Maybank’s Rights Issue: What you should know first?

Maybank has recently announced 9 for 20 rights issue at an offer price of RM 2.74, which represent a discount of 43%. Rights issues are offer of new shares to the current shareholders. If you are not an existing shareholder of Maybank, you are not entitled to the rights. There is a big confusion as many people thought they can subscribe Maybank shares at RM 2.74 without owning the shares first. 9 for 20 rights means, you are entitled to 9 rights issue at RM 2.74 for every 20 shares you currently hold. For those who are interested to subscribe to Maybank’s rights here are a six issues to consider:-


(a) Your average price

Suppose you purchase 20 Maybank shares at a current price of RM 4.58, your average price (before transaction costs) is calculate as below

20 shares@ RM 4.58 = RM 91.60
9 rights@ RM 2.74 = RM 25
Total cost = RM 116
Average cost per share is RM 116 dividend by 29 shares = RM 4.00

The rights issue exercise is expected to be completed by July. If the market price were to trade below your average price of RM 4.00, you would have booked in a paper loss. At the rate the global economy is moving, especially in US, UK and Japan, there is a high probability that Maybank price will trade below RM 4.00 by July.

(b) The purpose of rights

Maybank has stated that the proceeds from the rights will be utilized to boost its Tier 1 core capital ratio to 8.1%. from 5.2% (Basle II minimum standard is 4%). Risk capital weighted ratio will improve to 16% from 13% (Basle II minimum standard is 8%). Basically, the capital ratio tells you the amount of capital that the bank maintains to support its risky asset e.g. loans. If the RCWR is 16%, it means that Maybank has 16 cent capital to support every RM 1 of risky asset/loan. This is very essential as some loans will not be repaid and banks must have sufficient capital to write off these bad debts as non performing loan (NPL).

If I read between the lines correctly, it could also mean that Maybank is resigned to the fact that they are going to face a severe financial stress in coming months. In comparison to other Malaysian banks, Maybank has the largest exposure to international operations. That makes Maybank very vulnerable if global financial crisis continue to deteriorate further.

Analysts expect Maybank to write down its Indonesian and Pakistan operations this year by RM 1.2 billion and RM 892 million. That gives a total of around RM 2 billion. The rights issue is expected to raise RM 6 billion. If this worse case scenario materialized, 33% of the proceeds will be used to cover up the losses in Indonesia and Pakistan alone. This certainly destroys shareholders value.

(c) Poor corporate governance

In the past one year, Maybank purchased two banks, BII and MCB. The targeted acquisition, timing and pricing are wrong. Firstly, Maybank paid 4.3 times and 5.2 times premium over net tangible assets for 97% stakes in BII (Indonesia) and 20% stakes in MCB (Pakistan) in 2008. Against the wishes of minority shareholders, the management has gone ahead with the acquisition despite knowing the fact that global financial system is going for meltdown. Malaysian Minority Shareholder Watchdog had on the record registered the strongest protest and even call for the resignation of the board. Unfortunately, it was overruled by the strength of institutional investors like PNB and EPF. This is another testimony of complete failure of shareholder activism on the part of institutional investor. Now you know why EPF gives you a meager return for your savings.

(d) Non performing loan

The reason given by the management, for the reckless acquisition of BII and MCB is due to the loan growth potential of Indonesia and Pakistan. However, emphasizing growth while disregarding risk is sure path to disaster. As global recession deepens, expect more write offs. In addition, as local economy continues its downward spiral, Maybank will be put to severe financial stress by the end of this year. Maybank is like a walking time bomb as it could go the way of Citigroup. Secondly, can anyone think of a rationale to justify investment in Pakistan? Clearly, it is a failed state with high political risk. Yet, Maybank paid a premium of 5.2 times for only 20% stake.

(e) Earnings dilution

The expanded shareholder’s capital due to rights issue is expected dilute the earnings per share by as much as 45% in 2009. This does not take into consideration expected write offs from bad loans and investment. At this moment, Maybank maintains a dividend payout ratio policy of 60%. It means for every RM EPS, Maybank undertakes to pay 60 cent in gross dividend. I do not expect this payout policy to be retained in view of deteriorating global economic conditions. For your information, Maybank has just missed out on the traditional half yearly dividend. Dividend is considered an important variable to value Maybank, as it is considered a high dividend yield stock. Thus, expected lower dividend will lower its current share prices.

(f) Renounceable

For those who do not wish to participate in this rights issue, you can sell your rights entitlement before the acceptance date.

Warren Buffet is not invicible!

