Sunday, 30 October 2011

Back to Basics

The number one problem for the US and for Western Europe is job creation. There is no bigger problem. The politicians can focus on all sorts of other things: taxing rich people, subsidizing pet projects, bashing China, etc. But, anyone who thinks there is a bigger problem than unemployment is missing the forest for the trees.

How do we get more jobs? That is not a tough question. It is only tough because we are talking about labor. If we asked the identical question about anything else, the answer would be painfully obvious. For some reason, politicians and many economists become completely irrational when asked how to increase the demand for labor. If the same politicians and economists were asked about how to increase the demand for anything else the answer would be immediately forthcoming.

How do you increase the demand for something?

How about making that something more expensive? Would that help?

What about substantially increasing the taxes for people that use that something? Would that help?

What about passing new regulations that would apply to using that something? Would that help?

To increase the demand for apples, why not make apples more expensive, tax folks who eat apples, and make anyone who buys apples spend one month of every year filling out paperwork to satisfy the regulations required to consume apples. Would that increase the demand for apples?

Yet, politicians and economists (like Paul Krugman) think that this is exactly the prescription necessary to get to full employment of labor. They are wrong.

To get more jobs, you need to reduce the cost of labor, increase the economic incentives for those who employ labor and reduce the regulations that surround the employment of labor. That's how you would increase the demand for anything including labor.

Saturday, 29 October 2011

The Anger of the Entitled

Wherever you look these days, there are people demonstrating for their "rights." These "rights" are the right to take money from other people so that the demonstrators can have free this and free that. If education and health care are to be free, who pays? The demonstrators could care less.

Look at Greece. There are daily and massive demonstrations demanding that their failed welfare state continue to support the "entitled." It is always someone else that should pay for all of the things that the "entitled" want. Everything is a fundamental "right" without obligations on the part of the entitled to fund anything. There are no obligations to be imposed on the entitled. After all, they are the entitled.

What about Italy and Spain? Who pays? Their answer is the same as the OWS (Occupy Wall Street) crowd. They payers are "the rich." As if the rich had enough assets to keep all of these entitled folks going on indefinitely. The move to "get the rich" has historical precedents and none of them are very attractive for average people.

The Russian and Cuban experiments were long playing disasters for the average person living through those experiments. It's worth noting that even those "leveling" societies had their privileged. The Castro family lives in a style that America's rich would love to aspire to.

People with responsibilities, kids to take care of, old folks to support and the like don't have time to camp out in make-shift camps around the US and the world and make posters with four letter words describing their hatred for capitalism.

When winter comes, the OWS gang will retreat to the warmth of their comfortable homes or back to their "entitled" college community.

The truly disadvantaged don't have time for this stuff. But the truly "entitled" can camp out for years on end before retreating to a more comfortable lifestyle that they are "entitled" to.

The rest of us have to work for a living.

Milton Friedman noted long ago that the only societies that have ever produced for the average person were capitalist societies. Such societies also produced rich people as a by product of raising the standard of living of the average person. You can see the fruits of capitalism today in China raising the standard of living of hundreds of millions of Chinese. Capitalism is what is needed if the average person is going to have a fair shake.

But, the entitled are not interested in capitalism. They are mainly interested in getting their "rights" at the expense of others.

Friday, 28 October 2011

Ho Hum

The European "deal" is mostly a mirage. The only "real" thing that takes place in the deal is the 50% write down of Greek sovereign debt and even that write down only applies to the 60 percent of the debt that is in "private" hands, meaning mainly in the hands of commercial banks.

Buried in this deal is the possibility that CDS (credit default swap) contracts will not be triggered. That is probably a sop to the banks who are on the hook for these contracts, which, among other things, insure Greek sovereign debt. No payoff for those who took out insurance. Who would have thought?

Europe is following the American pattern of reneging on past contracts to foster the illusion that they are solving today's problems. (America continues this pattern with debt forgiveness orchestrated by the White House, invalidating legitimate private sector contracts with the hope of securing more votes for Obama in 2012).

As for the EFSF (European Financial Stability Fund), the plan for that entity is ridiculous. Somehow, someway, someone is going to give the EFSF $ 1 Trillion and then that will be used to "insure" the first twenty percent of loss on newly issued debt, presumably debt issued by Greece, Spain and Italy. Who is going to come up with the $ 1 Trillion? The short answer is no one. The long answer involves numerous future headlines about the Chinese, the Saudis, and other targets, who will play nice, but, in the end, will donate nothing at all to this silly idea.

This "deal" now gives breathing space for a further expansion in sovereign debt by the weakest members of the EU so that a year from now, problems will be much, much worse than they are now. Meanwhile, Greece can go back to running the most inefficient economy on the planet without fearing a default (in the next few weeks).

