to anchor their purchse based on past prices. They sometimes forget that peak of old price was selling at the extreme valuation. For Shanghai Composite Index to go back to 6,000 plus will take a number of years. Both approaches have its shortcoming.

In 2007, he took an elephant size of US $ 4 billion position in Kraft Food. He lost 20% as at 31 Dec 2008 but I do not think this is going to wipe out his US $ 4 billion inventment in the long run. Yes we may buy lesser or cut on premium products that we used to pampered ourselves but we are still going to eat.

I really do not know what he did with his organization, it is seems like people work for him has exceptionally high quality of lending or underwriting discipline. All players in sub-prime mortgage already bled to death but this guy is still rocking and rolling.

One of his companies Clayton is in the business of lending to people in the sub-prime category. Their customers have median FICO score of 644 vs. a national of 723 but what is interesting is this, 35% of them are below 620. Yet the unit turned in $ 1 billion pretax in 2007 and $ 700 million plus last year. The major difference is they lend it to people who needed a house and will keep a home and not going for a quick flip. Thus they are able to escape the carnage of sliding house prices. This is basic lending 101, a lesson that I will remember well when evaluating banking stocks.

Sunday, March 8, 2009

More thoughts on Warren Buffett letter to shareholders


For years he has been advocating concentration strategy. He was saying diversification is for birds – animal and creature with small brains. Concentration strategy may work better during the period of low volatility. The following chart shows the volatility since 1928. The volatility has picked up significantly since 1997 till present.

Berkshire’s book value average annual gain during low volatility period from 1965 to 1996 is about 25%. The average annual gain from 1997 till 2008 is only about 13.7% which only half of the previous period. I certainly realize that law of large number is against him too as his portfolio has grown substantially in the last decade. Combination of both factors – volatility and size – begin to change his thinking. He is adopting diversification.

In good years and bad, Charlie and I simply focus on four goals:

(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;

(2) widening the “moats” around our operating businesses that give them durable competitive advantages;

(3) acquiring and developing new and varied streams of earnings;

(4) expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.

Goal no 3 is clearly talking about diversification.

Volatility and position sizing

He confessed that he made two mistakes – the gross mistake was on the terrible timing of adding ConocoPhillips at the peak of oil price and a smaller one is quoted below:

I made some other already-recognizable errors as well. They were smaller, but unfortunately not that small. During 2008, I spent $244 million for shares of two Irish banks that appeared cheap to me. At yearend we wrote these holdings down to market: $27 million, for an 89% loss. Since then, the two stocks have declined even further. The tennis crowd would call my mistakes “unforced errors.”

This is another departure of Warren’s style of making a big bet in high probability event. The fact that he swung his bat show his convictions of a high probability win but unfortunately it was amiss. The damage to his overall performance was very little but painful though. He is taking much smaller position in highly volatile environment or higher risk bet. In this case, he is putting up only $ 244 million for two companies which is relatively small by his standard.

He has scaled up his bet very slowly on POSCO. He took the first shot of about $ 572 million in 2007 and added another $ 196 million last year. That bet is still less than $ 1 billion. This is understandable as he perceives commodity is highly cyclical and not to mention emerging market stock has higher volatility. I remember when he took a position in PetroChina, it was only $ 488 million, again below $ 1 billion.

Saturday, March 7, 2009

Penentang PPSMI dihujani gas pemedih mata

(Malaysia Kini) kemaskini 3.54pm Gerakan aktivis bahasa menentang dasar Pengajaran dan Pembelajaran Sains dan Matematik dalam Bahasa Inggeris (PPSMI) mencipta sejarah hari ini apabila turun ke jalan raya, mengulang peristiwa perarakan Keranda 152 beberapa dekad lalu.

Peristiwa bersejarah pada 3 Mac 1967 itu bagi membantah Rang Undang-undang Bahasa Kebangsaan di Dewan Bahasa dan Pustaka (DBP), dulu dijadikan lokasi kegiatan sasterawan dan intelektual Melayu. Nombor '152' merujuk Perkara 152 Perlembagaan Persekutuan yang menyentuh aspek bahasa Melayu.