Well 2008 was a horrendous year for the investment community. Even the world famous Warren Buffet's wasn't spared from this global crisis. 2008 was the second time whereby Buffet's portfolio has dipped into the negative territory. 2001 was the time when all the dot coms companies were supposedly the new force of the economy and Bufeft missed the boat because the didn't understand the tech sector.
Anyway, read more on Buffet's letter to its shareholder:
http://www.berkshirehathaway.com/letters/2008ltr.pdf

Citigroup: 36% stake by US government

The US government announced the conversion of $25 billion worth of preferred stocks into common equity, thus increasing their stake to 36%. This action forced GIC and Prince Alawaleed tfrom Saudi Arabia to follow suit. GIC now holds 11% in Citigroup. All parties forego their dividend and guaranteed cash flow for a stake in the embattled bank. Nevertheless, the threat of nationalization refuses to go away. Citigroup share prices drop to $1.50/share, the lowest since 1990. The US government still have another option to convert the remaining $20 billion in preferred stocks. This will boost its tangible common equity ratio to 4 or $81 billion. Previously it was below 2, which is considered weak. However, its Tier capital ratio at 11.6% is still the highest in the industry. But it doesn't mean much compare to the vast amount of toxic asset Citigroup is currently holding.

I just with Obama would just come and say "Read my lips, no nationalization, got it?" The flip flop statement by US government and politician in US Congress will only play into the hands of speculators and short sellers. Friday's Wall St 111 points drop is certainly due to Citigroup alone and it won't go away unless effective action is done to solve this problem once and for all. I have suggested creating a bad bank like Danaharta to sweep aside the toxic asset and recapitalize the US financial system. The current plan puts Citgroup in suspension mode. Firstly, Citigroup cannot get out from this mess because of write offs as their revenus would be insufficient to cover the write downs. Secondly, they are a "pariah" in the credit and equity market, unable to raise fund. Unwanted bastard! Thirdly, Citigroup is currently facing the second wave of credit crisis. The first one was just confined to sub prime derivatives instruments. Now it will extend to housing mortgage and credit cards as the economy worsem. I suspect Malaysian banks will be put to the sword end of this year. Finally, Citgroup faces very serious loss of confidence by the day. If this confidence is not restored soon, it will provoke a bank run. I remember 10 years ago, my mum and aunties were asking me whether it is save to put money in Maybank during the Asian currency crisis. Now, my mum ask whether it is save to put money in Citibank! I never thought it would come to this point. Also I remember, I told UTAR students at the beginning of sub prime mortage crisis, that Citigroup is rock solid even at a loss of $20 billion. How wrong was I! I believe all the financial guys were caught off guard. Temasek and GIC lost 30% of its value in 2008. The number is expected to be higher by now as it does not take into consideration the global financial meltdown that started in October 2008. At this moment, technical wise and fundamental factor seems to suggest that the worse is not over yet for Citigroup and the rest of US economy. The US economy contracted by 6.2% GDP last quarter. US companies continue to cut jobs and dividends. The lates is GE, which slashed 66% of its dividend. Earlier JP Morgan annnounced 87% cut in dividend. Even Buffet's portfolio has dropped. Looks like nobody is spared from this crisis, unless you are holding 100% cash or shorting the futures index. The gold continue to climb and oil price prices continue to fall.

What we can learn from Obama

The US maybe committing hundreds of billions to save their economy. Obama claimed that this is an unprecedented situation and not doing out anything is even more disastrous. Yet people are skeptical of his proposal would jumpstart the economy. You can't satisfy everyone. Anyway, that is not what I want to highlight. What I am impressed about Obama is his transparency when he launched his mega rescue package. Check out http://www.recovery.gov/ where he not only detailed the total amount that he is going to spend but also a Gantt chart with milestone. If you click on Obama photo, he even tried to justify his mega billions dollars to save the economy by being transparent. He don't want to be a leader to be doling out dollars behind closed door. Isn't that great to have a leader with a vision and believe in transparency compare to our leader who lauched a RM7 billion but I don't even know where did it go? And now they are talking about launching the second stimulus package with even bigger money without mentioning how we the rakyat can trace their action.

Friday Feb 13th.

Feb 13th. is the first year anniversary of Pak Lah's decision to dissolve the parliament. That led to the historic 12th. GE. Pak Lah though 13 is his lucky number but neither he nor BN leaders realize a political tsunami is developing across peninsular Malaysia. It was a spectecular result on 8 richter scale on the night of March 8th. From a almost total domination in 2004, BN fell in 5+1 states. The rest is history. As March 8 approaches, not much has changed (for the better). Malaysia remains unstable as ever, politically as the rakyat is treated to one sandiwara after another. The latest is the coup d'tat in Perak, masterminded by Najib who is schedule to take over the PM"s post next month. At the rate it is going, Selangor and Kedah might fall even before 13th. GE. The PR government can never depend on royalty to do the right thing for rakyat when it matters. The Sultan of Selangor today has asked the rakyat not to be "biadap". I am not surprise by this statement. The PR and rakyat by now, should know where they stand. All of the royalty either have been bought over or threaten to submission by the ever powerful Najib. PR is wrong to underestimate the survival of BN. If there is any doubt of Najib's ruthelessness, this has been put to rest with the efficiency and speed in execution in toppling the Perak government. Pak Lah lacks this and this contributed to his downfall after 5 years in power! But Najib is like the German Panzer division. Unlike Pak Lah, Najib has shown he has never hesitated in using brute force to have his way. As political stability in Malaysia is in question, no effort has been done to redress the declining economic problem. The government will present a mini budget next month. But the problem is implementation. As it seems, money will only flow into BN rep's and political cronies hands. This will only increase leakages in the economy. Monetary impact has its limit. Any more cuts will not have impact on revitalizing the economy as the rate is already low. But I still have doubts as to whether the government has funds to finance its budget this year, bearing in mind shorftalls in revenues due to lower taxes, commodities prices. Sigh, no end in side for Malaysia.

