Sunday, May 31, 2009

Turtle Portfolio Update : June 2009

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Turtle is reverting back to $ 888 saving/month starting June 2009.

MUI is moving on the right track by parring down their debts from over a billion to about 600 million as at 31 March 2009. With 500 million cash on hand, they are almost in net cash position. The critical thing is they need to make money at the operational level. Odds are getting better as days go by.

Saturday, May 30, 2009

Cover all bases

I sometimes come across report trying to cover all bases but very unfortunately it cannot help us to make any decision. First they frightened you - beware of double top. So, don't do anything. If you have position, should you sell? What they say however even it pull back, it may pull back to 7,500 level - around 10%

In case you keep waiting and that correction is not materialize, then watch out for break out of 8600. Breakout from this level will push the stock market higher. How high? Don't know.

Anyway, they say head and shoulder pattern is forming and should go all the way to 9700.

So after go round and round, they say there is a possibility of 10% correction and it can go up by 15%. Do you have any idea what to do now?

Thursday, May 28, 2009

Crude Oil Target

May 28 (Bloomberg) -- OPEC is likely to leave production quotas unchanged at today’s meeting in Vienna in a bet that demand will recover, pushing prices as high as $75 a barrel by year’s end, ministers said.

Officials from five of the 12 members of the Organization of Petroleum Exporting Countries said before the start of today’s closed-door assembly they supported leaving output targets unchanged, as the group did at its last conference in March. They will push instead for better compliance with targets set late last year.

“We should not make it more difficult for the world economy,” Shokri Ghanem, chairman of Libya’s National Oil Corp., said today in Vienna. OPEC is therefore unlikely to opt for more cutbacks, even as it sees “a lot of overhang in the market.”

Click here to read more:

Do I believe US $ 75 / barrel ? Yes as I am betting on recovery. Speculators are aiming at the same level based on 0.318 Fibo retracement. Those have strong recovery convictions should consider one more commodity: natural gas. It's really cheap in my opinion. Majority of the natural gas demand is coming from industrial sector. If you have strong conviction on demand recovery, consider this ETF (NYSE: UNG).

Wednesday, May 27, 2009

China -- love-hate?

Gone to China for a few days and finally managed to get out today. It's very frustrating because you cannot blog in China. No matter how hard you try, there was no way to go around it and make it work. You also cannot read any blog too! I wonder how some of my readers manage to do that.

They really control information in China. During my last trip, I took out a copy of WSJ and started to read while we were entering China immigration. My business friend told me to keep my paper, reading foreign materials is insulting and disrespecting their rules and regulations. But the thing that drove me nut was, I can turned on to satellite TV in the hotel watching Bloomberg or CNBC or CNN. A very strange country indeed. The moral of the story, when they close one eye, please do the same and do not challenge their inconsistencies, don't make them lose face unless you want to invite troubles.

After travelled from Southern to Northern China, you can hardly feel there is any slowing down in the economy. Cars filled up all the five-lane highway. Restaurants are full. Planes are full and etc. Do you remember the story of those toy factories shut down and 20 million people out of job in Southern China. Yeah, absolute numbers will frighten a lot of people but if you use percentage -- it's really a non-issue. In one small town in Southern city alone already has proximately 800 - 1000 toy factories. I felt a bit embarrassed in front of my friends when I started to quote what I read and shut up almost immediately when I saw the way the smiled (ai-yah you know what kind of smile is that-lah, Malaysian coming out of tempurong-lah).However, proactive steps taken by the Chinese government as a prevention was very useful. Most feel 8-9% GDP growth is not an issue for 2009. Got to go now. Just a few more words, though we Malaysians have been "kuat complain kaki", we still need to be thankful for the kind of freedom that we have.

Friday, May 22, 2009

Turtle Portfolio Record House Keeping

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How to be a good critique?

"As iron sharpens iron, so one man sharpens another." (Proverbs 27:17)

When iron is sharpened by coming into contact with more iron, sparks fly. But just because sparks are in evidence, we cannot assume that iron is being sharpened. The iron could just as easily suffer damage from an inexperienced hand. It takes a skilled hand to sharpen iron without destroying it.

