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Market Commentaries & Technical Analysis as at 28 Dec 2009

2009-12-27T21:46:00.002+08:00

Market Commetaries & Technical Analysis as at 14 Dec 2009

2009-12-14T08:22:00.002+08:00

a. State of US Economic & Monetary Trend
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The FED Governor: Ben S. Bernanke

Approach/Strategy:-
Constrained Discretion; Inflation-Targeting; PCE As Preferred Measure Of Inflation (Range of 1% to 2% inflation as his "comfort zone"); Focused On Inflation Expectations & Resource Utilization To Determine Monetary Policy; Regulation Fair Disclosure or RFD; Relies More On Economic Models And forecasts To guide Views

Challenges 1 (Global Financial Crisis, June 2008 – Feb 2009):
1.Forsaking Interest-Rate Targets, The Fed Is Focusing On Cutting Borrowing Costs and Kick-
Starting Demand. The Federal Reserve's Increasingly Unconventional Efforts To Mend The
Financial Markets and Restore Economic Growth;
2.Maintaining Sustainable Economic Growth & Price Stability

The Fed’s Objective: To Lower A Broad Range Of Interest Rates And Foster Easier Credit Conditions, Even Though The Fed Has Run Out Of Room To Lower Its Target Rate.

The Strategy Comprises Three Sets Of Programs:-
·The first group enhances liquidity via the Fed's traditional role as lender of last resort to banks. These are programs that make loans of cash or Treasury securities in exchange for less-liquid collateral.
·The second set is aimed at supplying liquidity outside the banking system directly to borrowers and investors in key credit markets. These activities include the upcoming program, to be coordinated with the Treasury, to buy up to $200 billion of asset-backed securities, debts backed by car loans, credit cards, and student loans.
·Finally, the Fed has begun to buy longer-term securities, most notably some $600 billion in debt and mortgage-backed paper held by federal agencies. On Jan. 28 2008 it reiterated that it's prepared to buy longer-dated Treasuries.

Fiscal Policy: US$789 Billion Package Of Spending And Tax Cuts

Fed Funds (Overnight Loans Between Banks) Rate as at Dec 2009: Range Of Between Zero & 0.25%

Fed Discount (Direct Loans To Banks From Central Bank) Rate as at Dec 2009: 0.50%

The Outcome as at Nov 2009:-

The Fed's balance sheet has ballooned to $2.1 trillion, reflecting the creation of a spate of lending programs intended to ease the financial crisis. That's more than double before the crisis struck.
As the crisis has eased, so has demand for some of the Fed's lending programs.

Short-term lending, which hit $1.1 trillion at the end of last year (2008), when the crisis was still mounting, has fallen to about $264 billion, a drop of more than 75 percent since the turn of the year (2009). Expecting this trend to continue as markets improve.

Demand for another "commercial paper" program that provides companies with short-term financing needed to pay for salaries and supplies also has declined sharply, from $334 billion at the turn of the year (2009) to less than $50 billion currently (Oct 2009)

Meanwhile, the Fed is on track to wrap up this month (Oct 2009) a $300 billion program to buy government debt. That program aims to lower rates for mortgages and other consumer debt.

The Fed also is buying $1.25 trillion worth of mortgage-backed securities, in another move to force down mortgage rates. Bernanke said both programs appear to be having their "intended effect."

Challenges 2 (Recovery Stage, March 2009 Till Dec 2009): Fears Of Inflation

The Fed’s Objective: Sop Up The Excess Liquidity Being Pumped Into The Economy.- The “Exit Strategy”

Overall the Federal Reserve has a wide range of tools for tightening monetary policy when the economic outlook requires them to do so. It will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster its dual objectives of maximum employment and price stability.

The Risk: Tightening too soon could short-circuit the recovery. Waiting too long could ignite inflation.

The Exit Strategies:-
1.Besides boosting its key bank lending rate, the Fed can raise the rate it pays banks on reserve balances held at the central bank. That would give banks an incentive to keep their money parked there, rather than having it flow back into the economy, where it can stoke inflationary pressures;
2.The Fed also can set up the equivalent of certificates of deposit for banks at the central bank, another incentive for banks to keep their money at the Fed;
3.The Fed also can drain money from the financial system by selling securities from its portfolio with an agreement to buy them back at a later date. Such large-scale "reverse repurchase agreements" can be done with banks, Fannie Mae and Freddie Mac and other institutions. That might involve transactions with money market mutual funds. Or the Fed can sell a portion of its securities outright.

The Risks In The Global Economy:-
1.High Oil Price with a sustained supply shock resulting from a major interruption in the supply -> Inflation Pressures -> Higher Interest Rate -> Bizs Cut Capital Spending & Hiring -> Cut In Consumer Spending -> Raising Inflation And A Flagging Economy!;
2.A Global Credit & Liquidity Crunch Originate From US Subprime Loans Crisis (Stabilizing );
3.A Global Deflationary Threat -> Hints of Global Recovery And Fears of Inflation;
4.A US Dollar (Depreciating) Crisis & High Commodity Prices

By Ben Bernanke … Dated Dec 2009

Federal Reserve Chairman Ben Bernanke warned that it is too soon to know whether the economic recovery will last and again pledged to hold rates at record-low levels for an "extended period."

The Fed chief's speech thinks the economy will struggle even as it recovers from the recession. He said the economy confronts "formidable headwinds" - including a weak job market, cautious consumers and tight credit.

Those forces "seem likely to keep the pace of expansion moderate.

The central bank has leeway to keep rates low because inflation is under control and is expected to stay tame because of the economy's weakness.

Some private forecasters even fear that the recovery could fizzle late next year (2010) as government stimulus fades.

Bernanke could not guarantee that a double dip recession won't happen. He stuck with his forecast for a moderate recovery but said a "vigorous snapback" is less likely.

He expects "modest" economic growth next year (2010). That should help push down the nation's unemployment rate - now (Dec 2009) at 10 percent - "but at a pace slower than he would like. Under one Fed forecast, the jobless rate would remain high next year (2010) - ranging from 9.3 to 9.7 percent.

The Fed has warned that it could take five or six years for the job market to return to normal.

To nurture the recovery, the Fed has kept rates at record low near zero for a year. By doing so, the Fed hopes to entice people and businesses to boost spending, which would aid the recovery.

Despite all the negative forces, consumers recently (Nov 2009) have shown their resilience and kept spending. Home sales have firmed helped by the government's tax buyer credit.

Still, economists took Bernanke's remarks as indicating that he isn't in a rush to raise rates. Bernanke's main message is that the Fed still remains very committed to policies that will provide further support for a stronger recovery. There hasn't been dramatic enough improvements in the economy to make any major changes.

Bernanke stays glum on the economy.

By Former Federal Reserve Chairman Alan Greenspan … dated Nov 2009

A rebound in stocks is “re-liquifying” the U.S. economy and housing prices are showing early indications of ending their decline.

US had been very fortunate that the stock markets moved back” and are “re-liquifying the whole process.

The world’s largest economy is feeling the “maximum impact” now (Nov 2009) from the federal government’s $787 billion in fiscal stimulus. A rebound in house prices might help avert another wave of foreclosures.

It may be too soon, but all the relevant price indexes are turning. Now (Nov 2009) whether or not that is temporary is very difficult to tell, because US has never been through anything like this.

Inventories are being drawn down as the economy recovers. Manufacturers will need to rev up production lines to prevent stockpiles from being depleted. An ever-increasing part of your consumption must be met by industrial production,” rather than from inventories. This phase may extend into the second quarter of 2010.

After that, the economic outlook “is going to depend to a very significant extent on what stock prices do.” Through stocks comes a “wealth effect” from realized capital gains.

The U.S. needs to address the country’s budget deficit. US capacity to sell U.S. Treasury issues was never in doubt because US had a very significant cushion between federal debt on the one hand and the capacity to borrow on the other.

With budget shortfalls projected, “that cushion is narrowing”. US is in a position where it has got to reign in” the national debt.

Monetary Policy …

The Federal Reserve pledged to keep a key interest rate at a record low for an "extended period," signaling that the weak economy remains dependent on government help to grow. The Fed stuck with its pledge to keep rates at "exceptionally low" levels for "an extended period.

Economic activity has "continued to pick up" and that the housing market has strengthened - a key ingredient for a sustained recovery. But warned that rising joblessness and tight credit for many people and companies could restrain the rebound in the months ahead (Nov 2009 & Beyond). Economic activity is likely to remain weak for a time.

Against that backdrop, the Fed kept the target range for its bank lending rate at zero to 0.25 percent. And it made no major changes to a program to help drive down mortgage rates.

Commercial banks' prime lending rate, used to peg rates on home equity loans, certain credit cards and other consumer loans, will remain about 3.25 percent, the lowest in decades.

Still, some credit card rates have risen over the past several months. In part, that reflects rate increases by lenders in response to escalating defaults on credit card loans. Lenders also pushed through increases before a new law clamping down on sudden rate hikes for credit card customers takes effect early next year (2010).

On Capitol Hill, the House voted Wednesday to accelerate the enactment date of the new rules to protect consumers from many such surprise changes. Credit card companies would have to comply immediately, rather than starting in February, unless they agreed to freeze interest rates and fees. But the proposal's chances in the Senate are considered dim.

The average rate nationwide on a variable-rate credit card is 11.5 percent, according to Bankrate.com. Lenders charge more and credit card customers pay rates higher than the prime because the debt they run up is riskier.

It wasn't clear how much of a role the Fed's statement played. In normal times, the Fed controls only short-term rates. But after the financial crisis erupted, the Fed began buying longer-term Treasuries. Its purchases kept those rates lower than they'd otherwise be.

This is good news for borrowers with auto loans, some student loans, 15- and 30-year fixed-rate mortgages and some adjustable-rate mortgages. But it hurts savers and people dependent on fixed incomes who would normally be enjoying higher yields.

The central bank hopes low rates will encourage consumers and businesses to boost spending, which would invigorate the recovery. The Fed signaled that it can continue to hold rates low because inflation is all but nonexistent.

The Fed has now (Nov 2009) entered a new phase: Managing the recovery rather than fighting the worst recession and financial crisis to hit the country since the Great Depression.

The economy began growing again in 3Q2009 for the first time in more than a year. But much of that growth came from government-supported spending on homes and cars. The strength and staying power of the recovery are uncertain, especially once government supports are removed.

In such a fragile recovery, a rate increase by the Fed is unlikely anytime soon. Growth does not mean a rate hike.

As with past rebounds, the budding recovery won't likely stop the unemployment rate from rising. The rate, now (Nov 2009) at a 26-year high of 9.8 percent, the jobless rate could rise as high as 10.5 percent around the middle of next year (2010) before declining.

At some point, once the recovery is firmly rooted, the Fed is likely to start signaling that higher rates are coming. One hint of an eventual rate hike would be the Fed's changing or dropping its pledge to hold rates at record-low levels for an "extended period."

It's a delicate task. Boosting rates and removing supports too soon could short-circuit the recovery. On the other hand, holding rates low and keeping government supports intact too long could unleash inflation.

Though it didn't change a program to help drive down mortgage rates, the Fed did say it will trim its purchases of debt from Fannie Mae and Freddie Mac to $175 billion, from $200 billion, because the supply of that debt has declined.

At its previous meeting in late September 2009, the Fed agreed to slow the pace of a $1.25 trillion program to buy mortgage securities from Fannie Mae and Freddie Mac. It decided to wrap up the purchases by the end of March 2009 instead of at year-end (2009). So far, the Fed has bought $776 billion of the mortgage securities.

Its efforts to lower mortgage rates are paying off. Rates on 30-year loans averaged 5.03 percent. That's down from 6.46 percent in 2008. Though the Fed will slow its purchases of mortgage securities, rates for home loans should remain low - in the 5 percent range_ as long as the purchases continue.
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The Waning Threat of Deflation

The recovery is starting to reverse many trends putting downward pressure on prices and wages, paving the way for the Fed to begin tightening in 2010

Policy decisions by the Federal Reserve have always been driven by the balance between inflation and recession risks. The difference this time is (Oct 2009) the enormous consequences of misjudging that balance. On one side, policymakers face a possible surge in inflation if they withdraw too slowly the massive amount of stimulus they've injected into the economy. On the other, they must ensure the economy will not suffer a relapse, which could push down prices and wages, setting off a pernicious round of deflation.

Economists generally agree that, right now (Oct 2009), deflation is still the bigger potential problem. But ever so subtly the balance of risks is beginning to shift away from deflation. That doesn't mean any move to tighten is imminent, as Fed Chairman Ben Bernanke reiterated on Oct. 8 2009. But it does suggest that the end of the greatest monetary stimulus in history has finally appeared on the radar.

With inflation clearly headed down, caution will rule out policy tightening well into 2010. Inflation, using the Federal Reserve's preferred measure, was -0.5% in August 2009, but that decline in prices is not true deflation. The drop is the result solely of lower gasoline prices. Still, core inflation, which excludes energy and food, has fallen to 1.3%, down from 2.7% this time last year (2008). And because inflation typically continues to decline for at least a year into a recovery, the rate may even breach the lower end of the Fed's 1% to 2% comfort zone next year (2010).

Deflation is a concern because of the unusually large amount of unused labor and production capacity created by the deepest recession since the 1930s. That slack erodes pricing power and the ability of workers to command higher wages. By some estimates, real gross domestic product is now (Oct 2009) some 6% below where it could be if all workers and production facilities were fully utilized.

The recovery is starting to reverse some of these deflationary forces, including many of the excesses that have contributed to the downward pressure on inflation. Now (Oct 2009) that policymakers have stabilized the financial markets and demand, many businesses find that they have cut inventories, capital spending, and payrolls too deeply. They face inadequate stockpiles and the need to boost output and payrolls to meet even a modest pickup in demand. These conditions will take up some of the slack in the economy and put a floor under prices and wages.

After slashing inventories by a record amount, businesses are shifting gears to a slower pace of liquidation. That means output is increasing, which will be evident in the report on third-quarter GDP on Oct. 29 2009. More production is putting some of that excess capacity back into use. Factory operating rates, while historically low, turned up in July and August 2009.

Plus, there's less excess capacity to soak up. The volume of equipment and productive facilities has shrunk, especially in manufacturing. Economists estimate that outlays for business equipment and software have been cut so sharply relative to the rate of depreciation that the U.S. capital stock will decline in 2009 for the first time since World War II. This shrinkage may partly reflect the credit boom, which fueled demand and created a lot of production capacity that is now (Oct 2009) worn out or obsolescent.

Slack in the labor market is sure to take a long time to absorb. Still, the 8 million jobs lost since the end of 2007, including the Labor Dept.'s latest benchmark revisions, have taken payrolls to unsustainably low levels. When demand was falling, businesses could squeeze out huge productivity gains from slimmer payrolls. But with demand now (Oct 2009) increasing, companies cannot sustain the 6% productivity growth of recent quarters. Soon they will need to add workers.

These emerging trends are still a far cry from those that would be associated with inflation concerns and Fed tightening. But the recovery is slowly creating conditions that will stem deflationary pressures and allow the Fed more leeway to start reversing its actions of the past year (2008).

… But The Fed Had The Risk Of Fighting A War On Two Fronts … Deflation & Stagflation

Beware the Bottlenecks: Isolated shortages early in the recovery could strain production—and that could lead to inflation

The one nice thing about a devastating recession is that everything's on sale: Whatever you need is readily available in big heaps, and inflation isn't a problem because sellers are eager to dump their excess supplies. That's why it's a little surprising, not to mention worrisome, that scattered shortages have emerged recently in an assortment of items ranging from economy cars and consumer electronics to such oddities as canned pumpkin and lobster bait.

Are these isolated shortages an early warning that there's less slack in the economy than commonly believed? If so, more bottlenecks could form as the economy gains speed and demand grows. And that, in turn, could drive up prices and force the Federal Reserve to raise rates before the recovery ever hits its stride.

Inflation hawks remember the deep recession of 1974-75, when the Fed overestimated the amount of unused productive capacity in the system. As a result of that mistake, the Fed kept monetary policy too easy and wound up with high inflation.

The predominant view among economists, business executives, and supply-chain experts is that shortages are mostly short-term problems that won't harm the overall economy. They say the bigger and scarier risk is deflation: an economic contraction that causes falling prices, more unemployment, and bankruptcies.

Nevertheless, even some economists who worry mostly about sluggish demand and falling prices say it's worth considering the possibility of inflationary glitches in the supply chain. For one thing, the ongoing credit crunch may be having some unexpected consequences. If weakened companies can't raise the funds they need to expand their capacity, they won't be able to respond to increasing demand. That could produce some ugly combination of higher prices and constrained growth—in a word, stagflation.

Factory closings (March – Oct 2009) have reduced U.S. industrial capacity at the fastest pace since record keeping began in 1967.

The auto sector would seem to be one that's vulnerable to supply disruptions despite the massive decline in sales. Automakers have decreased their capacity at the most rapid pace since World War II. That capacity reduction has helped prop up prices. Surprisingly, new-vehicle prices rose 1.6% in the year through September 2009.

The financial difficulties of auto and parts makers increase the risk that they won't be able to attract financing for needed expansions.

The Fed would have an easier time if it could focus on just one enemy, deflation. But it can't entirely ignore the opposite threat, capacity bottlenecks leading to inflation. The central bank must be prepared to fight a war on two fronts.

… Why The Fed Policy Of Keeping Short-Term Interest At Historic Lows Has Such Broad Support …

The Federal Reserve is holding short-term interest rates at the lowest levels in history—zero to 0.25%—even though the economy is showing signs of recovery. Some critics argue these ultra-low rates will trigger a dollar crisis or fuel financial speculation that will end, once again, in tears. Yet the engineer of these low rates, Fed Chairman Ben Bernanke, has retained the confidence of the financial markets and fellow policymakers.

How has Bernanke managed to win support for keeping interest rates at rock bottom, even though the easy-money policy he advocated in 2002-04 helped inflate the bubble that burst disastrously just a few years later? The answer is simple: Bernanke has succeeded in persuading most fellow economists—and, crucially, the bond market—that continued low rates pose no immediate risk of inflation and are in fact essential to keeping the U.S. economy from suffering a double-dip, W-shaped recession.

Bernanke's grip on policy has only been strengthened in recent days by Obama's endorsement as well as support from other central bankers at the Fed's August 2009 conclave in Jackson Hole, Wyo.

Despite chatter about the Fed's urgent need for an "exit strategy," traders in the money market expect the funds rate to remain at 0.25% or below through next January or March 2010 before drifting up to 1% by summer 2010.

The likelihood of continued cheap money isn't alarming the bond market, which hates inflation. Yields on 30-year Treasuries have fallen slightly over the past month (July 2009). Rates on inflation-protected Treasuries show no signs of mounting inflation anxiety.

However, critics who think Bernanke needs to hike rates. The cost [of low rates] will be a major currency crisis which undermines what remains of US economy. The Fed will be forced to raise short-term rates drastically in the next two years (2010-2011) to keep foreign creditors content and prevent a dollar collapse.

On Wall Street, few economists or traders worry that rates need to rise soon. Excess capacity will keep a lid on prices for a long time to come. The Fed doesn't need to raise rates to defend the dollar, either, because the recession has actually reduced net U.S. borrowing needs.

With an implicit endorsement from the bond vigilantes—and an explicit one from the President—Chairman Bernanke has the license to pursue his low-rate policy for as long as it takes to get the American economy back on track.

… And The Fed’s New Playbook For Tightening …

Now (Nov 2009) that growth is picking up, it'll soon be time to sop up excess funds. But given the unconventional easing of the past year (2008), the old methods no longer apply

Over the past year (2008), the Federal Reserve has committed trillions of dollars to its extraordinary effort to shore up the financial markets and prevent a severe recession from turning into a depression. By all signs, and with help from the stimulus package, it's working. Credit is flowing better, and the economy is growing again.

Now (Nov 2009) comes the hard part: Unconventional easing will require unconventional tightening. The old models don't fit the task, and the consequences of a miscalculation are much greater.

Gone are the days of simply deciding when and how much to raise interest rates. This time (2009 & Beyond) the Fed has to wind down more than a half-dozen lending and market support programs. It must drain the nearly $1 trillion in excess reserves it has added to the system or at least neutralize their inflationary potential.

And policymakers now (Nov 2009) have to consider two target rates: the traditional federal funds rate on overnight borrowing between banks and a new rate, the interest the Fed pays banks on any excess funds they hold at the central bank. For all this, the past offers no road map.

Fed watchers have a general idea of what tightening will look like, but the devil is in the details—and especially the timing. The first step: to prepare the markets, via speeches or testimony by Fed Chairman Ben Bernanke and by changes in the policy committee's statement. One of the first major alterations will be in the Fed's commitment since March 2009 to keep rates at "exceptionally low levels" for "an extended period." Policymakers left that language intact after its Nov. 3-4 2009 meeting, but at some point they will need more flexibility.

Keep in mind, though, that before starting to tighten, the Fed must stop easing. That will most likely occur when the program to buy $1.45 trillion in mortgage-backed securities and federal agency debt, a process that pumps funds into the system, comes to its expected conclusion by the end of March 2009. Then the Fed can begin to drain the excess.

For this, one tool the Fed plans to use is the sale of certain securities, called reverse repurchase agreements. Banks buy these securities in exchange for their excess cash, taking lendable funds out of the system. These sales will not initially involve raising the Fed's traditional target rate, now (Nov 2009) set at a range of 0% to 0.25%.

Rate increases will come in conjunction with the Fed's new authority to pay banks interest on their deposits. Manipulating this rate, now (Nov 2009) set at 0.25%, will make it easier for the Fed to control the main target rate, which could be difficult amid the flood of cash sloshing around. A higher deposit rate gives banks incentive to park their excess funds at the Fed and less incentive to lend them out in the interbank market. In this way, the excess funds actually stay in the system, but their potential to create new money and higher inflation is neutralized.

The real question in all this is the timing, something policymakers are already hotly debating. The doves, who are in no hurry to tighten and are in the majority, point to the enormous slack in the economy, which is putting downward pressure on wages and prices and perpetuating the risk of deflation. The hawks say popular measures of underutilized workers and facilities can give misleading impressions of the amount of slack, as was the case in the 1970s. Plus, they worry that exceptionally easy policy could fuel expectations of higher inflation, which are hard to reverse once they become ingrained in business and consumer behavior.

The timing will boil down to when the Fed thinks the recovery is sustainable. Despite last quarter's (3Q2009) solid 3.5% economic growth, clear improvement in the job markets, so crucial to sustainability, is still a ways off. Also, wage growth and inflation continue to slow. In the last two recoveries, the Fed did not begin to lift rates until unemployment had fallen notably.

The Fed's first verbal signal is not expected until the Dec. 15-16 2009 meeting at the earliest, and it may not be until well into 2010 that the Fed will very carefully start to feel its way toward tightening.

… But With The Danger in Tying The Fed's Hands …

Near term, inflation is under wraps. Down the road, however, the Fed's credibility as an inflation fighter could suffer if Congress exerts control over monetary policy—and that spells trouble

How much should US worry about inflation? In the coming year (2010), nearly all economists say "not much." With so many workers and production facilities likely to remain idle next year (2010), Econ 101 tells you the pressure on wages and prices is down. Looking beyond next year (2011 & Beyond), though, the question is beginning to take on greater weight, especially amid recent congressional challenges to the Federal Reserve's authority and independence in conducting monetary policy.

The Fed's basic task is already herculean. Over the past year (2008), excess reserves in the banking system, which determine the economy's money-creating potential, have soared to nearly $1 trillion, up from a comparatively trivial $2 billion or less before the financial crisis. Deciding when to start neutralizing this excess without either killing the recovery or breeding inflation will be hard enough. The Fed's increasing unpopularity on Capitol Hill adds another layer of difficulty. It may well have to begin tightening policy next year (2010) with unemployment at a very high level, something that would not go over well with such a hostile Congress.

More important, the Fed's credibility as an inflation fighter, which is crucial to its ability to make effective policy, may be at risk. Legislation coming out of the House Financial Services Committee, innocuously called the Federal Reserve Transparency Act and supported by two-thirds of the House of Representatives, would subject the Fed's decisions on monetary policy to congressional audit. That is, if Congress doesn't like the Fed's decision to hike rates amid high unemployment, it can forcefully and publicly challenge all members of the Fed's 12-person policy committee.

Any perception in the global financial markets that political pressure is influencing monetary policy would raise expectations of future U.S. inflation, which would push up interest rates and add downward pressure on the dollar. Rock-solid inflation-fighting credentials are the chief reason why the Fed has been able to run a wildly expansionary policy while keeping long-term interest rates low and avoiding a collapse in the dollar.

Concerns about inflation expectations, a crucial component of long-term rates, are central to the debate within the Fed over when to start tightening. The Fed's anti-inflation hawks are not thinking about inflation in 2010, but longer-term. They fear that an extended period of ultra-easy money could fuel the anticipation of rising prices. Such expectations can stoke actual inflation if they become deeply ingrained in business and consumer behavior.

Plus, the issue of underutilized labor and facilities is not cut and dried. Inflation hawks note that the jobless rate and operating rates can give misleading readings on the amount of slack in the economy, as happened in the 1970s. Technology and outsourcing may have rendered many skills obsolete, putting more upward pressure on the wages of workers with skills in need. And equipment is now (Nov 2009) wearing out faster than it is being replaced, thanks to sharp cutbacks in capital spending by businesses. That would imply a higher utilization rate that could create spot shortages and upward pressure on prices.

In fact, not all inflation measures are falling. Although core consumer inflation, which excludes energy and food, is declining in the broad services sector, goods inflation is running at the fastest pace in 16 years. For now (Nov 2009), the markets perceive little inflation danger, partly out of their belief in the Fed's anti-inflation resolve.

That perception will be important, given Washington's need for $2.8 trillion in new money over the next three years (2010-2012), based on Congressional Budget Office projections. As San Francisco Fed President Janet Yellen noted recently, budget deficits don't typically cause inflation in advanced economies with independent central banks that pursue appropriate monetary policies. Right now (Nov 2009), though, the Fed's independence and the appropriateness of its coming decisions are increasing uncertainties in the inflation outlook.

Economic Indicators … dated Dec 2009

Monetary Policy: The Federal Reserve pledged to keep a key interest rate at a record low for an "extended period”;
GDP Growth: A Surprising Third-Quarter 2009 Pickup In GDP is expected to show healthy growth and a broad rebound in demand is a key reason;
Corporate Spending/Confidence: Business Executives Are Growing Optimistic Again: Corporate executives are starting to share Wall Street's bullishness—a sign that could improve prospects for a rebound
Corporate Earnings: With productivity skyrocketing and labor costs plunging, profits will post strong growth in coming quarters now (Oct 2009) that demand is beginning to turn up;
The Housing Sector: A Housing Recovery with a Solid Foundation;
The Credit & Loan Growth: Lending remains tight, but overall bank standards are relaxing, and that will make it possible for businesses to expand as demand picks up;
The Labor Market: The Signs Say Job Growth Ahead (2010 & Beyond);
US Consumer Confidence: US consumer confidence deteriorated sharply in October 2009. Persistent trouble in the labor market was a major culprit;
US Consumer Spending: Despite weak labor markets, heavy debt, and low confidence, U.S. households have already begun to spend (Nov 2009), especially on services
US Households Wealth: Household wealth in the U.S. increased by $2 trillion in the second quarter 2009.

b. State Of Malaysia Economic & Monetary Trend
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Investment Theme For 2009

15. RM40 Billion Public Transport Expenditure
16. Water & Water-Related Play
27. Second Wave Privatization 1.0

Watch List In The Coming Week

Mega Project Calls For Tenders And Awards (LCCT, LRT extension);

Market Commentaries

It was going to be another “dry and slow trading day” on the stock exchange given the dearth of material news flows on the corporate scene.

The FBMKLCI may still seize the opportunity to inch up a bit more ahead.

With the impending inclusion of Nestle (M) Bhd and omission of Parkson Holdings Bhd as a FBM KLCI constituent effective Dec 21 25009, there could be some portfolio adjustments by index-tracking funds although any reallocation would be minimal given their relatively small weight in the index calculations.

The Risks … dated Nov 2009

Refer To Previous Report....

Technical Analysis

With investors all geared up for the holiday season (Mid Dec Till End Dec 2009), don’t expect big shakes from stock exchanges across the globe as the year (2009) comes to its end.

In Malaysia, with no leads or catalysts to propel the market, stocks have been moving sideways in listless trading.

The flurry of selling has a mild effect on the FBM KLCI, and some of the stocks are beginning to show signs of stabilising.

Thus, with fund managers closing their books and only likely to scan the market for bargains in January 2010, the next couple of languid weeks could offer value for the savvy investor.

The 1,255 is an extremely strong support level. Since the FBM KLCI broke out in March 2009, it has always held above this level despite various corrections. It’s important that the market doesn’t fall below this level.

However, if these markets continue to correct further, then the index too may crack. His next support level is at 1,248 points, which is the low seen on Nov 30 2009 when the Dubai financial crisis came to light.

Investors can take their time buying in January and February 2010. We will probably see a more convincing recovery in March 2010

The FBM KLCI has appreciated by some 45% on a year-to-date basis.

Meanwhile, based on the recent strength of Asian equity indices, global markets are likely to see a resurgence soon. In the next one to two weeks (late Dec 2009), the market should be telling us where it wants to go.

Over the week, investors in Asia were rattled after Japan reported that its economy grew far less than originally expected in the third quarter, at an annualised 1.3% instead of 4.8%, as cautious companies slashed spending.

Greece’s credit rating was lowered because of growing debt. Ratings agencies also cut ratings on state-linked companies in Dubai, the massively indebted Gulf city-state, and raised concerns about heavy public debt loads in the United States and Britain.

Undermining Factors

1. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Dubai’s Debt Crisis
Stabilizing)
2. Volatile Foreign Exchange Market (Volatile Due To Dubai’s Debt Crisis … Stabilizing)
3. State Of The Global Economy (Though Recovering Since March 09 But Dubai’s Debt Crisis
Added To Uncertainty … Stabilizing);
4. Commodities Prices (Volatile Due to Dubai’s Debt Crisis … Stabilizing);
5. A Global Deflationary Threat -> Hints Of Recovery – > Fear Of Inflation;
6. Threats Of High Commodities Prices And US Dollar Crisis;
7. Tightening Of Global Monetary Policy & Unwinding Of US Dollar Carry Trade

Unpredictable Risks/Surprises

1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu
4. Financial Crisis – Dubai’s Debt Crisis (Stabilizing)
5. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures …

Recession – Recovery – Growth – Boom – Burst

(With Global Valuations Fair To Approaching Expensive, Investors Should Begin Shifting Focus To Corporate Earnings)

a. One Of The Greater Risk For Emerging Equities Market – Unwinding Of US Dollar Carry
Trade … Spot For Bernanke’s Statement On Monetary Policy
b. State Of The US (Jobless Recovery), Japan (Recovering Stage But Still Uncertain), China
(Gaining Momentum) & The Middle East (Dubai’s Debt Crisis … Stabilizing) Economy as at
Dec 2009
c. Shifting Focus From Economic Growth Surprises (which drove upgrades to earnings and
valuations) To Other Factors To Drive (or protect) Returns Going Into 2010. (Latest)
d. Global Equities Outlook …
e. Global Monetary & Fiscal Policy (The Exit Strategy): Recovering Economy, Weakening US
Dollar, High Commodity Prices & Inflation Expectations Building Up
f. The US Equities Market: A Bubble Is In The Forming
g. The Malaysian Equities Outlook: 6 (Optimistic), 7 (Neutral), 6 (Pessimistic)
h. Global Inflation Outlook: Controlled Versus High
i. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged & Why
Dollar Is Weak Since Aug 2009
j. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA
k. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed
l. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
m.Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their
Stock Liquidity
n. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With
China As Sole Driver To A More Balanced US/China Model
o. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
p. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY
DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH
POLICY
q. What’s NEXT For The US & China Equities Market
r. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land,
Water
s. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During
3Q2009, To Position For Further Upside Later 2009.
t. What’s NEXT (2H2009) For The Malaysian Equities Market …
u. Carry Trades Are Making A Come Back Into Emerging Markets
v. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery
In Coming Months (June 2009 & Beyond).