US Bailout Plan

The US government has announced a bailout plan, estimated at around $1 trillion to repair the US financial system. This is different from the Paulson model which calls for the setting up of a "Bad Bank" model to purchase the toxic assets in the bank's balance sheet. This package will combine public and private funds to purchase toxic assets from the top 8 banks like Citigroup, BOA, Goldman, Well Fargo, JP Morgan. The first step is to provide funds to private investors like private equities and hedge fund to purchase the toxic assets at a discount. The financing will come from the US government with low interest rate. The sweeterner of the deal is Uncle Sam will guarantee these private investors against any lossess beyond a certain limit. For example, if the book value of the toxic asset is $10 million. At this point of time, bank would have written down at least 50% of its value. That is $5 million or the banks will not sell. Private investors will be provided with $ 5 million loan at, say e.g., 2% with a maximum loss of $ 1 million. That means if the value of the asset drops below $ 4 million the lossess will be borne by taxpayers, which is the US government. At this moment, the details are still sketchy. The US Treasury will be conducting a stress testing on the bank's Value at Risk to assess whether anymore new capital needs to injected in the coming months to replenish the bank's capital to facilitate more lending to the tight credit market. Secondly, in order to prevent foreclosure, the US government will be asking the banks to modify the loan agreement with their borrowers with the government providing subsidies. One form is interest rate. Suppose the interest rate is at 5%, the bank reschedules the interest to 2% with the US government paying the 3% shortfall, thus guaranteeing cash flow to US banks. It was reported that $50 billion has been earmarked to fund this subsidiy. One good thing that comes out from this plan is all US banks that accepted the government recovery plan will have to publish quarterly report detailing how these taxpayers money has been spent. CEO salaries and bonus are capped at $500,000 per annum plus there will be restrictions on dividends and corporate perks. The government is instituting a series of drastic best practices of corporat governance on these executives. They will be under spotlight from day one until they pay back every single cent of tax payers money. The government promised no nationalization. I agree with that policy because government are lousy bank managers. They will make matter worse. Having said that, it is good to have Big Brother watching over these corporate lizards for any misdeeds.

Empire Strikers Back

There is an English saying that “Don’t judge a book by its cover”. Or you can rephrase it as “Don’t judge a ruler by his words”. After all his words and credentials, Sultan Azlan Shah’s decision is a big letdown. That shows the monarchy is a self serving toothless paper tiger. The eldest daughter of Azlan is one of the substantial shareholders of Gamuda. Of course this is one of the public listed companies that his children have stake in. As such, if you look from the monetary point of view, Azlan’s decision is rationale. His family is a slave to Najib’s money bag. But the royalty’s reputation in Malaysia and international is in taters. Who can take them seriously next time they talk about justice, impartiality and rule of law? The damage is done the day the royal family chooses to sleep with the devil. The least he could have done is to order the special meeting of the state assembly to institute a vote of no confidence against Nizar’s government. If BN claims they have the majority support, than prove it. What have got to hide? This is a coup and the government is illegitimate.

The three traitors are losers as well. Are they sure Najib will honour the $15 million reward? Ezam was promised $10 million to join UMNO to slander Anwar. When he checked his account in Indonesia, only $100,000 was banked in, according to Gopalakrishnan the MP for Padang Serai. The “kaki capek” lady ought to be conferred honorary Bumiputera status, thanks to her Perak is now ruled by UMNO and the land titles of New Villages are in jeopardy. She has been cursed to death, can never set foot in Perak again. The Chinese are so furious that they burnt hell’s money for her. She must be very “suai”. Who knows she might die clutching her money.

BN’s is celebrating, especially UMNO but it is a matter of winning the battle but losing the war. As Dr M said, the repercussion will be felt in the next 13th. GE. Unfortunately, MCA, MIC and Gerakan will have to bear the anger from the non Malay voters. But of course the current loser is PR. But they can still recover depending on their next course of action. Hopefully, they learn a good lesson from this episode. Sun Tzu Art of War classic advice is know your strength and weakness as well as your enemies. 100 battles 100 victories. But Anwar’s has been adopting wrong strategy from day one. Firstly, talking about defection openly. Secondly, failure to check the enemy within. The Bota guy is a spy. Next time, select capable and people with integrity instead of selecting a form 5 “kaki capek” as a candidate. I suppose the happiest man is Dr M. Although you have lost the battle, you can still win the war.