As more critiques are being created by people outside of what has been called "the emerging church" (which would include EmergentVillage but is not limited to it -- as I'm sure the folks at EV would agree), the necessity of discerning the difference between a good critique and a poor one is heightened.

Recognizing that I'm only scratching the surface on this topic, I'd like to offer a few suggestions on how to tell a good critique from a poor one:

1. A good critique starts with understanding thoroughly the subject matter being critiqued. If we're going to critique something, it should be assumed that we'd do our homework and be knowledgable about what we're critiquing. There is very little to be gained from a critique that is based on sloppy, slanted, or inadequate research.

A good critique will be conversant with primary sources, not relying on other critiques as their basis.

2. There are two kinds of questions people ask when confronted with something that they aren't sure about:

Questions that are looking for information -- seeking to understand.

Questions that are looking for ammunition -- seeking rant-fodder.

A good critique will be evidenced by questions that are seeking understanding.

3. The use of the "false dichotomy" is a sign of a bad critique. A false dichotomy is an exaggerated either/or scenario, where people are given only two diametrically opposed options to choose from. The example I used in Clique Maintenance Part 2 (Next-Wave May 2003) was the false dichotomy created by proponents of the "courtship" approach to dating: you either accepted courtship principles (which aren't bad, by the way) or your only other option was mindless sexual promiscuity.

So in terms of the emerging church discussion, when we're given the two options of being (a) emerging or (b) Biblical -- it's a false dichotomy. The two need not be mutually exclusive. The use of the false dichotomy is actually quite manipulative, and should be avoided.

4. A good critique follows the spirit of Matthew 18:15-17. The broader theme of Jesus' teaching here is that we're dealing with family members, not enemies (cf. Galatians 6:1). A good critique reads like a letter from an old friend who is concerned about us. It's the attitude of a trusted friend sitting across the table from us in a coffeeshop or pub, and loving us enough to ask the tough questions, and listen to what's on our hearts.

5. A good critique is capable of seeing the good as well as sounding the alarm about potential problems. By acknowledging the positive aspects of the emerging church -- or at a minimum, acknowledging the validity of the questions being raised by the emerging church -- critics would find a more receptive audience of needed insights into our shortcomings.

"Wounds from a friend can be trusted..." (Proverbs 27:6).

A good critique may sting at times -- we're all aware that we see through a glass darkly -- but if the underlying attitude is one of redemptive friendship, a good critique will sharpen the emerging church.

And we'd welcome it.

Source: Forging A Good Critique by Rob McAlpine

Thursday, May 21, 2009

The more you repeat the less powerful is your message

May 21 (Bloomberg) -- Federal Reserve officials, who see possible signs of “stabilization” in the U.S. economy, signaled they’re not convinced those improvements will persist.

Policy makers, meeting April 28-29 in Washington, saw “significant downside risks” to the outlook for the economy, with the global financial system still “vulnerable to further shocks,” minutes of the session released yesterday said.

The report indicates that Fed officials may be ready to build on their plan in March to buy $300 billion of Treasuries should the economy or financial markets deteriorate further. Some policy makers said an increase “might well be warranted at some point to spur a more rapid pace of recovery” from the worst recession in five decades, the minutes showed.

“They are talking about keeping an option open in case things get worse for some reason,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, who previously worked as a senior economist in Congress. “But if the economy improves, they don’t need to do any more.”

I learned this lesson the hard way a long time ago - the more you repeat a message to the market, the less powerful the effect is. It was like Y2K problem, the more people concerned about the issue essentially people are well prepared for any eventuality. Old news to me -- they are just trying to scarce the market to justify QE.

Wednesday, May 20, 2009

Turtle, why you buy energy first before buying gold?

All right, after making noises and hints that I am going to buy some commodities and finally did it. This is a first transaction of dipping into commodity for Turtle Portfolio. Some may wonder why I get into energy first and not gold. I have reinterated several times, inflation is going to show up in the next economic recovery stage -- whether it is 1% growth, 2% growth or 4 - 5% growth, I simply have no idea. But as long as the frozen credit market start to flow, confidence will return and economic activities will expand. Not to mention that the governments around the world trying to err on the wrong side i.e. over-reacting, over-stimulating. I hope I get it right. So, beside demand-supply factor, I believe speculating money will flow into commodities again. What if I'm wrong on the timing? Well, it's a small position, so I can afford to top up my investment again -- after seeing a falling knife hits the ground.