Kindly Refer To Previous Report ...

Stock Market Leading Performance Indicator
5 (0-3-Bearish 4-6-Neutral 7-10-Bullish).

Market Commentaries & Technical Analysis as at 7 Dec 2009

2009-12-06T17:36:00.005+08:00

Investment Theme For 2009

*** UNCERTAIN ***
1. Privatization And M&As Deals
2. A Stronger Ringgit Policy
3. Implementation Of the Ninth Malaysia Plan
4. Asset Reflation Theme
5. Eastern Corridor Development Programme (Petronas-Led)
6. Northern Corridor Economic Region
7. Sarawak Region Corridor
8. The Sabah Development Corridor
9. The Asia Petroleum Hub In Johor
10. The Solid Waste Management Play
11. Flow of OPEC Petrodollars
12. The Trans-Peninsula Pipe Project
*** UNCERTAIN ***
13. Sarawak Corridor Of Renewable Energy (SCORE)
14. Iskander Development Region (IDR) In South Johor
15. RM40 Billion Public Transport Expenditure
16. Water & Water-Related Play
17. A U-, V-, W- Or L-Shaped Global Economic Recovery
18. Fiscal & Monetary Pump-Priming & Normalization Of Corporate Earnings
19. The Economic Stabilization Plan, Mini Budget & Budget 2010
20. Interest Rate Cycle (End Of Easing Cycle As Economy Recover)
21. Decoupling – Emerging Economies Is Disconnected From Developed Countries (Uncertain)
22. Liberalization Of The Services/Financial Sector
23. The Malaysian Government’s Reform “Train”
24. GLCs Revamp
25. The ‘Third’ Link Bridge (Eastern Johor) To Singapore (Uncertain)
26. A ‘Third Stimulus’ Package (Uncertain)
27. Second Wave Privatization 1.0

Watch List In The Coming Week

Mega Project Calls For Tenders And Awards (LCCT, LRT extension);

Market Commentaries

Looks like it is going to be another quiet week ahead due to the lack of significant market leads and prevailing holiday mood. It is believed there is limited upside for the local stock market and buying momentum is likely to remain weak as investors remain on the sidelines.

The Risks … dated Nov 2009

Emerging market equity funds saw renewed interest spurred by a weak dollar and low US lending rates, after experiencing their first outflows since the third week of July 2009 in the early Nov 2009.

Emerging Market Equity Funds, Global Equity, Commodity Sector, Energy Sector and Global Bond Funds all posted strong inflows during the week ended Nov 11 2009. Flows into the diversified Global Emerging Markets (GEM) Equity Funds totalled US$1.48 billion (RM4.99 billion) while Asia ex-Japan Equity Funds absorbed US$626 million.

In addition to being seen as a haven from dollar weakness, emerging markets benefited during the first full week of November 2009 from some robust Chinese macroeconomic data showing GDP growth on track to exceed 10% during the fourth quarter of 2009 (4Q09).

On the home front, foreign funds using the dollar carry trade had been playing a part in the Malaysian market as the rally in the FTSE Bursa Malaysia KLCI had been correlating closely to dollar weakness.

Concerned about this and if there was a sudden strengthening of the dollar, carry trades would unwind causing a harsh outflow from emerging markets, including Malaysia.

In a report on Nov 9 2009, Macquarie Equities Research was clear that stretched valuations had been a consequence of the US dollar carry trade, which had reflated Asian markets in general and indirectly supported Malaysian valuations.

By its nature, a carry trade is a momentum trade. As markets rise, hedge investors increase leverage and bet on momentum. Thus, a carry trade will not be unwound until the momentum turns. Thus a trigger is needed to turn the tide.

From the yen carry trade experience, which was only fully unwound in 3Q08 when Lehman Brothers was allowed to go under, weakness in the carry trade preceded increases in interest rate.

It is hard to pinpoint events that will eventually trigger a turning point, However, what we can do is monitor fund flows and attempt to imply the right timing from there.

There had been large inflows almost matching 2007 levels, into Asia and GEM equity markets in 2009, but of late, flows into Asian equities had tapered off, while flows into GEM continued to be strong.

Because valuations are already so stretched, the momentum trades could turn sooner rather than later, and certainly before 2H10 when expecting US dollar interest rates to start rising.
Meanwhile, foreign funds that had come into the Malaysian market over early Nov 2009 were selling out in mid Nov 2009, but the FBM KLCI did not fall much as the exiting funds were selling their holdings to other funds which were entering the Malaysian market. This means that the climb is on hold for the time being.

While the dollar carry trade was playing a part in the local market, the US dollar was not expected to strengthen suddenly, due to the weak economic indicators emerging from the US.
This is despite US Treasury Secretary Timothy Geithner said that he believed it was important for the US to maintain a strong currency. He may want the dollar to strengthen but if the US economy is not doing well, how will it happen?. The weaker dollar and carry trades were likely to continue well into next year (2010).

As for foreign participation in the Malaysian market, several people in the local investment community said it was still at a level lower than it had been prior to the economic crisis. Foreign participation could be “quite limited” as local funds may also be trading through foreign brokers.
According to industry observers, foreign trading participation has been rising for the past three months (Aug – Oct 2009). Bursa Malaysia statistics on trading participation showed that in October 2009, foreign institutional and foreign retail trading made up 24.86% and 0.57% of the total RM26.2 billion in value traded.

Meanwhile, despite the focus on the weakness of the dollar, in the week to Nov 11 2009, flows into US Equity Funds hit a 47-week high as investors were attracted to its stocks in light of recent earnings reports (3Q2009) and expectations that domestic interest rates will stay at current levels (Nov 2009) well into next year (2010).

The US Equities Market (4Q2009 & Beyond) …

Before 2009 comes to a close, there could be a surge in volatility in the financial markets as investors become nervous about the global economic picture.

At the moment (Oct 2009), investors are very short term focused, looking at the earnings seasons. But strong earnings may not last.

The momentum in corporate earnings sales and revenues of global companies could start to be disappointing again at the beginning of 2010 due to the effects if a sluggish economic recovery and that could weigh down global stocks. We are not immune to a market correction in the coming months (Oct 2009 & Beyond). The bigger the market rally, the bigger will be the market correction.

In the US, 4Q2009 corporate earnings results could be challenging and 2010’s earnings forecasts are looking a bit too ambitious, because a lot of the economic stimulus measures implemented by the US government earlier 2009 would be wearing off. In addition, there is a little bit more strain on US consumers due to high employment. Upside for US stocks could be more challenging in 4Q2009 and 1Q2009 because the engine for growth may slow down a little. There will be more volatility coming (Oct 2009 & Beyond).

The prospects for emerging market stocks in the months ahead (Oct 2009) still look bright compared with developed market stocks. The emerging market story is now (Oct 2009) more of an earnings story than a valuation story. There is a fair degree of confidence that earnings will be more robust in emerging markets.

Earnings will revised by a larger extent in emerging markets than developed markets. So, valuations for emerging equities cam get cheaper than current levels (Oct 2009) … on earnings upgrades.

Going forward, the valuations of emerging markets and developed markets could narrow and a valuation equilibrium may arise as these markets become integrated from an earnings growth perspective.

People historically expected a discount for emerging markets stocks. But they should not expect a discount in the future because developed markets and emerging markets do not look that dissimilar from a corporate governance prospective.

In terms of attractiveness of commodities, the rebound in commodity prices from their oversold levels is already done. It was driven by the sharp increase in Chinese exports. Since we believed the economic recovery will remain relatively sluggish for the coming 12 months, it is believed that China is not going to import on a large scale.

On top of that, the US dollar which has been under tremendous selling pressure since Sept – Oct 2009, it will rebound in 2010 because the greenback is clearly undervalued. And, a tactical rebound in the US dollar could weigh down prices of commodities, especially gold.

Technical Analysis

With the stock index above 1,271, its short-term outlook will “turn positive and pave the way for it to re-challenge November 2009’s high of 1,288.42 and even the major psychological hurdle of 1,300.

While market punters may be looking for signs of year-end (2009) window-dressing, the current market trend has yet to provide any clear indication as to when such activities are likely to start. Past trends would suggest that such activities usually start in the middle of December.

Undermining Factors

1. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Dubai’s Debt Crisis)
2. Volatile Foreign Exchange Market (Volatile Due To Dubai’s Debt Crisis)
3. State Of The Global Economy (Though Recovering Since March 09 But Dubai’s Debt Crisis
Added To Uncertainty);
4. Commodities Prices (Volatile Due to Dubai’s Debt Crisis);
5. A Global Deflationary Threat -> Hints Of Recovery – > Fear Of Inflation;
6. Threats Of High Commodities Prices And US Dollar Crisis;
7. Tightening Of Global Monetary Policy & Unwinding Of US Dollar Carry Trade

Unpredictable Risks/Surprises

1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu
4. Financial Crisis – Dubai’s Debt Crisis
5. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures …

Recession – Recovery – Growth – Boom – Burst

(With Global Valuations Fair To Approaching Expensive, Investors Should Begin Shifting Focus To Corporate Earnings)

a. One Of The Greater Risk For Emerging Equities Market – Unwinding Of US
Dollar Carry Trade … Spot For Bernanke’s Statement On Monetary Policy
b. State Of The US (Jobless Recovery), Japan (Recovering Stage), China (Gaining
Momentum) & Middle East (Dubai’s Debt Crisis … Stabilizing) Economy as at
Dec 2009
c. Shifting Focus From Economic Growth Surprises (which drove upgrades to earnings and
valuations) To Other Factors To Drive (or protect) Returns Going Into 2010. (Latest)
d. Global Equities Outlook …
e. Global Monetary & Fiscal Policy (The Exit Strategy): Recovering Economy, Weakening US
Dollar, High Commodity Prices & Inflation Expectations Building Up
f. The US Equities Market: A Bubble Is In The Forming
g. The Malaysian Equities Outlook: 6 (Optimistic), 7 (Neutral), 6 (Pessimistic)
h. Global Inflation Outlook: Controlled Versus High
i. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged & Why
Dollar Is Weak Since Aug 2009
j. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA
k. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed
l. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
m.Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their
Stock Liquidity
n. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With
China As Sole Driver To A More Balanced US/China Model
o. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery
& Investing In Equities On Expectation Of Second Round Recovery
p. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY
DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH
POLICY
q. What’s NEXT For The US & China Equities Market
r. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land,
Water
s. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During
3Q2009, To Position For Further Upside Later 2009.
t. What’s NEXT (2H2009) For The Malaysian Equities Market …
u. Carry Trades Are Making A Come Back Into Emerging Markets
v. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery
In Coming Months (June 2009 & Beyond).

a. One Of The Greater Risk For Emerging Equities Market – Unwinding Of US Dollar Trade … Spot For Bernanke’s Statement On Monetary Policy

The havoc wrecked by the unwinding of yen carry trades in 2008 in financial markets may be a distant memory for some of us in the wake of current (2009) rally in global equity markets.

However, it is a scene that could be replayed some time down the road (Dec 2009 & Beyond) and this is not good news for a recovering global economy. Only this time, the currency with the starring role is the US dollar.

In recent months, the rapid rise in US dollar carry trades has set alarm bells ringing. These trades have been flooding emerging markets with liquidity and driving up asset prices to levels that do not commensurate with economic fundamentals.

Asset bubbles are building up in equities and commodities, and over the longer term inflation will become threat. Asian currencies have been appreciating so far (till Nov 2009) as a result.

Of late, we have been hearing more and more talk that some central banks in emerging markets are considering imposing some form of capital control to battle the surge in the inflow of short term capital, or hot money.

Fortunately, or unfortunately, for Malaysia, depending on how you want to look at it, such speculative capital inflow has not been as heavy as for other markets in the region. It is unfortunate, one must say because yes, there is a return of hot money, but it is not coming this way.

It shows that foreign investors are ignoring Malaysia markets and we have to ask ourselves why.

On the other hand, it is fortunate for Malaysia because hot money has not chased up asset prices to unrealistic levels yet.

The heart of the matter is, will the US dollar carry trade hurt global markets just like the yen carry trade did in 2008 when it started unwinding?

A currency carry trade is the selling of a currency with low interest rates and the buying of a different currency that provides better yields. In the 1990s, the yen carry trade was prevalent because the Japanese central bank maintained a very loose monetary. Keeping rates at around 1% to boost growth.

As a result, investors took opportunity selling the yen for other countries and investing in assets that provided better yields especially in the US, Europe and Australia. The yen funded some US$6 trillion in overseas assets.

But the crunch came in 2006 and 2007, when the US banking system went into a tailspin and the US dollar depreciated. There was an exodus from these currencies and a flight back to the yen, the full impact of which was felt in 2008.

This time around (Till Nov 2009), the US dollar is at the center of the carry trade because the US undertook a quantitative easing policy more than a year ago (2008) to pump prime growth. This means investors have been able to borrow US funds at zero cost and put them into assets in the emerging markets with higher yields.

The dollar is serving as the funding currency for carry trades and is putting currencies of emerging markets as well as the euro. This is potentially explosive as it can create asset bubbles and lead to another global financial crisis.

Capital flows driven by yield differences are complicating monetary response in emerging economies. Some countries were already resorting to the use of capita controls. Other policy responses include raising reserves and allowing the currency to appreciate.

Up to this point (Till Nov 2009), the US dollar carry trade has yet to play itself out. But when it comes, financial markets will have to brace for yet another financial crisis that could quickly derail the fragile recovery in the global economy.

In this regard, emerging markets are vulnerable because most of the speculative funds have come to this side of the world, largely because Asia is expected to emerge the fastest from the recession and post some of the highest growth rates in the world.

US dollar carry trades are not sustainable because US interest rates are not likely to stay at zero forever. In fact, with the US economy showing some green shoots of recovery in the 3Q2009, focus has begun to shift towards defining an appropriate time for the exit of economic plans.

Be that as it may, there is consensus that the US is not likely to reverse its quantitative easing any time soon. But when interest rates start to rise again – and they will – that is when things can become hot. By then, it may be too late to panic.

b. State Of The US (Jobless Recovery), Japan (Recovering Stage) & China (Gaining Momentum) Economy as at Oct 2009

The US Economy …

By Treasury Secretary Timothy Geithner … Nov 2009

He acknowledges the federal budget deficit is too high, but that the priorities now (Nov 2009) are economic growth and job creation.

Geithner avoided giving specifics on tax hike. President Barack Obama is committed to dealing with the deficit in a way that will not add to the tax burden of people making less than $250,000 a year. The White House has not decided how to reduce the red ink.

Right now (Nov 2009) they are focusing on getting growth back on track.

He acknowledged that the economic recovery, while showing positive movement, has been shaky and uneven. A lot of damage was caused by this crisis. It's going to take some time to grow out of this. It could be a little choppy. It could be uneven. And it's going to take awhile.

A bright spot in the recovery identified by Geithner is the banking system, which he said is "dramatically more stable" because of the government bailout.

Even though 115 banks have failed so far 2009, there has been a "dramatic improvement in confidence," with private capital back in the system. Large businesses are now (Nov 2009) able to borrow again. The banking system is dramatically more stable than it was three months ago, six months ago, nine months ago, a year ago (2008).

But more needs to be done to assist small businesses, adding that the administration is working to help open up credit to them. These businesses, "face a really tough environment on the financing side."

After financial institutions were widely blamed for assuming too much risk and bringing the economy to the brink of collapse, a concern now (Nov 2009) is that they might end up being too timid. The big risk US face now (Nov 2009) is that banks are going to overcorrect and not take enough risk.

The US economy needs them to take a chance again on the American economy. That's going to be important to recovery.

Due to the growing unemployment rate, the president's economic stimulus program has done nothing but increase the size of government. Businesses are "sitting on their hands" because of government spending and proposals for health care and other initiatives would increase taxes.

Business people are afraid to invest in their business, afraid to grow their business, because they don't know what's going to happen next.

Geithner acknowledged the economy remains tough for many workers who have lost jobs and it's going to be some time before the employment outlook starts to brighten for many of them.

Unemployment is worse than almost everybody expected. But growth is back a little more quickly, a little stronger than people thought. Unemployment hit a 26-year high of 9.8 percent in September 2009, and the October 2009 could show it topping 10 percent. It's likely still rising. And it's probably going to rise further before it starts to come down again.

It is too early to decide if a second government stimulus package should be offered, though he acknowledged unemployment probably will rise even more before it starts to turn around.

Economists expect to see job growth after the first of the year, probably in the first quarter 2010.
You're not going to see real recovery until it's led by the private sector, by businesses.

With about half of the stimulus money left, along with tax cuts and investments ahead, "there's a lot of force still moving its way through the system now (Nov 2009)" and that will keep providing economic support.

Geithner also said the administration supports steps being considered by Congress like extending unemployment insurance benefits and the tax credit for first-time homebuyers.

The U.S. banking system is "dramatically more stable" because of the government bailout. Just one year ago (2008), economic activity came to a standstill as major financial institutions shut down due to lack of liquidity.

Even though 115 banks have failed so far this year (2009), there has been a "dramatic improvement in confidence," with private capital back in the system.

One danger now (Nov 2009) is that bankers will be too conservative and not take enough risk to get adequate capital flowing, especially to small businesses. Obama administration is working to help open up credit to them.

By Aberdeen Asset Management Plc … Nov 2009

The U.S. economy may “relapse” next year (2010) on concern that the government’s rescue efforts may not be sustainable.

What we’re saying right now (Nov 2009) is basically to be cautious because of the possibility of this relapse next year (2010), a W-shaped recovery.

Global equities will have “modest” gains in 2010 compared with this year (2010)/

By Joseph E. Stiglitz … Nov 2009

The U.S. recession is “nowhere near” an end and the economy’s third-quarter 2009 growth rate of 3.5 percent, the first expansion in more than a year, won’t carry into 2010.

While latest figures on gross domestic product are “very good,” the numbers would be “miserable” without stimulus measures enacted by the Obama administration. He urged the U.S. and other countries not to pull back on efforts to shore up economies.

When we look at if workers can get jobs, if they can work full time, if businesses are able to sell goods they produce, in those terms, we are nowhere near the end of recession” in the U.S. The U.S. job market is still “in very bad shape.”

While most economists estimate the recession has ended, the National Bureau of Economic Research is responsible for determining when contractions begin and end. The Cambridge, Massachusetts, organization usually makes its recession pronouncement as long as a year and a half after the fact. The group defines a recession as a “significant” decrease in activity over a sustained period of time. The declines it measures would be visible in gross domestic product, payrolls, production, sales and incomes.

The unemployment rate is likely to go up. Growth won’t be fast enough to bring down the unemployment rate. The growth rate of 3 percent to 3.5 percent needed to create enough jobs for new U.S. labor market entrants was unlikely to be sustained into next year (2010).

It is too early for the U.S. and other countries to begin easing stimulus measures put in place a year ago to avert a financial market meltdown. For the world as a whole, it’s premature to think about exiting stimulus.

Around the world, central banks are paring emergency measures taken at the height of the financial crisis. The record $1.4 trillion budget deficit limits Obama’s options for more aid, Obama’s options for more aid, while Federal Reserve officials try to convince investors that the central bank will exit emergency programs in time to prevent a pickup in inflation.

By The Fed … Nov 2009

U.S. unemployment likely will remain high for the next several years (2009 & Beyond) because the economic recovery won't be strong enough to spur robust hiring.

It warned that rising unemployment could crimp consumers, restraining the recovery. Consumer spending accounts for about 70 percent of economic activity. With such a slow rebound, unemployment could well stay high for several years to come. In other words, US recovery is likely to feel like something well short of good times.

It envisions the shape of the recovery kind of like an "L" with a gradual upward tilt of the base.

Very slow net job gains" may occur "sometime next year (2010)." Troubles in the commercial real estate market and the plight of small businesses also will weigh on the recovery.

Small businesses - which held up reasonably well in the 2001 recession - have been clobbered by the downturn, accounting for about 45 percent of net job losses through the end of 2008.

During the last two economic recoveries, small businesses contributed about one-third of net job growth. But doubted that would be the case this time. That's because many small businesses rely on smaller banks for credit. But troubled commercial real estate loans are concentrated at those banks, hobbling the flow of credit.

The consumer spending is growing, but doubts it will recover its pre-recession vigor "for some time to come."

There is no imminent willingness by businesses to rehire or expand capital expenditures during the recovery. It may be some time before significant job growth occurs and even longer before meaningful declines in the unemployment rate.

Inflation is likely to remain subdued and that the Federal Reserve's current monetary policy is appropriate.

It will take some time to get back on a steady pathway to a pace of growth that will result in significant job creation.

By Warren Buffet … dated Nov 2009

Capitalism is still alive and well despite lingering shocks from the longest, deepest recession since the Great Depression.

The financial panic is behind us. The bottom has come in stocks (Nov 2009). Don't pass on something that's attractive today (Nov 2009).

There were at first reassurances that the U.S. economy had not collapsed. The fundamentals of the system, a marketplace-driven system where US invest in education and a great infrastructure for the long-term, that's continued.

Even in the country's "darkest hour, American businesses were still innovating.

Last fall (2008) was really blindsiding. Still, he did not worry about the overall survival of US economy.

The worst recession since the 1930s may be over, but the recovery isn't expected to be strong enough to stem job losses and get businesses hiring again.

Employers shed a net total of 190,000 jobs in October 2009. It was the 22nd straight month of losses. And the unemployment rate jumped in Oct 2009 to 10.2 percent, a 26-year high.

Only the government could have saved things after the collapse of Lehman Brothers triggered a freeze-up in credit markets and panic on Wall Street. In the future, however, there should be more downside to the head of any institution that has to go to the federal government to be saved for reasons of the greater society.

Warren Buffett, perhaps the world's most admired investor, said on Thursday, Nov 12 the financial panic that gripped the globe last year is a thing of the past, even as the U.S. economy's struggles persist.

Nevertheless there is greater opportunity for investments inside the United States than outside, noting that the U.S. economy is far larger than any other.

By CIMB … dated Nov 2009

The US economy grew at a stronger-than-expected 3.5% in the third quarter (3Q2009) may have boosted sentiment, but the question remains if the recovery is sustainable.US growth would raise exports for regional trading economies like Malaysia and Singapore, but expressed concern on whether US growth was sustainable.

The US’ better than expected growth had come mainly from government-induced spending, including the popular “cash for clunkers” programme and a US$8,000 (RM27,440) tax credit for first-time home buyers. The cash for clunkers programme that ended in August 2009 resulted in 700,000 vehicle sales during the quarter.

Growth was mainly lifted by temporary fiscal measures. This pace of growth is unsustainable given that the fiscal stimulus spending will gradually taper off while household deleveraging and sustained weakness in the labour market will continue to weigh on consumer spending.

Instead, expecting a slow and uneven economic recovery in the US. The financial system is still in recovery mode, households will try to rebuild their savings and fiscal stimulus is tapering off.

In terms of export growth, looking at the US alone was not enough and that a recovery in the European Union (EU) and Japan would have to take place as well for there to be “export strength”.

At present (Nov 2009), it was Asia that was leading the recovery in the global economy, but the region was certainly not decoupled from the G3 economies of the US, EU and Japan.

Economies in the region with large populations such as China, India and Indonesia continued to expand due to their large domestic markets, but trading nations like Malaysia and Singapore relied more on exports.The Japan Economy …

Deflation in Japan accelerated in October 2009, with core consumer prices down 2.2 percent from a year earlier (2008).

The jobless rate, however, improved to 5.1 percent.

The key consumer price index, which excludes volatile fresh food prices, has fallen for eight straight months, posing a growing threat to Japan's fragile economic recovery. The result was slightly worse than Kyodo news agency's forecast for a 2 percent decline.

Japan's government highlighted the danger of deflation for the first time in three years. While hardly a surprise, it showed that leaders of the world's second biggest economy are clearly worried about the trend.

Falling prices, which plagued Japan during its "Lost Decade" in the 1990s, may sound like a good thing. But deflation can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.

Prices are expected to continue falling. The core consumer price index for Tokyo, seen as a barometer for prices nationwide, fell 1.9 percent.

On the labor front, Japan's unemployment rate improved to 5.1 percent in October 2009, better than 5.3 percent the previous month and July's record high of 5.7 percent. The number of jobless rose almost 35 percent from a year earlier to 3.44 million, while the number of employed people fell 1.8 percent to 62.71 million, according to the Ministry of Internal Affairs and Communications.

The ratio of job offers to job seekers stood at 0.44, up for the second month. The figure means there were 44 jobs available for every 100 job seekers.

Also, monthly household spending rose 1.6 percent in October 2009 from a year earlier. The figure is a key indicator of private consumption, which accounts for about 60 percent of Japan's economy.

The China Economy …

China's manufacturing activity grew for a ninth straight month in November 2009 amid heavy stimulus spending but the growth rate was unchanged from October 2009.

The state-sanctioned China Federation of Logistics and Purchasing said its monthly purchasing managers index, or PMI, stood at 55.2 on a 100-point scale. Numbers above 50 show manufacturing activity expanding.

The November 2009 PMI is level with the previous month, possibly indicating the economic boom is starting to stabilize after reaching a fairly high level.

Beijing's 4 trillion yuan ($586 billion) stimulus has helped to boost growth by pumping money into the economy through spending on public works projects. Economic growth rose to 8.9 percent over a year earlier in the quarter ending in September 2009 and the World Bank is forecasting 8.4 percent growth for the full year.

The government plans to shift emphasis to encouraging private investment and consumer spending in the second year of the stimulus.

Economists see the PMI as a more effective measure of future economic activity than gross domestic product because it contains forward-looking information such as new orders.

The November 2009 index for employment fell 1.3 points to 51.1, indicating more jobs were created but at a slower rate than in October 2009. Exports grew but that index slipped 0.9 points to 53.6.

The government and business groups have warned that stimulus spending might be worsening chaotic overinvestment in industries such as steel and cement where supply already exceeds demand. In Nov 2009 the government has rejected 47 proposed industrial projects worth a total of 191 billion yuan ($28 billion) since September 2009 in the steel, petrochemical, nonferrous metals, power generation and other fields.

The Middle East Economy …

Efforts by Dubai World to restructure about US$26 billion in debt out of the estimated US$59 billion it owes reassured investors that the emirate's debt problems can be contained.

Dubai World, the government-controlled conglomerate that led the transformation of Dubai into a regional hub for finance, investment and tourism, unveiled details of a restructuring plan on 30 Nov 2009 that would cover debt owed by its main property firms, Nakheel and Limitless.

Initial discussions have commenced with the banks of Dubai World and are proceeding on a constructive basis.

Dubai is still a risk but most of Asia has very limited exposure to Dubai other than isolated banks. So people may want to avoid the banks but most other companies are okay.

Dubai World restructuring efforts would not include other firms such as Infinity World Holding, Istithmar World and Ports & Free Zone World, which includes DP World, Economic Zones World, P&O Ferries and Jebel Ali Free Zone, or JAFZA. Dubai World said those firms were financially stable.

The restructuring plan would look at options for deleveraging, including asset sales, funding requirements and the formulation of restructuring proposals to financial creditors.
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If global investors were looking for reassurances from Dubai that it would stand behind its massive, debt-swamped investment conglomerate, they got none. Instead, the Gulf city-state seemed to wash its hands of the financial woes that have rattled world markets.

The muddled message from Dubai has fueled worries over a possible default by the conglomerate, which is involved in projects around the world - from Gulf banks and ports in 50 countries to luxury retailer Barneys New York and a grandiose six-tower hotel-entertainment complex in Las Vegas.

Many investors are hoping that the conglomerate, Dubai World, will either openly discuss restructuring of some $60 billion in debt with its creditors, or that Dubai's larger, oil-rich neighbor, Abu Dhabi, will step in to restore confidence by promising to foot any bills.

Dubai and Abu Dhabi are the most powerful of the seven highly autonomous statelets that make up the United Arab Emirates, but their sharply different styles have long made them rivals. For any help, Abu Dhabi will likely demand a price, possibly including increased say over Dubai's affairs.

Abu Dhabi, the seat of the UAE's federal government, has been the more conservative, religiously and financially, relying on its oil wealth to fuel growth.

Meanwhile, smaller Dubai - without any oil resources - has for the past decade (2000s) been the freewheeling boomtown, racking up debt as it built extravagant skyscrapers, artificial residential islands and malls complete with indoor ski slopes. Government-owned Dubai World has been the engine for much of that growth at home and abroad.

Investors appeared to have a better sense of the size of potential losses from Dubai and were reassured for the moment that its woes don't signal a new crunch for credit markets, still recovering from last year (2008)'s near-shutdown.

But the impact from Dubai's comments on 30 N0v 2009 could rekindle the same concerns. Investors with strong exposure to Dubai had the sinking feeling that not only is Dubai sticking to the opaque ways that many feel helped cause the mess, it was continuing to deny the city-state even has a problem.

Dubai officials have largely been silent and when its top financial official made his first comments, it was hardly reassuring. Abdulrahman al-Saleh distanced the emirate from Dubai World's debt, saying that while the conglomerate was government-owned, it was "established as an independent company."

"Given that the company has various activities and is exposed to various types of risks, the decision, since its establishment, has been that the company is not guaranteed by the (Dubai) government”.

Moreover, lenders should take some of the responsibility for the problems, arguing that they lent money to the company on the basis of the feasibility of its projects, not on assurances provided by Dubai's government.

Further fueling the confusion from Dubai authorities, the only other official to speak out about the debt mess was the emirate's police chief, Lt. Gen. Dhahi Khalfan Tamim. Tamim said Dubai faces "unfair competition" aimed at "the defiling of the emirate so that it will not be a hub for finance, work or foreign investment." He said the Dubai government's debts "are not worth mentioning" and shouldn't be confused with those of local companies.

Dubai World said that hat "constructive" discussions have begun with banks. It said the restructuring would include about $6 billion covered by Islamic bonds issued by its Nakheel subsidiary. Nakheel, which is the real estate developer famous for building Dubai's palm tree-shaped islands, has a roughly $3.5 billion Islamic bond coming due in Dec 2009 and it was considered the litmus test of Dubai World's debt woes.

The conglomerate emphasized that the proposed restructuring would not include a number of its other portfolio companies, including Infinity World Holding, Istithmar World and Ports & Free Zone World.

While the statement offered the first taste of clarity for a financial world eager for some transparency, it did not deal with the broader issue of how the company and Dubai itself would deal with the overall debt.

One possibility is that Abu Dhabi will step in, more to salvage the UAE's creditworthiness and economy than out of any filial or legal obligation to Dubai.Abu Dhabi's rulers appear to be furious over Dubai's handling of its debt announcement, showing it by remaining silent amid the crisis.

Abu Dhabi's leaders have long viewed Dubai's economic growth model as excessively risky, and they now (Nov 2009) feel vindicated. But it also can't allow Dubai or Dubai World to fail. "Some of Dubai's largest creditors are domestic Emirati banks in Dubai and Abu Dhabi, and Abu Dhabi does not want Dubai's troubles to spook international investors away from the UAE as a whole.

In a move to partly allay liquidity concerns, the UAE's Abu Dhabi-based central bank on reaffirmed it was standing behind local and foreign banks in the country by offering additional funds at a low cost. The move was ostensibly to ward of a run on the banks.