Lessons from 1929

They say history repeats itself. Like a wave, it repeats itself again and again albeit with different characters. 1929 was well known for its crash, yet we saw crashes after crashes after that. Easy credit was one of the root cause that caused Wall St to soar to stratospheric heights, when eveyone from barber to shoe shines were talking about the market. Stock prices were moving like they have their own lives. And we saw that happened in KLSE '93. Soros well known for its speculative activities, in 1929 there were speculators too. So let's pause awhile and watch the video (http://video.google.com/videoplay?docid=7233622324068640582&hl=en)

Recession Blues

Technically, an economy is in recession if the GDP shrinks by 2 consecutive quarters. While this year’s celebration of CNY is muted and subdued in Kulim ( I believe it’s the same for the rest of Malaysia), I don’t see any strong evidence of a massive crash like the one we are seeing, reading or hearing everyday in US, UK and Europe. STAR reported 12,000 job cuts on Tuesday alone in US which affected all industries. It was 71,000 layoffs on Monday. All together 211,000 jobs have been lost in the month of January alone in US. What is peculiar is not only losing company are slashing jobs but profitable companies like Microsoft which announced $4 billion quarterly earnings are retrenching to the tune of 3,000 job cuts. This implies that the management is expecting a longer and deeper recession beyond 2010. At this moment US and UK economy is going for a free fall. Financial institutions are the most vulnerable. Unfortunately also, they are the heart and soul of the economy, not to mention employment and wealth creation. It is a vicious cycle. Remarkable news today is not only companies are falling like a pack of card but government as well, like in the case of Iceland. Indeed the Titanic has hit the iceberg.

Malaysian economy is expected to slow down drastically after CNY. You will be seeing a lot of hangover blues after Chap Goh Mei. In fact, many won’t have to wait that long as the HR ministry has reported officially 50,000 jobs will be lost. This has prompted Bank Negara to cut interest rates by 0.75% to 2.5% as a pre-emptive measure against economic slowdown. It also reported credit card NPL stood at 2.6% recently. I hope this is true figure. Time will tell.

Anyway, judging from today’s restaurant and food business in Kulim on the third day of CNY, I can say satisfactory. No doubt business has dropped by 30% but this decline is manageable. I believe the number could have been lower if business is willing to slash prices or reduce their profit margin. We have not reached the desperate level of US and UK. The financial institutions are still flush with liquidity. The Chinese have big reserves as they have saved during good times. At the same time, the civil servants are getting increment in pension. By today’s figure, the Malay would have formed nearly 85% of the civil services are they are prolific consumers unlike the kiasu and kiasi Chinese. So the Malays play a big role in generating consumption and investment. The role of government is of great important at this stage. Which is why at this stage, I am still using the word slowdown instead of recession in Malaysia. On a micro level, my estimation is we have a reserve of 18 months till July 2010 before feeling the devastating impact. So if we can stand for another 18 months with the hope that the first light of recovery in US seen by 3rd. quarter 2010, Malaysia will avoid recession. At this moment the odds are only 25% that we will have recession in 2009. Malaysia suffers not from credit crunch but from confidence to lend and borrow. This will be difference between slowdown and recession. I wish all Malaysian Chinese Gong Xi Fa Chai in the year of the OX.

Obama's Mission

Barrack Obama was inaugurated as the 44th. US President after a slip in oath taking ceremony. He will inherit from Bush administration an American economy in the most severe crisis since 1929-1932. He accepted the presidency, with a promise to remake America and claim world leadership. Obama would become the first African American president in history. To call his a black president might not be right as his mother is white. I thought that is only possible in movies. So that is an American Dream fulfilled. In Malaysia, after another crushing defeat in KT, incoming PM, Najib also promise to remake Malaysia. But this is the same filthy emperor in another piece of suit whereas in US it is a complete change in government.

The departure of Bush marks the end of a controversial and violent decade. His cohorts are long gone. Blair was forced out by his party members and Howard was defeated in the Australian general election. 2000 till 2009 is a chaotic time starting with 911, invasions of Iraq and Afghanistan, global terrorist attack, major disasters like the Tsunami and SARS and the current global financial crisis. You have a version of Armageddon.

Citigroup shares continue to plunge to a low of $2.50. This comes after the plan to break the business into 2 core business. Within a space of one year Citigroup has turn from a financial supermarket to a 7-11 store. In the same week, all UK top banks were crushed to pieces. Royal Bank Scotland share price crashed to a low of 10 pence! Barclays massive loss in value resulted in 440 million pounds wipe off for the Abu Dhabi group which happens to be the owner of Manchester City. Immediately, the UK government through BOE launched a 100 billion pounds fund to bail out these trouble banks. The UK government has already acquired 70% stake in RBS and 45% in Lloyds at this moment.