One factor is delaying my gold purchase -- IMF has been telling everybody that they plan to sell gold to raise cash. They got plenty of gold. When that happen, gold price may go down. How low? I don't know, when market participants become irrational, it's hard to predict what will be the floor, we have seen that just less than 60 days ago. Stick to one simple principle, buy when I see blood on the street. Since I'm 80% invested for Turtle portfolio, there is no really hurry for me to buy yet. There is always a better investment proposition exists everyday.

Tuesday, May 19, 2009

Turtle bought RM 1000 OSK-UOB Energy Fund

Placed an order of RM 1000 OSK-UOB Energy Fund. Will update more later.

Monday, May 18, 2009

Hottest word in town: Green Shoots

The hottest word in town is green shoots. Some say green will soon turn into yellow and die in winter (brown). It has been a while I did not indulge my posting with a lot of charts, going to party with charts today. OECD Leading Indicator plunged into the steepest level that we have not seen since 1975. The average of Peak-Trough is about 23 months, however there were two periods that we have a long peak-trough cycle: Nov 1978 - Jul 1982 ( 44 months) and Nov 1988 - Nov 1992 (48 months). We could be lured into thinking this time may be the same, only half way to the trough. Not likely in my view, contraction in both periods we a lot shallower unlike this time, it was really a bungee jump. I will still leave a room of sharp rebound and we can get out from the recession this year.

Most of the people are still recovering from shocking data of steep plunged in Industrial Production Index data by looking at Jan and Feb '09. I can tell you it was indeed extremely scary if you are industrial sector. May be the pro can access to March and April 2009 data but based on my personal observations, it is getting a lot better right into May 2009.

If you look at this chart, up to 2001, you will find that East Asia economies tend to bottom out before OECD. However the pattern start to change after 2003, East Asia economies tend to bottom out later and peak later, as the chart suggest, BRIC was lending the support(decoupling). Looking at the chart, we are probably will go back to recoupling for a while after went through the shock last year. With BRIC recovering, it will get the global economy moving again.

Interestingly, China and Euro are showing signs of turning around.

May be people are getting nervous that stock markets are correcting thus feeling less confident again. If the stock markets were to correct by another 5 - 10 %, my view will remain unchanged. The US stock market is in the bottoming process and some market like Hong Kong already has begun to climb the wall of worries(speculative wave) now.

.......... to be continued.

Sunday, May 17, 2009

Energy strategy exposure: OSK-UOB Energy Fund

I have blogged about energy for several times - started from calling it a bubble to cheer leading after the collapsed in July 2008. I touched on those topics at fairly conceptual level but did not make specific actionable investment idea. One of the things that I am planning to do for Turtle portfolio is to buy into OSK-UOB Energy Fund.

This fund will allow me to have exposure into energy, commodities future and some energy related stocks. As many of you have been reading my thoughts that hard asset exposure is important for the next few years as I am betting on reflation. Why am I so stubborn insisting on reflation and not deflation? It's simply because I know government around the world will do whatever it takes to defeat deflation. I am confident they will win because they have the ultimate weapon -- printing press !

In a nutshell, this fund will have exposure to :
60% of JPMorgan Commmodity Curve Index(JPMCCI) Energy Excess Return Index(Index)
20% of Energy Select Sector SPDR Fund(ETF-XLE)
20% of Powershares WilderHill Clean Energy Portfolio(ETF-PBW)

JPMCCI Index will exposre to about 33 kind of commodities as you can see in below chart.

JPMorgan Index has slight different sector exposure compared to S & P GSCI and DJ-AIGCI. The energy exposure is not as high as S & P GSCI but higher than DJ-AIGCI. Personally I think this is quite a balance index.

XLE Index is basically an ETF that holds large US oil companies like Exxon Mobil, Chevron, ConocoPhilips and etc.

The third component of the fund expose to alternative energy stocks(PBW).

Saturday, May 16, 2009

Dr Doom is finally bullish of something

Our famous Dr. Doom Roubini is finally bullish of something. He wrote an Op-Ed piece on the New York Times: The Almighty Renminbi? He sounded bullish on Yuan, here are some of the snippets

THE 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.