So, why did the markets go up?

Because the US economy continues to grow, albeit slowly, and business is learning how to do without employees and still make money. So stocks will continue their upward march -- at least for a while yet. A sick Europe and an ever growing sovereign debt debacle is factored into market prices already. That's why the market is cheap (but getting less cheap).

Thursday, 27 October 2011

Will Thailand flooding with Debts after this?

Oh my god. Another disaster has occurred, and this time is Thailand's turn. Finance Malaysia would like to offer condolences to Thailand for its massive damage caused by floods. This is not an ordinary floods, please read the numbers below then you will know.

  • worst floods in 50-years!!!
  • more than 300 lives gone
  • affecting nearly 9,000,000 people

Started weeks ago at upper Thailand, the floods were spreading down to its capital - Bangkok - now. Bangkok has more than 12 million population. The situation can only get worse from here and everyone is fleeing the city, searching for higher grounds and off to vacation. People are snapping up dry foods, fresh waters and daily products, hoping to brace through the difficult periods.

Will Thailand went into recession?
With Bangkok being the major engine of the country, many economists are expecting that the strong flooding in Bangkok would severely impact Thailand's GDP growth. Bank of Thailand (BOT) already downgrading their growth forecasts for this year to below 4%. Not yet negative, thanks to the first half of 2011. So, no recession yet unless there is not drastic measures taken by the newly elected government.

How serious is it?
First, the industrial parks in Ayutthaya provinces where houses many factories of multi-national companies are heavily impacted by floods. Obviously, Japanese automobile manufacturers being the hardest hit. Honda and Toyota already shut down their productions. Together with other companies situated there, their earnings sure will be affected.

Second, banks will be impacted by higher non-performing loans (NPL), in which companies and borrowers affected may not able to repay their loans.

Third, businesses in the city closed doors to prevent flash floods and riots that may happened. Domestic consumption will slow, very slow.

Forth, agriculture land was damaged. This will severely impact those rural people, and they have to takes weeks (if not months) to resume their activities.

Fifth, slowdown in sales for property developers is inevitable.

Sixth, flights and other transportation services disrupted led to earnings downgrade on companies such as airlines.

How about its impact to other countries?
While it was a bad experience for Thailand, other countries may benefiting from this episode such as Malaysia and South Korea. Why? Simply because those affected companies may swift their operations to other countries. Then, why Malaysia and Korea?

The most affected companies is from Japan, dealing in automobiles, digital camera and hard disk drive businesses. So, Japanese companies may potentially swift their operations or supply chains, either temporary or permanently, to Malaysia due to its strategic location and labor markets. 

Other than that, South Korea also is an ideal place for Japanese companies. We have seen this after the Japanese tsunami and nuclear crisis this year. This is not new anymore. Some interesting growth may surfaced in the automobiles and technology sector in South Korea.

What should be investors' positioning right now?
Generally, I don't think that Thailand will go into recession. Slowdown Yes. Thailand has more than enough financial resources to rejuvenate their economies. The rebuilding exercise should not be a problem. What we concern most is the execution part (just like Japan). For this investors should keep investing in Thailand selectively. Avoid banking, automobiles, agricultural and property sectors. Instead, hunt for those attractively priced counters in building materials, construction and healthcare sectors.

Countries wise, chose Malaysia and South Korea for the above mentioned reasons.

Sunday, 23 October 2011

Side Issues and Reality

You might wonder why all the talk about greed and Wall Street. Isn't the real issue that the American economy is moribund and that unemployment is at staggeringly high levels? Why is the national debt important? Because it threatens the economic vitality of the future. These are the real issues -- the economy. They are made more real by the simple fact that opportunities for those who are less fortunate always improve with economic growth and always decline with economic stagnation.

Case in point -- today. As much as the Obama folks crow that they support the economically less fortunate, the Obama policies are devastating the poor, minorities and the less fortunate among us. Folks cannot find work. That is the real problem.

It is clear that President Obama will never focus on the economy's real problem -- stagnation and unemployment. He doesn't understand such problems because he has never experienced them and knows no one who has ever experienced these problems. His olympian view is that politics can solve all ills.

Well, politics has devastated our economy and our economic future. Government policy, regulation, and taxes have brought the American economy to its knees. Europe and the US have made promises to their citizenry that cannot be kept. So, why not change the subject? Find someone else to blame. We've seen this political tactic before many times in world history.

Saturday, 22 October 2011

Budget 2012: How Does 1% more EPF Affecting YOU?