Obama’s administration is mulling on setting a government bank specializing in buying bad assets from troubled major banks. It is similar to the Danaharta and Danamodal set up in 1998. The difference is the Danaharta mechanism was actually created to bail out Dr M’s cronies and Daim’s troubled assets. I suggest the US government buys the toxic asset at face value so that these banks can start lending again and stop the economy downturn. It will get the economy growing again and hence reduce the cost of write downs of bad loans in the future. At this moment, I can’t foresee anyway out as long as these toxic assets are still in the balance sheet and as the economy continues to deteriorate, future write-offs will increase with no change of recovery. The cost of bailing out these banks is less than not bailing out due to its wide systemic risk impact. The credit and capital market faces a severe credit crunch. Immediate action is required.

The breaking up of Citigroup

During the end of last weekend, Citigroup reported another quarter loss of around $8 billion. This brings the total to around $26 billion for 5 quarters since the start of sub prime mortgage crisis. $26 billion is enough to wipe up the whole of Maybank! The result seems to suggest that bottom is still far away. Citigroup is forced to split its business into 2 groups. Citicorp would house the stable and profitable banking business like commercial, investment banking and credit card. Citi would host bad business like loans. This event is significant as it herald the end of the bank holding group era with this development. It looks like Citigroup has to scale down its financial supermarket business to one that fits 7-11 store to survive. I have always maintained that except for the “toxic asset” they held in their balance sheet, its banking business has been profitable. In regards to toxic asset, the US government has agreed to guarantee 90% of the value while Citi will foot the rest. The US government is a major shareholder when it bought $45 billion worth of preference stocks at 10% fixed dividend with an option to convert. The downside is dividend is restricted to 1 cent every quarter for the next 3 years. The last closing price is $3.50 and it has gone down as low a dollar in 1990 during a mild recession. If it does again, I will make my move to swoop the undervalue stocks. Of course I know that Citigroup purchase is risky but I am reminded also on the day Alexender the Great, Napoleon and Hannibal snatched victory from the jaws of defeat at a critical decision decision. I believe now is the time. I am using Citigroup performance as a barometer for economic recovery.

On the political front, BN has lost again. It lost by more than 2000 votes despite spending $250 million for a month’s week campaign. It will badly reflect on Najib, who now has lost 2 consecutive defeats. According to MCA, the Chinese in KT has given solid support to BN with increase in votes. Had they switch, the margin of victory could have been bigger. This is the sentiment you got days before the polling day, as Chinese packed opposition dinner to hear speeches. It looks like it did not translate into votes because the Chinese are “kiasi” and being practical lot. I don’t think Hudud has got anything to do with it. Hudud is not an issue in this by election. The Chinese voted BN because of promises of handouts and threats. Let’s see whether BN will keep its promises. After all, 2012 is only three years from now. At this current sentiment, it is not advisable for BN to antagonize the rakyat again.

The Moon

For the past 4 days, it seems that the MOON or BULAN is big and bright at night. This is the time whereby a lot of mental patients in Hospital Bahagia will go even crazier. They will be in estasy. This can also be interpreted as a good omen for PAS in the KT by election this Saturday. RPK predicted a 5,000 majority vote for PAS candidate. Chinese papers reported that betting syndicate is giving the odd of 9-1 for the PAS candidate. That means at this moment (excluding cheating and vote tampering), BN is staring at a massacre. This will reflect badly on Najib who is poise to take over as PM in less than 3 months time.

If PAS wins, then it is not strange (assuming free and fair election) but what is really strange is by Najib's statement last Friday, re-affirming his confidence that Malaysia will not slip into recession. It seems that Malaysia will buck the trend. Obama had told Americans to expect recession to last for years. BOE has cut interest rate to its lowest level since 1694 because of massive contraction in economy. Singapore PM has told his citizens to brace for the worst. I think in everywhere the sentiment is the same except this great country. At this moment, to be fair, I think there is only 50-50 change we will follow the gang if the recession last one year. If it is more than one year, all bets are off. I can't see why we can be exempted since oil and palm oil prices are falling like nobody business. Not to mention about corruption which is endemic in Malaysia. After CNY, Penang and Kulim will be hit with a violent first wave Tsunami. The latest news I heard from my cousin is Intel will cut 15% of their workforce after CNY. However, it is not known whether it is global or confine to Malaysia only. If it is confined to Malaysia, that would be real bad. In 2007, when Intel starts to offer VSS, everyone was looking forward. Today, the word R is a dreaded word. After all, if you are sacked from the manufacturing sector, there is little possiblity you can get employment in other firms. Unless you go to education which will take this opportunity to squeeze you high and dry. Well at least in WOU, things are not so bad. The VC has guaranteed employment till 2013, provided you perform. It even paid one bonus for 2008. I don't think you can expect one this year. But on the relative terms, consider yourself lucky. It's better than retrenchment or shorter working hour or pay cuts. But because I am a fundamentalist value investor, a deep crisis present good opportunities to buy good business at a deep discount.