Kira-kira 2,000 orang yang berarak dari Masjid Negara selepas jam 2 petang bagaimanapun dihujani serangan gas pemedih mata daripada polis di Kampung Attap, tidak jauh dari Istana Negara.

Perhimpunan itu, yang asalnya dibenarkan oleh polis di masjid tersebut, melanggar larangan polis yang tidak membenarkan sebarang perarakan.

Mereka berhasrat membawa memorandum kepada Yang di-Pertuan Agong bagi memohon campur tangan baginda dalam pemansuhan dasar kontroversi itu.

(Klik di sini untuk membaca seluruh artikel ini)

Sudah sangat lama saya tidak menggunakan Bahasa Melayu selepas saya mula berkerja. Walaupun Bahasa Melayu saya sudah berkarat, saya akan tetap akan mencuba menulis catatan saya dalam Bahasa Melayu pada hari ini. Apakah tujuan saya? Anda akan faham selepas membaca catatan seterusnya. Adakah menulis catatan dalam Bahasa Inggeris pada hari-hari lain mengurangkan kesetiaan saya kepada negara tercinta ini Malaysia? Adakah menulis dalam Bahasa Melayu bermakna saya menderhaka bangsa saya sendiri, bangsa Cina??? Apakah penggunaan Bahasa Inggeris pada hari hari lain melumpuhkan keupayaan saya berkomunikasi dalam Bahasa Melayu? Perlukan kita mengadakan perarakan untuk memberitahu seluruh dunia kita menentang kerana kelemahan kita tidak dapat menguasai Bahasa Inggeris?

Kita perlu sedar bahawa bursa Malaysia sebelum 8 Mac 2008 mempunyai premium yang lebih tinggi, anggaran saya lebih kurang 20% premium berbanding dengan pasaran lain. Pelabur asing membayar premium ini kerana kestabilan politik and socio-ekonomi Malaysia. Apa yang berlaku sekarang ini amat merunsingkan pelabur tempatan and asing. Kalaulah pihak pemerintah(kerajaan) and pembangkang tidak mengamalkan pemikiran rasional untuk menyelesaikan isu-isu, kemorosotan quality pengurusan negara pasti akan menjatuhkan negara kita sendiri.

Saya amat bimbang pada suatu nanti pelabur - pelabur enggan melabur di Malaysia walaupun P/E dinilai dengan amat murah PE 5 - 7 X sahaja. Bukankan kita memusnahkan kemakmuran ekonomi kita sendiri ? Dari PE 15 X ke PE 5 - 7 pada masa akan datang? Apakah kita mahu menjadikan Malaysia yang disanjungi dalam arena antarabangsa pada suatu masa dahulu digolongkan sama seperti Filipina atau Thailand? Apakah maksud say? Sebelum 2008, pelabur-pelabur sanggup membayar RM 15 untuk setiap RM 1 keuntungan per saham, kemerosotan Malaysia akan menyebabkan pelabur sanggup bayar mungkin dalam lingkungan RM 5 - RM 7 untuk setiap RM 1 keuntungan per saham. Ini bermakna, kita memusnahkna nilai kita sebanyak 53 - 67%!!!! Kita perlu faham implikasi ini.

Kalaulah Pelabur Kura-Kura boleh menguasai Bahasa Malaysia and Bahasa Inggeris, bukankan setiap anak Malaysia mempunyai keupayaan yang sama?

(To international readers, today is a special day I made an entry in Malay language to make some points. I will resume with English in the next entry)

Friday, March 6, 2009

From under pricing risk to over pricing risk

Two headlines caught my attention today.

1) AAA rated companies are no different from junk in credit default swap market.

March 6 (Bloomberg) -- Warren Buffett and Jeffrey Immelt are among a handful of chief executive officers whose companies are rated AAA. Yet Buffett’s Berkshire Hathaway Inc. and Immelt’s General Electric Co. are being treated like junk in the market for credit-default swaps.