During the recent Budget 2012 announcement, one of the controversial issue is the increment of 1% contributed by employers to EPF effective 1st January 2012. This will bring the minimum contribution rate by employers to 13% from 12% currently for those earning less than RM5,000 per month.

The Fatter EPF
While employees are welcoming the new rules, many employers are voicing out their concern on the extra burden being bear by them. "This is not fair to us, especially during current scenario where businesses are bracing for more challenging times ahead", says one of the concerned boss. Although there is some sort of tax-relief for employers who contribute more, bosses are still unsatisfied by the new ruling which adds to their fixed costs.

What is the rationale behind?
The reason is somewhat very good, that is "to equip Malaysians more retirement funds for their golden age" after recent facts shown that Malaysian generally fully utilized their EPF monies between 3-10 years time after retired. This is an alarming issue which prompt government to impose the new ruling.

We work hand-in-hand
However, Finance Malaysia found another good reason behind all this. That is "EPF needs more money". Why?

  1. General election is coming very soon
  2. We need a feel good factor on Bursa Malaysia
  3. External environment resulting in a not so perform KLCI

If we link all the three points together, we can come out a conclusion, which is "Due to the gloomy economic outlook caused by western countries, Bursa Malaysia is in red territories in-line with other countries. Normally, KLCI is also an index which measures the health of Malaysia's economy. In other words, people perceived that our economy is good if KLCI is advancing, which acts as an advantage for the government in the coming general election. And, one of the important supporters was EPF". So, you know why EPF needs more money now?

Then, how does 1% more EPF affecting you?
Less Increment. If raw materials prices eats into profit, bosses will pass the extra costs to end consumers. Does this 1% more EPF consider as extra cost to bosses? Definitely. But, this is called operating costs to employers. So, the natural option for employers is to giving you less increment, thus reducing the effect of 1% more EPF contributions.

Example, you may only get a 9% increment, instead of your deserved 10%. Anyway, you still get the money in this case, but is in your EPF account rather than cash in hand. Good luck, buddies.

Note: This is purely for your own consumption without the intention to provoke any parties.

Wednesday, 19 October 2011

New Fund: Public Ittikal Sequel Fund

The Public Ittikal Sequel Fund (PITSEQ) is a Shariah-compliant capital growth fund that invests in a diversified portfolio of index-linked companies, blue chip stocks and companies with growth prospects listed on the Bursa Securities. The fund may also invest in sukuk such as sovereign sukuk, corporate sukuk and Islamic money market instruments to generate returns.

The Fund will focus its investments mainly in the domestic market, capitalising on opportunities arising from Malaysia’s resilient economic growth prospects in the medium-to long-term. Some of the sectors that the Fund may invest in include consumer, industrial, telecommunications and utilities sectors.

How about foreign investment?
To achieve increased diversification, the Fund may invest up to 30% of its NAV in selected foreign markets. The foreign markets which the fund may invest in include Singapore, Taiwan, South Korea, Japan, Hong Kong, China, Thailand, Indonesia, Philippines, India, Australia, United States of America and other permitted markets.

Free Takaful?
The fund comes with free takaful coverage on Group Term Life with Total and Permanent Disability plus Group Personal Accident for unitholders aged between 18 to 59 years with a minimum NAV of RM5,000 at any point of time. The amount of takaful is equal to the NAV of units held in the ratio of RM1 takaful coverage for every RM1 NAV of units held, subject to a maximum amount of RM100,000 per unitholder of the fund.

Source: Public Mutual

Monday, 17 October 2011

If Germany Caves

There is always the possibility that Germany will agree to underwrite the sovereign debt problems of the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain). How would that look? Imagine the concept of creating Eurobonds that all of the Eurozone countries stand behind (which would basically put Germany on a hook that they are not currently on) or have the ECB buy $ 2 Trillion of Sovereign debt (which would be pretty much the same thing). What happens then?

If this happens, you have the situation that will, in time, present itself to the US. There will be a massive debt that really cannot ever be paid off other than by simply printing currency and using the currency to continue to fund the debt. That means massive worldwide inflation with the purpose of destroying the "value" of the outstanding sovereign debt. If the inflation does not spiral out of control, this could work. It would be simply another way of defaulting.

Imagine a 10 percent inflation rate worldwide. In a reasonably short time, the value of outstanding sovereign debt would fall dramatically (along with all currency-denominated assets). In effect, you simply destroy the value of the sovereign bonds as you use the printing press to keep them current. If you can keep the inflation rate high but under control, this will do the trick. The danger is, of course, that inflation can have a mind of its own and might not remain under control. This could mean hyperinflation which could destroy the major economies of the world. But, it is possible that inflation could be kept under control at a high level. Who knows?

