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.