The conglomerate (Dubai World), alone, is responsible for about 75 percent of Dubai's at least $80 billion in liabilities.

Abu Dhabi could earn additional political leverage by stepping up. Intervening "gives Abu Dhabi the leverage it needs to extend its influence more broadly across the UAE federation". Abu Dhabi wants to get the message across that it will not simply write blank checks.

In the medium and long term, Dubai's financial model will change to look more like Abu Dhabi's as Dubai's rulers lose political clout."

c. Shifting Focus From Economic Growth Surprises (which drove upgrades to earnings and valuations) To Other Factors To Drive (or protect) Returns Going Into 2010

The pendulum of investor expectations has finally swung completely the other way. At the start of 2009, expectations focused on a global financial system teetering on the brink. But as we near the end of the year (2009), investors now Oct 2009) anticipate a sustainable, if modest, economic recovery moving into 2010 supported by a global banking system now seen as stable. These expectations are reasonable.

Citi's base-case forecasts anticipate global economic growth to reach 3.1 per cent in 2010, compared with a 2.1 per cent contraction in 2009. But with the consensus view now (Oct 2009) one of global economic recovery, investors will probably need to shift their focus from economic growth surprises (which drove upgrades to earnings and valuations) to other factors to drive (or protect) returns going into 2010.

With global valuations, by estimates, in some cases approaching expensive, investors should begin shifting their focus to corporate earnings.

Recall that the rally from the market lows in March 2009 sprung from an environment of extremely low expectations about economic growth and earnings as well as historically low valuations.

Since then, confidence in economic recovery has grown as the year (2009) progressed, driven first by eliminating the 'worst-case scenario' of a systemic financial system crisis (driven by government support of the system in February-March 2009) and then by rising expectations of economic recovery (driven by government stimulus beginning in March-April 2009 in China and in the rest of the world through the summer months).

Alongside this improvement in sentiment, investors have raised their expectations about the earning power of corporations worldwide, encouraging these investors to pay more for securities, and driving up valuations. In summary, rising expectations about economic recovery drove up earnings expectations and valuations of global asset markets.

Looking ahead (2010), US may be approaching peak in economic recovery momentum when measured by leading economic indictors. One leading indicator is the US Institute of Supply Management's (ISM) New Orders Index. This index has been particularly good historically at anticipating turns, both peaks and troughs, in US economic activity.

The August 2009 reading of 64.9 indicated fairly rapid expansion in new orders in the US economy and was higher than over 95 per cent of the monthly readings going back to 1980 and over 90 per cent of the monthly readings going back to 1948. Indeed, the moderation of the September 2009 ISM New Orders Index to 60.8 is the first sign that new orders may have peaked.

On a smaller scale during Oct 2009, there is growing evidence that it is increasingly difficult for the US economy to 'beat' expectations.

Rescuing investors from these declines has been a firm start to the US earnings season allowing US as well as Asian equity markets to rally almost 4 per cent in October 2009, after being down as much as 2-3 per cent at the start of the month (Oct 2009).

With valuations and economic expectations increasingly stretched, the October 2009 experience highlights the importance of the earnings outlook for investor returns going forward.

With earnings revisions now (Oct 2009) above the peaks of both 1998 and 2006-2007, risk-reward in the markets is at best becoming more balanced.

As a result, having held the view through much of 2009 for investors to build positions in risk assets, it may be time for them to actively re-assess and manage risk within their portfolios as the markets and the global economy transition to the next stage of recovery.

On balance, trajectory of the global economic recovery is still optimistic. But the catalysts (economic growth, valuation and earnings) that drove global equity markets from their March 2009 lows are now (Oct 2009) not only increasingly well priced into markets (Oct 2009), but may also be losing some of the tailwind of government stimulus that supported them through much of 2009.

As the benefits of stimulus wane moving into 2010, evidence of improving private sector demand needs to emerge to create a more balanced, sustainable global growth profile over the coming year (2010 & Beyond).

g. The Malaysian Equities Outlook

Optimistic Outlook …

BY UOB-OSK Asset Management Sdn Bhd …dated Dec 2009

It has forecast Malaysia's economy to grow 5% next year (2010) while the target for the 30-stock FMB KLCI will be 1,400. The FBM KLCI's resistance level would range from 1,350 to 1,400.

It (FBM KLCI) will outpace the company's forecasted gross domestic product (GDP) growth of 5%.

The GDP growth would be underpinned by the plantation, oil and gas and services sectors. The banking sector would possibly benefit from the recovery while plantations would gain from rising demand for crude palm oil (CPO). Supply of CPO was affected by the hot spell from May to July 2009.

On the corporate earnings for the quarter ended Sept 30 2009, corporations appeared to have learnt their lesson from the 1997 Asian Financial Crisis.

As for next year (2010), while there may be small pockets of problematic companies, anticipating a largely turmoil-free year in 2010. The worst had passed.

By CIMB … dated Dec 2009

Malaysia’s key stock index may rise 14 per cent by the end of next year (2010), which raised its forecast after the country’s “breathtaking” third-quarter 2009 corporate earnings.

The FTSE Bursa Malaysia KLCI Index, which has increased 45 per cent this year (Till early Dec 2009), may advance to 1,450 by the end of 2010, the highest level since Jan. 17, 2008. Its previous target was 1,400. The index gained 0.2 per cent to 1,269.29 at the midday break.

The latest earnings reports were “breathtaking and positive on nearly every measure. The economy is “clearly in a recovery mode” as the global recession eases and the government’s stimulus policies take hold.

By HwangDBS … dated Dec 2009

It is likely to see the return of foreign funds, especially if global equities turn increasingly volatile ahead (Dec 2009 & Beyond).

As the risk-reward profile tilts to the opposite direction because of stretched valuations, strategists may be tempted to make a gradual tactical switch to more defensive low-beta markets like Malaysia to diversify their risks.

The prospect of an appreciating ringgit is an added appeal for investors in search of incremental investment returns.

Even though Malaysian stocks remain unexciting from a broad valuation perspective, there are "hidden gems" to be found using a bottom-up approach. These are fundamentally under-valued stocks that were once favourites of foreign investors, but are now (Dec 2009) under-owned by them.

The list of big and mid-cap companies, under-owned stocks - with foreign shareholdings far below their recent peaks - that could increasingly come under the investment radar of foreign investors again are CIMB (with 33 per cent foreign shareholding as of end-June 2009 versus a peak of 54 per cent), IJM Corp (34 per cent vs 62 per cent), MRCB (19 per cent vs 44 per cent), SP Setia (28 per cent vs 56 per cent) and Tenaga (11 per cent vs 28 per cent), Gamuda (45 per cent foreign shareholding in June 2009), Genting (44 per cent), Genting Malaysia (33 per cent), Hong Leong Bank (7 per cent), Proton (16 per cent), Public Bank (25 per cent) and RHB Capital (5 per cent).Foreign investors were conspicuously absent from the scene when the Malaysian stock market jumped 51 per cent from a trough of 836 in mid-March 2009 to now (Till Dec 2009). This was evident in the insignificant level of trading activity by foreign investors (just 25 per cent of trading value in January-September 2009) and the persistent net portfolio investment quarterly outflows (since third quarter of 2007) with foreign ownership standing at a five-year low.

Foreign ownership - standing at 21 per cent of overall market capitalisation as of September 2009 - is also at its lowest in five years.

By JPMorgan … dated Nov 2009

Malaysia's FTSE Bursa Malaysia KLCI Index may rise to 1,400 by the end of next year (2010) as economic growth accelerates, which said it was “positive” on the nation’s equities.Malaysia’s economy may expand a faster-than-estimated 5 percent, while the implementation of large infrastructure projects and reform policies may exceed investors’ “low expectations”. A strengthening currency and the positive outlook for global emerging-market shares may also provide a boost to the nation’s stocks.

Malaysian stocks have “underperformed in the 2009 recovery”. The consensus underweight in Malaysia combined with low expectations on policy implementation generates upside risk.

JPMorgan’s forecast for Malaysia’s gross domestic product is faster than the government’s estimate of growth of between 2 per cent and 3 per cent in 2010. The government has said the us$195 billion economy may shrink 3 per cent this year (2009).
By JF Apex … Sept 2009

Expecting more upside as more liberalisation and investor-friendly measures to come out of the budget.

The tone has already been set by Najib’s previous moves which includes the call to pare down Khazanah Nasional Bhd’s stakes in government-linked companies and bringing Maxis Communications Bhd back to the local bourse.

There may be a pre-budget rally. The objective is simple. The market needs to move. Najib appears very serious in attracting foreign investments to the market.

By KAF … Sept 2009

Expecting the 2010 budget to be a follow-through of the expansionary policies announced in the past year (2008), while continuing to focus on stimulating consumption.

Structural adjustments to the composition of the government profit & loss are unlikely although the Prime Minister has hinted at a need to manage expenses more efficiently. Overall, the budget should be market friendly and provide a nice trigger ahead of the third quarter 2009 reporting season.

It points out that the present (Early Oct 2009) correction may provide a good chance to buy quality stocks. Our markets have corrected ahead of the global market ... we had the Hungry Ghost Festival in September 2009. So, the CI’s downside is limited. If you look at the second and third liners, there is hardly any correction.

The market is looking for a reason to move to the next level.

Potential catalysts from the upcoming budget may come wrapped in the form of bigger construction projects to be awarded including the extension of the light rail transit lines estimated at RM7bil and the new Low Cost Carrier Terminal

By Nomura … Sept 2009

Taking a cue from the past post-crisis rallies and historical earnings upgrade cycles, it remains bullish. Economic recovery should continue to underpin earnings upgrades, supported by ongoing stimulus spending.From a regional perspective, however, Malaysia could lag as cyclical markets elsewhere offered better returns.

Nomura noted that in the past 1997/1998 Asian financial crisis, banks had rebounded by over 200 per cent over a 12-month basis.

In terms of cumulative current account balance (CCAB) between 1980 and 2009 (year-to-date) as a percentage of GDP and market capitalisations, Malaysia ranks among the top five in the Asia-Pacific. The country’s CCAB as a percentage of GDP is at 83% is only behind Singapore’s 202%, Taiwan 110% and Hong Kong 101%.

Consistently, Malaysia’s CCAB as a percentage of market capitalisations, at 69%, has ranked among the top five, after Shanghai’s 88%, Tokyo’s 82%, Singapore’s 79% and Taiwan’s 75%.

It remains positive on the market supported by a favourable earnings revision cycle. Judging from the previous upgrade cycles, it still see plenty of upside to the current earnings upgrade cycle (Oct 2009).

By AMBank … Sept 2009

The general outlook of the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) remains bright.

It had raised its fair value for the FBM KLCI to 1,350 points from 1,190 based on 2010’s price earnings (PE) ratio of 16.5 times.

Anticipating a correction phase in the third quarter of 2009 “may be behind us,” or at least “the risk of pullback was dissipating.”

There were still lingering worries over valuation after the steep run-up in share prices but the macro environment flushed with liquidity was most conducive to the equity market.

More importantly, macro fundamentals are now (Sept 2009) pointing towards a start of a growth cycle moving into the fourth quarter 2009. There is less doubt over a global economic recovery. Inflation expectations are muted, implying that the interest rate cycle is not going to rise anytime soon.

It is forecasting gross domestic product to expand by 3% in 2010.

Historically, an earnings-driven re-rating from trough to peak of the market had never been shorter than 12 months. Rally in 1998/99 and 2001/02 sustained for 16 months and 12 months respectively. This present rebound (April 2009 – Sept 2009) is just six months from lows.

It has forecast corporate earnings to expand by 17% in 2010 or more than two times faster than its trend-average growth rate of just 7% in 2000 to 2009. It expects the revision cycle to gain traction. Earnings drivers of the heavyweight sectors, such as banks and plantations, were solidifying.

Neutral Outlook …

By AMResearch …

The current (Nov 2009) disconnect and divergence between the direction of equity markets and macro economic cycles may be pointing towards an easing in risk appetite — even as the pace of the global economic recovery continues unabatedly in the coming quarters (4Q2009 & Beyond).

External macro economic data released in recent days were indeed solid, with the United States’ ISM manufacturing index strengthening to a three-and-a-half-year high of 55.7 in October, suggesting that gross domestic product (GDP) growth in the fourth quarter of 2009 (4Q09) should at least keep pace with the 3.5% in 3Q09.

PMI reading for the European Union expanded to 50.7 in October 2009 as well — the first expansion in 17 months, while China’s economy accelerated further in October 2009, with its PMI rising to 55.2.

Nonetheless, risk appetite would ease as interest rate expectations escalated. With macro economic cycles having negotiated past a trough, growth concern is not the residual drag on markets.

As macro economic data continues to outpace expectations, the primary concern is shifting to — whether this ongoing recovery in the global economy, along with continued increases in prices of commodities — will prompt central banks around the world to embark on a tightening interest rate cycle.

Any tightening would put an end to a net liquidity creation that had been feeding a market rally for the most part of 2009. There were nascent signs that other countries would soon follow Reserve Bank of Australia in raising rates.

Trading conditions are likely to be very volatile in 4Q09 as markets start to assimilate expectations of an upturn in global interest rates sooner than had previously anticipated.

Market has to discount rate hikes before trending higher. In the immediate months ahead (Nov 2009 & Beyond), expecting to see tactical weaknesses in the market — as interest rate expectation supersedes macro cycles — in dictating direction of the market.

At the early stages of a recovery (April 2009), it continued to believe that a risk to earnings estimates would still be on the upside. However, it is on the ground to deliver evidence of stronger-than-expected recovery in sales and margins, kicking off another robust reporting season this month (Nov 2009).

It was retaining its FBM KLCI fair value of 1,350 — based on 2010’s PE of 16.5 times — or one standard deviation above the trend average PE of 14.5 times.

By Great Eastern … Oct 2009

Malaysia stocks may trade lower in the first half (1H) of next year (2010) against a landscape of less impressive world economic data and a possible contraction in commodity prices.Expecting sentiment to be positive till March next year (2010), before investors took profit and revisited valuations and earnings of local companies which might come in below expectations.

It does not foresee a major correction (in the US stock market). Malaysia, to a large extent, will probably see its performance around the negative 10% range (in the second quarter of 2010).The other reason apart from Malaysia’s high plantation weighting, is that most blue chips in Malaysia are trading at full valuations.For now (Oct 2009), the general sentiment is that world markets have run ahead of economic fundamentals as investors price in a macro-economic recovery, which in turn dictates companies’ earnings and valuations.

The big picture, going forward, hinges largely on the dynamics of the US economy and the outlook for large emerging markets like China.

US equities may swing in both ways in the next six months (Oct 2009 – March 2010), who foresees a 10% upside or downside in the world’s largest economy’s stock market.
Looking at the macro data, particularly, consumption and consumer spending, besides, household spending and debt, it does not suggest that the recovery for the US is going to be strong.

It sees commodities pulling down equities in 1H2010 with the outlook for the world economy being less than rosy. Expecting a drop of around 10% for Malaysian stocks in 2Q2010.

It is cautious about commodities. This is because prices for items like crude oil and palm oil, which are deemed to have run ahead of economic fundamentals, may come under downward pressure next year (2010) against a backdrop of lower demand for these resources.Palm oil rates tend to move in tandem with crude oil prices as costlier hydrocarbon energy prompts demand for palm oil as feedstock for production of biodiesel, a cheaper alternative.
But the correlation was less now by virtue of palm oil being used for food production, hence, prices of palm oil are expected to be more resilient than crude oil prices.

But commodities will be an asset class that will depreciate.Demand scenario will again be disappointing for commodities. Urge investors to be very careful for commodities next year (2010). It foresees a smaller decline in palm oil rates compared to crude oil prices during the first half of next year (2010).Inflation and asset reflation themes would be key highlights in 2010. Inflation and asset reflation will gradually emerge as a catalyst for greater market performance against a landscape of ample liquidity, low interest rates and the anticipation of a weakening US dollar.These will likely translate into rising commodity and asset prices when the economic upcycle becomes firmly established. This would imply better prospects for the oil and gas, plantation, and property sectors.However, the potential risk of countries implementing ‘exit strategies’ or policy tightening implies greater volatility in world financial markets.

By OSK …. Sept 2009

It was “not too alarmed” with the mild profit taking currently (Sept 2009) occurring on the local market, which was “still buoyant”.The decline was in part due to the prevailing cautious sentiment in the regional markets, which fell in tandem with Wall Street.The local market was expected to trade range-bound as well as undergo some mild corrections before recovering in early October 2009.

There are still no clear indications that the US economy is out of the woods as the US Federal Reserve kept interest rates at near zero level after the Federal Open Market Committee meeting.Also, the unexpected decline in existing US home sales for the first time since March 2009 caused a minor blip, leading investors to view that a recovery in US housing was slowing down.

It was too early to judge whether the correction in the local market would turn into something major, with more concrete signs likely to appear following the end G20 summit on financial reforms.

In general globally, over the last six months (April 2009 – Sept 2009), market talk on reducing fiscal stimulus or tightening monetary policy would prompt a selldown in stocks, before investors returned to the market. On the local front, the government would likely unveil “sweeteners” ahead of the Budget 2010 announcement on Oct 23, which would boost the FBM KLCI.
It believes current upgrading of stocks and earnings is happening because of improved results and the belief that the worst is over.

Currently, the stock market is still on an uptrend. Expecting some good news to flow in Oct 2009, so the feel good factor will still be there. In the case of fundamentals, things have gone past the worst. Everyone is now looking beyond 2009.

When next year (2010) comes along, we may fund that reality does not quite match what was hoped for. Earnings may disappoint investors. Therefore, the market may reach a peak in 2Q2010. Valuations too will be stretched. There will be some retracement. The correction would not be much. We have seen the worst of the economic downturn.

By Inter Pacific … Sept 2009

The decline in US home sales in August 2009 was unlikely to undermine actual sales that had grown in five out of eight months this year (2009).As such, its opinion that the latest data is unlikely to undermine the US Federal Reserve’s comments on the improving housing market and growing stability in the economy. It continues to hold in their view that the improvement in the housing market will remain modest as the real test will be when the government ends the stimulus measures.

By TA … Sept 2009

October has been touted as a negative month, more so because many of the global negative events in the past, took place during these months. Without these negative events, it’s actually quite a random trend.

But there’s opportunity in crisis.

Expecting more of a post-budget rally and anticipating investors to accumulate on confirmation of news.

The market is now correcting along with global markets. It favors the market dip a further 50 points before positioning myself for the year-end rally (2009) … has a 1,250 target for end-2009.

The short-term impact and direction of the budget on the economy and stock market are irrelevant. After all, market often reacts with knee-jerk speed and over-zealousness.

The clever investor will think: Expectations are still pretty bearish. The green shoots everyone has been talking about may turn to dead leaves. This year (2009), everyone is still complaining about a recession, the lack of execution and political uncertainty. Maybe it’s a good time to buy.

This bearish mood will hit good stocks with high dividend yields. Solid stocks will also be hit and be fleetingly cheap.

By Kim Eng Research … Sept 2009

There were clearer signs of rebound in Malaysia as seen in semiconductor, CPO and even property sales.

The stock market has risen 33% year-to-date (Sept 2009) but still lagged other Asian bourses. Valuation have just broken out of the post-Asian crisis resistance level of 16 times and trading at financial year 2010 (FY10) PE ratio of 17 times on earnings per share growth of 17%.

Opine that it needs strong catalysts for the stock market to continue its northbound track, failing which it could settle back at the resistance of 16 times of around FBM KLCI 1,100 points.

By UOB … dated Oct 2009

Having the over sharp gain since January 2009, it had turned cautious warning on a long over due correction on Bursa Malaysia. There has to be a regional market correction at some point in time and pegs the FBM KLCI year-end (2009) target at 1,180-points range.UOB’s first expected scenario of the market correcting in October 2009 before staging a recovery did not play out. A second possibility was that the market would continue rising before pulling back at year-end (2009).

By Singular Assets Management … dated Oct 2009

Better corporate earnings in Asia, backed by stronger economic growth, will boost stock markets in the region with selective stock-picking becoming increasingly important as growth becomes less broad-based.

The economic fundamentals in Asia were generally positive over the next one to two years (2010-2011) with private consumption in China, India and Indonesia underpinning growth in the region.

The challenge is to pick the right stocks because the regional markets have rallied quite a bit since March 2009 and growth going forward may not be as broad-based.

Pessimistic Outlook …

Investors should remain selective in holding on to their positions in the equity market amid the current (Sept 2009) bout of correction and keep an eye out for profit-taking opportunities.It was the season (Oct 2009) for investors to be nimble, paying attention to macro economic issues and be prepared to sell into rallies even though the local bourse was not expected to see any major corrections.

In the past three decades (1980s-2000s) of the Kuala Lumpur Composite Index’s (KLCI) memory, the third quarter of the year had typically been the weakest. That is why some investors shun the market from August 2009 right up to October 2009.

By Maybank Investment Bank … dated Oct 2009

It has proof to substantiate that. “Month-on-month (MoM) returns from 1977 to 2009 show that the months with the highest risk are the worst performing. Based on over 32 years of observations on MoM returns, it had identified a common trend for the FBM KLCI index as well as the Dow and Hang Seng indices. All three markets are weak in the August to October months.

For that reason, it recommends investors to “Sell” over this period and “Buy” in December 2009 and expecting the market to remain volatile as it is still in the “very high risk” zones.

A potential catalyst (or not) could be the upcoming budget 2010 which to be tabled in parliament on Oct 23 2009. Do pre and post budget market swings present an investment opportunity?

Based on the past five years, the stock market tends to show a slight downward dip in the aftermath of the budget as investors generally have high expectations, and as such, end up getting somewhat disappointed over the lack of goodies.

But as this will be Prime Minister Datuk Seri Najib Tun Razak’s first budget as he is also the Finance Minister, don’t be surprised to see market-friendly measures, despite the Government saying it is looking to reduce operating expenditure while maintaining fiscal discipline.

Compared to the regional bourses on a year to date (Oct 2009) basis, the FBM KLCI remains the second worst performer at 40.7%, only ahead of Japan.
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With the FBM KLCI making fresh highs despite having surpassed its recent 1,196.46-point peak, risks to the downside would increase significantly while potential rewards diminished.It would only be a matter of time before a steep correction set in.Bearish divergent technical signals are now (Sept 2009) very obvious. Waning potential upside would cause wise investors to dispose of stocks on the FBM KLCI on rallies. This rise will be fraught with heavy stock liquidation. The next major impending move will be down.The local bourse was expected to stall in its saturation zone of between 1,237.25 and 1,248.34 “very soon”, and that investors should remain in a “selling mode and stay vigilant”.

Investors should “dispose of stocks on any and every rebound from now (Sept 2009)”.

By ECM Libra … Sept 2009

It also sees profit taking ahead for the FBM KLCI, although it expected a more positive outlook for the local market after the pullback ended.While it is uncertain whether this small profit taking wave which would morph into a significant correction or a reversal, it is always prudent to take a little money off the table first, especially after such significant gains in recent times.

By MIDE Amanah … Sept 2009

There are a lot of reasons for the global market to decline, including markets running ahead of themselves and being overvalued. Moreover, no clear solutions have been found for the problems that caused the crisis in 2008.

The structural problems remain unresolved. The US is fighting to deleverage with more money. There is not much change in the situation from six months )April 2009). A lot of it is from short term celebration.

Uncertainties over the sustainability of the global market recovery have added o investor jitters in the month of Oct.

By BCA Research … dated Oct 2009

Investors should “tactically sell” developing-nation stocks after a 68% rally in the MSCI Emerging Markets Index this year left prices overstretched. The MSCI Asia Pacific Index, on the other hand, has climbed 73% from its five-year low on March 9 2009.

It would be difficult for earnings to keep beating estimates after analysts increased their profit projections.

By Inter Pacific … dated Oct 2009

Stock exchanges in the region, but not the local bourse, were on the verge of a correction in the short term.

The Asian markets may be due for a correction but the local market is a little peculiar as retail momentum is fuelling it with very little institutional participation so there’s no dynamic change.

By RHB … dated Oct 2009

Malaysia’s benchmark stock index may fall after its candle chart showed a “shooting star” formation on 20th Oct 2009, signaling a potential end to a rally that lifted the measure to a 17-month high.

The bearish candlestick pattern “suggests a possible reversal from the recent upswing.
A candlestick chart displays a security’s high, low, open and close for each day, and can signal a reversal of a trend or a continuation. A “shooting star” candle, a short real body with a long upper shadow, forms on a day when a security that has been rising previously has an open, close and low that are close together and far away from the high for the day. The index’s relative strength index has been above 70 for the past six days, the threshold that some investors use as a signal to sell. After surpassing the 1,250 level, the immediate-term target for the index has been raised to 1,300. Strong support is seen near 1,250.

Stock Market Leading Performance Indicator
5 (0-3-Bearish 4-6-Neutral 7-10-Bullish).

Market Commentaries & Technical Analysis as at 15 Nov 2009

2009-11-15T22:31:00.004+08:00

About Maxis ...

2009-10-15T11:44:00.002+08:00

MAXIS
1. Why List Maxis After Delisted On 2007?;
2. The Prelisting Restructuring Of Maxis & Binariang;
3. What Is The Upside For Ananda and Binariang After Maxis Bhd Is Relisted?;
4. The Question Is, Will Maxis Be Able To List Rm5 a Share Or More?;
5. The New Versus Old Maxis;
6. Given Tougher Market Conditions, The Question Is. What Kind Of Growth Can Maxis Deliver
In The Current (2009) Environment?
7. Valuations Of Maxis;
8. Maxis Vs Axiata & DIGI

Saudi Telecom Co (STC) has a 25% stake in Binariang GSM Sdn Bhd, the parent company of Maxis.

Two years ago (2007), MAXIS was taken private in a RM39 billion exercise.

By relisting MAXIS, Ananda gains big time on three counts …
·He is relisting only his Malaysian teleco assets whereas the MAXIS he took private in 2007 included international assets.
·Through a series of deft pre-IPO restructuring, Binariang, which he controls privately, will raise billions in cash that will enable him to retire virtually all the debt he and Binariang had taken to privatize MAXIS if he chose to. In short, Binariang will be able to pay the bulk of its debts and still end up controlling 70% of the relisted MAXIS
·Ananda will score brownie points with Najib, who is also finance minister and who wants to put Bursa back on the radar screen of international fund managers the way Malaysia was in the 1990s. To achieve this, Bursa needs more profitable big companies.

At the same time, Binariang need to restructure its debts. Binariang has three denominated debts of RM21 billion and US dollar denominated debt paper of US$900 million. Sources say Binariang needed to shore up its balance sheet to continue to enjoy a debt rating of AA (2) and A (3) respectively for the ringgit and US dollar debts.

The say Binariang needed to inject more money into its Indian telco Aircel Cellular Ltd, but it would have been difficult for it to borrow unless it restructured its existing debt. They also say the global financial crisis meant bank borrowings had become more difficult and expensive.

It was a combination of the financial crisis, which made the US dollar borrowing expensive, and Maxis’ Indian operations requiring capital to expand market share that led to the restructuring of Maxis and listing of its Malaysian arm.

The Indian operation is key to Ananda’s realizing his dream to have a cellular mobile empire with strong presence across Asia.

When Maxis was taken private in 2007, it was primarily because the listed company would incur massive debt due to its operations in India and Indonesia, something that would damp its share price performance. Moreover, the cash being paid as dividends could be used to fund expansion.

Binariang later sold a 51% interest in its Indonesian arm PT Natrindo Telepon Seluler to STC, leaving it and Maxis with Aircel as its major overseas investment.

To compete aggressively, Aircel needs more capital, an asset not all shareholders of Binariang may be comfortable with.

The biggest shareholder of Binariang is Ananda, with a37% stake, followed by Harapan Nusantara Sdn Bhd, with 30%. STC holds 25% equity stake while Shield Estate NV, a vehicle linked to Ananda has 8%.

Aircel’s capital expansion programme over the next four years (2010-2013) is about RM16.4 billion and this is expected to be primarily financed via additional equity and/or debt.

In line with Aircel’s funding needs, the group (Binariang) debt load is expected to balloon to around RM25 billion in 2010 (from RM21 billion as at Dec 2008).

It was the rating rationale that gave the market the first indication of the need for Binariang to undergo a restructuring to give Aircel additional funds to accelerate expansion.

The restructuring and relisting of Maxis are being done in a manner that will solve Binariang’s balance sheet and funding woes and give the company the flexibility to expand in India and other countries without burdening shareholders.

MCB will list its Malaysian arm Maxis Bhd by divesting 30% or 2.25 billion shares to investors. MCB is wholly owned by Binariang.

Assuming the sale is done at Rm5 per share, the divestment will net MCB some RM11.3 billion and value the Malaysian assets at RM37.7 billion. This compares with the RM39 billion valuation of Maxis that included its entire Malaysian and overseas assets when it was taken private.

Also, prior to the relisting, MCB is undergoing a restructuring that will see Maxis acquiring assets from the parent (MCB) for close to Rm4 billion and also receiving a dividend payment amounting to RM4.03 billion.

As a result of the pre-listing restructuring, Maxis will owe MCB RM4.99 billion. Maxis will seek Rm5 billion long term external debt to repay the debt.

Apart from that, four subsidiaries of MCB have declared dividends to MCB to the tune of RM4.03 billion before the upcoming listing .Of this amount, some RM2.84billion was paid in cash. The remaining RM1.18 billion will be settled by Maxis from the Rm5 billion borrowing. The dividends were declared by utilizing the retained earnings of four subsidiaries, which will come under the Malaysian arm Maxis after the listing.

Apart from dividends from the four subsidiaries, Binariang also received dividends to the tune of RM290 million in respect of redeemable convertible preference shares in Maxis Broadband.

In a nutshell, even prior to the listing, MCB (which is 100% owned by Binariang) will receive Rm7.84 billion in dividends and divestment of assets arising from the prelisting restructuring. Together with the RM290 million that Binariang received for its preference shares, the total sum MCB will ;ay the holding company is more than RM8 billion.

Add the post IPO proceeds of some RM11.3 billion (assuming the sale of 30% of Maxis is done at RM5 per share) to the Rm8 billion and the total proceeds that Binariang will get are more than a whopping RM19 billion. That is not too far off the cost incurred by Ananda and Binariang when they took Maxis private.

Then, Binariang had piled on ringgit debt papers of RM21 billion that were used to buy out old Maxis’ minority shareholders.

What is the upside for Ananda and Binariang after Maxis Bhd is relisted?

When Maxis was take private, it had both the international and local businesses. Now (Sept 2009), only the local arm is being relisted and the proceeds received will almost cover the debt incurred in taking Maxis private, if the shares are sold at Rm5 and above.

Effectively, if the shares are sold at Rm5, this will value the Malaysian operations at Rm37.7 billion. When Maxis was privatized at RM15.60 per share, the company’s market capitalization stood at Rm39 billion.

Also, after taking Maxis private, STC invested a total of US$3.1 billion to take a 51% stake in Maxis Indonesian operations and a 25% stake in Binariang. This was done via an issue of new shares, which meant the money went to Binariang’s coffers, hence reducing its cost of taking the old Maxis private by some RM10 billion.

The funds from STC are said to have been channeled into Binariang‘s overseas operations. Also, STC, together with Binariang, jointly underwrote a US$900 million loan for the Indian expansion.

If Ananda can raise enough funds from the relisting to pay off the ringgit papers raised to fund the fund the privatization of Maxis, he will free Binariang from a substantial amount of debt and still end up owning 70% of a listed Maxis and 100% of MCB’s overseas arm.

But the question is, will Maxis be able to list RM5 a share or more?

So far, based on reports, the valuations given to Maxis range from Rm4 to Rm6, depending on the kind of valuation method.