One side effect is the destruction of all of the entitlement programs. Social security and pension funds which are denominated in dollars will lose much of their value (politicians will find a way to eliminate cost of living indices that are in place to preserve the value of these funds). Health care programs are budgeted in dollars. They will become worthless as well. Public employees will find their salaries fixed and they will find themselves impoverished.

What will prosper in this environment is anything whose value is not stated and fixed in currency terms -- commodities, free market businesses, anything where prices adjust upward with inflation.

In other words, world wide inflation triggered by selling Eurobonds or some other equivalent scheme, is just a default by another name (see Rogoff and Rinehart's recent book, "This Time is Different").

Just plain defaulting would be much simpler, but may not suit the politicians as well as massive inflation.

YTL Power to be privatized? (Oct 2011)

According to The Edge over the weekend, "rumours are swirling that YTL Group has hired local investment bankers to work on a possible corporate exercise that could result in its restructuring".  YTL Power and YTL Land, whereby YTL Corp has a 51.7% and 57.9% stake in respectively, are said to be targets for privatization or share swap exercises to align the group.

Well, if this is true, it definitely will boost the said target companies share prices. Before jumping to the conclusion, let us get the view from professionals. With that, we have a timely article from RHB Research who touched on this matter as below:

"We believe the likelihood of a privatization is low, as its FY12 PE of 12.8x is not much lower than its 5-year average forward PE of 14.7x. Besides, YTL Power's FY12 PE is similar to the 13x PE used for our end-2012 FBM KLCI 1,385 target."

"Also, we believe it will be very costly to privatize YTL Power. While YTL Power could take on more debt to facilitate such a privatization, it would significantly hamper its ability to acquire distressed utility assets in Europe."

"Our calculations indicate that at RM2.21 (assuming a 20% premium to its last traded price of RM1.84), YTL Corp would need RM8.3bn to buy out the remaining 48.3% equity stake held by minorities and assuming full conversion of outstanding warrants. A share swap is more likely as there is not much cash at the holding company, YTL Corp."

Any synergies from consolidating?
"We do not see much synergies in realigning the companies via a share swap exercise if YTL Corp were to consolidate YTL Power and YTL Land into a single entity, since there is little overlap among these businesses."

Investment case...
"We maintain our Market Perform call on YTL Power with an unchanged SOP-derived fair value of RM2.00. YTL Power offers a decent net dividend yield of 5.1% - the key investment thesis for the stock. While news flow will lift short-term sentiment, concerns over expanding WiMAX losses may cap longer-term upside potential".

Source: RHB research report dated 17th Oct 2011

Saturday, 15 October 2011

The Blame Game

If you buy a residence in the US and live in it, you are in a remarkable situation, especially if you finance the home with a large mortgage. If the value of your home rises, you can sell it tax free (in more than 98 percent of actual home sale situations) and if the value of your home falls, you can, in most states, simply move away and owe nothing. Even better, the government subsidizes the interest expense that you pay on the mortgage by permitting tax deductions for mortgage interest paid.

If you decide to pay off your mortgage early (to take advantage of lower mortgage rates), the government insists that all "conformable" mortgage loans (comformable to GNMA standards, which accounts for more than 90 percent of all US mortgages) provide for no penalty whatsoever to homeowners choosing to refinance their homes (a luxury unheard of in the mortgage market for commercial real estate).

As if that isn't enough, Congress has created two "quasi" government agencies, Federal National Mortgage Association (Fannie Mae) and Federal Mortgage Corporation (Freddie Mac) who currently own or guarantee more than half of the mortgages in the US. The effect of this taxpayer largess to home buyers is to lower the interest rates paid on home mortgages by providing massive amounts of taxpayer dollars for the mortgage market.

Is there a wonder that there was a housing bubble? Does it really require predatory lenders to get this rocket-fueled housing bubble going?

If virtually all capital gains on common stock were tax free, we would see a massive bubble in US stocks, especially if the interest on stock loans were tax deductible and if the government provided taxpayer money to loan money to potential stock holders.

So, why the deal with housing?

The government (both political parties) made the decision to favor home ownership over renting for the average American.

Note that none of the legislation introduced by either President Obama or Republicans does anything to change the current government favoritism of residential housing. So, guess what? We are absolutely assured to repeat the housing bubble and bust in the future. Nothing in Dodd-Frank or the other sledgehammer attacks on capitalism initiated by President Obama and his Democratic Congress do anything to change government's policies that guarantee another housing disaster at some future date.