BOE Interest Rate Cut

BOE cut interest rates to 1.5%, the lowest since 1694. This underscores the vulnerability of the UK economy which is expected to be officially in recession end of this month. With this rate cut, I expect sterling to depreciate further. I forecast the UK rate will track closely the US rate at 1%. I am expecting another deep cut in 3 months time when global recession hits its peak. I think the rate cut is unavoidable as I have mention that mortgage market in UK is sensitive to interest rate movement. This is to stem the drastic fall in property prices which would pose a systemic threat to the UK financial system. BOE reported fast deteriorating situation of the British economy.

Today, the bears maul the bulls. Looks like the rally is unsustainable with the fall in CPO and oil prices. The current rally is due to the Middle East tension last week. Once situation calms down, the world would be facing a global recession and weak growth in the next 12 months. Penang and Kulim manufacturing sector is bracing for a massive retrenchment, pay cuts and shorter working hour after CNY. So all of us must enjoy our CNY. We must yam yam yam seng because we might not have an opportunity after this for a long time. The winter has set in.

Globetronics announce consolidation of their par value from 10 cent to 50 cent in its bid to reduce speculation and create long term value. I support this decision. It is long over due. But such exercise will not create value in the short term. No cash transaction will take place. Just divide your shares by 5.

Today is the examination board meeting for SBA at WOU. It was a long meeting to discuss the results of 14 courses. The meeting was held up by one course which has a low passing rate. After much deliberation, 10 marks were awarded across the board. This is done after report manipulation and pressure from management to reduce the high failure rate. I did not say a word but I feel the trend in education today is being dominated by consumer power of dollar and cent rather than quality. A high failure rate is blamed on the poor lecturer, difficult content and harder questions. Nobody blamed the students poor quality. Being in this industry of higher learning for 6 years, I think quality of students are dropping by the year. Last Friday, I opened an account with Citibank. Guess what? I was told later that the officer gave me a wrong number! Quality of new bank officers have dropped drastically. They are no longer capable to give good advice, let alone do a good job. Communication skills are poor and knowledge non existence among the new generation of bankers. And this are degree holders with good CGPA. Bah!

Israel's invasion of Gaza

Israel invaded Gaza and the whole world erupted in anger over the decision. They have forgotten that it was Hamas rockets that provoked the Israeli government to take such a drastic military action. Israel was asked to end the campaign and go for a ceasefire. That would be sheer stupidity on Tel Aviv side without getting a firm commitment that rocket attacks will stop. In Sun Tzu Art of War, when you are on the winning side you must keep the pressure on the enemy. The pressure must be relentless until your enemy is subdued. A ceasefire will just allow Hamas fighters and bombers to regroup. Unfortunately, the Middle East tension has caused oil prices to rise again. Now it is going to breach $50 mark. This has caused oil and gas company like KMN to rise and a rally for IOI Corp. Today it is traded at a high of $4.40. Imagine how much it has risen since October ($2.45). Or the fact that it was hovering around $3.5 since the December till last week. But I doubt it can be sustained. Perhaps this is CNY January effect rally? After all, the full impact of an economic slowdown is expected after CNY. The mood in Penang is Malaysia will face a recession. I am more optimistic as I think we can barely avoid a recession due to our strong financial system. The slowdown is due to US recession. Unless I see any deterioration in economic figures, I maintain that we should see the first light of recovery by 2nd quarter 2010.

I have been with WOU for 3 months and today another senior lecturer has resigned. This is the second resignation for the School of Science since I joined in October. Looks like the turnover rate is very high for a university. On my way back, my Proton Iswara car was hit at the back by a lady driver. I felt a loud bang. Penang road is congested during peak hours and if you are not alert you will accidentally bank into people's backside. Bad karma ripen!

Uchi Tech: A Quarterly Review

Based on the last quarter result ending 30th. September, Uchi Tech's revenue declined by 33% quarter to quarter comparison. As a result, its EPS has dropped by 32%. This is expected due to its heavy reliance on US and European markets. Nevertheless, its products target high end customers, who are recession proof unless a prolonged economic recession sets in. However, the good news is this company carries no bank borrowings in its balance sheet. Uchi has a cash of $121 million. In addition its inventories dropped by 18% while retained earnings rose from $72 million to $83 million. Its healthy balance sheet is enough to last 2 years of deep recession. Bear in mind also Uchi's product commands high (about 50%) profit margin.

In regards to institutional shareholding structure the list has not change, implying its long term sustainability:-

(a) Lembaga Tabung Haji 6.6%. They have been actively acquiring shares since November.
(b) ASB 5.5%
(c) ASW 2020 3.15%
(d) ValueCap 3%
(e) EPF 1.45%
(f) GIC of Singapore 0.9%

Notice the presence of ValueCap, ASB and GIC of Singapore. Assuming a drop of dividend to 15 cent this year, Uchi will still yield an astonishing 15.7% at a price of 95 cent! The sustainability of the dividend is almost certain due to its zero gearing and cash rich position. In addition, its major shareholders are also top managers of the company. This ensures that the interest of the shareholder is aligned to that of the manager. This is a classic principal agency theory and good corporate governance practices.