If based on EV/Ebitda, a RM5 tag is too high as it would translate to more than nine times EV/Edita. On the other had, if Maxis is positioned as a dividend play, it can fetch a higher price of about rm5 a share. But then if investor is looking at dividend play, there are other options such as DIGI and Axiata.

A New Versus Old Maxis

When Maxis or old Maxis debuted on the Main Board in July 2002 with just over three million subscribers, Malaysia mobile penetration rate was under 40%. By the time it was privatized five years ago in July 2007, Malaysia’s mobile penetration rate had gone just above 90% and its subscriber base had more than tripled.

Between 2006 and 2008, Maxis’ revenue grew 21.5% to Rm8.45 billion in FY2008 from RM6.96 billion in FY2006 even as its mobile subscriber base expanded around 18% a year in Dec 2008 from Dec 2006. Mobile revenue, which made up over 90% of Maxis group revenue, grew 20.4% to RM7.9 billion in 2008 from Rm6.5 billion in 2006.

Today (2009), Malaysia’s mobile penetration rate is already above 100% alongside regional countries. Mobile operators are now (2009) looking to services such as mobile broadband as well as value added 3G data services to grow or maintain average revenue per user numbers.

The battle for price sensitive prepaid users has also become cutthroat, with at least four active mobile virtual network operators selling rebranding mobile services rising Celcom Bhd’s network.

And it is in this scenario of a highly competitive near saturated market than Maxis Bhd or the new Maxis is seeking to list on the Main Board without its sister companies in India and Indonesia that are still in the red due to start up losses.

Given tougher market conditions, the question is. What kind of growth can Maxis deliver in the current (2009) environment?
From the growth that Maxis has delivered over the past two years under the new group CEO, the need to perform remains imperative. Maxis os after all still under AK company.

In Malaysia, Maxis is still the leading mobile operator, with its 11.25 million subscriber base, commanding 40% of the market ahead of Celcom’s 34%, Digi’s 25% and U Mobile’s 0.7%. Maxis’s revenue market share also remains the largest.

However, due to competitive pressures, Maxis’ Ebita margin fell for the six months ended June 2009. Celcom’ slide however was relatively smaller.

There are also Maxis dominance coming under threat.

Its postpaid revenue market share has slipped below the 50% mark. It is also no longer the leader in terms of prepaid ARPU. Maxis was the only one of the big time operators to lose prepaid subscriber market share in 1H2009.

Celcom has made known its intention to unseat Maxis as market leader by 2011.

In terms of mobile broadband users, Celcom has been more successful in growing its subscriber base.

Nonetheless, the fact remains that competition is getting tougher and margins are being eroded. Without the potential growth factor from markets abroad, Maxis’ valuations would likely be closely tied to its ability to generate cash and pay dividends.

At the indicative IPO price of for institutional investors is RM5.50 apiece and retail price of Rm4.95) to be fair as it would imply an equity valuation of RM37.1 billion or 16.3 times annualized 1HFY2009 earnings and nine times EV/Ebita.

The valuation is on par with the prospective PER of 14 to 16 times at which domestic and regional mobile companies are trading..

Be that as it may, the absence of the potential growth factor from markets abroad and heightening competition in a near saturated market at home mean it would be tough for the new Maxis to outshine the old Maxis.

Maxis Vs Axiata & DIGI …

One of the key investment merits for Maxis was the strong cash flow from its domestic operations, hence, the ability to sustain good dividends going forward (targeted payout of 75%). Maxis provided investors with a strong alternative as an income stock, though the local cellular telephony space was “close to saturation (over 100% penetration)”.

Maxis's re-entry into the public domain has raised speculation about its impact on Axiata and DiGi.

Maxis has 11.4 million subscribers representing about 40% of the estimated 28.5 million mobile subscriptions in Malaysia. MCB announced it would sell a 30% stake comprising 2.25 billion shares in Maxis Bhd, which consolidates its Malaysian operations. Of that, 2.075 billion shares will be offered to institutions and the remaining 174.79 million shares to the public and customers. After the corporate exercise, MCB would hold 5.25 billion shares, representing 70% of Maxis’ paid-up capital.

Based on the announcement, this would see members of the public owning a very small stake in the company.

As at June 30, 2009, Maxis had deposits, cash and bank balances of RM1.88 billion. For the first half ended June 30, 2009, it posted a net profit of RM1.41 billion.

Some believe there may be a realignment and shifting of portfolio in the sector upon Maxis’ re-entry. Nonetheless, Axiata — when compared with Maxis — was a more compelling longer-term exposure given its strong regional growth prospects which would provide more superior earnings upside. Meanwhile Maxis’ relisting would impact DiGi more than Axiata due to the former’s much lower trading liquidity and market capitalisation.

The key factor that the major shareholders need to take into consideration was the listing pitch, given that Maxis was once perceived to be a darling stock with strong regional prospects and good dividend yields.

Based on shareholding data from individual companies, foreign shareholding in telcos was at an all-time low in June 2009 despite the improved market appetite since March 2009. This was because Malaysian telecom stocks are perceived to be trading at a premium relative to their peers in Indonesia, Singapore and Thailand.

Telekom Malaysia’s foreign shareholding fell from 15.9% at the end of 2008 to 10.6% at end-June 2009 while DiGi’s foreign shareholding (excluding Telenor) tumbled from 15% to 11% during the same period. It is believed Axiata saw a slight expansion in foreign interest following the increased weightage under the new FBM KLCI after hitting a low of 8.4% in June 2009.
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The top reasons for investing in soon-to-be-listed telecommunications company (telco) Maxis Bhd (Maxis Malaysia) are its potentially high-dividend yield, dominant share of the local mobile market and superior margins.

Maxis Malaysia, the year's most anticipated initial public offering (IPO), is largely expected to be listed in November 2009 with a go-to-market valuation of around RM37 billion to RM40 billion.

Maxis Malaysia's key investment merits are its target dividend yield of over 5 per cent on the back of the domestic operation's strong and steady cashflow, dominant share of the domestic mobile market and superior margins.

The listed entity, which will comprise only Maxis Communication Bhd's domestic operations, could have a negative impact on other listed telcos such as DiGi.Com Bhd and Telekom Malaysia Bhd (TM). It is believed that Maxis Malaysia's "significantly" higher profile, market capitalisation and trading liquidity, investors are likely to switch to it from DiGi.Com and, to a certain extent, TM.

Industry observers believe the re-listing of Maxis will be negative for DiGi.Com given (the latter's) smaller share liquidity and market capitalisation and Maxis' relatively more superior EBITDA (earnings before interest, tax, depreciation and amortisation) margin and dividend payout potential.

Meanwhile, as Maxis will be relisted without its overseas operations, it is not seen as a direct threat to Axiata. Axiata provides a more compelling longer-term investment proposition given its regional footprint in 10 countries.

MAXIS deserves premium valuation over DiGi (PE multiple of 16 times) but a discount to TM's fixed-line and broadband monopoly (20 times).

Expecting Maxis to be included as a component stock of the FBM KLCI, which would be a boon for index-linked funds.

Market Commentaries & Technical Analysis as at 12 Oct 2009

2009-10-12T15:00:00.003+08:00

Market Commentaries & Technical Analysis as at 04 Oct 2009

2009-10-05T09:49:00.005+08:00

Watch List In The Coming Week
1. 2010 Budget Announcement In 23 Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009;
3. Mega Project Calls For Tenders And Awards (LCCT, LRT extension);
4. Upcoming Maxis IPO;
5. More Construction Contracts, O&G Projects& Liberalisation Measures Of The Services Industry

Market Commentaries
Positive Factors …
While September 2009 took it by surprise with a liquidity-driven run up, profit taking took over at the end on fears of a cutback on stimulus measures worldwide.

For October 2009, with the runup to the budget, expecting a strong flow of news, which should hopefully, offset the signs of risks in global markets.

The endorsement by the G20 Finance Ministers’ meeting of the International Monetary Fund’s allocation of 161.2 billion worth of Special Drawing Rights (SDR) on Aug 28 2009, with an additional SDR21.5 billion on Sept 9 2009, gave equity markets a shot in the arm in terms of liquidity.

It was only when indications of a slowdown in mortgage securities purchases by the US Fed surfaced later in the month (Sept 2009) did profit taking set in across the globe.

While trading volume in Malaysia was expectedly weak in line with the more subdued trading during the Ramadan month, the FBM KLCI nevertheless registered a gain of 2.4% in September 2009.

The particularly newsworthy events were the unveiling of the proposed routes for the LRT line extension to Puchong and Subang, the draft prospectus for Maxis’ upcoming IPO and the placement by Khazanah Nasional Bhd of some stakes in its subsidiaries and the upcoming National Automotive Policy (NAP).

On the outlook for the October 2009, there could be a slew of positive news flow, including more construction contracts, oil and gas projects and liberalisation measures of the services industry.
The good news is that there is very little foreign participation in the market now (Oct 2009). If they return for whatever reason, it would give the stock market a badly needed boost.

While the media reported rumours that the 10th Malaysia Plan (10MP) may see a cut in development spending of 10% to RM180 billion for 2011 to 2015 compared with RM200 billion for the 9MP to allow the government to trim its budget deficit to 4% by 2015, this cut should be compensated by the carrying forward of unutilised allocation from the 9MP and that the government may step up incentives for greater private sector participation such as through PFIs or financial guarantees.

An example is the proposed permanent low-cost carrier terminal (LCCT) which will be funded by Malaysia Airports Holdings (MAHB) rather than directly by the government.

In any case, expecting a number of mega projects to be awarded over the next 12 months (Sept 2009 – Sept 2010) in the final year of the 9MP while a sizeable oil and gas project could be announced before year-end (2009).

The Risks …

The outlook for regional markets in the final quarter of 2009 is hazy, with uncertainties still loom over the global economy.

The excitement created in the markets by the ample liquidity pumped into global financial systems could evaporate if the stimulus plans fell short of their objectives.

It would be a “wait-and-see” period, while the third quarter 2009 ended on a fairly positive note for most markets on confidence boosted by some of the data coming out of the US, this might not be the case going forward.

It was important to view the markets in the context of some of the economic stimulus packages coming to expiration.

Investors have to see if the expiration of the stimulus packages would result in a pullback in the markets.Investors would tread water and the markets will move sideways until more definitive data comes out from the US.

If investors and consumers retreated in a major way should the US economy, in particular, not fully recover, it would have serious repercussions on global equity markets.

Compared to the first half of the year (2009), there appeared to be a slight slowdown in the uptrend of the local bourse. Part of the reason was that the valuations in the FBM KLCI were now (Oct 2009) rather high.

Also, the index was more reliant on the financial sector, given that commodity prices had fallen and thus affecting plantation stocks. For the market to pick up steam, there must be rotational play and, for that to happen, commodity prices have to recover.

Another reason why participation in the local market had been lukewarm of late was the government’s plan to cut spending, a move that would dampen the outlook for infrastructure and construction players.

We need a new catalyst, perhaps a recovery in commodity prices, but the conditions that permit that are not here.

All attention would be focused on what Budget 2010 brings, and the extent of the government’s budget deficit, probably there would be increases in sin taxes.

As far as the domestic stock market is concerned, it has been local funds that have kept it up, given the lack of foreign fund participation. There would invariably be a lull in the local market when foreign funds moved their investments to other exchanges that they perceived as doing better, and vice-versa.

The fortunes of the regional stock markets now (Oct 2009) lay with global issues, an important factor was how economies and consumers would respond when the fiscal stimulus measures adopted by countries like the US came to an end.

How will the governments replenish when the cash runs out? You will have to find the money first, and during that period if the consumers or investors pull back, then the markets will suffer. An economic recovery based on government stimulus alone would not last as once the stimulus expired, the economy would slump again.

However, despite the mid- to long-term uncertainties, the equity market remained in a “sweet spot” for now (Oct 2009), driven by abundant liquidity, economic and profit recoveries, easing credit policies and a low inflationary environment.
**********************************
It’s been a good run on the local bourse, but before the FBM KLCI can tirelessly speed up to the next pit stop, it needs a much needed breather before positioning for its bullish lap.

After heading north over the last six months (April 2009 – Sept 2009), and gaining 38.5% on a year-to-date (Sept 2009) basis to 1,214, it is no surprise that some resistance has emerged.

The FBM KLCI has been encountering strong selling pressure, ever since it penetrated the heavy psychological resistance level of 1,200.

The short-term negative technical reading is pointing towards a further pullback. Hence, the index may retest of the 10-day simple moving-average of 1,211 and the 1,200 psychological support soon.

Another source of concern is the Shanghai Composite Index which has broken below its short-term 30-day red moving-average line. If the Shanghai market does not break back above this short-term dynamic resistance, it could trigger an increased level of profit-taking activity among regional markets, particularly our local FBM-KLCI.

Investors are advice to be prudent and taking a little money off the table, especially with such significant gains in recent times. Moreover, Marc Faber said he would not be surprised if we have seen the peak of the market for this year (2009) because economic news is not going to improve very much.

Trading volume on the local bourse was thin during the three days as most investors were still away on the Hari Raya. Some institutional fund managers, especially government linked funds were still on Hari Raya leave.

Apart from the holidays, the lack of buying interest also contributed to low trading volume last week. The market is getting tired of the recovery story. It is at a crossroads now, awaiting fresh catalysts. Many institutional investors are on the sidelines.

Some view the market is that current valuations look a bit rich now. As a result, the market is due for correction. On the other hand, due to ample liquidity could lift the market further.

The bigger picture, however, remains positive.

In the coming weeks (Oct 2009), newsflow on new construction projects such as the RM1bil low-cost terminal and the RM7bil LRT extension will start to filter through.

Also, speculation on potential policy measures in the upcoming 2010 Budget on Oct 23 2009 could give the market a boost in the coming weeks.

Pending any tangible bearish signs, positive outlook for the FBM-KLCI remains after this wave of profit-taking activities. Owing to the absence of major negative catalysts, the index should be able to sustain above these support levels for now (Sept 2009).

Investors are advice to track the leads from Wall Street and the development of the G-20 summit in Pittsburgh to assess near-term market conditions.

The potential share placements by government-linked companies such as Khazanah Nasional Bhd as a win-win proposition for Malaysia as they improve the free-float and liquidity while giving investors the opportunity to ride on the upside of the market. Placements can also help renew foreign investor interest and drive a re-rating of the market.

By CIMB … It maintains end-2010 KLCI target of 1,400, based on an unchanged mid-cycle price/earnings of 15 times. Malaysia’s dividend yield of close to 5% is an added attraction, being the highest in the region.

Technical Analysis
After arriving at the grossly oversold area, the oscillator per cent K climbed over the oscillator per cent D of the daily slow-stochastic momentum index to trigger a buy on Thursday.

Mirroring the trend, the 14-day relative strength index dropped to a reading of 43 during the week before ticking up to settle at xx points.

In stark contrast, the daily moving average convergence/divergence (MACD) histogram extended the negative expansion against the daily signal line to retain the bearish note. It flashed a sell on Sept 28 2009.

Weekly measurements were waning, with the weekly slow-stochastic momentum index showing an unconfirmed sell signal and the weekly MACD in danger of slipping below the trigger line.

Bursa Malaysia tripped into correction after peaking out temporarily on Sept 23 2009, which witnessed the FBM KLCI reversing from the 1,231.49 level to a low of 1,200.65 in mid-week before halting.

Based on the daily chart, the prevailing trend remains bullish but trading volume is so thin, implying many players are sitting on the sidelines or taking a cautious stance.

With the Dow suffering while US investors accentuating the negative news for the moment and the Shanghai Composite Index in great risk of a major breakdown on bearish-extended mode, as well as the absence of strong buying conviction at home, cautious mood is likely to prevail.

Technically, the downward expansion of the daily MACD and the fading weekly MACD suggest the local bourse may stay in consolidation mode this week, probably sideways until a new catalyst emerges.

The key index will face resistance at 1,220 points, 1,231.49 points, 1,240-1,250 points band, 1,260 points and the next, at 1,280 points.

Initial support is seen at 1,196.46 points. If the important floor of 1,184.77, also the 50-day simple moving average line is violated, investors should be prepared for more downward journey on increase liquidation pressure.

Undermining Factors
1. Blowup In US Subprime Loans & Shaky Financial Assets Associated With Them And As A Result Of Re-pricing Or Revaluation Of Risk Contributed To A Squeeze In The US Credit Markets (Stabilizing);
2. Malaysia Political Uncertainty;
3. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Stabilizing);
4. Volatile Foreign Exchange Market;
5. A Slowdown In Global Economy (Rate Of Decline Has Started To Moderate Since March 2009);
6. Commodities Prices (Strengthening);
7. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation
8. Threats Of High Commodities Prices And US Dollar Crisis

Unpredictable Risks/Surprises
1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu
4. Financial Shocks – Unwinding of Yen/Dollar Carry-Trade Funds, China’s Stock Market Bubble, Global Liquidity Crunch Resulting From Blowup In US Subprime Loans And Shaky Financial Assets Associated With Them & Falling Dollar;
5. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures … Second Leg Global Recovery (Sept 2009 Onwards) !!!

Recession – Recovery – Growth – Boom - Burst
(Transition From One With China As Sole Driver To A More Balanced US/China Model)

a. The US Equities Market: A Bubble Is In The Forming
b. The Malaysian Equities Outlook: 5 (Optimistic), 3 (Neutral), 3 (Pessimistic)
c. Global Inflation Outlook: Controlled Versus High
d. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged & Why Dollar Is Weak Since Aug 2009
e. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA
f. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed
g. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
h. Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity
i. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model
j. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
k. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY
l. What’s NEXT For The US & China Equities Market
m. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
n. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
o. What’s NEXT (2H2009) For The Malaysian Equities Market …
p. Carry Trades Are Making A Come Back Into Emerging Markets
q. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).

a. The US Equities Market: A Bubble Is In The Forming
The U.S. recovery may be the slowest since World War II to regain all the ground lost during the recession, even if economists’ more optimistic forecasts for expansion turn out to be right.

The slump this time (2008-2009) was so deep that the 3.5 percent average quarterly growth rate in 2010 won’t be enough to bring gross domestic product back to its $13.42 trillion pre- crisis peak. That’s in contrast with the last 10 recoveries, when GDP returned to its previous levels within 12 months.

The result: A year after the Lehman Brothers Holdings Inc. bankruptcy helped drive GDP down to an annualized $12.89 trillion in the second quarter 2009, there’s still “plenty of malaise”. Unemployment may remain close to the current (2009) 26-year high of 9.7 percent through 2010, upsetting voters ahead of mid-term Congressional elections and forcing officials to keep interest rates near zero and the budget deficit around this year (2009)’s record $1.6 trillion.

This will be the most disappointing recovery.

The U.S. might not recover the 6.9 million jobs and the $13.9 trillion in wealth lost during the recession until about the middle of the decade. The unemployment rate may never get back down to the 4.4 percent low of 2007.

Stock prices may take three or four years to reach their previous highs as the cyclical revival of the economy gradually boosts corporate profits. It will be a bull market, but not a roaring bull market.

Companies, particularly retailers such as Macy’s Inc., may have to adjust as consumers buy less. Household spending as a share of GDP might fall to its long-run historical average of 65 percent from 70 percent in the past decade (1990s) as people opt to save more.

The restrained performance that is forecast for the economy reflects both the depth and the origins of the recession, which began in December 2007. The 3.9 percent decline in gross domestic product was the most since World War II.

The decline has been a “balance-sheet recession”. Those take time to recover from, as once highly leveraged banks and consumers gradually reduce their debt.

Policy makers may have to keep interest rates low and the federal budget deficit high to push the economy forward as financial institutions and households adjust.

Federal Reserve Chairman Ben S. Bernanke and his fellow central-bank colleagues might hold their target for the federal funds rate between zero and 0.25 percent through 2010. That’s the rate at which commercial banks lend each other money overnight.

A Pessimistic Outlook ….

This should have been a week for traders in the stock market to feel good about life. US stocks have rallied by close to 60 per cent in barely six months since they hit bottom in March 2009. The Federal Reserve meanwhile pronounced in Sept 2009 that "economic activity has picked up" - the most confident language the central bank has used for some time.

But some was seeing things differently and that the rally was "entering a bubble phase". They argued that markets were being distorted by governments' deliberate attempts to push down the price of money by buying bonds, a policy known as quantitative easing. At some point the quantitative easing will have to come to an end but, until it does, this bull market is sponsored by [Her Majesty's Government] and everyone should enjoy it.

History is full of examples of strong rallies after big sell-offs - it is all part of the "physics" of markets. The all-time highs for developed market stocks, set in 2007, are not in sight. On conventional valuation measures, stocks are nowhere near as expensive as at the top of past investment bubbles. Also, the economic "free-fall" at the end of last year (2008) appears to have been halted. In addition, the Fed's pronouncement signalled interest rates will remain low for a while - a sweet spot for risky assets such as stocks. A strong recovery for share prices since March 2009, when there was a real fear of a second Great Depression, seems reasonable.

But the question of whether this is a real recovery or a bubble must still be asked, and there are worrying signs. The rally has been achieved with global economic growth barely above zero and unemployment still rising. The S&P 500 index of US stocks is already far above the forecasts nine out of 10 Wall Street strategists have in place for the end of the year (2009). Concerns are prevalent that US consumers will not return to their old buying habits because of high unemployment and the debts they need to pay off.

There are also concerns that China, the other leading source of growth, has achieved that only by stoking lending - notably, Chinese stocks sold off sharply in August 2009 when authorities hinted at tightening lending.

The speed of the rally is itself cause for concern. Historically, big sell-offs have typically been followed by big bounces. But as measured by the S&P 500, the current rally (March 2009 – Sept 2009) is stronger after six months than any predecessor, including those that followed the lowest points of the market in 1932, 1974 and 1982.

Relationships between markets also imply unhealthy levels of speculation. Currency and stock markets had minimal correlations before the crisis took hold in 2007, while oil and stocks were usually inversely correlated. But oil and stocks have been rising in tandem this year (2009), just as they fell together during the crisis, while the correlations between the dollar and stock markets remain remarkably close.

The implication of such correlations is alarming. Since early 2007, 40 per cent of all movement in the S&P 500 can be predicted or explained from the movement of the yen and vice versa. If assume that the yen and the S&P 500 should be fundamentally unrelated instruments, this implies a breakdown of efficient price discovery in the markets.

The classic definition of a bubble came from the economist Charles Kindleberger in his 1978 book Manias, Panics and Crashes . For him, a bubble is a phenomenon of mass psychology, and refers to the last stage of an investment mania, when assets are bought "not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price". The bubble bursts when there is no longer a "greater fool" ready to pay too much for the asset.

Thus, in a true bubble, stocks are wildly overvalued compared with their fundamental measures, such as their earnings or the value of the assets on their balance sheets. But conventional valuation measures of stocks (Till Sept 2009) suggest they are still far from a true bubble. US stocks are trading at a multiple of 18.7 times their average earnings for the past 10 years (1999-2009). Historically, extremes in cyclical price/earnings ratios have accurately signalled long-term market peaks and troughs. The cyclical p/e stood at 27 immediately before the crisis in 2007, for example, and reached 43 at the peak of the internet boom. So it looks premature to say stocks are in a bubble.

But an argument that this is an incipient bubble, carrying real risk that a mania will develop, is easier to sustain. First bubbles are driven by cheap credit. With US interest rates at zero, credit is very cheap. Second, many investors seem to be using bubble-like logic; they believe others will soon be prepared to buy even more.

There are true "bulls" who believe the global economy will recover strongly from here (Sept 2009), bringing up corporate earnings in its wake. But others focus on the cash that has been on the sidelines, and on the pressures on fund managers who want to avoid the embarrassment of having stayed out of the market during the rally.

The danger, in this scenario, is that lenders lose confidence in the creditworthiness of governments, which could cause rates to rise and spark a renewed sell-off. But that is not imminent (Till Sept 2009).

Just as it made sense to stay in the market while the booming mortgage market kept credit unnaturally cheap, it may make sense to do so while state intervention keeps credit unnaturally cheap. And when bonds and cash pay so little, raising the risks of inflation in the future, the rational response is to buy assets that generate more reliable cash flows, such as stocks; or that act as a hedge against inflation, such as commodities. On this logic, investors may as well heed Mr Odey and "enjoy the bubble".

When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments' assumption of banks' debts]. There's nobody left to pass it to in the future."

b. The Malaysian Equities Outlook

Optimistic Outlook …

Overseas investors become net buyers of Malaysian stocks in August 2009 as they sought “shelter” in defensive markets to evade global volatility.

Foreign funds bought US$87 million of Malaysian shares in Aug 2009 after a “selling binge” in July 2009 led to an outflow of US$121 million, the first net sales in four months.

Malaysia’s position as a low-beta and defensive market may have attracted foreign funds that were seeking shelter. September 2009 could be another month of net inflows as global markets” have been “jittery” and may shift funds to more defensive markets.

The sell-off in July 2009 may have been a “blip” given that Malaysia has been lagging behind its peers in this rebound and its valuations are becoming more “compelling”.

Foreign funds are starting to make their way back into Malaysia, with Aug 2009 experiencing a net inflow of US$87 million.

Following the improved mood, there has been a slew of upgrades for stocks on the local bourse since Aug 2009. This is the first time since Feb 2008 that the number of upgrades has exceeded the number of downgrades.

For now (Oct 2009), investors are looking at quarter to quarter to growth. As we are starting low base, things look quite positive from where we are at the moment. However, the market will anticipate a drop when the base was reached a certain level … and that is when investors will start to sell. But that is unlikely anytime soon.

By CIMB … Oct 2009

It is maintaining its overweight stance on Malaysia, the placements could help renew foreign investor interest and drive a re-rating of the market.

It remains bullish about Malaysia and maintain its end-2010 KLCI target of 1,400, based on an unchanged mid-cycle price-earnings ratio (PER) of 15 times. Malaysia’s dividend yield of close to 5% is an added attraction, being the highest in the region.

The turnover and free float in Malaysia were among the lowest in the region, which would help explain why even Indonesia and Thailand’s recent trading volumes topped Malaysia’s despite their smaller market capitalisation.

Foreign investors appeared to have largely bypassed Malaysia in this rally as statistics from Emerging Portfolio Fund Research (EPFR) showed that foreign investors turned significant net sellers in July 2009. Foreign investors have been aggressive buyers in the rest of the region during this market upswing.

Investors will continue to look favourably upon placements by GLICs such as Khazanah as the move signals skillful execution of the government’s drive to boost market liquidity.

Also, it will not be perceived as cashing out by GLICs at the peak as the KLCI is hovering around 1,200 points and is far from its 2008 peak of above 1,500 points.

Furthermore, many local and foreign institutional funds still have significant cash positions and would want to increase exposure without driving up share prices too much.

Should Khazanah or other GLICs scale back their stakes in major blue chips, it could be positive for the share prices of the affected GLCs and the overall market liquidity and turnover. Companies in which Khazanah has more than 50% shareholding include MAS, PLUS Expressways, UEM Land and Pharmaniaga. It also has substantial holdings in companies such as Proton, Axiata, Telekom and Time Engineering where there is minimal risk of losing control.

By JF Apex … Sept 2009

Expecting more upside as more liberalisation and investor-friendly measures to come out of the budget.

The tone has already been set by Najib’s previous moves which includes the call to pare down Khazanah Nasional Bhd’s stakes in government-linked companies and bringing Maxis Communications Bhd back to the local bourse.

There may be a pre-budget rally. The objective is simple. The market needs to move. Najib appears very serious in attracting foreign investments to the market.

By KAF … Sept 2009

Expecting the 2010 budget to be a follow-through of the expansionary policies announced in the past year (2008), while continuing to focus on stimulating consumption.

Structural adjustments to the composition of the government profit & loss are unlikely although the Prime Minister has hinted at a need to manage expenses more efficiently. Overall, the budget should be market friendly and provide a nice trigger ahead of the third quarter 2009 reporting season.

It points out that the present (Early Oct 2009) correction may provide a good chance to buy quality stocks. Our markets have corrected ahead of the global market ... we had the Hungry Ghost Festival in September 2009. So, the CI’s downside is limited. If you look at the second and third liners, there is hardly any correction.

The market is looking for a reason to move to the next level.

Potential catalysts from the upcoming budget may come wrapped in the form of bigger construction projects to be awarded including the extension of the light rail transit lines estimated at RM7bil and the new Low Cost Carrier Terminal.

By Nomura … Sept 2009

Taking a cue from the past post-crisis rallies and historical earnings upgrade cycles, it remains bullish. Economic recovery should continue to underpin earnings upgrades, supported by ongoing stimulus spending.From a regional perspective, however, Malaysia could lag as cyclical markets elsewhere offered better returns.Nomura noted that in the past 1997/1998 Asian financial crisis, banks had rebounded by over 200 per cent over a 12-month basis.

By AMBank … Sept 2009

The general outlook of the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) remains bright.

It had raised its fair value for the FBM KLCI to 1,350 points from 1,190 based on 2010’s price earnings (PE) ratio of 16.5 times.

Anticipating a correction phase in the third quarter of 2009 “may be behind us,” or at least “the risk of pullback was dissipating.”

There were still lingering worries over valuation after the steep run-up in share prices but the macro environment flushed with liquidity was most conducive to the equity market.

More importantly, macro fundamentals are now (Sept 2009) pointing towards a start of a growth cycle moving into the fourth quarter 2009. There is less doubt over a global economic recovery. Inflation expectations are muted, implying that the interest rate cycle is not going to rise anytime soon.

It is forecasting gross domestic product to expand by 3% in 2010.

Historically, an earnings-driven re-rating from trough to peak of the market had never been shorter than 12 months. Rally in 1998/99 and 2001/02 sustained for 16 months and 12 months respectively. This present rebound (April 2009 – Sept 2009) is just six months from lows.

It has forecast corporate earnings to expand by 17% in 2010 or more than two times faster than its trend-average growth rate of just 7% in 2000 to 2009. It expects the revision cycle to gain traction. Earnings drivers of the heavyweight sectors, such as banks and plantations, were solidifying.

Neutral Outlook …

By OSK …. Sept 2009

It was “not too alarmed” with the mild profit taking currently (Sept 2009) occurring on the local market, which was “still buoyant”.The decline was in part due to the prevailing cautious sentiment in the regional markets, which fell in tandem with Wall Street.The local market was expected to trade range-bound as well as undergo some mild corrections before recovering in early October 2009.

There are still no clear indications that the US economy is out of the woods as the US Federal Reserve kept interest rates at near zero level after the Federal Open Market Committee meeting.Also, the unexpected decline in existing US home sales for the first time since March 2009 caused a minor blip, leading investors to view that a recovery in US housing was slowing down.

It was too early to judge whether the correction in the local market would turn into something major, with more concrete signs likely to appear following the end G20 summit on financial reforms.In general globally, over the last six months (April 2009 – Sept 2009), market talk on reducing fiscal stimulus or tightening monetary policy would prompt a selldown in stocks, before investors returned to the market. On the local front, the government would likely unveil “sweeteners” ahead of the Budget 2010 announcement on Oct 23, which would boost the FBM KLCI.

It believes current upgrading of stocks and earnings is happening because of improved results and the belief that the worst is over.

Currently, the stock market is still on an uptrend. Expecting some good news to flow in Oct 2009, so the feel good factor will still be there. In the case of fundamentals, things have gone past the worst. Everyone is now looking beyond 2009.

When next year (2010) comes along, we may fund that reality does not quite match what was hoped for. Earnings may disappoint investors. Therefore, the market may reach a peak in 2Q2010. Valuations too will be stretched. There will be some retracement. The correction would not be much. We have seen the worst of the economic downturn.