What about Canada? Canada does not have tax-free sales of residential homes. Canada does not permit tax deductions for interest expense. Canada does not have a Fannie Mae or Freddie Mac? Guess what? Canada had no housing bubble either. Are Canadians that different from Americans? Nope. They just have different government policies regarding housing.

So, why are Wall Streeters blamed for the housing bubble, but government policies get a free ride? Because politicans have no clue as to what happened from 2006 to the present. Today's Obama tirades are simply a knee-jerk, anti-capitalism reflex to a downturn that their very own political allies put in motion generations earlier.

Wall Streeters did not cause the housing bubble or its subsequent collapse. Wall Streeters did not put in place the Obama policies that have stifled any hopes of a vigorous economic recovery.

The real blame for the housing bubble and collapse belongs to current government policies regarding residential housing. Until those policies end, we are doomed to repeat the housing bubbles and busts.

RHB Cap and OSK: Largest Investment Bank in the making?

Finally, Bank Negara Malaysia (BNM) gave the green light for RHBCap and OSK to start negotiations on the possible merger yesterday. The approval is valid for 3 months. Indeed, the act by BNM is fast this time, signalling its commitment to consolidate the banking sector. Regional footprint is increasingly crucial for local players to counter the highly competitive domestic landscape. That's why BNM is willing to speed up the process of any merger and acquisitions that may create a regional champions.

The merger of RHB Cap and OSK will proudly creates the largest investment bank at least in Malaysia. Currently, CIMB leading the segment under the leadership of Datuk Nazir Razak. If we recalled back, RHB Securities is very famous during 90s before financial crisis. When we heard about RHB last time, it refers to RHB Securities (not RHB Bank), which is a business under the investment banking arm.

However, everything was changed after the 97 financial crisis, which left RHB with heavy debts and the business of RHB Securities lag behind without much focused by management since then. Anyway, it's good to know that RHB is trying to revive the long lost business.

Would the deal go through?
For RHB, it would be the first major milestone for new Group Managing Director Kellee Kam, who said: "This is an exciting opportunity for the RHB group as it would enhance and elevate its investment banking franchise to a new level".

Meanwhile, OSK had signaled that they are happy for any collaboration with RHB. Currently, OSK had a wider regional footprint with operations in KL, Singapore, Hong Kong, Shanghai, Phnom Penh and Jakarta. Coupled with its strong brand name, this is definitely a big boost to RHB's expansion plan.

As such, my view is that both parties are keen to conclude the deal on a willing buyer willing seller basis. Backed by EPF, RHB had a lot of cash in hand, while OSK needs the money to kick-start its regional operations.

At what price?
The determining factor for any M&A activities would be the price. And, this is the most important part where investors would want to know, so that, they can benefit from it. Well, I believe the merger plan would eventually turn-out to be an acquisition plan, where RHB Cap may launched a take-over deal for OSK. That's why I only set a determining price for OSK here, which is in the range of RM1.90 to RM2.00 (depending on how hungry RHB was). Let's see how it go.

Thursday, 13 October 2011

Background Noise

Occupy Wall Street (OWS) and the President's "jobs plan" have become background noise to the faltering US economy. Far more interesting are the political shenanigans in Europe attempting mission impossible -- trying to keep most of Europe from defaulting. This steady drumbeat of irrelevance beats on as the Western economies slide into the mud.

Capitalism is now so hamstrung in the Western economies that we will soon be trumpeting 8 % unemployment as full employment. Europe is pretty much used to that already. European countries haven't seen four percent unemployment since Queen Victoria's days and they are not likely to see it again in the future. The US is a tag along.

All of our troubles in the Western world stem from one simple consideration: many people have an insatiable desire to be appear to be "good" people. Appearance is the key here. Really helping people is not the plan.

Look at Buffett. He is complaining that people like him don't pay enough taxes. That problem is easily solved. He can send in more money with his tax return. Then he can pay what he deems his fair share. You think he would do that? Are you kidding? Buffett is just trying to prove that he is a "good" guy. This is all about appearances. Buffett has no intention of paying more in taxes. If he did, he would do it. Nothing prevents Buffett from paying more in taxes right now, except that he doesn't want to pay them. But, he sure wants to BS about how he wants to pay more. Interesting!

Most good ideas that people want to foist on others, such as minimum wage laws, don't affect anyone but poor people. Minimum wage laws simply outlaw certain contractual arrangements because one is poor. That's it....nothing more. Heaven help you if your skill set doesn't merit some liberal's idea of a living wage. You are just flat out of lack. Let them eat cake, one supposes.

And so it goes. Laws passed to help workers invariably end up creating reasons for employers to not have workers. Anytime government favors a group, it makes them toxic to other people and especially toxic to people who make hiring decisions.

