Lousiest Fund Manager

Today i received a cheque from my investment in Prudential Shariah FX. Do you know how much is it? RM13.02 profit over 3 years or 0.26% return!! This is a capital protected fund that is invested in basket of currencies that bet against the USD. Well as you know currently USD has weakened tremendously against majority of currencies, yet this fund only returned 0.26%. This is really intriguing. Prudential fund managers, you are so damn lousy!! If you can't beat FD rate, you shouldn't be selling investment schemes. Even monkey can perform better.

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.