By Inter Pacific … Sept 2009

The decline in US home sales in August 2009 was unlikely to undermine actual sales that had grown in five out of eight months this year (2009).As such, its opinion that the latest data is unlikely to undermine the US Federal Reserve’s comments on the improving housing market and growing stability in the economy. It continues to hold in their view that the improvement in the housing market will remain modest as the real test will be when the government ends the stimulus measures.

By TA … Sept 2009

October has been touted as a negative month, more so because many of the global negative events in the past, took place during these months. Without these negative events, it’s actually quite a random trend.

But there’s opportunity in crisis.

Expecting more of a post-budget rally and anticipating investors to accumulate on confirmation of news.

The market is now correcting along with global markets. It favors the market dip a further 50 points before positioning myself for the year-end rally (2009) … has a 1,250 target for end-2009.

The short-term impact and direction of the budget on the economy and stock market are irrelevant. After all, market often reacts with knee-jerk speed and over-zealousness.

The clever investor will think: Expectations are still pretty bearish. The green shoots everyone has been talking about may turn to dead leaves. This year (2009), everyone is still complaining about a recession, the lack of execution and political uncertainty. Maybe it’s a good time to buy.

This bearish mood will hit good stocks with high dividend yields. Solid stocks will also be hit and be fleetingly cheap.

By Kim Eng Research … Sept 2009

There were clearer signs of rebound in Malaysia as seen in semiconductor, CPO and even property sales.

The stock market has risen 33% year-to-date (Sept 2009) but still lagged other Asian bourses. Valuation have just broken out of the post-Asian crisis resistance level of 16 times and trading at financial year 2010 (FY10) PE ratio of 17 times on earnings per share growth of 17%.

Opine that it needs strong catalysts for the stock market to continue its northbound track, failing which it could settle back at the resistance of 16 times of around FBM KLCI 1,100 points.

Pessimistic Outlook …

Investors should remain selective in holding on to their positions in the equity market amid the current (Sept 2009) bout of correction and keep an eye out for profit-taking opportunities.It was the season (Oct 2009) for investors to be nimble, paying attention to macro economic issues and be prepared to sell into rallies even though the local bourse was not expected to see any major corrections.

In the past three decades (1980s-2000s) of the Kuala Lumpur Composite Index’s (KLCI) memory, the third quarter of the year had typically been the weakest. That is why some investors shun the market from August 2009 right up to October 2009.

By Maybank Investment Bank … dated Oct 2009

It has proof to substantiate that. “Month-on-month (MoM) returns from 1977 to 2009 show that the months with the highest risk are the worst performing. Based on over 32 years of observations on MoM returns, it had identified a common trend for the FBM KLCI index as well as the Dow and Hang Seng indices. All three markets are weak in the August to October months.
For that reason, it recommends investors to “Sell” over this period and “Buy” in December 2009 and expecting the market to remain volatile as it is still in the “very high risk” zones.

A potential catalyst (or not) could be the upcoming budget 2010 which to be tabled in parliament on Oct 23 2009. Do pre and post budget market swings present an investment opportunity?

Based on the past five years, the stock market tends to show a slight downward dip in the aftermath of the budget as investors generally have high expectations, and as such, end up getting somewhat disappointed over the lack of goodies.

But as this will be Prime Minister Datuk Seri Najib Tun Razak’s first budget as he is also the Finance Minister, don’t be surprised to see market-friendly measures, despite the Government saying it is looking to reduce operating expenditure while maintaining fiscal discipline.

Compared to the regional bourses on a year to date (Oct 2009) basis, the FBM KLCI remains the second worst performer at 40.7%, only ahead of Japan.
***********************
With the FBM KLCI making fresh highs despite having surpassed its recent 1,196.46-point peak, risks to the downside would increase significantly while potential rewards diminished.It would only be a matter of time before a steep correction set in.Bearish divergent technical signals are now (Sept 2009) very obvious. Waning potential upside would cause wise investors to dispose of stocks on the FBM KLCI on rallies.

This rise will be fraught with heavy stock liquidation. The next major impending move will be down.The local bourse was expected to stall in its saturation zone of between 1,237.25 and 1,248.34 “very soon”, and that investors should remain in a “selling mode and stay vigilant”.Investors should “dispose of stocks on any and every rebound from now (Sept 2009)”.By ECM Libra … Sept 2009

It also sees profit taking ahead for the FBM KLCI, although it expected a more positive outlook for the local market after the pullback ended.While it is uncertain whether this small profit taking wave which would morph into a significant correction or a reversal, it is always prudent to take a little money off the table first, especially after such significant gains in recent times.

By MIDE Amanah … Sept 2009

There are a lot of reasons for the global market to decline, including markets running ahead of themselves and being overvalued. Moreover, no clear solutions have been found for the problems that caused the crisis in 2008.

The structural problems remain unresolved. The US is fighting to deleverage with more money. There is not much change in the situation from six months )April 2009). A lot of it is from short term celebration.

Uncertainties over the sustainability of the global market recovery have added o investor jitters in the month of Oct.

Market Outlook as at 28th Sept 2009

2009-09-27T22:11:00.003+08:00

Investment Theme For 2009
*** UNCERTAIN ***
1. Privatization And M&As Deals
2. A Stronger Ringgit Policy
3. Implementation Of the Ninth Malaysia Plan
4. Asset Reflation Theme
5. Iskander Development Region (IDR) In South Johor
6. Eastern Corridor Development Programme (Petronas-Led)
7. Northern Corridor Economic Region
8. Sarawak Region Corridor
9. The Sabah Development Corridor
10. Sarawak Corridor of Renewable Energy (Score)
11. RM40 Billion Public Transport Expenditure
12. The Asia Petroleum Hub In Johor
13. The Solid Waste Management Play
14. Flow of OPEC Petrodollars
15. The Trans-Peninsula Pipe Project
*** UNCERTAIN ***

16. Water & Water-Related Play
17. A U-, V-, W- Or L-Shaped Global Economic Recovery
18. Fiscal & Monetary Pump-Priming & Normalization Of Corporate Earnings
19. The Economic Stabilization Plan & Mini Budget
20. Interest Rate Cycle (Speculating End Of Easing Cycle As Economy Recover)
21. Decoupling – Emerging Economies Is Disconnected From Developed Countries (Uncertain)
22. Liberalization Of The Services/Financial Sector
23. The Malaysian Government’s Reform “Train”
24. GLCs Revamp
25. The ‘Third’ Link Bridge (Eastern Johor) To Singapore (Uncertain)
26. A ‘Third Stimulus’ Package (Uncertain)
27. Market Liberalization (Paring Down In GLCs’s Stake)

Watch List In The Coming Week
1. 2010 Budget Announcement On 23 Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009
3. Mega Project Calls For Tenders And Awards (LCCT, LRT extension)

Market Commentaries
It’s been a good run on the local bourse, but before the FBM KLCI can tirelessly speed up to the next pit stop, it needs a much needed breather before positioning for its bullish lap.

After heading north over the last six months (April 2009 – Sept 2009), and gaining 38.5% on a year-to-date (Sept 2009) basis to 1,214, it is no surprise that some resistance has emerged.

The FBM KLCI has been encountering strong selling pressure, ever since it penetrated the heavy psychological resistance level of 1,200.

The short-term negative technical reading is pointing towards a further pullback. Hence, the index may retest of the 10-day simple moving-average of 1,211 and the 1,200 psychological support soon.

Another source of concern is the Shanghai Composite Index which has broken below its short-term 30-day red moving-average line. If the Shanghai market does not break back above this short-term dynamic resistance, it could trigger an increased level of profit-taking activity among regional markets, particularly our local FBM-KLCI.

Investors are advice to be prudent and taking a little money off the table, especially with such significant gains in recent times. Moreover, Marc Faber said he would not be surprised if we have seen the peak of the market for this year (2009) because economic news is not going to improve very much.

Trading volume on the local bourse was thin during the three days as most investors were still away on the Hari Raya. Some institutional fund managers, especially government linked funds were still on Hari Raya leave.

Apart from the holidays, the lack of buying interest also contributed to low trading volume last week. The market is getting tired of the recovery story. It is at a crossroads now, awaiting fresh catalysts. Many institutional investors are on the sidelines.

Some view the market is that current valuations look a bit rich now. As a result, the market is due for correction. On the other hand, due to ample liquidity could lift the market further.

The bigger picture, however, remains positive.

In the coming weeks (Oct 2009), newsflow on new construction projects such as the RM1bil low-cost terminal and the RM7bil LRT extension will start to filter through.

Also, speculation on potential policy measures in the upcoming 2010 Budget on Oct 23 2009 could give the market a boost in the coming weeks.

Pending any tangible bearish signs, positive outlook for the FBM-KLCI remains after this wave of profit-taking activities. Owing to the absence of major negative catalysts, the index should be able to sustain above these support levels for now (Sept 2009).

Investors are advice to track the leads from Wall Street and the development of the G-20 summit in Pittsburgh to assess near-term market conditions.

The potential share placements by government-linked companies such as Khazanah Nasional Bhd as a win-win proposition for Malaysia as they improve the free-float and liquidity while giving investors the opportunity to ride on the upside of the market. Placements can also help renew foreign investor interest and drive a re-rating of the market.

By CIMB … It maintains end-2010 KLCI target of 1,400, based on an unchanged mid-cycle price/earnings of 15 times. Malaysia’s dividend yield of close to 5% is an added attraction, being the highest in the region.

Technical Analysis
The support line for FBM KLCI is pegged at around 1,200 to 1,210 points, with immediate resistance at 1,220 - 1,240 points. The breakout level is marked at around 1,190 to 1,195 points.

The FBM KLCI may hit its saturation zone at 1,237.25 to 1,248.34 soon, before risks to the downside increase greatly. Investors are urged to remain cautious at the present (Sept 2009) “lofty” levels that the local stock market have attained.

The ample share placements and off-market deals that have been happening in the background, arguing that these are obvious pre-cursor to an impending market correction.

With market breadth and volumes shrinking, coupled with the emerging weak and bearish technical signals, it is just a matter of time before the benchmark index heads south. Thus, he advises investors to trade with a short-term time frame.
*****************************
After erasing the recent peak and overcoming the 1,200-point monster barrier, Bursa Malaysia’s principal index moved forward to establish a new high for the year (Sept 2009), hitting 1,210.36 session amid improving liquidity, aided largely by the strong performance of overseas equities.

A positive breakout has been detected, signalling an end to the three-week-old sideways consolidation phase. Going forward, it usually would set the stage for a rally, and based on the daily chart, the key index may reach the returning line of the existing upward channel, now (Sept 2009) resting at approximately 1,280 points.

The next upper strong resistance is envisaged at 1,300–1,305 points. However, given the modest volumes, the speed of ascent may be gradual, unless there is evidence of aggressive third-quarter 2009 window-dressing activities coming up.

Before arriving at the upper boundary of the existing channel, the FBM KLCI will encounter resistance at 1,220 points, 1,240-1,250 points and 1,260 points.

Technically, the indicators are bullish, especially the MACD, implying the market is likely to scale new heights, provided there are no nasty surprises from abroad, particularly the United States and China.

Initial support is seen at 1,196.46 points, followed by the 14-day simple moving-average (SMA) of 1,183 points, the 21-day SMA of 1,178 points, the 50 day MAV lines (1138). The 200 day MAV line is at 1106.

The lower floor is resting at 1,160 points and the recent bottom of 1,153.97 will now act as the base.

Undermining Factors
1. Blowup In US Subprime Loans & Shaky Financial Assets Associated With Them And As A Result Of Re-pricing Or Revaluation Of Risk Contributed To A Squeeze In The US Credit Markets (Stabilizing);
2. Malaysia Political Uncertainty;
3. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Stabilizing);
4. Volatile Foreign Exchange Market;
5. A Slowdown In Global Economy (Rate Of Decline Has Started To Moderate Since March 2009);
6. Commodities Prices (Strengthening);
7. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation
8. Threats Of High Commodities Prices And US Dollar Crisis

Unpredictable Risks/Surprises
1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu
4. Financial Shocks – Unwinding of Yen/Dollar Carry-Trade Funds, China’s Stock Market Bubble, Global Liquidity Crunch Resulting From Blowup In US Subprime Loans And Shaky Financial Assets Associated With Them & Falling Dollar;
5. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures … Second Leg Global Recovery (Sept 2009 Onwards) !!!

Recession – Recovery – Growth – Boom - Burst
(Transition From One With China As Sole Driver To A More Balanced US/China Model)
a. Global Inflation Outlook: Controlled Versus High
b. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged & Why Dollar Is Weak Since Aug 2009
c. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA
d. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed
e. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
f. Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity
g. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model
h. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
i. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY
j. What’s NEXT For The US & China Equities Market
k. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
l. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
m. What’s NEXT (2H2009) For The Malaysian Equities Market …
n. Carry Trades Are Making A Come Back Into Emerging Markets
o. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).

a. Global Inflation Outlook: Controlled Versus High
The very worst of the economic downturn is now (Sept 2009), almost certainly, behind us. Across the world, investors are cautiously emerging into the faint sunlight of a new economic dawn, and starting to hope for the best.

But even as we start to experience optimism (or less pessimism) about the future, a fear is also fermenting. The fear of higher inflation has been unleashed.

Most professional economists, including those of the world's main central banks, do not think inflation will be a problem for the advanced economies of the world. The range of views from investors is very wide, however. Some investors think that a Japan style deflation is imminent. Some investors believe inflation will tip into hyper-inflation (a view where the only sensible investment strategy could appear to be to stock up on canned food and bottled water, as normal economic activity collapses).

First, it is worth thinking about the sort of inflation ranges that are "controlled" versus "high". Generally speaking, if inflation averages about 2.5 percent or 3 percent over a period of a few years, economists consider the pricing environment to be "controlled".

This suggests that inflation should not go too far above 5 percent -- for were it to do so, investors and workers would question whether in fact inflation would continue to revert back to its long term average. What policy makers need to avoid is "high" inflation - numbers that go above 5 percent and then stay there.

What is wrong with higher levels of inflation? The main risk is that higher inflation would add an element of uncertainty to economic markets. If, after years of relatively well behaved inflation pressure, prices start rising more rapidly, investors would become uncertain about the future path of inflation.

At the moment, investors can assume that over a period of some years inflation in the major economies will average out around 2.5 percent to 3 percent. If something happens to challenge that assumption, investors will want an appropriate insurance premium. If an investor feels that inflation could rise as high as (say) 10 percent, they will demand compensation for that risk. This risk is what economists call "inflation uncertainty risk". Inflation uncertainty risks runs as high as 1 percent to 1.5 percent, and it is an addition to the cost of borrowing money.

This is where the real danger of inflation comes in. If the cost of borrowing money rises, companies will borrow less. If companies borrow less, they will invest less. If companies invest less, they will be less efficient - and if companies are less efficient, the economy overall is less efficient. In other words, if high inflation increases inflation uncertainty risk, economic growth is almost bound to suffer.

High inflation will also add to government debt burdens. This often seems counter-intuitive (people talk about governments "inflating away" debt), but in fact government debt is five times more likely to rise or hold steady than it is to decline under a high inflation environment. This is because governments need to refinance their debt frequently.

Around 55 percent of the US national debt has to be refinanced in the next two years (2010-2011). If the US government were to create inflation, bond investors would punish the US Treasury by raising bond yields faster than inflation increases (and the increased debt service cost would increase government debt levels).

Why is inflation likely to remain contained? There are two good reasons to suppose that inflation will remain under control:-
· First the world economy has plenty of spare capacity at the moment. Factories sitting idle, unemployed workers - these are resources that can be called upon as growth starts to recover. Any pressure for prices to rise will be held in check by using this pool of under utilized resources. · Second, give central bankers some credit. The world's monetary authorities have spent three decades (1970s-2000s) controlling inflation. They know how to keep inflation in check, and (at least in recent years) they have tended to be rather good at achieving their policy objective. Central bankers understand that inflation generates high economic costs. As a result, expecting policy makers to respond appropriately to any signs that inflation is going to be too high.

What about commodity prices? Certainly commodity prices could rise as the world economy recovers (in particular, as emerging markets recover). However, commodity prices are only a small part of final inflation for most developed economies.

Around 70 percent of US inflation is actually caused by (domestic) labor costs, for example. Commodities contribute around 15 percent of US final inflation. As long as labor costs are held in check by spare capacity, major economies are likely to continue to enjoy low inflation.

Commodities are more of a threat to emerging market inflation rates (as commodities tend to have a higher weight in inflation calculations for emerging markets). But even taking that into account, inflation is not likely to be an economic concern in the months(Oct 2009 & Beyond) ahead.

b. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged, Why Dollar Is Weak Since Aug 2009 …

The US Dollar Carry Trade …
For years (1990s-2000s), the yen was the currency of choice to fund international carry trades. But is the dollar starting to take its place (Sept 2009)?

Negligible US interest rates, its quantitative easing measures and little sign that the country is set to withdraw from its ultra-loose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade (1990s).

This puts the dollar in exactly the same position as the yen back in 2001 and makes it naturally attractive as a carry trade funding currency. The dollar is the new yen.

The carry trade strategy, in which low-yielding currencies are sold to finance the purchase of riskier, higher-yielding assets, was widely used in the years prior to the eruption of the financial crisis.

The low-yielding yen, and to a lesser extent the Swiss franc, were the most widely used as funding currencies, pushing them down to multi-year lows against a raft of currencies as risk appetite was supported by an abundance of liquidity and rallying asset markets. Indeed, both currencies rallied sharply as turbulence on global markets erupted last autumn (2008) and forced investors to unwind their positions.

But rather than lose their value as asset markets have shown renewed signs of strength and risk appetite has improved in Sept 2009, both the yen and the Swiss franc have rallied against the dollar. Indeed, the dollar fell to a seven-month low of Y90.18 against the yen in Sept 2009 and on Tuesday hit a one-year low of SFr1.0318 against the Swiss franc. The dollar has not just been weak against the yen and Swiss franc, however.

There is a change in dynamic that has made the dollar a more attractive funding currency to explain its recent fall.

The Marriage of The Dollar And Oil Is Growing Estranged …
Their divergence has snapped a longstanding correlation, for the time being at least (Sept 2009). A weakening dollar generally accompanies higher oil prices. The relationship has a solid basis. Oil is bought and sold in dollars, forcing exporters to raise prices to compensate for a less potent currency.

Higher crude prices also worsen US trade balances, pressuring the dollar. Investors concerned that quantitative easing will lead to runaway inflation and debased currencies have also flocked to commodities as a hedge.

Many are expecting a continuing decline in the dollar, combined with reinvigorated oil demand, will push oil prices higher. For now (Sept 2009), an amply supplied oil market is repelling any price support from the currency.

Now (Sept 2009) that expectations of an economic recovery are widespread, we are back to people recognising the size of the US debt and ... fiscal deficits and back to the flight from the dollar.

Because there isn’t enough of a rebound of real demand for oil and stockpiles have accumulated, we’re not seeing a spike in oil prices yet.

In the past, some big exporters have called for oil to be denominated in a basket of currencies to blunt the impact of dollar weakness, but to little avail. The main variable to consider is the import structure of oil producing countries. If they have to buy most of their imports in US-dollar denominated prices, probably they will prefer to keep oil US denominated.

While official US interest rates, such as those in Japan and Switzerland, are moored at levels close to zero, it is the rates on offer in the interbank market that are crucial in determining the profitability of carry trade strategies.

In Aug 2009, three-month dollar Libor lending rates fell below those of the yen and later dropped below those of the Swiss franc for the first time since November 2009, effectively making the dollar the cheapest funding currency.

Indeed, at just 30 basis points, three-month dollar lending rates are falling towards levels that led to two waves of yen-funded carry trades that weighed on the Japanese currency between 1996 and 1998, and then between 2001 and 2008.

Why Dollar Is Weak Since Aug 2009 …
The usual explanation for dollar weakness over recent months (Aug – Sept 2009) has been an improvement in risk appetite. This weighs on the dollar as emboldened investors sell the currency to fund investments in higher-yielding assets elsewhere.

But this fails to adequately explain the secular drop in the dollar in recent weeks (Sept 2009). Indeed, it is not clear that there was actually much further improvement in risk appetite in Sept 2009.

A likely explanation for the drop in the dollar is that it is increasingly becoming a favoured funding currency, taking over the mantle from the yen. This is likely to continue to put pressure on the dollar: Ultra-low interest rates suggests that the dollar will remain under pressure for a while yet, especially as the Federal Reserve continues to highlight that US interest rates are not going to go up quickly.

Speculative positioning data seem to back up the shift against the dollar, revealing the extent of recent (Aug – Sept 2009) deterioration in dollar sentiment. According to figures from the Chicago Mercantile Exchange, which are often used as a proxy for hedge fund activity, aggregate bets against the dollar versus the euro, yen, Swiss franc, sterling and the Australian, New Zealand and Canadian dollars in Sept 2009 rose to their highest levels since July 2008, when the dollar hit a record low against the euro.

The fact that high-yielding currencies have rallied for most of this year (Till Sept 2009) while the traditional carry trade funding currencies – the yen and the Swiss franc – have not weakened throws up one of two conclusions.

Either the carry trade has not returned and high-yielding currencies are strong in spite of any yield attraction, or another currency has supplanted the yen and the Swiss franc as the funding currency of choice. If this is the dollar it could imply that the greenback is in real danger.

It is certainly possible given the dollar’s weakness, negative positioning, and the fact that short-term US interest rates are down to Swiss and yen levels that the dollar has assumed the position of the carry trade funding currency of choice.

c. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA

By Nomura … Sept 2009
Taking a cue from the past post-crisis rallies and historical earnings upgrade cycles, it remains bullish. Economic recovery should continue to underpin earnings upgrades, supported by ongoing stimulus spending.From a regional perspective, however, Malaysia could lag as cyclical markets elsewhere offered better returns.Nomura noted that in the past 1997/1998 Asian financial crisis, banks had rebounded by over 200 per cent over a 12-month basis.

By Morgan Stanley … Sept 2009
The Malaysian market has developed a defensive nature, outperforming during market downturns, and underperforming during market upturns, despite having generally fallen by the wayside amid structural issues in the economy.

Nevertheless, from a macro perspective, it still expected Malaysia to deliver a reasonable growth outlook in 2010. Its 2009 and 2010 forecasts of -3.5% year-on-year (y-o-y) and +4.3% y-o-y respectively, are below consensus’ -3% y-o-y for 2009 but in line with the +4.3% y-o-y for 2010. It sees 2011 growth at 4.8% y-o-y.

However, it noted a dichotomy in terms of market sentiment. Whilst certain quarters of the market have been eager to get bullish on Singapore given the global rebound, it does not sense the same sentiment with Malaysia despite Malaysia being the second-most exposed to global trade within Asean as well as a commodity play.

The three-legged growth model of manufacturing trade, commodity trade and the public sector economy was useful in assessing the Malaysia outlook.

Trade was slowly but surely turning around as manufacturing faced the same amid an inventory snapback. Manufacturing production has already picked up ahead of trade amid a lesser pace of destocking in 2Q09. On a three-month moving average basis, exports had shown some second-order derivative. The US ISM New Orders Index (which leads by about four months) showed that a more evident turnaround was in the pipeline.

Malaysia, being the top net commodity exporter (mainly of oil and crude palm oil) in Asia, was poised to be the biggest beneficiary of higher prices. Limited global spare capacity and El Niño weather conditions could keep crude oil and edible oil prices supported at elevated levels.

Commodity trade aside, the large natural resource endowment also helps to fill government coffers in terms of revenue. Revenue from commodities constitute about 40% of total government revenue, which in turn helps to support what is one of the largest public sector economies within Asia.

Expecting government expenditure to pick up further on a sequential basis as spending tended to be back-end loaded in the second half (2009) of the fiscal year.

While Budget 2010, to be delivered on October 23 2009, would be less expansionary, expecting Malaysia to have one of the highest fiscal deficits within Asean for next year (2010).Global backdrop and the political climate as two key risks for Malaysia.

As it is, Malaysia’s manufacturing exports are already under structural pressures, losing global competitiveness.

Separately, the coordination within the federal government given the two-party system and the coordination between the federal and state governments would be key to watch in terms of how it would affect the workings of the public sector economy.

Beyond the cyclical turnaround in 2010-11, structural gaps needed to be addressed in the longer term. Malaysia faces a ‘Dutch Disease’ of sorts, in its view”. It refers to the phenomenon where the commodity resource sector displaces the export manufacturing sector.

When commodity exports augmented the current account balance either due to a commodity boom or new supply discovery and real exchange rates appreciated, the manufacturing export sector suffered.

Capital and labour shift into the commodity sector due to its profitability and as manufacturing competitiveness erodes. Factor inputs also move towards production of non-tradeables to meet the increase in domestic demand.

Excess domestic demand from positive terms of trade could also lead to real currency appreciation, which further de-industrialises the economy. The benefits of technological know-how and productivity growth from manufacturing would whittle away and macro vulnerability to the commodity sector increased.

Malaysia’s real effective exchange rate appreciated by a maximum of 11% between 2005 and mid-2008, suggesting that there could be some causality from the Real Effective Exchange Rate (REER) to the competitive erosion of the manufacturing export sector.

The growth buffer in a young labour input and commodities trade had reduced the sense of urgency to increase competitiveness (productivity) and allowed inefficiencies like the affirmative-action policy to go on for longer.

Indeed, hard infrastructure standards are relatively high as the government spends sizeable amounts on construction but soft infrastructure gaps have persisted. The upshot remains the same — a competitive erosion in exports and FDI that could serve to undermine the economy.

Despite the benign global conditions, Malaysia’s trade surplus of machinery and transport equipment fell from US$10.5 billion in 2000 (11.2% of GDP) to US$9 billion in 2008 (4.1% of GDP). In comparison, the trade surplus of China (-US$9.3 billion to US$231.3 billion), Korea (US$41.2 billion to US$119.1 billion), Taiwan (US$19 billion to US$45.1 billion) and Singapore (US$11.2 billion to US$22.9 billion) all saw a positive delta between 2000 and 2008.

Machinery and transport equipment constituted about 49% of Malaysia’s total exports and Malaysia’s global share of these exports declined from 2.3% in 2000 to 1.7% in 2007 after China joined the WTO and saw its global share increase from 3.1% to 11.6%.

Specifically within the machinery and transport equipment segment, telecommunications equipment (from 4.5% in 2000 to 2.4% in 2007) and electronic data processing/office equipment (5.6% in 2000 to 5% in 2007) saw the most pressure in terms of declines in global share.

As net FDI in certain economies in the region (China, India, Singapore, and Thailand) continued to climb higher, net FDI in Malaysia had generally trended down from the peak in the early 1990s, and was now dipping into negative territory. Net FDI (4Q trailing sum) stood at -3.8% of GDP in June 2009 from +2.4% of GDP in June 2004.

Execution of the government’s reform measures would be key as the policy intent behind them served to arrest the structural weakness in the economy. Investors will now (2009) be closely watching for the government’s ability to execute on these measures.

By CLSA Asia-Pacific Markets … Sept 2009
It has described Prime Minister Datuk Seri Najib Tun Razak’s current positive economic and social reforms as "Najibnomics", given his economics background.

With his background on industrial economics from the University of Nottingham, Najib had been quick to effect various fiscal, government and structural reforms.

They include liberalising the New Economic Policy, ensuring greater transparency, speeding up the award of government infrastructure projects and improving ties with Singapore to draw more foreign direct investments into Iskandar Malaysia, a development region in Johor twice the size of Singapore.

In its special strategy report on Malaysia, Najib had covered good ground since taking office on April 3 2009 with a number of positive policies and actions aimed at stimulating the local economy, attracting foreign investments and foreign talent, reducing bureaucracy, tackling crime and corruption, effecting greater accountability and promoting national unity (through the 1Malaysia concept).

Although he has until March 2013 to call for the next general election, he has little choice but to work quickly as the clock is fast ticking. Najib not only has to implement new policies to reform the government and turn around the economy simultaneously, he has to deliver some decent results to ensure that the ruling Barisan Nasional coalition performs better than in the last general election in March 2008.

On the economic front, expecting the Malaysian economy to recover in 2010 while consumer sentiment was also improving.

In view of Malaysia's high savings rate at 43.3 per cent of the GDP which would support private consumption while the impact of weak imports from Western countries would not be too severe, it pointed to an economic recovery next year (2010).

Malaysia's 2009 GDP has been forecast to decline by 4.0 to 5.0 per cent this year (2009) compared to a growth of 4.5 per cent last year.

CLSA's expectations are in line with that of Bank Negara Malaysia which indicated that the country's growth outlook for the second half of 2009 is expected to improve after the economy contracted at a slower rate of 3.9 per cent in the second quarter of 2009 following a 6.2 per cent contraction in the Q1 2009.

The central bank said there were increasing signs that conditions in the global economy were stabilising as the pace of the decline in economic activity was moderating in advanced countries.

There has not been any high-profile debt default while non-performing loans in the banking system remain benign. Companies have merely been hit by shrinking revenues, thinning margins and higher receivables, while corporate governance issues have been sporadic. Most companies believe that the worst is over. Having said that, they do think the way forward will remain challenging as unemployment continues to creep up.

In terms of household income, 44 per cent said they experienced a decline in income while 10 per cent experienced an increase.

About 70 per cent said they had changed their spending patterns, reducing expenditure on food, clothing as well as leisure. Essentials like mortgages, utilities, transport, children’s education, healthcare and communications had been largely unaffected by the downturn.
By AMBank … Sept 2009

The general outlook of the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) remains bright.

It had raised its fair value for the FBM KLCI to 1,350 points from 1,190 based on 2010’s price earnings (PE) ratio of 16.5 times.

Anticipating a correction phase in the third quarter of 2009 “may be behind us,” or at least “the risk of pullback was dissipating.”

There were still lingering worries over valuation after the steep run-up in share prices but the macro environment flushed with liquidity was most conducive to the equity market.

More importantly, macro fundamentals are now (Sept 2009) pointing towards a start of a growth cycle moving into the fourth quarter 2009. There is less doubt over a global economic recovery. Inflation expectations are muted, implying that the interest rate cycle is not going to rise anytime soon.

It is forecasting gross domestic product to expand by 3% in 2010.

Historically, an earnings-driven re-rating from trough to peak of the market had never been shorter than 12 months. Rally in 1998/99 and 2001/02 sustained for 16 months and 12 months respectively. This present rebound (April 2009 – Sept 2009) is just six months from lows.

It has forecast corporate earnings to expand by 17% in 2010 or more than two times faster than its trend-average growth rate of just 7% in 2000 to 2009. It expects the revision cycle to gain traction. Earnings drivers of the heavyweight sectors, such as banks and plantations, were solidifying.

By Kim Eng Research … Sept 2009
There were clearer signs of rebound in Malaysia as seen in semiconductor, CPO and even property sales.
The stock market has risen 33% year-to-date (Sept 2009) but still lagged other Asian bourses. Valuation have just broken out of the post-Asian crisis resistance level of 16 times and trading at financial year 2010 (FY10) PE ratio of 17 times on earnings per share growth of 17%.

Opine that it needs strong catalysts for the stock market to continue its northbound track, failing which it could settle back at the resistance of 16 times of around FBM KLCI 1,100 points.

d. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed

By Treasury Secretary Timothy Geithner …

Citing emerging financial sector stability, a number of government rescue efforts in place since the Wall Street crisis are no longer needed and that banks will repay US$50 billion in rescue funds over the next 18 months (Sept 2009 & Beyond).

US still has a ways to go before "true recovery takes hold. But improved conditions in the banking industry have prompted Treasury to begin winding down emergency support programs implemented after the collapse of Lehman Brothers last year (2008).

The cautious but upbeat tone reflects a growing push by the administration to present the government financial rescue efforts as a success amid lingering public apprehension about the economy.