Good ideas designed to help people become anchors that prevent people from the having the opportunity to improve their lot. That's why inequality has grown so dramatically in the past several decades. Liberal help has created a situation where the poorest among us have no real upside anymore.

The rich are comfortable which is why virtually every wealthy suburb in America is now represented by some arrogant white liberal. Nancy Pelosi's district isn't full of poor people and Nancy Pelosi is herself among the 1/100 of 1 percent of the richest people in America. Let them eat cake. Thanks Nancy!

These folks bask in self adulation thinking that they are doing good, but what they are really doing is preserving their dominance over folks less fortunate. The welfare state is like a boot on the neck of poor people. They just don't have a chance in this kind of environment.

What the less fortunate among us need is for the government to get out of the way and give them a chance. Asia is giving their citizens a shot. That's why Asia will supplant the West as the dominant economic power within another two generations.

Wednesday, 12 October 2011

Why Gold Price DROPs lately? (Oct 2011)

During market uncertainties, there are two popular safe assets which is Gold and USD. This explain why the demand for these two assets is great, resulting them to become more valuable while equity market fell. We experienced the said scenario recently and let's see the chart below to gauge the Gold price movements.

"Gold prices collapsed from their August highs in September amid a broad commodity sell-off and despite intensifying concerns over sovereign debt issues in Europe. After exhibiting a remarkable correlation to real rates this year, particularly during the swift August rally, the sharp pullback in gold prices occurred with real rates mostly unchanged."

"Gold prices have now fallen back in line with our 3-month price target. As we expect gold prices will continue to be driven in large measure by the evolution of US real interest rates and with our US economic outlook pointing for continued low levels of US real rates in 2012, we continue to recommend long trading positions in gold and reiterate our 12-month price target of $1,860/toz", reported Goldman Sachs.

Why is it different this round?
Supposedly, gold prices should move in-line with USD. But, we see USD strengthening to months high while gold prices faced some setbacks lately. We at Finance Malaysia would like to guess the off-the-screen factors such as...

First, who is holding the most gold?
Second, who is in dire needs to sell gold reserves?
Of course, European countries (highlighted in yellow)

Now, you know why gold prices behave differently? Ha...ah. We are not surprise by the sell-down (if any), given the high valuations gold fetches when it recorded all-time high almost every days until $1,900/toz. Does Gold more important than cash right now? Yes for China, No for Europe.

Saturday, 8 October 2011

4 Interesting Questions on Budget 2012

Well, well, well... The newly announced Budget 2012 seems to be a very holistic one, which covers almost everyone (even the opposition MPs). In the budget, a total of RM232.8 billions was allocated to implement all Government development plans, which include the projects and programs under various plans, focusing on the well-being of the rakyat. But, there are a few interesting questions that Finance Malaysia would like to highlight here.

1) Is it too optimistic?
As we all know, the external environment is becoming more challenging once again due to slowdown in US, Europe and Japan (if not double-dip recession). This would definitely impact Malaysia as manufacturing sector still playing a crucial role in our country's growth. While IMF is revising downward the global growth next year, our Government is projecting a 5 - 5.5% growth this year, and 5 - 6% for 2012. I think we should be very happy if Malaysia can grow more than 4.5% for 2011 and 2012.

2) Budget Deficit to come down?
Taking into account the estimated revenue and expenditure, the Federal Government deficit in 2012 is expected to improve to 4.7% of GDP compared with 5.4% in 2011. As we all know, Petronas is the main contributor to Government's revenue, which is heavily relies on crude oil prices. How much is the estimated price Government based on 2012? It does not stated. Of course, it should be lower than current year. Am I correct?

3) Construction sector to be one of the main growth engine?
By setting a 7% growth forecast for Construction sector next year, is it too optimistic (yet again)? Given the current state of delayed tendering process, land acquisition dispute and change of project owners (MRT project), I doubt the execution part of the beautifully layout projects. Do remember that Hong Kong and Singapore takes more than 5 years just for planning for their MRT projects. And, if we can kick-start so soon, sure Malaysia Boleh!!!

4) Is it really Rakyat-centric?
Just as rakyat coping with high living cost, especially in urban areas, there is some relieves after the Government's latest various incentives and rebates. Subsidies on some of the basic food items were continued. Concurrently, our MPs also have higher allowance. This seems like a win-win situation. However, would the Government forgot about another very important item - petrol? As promised earlier, our petrol prices are adjusted according to market price. Judging from the fallen crude oil prices lately, why Government still not yet lower petrol prices? I believe this is definitely a better and more effective way to help rakyat.

