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Sunday, December 27, 2009

Market Commentaries & Technical Analysis as at 28 Dec 2009

Monday, December 14, 2009

Market Commetaries & Technical Analysis as at 14 Dec 2009

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).

Sunday, December 6, 2009

Market Commentaries & Technical Analysis as at 7 Dec 2009

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).