The Fall of Sterling: Propects and Potentials

One important lesson that can be learnt from the current global financial crisis is that no institution, country is immune from its impact. The bigger you are, the harder you fall. One good example is the mighty pound sterling fall from grace. Pound sterling decline substantially compare to the euro. By today, euro has reached parity with the sterling. The impact has even affected EPL clubs as weakness of sterling means less euros to buy or pay the wages of Continental European footballers.

UK economy and financial institutions are the second hardest hit after their American brothers. You can say it is like an Anglo-American crisis. The flight of safety to US Treasury securities add to the woes of pound sterling. But I believe the big decline is unjustified in the long term. Firstly, London's role as the world premier financial centre remains unchallenged even with the introduction of the euro. Secondly, the UK government has set up 50 billion pound sterling fund to bail out Big 8 financial institutions in UK. So far none has utilized the fund. This has avoided serious bank runs and systemic failure in the UK financial system. Thirdly, based on 35 years history, pound sterling has bounced back strongly each time it has declined to a bottom. The last bottom was in 1992 after the sterling was attacked by George Soros. The sterling is just like a high beta stock. The RM 5.2 rate against the sterling is the lowest since 1998. Average rate during this decade is RM 6.

Bank of England interest rates have fallen from a peak of around 5% to only 2% due to the sub prime mortgage crisis and the economic recession. At the same time RM deposit rate remains around 3% as opposed to sterling deposit rate of 1.75%. This has turned the negative interest rate differential to postive. I expect the sterling to fall below RM 5 mark if BOE continues to cut rates. It will depend again on the next quarterly result of the British economy. In UK, the mortgage market is sensitive to interest rates movement. I don't expect a recovery of the UK economy for another 3 more quarters. Thus, I believe more rate cuts are in store in the next 2 quarters. I speculate a cut to 1%, slightly above 0.75% by the US Fed. All things remain constant; sterling is expected to slide below RM 5. That would definitely make the sterling an attractive currency to speculate or invest in. Sterling bear will dominate 2009 but be prepared for a turning point end of this year.

US Dollar & the Equities Market

It is essential for investors and speculators to understand the linkages between the US dollar and global equities market as part of their financial risk assessment. Uncle Sam’s greenback is a much sought after currency during financial crisis and uncertain times. The simple reason is the US is the only superpower left in this world. Superpower in terms of political, military, cultural and of course economic might. No doubt, US faced twin deficits, namely budget and trade deficit. But the underlying strength of US lies in its value of Gross Domestic Product worth trillions of dollars, innovation, creativity and political stability. China might hold $1 trillion of US dollar as its reserves, but it still lacks the factors mentioned above. So Uncle Sam is not bankrupt or about to go bust. The irony is the greenback has been appreciating since October 2008. Compare that with July 2008. What a stark difference. During that time, US government has been printing US dollar bills at a feverish pace and yet its value appreciates. It didn’t go the way of the banana currency.

As global equities market collapse in panic (especially in 8 days of madness in the first 2 weeks in October), investors, speculators, fund managers and sovereign governments shifted funds toward US Treasury securities. Demand for US IOU bills push up its prices to record high while the yield reaches near zero. That means, thanks to the financial crisis, Uncle Sam is borrowing your money for free! The collapse of global equities market led to the price bubble of US Treasury securities. That explains why US dollar gains strength rapidly. Recently, the US Fed cut interest rate to 0.75% and this has contributed to the weakness of the US dollar. But that is due to interest rate factor rather than the lowering of risk aversion among investors. When investors are risk averse, funds will be parked in safe heavens like the US Treasury. Hence, one should expect the fall of the dollar again after calmness has returned to the global equities market. Investors would be more willing to take more risk by selling the dollar and switching into high yield currency asset. At this moment, I think investors are still risk averse. Another indicator one should look is the weakening of the yen. Due to low cost of borrowing, the yen remains a favorite carry trade strategy. In this strategy, speculators and investors will borrow in yen and convert into high yield currency asset.

At this moment there is a serious misalignment of prices in the financial and commodities market. The weakness of the US dollar is one of the chief factor of the stratospheric oil price last July ($147/barrel). Today, it is priced slightly above the $45/barrel. While the price has dropped 70%, has the US dollar appreciated by 70% against the basked major world currencies? As such, this misalignment cannot carry on for long. It is either the oil price will have to rise again or the US dollar will have to appreciate further. The facts are OPEC has cut production and new oil fields exploration has stopped due to low oil price. Once the economy stabilizes, the full impact of the fiscal measures by the Chinese government will be seen. With the severe shortage of oil supplies, prices will roll up again. Palm oil will follow suit. Its current price of $1700 is simply not sustainable. La Nina is expected in May which brings in heavy rainfall. We are already seeing the impact of global warming. Low harvest against high future demand will push prices up again. Thus, the morale of the story is in this complex and interrelated financial markets, one cannot function independently on its own. Now, you understand why La Nina can affect the prices of your butter and margarine.