Chinse firm listing on Bursa Malaysia

Regular readers will be familiar with my thoughts that I am bullish on China but they also know that I will not buy into any stocks with China label on it. I saw this a while back but I don't have a chance of get my thoughts organized. I read in the Edge this week that a Chinese shoe maker will come here for listing. I hope they will not price it below RM 1 to sow the seed of Char Koey Tiau business.

(TheEdge)KUALA LUMPUR: The Securities Commission (SC) has approved one Chinese company for listing on the Bursa Malaysia, making it possibly the country’s first foreign listing.

SC chairman Datuk Zarinah Anwar said on May 8 the regulator was also looking at a proposal by another Chinese company while it had also received several inquiries from other countries.

Singapore Exchange attracted a dozens of Chinese firms for the last few years. To those who have been critical towards Bursa Malaysia for lack of competency should apply the same yardstick to Singapore Exchange - measure them and beat them with stick when not performing up to the standard. Singapore admirers should be careful, SGX failed to protect investors!!!. Some of the shares pluged almost 80 - 90%. Many are still holding on to their asses and cannot walk properly, got screwed badly! When it comes to stock market only two things matter - greed and fear.

(The Star)SQUEAKY-CLEAN Singapore seems an unlikely place for serial financial scandals to occur.

That has occurred because it is a location for stock exchange listings of companies with operations mainly in China. These China stocks in Singapore are called S-chips. In some cases, S-chips have seen extreme volatility in their share prices amid suspicion of impropriety.

In other cases, shocks of misdemeanour has occurred, with the latest striking Raffles Education Corp Ltd, which is listed on the Singapore Exchange (SGX).

This ricocheted from its associate company, Oriental Century Ltd, an S-chip listed on Singapore’s Catalist market that had replaced the Sesdaq. Raffles Education is the single biggest shareholder of Oriental Century which operates private schools in China.

It’s strangely reminiscent of India’s Satyam scandal in which its chairman confessed to having inflated the company’s cash balances, and other irregularities.

Oriental Century said in a statement to Catalist on Thursday that its executive chairman and chief executive officer Wang Yuean informed the board that cash balances of 234 million yuan (RM126mil), reportedly on the balance sheet as at Dec 31, were “substantially inflated.” Over the years, Wang had diverted unspecified sums to an interested party.

Interestingly, the auditors, KPMG, had informed Oriental Century’s chief financial officer (CFO) on Monday that it had difficulties reconfirming the bank balances and there were doubts about the authenticity of the bank confirmation. Later the same day, the CFO informed the audit committee he had serious doubts over the bank balances.

KPMG then informed the audit committee that following its enquiries, the bank indicated it had no knowledge of having issued the confirmation.

Raffles Education said it is a passive investor, with no management role in Oriental Century. The former added that in a worst-case scenario, if it needs to write off the investment, the effect is S$34.6mil or just 1.5 cents a share in Raffles Education.

In another case, Beauty China Holdings Ltd told the SGX on Friday that it received a statutory demand from its syndicated lenders to repay an entire loan of HK$134mil (RM63mil). The deadline to do so is March 27 and a failure to reschedule the loan will raise a going-concern issue, it said.

In late February, the stock was suspended from trading when the company said its chairman Wong Hon Wai was in talks with a potential buyer for all his shares.

When the stock was requoted on March 3, it crashed 70% from its pre-suspension price of 37 cents to 11 cents.

It was later revealed that all of Wong’s shares, held through a company, were pledged to obtain credit facilities and some of the shares were forced sold.

Beauty China is one of the biggest domestic brands of cosmetics in China. At the start of last year, it had a total market value equivalent to over RM1bil.

In yet another case, Fibrechem Technologies Ltd announced to the SGX last month that its auditors encountered difficulties finalising its audit of trade receivables and cash balances.

In addition, executive chairman James Shang offered to resign with immediate effect, the company said. The company manufactures chemical fibre in Fujian province, China.

As a result, public anxiety over cash balances spread to other companies. That rolled into China Hongxing Sports Ltd after a sell-down in its share price with high transaction volume – the media and blogs questioned if the cash is in the company when it did not declare a final dividend.