Banks have already paid back $70 billion of the $250 billion that the government injected over the past year (2008) to boost their liquidity. Only $11 billion of that infusion has occurred since he became Treasury secretary earlier this year (2009).

A major Treasury program that had been used to guarantee up to $3 trillion in money market mutual fund assets would be closed down on schedule on Sept. 18 2009. The program had no direct cost to taxpayers and actually earned more than $1 billion in fees paid by the mutual fund industry.

A series of emergency program initiated by the Federal Deposit Insurance Corp. and the Federal Reserve have also begun to phase out.

Still, unemployment stands at 9.7 percent and administration officials say it could rise to 10 percent in the coming months (Sept 2009 & Beyond).

Foreclosure rates are surging and the mortgage market remains tight. Geithner acknowledged that the economy would still face "more than the usual ups and downs."

By Warren Buffet …

The U.S. must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now (Aug 2009) pose threats to the world’s largest economy and its currency.

The “gusher of federal money” has rescued the financial system and the U.S. economy is now (Aug 2009) on a slow path to recovery. While he applauds measures adopted by the Federal Reserve and officials from the Bush and Obama administrations, Buffett says the U.S. is fiscally in “uncharted territory.”

The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts and infrastructure projects, while the Treasury and the Fed have spent billions more on separate programs to rescue financial institutions and resuscitate the banking system.

The U.S. budget deficit is forecast to reach a record $1.841 trillion in the year that ends Sept. 30 2009.

Enormous dosages of monetary medicine continue to be administered and, before long, the US will need to deal with their side effects. For now (Aug2009), most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year (2009), while net debt will increase to 56 percent of GDP

The U.S. budget deficit reached a record for the first 10 months of the fiscal year and broke a monthly high for July 2009. The excess of expenditure over revenue for July 2009 climbed to $180.7 billion compared with a $102.8 billion gap in July 2008 as the government spent more than in any month in U.S. history.

Officials must still do “whatever it takes” to get the U.S. economy back on its growth momentum. Once recovery is gained, however, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with its growth in resources.

With government expenditures now (Aug 2009) running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

The dollar will weaken as the swelling U.S. deficit erodes its status as a reserve currency. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

By The Fed … dated Sept 2009

The Federal Reserve upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession, while reiterating its promise to hold interest rates very low for a long time.

The Fed would slow its purchases of mortgage debt to extend that program's life until the end of March 2010, in a move toward withdrawing the central bank's extraordinary support for the economy and markets during the contraction.

The U.S. central bank, as widely expected, held its benchmark overnight lending rates at close to zero percent.The Fed said that information received since the Federal Open Market Committee met in August 2009 suggests that economic activity has picked up following its severe downturn.U.S. government bond yields ended lower on the news that the central bank had reiterated a pledge to keep rates ultra-low for an extended period.

The Fed would gradually slow the pace of its purchases of mortgage-related debt in order to promote a smooth transition in markets as the Fed has been the biggest buyer. But it made clear it would purchase the full amount of US$1.25 trillion in agency mortgage-backed securities.

The U.S. central bank on Wednesday played down concerns about price pressures in an economy where the jobless rate is at a 26-year high and factory capacity is greatly underutilized.

Market Outlook as at 23 Sept 2009 ...

2009-09-22T21:46:00.003+08:00

Investment Theme For 2009
*** UNCERTAIN ***
1. Privatization And M&As Deals
2. A Stronger Ringgit Policy
3. Implementation Of the Ninth Malaysia Plan
4. Asset Reflation Theme
5. Iskander Development Region (IDR) In South Johor
6. Eastern Corridor Development Programme (Petronas-Led)
7. Northern Corridor Economic Region
8. Sarawak Region Corridor
9. The Sabah Development Corridor
10. Sarawak Corridor of Renewable Energy (Score)
11. RM40 Billion Public Transport Expenditure
12. The Asia Petroleum Hub In Johor
13. The Solid Waste Management Play
14. Flow of OPEC Petrodollars
15. The Trans-Peninsula Pipe Project
*** UNCERTAIN ***

16. Water & Water-Related Play
17. A U-, V-, W- Or L-Shaped Global Economic Recovery
18. Fiscal & Monetary Pump-Priming & Normalization Of Corporate Earnings
19. The Economic Stabilization Plan & Mini Budget
20. Interest Rate Cycle (Speculating End Of Easing Cycle As Economy Recover)
21. Decoupling – Emerging Economies Is Disconnected From Developed Countries (Uncertain)
22. Liberalization Of The Services/Financial Sector
23. The Malaysian Government’s Reform “Train”
24. GLCs Revamp
25. The ‘Third’ Link Bridge (Eastern Johor) To Singapore (Uncertain)
26. A ‘Third Stimulus’ Package (Uncertain)
27. Market Liberalization (Paring Down In GLCs’s Stake)

Watch List In The Coming Week
1. 2010 Budget Announcement In Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009
3. Mega Project Calls For Tenders And Awards (LCCT, LRT extension)

Technical Analysis
In conjunction with the Hari Raya Aidilfitri public holidays, the Malaysian stock market will be closed for two days. Operations will resume on 23 Sept 2009.

Given the three-day holiday-shortened week, trading of Bursa Malaysia shares is expected to be thin, and range-bound. But there is also a high possibility of buying momentum staging a strong comeback after the long market break, given the prevailing bullish market sentiment. It is believed that investors would not want to miss out on this rally.

The support line for FBM KLCI is pegged at around 1,200 to 1,210 points, with immediate resistance at 1,220 - 1,240 points. The breakout level is marked at around 1,190 to 1,195 points.

The FBM KLCI may hit its saturation zone at 1,237.25 to 1,248.34 soon, before risks to the downside increase greatly. Investors are urged to remain cautious at the present (Sept 2009) “lofty” levels that the local stock market have attained.

The ample share placements and off-market deals that have been happening in the background, arguing that these are obvious pre-cursor to an impending market correction.

With market breadth and volumes shrinking, coupled with the emerging weak and bearish technical signals, it is just a matter of time before the benchmark index heads south. Thus, he advises investors to trade with a short-term time frame.
**************************
The daily slow-stochastic momentum index triggered a short-term sell at the top on Thursday, but it can’t be confirmed as yet.

In contrast, the daily moving-average convergence/divergence (MACD) histogram expanded positively and steadily against the daily signal line to stay bullish. It issued a buy on Tuesday.

Meanwhile, the 14-day relative strength index continued to linger in the bullish area. Weekly measurements were looking great, with the slow-stochastic momentum index flashing a buy and the MACD indicator resuming its upward expansion against the weekly trigger line.

After erasing the recent peak and overcoming the 1,200-point monster barrier, Bursa Malaysia’s principal index moved forward to establish a new high for the year (Sept 2009), hitting 1,210.36 session amid improving liquidity, aided largely by the strong performance of overseas equities.

A positive breakout has been detected, signalling an end to the three-week-old sideways consolidation phase. Going forward, it usually would set the stage for a rally, and based on the daily chart, the key index may reach the returning line of the existing upward channel, now (Sept 2009) resting at approximately 1,280 points.

The next upper strong resistance is envisaged at 1,300–1,305 points. However, given the modest volumes, the speed of ascent may be gradual, unless there is evidence of aggressive third-quarter 2009 window-dressing activities coming up.

Before arriving at the upper boundary of the existing channel, the FBM KLCI will encounter resistance at 1,220 points, 1,240-1,250 points and 1,260 points.

Technically, the indicators are bullish, especially the MACD, implying the market is likely to scale new heights, provided there are no nasty surprises from abroad, particularly the United States and China.

Initial support is seen at 1,196.46 points, followed by the 14-day simple moving-average (SMA) of 1,183 points, the 21-day SMA of 1,178 points, the 50 day MAV lines (1138). The 200 day MAV line is at 1106.

The lower floor is resting at 1,160 points and the recent bottom of 1,153.97 will now act as the base.

Undermining Factors
1. Blowup In US Subprime Loans & Shaky Financial Assets Associated With Them And As A Result Of Re-pricing Or Revaluation Of Risk Contributed To A Squeeze In The US Credit Markets (Stabilizing);
2. Malaysia Political Uncertainty;
3. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Stabilizing);
4. Volatile Foreign Exchange Market (Signs Of Volatility Has Peaked);
5. A Slowdown In Global Economy (Rate Of Decline Has Started To Moderate Since March 2009);
6. Commodities Prices (Strengthening);
7. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation
8. Threats Of High Commodities Prices And US Dollar Crisis

Unpredictable Risks/Surprises
========================
1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu (Worsening)
4. Financial Shocks – Unwinding of Yen/Dollar Carry-Trade Funds, China’s Stock Market Bubble, Global Liquidity Crunch Resulting From Blowup In US Subprime Loans And Shaky Financial Assets Associated With Them & Falling Dollar;
5. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures … Second Leg Global Recovery (Sept 2009 Onwards) !!!

Recession – Recovery – Growth – Boom - Burst
(Transition From One With China As Sole Driver To A More Balanced US/China Model)

a. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
b. Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity
c. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model
d. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
e. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY
f. What’s NEXT For The US & China Equities Market
g. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
h. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
i. What’s NEXT (2H2009) For The Malaysian Equities Market …
j. Carry Trades Are Making A Come Back Into Emerging Markets
k. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).

a. The Good, The Bad And The Ugly Aspects Arising Since Sept 2008 …

The demise of the venerable Lehman Brothers September 2009 marked a defining moment for the world’s financial and economic systems. But the crisis did not last as long as expected, there are understandably structural changes going on in many countries as they adapt to the new economic realities.

The Good

i. Improving Outlook ...

The global economy is responding well to the massive injection of government spending worldwide.

It is generally perceived that the downturn has bottomed out about six months ago (March 2009). There are now (Sept 2009) some clear signs that recovery is on the way for most countries, though the process remains gradual and vulnerable, and some economists are arguing about the sustainability of those comforting indicators.

The head of the International Monetary Fund (IMF), Dominique Strauss-Kahn (Sept 2009) said a recovery of the world economy could occur earlier than expected, at the beginning of next year (2010).

The global financial institution has recently revised upwards its forecasts for the global economy. It now (Sept 2009) expects the world economy to shrink 1.3% this year (2009), a tad better than its earlier projection of 1.4% contraction, before growing again at 2.9% next year (2010), compared with its 2.5% growth projection earlier.

ii. Asia Leading ...

Asia seems to be leading the global recovery process. Most economies in this region started turning around in the second quarter of the year (2009). Malaysia’s gross domestic product (GDP) is expected to post growth by the fourth quarter of 2009.

The quick rebound of Asia seems to support the long-prophesied rise of the region as the next economic power. Economists are arguing that the crisis has accelerated the tectonic shift in world economic power to the emerging markets of Asia, in particular, China.

Asian economies suffered a downturn arising from the financial crisis due to the collapse in exports demand from industrialised economies that were going through a deep recession.

Exports demand for Asian goods is still sluggish till this day, but the Asian economies are improving faster than expected, thanks to the expansionary packages that are stimulating domestic demand.

iii. New Platform ...

Asia is coming to grips with the fact that external demand will most likely remain in the doldrums for a long time, as consumers in industrialised economies become more frugal. Hence, the export-dependent region has been displaying a sincere desire to shift to a new economic model – one that is more inward-looking.

Efforts are now (Sept 2009) moving towards boosting domestic consumption for sustainable growth. This may take some time as such efforts would involve ideology changes – that is, from the present (Sept 2009) “save more, spend less” to “save less, spend more”.

The Bad

i. Inflation Threat ...

The economy bouncing back from the trough has brought with it a quick, perhaps too soon, rebound in the global crude oil prices, which are currently (Sept 2009) hovering around the US$70 per barrel level, compared with less than US$40 per barrel at the end of last year (2008).

This gives rise to the risk of inflation, which could jeopardise the nascent recovery process. Nevertheless, the inflation risk at this stage remains subdued, as most countries are still in a deflationary stage.

Technically, Malaysia too seems to be experiencing a deflation as indicated by its consumer price index (CPI). The negative CPI for the third consecutive month in August 2009 gives the impression that the general price level of goods in the country has fallen, but as we are well aware, this is not the case.

The negative CPI is more reflective of the decline in fuel prices over the past one year (2008). But in general, the prices of most goods remain sticky since they were raised in tandem with the steep rise of fuel prices in July 2008r.

To be cautious, the current (Sept 2009) environment of low interest rates provide room for inflation to seep in. So, central banks could raise interest rates earlier than expected to rein in the risk of inflation.

ii. Bubbles Forming?

The expansionary monetary policies are feeding cheaper funds into the economy. While liquidity remains comparatively tight in most industrialised economies, emerging markets in Asia are flushed with liquidity.

Financial experts are now (Sept 2009) warning of potential asset bubbles, especially in property, forming in Asia. Liquidity in the region is far too abundant for policymakers to keep interest rates at their current (Sept 2009) lows.

Low growth and the lingering uncertainties are setting the conditions for bubbles to emerge as officials maintain their accommodative monetary stance. In an economy flushed with liquidity, prices of assets can increase even if growth fundamentals appear unsupportive.

There are already signs that the leverage in Asia is building up, while that of the West is falling. Since the collapse of Lehman Brothers, the Asian leverage has risen from 15x to 17x for the second quarter of this year (2009). The Western leverage, on the other hand, has decreased from 34x to 28x in the same period.

Asia’s leverage is coming off all-time lows and will probably go higher. This is especially so for Hong Kong, China, India and Indonesia.

iii. Joblessness ...

Meanwhile, the labour market conditions in the global economy have not improved much. Unemployment rates in most countries remain high, and they are rising.
This problem does not only plague the industrialised nations, but also some Asian economies, including China.

The unemployment rate in Malaysia was at a manageable 4% for the first quarter of 2009. The rate is expected to increase to 4.5% for the full year, compared with 3.3% in 2008.

The unemployment situation in Malaysia is mainly affecting the manufacturing sector, which is currently awash with excess capacity due to weak external demand.

iv. Declining Investments ...

Excess capacities across industries in most economies have caused the decline in private investments across the board.

In Malaysia, the sharp decline in private investments activities is due mainly to excess capacity in the manufacturing sector. Industry observers say that there could be a prolonged recovery for private investments in Malaysia due to the prevailing excess capacity.

vi. Widening Deficits ...

While the massive injection of government spending worldwide have managed to pick up the slack in most economies, higher government spending amid declining revenues have pushed some of them to face historically high levels of fiscal deficits.
This is particularly so for the US, whose fiscal deficit is expected to rise above US$2 trillion by the end of the year (2009).

Malaysia has been in a fiscal deficit position since the Asian financial crisis in 1998. The present (Sept 2009) pump-priming activities is expected to widen its fiscal deficit to 7.6% of the country’s GDP this year (2009), compared with 4.8% in 2008 and 3.2% in 2007.

Some countries like Singapore are luckier as they are merely depleting the surpluses that they have accumulated through the boom years to finance their expenditure.
vii. Protectionist Measures ...

On the global trade front, many countries seem to be putting up barriers to protect their own turf. This is despite policymakers preaching the opposite – that protectionism will only hurt global recovery. A case in point is the recent spat between China and the United States.

The Ugly

Greed Is Back …

With the improving economic outlook, the appetite for risk has also returned as investors seek to make more easy money.

Stock markets in major economies are rising. It is widely feared that their valuations are getting stretched to levels unjustified by earnings growth. It has also been reported that Western financial institutions are once again betting on high-risk instruments for better margins.

Unfortunately, as long as there is money to be made, greed is pretty much a virtue. Yet, this is the very sin that has brought the global economy into this mess. Generally the fear of missing out on the global rally far outweighs the risk of a potential sharp correction ahead.

b. Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity

The Government is putting its money where its mouth is. Recent developments seem to suggest that it is finally ready to reduce its shareholding in the government-linked companies (GLCs), something that has been talked about for a long time.

A strong indication surfaced on Sept 10 2009, when Khazanah Nasional Bhd placed out a 5% stake, or 55 million shares, in Malaysia Airports Holdings Bhd.

At the same time, two other Khazanah-related companies, namely CIMB Group Holdings Bhd (in which Khazanah owns 28.4%), and Pos Malaysia Bhd (32.2%), reported large off-market share placements.

On Sept 10 2009 as well, 30 million CIMB shares, or a 0.8% stake, changed hands at RM10.38 per share. It was reported that the seller is Takrif Aspirasi Sdn Bhd. CIMB’s eight largest shareholder. The following day, Utilico Emerging Markets Ltd sold 25 million Pos Malaysia shares, or a 4.7% stake.

While these two off-market transactions are unrelated to Khazanah, they support the argument that now (Sept 2009) may be a good time for the government investment arm to sell shares in the GLCs.

Rumours began swirling as to which investee company of Khazanah will be next to see a similar share sale.

That aside, market watchers believe that Prime Minister Datuk Seri Najib Razak, who is also Finance Minister, is serious about wanting the Government to lower its corporate holdings and attract new investors.

He is thoughtful in allowing the private sector to discover its own path and for the local bourse to eventually flow with liquidity.

Government’s desire to pare down its stake in GLCs will get more participation, and in an overall sense, there’s greater market liberalisation. This also profiles Malaysia as an institutional haven for global investors.

The stock market needs more shareholder diversity, and this means fewer shares in the hands of the usual local institutional funds.

Long-term shareholders such as sovereign wealth funds that have a strategic interest will be value adding for the GLCs in many different aspects. A sovereign fund won’t sell for the sake of trading gains. In fact, they may increase their stake over time, as they always need to be invested.

It is true that for a country to have long-term stability, it still needs its own capital base and local investors. However, foreign investors create competition, which is needed to put everyone on the treadmill. Otherwise, there is a tendency to lie down or stand still.

With foreign participation, Malaysia will have the benefit of exposure to foreign views and perspectives. This is because, apart from the capital infusion, what is just as important is the value brought by the new investors.

A foreign investors can contribute by enhancing many different aspects such as market access, higher technology and new management. This leads to higher productivity and competitiveness. These are key ingredients to fast track our economy to global heights.

The private sector has to play its part in reinvigorating the economy and creating some crowding-in effect.

While people may be concerned about foreign control, this should not be an issue, especially when the positive effects on the industries and companies become tangible.

For instance, should Volkswagen AG (which is a world leader in its segment), takes up a stake in national car maker Proton Holdings Bhd, it immediately creates greater global value. Upon signing on the dotted line with its new partner, Proton becomes a global player instantly!

While hot money is sometimes viewed negatively, it has its benefits. First of all, it increases optimism and confidence levels. Hot money is inevitable in any market, although, yes, too much of it isn’t good. But in Malaysia’s case, we are at the stage where we need more foreign direct investments (FDI).
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Khazanah Nasional Bhd is expected to reduce stakes in more government-linked companies (GLCs) after selling off 55 million shares, or 5%, in Malaysia Airports Holdings Bhd (MAHB) to unidentified institutional investors.

The government-linked investment arm might be looking to divest stakes in companies that it owned more than 60%. The selldown in MAHB’s was “unique” as Khazanah used to own more than 70% in the company.

The next possibilities would be those in which it has over 50% stakes, which only consist of a few companies. Time dotCom Bhd and Proton Holdings Bhd could be next as “Khazanah has always talked about divesting its interest in these companies.”

Khazanah doesn’t need the funds. It’s in line with the Government’s call to free up more liquidity to attract foreign investors. The sale proceeds, nonetheless, could be pumped into Iskandar Malaysia.

The reduction in shareholding should not have an impact on the transformation programme that the GLCs were undergoing since Khazanah still owned substantial stakes. As long as Khazanah maintains its position as one of the key shareholders, it should not be an issue. Khazanah could still retain control as long as it had board representation in the companies.

The 5% selldown in MAHB is (of) no impact. What is 5% when its stake was over 70%?. With the sales proceeds, Khazanah could boost its exposure in the services and high technology sectors. Also expecting Khazanah to tap offshore opportunities especially since asset classes in the US and Europe remain at low levels.

Meanwhile, Takrif Aspirasi Sdn Bhd, CIMB Group Holdings Bhd’s eighth biggest shareholder, sold 30 million of the bank’s shares, representing 0.8%, at RM10.38 each, valuing the block at RM311.4mil. The report did not identify the buyer of the shares.
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A total of 55 million MAHB shares were traded in three off-market transactions at RM3.30 per share for a total of RM181.5 million. The transactions, involving a combined 5% stake of MAHB, have given rise to speculation that it could be the government’s investment arm Khazanah Nasional Bhd paring down its stake in the airport operator.

Khazanah has a 72.74% stake in MAHB, which has a free float of about 27.26% representing 299.85 million shares in the company.Sources said buyers in those off-market deals were most likely local and foreign institutional funds. Talk has it that CIMB Investment Bank Bhd has been mandated to help Khazanah sell down its stake in line with Prime Minister Datuk Seri Najib Razak’s call to government-linked companies (GLCs) to increase their stock liquidity.

Interestingly, CIMB group chief executive officer Datuk Seri Nazir Razak was quoted as saying that the entry of foreign sovereign wealth funds, particularly from China, would be good for the country as it would create greater connectivity with the fastest-growing economy in the world.Second Finance Minister Datuk Ahmad Husni Hanadzlah later denied the report.If Khazanah was the seller in MAHB, then more selldowns could be expected in the coming weeks (2009 & Beyond), including those in other GLCs, as the environment now (Sept 2009) is conducive given the improved investor sentiment.It has often been argued that GLCs, which make up some of the largest capitalised companies on the local bourse, have not been able to adequately garner foreign investor interest due to the illiquidity of their shares, the bulk of which is held by government institutions.

It is believed that GLCs’ share prices could improve in line with any enhancement in liquidity.The government’s move to pare down its stakes, if confirmed, would be positive for the local market and help to increase the attractiveness of such counters in the eyes of investors.There were keen interests all along in most of these GLCs. Many more such moves might follow suit, and MAHB could be the first among the pack.

Calculating Ex-Rights Price For Gentng SP ...

2009-09-18T16:27:00.002+08:00

1 for 5 @ SGD0.800.

5000 Existing shares at SGD1.09 = SGD5450.00
1000 new shares at SGD0.800 = SGD800.00
Value of 6000 shares = SGD6250

Ex-Rights Value per share = SGD1.042 (SGD6250/6000 shares)

Recently what Genting SP/Genting Bhd/GenM, YTL/YTLE and MPHB/U-Mobile Have in Common?

2009-09-18T09:48:00.005+08:00

1. YTLP/YTLE: Possibility Of Using YTLP As A Vehicle To Spearhead The Group Venture Into WIMAX Services (YTLE).
2.Genting SP/Genting Bhd/Genting Malaysia: Rights Issue By Genting SP!!! Its Purpose!!!
3. MPHB/U-Mobile: The Way The Deal Was Crafted Gvie Rise To Speculation That It Is One Friend Helping Another!!!

YTLP/YTLE
dated Sept 2009 ...

YTLP’s announcement on June 2009 that it had bought a 60% stake in YTL Communications Sdn Bhd for a mere RM300,000 from YTL E-Solutions Bhd (YTLE) barely made a blip on investors’ radar screen.

Indeed, the amount paid was a drop in the ocean when you take into account the sprawling size of the YTL empire. Thus, not many paused to think why Malaysia’s IPP was acquiring a subsidiary whose core business was wireless broadband.

So the question now is, what is the rationale for the acquisition? How does it fit into YTLP’s future plans? And of all the companies in the group’s stable, why YTLP and not YTL Corp Bhd. YTL currently holds 51% of YTLP and 74% stake in YTLE.

YTLP’s plans for its new subsidiary are still unknown and company officials were not available for comment. However, a widely held view among is that the move was to tap into YTLP’s strong cash reserves.

Industry observers were surprised by the possibility that YTLP may be used as a vehicle to spearhead the group’s venture into WIMAX services.

The biggest concern is that YTLP’s dividends may be at risk. YTLP is known for its good dividends, offering a yield of between 55 and 7% over the past two years (2007-2008).

Capex for WIMAX is still uncertain, but assuming RM500 million per annum as reported, this will reduce its free cash flow estimate by 50% to 70% as WIMAX is not immediately income generative.

*** To recap, YTLE was one of the four operators awarded WIMAX license by MCMC. YTLE has yet to roll out the service, but has plans to spend RM2.5 billion on WIMAX over then next five years, with RM1 billion to be spent in the first year alone ***

So why was YTLP picked over others in the YTL group?

Industry observes say YTLP is the most logical candidate after taking into account the cash positions of all the YTL companies. YTLE certainly does not posses the financial cloud to fund such venture at this point in time.

The reason YTLP was a favourite was its solid fundamentals, anchored by the only take or pay power purchase agreement in Malaysia. Aside from power YTLP is also the concession holder for Wessex Water in the UK.

For its FY2009 ended June 30, 2009, its deposits, cash and bank balances stood at rm5.97 billion. In comparison, its parent YTL’s cash pile was RM430 million while YTLE’s cash amounted to Rm1.13 million.

Despite a net gearing of 2.8 times, YTLP’s debts are mostly on a project financing basis serviced by the free cash flow of the respective IPPs and Wessex. Full conversion of warrants due in Jan 2010 will raise a further Rm980 million.

So YTLP definitely has the funds to drive the YTL group plans for WIMAX. However, will such a move go down well with YTLP’s shareholders and is it truly in the best interests of Malaysia.

But for YTLW, the sand in the its hour glass for rolling out WIMAX is fast running out. The MCMC has the right to take the spectrum back if the players are unable to meet the required 25% coverage by 2010.

Industry observers see this as a negative development as investors have viewed YTLP’s utilities earnings as defensive. Instead YTLP is extending from a business that provides recurring income streams to one with highly uncertain revenues – a new telecoms operation, which has yet to fully kick off even in the developed countries.

Genting SP/Genting Bhd/Genting Malaysia
dated Sept 2009 ...

The question weighing heavily on investors is its ultimate effect on parent Genting Bhd. Genting Bhd being the majority shareholder, how will Genting Bhd finance its portion of the rights issue?

Will there be more cash calls by its Singapore unit, given that the latter just had one two years ago?

Will it tap Genting Malaysia Bhd’s – more than RM5 billion cash hoard?

Most agree that Genting Bhd will have little problems in raising borrowings to answer the cash call.

However, other possibilities have also been bandied about. This includes Genting Bhd making its own cash call, but industry observers feel that this would be an unlikely move. But most seem to concur that 48.5% owned Genting Malaysia cluld end up playing a role.

This is because at company level, Genting Bhd holds only Rm310 million in cash, deposits and money market instruments as at end FY2008. Genting Malaysia in comparison held RM3.2 billion for the same corresponding period. As at end June 2009, Genting Malaysia’s cash holding amounted to Rm5.1 billion.

The notion of Genting Bhd tapping cash rich Genting Malaysia is an intriguing one, given that it can be done in a number of ways. There is always an intercompany loan or upstreaming cash in the form of dividends alternatively Genting Bhd could raise convertible bonds on its stake in Genting Malaysia.

Doing an interco with Genting Malaysia are unlikely to look into kindly on such an exercise.

But what could possibly appease Genting Bhd shareholders is if the company took the upstreaming cash route. As cash rich Genting Malaysia is, the one sticking point was Genting Malaysia’s dividend payout. Most agreed it was decent, but payout had been very little as Genting Malaysia is said to be hoarding cash for M&As opportunities. But it is unlikely that Genting Malaysia will suddenly give a bumper or special dividend.

Tapping Genting Malaysia’s cash hoard will not be the best use of funds, given management repeated intentions to undertake M&A that will likely generate a bigger earnings accretive effect.

However, industry observers do not rule out a combination of debt and tapping Genting Malaysia’s cash pile to cap Genting Bhd’s gearing ratio. If Genting Bhd chooses to fund the exercise purely by borrowings with a financing cost of 7%, forward earnings could be cut.

Another possible impact on Genting Malaysia from this exercise is not just monetary. To recap, Genting Singapore says in its statement to the SGX that it plans to use 60% of the funds from the rights issue for expansion. It would appear that Genting Malaysia’s role as the group’s flagship M&A vehicle is under threat as its related companies may be vying for similar assets.

By Moody’s Investor …
Moody’s Investors Service does not expect any immediate impact on GENTING BHD’s Baa1 issuer and senior unsecured debt ratings or on the stable outlook, following the announcement that its 54%-owned subsidiary, Genting Singapore plc, is to raise gross proceeds of up to S$1.63 billion (RM3.99 billion) through a rights issues.

The rights issue was fully underwritten by eight banks and the proceeds would be used by Genting Singapore for future investments and working capital requirements. Moody’s expects Genting will fund its portion of the investment, about S$840 million, by a combination of debt and internal reserves.

Expecting Genting will have to raise approximately S$600 million of debt to fund its portion of the rights. While this will increase its gross debt at the issuer level, the rights issue will improve Genting Singapore’s liquidity positions and to some extent reduce its near-term debt funding requirement.

On a consolidated basis, Genting’s net debt position will modestly improve as a result of the equity contribution from minority shareholders.While part of the proceeds from the rights issues were reserved for potential acquisitions, Moody’s learnt that there was no immediate investment target.

The core rating driver for Genting remains the successful execution of its business strategy and ramp-up of the integrated resort project at Sentosa, Singapore.Partly mitigating the concerns, construction risks associated with the Sentosa project have been lowered, as 60%-70% of the physical construction has been completed, while phase I of the project will likely open on time in 1Q 2010.Moody’s last rating action with regard to Genting occurred on Aug 20, 2007, when the company’s Baa1 issuer and debt ratings were affirmed with a stable outlook.

MPHB
Dated Sept 2009 ...

MPHB foray into the telecoms sector has raised many eyebrows. Skeptics wonder why a company with gaming as its forte is getting into the telecoms sector. More startling is that the entry is via smallish U Mobile Sdn Bhd at a time when giants such as Japan’s NTT DoCoMo and South Korea’s KT Corp are exiting.

What does MPHB see in U Mobile that KT and DoCoMo did not? Could MPHB have done it via another vehicle instead of exposing the company to risks?

The way the deal was crafted also gives rise to speculation that it could be one friend helping another.

MPHB was buying a 3.9% stake in U Mobile. It also has a “put’’ option from AmBank (M) Bhd to buy an additional 41.63% stake in U Mobile for RM280mil within 13 months should there be a default on a financing facility taken to part pay the Japanese and South Korean investors. MPHB declined to disclose the amount MPHB paid for the 3.9% stake.

If the put option is exercised, MPHB gets 45.53% stake in U Mobile for a song in comparison to the US$200mil (RM750mil) that U Television Sdn Bhd (UTV) has to pay the Japanese and South Koreans for their combined 33% stake.

U Mobile is one of four 3G spectrum holders in the country. It was assigned the spectrum in 2006 and April 2009 got two foreign investors – DoCoMo and KT – to take a combined 33% stake in the company. The remaining 67% in U Mobile is held by U Television Sdn Bhd (UTV), a company controlled by businessman Tan Sri Vincent Tan.

DoCoMo and KT each held a 16.5% stake and when exiting U Mobile, cited differences of opinion with other shareholders over management. The two are selling their U Mobile stakes to UTV for the original amount they paid, US$100mil each, or a total of US$200mil.

To pay the Japanese and South Korean investors, UTV took a financing facility from AmBank to part finance the payment and pledged U Mobile shares as collateral. MPHB’s entry into U Mobile is as a guarantor for the pledged shares; so if UTV defaults in repayment, MPHB can exercise the put option to buy the 41.63% stake in U Mobile for RM280mil.

If there is no default, MPHB will be left with a 3.9% stake in U Mobile, but ideally it would like to have about 10%-15% stake, the strategic investor about 30% and UTV the remaining 55%-60%.

The two friends here are Tan Sri Vincent Tan – who controls UTV, which in turn controls U Mobile – and Datuk Surin Upatkoon, the managing director of MPHB. Surin has an effective 34% stake in MPHB.