Enter the Dragon: 2009

Firstly, I would like to wish all global citizens a safe, healthy and prosperous 2009. For the first time in many years, you do not see motorists rushing to petrol station to fill up their petrol tanks. You might wonder why I have not posted the year end 2008 review. The simple reason is after a horrendous year we all have encountered, this is the last thing I want to recall. I am more interested in what can be expected in 2009. It's better to look at present rather than the past. Enough said, looks like it's a wet New Year's eve and day. Rather than drenched in cold and wet rain, I prefer the comfort of hot meal 4 course dinner of steam fish and crabs and chicken bean sprout (better known as “Nga Choe Kai”) with my parents and relatives. It is to celebrate the old man's 65th. birthday recently. Besides that, being out with those hooligans on the street in Gurney Drive is a risk not worth taking. Times have changed. Situation is no longer as secured and comfortable as it used to be.

This is expected to be a difficult year. It happens to be the 80th. anniversary of the Great Depression of 1929-1932. Keynes went on to introduce his famous classical aggregate demand theory. Benjamin Graham went on to write his classical value investment philosophy titled “Security Analysis”, after nearly went bankrupt due to the Wall Street crash in 1929. 2009 provides the best opportunity to test the validity of Graham's and Buffet's value investment philosophy. I have not lost faith in value investment despite big paper loss in 2008. How can one be wrong if you are right in assessing its intrinsic value? In fact, market reaction should be ignored as “noise”. One must buy according to the value of the business. Let me quote Buffet's famous advice “When people are greedy, you should be fearful and when people are fearful, you should be greedy". I believe one should be greedy in 2009. How often do we come across such rare opportunity? The last major crisis was in 1998. An opportunity every 10 or 12 years is worth taking in terms of risk.

Malaysia should brace for the worst after CNY. In Penang and Kulim, manufacturing sector is sliding into a major slowdown. Retrenchment, pay cuts and shorter working time are no longer new news. Everyone is bracing for the worst after CNY when CEOs and Chinaman towkays are expected to announce another round of bad news. Nevertheless, I do not think the global economy will reach the scale of 1929-1932. I am betting on it based on the following factors.

Firstly, major central banks around the world led by the US Fed are proactive in injecting liquidity into the financial system to the extent of nationalizing financial institutions in US and UK. In addition, interest rates have been slashed to near zero. Bailouts have been approved to purchase “toxic asset” like sub prime mortgage instruments. The bail outs have been extended to the automaker as well.

Secondly, it's the financial institutions that have lost money as money remain circulated somewhere. If the bank has lost money, the money must be in the hands of an individual or organization. Thus, no money has disappeared. In fact the supply of money has increased as central banks inject more liquidity into the financial institutions. For example, the US government has injected $700 billion through its bailout plan since October 2008. As such, I expect the “mother of all super bulls” once stability is regained due to awesome liquidity.

Thirdly, don't discount the large savings rate and trade surplus of China. The Chinese government has started to pump prime its economy. The Chinese government cannot afford a prolong recession or the mandate from heaven to rule for the Communist party will expire.

Finally, the regulatory standards of financial institutions are much more sophisticated than in 1929. Prior to 1929, there is no international initiative as Basle II or bank deposit insurance scheme. Now, not only we have deposit insurance, all governments including US are providing blanket guarantee on deposit till 2010 to prevent bank runs. The US government is now a major stakeholder in Citigroup, AIG, Fannie Mae and Freddie Mac to prevent systemic crisis in the international financial system. The same happen in UK when BOE bought stakes in major banks to prevent systemic failure. With all these aggressive measures, how can we fail? The risk of failure is remote. It is like you are given the examination questions together with the answers. You have to be a real big idiot to fail the exam.

All is not that bad in Malaysia. Malaysian banks do not lack liquidity but only confidence to lend. As such, I am retaining the list of my Dream Team Portfolio for Malaysia and US. I might add some good value companies this year as valuation is getting cheaper by the days. Recovery is certain but I have no idea when. Buddhist principle emphasizes the concept of impermanence. Since, the market has been on the decline for quite some time, the next step is up. The bulls are hibernating waiting for the right time to crush the bears. So enjoy your beer, get soaked under the rain but don't forget the back seat belt on your way back. The police will have bionic eyes to spot offenders. Don't start the first day of the year $300 poorer.

PS: I have decided not to continue Empire Strikes Back sequel. The outcome has been determined. Najib will take over as PM and Anwar has lost. For a change, the bad guy wins in the end. That is more realistic in Malaysia.