That led the company to issue a statement to the effect that it had 1.98 billion yuan cash as at Dec 31, with borrowings of just six million yuan. The company, which makes sports shoes and apparel in China, said in view of the uncertain economic environment, it was prudent to maintain its cash position and not to declare a final dividend.

These transgressions and apprehension have caused Singaporeans and other investors to lose a lot of money, given S-chips’ higher risk profile and a reputation that some do not deserve.

Tuesday, May 12, 2009

Just to say Hi

I will be out of pocket for a few days as I am working on an important project, it's my job related. Hope to be able to post by this weekend.

May 12 (Bloomberg) -- The dollar’s rally is set to end in a “currency crisis,” investor Jim Rogers said, adding that he may bet on a slide in equities after nine weeks of gains.

The advance in the U.S. currency has been driven by investors covering their short sales, Rogers, 66, said in an interview with Bloomberg Television in Singapore. He may consider adding to his holdings of the yen and prefers the euro to the dollar or the pound, the investor added.

“We’re going to have a currency crisis, probably this fall or the fall of 2010,” Rogers said. “It’s been building up for a long time. We’ve had a huge rally in the dollar, an artificial rally in the dollar, so it’s time for a currency crisis.”

The dollar has climbed against all of the so-called Group of 10 currencies except the yen over the past 12 months, according to data compiled by Bloomberg. The U.S. currency was at $1.3592 per euro today from $1.3582.

Rogers joins “Black Swan” author Nassim Nicholas Taleb in avoiding the U.S. currency. Taleb told a May 7 conference in Singapore he preferred gold and copper to the dollar and the euro as the global economy faces a “big deflation.”

Gains in U.S. stocks also signal a “correction,” Rogers said. He’s avoiding equities for the next two to three years because prospects haven’t changed, he added.
Dollar Rally Will End, Rogers Says; May Short Stocks

I am still sticking to my position of inflation is going to be a big problem - so I am NOT going to agree with Taleb. Jim says equity to correct - yes but unlikely to make new lows. Despite of I beg to differ with their views but end result is the same, buying GOLD and Copper in coming correction is what I want to do. Take care.

Sunday, May 10, 2009

Stress Test Result

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19 of the largest banks undergone stress test based on various scenarios. The results were listed in the table. It is seems like the market did a good job to price in banks that have adequate and inadequate capital. Judging from the stocks price rally, in fact the market priced in much more worse scenario for some of the banks like Bank of America, Wells Fargo, American Express, Capital One.

This "engineered" optimism should provide some relieves lead to more private capital funding. With that, I believe and I need to take a lot of guts to say this: Credit Crisis is behind us even though the pain of housing pricing will continue to decline but already countered by the accounting rule relaxation delaying toxic assets further write-down from damaging their balance sheets.

Thursday, May 7, 2009

We all are bubble expert now.

Just 50% off the low, people already called it a bubble, hmmm interesting. Since when we all become so cautious, I wish they were about 1 - 11/2 year back.

(The Business Times) (SHANGHAI) China is at risk of a stock market 'bubble' that may burst as investor confidence in the nation's economic recovery weakens and bank lending slows, according to China Galaxy Securities Co, the nation's largest brokerage.

The Shanghai Composite Index has surged 50 per cent since last year's low on Nov 4 amid signs that the government's stimulus measures are reviving the world's third-largest economy. The gains have driven valuations on the index to 27.2 times earnings, the highest in a year and Asia's third most expensive. These levels are 'signs of a bubble', Galaxy Securities strategists, led by Teng Tai, wrote in a report.

Click here for the whole story:,4574,331832,00.html?

When I first featured China Morgan Stanley A Shares(NYSE: CAF) in Mar 10, 09 it was selling for about US $ 26/share and today is selling for about US $ 38, appreciated by almost 46%. This fund has traded at a 37% premium over its NAV. Wow, what a day and night when sentiment tides turn.

Is Credit Market healing?

Is the credit market healing? This High Yield Corporate Bond chart tells us so. People are coming out to take more risk now. Can price goes back to pre-Lehman Brother collapsed?