Wednesday, 5 October 2011

The Wall Street Protestors

You just knew that it couldn't be confined to Greece. The US has more than its share of folks that feel entitled and now they are congregating daily on Wall Street. Students, having spent four years boozing it up and studying sociology, now wonder where are the jobs?

Corporate greed, huh? Who owns corporations? Workers their pension funds. So, if you can destroy corporations, you are basically destroying the savings and the economic future of the average worker -- union worker, state and local public employee worker, anyone with an IRA. There isn't some rich guy out there that owns Big Oil. The average worker owns Big Oil in his pension fund.

So, we come full circle. The attack on greed is really an attack on the retirement hopes and dreams of the average American. They have been so greedy as to plan for retirement or to work for an employer that provides a pension fund. By all means, lets destroy it in a war on "corporate greed."

We are no longer debating policies; we are now debating "sharing burdens." "Sharing" means I want what is yours. That is sharing. The idea is that we no longer intend to see the pie grow, so let's start cutting the pie up and sharing it. Forget about the idea that America can be a properous and growing country. That's so....Reagan-like.

This is what happens when the highest levels of government no longer have any policy prescriptions other than demonizing rich people. It catches on. Pretty soon rich people are really the middle class and the working classes. They are all greedy when compared to a bunch of students used to cutting classes (which they are doing now), and wondering why the world isn't beating a path to their door.

There isn't much of a labor market for empty political rhetoric. These protestors are going to be out there for a long time. They represent the new normal in the Obama economy.

OSK Strategy and Outlook (Oct 2011)

We still feel that there is downside to the KLCI although with non-GLICs supposedly close to maximum cash levels and GLICs supposedly not aggressively supporting the market up till now, further downside maybe somewhat less than our recession market bottom of 1086 points.

OSK: Normalised performance of September’s top stock picks

With Budget 2012 (to be announced on this Friday 7th Oct) around the corner, OSK has no major expectations of the budget except that it will probably be people friendly and include:
  1. No further tightening of regulations with regards to the property sector which should be positive for property stocks
  2. No hike in Brewery Tax which will be positive for Carlsbergy and Guiness
  3. A 4.5 - 6.8% hike in Tobacco excise duties which will be mildly negative for BAT and JTI
  4. A likely hike in Civil Servants salary as the last hike was in 2008 which will be positive for MBSB

OSK: Defensive Top 10 Buys

OSK remain defensive for now with expectations of a further drop in the KLCI although they do not see it dropping to our recession bottom of 1086 points. Given the volatile market conditions, it is difficult for us to forecast when the KLCI may fall past the 1300 points level although a break below is possible in October itself. As such, our recommendation is no longer "time-based" but rather "level-based".

For now, with 1300 points still some 6% away from current levels, we remain NEUTRAL on the market with our call still focused on Defensive stocks. A fall below the 1300 level will likely prompt us to upgrade our call on the market to a BUY.

OSK: Top 5 picks for the month of October 2011

With 3 of Top 5 Buys in September outperforming the KLCI and given the significant market uncertainty remaining, OSK keep its Top 5 Buys intact for October. Axiata, Petronas Gas, TM and KPJ are undoubtedly defensive stocks while selling may yet abate on foreign darling AirAsia with profit prospects improving as oil price drops. Aggressive Bottom Fishing is only recommended once the market breaks below 1300 points with names such as Genting, Parkson and Dialog coming to mind then.

Source: OSK Research

Monday, 3 October 2011

New Fund: Hong Leong Hong Kong Equity Optimizer Fund

Finally, there is a new fund from Hong Leong Asset Management (HLAM). The fund is designed to capture the vibrant growth of the Hong Kong capital market. The Hong Kong market has one of the world's leading securities exchange in the Asian region which is one of the fastest growing capital markets by market activity and new listings

Hong Kong, dubbed as Asia's most liquid exchange, acts as a key platform in the internalization of the Renminbi (RMB) currency. This allows investors to participate in the RMB appreciation potential via investments in equities and bonds.

The new Hong Leong Hong Kong Equity Optimizer Fund, being a growth fund, will invest primarily in equities and equity-related securities that are listed on the Hong Kong Exchange. Meanwhile, the balance may be invested in domestic and Hong Kong fixed income securities.

To achieve its investment objective, the Fund adopts an actively managed investment strategy which may include investment in common stock and depository receipts of companies, unit trusts funds, exchange traded funds (ETFs) and real estate investment trusts (REITs).