Contracts that protect investors against a default on bonds of Omaha, Nebraska-based Berkshire, which has $25.5 billion in cash, cost as much as those of KB Home, the homebuilder that lost money for seven consecutive quarters. Credit-default swaps on the finance arm of GE, which holds $45 billion of cash, are about as expensive as those for building materials-maker Louisiana-Pacific Corp., which posted nine straight quarterly losses.

(click here to read the whole article)

Do I have any comment? No, I'm speechless. I have reasons to believe Credit Default Swap market or safe haven assets has entered euphoria stage -- bubble for lack of a better word.

2)This is the first time I heard about 36 South Investment Managers. They made 236% in last 12 months(very nice) and plan to closed it down[very smart move]. They were betting on black swan by buying long dated options in global currencies, fixed-income, equities and commodity market. If hedge-fund is taboo to you, don't worry - I don't know that well and not qualified to invest in them too. The point is they know lightning will never strike twice within a short span of time -- it is highly improbable that we will see the same magnitude of decline across assets. Deleveraging will still on going but it will be in much controlled manner.

March 6 (Bloomberg) -- 36 South Investment Managers Ltd., a New Zealand-based hedge fund firm set up by derivatives traders, will close its Black Swan Fund after it gained 236 percent in the last 12 months and start a fund that wagers on inflation.

(Click here for more)

For someone to bet on inflation, I would interpret that there is a good chance of economy recovery in later part of the year. Regular readers should know that I am waiting at maximum pessimism of anti-inflation assets to be trashed between now and end of 2009.

There is this chart I want to show you - Federal Reserve balance sheet has no doubt gone through the roof, passed well beyond 2.3 trillions but that is not the point. The balance sheet begin to contract which is a good sign of liquidity stress is improving. The wild card is the impact of bank recapitalization and bad assets write down(this is the grand finale that I have been waiting patiently). Let's see whether Fed balance sheet will continue to contract or expand. Contraction is a good sign and expansion will give us some clues how bad the inflation will show up.

Thursday, March 5, 2009

To cheer or not to cheer?

Should you listen to CEO talk about their company outlook? Or the President of the United States about stock market? I am sure many leaders will find themselves in a dilemma - to cheer or not to cheer?. If you talk down economy you will get a down economy, if you talk down your stock market you will get a down market. Is it true?

President Obama and his team have been warning all over since they took over the office. The message I am getting, we are doing something but don't hope for a quick turnaround - the worst is yet to come. He may be honest with his assessment but is it necessary to keep reminding us? Or can he says the fear is fear itself? Perhaps he is afraid to look silly to call for a market bottom.

Going back to history book. During the Great Depression, DJIA bottomed out on the week of Jun 27, 1932[DJIA closed at 48]. FDR made his famous speech Fear Itself on March 4, 1933 on the day he was sworn in as the President of the USA, nine months after stock market lost almost 85%. DJIA was around 60 on that day and 25% higher than the Jun 27 low. The point of maximum pessimism already behind him by the time he made that speech. Here is the speech.

I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candor and a decision which the present situation of our Nation impels. This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.

In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone.

More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment.

(Click here to read the whole speech)

Putting Obama and FDR inauguration speech side by side. Obama speech looks far less desperate.

Homes have been lost, jobs shed, businesses shuttered. Our health care is too costly, our schools fail too many, and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet.

These are the indicators of crisis, subject to data and statistics. Less measurable, but no less profound, is a sapping of confidence across our land; a nagging fear that America's decline is inevitable, that the next generation must lower its sights.

Today I say to you that the challenges we face are real, they are serious and they are many. They will not be met easily or in a short span of time. But know this America: They will be met.


On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord.

(read the whole speech here)

Two days ago, he came out to address the nation fearing the market continue to fall after DOW broke below 7,000. Our usual cool guy got even cooler, he is expounding Benjamin Graham philosophy - in the short run the market is a voting machine but in the long run it is a weighing machine.

Obama compared the daily market fluctuations to a tracking poll in politics and said he wouldn’t be adjusting his policies just to meet daily market expectations.