Tan asked Surin to take up the U Mobile shares. Surin agreed but not before getting the MPHB board’s nod. It is a friendly deal. A director of MPHB pointed out that “it is done at arm’s length.’’ MPHB views the deal as “not to help a friend, but an opportunity to get into the telecoms sector.’’

For MPHB it is a chance to get into a new business where the downside risk is minimal; U Mobile has a 3G spectrum whose potential has yet to be exploited; there is room for further growth in Malaysia’s celco sector and margins earned by celcos are the highest in the region; and this investment could be income generating even though there may be some hurdles in partnering U Mobile.

That is why MPHB took up the put option and being an investment holding company, took the plunge itself instead of using another vehicle. MPHB is also involved in the stockbroking, insurance and property sectors. So as Surin puts it, it is not solely a gaming company.

Surin is excited about the prospects the telecoms sector holds despite the huge capital expenditure needed and the long gestation periods. In fact, he has been involved in the sector via his effective 17% stake in Thailand’s Shin Corp.

Whatever the deal, what is clear is that U Mobile needs a strategic investor with telecoms expertise to drive the company forward. There have been preliminary talks and Surin has his own list of potential investors for this purpose.

The strategic investor should be given total control to develop U Mobile into a serious player in the cellular services market. Set up in 2007, U Mobile offers limited coverage and services, rendering it unable to steal market share away from the larger service providers. It currently has less than 1% of the cellular market that has more than 28 million subscribers.

With growing competition, celcos must keep their promises of quality services, cost-effective packaging and timely delivery or risk their customers switching service providers. Celcos should realise that if they cannot deliver, they should let someone else do the job. For U Mobile, the time has come for it to get its act together.

Meanwhile, preliminary talks are said to have taken place between U Mobile Sdn Bhd’s major shareholder and a Singapore telecommunications company for the latter to come in as a strategic investor with up to 30% equity stake in the former.

Names such as StarHub and SingTel have been bandied around and while the former seems a more likely candidate, the parties are not willing to confirm it. At this juncture, a lot depends on the direction of the talks and the due diligence that will be conducted on U Mobile.

But there is no denying that U Mobile needs a strong strategic investor to drive it forward to offer more than voice telephony. This is necessary since Japan’s NTT DoCoMo and South Korea’s KT Corp called it a day at U Mobile earlier Sept 2009.

U Mobile has declined comment on purported talks with any strategic investor. Multi-Purpose Holdings Bhd (MPHB), which this week bought 3.9% stake in U Mobile and has a “put” option to buy an additional 41.63% stake, also declined comment. At this stage MPHB is only involved in the put option.

Market Commentaries & Technical Analysis as at 13 Sept 2009

2009-09-13T20:51:00.003+08:00

Watch List In The Coming Week
1. 2010 Budget Announcement In Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009

Market Commentaries
A hush market in the third quarter of 2009 is reflected by a slowdown in the Muslim fasting season and a typically weak September 2009 in the equity markets. The pleasant 2Q09 results season is already priced in by a rushed recovery since March 2009.

Expecting a seasonal economic slowdown and less newsflow on mega project tenders and awards during the Muslim fasting season that started on Aug 22 2009.

Meanwhile, improving economic fundamentals have been discounted by institutional investors who have already rushed in to raise their equity weightings since March 2009.

Nevertheless, downside is limited given the ample domestic liquidity, led by the newly established government-backed Amanah Saham 1Malaysia Fund, which raised more than RM2 billion in August 2009. 1Malaysia’s fund manager Permodalan Nasional Berhad says that with its recent fund-raising efforts, it has raised about RM15 billion year-to-date (Sept 2009).

The key event in 3Q09 — the Budget proposal announcement in October 2009 – is unlikely to provide much excitement. However, key events in 4Q09 should include mega project calls for tenders and awards (LCCT, LRT extension), which will benefit the construction and building material sectors, and refinement to the National Automotive Policy, which should reinforce support for national car producers like Proton.

The dramatic recovery to stability since March 2009 is underpinned by the following: a) easing losses and fund-raising needs by banks globally, b) sharply narrowed US credit spread, c) significantly lower risk premium in emerging markets as reflected in the JP Morgan Emerging Markets Bond Index, and d) steadfast recovery in US housing transactions and median pricing.

Improving domestic indicators are reflected in the following: a) rebounding employment and consumer sentiment indices; b) modest improvement in fast-moving consumer goods consumption, and c) improved sales of durable goods (including auto sales), particularly for newly launched mid-tier to high-end residential properties.

Expecting modestly improved q-o-q earnings in 3Q09, in line with global trend.

However, not completely out of the woods. We continue to subscribe to the view that global economies will sustain a much more modest economic growth compared with the period prior to the emergence of US subprime loan problems.

In particular, expecting US consumerism to remain weak — although there could be a temporary recovery in the Christmas season — as high unemployment rates and job uncertainty continue to encourage high savings rates.

Market consolidation underway (Sept 2009) due to market’s low value proposition. KLCI is already trading well within its historical forward PE band of 12-17x. The KLCI trades at 14.8x 2010 earnings, in the middle of its post-Asian financial crisis PE range. It also trades (Sept 2009) at a current P/B of 2.0x vs the historical nine-year average of 1.7x (based on Bloomberg).

Expensive relative to region; non-strategic foreign ownership to stay at 22%. Despite improved macroeconomic and political conditions, market valuations (Sept 200() are not cheap enough to entice foreign investors to rush in, although there are still some compelling values among mid-caps.

FBM KLCI Crossing The Psychologically Important 1,200-point Level …

The local stock market’s benchmark index breached the psychologically important 1,200-point level (Sept 11, 2009) driven largely by the global liquidity run.

Investor sentiment in the region has been bolstered by a number of factors including the weekend decision by G20 finance ministers to keep economic stimulus efforts in place as well as a slower decline in US job losses.

Nevertheless, cautious remains on the local stock market. While it seems to be a bull run, the fundamentals that drive a bull market appear absent. The index is currently (Sept 2009) where it was at the beginning of 2007, the year of the bull run, but the current (Sept 2009) backdrop for the fundamentals that would support current valuations remains very “touchy”.

In 2007, we had a great commodity market, fantastic exports and robust earnings – where are all of that now (Sept 2009)?

Liquidity, however, may be sufficient to keep the market on an uptrend for a while but it would be difficult to peg the market’s fair value because of this. The G20 countries said they would continue to flood the system with liquidity so the economy doesn’t tank, that’s what investors wanted to hear.

Technically, most of the short-term indicators are painting a positive landscape, with the weekly moving average convergence/divergence (MACD) histogram resuming the upward expansion against the weekly trigger line and the daily MACD triggering a “buy” signal.

The FBM KLCI’s successful penetration of the 1,200-point monster resistance, supported by bigger trading volume indicates the end of the recent sideways congestion phase and the start of a pre-Raya rally.

Betting On A Second Leg Recovery (Sept 2009 Onwards) …

On a cautious note, even as the global economic outlook is increasingly rosier, the next challenge is to sustain the recovery.

Sustaining the recovery will require some rebalancing acts, in that the global economy should refocus towards more US exports and more Asian imports (a reverse from the present scenario). The rationale is that the crisis has left some “deep scars” that will affect both supply and demand in the global economy for many years to come.

Given that the current global economic (Aug 2009) rebound is supported mainly by massive fiscal stimulus measures, the concern is that the rebound may not be sustained once the allocated spending is exhausted. Most economists see the factors driving the current economic rebound as temporary in nature.

So, the main call is for Asia to create its own demand to reduce its reliance on exports for growth, while at the same time, generate new opportunities for international trade.

Asian governments, including that of Malaysia, have announced earlier that they planned to create new economic models to ensure the future sustainability of their economies. Malaysia is expected to announce the outline of its new economic model towards the end of the year (2009).

Meanwhile, some economists are also concerned about the growing fiscal deficits faced by most governments as a result of their massive stimulus packages. Higher taxation – unpopular, but perhaps necessary – as the solution.

Although a recovery is underway, a sustained recovery will likely be slow and a follow-through recovery is needed. A stronger global recovery in 2011 with 2010 merely a getting-out-of recession phase.

2010 would a be “year of global interest rates hike” with India and Indonesia to be the first few to make a move. There will be negative forces pushing the inflation higher next year (2010). Loose monetary policies, a revival in commodity prices and a higher budget deficit would push inflation higher.

If there is any rate action, it will be in baby steps and probably in the second half of 2010. Did not foresee a resurgence in high inflation now (Aug 2009).

High savings and foreign reserves exceeding US$4.3 trillion had strengthened Asian economies’ external position” and that “the region is poised to ride or even lead the next economic boom.”

There was a need to reinvent Asia and make a shift from external demand to domestic demand.

Asia had escaped the “bullet” of recession and that higher interest rates would not have a big impact on its recovery. Moving from the current 2% to 3% will not impact the market so much.

The best time to return to the market was three months ago (April – May 2009), but the risk of getting a double-dip was a lot lower now (Aug 2009) than three to four months ago. It is possible to return to the 2007 level but don’t know by when. Some companies might recover and some might not. Some have even surpassed their 2007 peak. It is unlikely everyone will recover?. There will be some winners and losers.

Investors are also encouraged to continue investing in equities on expectation of a second round of recovery. The market moves ahead of the real economy by six to nine months. The recent (July – Aug 2009) positive market performance has moved in anticipation of the first round recovery. From here (Aug 2009), a positive uptrend that investors can still partake of in anticipation of the second leg of the recovery

Corporate Earnings Of Malaysia … Going Forward

In the midst of a global market correction, intensifying AH1N1 flu virus and political uncertainties, there was some splash of good news on the Malaysian front. The second-quarter 2009 earnings season, which only just got wrapped up (Sept 2009), pointed to one direction – corporate Malaysia may be back on positive earnings territory.

For those who reckoned the second quarter 2009 would echo the weak first-quarter report card 2009, they welcomed the upside surprise.

One indicator for a positive outlook for equities would be the upgrade to downgrade ratio, which turned positive to above 1 time for the first time since the fourth quarter of 2007.

It rose from 0.6 time in May 2009 to a hefty 1.6 times, the best since the fourth quarter of 2006. This implies that far more companies beat expectations than the reverse. Upgrades also exceeded downgrades for the first time since the second quarter of 2007. The last time this happened in the fourth quarter of 2006, the bull market lasted for a year.

With green shoots sprouting out during the May and August 2009 results seasons and the second-quarter 2009 gross domestic product pull-back coming in lower than expected, the logical conclusion to draw is that the worst may be behind.

The return to positive territory is earlier than expected. It is expected to happen in the third quarter 2009. The positive earnings momentum is good news for the stock market, as the last time earnings turned positive after being in the red was in the second quarter of 2006. The stock market had then rallied from the fourth quarter of 2006 onwards.

The second-quarter 2009 results were overwhelmingly stronger than expected. Not only did the pace of earnings contraction slowed down but the 12-month forward core market earnings saw further upgrades in July to August 2009, with banks driving the overall upgrade in market earnings.

Given the positive trajectory, most are already looking forward to 2010 earnings and as such, the third-quarter 2009 results may somewhat come off as a non-event unless, of course, there are significant surprises. In fact, some expects to see more downgrades in the third quarter 2009 as realisation of a longer drawn-out recovery sets in.

Earnings recoveries and growth expectations are positive to stock prices, especially when earnings momentum is strong. With the FBM KLCI having rallied 40% from the March 2009 trough, a sustained re-rating will not only require earnings delivery but further consensus EPS upgrades is also equally critical.

It is thus important to closely monitor the earnings revision trend in September to October 2009 leading up to the third-quarter earnings season.

Technical Analysis

The daily slow-stochastic momentum index triggered a short-term sell at the top on Thursday, but it can’t be confirmed as yet.

In contrast, the daily moving-average convergence/divergence (MACD) histogram expanded positively and steadily against the daily signal line to stay bullish. It issued a buy on Tuesday.

Meanwhile, the 14-day relative strength index continued to linger in the bullish area. Weekly measurements were looking great, with the slow-stochastic momentum index flashing a buy and the MACD indicator resuming its upward expansion against the weekly trigger line.

After erasing the recent peak and overcoming the 1,200-point monster barrier, Bursa Malaysia’s principal index moved forward to establish a new high for the year (Sept 2009), hitting 1,210.36 session amid improving liquidity, aided largely by the strong performance of overseas equities.

A positive breakout has been detected, signalling an end to the three-week-old sideways consolidation phase. Going forward, it usually would set the stage for a rally, and based on the daily chart, the key index may reach the returning line of the existing upward channel, now (Sept 2009) resting at approximately 1,280 points.

The next upper strong resistance is envisaged at 1,300–1,305 points. However, given the modest volumes, the speed of ascent may be gradual, unless there is evidence of aggressive third-quarter 2009 window-dressing activities coming up.

Before arriving at the upper boundary of the existing channel, the FBM KLCI will encounter resistance at 1,220 points, 1,240-1,250 points and 1,260 points.

Technically, the indicators are bullish, especially the MACD, implying the market is likely to scale new heights, provided there are no nasty surprises from abroad, particularly the United States and China.

Initial support is seen at 1,196.46 points, followed by the 14-day simple moving-average (SMA) of 1,183 points, the 21-day SMA of 1,178 points, the 50 day MAV lines (1138). The 200 day MAV line is at 1106.

The lower floor is resting at 1,160 points and the recent bottom of 1,153.97 will now act as the base.

Understanding Rights Issue ....

2009-09-09T15:05:00.001+08:00

There have been a spate of rights issues by listed companies recently. These changes are no doubt bought about by requests from companies. So, what exactly are rights issues?

Rights are essentially a way for companies to raise capital (money). Fresh capital is essential for a company if they need more funds for their business operations. In the current (2008 – 2009) economic climate, more and more companies find that they require more funds. There is also the problem of existing credit lines of companies being reduced, thus increasing their need to raise capital.

Traditionally, there are two main ways for companies to raise capital. Via debt or equity.
Debt can be raised through bank borrowings or the issuing of bonds. The problem with bank borrowings now (2009) is that banks are unwilling to lend money. And if they do agree to lend, the interest rates are higher than normal. For bonds, there might not be enough takers.

Equity can also be raised through issuing preferred shares, private placement of shares or rights issues.

In a private placement, shares are issued to a selected group of people at a particular price. The problem with this method is that the traded price of many companies are at very low levels now (2009). Existing shareholders will be extremely unhappy if a private placement is done at low prices and their shareholdings get diluted. It would be like daylight robbery.

A rights issue overcomes the problem of a private placement by offering all shareholders an equal chance to subscribe to the new shares at the low price. While this might seem fairer than a private placement that would benefit only selected people, it does come with its disadvantages to existing shareholders.

This would be better illustrated with an example.

Lets say you own 1000 shares of company X and the shares were purchased at $1 each. The company has 100000 shares in circulation so you own 1% of the company.

Suppose you were only willing to commit $1000 of your capital when you purchased the shares. And that is the amount you will lose should the company go bust. Your liability is limited to your initial capital.

Now company X decides to issue a 1 for 1 rights at a price of $0.80. Assuming you subscribe to your entitlement, you would have paid an additional $800 to purchase 1000 shares.

While the number of shares you own has now increased to 2000, your percentage of shareholdings actually remain unchanged. 2000 out of 200000 shares is still 1%.
What this means is that you have been “forced” to pump in more of your money just to maintain your ownership of the company. Your capital at risk has also increased from $1000 to $1800. This is like the reverse of issuing dividends.

You have the right to refuse to subscribe for the rights of course. If you do nothing at all, your initial shareholdings of 1000 shares will become only 0.5% after all the new shares are issued. This would be a huge mistake as the very least you should have done is to sell off the rights to recover some capital if you are not going to subscribe for the new shares. This will help to compensate slightly for the dilution of shares.

The rights of shareholders are these few options:
1. Subscribe to the rights based on the amount of money needed by the company. You are at the mercy of the terms of subscription price as well as number of shares you can subscribe to.
2. Sell off the rights, keep the shares and have your shareholdings diluted.
3. Sell off the shares before they go ex-rights.

Sometimes, an investor could feel that he is having no rights as none of the options are attractive. For example, an investor could be pretty positive about the company but he doesn’t have the cash on hand to subscribe to the new shares. Neither option 2 or 3 would be good for him.

So, faced with the prospect of a massive dilution of my shares, you had to decide whether to sell off your holdings (at firesale prices).

Renounceable - A renounceable rights issue allows for shareholders to sell away their rights. A non-renounceable rights, on the other hand, cannot be sold.

Underwritten - A rights issue that is underwritten ensures that all the required funds are received regardless of the number of subscriptions by the shareholders. The underwriter will have to subscribe to any leftover rights. In return for this risk, a fee has to be paid to the underwriter. In cases where an underwriter cannot be found, it is common to get a majority shareholder to agree to subscribe to the excess rights. Another way is to allow for all shareholders to subscribe to the excess rights.

Market Commentaries & Technical Analysis as at 7 Sept 2009

2009-09-06T21:51:00.001+08:00

Market Commentaries

The biggest corporate news last Friday (04.09.2009) was speculation that the Chinese government has been offered a 10% stake in Sime Darby Bhd. This was quickly dismissed by Malaysia’s officials but the market is not expected to believe the denial.

The possible entry of Chinese companies into Sime Darby is expected to dictate the pace of the market this week as the plantation giant carries significant weightage on the FBM KLCI, being one the top 10 stocks.

This week, Malaysia will release the trade figures for July and Reveal its foreign reserves position. But with the corporate reporting season over and GDP figures for most countries announced, no other major announcement is expected to impact the market this week.

The US Federal Reserve’s Beige Book, which is publishes eight times a year and gathers anecdotal information on the current economic conditions in US, is one of the more important economic data due out this week.

Betting For A Second Leg Recovery (Sept 2009 Onwards) …

On a cautious note, even as the global economic outlook is increasingly rosier, the next challenge is to sustain the recovery.

Sustaining the recovery will require some rebalancing acts, in that the global economy should refocus towards more US exports and more Asian imports (a reverse from the present scenario). The rationale is that the crisis has left some “deep scars” that will affect both supply and demand in the global economy for many years to come.

Given that the current global economic (Aug 2009) rebound is supported mainly by massive fiscal stimulus measures, the concern is that the rebound may not be sustained once the allocated spending is exhausted. Most economists see the factors driving the current economic rebound as temporary in nature.

So, the main call is for Asia to create its own demand to reduce its reliance on exports for growth, while at the same time, generate new opportunities for international trade.

Asian governments, including that of Malaysia, have announced earlier that they planned to create new economic models to ensure the future sustainability of their economies. Malaysia is expected to announce the outline of its new economic model towards the end of the year (2009).

Meanwhile, some economists are also concerned about the growing fiscal deficits faced by most governments as a result of their massive stimulus packages. Higher taxation – unpopular, but perhaps necessary – as the solution.

Although a recovery is underway, a sustained recovery will likely be slow and a follow-through recovery is needed. A stronger global recovery in 2011 with 2010 merely a getting-out-of recession phase.

2010 would a be “year of global interest rates hike” with India and Indonesia to be the first few to make a move. There will be negative forces pushing the inflation higher next year (2010). Loose monetary policies, a revival in commodity prices and a higher budget deficit would push inflation higher.

If there is any rate action, it will be in baby steps and probably in the second half of 2010. Did not foresee a resurgence in high inflation now (Aug 2009).

High savings and foreign reserves exceeding US$4.3 trillion had strengthened Asian economies’ external position” and that “the region is poised to ride or even lead the next economic boom.”

There was a need to reinvent Asia and make a shift from external demand to domestic demand.

Asia had escaped the “bullet” of recession and that higher interest rates would not have a big impact on its recovery. Moving from the current 2% to 3% will not impact the market so much.

The best time to return to the market was three months ago (April – May 2009), but the risk of getting a double-dip was a lot lower now (Aug 2009) than three to four months ago. It is possible to return to the 2007 level but don’t know by when. Some companies might recover and some might not. Some have even surpassed their 2007 peak. It is unlikely everyone will recover?. There will be some winners and losers.

Investors are also encouraged to continue investing in equities on expectation of a second round of recovery. The market moves ahead of the real economy by six to nine months. The recent (July – Aug 2009) positive market performance has moved in anticipation of the first round recovery. From here (Aug 2009), a positive uptrend that investors can still partake of in anticipation of the second leg of the recovery

Corporate Earnings Of Malaysia … Going Forward

In the midst of a global market correction, intensifying AH1N1 flu virus and political uncertainties, there was some splash of good news on the Malaysian front. The second-quarter 2009 earnings season, which only just got wrapped up (Sept 2009), pointed to one direction – corporate Malaysia may be back on positive earnings territory.

For those who reckoned the second quarter 2009 would echo the weak first-quarter report card 2009, they welcomed the upside surprise.

One indicator for a positive outlook for equities would be the upgrade to downgrade ratio, which turned positive to above 1 time for the first time since the fourth quarter of 2007.

It rose from 0.6 time in May 2009 to a hefty 1.6 times, the best since the fourth quarter of 2006. This implies that far more companies beat expectations than the reverse. Upgrades also exceeded downgrades for the first time since the second quarter of 2007. The last time this happened in the fourth quarter of 2006, the bull market lasted for a year.

With green shoots sprouting out during the May and August 2009 results seasons and the second-quarter 2009 gross domestic product pull-back coming in lower than expected, the logical conclusion to draw is that the worst may be behind.

The return to positive territory is earlier than expected. It is expected to happen in the third quarter 2009. The positive earnings momentum is good news for the stock market, as the last time earnings turned positive after being in the red was in the second quarter of 2006. The stock market had then rallied from the fourth quarter of 2006 onwards.

The second-quarter 2009 results were overwhelmingly stronger than expected. Not only did the pace of earnings contraction slowed down but the 12-month forward core market earnings saw further upgrades in July to August 2009, with banks driving the overall upgrade in market earnings.

Given the positive trajectory, most are already looking forward to 2010 earnings and as such, the third-quarter 2009 results may somewhat come off as a non-event unless, of course, there are significant surprises. In fact, some expects to see more downgrades in the third quarter 2009 as realisation of a longer drawn-out recovery sets in.

Earnings recoveries and growth expectations are positive to stock prices, especially when earnings momentum is strong. With the FBM KLCI having rallied 40% from the March 2009 trough, a sustained re-rating will not only require earnings delivery but further consensus EPS upgrades is also equally critical.

It is thus important to closely monitor the earnings revision trend in September to October 2009 leading up to the third-quarter earnings season.

Technical Analysis

The oscillator per cent K and the oscillator per cent D of the daily slow-stochastic momentum index retraced from the top to the mid-range before reversing up to trigger a short-term buy on 04 Sept 2009.

The past week witnessed the 14-day relative strength index pulling back from a reading of 58 to the mid-range before ticking up gradually.

Meanwhile, the daily moving average convergence/divergence (MACD) histogram remained in sell mode, but the downward pressure appeared decelerating.

Weekly indicators were very much unchanged, with the weekly slow-stochastic momentum index sustaining the declines and the weekly MACD in danger of flashing a sell signal.

Bursa Malaysia continued to consolidate the past week, but with a mild upward bias on late support in the heavyweights. It looks like the market is just taking its time digesting and adjusting the recent rally. Though indicators so far, were not consistent, there is no mistake to say the worst of the global economy is over, if not already on the healing course.

According to the daily chart, the prevailing trend remains intact, but little has changed while the principal index continuing to flirt within a band.

The market has a chance to construct a new floor at above the 1150 point level, having seen the market trend sideways at above this level. There is still a possibility of the FBM KLCI falling towards the 50 day MAV lines (1138). However its uptrend will remain intact as long as the market stays above the 200 week MAV line (1106).

This means that even if the 50 day MAV line were violated, the uptrend extending all the way from the March 2009 low will still be intact. Bullish bias view still remains.

Support floor is maintained at the 1,150 points, followed by the 1,140-1,142 points band.

Going forward, should there be any early concrete signs of the existing sideways congestion coming to an end or the bulls about to resume their rally, it would certainly be the trading volumes.

Apparently, daily turnover shrank to 499 million shares before getting better to over 600 million shares. If buying can further improve from here onwards, there is a great possibility of a pre-Raya run ahead. So, watch out the volumes.

Technically, Bursa Malaysia may still be trapped, unless there is a new catalyst emerges. Support is maintained at 1,150 points, followed by the 1,140-1,142 points band while resistance can be expected at 1,196.46 points, and the next, at the 1,200 points psychological mark.

Second Leg Global Recovery (Sept 2009 Onwards) ...

2009-09-06T16:09:00.004+08:00

Transition From One With China As Sole Driver To A More Balanced US/China Model.

Looking back at the first quarter of 2009, many investors, fretting about the woeful state of the global economy, failed to focus on the things that matter - valuation and the rapid acceleration of global policy momentum. As it turned out, the combination of these factors created the backdrop for the sharp rally in global equities over the past six months (March – Aug 2009).

Looking forward now (Sept 2009) from the heights that global equity prices have achieved, it is understandable that investors are getting increasingly wary. Admittedly, the valuation case has weakened with the rallies to date (Sept 2009). But global policy effectiveness has not waned. Rather, it has begun to shift from the Chinese-led successes of the first half of 2009 to a broader, global story, with US policy achievements, in particular, emerging recently.

This leaves the prospect for another leg in the global rally in equities that began in March 2009.

Continued momentum in US economic and earnings data in coming weeks (Sept 2009 & Beyond), underpinned by US policy momentum of the second quarter 2009, is expected to drive this leg of the rally. Year-to-date (Sept 2009), economic recovery momentum has been key to identifying relative outperformers globally. With emerging markets recovering from the 'Great Recession' more quickly than developed markets, economic momentum reflected in data releases has been a focus of market attention in the current rally (Sept 2009). Recall, early in the year (2009), news of the US and Chinese economic policy changes that helped set the stage for a bottoming in global markets.

With Chinese stimulus coming sooner and more aggressively, unsurprisingly, the MSCI China rose 35 per cent in the first half of 2009, compared with a meagre 5 per cent for MSCI World.With Chinese policy now (Sept 2009) stabilising, as Beijing tries to contain rapid year-to-date (Sept 2009) loan growth, US growth momentum is beginning to benefit from Washington's stimulus efforts of the late-first quarter of 2009. Their effectiveness was most recently seen in the July 2009 expansion of the Institute of Supply Management's New Orders Index, which historically has provided a three to six-month lead to turns in the US economy. Indeed, the most recent reading suggests that investors' concerns about job growth in the United States may begin to be addressed in coming months (Sept 2009 & Beyond)), providing further economic support to the earnings drivers that may emerge come October 2008.

Looking a bit further ahead, the US third-quarter 2009 earnings season likewise looks set to provide support to the market in coming weeks (Sept 2009 & Beyond). Indeed, during the rally since March 2009, the US earnings season - the first six weeks of each quarter - was a key driver for market performance. Recall, as the first-quarter 2009 earnings season got under way in April 2009, world equities, represented by MSCI World, rallied 18 per cent before stalling in mid-May 2009 as the earnings season came to a close. Similarly, as the second-quarter 2009 earnings season got under way in July 2009, world equities rallied another 12 per cent up to mid-August 2009, as the season came to a close again. In total, on a compounded basis, the earnings-season rallies accounted for almost two-thirds of the 52 per cent rise in global equities up to Aug 21 2009.

With another earnings season quickly coming upon us in October 2009, upward revisions to earnings expectations could continue into the northern autumn 2009, potentially providing a catalyst for the next leg of the rally we have seen since March 2009.

The resumption of US economic growth momentum and positive prospects for US earnings surprises in the third quarter 2009 suggest the global economic recovery is starting to transition from one with China as the sole driver to a more balanced US-China model. Indeed, since mid-year 2009, this transition in policy and data has resulted in US equities outperforming their Chinese counterparts, with MSCI US rising 11.5 per cent up to Aug 21 2009, exceeding the 5.7 per cent increase in MSCI China over the same period.

Therefore given that valuations are no longer cheap, expected news flow leads us to believe that caution will not be rewarded by the markets in the coming months (Sept 2009 & Beyond). Rather, investors are encourage to manage their risk by managing their exposure within global equities. Expecting that Asian equities, even after a near-50 per cent rally year-to-date (Sept 2009), as indicated by MSCI Asia ex-Japan, may participate in this next leg. However, unlike the first half of 2009, where they trumped the flattish 5 per cent performance of global equities, do not believe that they will necessarily lead regional performances as they did in the first semester 2009.

Rather, investors who ignored US equities early in the year (2009) may wish to reconsider opportunities provided by this market. However, they should keep in mind that while recovery looks entrenched, the US recovery is expected to come in sub-trend, with GDP growth in the recovery phase falling short of previous cycle peaks. With this in mind, investors may seek to focus on opportunities that continue to under-price even the modest economic recovery expecting.

Despite our optimism through to year-end (2009), we must admit that the global recovery story must be strengthened further to sustain the rally into the new year (2010). China, already grappling with rapid loan growth, must moderate its aggressive easing policy of early-2009 and structurally, continue to build its domestic consumer base. As for the US, it needs to transition its economy from a stimulus-led recovery back to a private sector-driven demand story.

On balance, though, while there are certainly concerns on the horizon, news flow over the coming months (Sept 2009 & Beyond) is expected to show not only recovery but, in the case of the US, accelerating recovery that investors have been hoping for, leaving the balance of risk and reward through year-end (2009) still pointed in favour of the reward camp, and creating an opportunity for investors to broaden out their focus from first-half leader (1H2009) emerging markets to include opportunities presented by US markets (2H2009) as well.

State Of Global Economy …

As the global economy returns to the path of a synchronised recovery, thanks to the synchronised massive spending of governments worldwide, manufacturers around the world are also gaining confidence to ramp up production and inventories.

The global Purchasing Managers Index (PMI) has now (Sept 2009) entered the positive territory for the first time since May 2008. The index at 53.1 last month (Aug 2009), rising from 50 in July 2009, provides an early indication that the global manufacturing sector is experiencing recovery in the demand for their products. Such trend will certainly add strength to the economic recovery process.

In the United States, for instance, the PMI for the manufacturing sector, as measured by the Institute for Supply Management, recorded the first expansion in August 2009 with a reading of 52.9, after 19 months of contraction. Any reading above 50 for the index signals an expansion.

As for the European manufacturing sector, the easing contraction has added evidence that the region is emerging from recession. The recent survey of purchasing managers produced an index reading of 48.2 for the euro-area manufacturing sector in August, compared with 46.3 in July 2009. Although any reading below indicates contraction, the rise in the European PMI last month (Aug 2009) was the highest in 14 months.

China is still charging ahead, with its manufacturing sector staying above the 50-mark for the sixth consecutive month. China’s PMI rose at the fastest pace in 16 months in August 2009, with a reading of 54 compared with 53.3 in July.

Similarly, Singapore’s PMI also stayed above the 50-mark for the sixth consecutive month in August 2009, with a reading of 54.4 compared with 51.5 in the previous month.

For most of the economies in Asia, what’s critical in boosting their manufacturing sector is demand from major advanced economies such as the United States and Europe.

This is indicated by the recovery in the import order from the advanced economies from minus 5.6% quarter-on-quarter (q-o-q) in the three months to March 2009 to a growth of 2.9% q-o-q in the April-June 2009 period.

Specifically, the recovery in the imports of the United States from a decline of 6.7% q-o-q in the first quarter 2009 to a growth of 3.5% q-o-q in the second quarter helped lift the exports and industrial production of Asia.

In Singapore, for instance, the industrial production in July 2009 rose 12.4% year-on-year (y-o-y), compared with a slump of 9% y-o-y in the preceding month.