Honestly I have been waiting for a correction but this rally is extremely powerful because all big the big brothers say holding cash is the most dangerous thing to do when you have a powerful move like that. Even Jim Rogers who has been extremely bearish on equities said he has least amount of shorts in his whole life now. Luckily, I have been heavily invested at lower price. All I need to do now is just hang on to the ride without having pressure myself keep asking: is this real? Should I jump in now? ..........

Tuesday, May 5, 2009

Sell in May and Go Away

I have been seeing this headline all over the place, this headline is flashing much more compared to the past. Perhaps my mind play tricks on me. But look at this, what does it tell us when you need to assemble a panel of expert to debate about it?

If people really want to sell, they will sell it quietly. Since statistically everyone knows about this secret, why don't they do it? Why? It's because everybody doesn't want to make a first move fear of losing out. Plus there have been rumors that more than 10 US banks will fail the stress test but profit taking has been shallow. Why?

(Business Times)SINGAPORE - Citigroup's Asian wealth management chief said business has improved in 2009 and clients are reducing their cash levels by investing in stocks and bonds, a turnaround from their super defensive stance late last year.

'The paranoia that gripped the market last year has eased off,' Aamir Rahim, CEO Asia-Pacific of Citi Global Wealth Management, told Reuters. 'People are more comfortable taking risk, but are much more disciplined about it.'

'We've actually seen an improvement in the first few months of this year month-on-month in the Asian business and we continue to see that,' he said in interview on Tuesday.

He said clients have begun to deploy some money into markets.

'They are probably still 50 per cent long cash. Late last year they were in the range of 70-80 per cent in cash,' he said.

It's because people are loaded with cash -- 50% long cash is a lot of money.

Sunday, May 3, 2009

Holiday reading: The return of depression economics by Paul Krugman

Picked up a book from a local bookstore, The return of depression economy and the crisis of 2008 by the Nobel prize winner in economics: Paul Krugman. With his kind of caliber, he is definitely capable of writing stuffs that I cannot understand but he did a good job narrating past financial crisis in plain English.

I was looking for answers how we can prevent future financial crisis so that we all can feel secure investing our money. The bad news is no easy answer can be found because there is no perfect model available. Some how we have ten woks but only seven lids.

I am going to share just two ideas that left a deep impression in me: Latin American and Asian crisis.

Let's start with Latin American first. Argentina was abusing their printing press for years with inflation went through the roof, 3000% and poor economic growth. They even introduced a new currency the austral. The austral was used between 1985 to 1991 but it was a doomed currency, nothing seemed to work. They finally resorted to peg their currency to US dollar, every peso printed backed by every US $ in their reserve. The results were dramatic, inflation dropped to almost zero and capital began to flow and economy expanded.

However, solving one problem created another problem. The system has a problem to deal with contagion effect. During Mexico infamous Tequila crisis ( a currency crisis), international investor lumped all countries by region. They pulled out money from all countries spelled as Latin America. So, the contagion effects spread to Argentina though their fundamentals were Okay. What was worst the problem compounded by local investors/residents panic and lost faith in their own peso and begin to convert to USD that caused USD shortage. Luckily, American has Exchange Stabilization Fund came into rescue and injected US $ 12 billion to stop the panic.

This reminds me of some investors demanded US to pegged their dollar to gold to prevent abuses of their printing press. There is no doubt that this will create a lot more discipline in their fiscal or monetary policies but in event of financial crisis, when you cannot increase your money supply fast enough, the vicious cycle will bring to its to your knees -- begging for help but god is too far away. This was one of the problems faced during the Great Depression until FDR confiscated gold. I am not saying we should or we should not but this is what I meant no perfect model existed.

The other part of the story was Japanese carry trade. We all know that Japan has lost decades after the twin bubbles busted. Not only they have zombie banks, lowering interest rate to zero and building roads to no where still cannot cure themselves. What is worst, they exported the problem to others. When Japanese hungered for higher yield, they lent money to some Thai "finance" companies. So, these "finance" companies controlled by corrupt and cronies of government officers, borrowed in Yen that heated up the property speculation. So, everybody had a good time partying, making good and fast and easy money. They became increasing reliance on foreign borrowings. Thai Bath begin to strengthen but it has came to a point hurting its economy as export became uncompetitive. This created another problem, import imploded that created huge trade deficit. Well the government wanted to fix their currency instead of letting it rose making the problem worse. This has created a fertile ground for speculators to take advantage of shorting the currency. I think the rest is history, many of us went through that crisis ourselves.