The Offshore Investment Adviser
GuocoCapital Limited (GCap) has been appointed as the offshore investment advisor for the Fund, in which GCap shall provide advice on the Manager's equity and equity-related securities in Hong Kong market. GCap is an established brokerage house with a diverse clientele, offering a full range of services, including modern delivery channels such as the Internet and the Automated Trading Hotline (IVRS). GCap is a wholly owned subsidiary of Guoco Group Limited which is a listed company on the Hong Kong Stock Exchange.

The Fund is suitable for investors who:

  • have a medium-to-long term investment horizon;
  • wish to participate in potential investment opportunities in the Hong Kong market;
  • are seeking primarily capital growth and to a lesser extent income; and
  • are willing to accept higher risk in their investments to obtain potentially higher returns

Source: HLAM

Sunday, 2 October 2011

Growing Slowly

The US economy is not going to get much worse. It will improve. But, it won't be like the economy in past years. Why?

Unemployment is here to stay and especially for those in the bottom half of the skill pool. The future will have a permanent unemployed part of the American population. The unemployed will survive by various "safety nets" funded by government. It is hard to see how they will ever be legally employable again in any great numbers.

The absence of work opportunities for the unemployed suggests that their children will be disadvantaged as well, since useful employment will not be a day-to-day feature of these households. The US will have a perpetual underclass, basically created by government fiat.

For the upper middle income and the rich, the "new economy" will seem much as before. Using "outsourcing" and technology, the wealthiest part of America will find a way to get by without the unskilled labor force that once had a home in this economy.

The rags to riches stories will be things of the past. Just as in modern day Europe, economic and social classes will be frozen, economic growth will move along at a snail's pace, and social and economic mobility will come to an end.

This unfortunate future is the result of pricing the low income part of the labor force out of the market. Business just cannot afford them anymore thanks to the blithering array of taxes, mandates, litigation fears. All of these things that government has decided to do to "help" workers, simply makes them toxic to employers. We've gone past the tipping point.

These obstacles that shackle poor folks are not that formidable for high income, highly skilled folks. Their incomes are high enough and their skill sets are high enough that they can still be employed -- at least for now.

One way to see what has happened is to imagine that the minimum wage has been raised to $ 50 per hour. Who then will get a job? Those with the skills that are worth more than $ 50 per hour to the employer. Everybody else is flat out of luck.

This doesn't mean that the economy can't grow. It can and will. Europe has grown and gotten used to the idea of double digit unemployment and a permanent underclass with no social and economic mobility. (Europe arrived at this situation by the simple expedient of passing laws that forbid companies to fire anyone). It has taken the US a bit longer to get to the "creeping stagnation" economy, but we're there now.

As the West slowly trudges along, Asia, Eastern Europe, Africa, Latin America and perhaps even the Arab world have a real chance to take over center stage in the world economy. The West has abdicated. It remains to be seen who will supplant the West -- most likely China and the countries on China's periphery.

All of this is why stocks are probably a pretty good bet. Some companies, indeed many oompanies, will do fine in the world that is coming. There will be growing demand from China, Brazil, India, and the rest of the world for products that the West has long taken for granted. This doesn't mean that stocks won't stumble a bit when the inevitable European sovereign defaults begin. But, the defaults are inevitable and everybody but Tim Geithner knows it. The real stock market bottom has probably already passed, but if hasn't, then wait until Greece, Spain, and Italy default and the German and French banks are nationalized and then buy stocks with a reckless abandon.

RHB: Market Outlook & Strategy 4Q2011

Titled "Perilous Crossroads; Challenging Times Ahead" RHB Research painted a not so rosy 4Q2011 outlook for KLCI. Undeniably, our market are in for a turbulent times and we do not know how the year will be ended. Bear or Bull market?

Below is the excerpt from the said report:

~ The US economic recovery has slowed to a crawl, while Europe is not just lurching from one crisis to another, it is lurching into a new one before the previous one is solved. There is growing risk that sustained weak confidence could exert downward pressure on demand and business activity worldwide.

~ Nevertheless, "double-dip" recession can still be avoided if political leaders get their acts together fast enough to contain the debt crises and avert a contagion given that global trade has not fallen off the cliff.

~ On the home front, we expect the Government to speed up the implementation of the Economic Transformation Programme, which coupled with resilient consumer spending, will provide some cushion to the weak external demand for the country's exports.

~ RHB has revised down our 2012's economic growth projection to 3.6% from 4.5% previously and compared with +4.3% estimated for 2011.

~ With a still cloudy global economic outlook, we believe it is still too early to "bottom fish" at this stage. As global headwinds remain strong and situations could get worse, we will continue to advocate a defensive investment strategy for investors.

~ Under such circumstances, we are of the view that high dividend yielding stocks with reasonably good growth potential would be more resilient and will likely outperform the overall market.