“If you spend all your time worrying about that, then you’re probably going to get the long-term strategy wrong,” he said.

The president also said that consumer confidence is “taking root” with enactment of the $787 billion package of spending and tax cuts he won from Congress last month.

“There are a lot of losses that are working their way through the system,” Obama said. “And it’s not surprising that the market is hurting as a consequence.”

I believe Obama is realizing that he needs to shore up confidence.

March 3 (Bloomberg) -- President Barack Obama said falling share prices may mean bargains for investors with a “long-term perspective.”

Obama, who is seeking to boost public confidence in his strategy to pull the U.S. out of recession, spoke a day after stock markets tumbled. The Dow Jones Industrial Average yesterday dropped below 7,000 for the first time since 1997. The Standard & Poor’s 500 Index closed at the lowest level since October 1996.

“What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it,” Obama said at the White House today while meeting with British Prime Minister Gordon Brown on battling the global recession.

(click here to read the source)

Right after FDR made his famous fear itself speech, he launched The New Deal programs with full of Alphabet soup agencies[NRA, SEC, PWA, NYA, etc] to get things done. I am seeing Obama administration is lack of boldness or ability to get things done. It's very unAmerican too me. I am very weary that his dream team will spend more time talking rather than doing, despite of Obama relentlessly demanding time for action is now. Will he end up being a leader with no followers? Will Obama's vision of hope and change turn into no hope and no change? This is what the market is telling him. I like Obama's ideals but he must show the world he can get things done.

Wednesday, March 4, 2009

Why Public Mutual China Select Fund?

I believe the curiosity is not why buy Public Mutual China Select Fund but why March 2, 2009 after DOW went under 7,000. I don't have perfect answers.

The room for stock to decline 50% when DOW at 12,000 or 13,000 is very high. But the probability of DOW to decline 50% at 7,000 is somewhat smaller.

Just a small stake to test out timing, I will not put in another dime until this $1,000 shows some promise not to lose more than 15%(excluding loading fees of 5.5%). Shanghai Composite Index closed 2,093 today. The recent Shanghai Composite Index high(before correction) was 2,403, if it decline by 20% - below 1,920 - it will tell me this is a false bull start, then I will not put in more money.

2,100 is the approximate target zone that I planned to put in some money.

In case I am wrong on the timing, I still have cash left to buy more if I am convince quality stocks are getting cheaper and long-term fundamentals are not impaired.

KLCI : 868

Tuesday, March 3, 2009

Turtle bought RM 1,000 Public China Select Fund

More update later.

Reflection on Warren Buffett letter to shareholders

Reading Warren Buffett letter to shareholders makes me feel like going to church listening to sermon. He preaches the same sermons over and over again. Like church, you will see multitude of real greenhorn(new convert) or retirees(guys(gals) that finally mature after graduated from hard-knock school) keep nodding their heads agreeing to the gospel “truths”. Rebellious teenagers will flee finding the preacher is very preachy and boring. They like to prove the old chap is wrong, obsoletes and irrelevant to financial engineering innovation. The can’t even use computer properly except yelling for help - hapless. Their tools belong to Stone Age and Greek illiterate. I was one of those rebellious teenagers but humbled by “Society University” and finally return to the root and a home called Kampung Intelligent Investing.

Ever since I can get his letters on-line, I always spend time thinking over what he says in his letters. I don’t like to turn my reflections into an essay competition about Warren Buffett. I am sure countless of articles already flying around the Internet over the last few days. My inner contrarian normally will prevent me writing a guy that already very popular. But for Warren Buffet, it’s always a pleasure. So let's get started.

Intrinsic Value. Berkshire Hathaway 2008 book value fell by 9% vs. S & P 500 37% but share price of Class A lost almost 31%. Seems like some mis-match here. Warren Buffett finally openly talk about how to value Berkshire.

per share investment ( Bond, Equity and cash equivalent) + per share earnings from other sources(operating units)

2008 Intrinsic value of Berkshire = 77,793 + 39,210 ( 10 X EPS) = 117,003 or 3,900 per Class B share.

In my opinion, Berkshire is undervalued now.