We may be strong but sometimes earthquake originated somewhere sending Tsunamis to our shores creating sorrows and there is nothing we can do about it. So, I really think we are living in the age of high volatility. Nothing is safe anymore, it is not a question of if but when a crisis will return. Read this book, it will help you to understand more about risk and how tightly coupled are financial markets. Financial globalization is far more dangerous than I originally thought.

Saturday, May 2, 2009

AmInvestment: Zero Strikes On Berkshire Hathaway

AmInvestment Bank launched Zero Strikes on Berkshire Hathaway Class B listed in KLSE( Stock code 0536C1, stock name BRKB-C1) on April 22, 09. Since launching, trading volume has been thin. The reception has been been cold either (i) mostly outright bearish on Warren Buffet or (ii) retail investors still not convinced of this rally has more legs to go or (iii) cannot understand risk-reward of this new animal. Before I proceed further the objective of this post is just for information and I have no position in BRKB-C1.

What is Zero strike call warrant Berkshire Hathaway? Firstly, like any other call warrant, it's a synthentic instrument that tracking an underlying shares without really owning them. At the expiry date, settlement is by cash and no shares will be delivered. In normal call warrant, you can only exercise when the settlement price(nornally average of last 5 trading day) is above certain price technically called strike price. If the settlement price is less than the strike price, the call warrant will expire worthless - satu sen pun tak ada. In zero strike call warrant, you don't have to worry about your call warrant expire worthless because it will be always in-the-money(meaning you can always exercise the call).

BRKB-C1 has 5 years to maturity and unleverage(1:1). So unless you are bullish about its propect in the next 5 year, you should not go near to this instrument. The second risk (or any risk when dealing with any foreign underlying share with 5 year time horizon is exchange risk). How do you calculate potential gain or losses? In Am marketing flyer, they highlighted how BRKB market price is always higher than book value, it can be between 60% - 150% higher.Only 2 occassions when it was traded very close to the book value - year 1999 and 2009.

From the chart, book value was roughly about US $ 2400, assuming he is able to growth his book value around 10% per annum ( which is less spectacular compared to his early days of more than 20% plus), book value in 5 year time will be US $ 3,865. Let's assume the market will give him only 20% premium over his book value, market share price will be around US $ 4,638. In this case, what is your return?

First, let's determine what is the zero strike at the issue date which was Apr 22, 09.
Issue date
Stock price : US $ 3072
Exchange rate : 3.629 (MYR/USD)
Zero strike at issue date = (3072/11148.29)*3.629 = RM 1.00

Maturity date
Stock price : US $ 4638
Exchange rate : 2.800(MYR/USD) Assuming USD tanked!
Zero strike at maturity = (4638/11148.29)*2.8 = RM 1.16

If you pay RM 1.00, then your return will be (1.16 - 1.00) = 16% or annual compounding return is roughly about 3%. It will get worse if you buy them at higher price in the secondary market or KLSE.

Let's consider another scenario which is more extreme. In March 06, the stock was wallop by the Great Depression fear, investors flee and jumped ship, the stock fell to USD 2,327. Let say at maturiy, the "Great Depression III" return, BRKB closes at USD 2,327, what is the zero strike at maturity?

Zero strike at maturity = 2,327/11148.29*2.8 = RM 0.48

In this case, you lose 52% (1.0 - 0.48), again it will get worse if you pay higher price. Though this is quite extreme but I will assign no more than 20% chance of history to repeat itself in short span of 5 year time.

So on the annual compounding return basis, we may have 20% chance losing 14%, 40% chance making 3% and 40% chance of making 15% if we pay for RM 1. I would not say it's a screaming buy but odds will improve a lot if it's around RM 0.60 - RM 0.70. I think AmInvest was trying to create a product for safe haven seekers. But, with not enough volatility(in the underlying share) and leverage, it's very unlikely to attract traders and speculators.

Friday, May 1, 2009

Turtle Portfolio Update - May 2009

(Click on the image to enlarge)
Added RM $ 620 saving to May 2009.