State Of The US Economy …

The Budding Recovery Has Staying Power: Recent business austerity is boosting profits and the need to expand, and rising global growth is lifting exports, all while massive policy efforts continue to

The worst U.S. recession since the 1930s appears to be over. The best sign: Real gross domestic product, the most comprehensive gauge of the economy's ups and downs, almost certainly hit bottom in the second quarter 2009. Monthly data so far suggest a surprisingly strong advance this quarter (3Q2009) with enough momentum to keep the upturn going in the fourth quarter 2009. Still, many investors are skeptical. The improving outlook has succeeded only in setting off a hot debate:

Is the recovery sustainable, or just a temporary bounce fueled by a few one-shot government programs?

The debate will not be settled anytime soon, but several underlying forces make a strong case that the upturn is durable. Already, spending by consumers and businesses, homebuilding, and manufacturing activity have begun the third quarter 2009 with much more oomph than expected, and many economists think annualized GDP growth in the 3%-4% range this quarter (3Q2009) is a real possibility.

The key force at work is the sheer volume of fiscal and monetary policy. Its support of demand this year (2009) and next dwarfs any such effort in the downturns since World War II. To date (Sept 2009), most of the fiscal stimulus has been tax-related, along with other income support. However, much of the stimulus from infrastructure spending and other government outlays is only now (Sept 2009) working its way into the economy. For example, since January 2009 the growth of public construction spending through July 2009 has accelerated to an 18.9% annual rate.

Plus, the Federal Reserve's support of the credit markets will continue to strengthen financial conditions, so crucial to growth, well into 2010. Housing will benefit greatly. Already, the housing component of GDP is set to add to growth this quarter (3Q2009) for the first time in 3 1/2 years.

Plus, with home prices bottoming out, prospects for mortgage-backed securities will improve, helping to further shore up housing while stanching the bleeding on bank balance sheets.

Prospects for business spending are also looking brighter, especially given the surprisingly strong performance of profits, which drive the expansion of outlays and hiring. In the second quarter 2009, profits of nonfinancial corporations, based on the Commerce Dept.'s accounting, rose at a 19.3% annual rate from the first quarter 2009—an especially solid performance for a quarter with falling GDP.

Profit margins also grew last quarter (2Q2009), a testament to the benefits of corporate cost-cutting and productivity gains. Nonfinancial companies are emerging from this recession with margins much higher than at the end of the last recession. With revenues set to pick up in the second half 2009, further gains in profits are a sure bet.

Of course, consumers will be essential to a lasting recovery, and their help will require stronger labor markets. The plus here is that businesses have been extremely conservative in their spending and hiring, which puts them in a good position to gear up quickly as a recovery takes hold. Many are doing so, as the recent easing in job losses suggests. In fact, income growth, the key to any sustained increase in consumer spending, is already getting support from wages and salaries, which rose slightly in July 2009 for the first month in almost a year.

Finally, the upturn is global, with Asia, the Americas, and Europe all set to grow simultaneously. A synchronized recovery will boost the volume of world trade, especially to the benefit of U.S. exporters. Trade typically has been a drag on U.S. growth early in a recovery, as demand picks up in advance of other economies, boosting imports and widening the trade deficit. This time the trade gap is not likely to widen as rapidly, eliminating a potentially large hindrance to growth.
In the past, steep recessions have been followed by robust recoveries as was the case in the 1970s and 1980s.

The current (March – Aug 2009) upturn seems to be starting out that way as businesses restock their exceptionally low inventories. But even if it doesn't maintain its initial burst, the strengthening supports under demand in all major sectors suggest this recovery has legs.

Xingquan/MSports … Why Trading Below Their IPO Prices

2009-09-04T08:56:00.001+08:00

The two Chinese companies listed in Bursa Malaysia have been trading below their IPO prices, although both recently reported improved earnings.

The entry of both companies into Bursa Malaysia garnered much attention as they provide an avenue for local investors to tap the Chinese market, but investors have yet to respond with confidence to the stocks.

There are many views on why the share price performance and trading volume of the Chinese counters are poor.

One is that their IPOs were overpriced. Industry players familiar with the listing process point out that the pricing was done through a market mechanism and that it is unlikely the stocks were mispriced at the time of the IPO.

Industry observers attributing the poor performance of the counters to a lack of understanding of the Chinese market among local investors.

Malaysian investors do not understand the Chinese market yet. That is why they are still staying on the sidelines.

Their IPO prices were not too high. At a PER of around five times, their IPO prices were quite low compared to the PERs of Malaysian manufacturing companies of about seven to eight times. In Malaysia, we only have a population of 27 million, so our market is quite limited. But in China, the market is much larger for the same manufacturing company. Despite this, the pricing of the Chinese companies were lower than that of Malaysian manufacturers … the investment bankers had no choice because Chinese stocks are new to the market here.

It is not surprising that investors are cautious when it comes to investing in Chinese companies, given reports of fraud at some of those listed Singapore, ranging from missing cash to management using company cash to secure personal credit facilities from Chinese banks.

The rational is that Chinese companies are quite difference from Malaysian companies. The SGX bourse has developed due diligence guidelines through experience. These evolved over time and have been significantly enhanced following reports of fraud in a few Chinese companies.

It is understood that while Malaysia does not have guidelines for foreign listing, the due diligence undertaken by the advisers here is thorough.

Moreover, the drop in the share prices op the two Chinese companies happened at the same time as a correction on the Shanghai Stock market. The fall in the prices of the two shoemakers was likely due to recent (Aug 2009) poor marker sentiment. Their performance of the Chinese market, which has been on a downtrend since early August 2009. If you track back, the price patterns of both these counters have a correlation with trading on the Shnaghai market.

When market improves in China, these two counters should rise in tandem. Both are trading at a PER of four times at the present time (Aug 2009), which is half the PERs of shoemakers listed on the Singapore and HKSEX.

These could be local investors have adopted a cautious stance on the Chinese counters. The two companies may have cheap PERs – way below the market’s PER of 20 times – but investors may still adopt for a cautious approach when it comes to investing in them. This is not because the companies are not good per se … it is believed that it has more to do with the industry they are in. These are challenging times and the industry is facing declining margins and is not monopolistic or oligopolistic in nature. The barriers to entry are also very low.

Malaysia Equities' Medium Term Outlook as at 02 Sept 2009

2009-09-02T20:54:00.002+08:00

The local market has risen sharply but may run a little ahead of fundamentals. Macroeconomic fundamentals will have to catch up before the markets can move to a higher level on a sustainable basis.

The FBM KLCI has risen 20.7% in the first-half (1H2009) and has factored in to a large extent improvements in the global economy and rising corporate activities but the easy money has been made and the market may be more challenging in the second half 2009.

Although Malaysia’s valuations were not cheap compared to regional peers, the local market remained attractive as it was less volatile, with stocks which have predictable and sustainable earnings.

Expecting 3Q2009 to be fairly quiet and range-bound pending more evidence of improvement in macroeconomic fundamentals before the next push higher .The next leg of market re-ratings would be earnings-driven set against a backdrop of still-healthy liquidity conditions.

Relative to the region, Malaysia’s valuations were not as compelling as its regional peers due to higher price-to-earnings ratios and lower growth rates with low trading liquidity.

Technically many agree that the stock markets are entering a correction phase. However, the jury is still out on how severe this correction will turn out to be…

It is believed that it is the start of a correction, but whether this will be a major correction that everyone is talking about. Whether this correction will turn out to be a massive moderation of the market – that is a clawback of more than 50% - remains to be seen.

Let’s say that it is a correction to reverse the five months of relentless rise (April – Aug 2009) from 836.21 to 1196.46. It may be gentle at first but let’s see how the world markets also pan out in time to come.

Critics say that this is happening now as growth concerns resurface in light of the recent monetary tightening in China. The good news for investors, however , is that the correction will not be as severe as in previous rallies.

Analysis of the two previous bear rallies – in 1998/1999 and 2001 – indicates that the pullback after troughs tends to be transitory, stretching no longer than two months. And the dips were 15% to 22% off intermittent highs, before rebounding by stronger percentages.

This time around, the correction may be less dramatic because the starting point of the recent upswing was from a depressed trough PPE of 11 times in March 2009, versus 16 times in April 2001. In the immediate term, the market may dip 10% off Aug 2009 high of 1187, forming a base of 1068 in the worst case scenario.

At the end of the day, markets have gone up a lot and risk to reward is not as attractive as before. China aside, movements in the US market must also be taken into consideration. US markets are generally turbulent between Aug and Oct, so some unsteadiness should be expected there. As such 1196.46 may be the peak for the market for now (Aug 2009).

Meanwhile it is worth noting that overseas investors turned net sellers of Malaysian stocks in July 2009 for the first time in four months, as the Southeast Asian nation’s stock market continued to lag behind regional peers.

Foreign funds unloaded US$121 million of Malaysian shares in July 2009, the equivalent of 56 per cent of the previous three months’ inflow. The reversal of fund flows is an “unwelcome surprise for us” and the outflow was “relatively steep”. All its regional peers enjoyed foreign fund inflows in July 2009.”

Foreign funds “lightened” their holdings in stocks such as Genting Malaysia Bhd, Digi.Com Bhd and PLUS Expressways Bhd, he said. Funds added to weightings in banks including Public Bank Bhd, Malayan Banking Bhd and RHB Capital Bhd. Malaysia’s lower liquidity and velocity could be a symptom or cause, of foreign investors’ lack of interest in the market. The net selling could be a temporary hiccup that is consistent with past trends where it was relatively rare for foreign funds to be net buyers for more than three months running.

By RHB … Sept 2009

The FBM KLCI may look vulnerable to a correction in the near term after surging 34% so far this year (2009), but better earnings outlook and a projected return to economic growth next year (2010) will keep the uptrend intact in the longer term.

Although the urge is to turn more risk averse in the near term, investors should position for better returns beyond the next two or three months (Sept 2009 & Beyond).

The firm expects positive economic “datapoints” in the fourth quarter 2009 and upward corporate earnings revision to keep the market’s long-term “uptrend” intact.

It believed any market correction will be quite shallow.

At current levels (Sept 2009), equity measures in Shanghai and Shenzhen had tumbled more than 20% from peaks hit in early August 2009, which fit analysts’ classic definition of a bear market.

By OSK … Sept 2009

Fears of greater anti-speculation controls in China had capped gains in Asian stock markets in recent weeks (Aug 2009) despite Wall Street advances.

Going forward investors pulling are expected to pull out money from the region as valuations are significantly pricier compared with the US.

Despite its view of the FBM KLCI being “expensive”, it raised its call on local stocks to “neutral” from “sell into strength.” The firm also increased its target price for the FBM KLCI to 1,144 points and to 1,265 for 2010.

The brokerage’s year-end fair value was based on 14.5 times earnings for 2010, while next year’s target was derived by putting a higher multiple of 16 times of the same year earnings.

At current levels, the FBM KLCI had risen 34% year to date and 40% from a low point in March 2009. While the leap lagged behind most emerging Asian equity rally in the past months (April 2009-Aug 2009), the valuations appeared to be at a premium compared with its peers.

By HwangDBS … Sept 2009

At 15 times its 2010 earnings and 1.7 times book value, the FBM KLCI was “vulnerable to a correction.” There needs to be further evidence of stronger growth for a sustained upside beyond the current 15 times multiple in the near term.

It has a 2010 year-end (2009) target for the FBM KLCI of 1,240 points and expects local corporate earnings to grow 15% in 2010, after contracting 8.1% this year. It projected a further 11% growth in 2011.

By Tan Teng Boo … Aug 2009

The FBM KLCI is expected to increase between five and 10 per cent from the current level (Aug 2009) by year end (2009).

Tan is also projecting the FBM KLCI to reach 1,500 points within two years (2010 – 2011) depending on the economic development in the country as well as globally. As long as Malaysia does not face major political calamities, the longer-term outlook for Bursa Malaysia remains positive.

On the global economic outlook, Tan believed the global economy led by China has begun a V-shaped recovery and the current (Aug 2009) rally the beginning of a new bull market. The global economy is facing a secular boom with cyclical inflation.

He also believed the global economic contraction in the last three quarters (Oct 2008 – June 2009) was not due to the US sub prime or mortgage problems. Analysis showed that global economic activities contracted only after the collapse of Lehman Brothers on September 15, 2009. In the last twelve months (Aug 2008 – July 2009), the global economy impacted by the US-led financial crisis, went through a very turbulent period, leaving investors totally confused.

By Areca Capital Sdn Bhd … Aug 2009

Fund managers still see value in equities although the local stock market has charged into its fifth month of rally.

Prices for some stocks are a little ‘toppish’ now (Aug 2009) but think there’s room for earnings growth when real economic recovery kicks in and the improvement would help bring valuations down again.

Economists believe faltering global markets may have already bottomed. However, global economies would not see any sustainable recovery until at least next year (2010).

The gradual economic recovery in the US, the biggest import market for most Asian nations, as well as local funds flushed with cash should provide a buffer to a severe correction in the local market.

The fund manager is adopting “cautiously optimistic” stance and will do some stock-picking if the market drops although don’t expect anything major. At this moment (Aug 2009), it invested mainly in blue chips which are liquid.

It maintained that the market would trend upwards “strongly” in two to three years (2010-2011) after the global mess had been sorted out.

By Fortress Capital Asset Management (M) Sdn Bhd … Aug 2009

The FBM KLCI has gone up 41% since mid-March prompting it to re-evaluate his investment strategy. It had trimmed his invested funds from some 90% to about 60% (Early Aug 2009).

They are adopting a cautious short-term stance and have sold ahead of the full release of corporate results. The selldown was to evaluate whether the recent slew of earnings upgrades by brokerages was reasonable or not.

By MIDF Asset Management … Aug 2009

Emerging economies risk experiencing another blow to economic progress given the build-up of stock market bubbles if systemic risks that brought about the economic crisis are not addressed.

Regional markets have been picking up steam since the end of March 2009 on the back of positive economic data and pent-up buying demand. Expectations of greater liquidity in the system from government fiscal stimulus spending have also buoyed market expectations.

It warned that much work was needed to address the systemic risks exposed by the present economic crisis. Liquidity alone does not wash away the problem. Restoring credit lines is essential but to spend at that kind of pace, cutting interest rates to near zero and allowing banks to lend aggressively is scary.

Ironically, the build-up of debt and credit spending that’s happening now (July 2009) was what occurred in the US after the tech bubble popped in 2000. The situation could become as pernicious as in the US today (2009) if risks in the economy were not addressed.

Economic data from the first half of 2009 had shown marked improvement, but there was noindication that this kind of recovery was sustainable. Moreover, countries needed to work to transform their economic model because the export-based model was no longer viable.

All emerging markets are dependent on exports to developed markets, but the demand is no longer there, leaving a void. There is compelling evidence that they will not come back anytime soon. China and India can eventually fill that hole, but that will take time.

This has not stopped market investors from riding on the theme of recovery, however. Market valuations have risen concomitantly with improving economic data, so much so that valuations, at least on Bursa Malaysia Securities, are reaching the high end of the historical trading range.

The increase has prompted some quarters to raise the red flag of a speculative bubble that may be forming on global equity markets.

The benchmark FBM KLCI was trading at 20.49 times price to earnings (PE) on late July 2009, according to Bloomberg data. Bursa’s normalised valuations range from 10 to 20 times PE, with the latter representing peak valuations. The FBM KLCI’s 20.49 times PE ratio was a five-year high, after reaching a low of 9.26 times on Oct 24, 2008. Indonesia’s Jakarta Composite Index valuations also neared a five-year high last Friday at 28.56 times, recovering from a low of 6.77 times on Nov 21, 2008. Singapore’s Straits Times Index, which was revamped in January 2008, also hit its record high last Friday, trading at 16.19 times PE. Hong Kong’s Hang Seng Index, which was valued at 18.55 times PE, neared its five-year high of 20.34 times PE, which was last seen in 2007.

That markets were close to the peaks suggested that investors were expecting corporate earnings to match pre-crisis levels. However, chances were slim that the systemic risks exposed by the crisis had all been completely erased more than a year after the crisis first broke out.

By all accounts, the present rally (March 2009 – July 2009) is being driven by liquidity, but that could not go on forever.

By AMResearch … Aug 2009

Markets were outrunning the economy as equity investors were pricing in a recovery in 2010.

Markets are outrunning the economy, but that’s happening everywhere. The market usualy prices ahead the economy by between six and nine months. The markets are growing to reflect expected potential earnings from next year (2010) even as economies are still contracting.It expects the markets to take corrective measures at some point and based on previous bear market rallies, to correct by between 15% and 22%.

By RAM … Aug 2009

Although a recovery was imminent, it would not be V-shaped — meaning no sudden surge after the trough. Moreover, the global economy was not out of the woods yet.

Developed countries that contribute more than 60% of global output are still in recession, but it is important to note that the recovery process has begun. There are signs that we are on an uptrend, but it is also a slippery slope due to massive wealth destruction. As long as credit flows are subdued, there might be a relapse in the US and European economies, which could trickle down to us.

Though no bubble had developed in key markets, it did not mean that one would not form. In Malaysia, we have not exhibited the classic symptoms of a bubble such as supply outstripping demand, a steep decline in prices and an excess of 20% increase in credit growth over a lengthy period of time.

But often with bubbles, you don’t know you are in one until it pops, and this is an innate failure of the capital markets.

What's NEXT For China Equities Market as at 01 Sept 2009

2009-09-01T10:34:00.000+08:00

Broke 2700 Points!!! …

China's benchmark Shanghai Composite Index may stabilise at around 2,700 points as valuations become more compelling, with any further drop seen prompting officials to take action to prop up the market.
· The 2,700 level is seen as key because it marks the 125-day moving average, the Chinese market definition of a bear market. A fall below that could spur further panic selling after the more than 20% slide in Aug 2009.
· While investors believe the bull run is over in Shanghai, few expect a sustained fall in shares because corporate profits have rebounded this year (2009) along with the surprisingly strong bounce in economic growth.
· Combined Shanghai and Shenzhen A-listed shares are trading at about 25 times forecast earnings for this year (2009) -- a high level but one that is seen as compelling given China's turbo-charged economic growth.
· Forecasts are for Chinese earnings-per-share growth of 22% to 23% this year (2009) and in 2010 compared with historical EPS growth of 35.2%.
· The official Shanghai Securities News reported on Aug 2009 that about half of China's more than 1,600 listed companies that have reported results have seen net profit soar 70% in the second quarter 2009 from the first three months of the year.
· The fall in the stock market is not seen tied to any change of opinion on the economic recovery that saw growth accelerate to a 7.9 percent annual pace in the second quarter 2009, with the latest data prompting economists to upgrade economic forecasts.
· Officials are concerned about the market's sharp retreat. China's three most influential official securities newspapers published bullish comments on Aug 19 2009 and sought to talk up the mood, which is typical in the market's 18-year history.
· Authorities will probably be reluctant to intervene unless the Shanghai Composite falls sharply below 2,500 points in coming weeks (Aug 2009 & Beyond) and they believe panic is starting to grip the market.
· As a first measure, officials would likely try to talk up the economy's strength and the health of corporate profits.
· More serious intervention could involve an announced slowdown in the number of initial public offerings that have started to hit the market in the past month (July 2009) and have been cited as one factor sparking the retreat from a 14-month high earlier in the month (Aug 2009)
· Other intervention could involve China's US$200 billion sovereign fund, China Investment Corp, saying saying it would start buying shares in big state-owned banks, such as Industrial and Commercial Bank of China and Bank of China.
· CIC bought bank shares several times last year (2008) when the market tumbled 65 percent, its biggest yearly drop on record.

Fear of Shanghai Crash Unfounded …

Concerns that the China stock market will crash appear to be unfounded. Why should it? There is ample liquidity in the mainland.

Although the Chinese government is beginning to tighten lending, the republic’s banking sector has lent much more money than projected, with new loans totaling RMB7.73trillion in the first seven months of the year (2009).

Meanwhile, funds keep pouring into China in the form of foreign direct investments. And the fact remains that funds do not flow out of China easily due to strict capital control.

Also, after a 20% fall since Aug 3 2009, China’s stock markets is not that excessively expensive anymore.

For instance, take the valuation figures of the widely used benchmark CSI 300 Index, which tracks the 300 key component stocks listed on Shanghai and Shenzhen stock exchanges. It is trading 30.3 times 2008 earnings, ww.2 times current year (2009) estimated earnings and 18.4 times 2010 earnings.

In comparison, the broader S&P 500 index in the US currently (late Aug 2009) trades at 18.4 times historical earnings, 16.7 times current year (2009) estimated earnings and 13.4 times 2010 earnings.

But given the high expectations of China’s high GDP growth that is projected to hit between 9% and 10% in 2009 and next, the CSI 300’s premium relative to other major intl markets is acceptable.

Taking a deeper look at the CSI 300 index, its top 20 constituent stocks, which have a combined market value of RMB7.2 trillion as at late Aug 2009 and account for over 43.4% weightage of the index, are not excessively priced.

In the top five, BOC (9.23%), China Merchant Bank Co Ltd (3.24%), Ping An Insurance Group Co of China Ltd (3.14%), Citi Securities Co Ltd (2.45%) and China Petroleum & Chemical Corp (2.34%).

To see how the CSI 300 is composed, it is worth nothing that seven of the top 20 weightage stocks are commercial banks. Besides BOC and China Merchants, the other five are Shanghai Pudong Development Bank, Bank Of Communications Industrial Bank Co, China Minsheng Banking, and Industrial and Commercial Bank of China.

Besides the seven commercial banks, two of the top 20 CSI 300 components are in financial services (Ping An and Citic), with three in the steel , aluminium and petroleum sectors. There are two power generation companies, two real estate players, two beverage producers, one railroad operator and a telecommunications company.

While some among the top 20 constituents have high PERs of more than 25 times, it is worth that an average, the seven commercial banks, which collectively command 21.5% of the CSI 300 weightage, are trading 15.46 times of 2008 and 14.43 times current year estimated earnings (2009).

Valuations of banks are considered moderate, given their high loans growth versus the risks in asset quality.

In general, the fact that the composition of CSI 300 is well represented across different sectors and that it is trading at about 22 times 2009 estimated earnings. Shows that its downside is fairly contained from this point (late Aug 2009).

Recent moves by China to open the floodgates for IPOs and its plans to invite foreign listings tend to improve the breath and depth of the stock market, thereby diverting hot money circulating mostly at overpriced lower liners counters and new IPOs.

If the China government is not inclined do divert part of the massive liquidity abroad by relaxing capital control rules, it has to create a bigger pool within with more stock offerings. This will improve the breadth and depth of its stock markets, and enhance their ability to absorb shocks and waves.

Xingquan/MSports … Why Trading Below Their IPO Prices

The two Chinese companies listed in Bursa Malaysia have been trading below their IPO prices, although both recently reported improved earnings.

The entry of both companies into Bursa Malaysia garnered much attention as they provide an avenue for local investors to tap the Chinese market, but investors have yet to respond with confidence to the stocks.

There are many views on why the share price performance and trading volume of the Chinese counters are poor.

One is that their IPOs were overpriced. Industry players familiar with the listing process point out that the pricing was done through a market mechanism and that it is unlikely the stocks were mispriced at the time of the IPO.

Industry observers attributing the poor performance of the counters to a lack of understanding of the Chinese market among local investors.

Malaysian investors do not understand the Chinese market yet. That is why they are still staying on the sidelines.

Their IPO prices were not too high. At a PER of around five times, their IPO prices were quite low compared to the PERs of Malaysian manufacturing companies of about seven to eight times. In Malaysia, we only have a population of 27 million, so our market is quite limited. But in China, the market is much larger for the same manufacturing company. Despite this, the pricing of the Chinese companies were lower than that of Malaysian manufacturers … the investment bankers had no choice because Chinese stocks are new to the market here.

It is not surprising that investors are cautious when it comes to investing in Chinese companies, given reports of fraud at some of those listed Singapore, ranging from missing cash to management using company cash to secure personal credit facilities from Chinese banks.

The rational is that Chinese companies are quite difference from Malaysian companies. The SGX bourse has developed due diligence guidelines through experience. These evolved over time and have been significantly enhanced following reports of fraud in a few Chinese companies.

It is understood that while Malaysia does not have guidelines for foreign listing, the due diligence undertaken by the advisers here is thorough.

Moreover, the drop in the share prices op the two Chinese companies happened at the same time as a correction on the Shanghai Stock market. The fall in the prices of the two shoemakers was likely due to recent (Aug 2009) poor marker sentiment. Their performance of the Chinese market, which has been on a downtrend since early August 2009. If you track back, the price patterns of both these counters have a correlation with trading on the Shnaghai market.

When market improves in China, these two counters should rise in tandem. Both are trading at a PER of four times at the present time (Aug 2009), which is half the PERs of shoemakers listed on the Singapore and HKSEX.

These could be local investors have adopted a cautious stance on the Chinese counters. The two companies may have cheap PERs – way below the market’s PER of 20 times – but investors may still adopt for a cautious approach when it comes to investing in them. This is not because the companies are not good per se … it is believed that it has more to do with the industry they are in. These are challenging times and the industry is facing declining margins and is not monopolistic or oligopolistic in nature. The barriers to entry are also very low.

What's NEXT For US Equities Market as at 01 Sept 2009

2009-09-01T10:30:00.002+08:00

As equity investors ponder whether the recent (Aug 2009) pullback in equities is just a brief pause for breath in an extended rally, fixed-income markets are signalling a less optimistic view of the economy and the consumer.

Until late Aug 2009, equities had diverged from the bearish performance of corporate credit and steady decline in Treasury yields. Then, equities were hit by selling, a move which extended the weakness in credit and boosted government bonds further.

This split in thinking has long been a feature of trading across asset classes, with equities usually reflecting a more optimistic view of the economy and the consumer. But over the Aug 2009, the debate over the sustainability and strength of a recovery in economic activity has intensified.

Equities in Japan, Europe and the UK have also pulled back after a strong rebound from their lows in March 2009. While data from Japan, France and Germany show that their economies have pulled out of a recession, doubts remain about how quickly activity will normalise. There are a number of headwinds in the economy and they are not really going away very quickly or easily.

Economists expect the US will expand in the third quarter 2009, as low inventories are built back up, but recent US data (Aug 2009) has highlighted weak consumption and tighter credit standards. The latest Federal Reserve loan officers survey for the three months ending July 2009, revealed further tightening in lending conditions.

Against a backdrop of high and rising unemployment and declining real incomes, it would be a leap of faith to suggest that this situation is going to change any time soon.

That has fuelled a Treasury rally, with the yield on the 10-year Treasury note back below 3.50 per cent, down from near 3.90 per cent at the end of the first week of August 2009. Once you stabilise, the recession ends, but the reality is that US face very weak growth as consumer balance sheets take time to adjust. There have been solid inflows into Treasuries since yields recently (Aug 2009) peaked.

Institutional investors such as Pimco have recently sought to lower their risk to some areas of the credit market, such as high yield, which has rallied more than 30 per cent this year (Till Aug 2009). High yield has been the winner of the year and it's time to turn cautious.

The second half of the year (2009) is going to see choppy waters for credit and that is a function of the economic reality being pretty weak with credit being range bound.

For many companies, however, cost-cutting translates into slashing jobs or wages, and the bleak employment picture, in turn, weighs heavily on consumer spending and confidence.
Consumers in different income groups have their own reasons to keep a lid on spending, be it high unemployment in the low-income segment, the overlevered balance sheets of the middle class, and lost wealth and fears of tax hikes among high earners.

US Equities have yet to fully reflect the consequences of declining nominal sales and incomes, which in part was evident in the economic data from the latter part of last week (Aug 2009).

The bank warns: "In particular, with an absence of corporate cheerleading for the next couple of months (Sept 2009 & Beyond), the economic news will likely need to improve somewhat for equities to make much headway during the tricky months of September and October 2009.”
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In the past five months (March 2009 – July 2009), the world’s stock markets have gained more than 50 per cent. The big question now (Aug 2009) is: where next? This rally is not unprecedented but history offers few comparisons. Those that exist are all imperfect and contradict each other. But rallies in the last century stand out:

1930. In the wake of the Great Crash, the S&P 500 staged a rally a lot like this one. From its low on November 12 1929, it rallied 47.2 per cent in five months. This fooled many. Anyone who bought at the top of the rally, on April 10 1930, would have lost 83 per cent over the next two years. If there is a rally for the bears to cite in their cause, this is it.

1932. Marking the very bottom of the 1930s’ bear market and arguably the most impressive rally in stock market history, the S&P did twice as well as in this current rally (March 2009 – July 2009), in half the time. It rose by 111 per cent in the 10 weeks from July 8.

This time (March 2009 – July 2009), the lows were never revisited. But the outlook was not good. After that violent upswing, just before the election of Franklin D. Roosevelt, the bear market dragged on for decades, with gains only for opportunists. The S&P fell 25 per cent once more by the end of 1932 and it would fall below its level of September 1932 in 1934 and again in 1938. This was not a great time to buy and hold.

1975. After the savage 1973-74 bear market, stocks enjoyed a 53.8 per cent rally from October 12 1974 to July 15 1975. In one five-month span, it gained 47.1 per cent.

In hindsight, it looks like a cousin of the 1932 rally, as the rally gave way to a bear market that ground on for the rest of the decade. Stocks were no higher three years later. Profits were only for opportunists.

1982. With Paul Volcker at the Federal Reserve still attacking inflation, and Margaret Thatcher and Ronald Reagan applying unpopular economic medicine, the 15-year bear market suddenly ended.

In the five months after August 12 1982, the S&P gained 43 per cent, starting a secular bull market that lasted until the tech bubble burst 18 years later. August 1982 was possibly the best time ever to buy stocks; early 1983 was still a good time.

This is the rally that bulls call to their aid. Those alarmed by the potential for fresh crises in emerging markets can even point out that this rally survived the first great Mexican devaluation crisis, which hit in the early weeks of the equity rally.

What did these rallies have in common?

Pessimism had grown overwhelmingly, with fear far outbalancing greed when they started. Except for 1930, they came near the end of severe recessions. They have both points in common with the current (March 2009 – July 2009) rally.

But there are differences. The rallies of 1932, 1975 and 1982 came when stocks were unambiguously cheap, and were still cheap after the initial 50 per cent rally. The cyclically adjusted price/earnings ratio, a multiple of average earnings over 10 years, was at extreme lows.

But in 1930, stocks never dropped to long-term fair value before rallying and were blatantly expensive by the time the rally ended. This time, prices fell a bit below their long-term average for a few months but the rally has already brought them back to look expensive.

In the critical sense of valuation, then, this rally (March 2009 – July 2009) looks nothing like 1932, 1975 or 1982. It looks a little more like 1930.

The environment of inflation and interest rates differed widely. In 1930, western economies were lapsing into deflation; in 1932, the world was mired in deflation; in 1975, it was stuck in inflation; and in 1982, inflation was high but coming under control.

The current (March 2009 – July 2009) picture does not fit with any of these – consumer price inflation in the west has been tame for decades. Last year (2008)’s crisis created the risk of severe deflation but the prompt decision by governments to throw money at the problem is a huge point of difference from 1930. Those who believe the deflationary scenario can logically forecast a repeat of the 1930 collapse in share prices. But this is a pessimistic point of view.

Parallels with 1982 do not work any better. The 1980s’ huge gains from steadily lowering rates and innovation in the financial sector are not available this time around (2009). The very opposite is more likely.

The 1932 rally came in truly extreme conditions.

But the 1975 rally may be a decent match; it came during a restocking boom after companies had slashed inventories (very much what the market is betting on now (Aug 2009)), at a point when oil prices were volatile and exerting a big influence on the economy.

The world now (Aug 2009) is still different in many important respects from 1975 but this may just be the best comparison. That would suggest the most likely outcome now (Aug 2009) is a protracted dose of directionless trading. For those more optimistic or pessimistic, you have your examples to hang on to.