Derivatives. Yes the multibillion put option contract he wrote. Since he explains better than I do, I will reproduce the whole explanation here:

The Black-Scholes formula has approached the status of holy writ in finance, and we use it when valuing our equity put options for financial statement purposes. Key inputs to the calculation include a contract’s maturity and strike price, as well as the analyst’s expectations for volatility, interest rates and dividends.

If the formula is applied to extended time periods, however, it can produce absurd results. In fairness, Black and Scholes almost certainly understood this point well. But their devoted followers may be ignoring whatever caveats the two men attached when they first unveiled the formula.

It’s often useful in testing a theory to push it to extremes. So let’s postulate that we sell a 100- year $1 billion put option on the S&P 500 at a strike price of 903 (the index’s level on 12/31/08). Using the implied volatility assumption for long-dated contracts that we do, and combining that with appropriate interest and dividend assumptions, we would find the “proper” Black-Scholes premium for this contract to be $2.5 million.

To judge the rationality of that premium, we need to assess whether the S&P will be valued a century from now at less than today. Certainly the dollar will then be worth a small fraction of its present value (at only 2% inflation it will be worth roughly 14¢). So that will be a factor pushing the stated value of the index higher.

Far more important, however, is that one hundred years of retained earnings will hugely increase the value of most of the companies in the index. In the 20th Century, the Dow-Jones Industrial Average increased by about 175-fold, mainly because of this retained-earnings factor.

Considering everything, I believe the probability of a decline in the index over a one-hundred-year period to be far less than 1%. But let’s use that figure and also assume that the most likely decline – should one occur – is 50%. Under these assumptions, the mathematical expectation of loss on our contract would be $5 million ($1 billion X 1% X 50%).

But if we had received our theoretical premium of $2.5 million up front, we would have only had to invest it at 0.7% compounded annually to cover this loss expectancy. Everything earned above that would have been profit. Would you like to borrow money for 100 years at a 0.7% rate?

Let’s look at my example from a worst-case standpoint. Remember that 99% of the time we would pay nothing if my assumptions are correct. But even in the worst case among the remaining 1% of possibilities – that is, one assuming a total loss of $1 billion – our borrowing cost would come to only 6.2%. Clearly, either my assumptions are crazy or the formula is inappropriate.

I’ve written about how shrewd and innovative he is when come to generating float. In this case, you are loaning him money at 0.7% compounded annually. Even his bets gone soured, he is paying at a maximum of 6.2% financing cost. Let's say this old tiger lost its hunting skill, say, he can only generate 10% annual compound return for next 100 years, still you are letting him grow his net worth at very cheap financing rate. In 100 years later that 2.5 million will grow to 71 million (worst case), 18 billion (1% chance of 50% decline below agreed index) or 34 billion (99% chance of not paying anything)

Back to his real money bet. 4.3 billion premiums he received so far on put contract, he is likely to create additional 25 billion wealth and not like what most believe that is the beginning of the end of Berkshire Hathaway. Honestly, do you believe that S & P will go from 900 to 450 or 0 on 31 December 2028(I pick the date from the air of European style settlement in 20 years time)? It is always frightening when you hear the media report he has 14.9 billion losses on derivatives(based on mark-to-market).

Enough of hard stuffs? Now you know the old man that you know is a complex man. He is just too humble and decided to come down to our level. Give him that respect. Will be back soon on his other subjects soon. Stay tuned……….

Monday, March 2, 2009

Portfolio Update - March '09

(Click on Image to enlarge)

There are two components to grow our net worth. The first component or first bucket is our personal earning - our day job, business, parents, etc. The second component is shifting our first bucket to second bucket (investments that consist of equity, bond, cash and etc) and hoping it will grow over time.

During this downturn, both buckets are hurting. Turtle got to cut saving from $ 888 to $ 620 / month for the next six months. If things don't improve, $ 620 will be extended to another six months. This is the reality that I have to accept.

God, grant me serenity
to accept the things that I cannot change;
the courage to change the things I can;
and the wisdom to know the difference.