The dreadful call

After witnessing the sell down of Axis from RM1.66 to RM0.35 or -79% within 3 market days and finally seeing it suspended on the 4th day(refer here for other possible reasons), I have started to take a keen notice of the major losers during the trading hours. The main reason was to check whether there is any "domino effect" to other stocks. True enough, one counter that has been affected today was AturMaju(also attracted the attention of Bursa). Its share price plummeted from RM0.695 to RM0.395 or -43% nearing mid day.(refer price movement chart above) This prompted Bursa to issue an UMA Query(Unusual Market Activity) to AturMaju which the company promptly replied during lunch break. The reply was the usual stuff...not aware of this and that. So soon after market starts in the 2nd half, Aturmaju shares came up strongly and it created more than 5 million shares traded compared to its daily average of 30,000 shares! The "buyers" bought the shares till there were no more sellers available at the end of the closing bell! It closed unchanged as if nothing happened at RM0.695. What really happened to this usually illiquid and family owned stock which caused such volatility?

I ask myself whether AturMaju's selling was similar to Axis's which was one of the infamous 8 companies "related" to Global Trader sell down due to margin calls on accounts in March this year (discussed here before). Curiously, I search through the 8 companies' List of 30 Largest Shareholders because this is were I could find out more about the share margin accounts. In addition, the companies latest financial results and announcements were also scrutinised. Here are the glaring findings. Among the 8 companies, 3 companies stand out "calling". AturMaju has 25 largest shareholders whose shares are in margin accounts, Axis has 19 while RPB has 13.(RPB is "next"?) Does the sell down today and days before(for Axis) have something do with insider information or some of the shareholders are really having financial problems and as a result sell down of shares to redeem money back to the financiers? Having many pledge securities account holder in the top 30 list is "dangerous" as it creates a snowballing effect to the share price when these shareholders starts selling if something goes wrong. Remember these shareholders are taking loans to finance this shares. They would have to top up or face force selling. It will be worse if the share trading is illiquid. With respect to Aturmaju, could the reason why it recovered so quickly today is due to major margin shareholders propping up the shares above the margin call level to avoid the dreadful margin call? Will Bursa have a close follow up and reveal to the investing public the reason for such selling and volatility in the first place? It will definitely help to educate the investing public some of the unwritten rules in investment. Knowing Bursa, from the last Global Trader sell down, the findings will probably be no where in sight! MyTake: "Never invest in companies which are illiquid and especially so if they have a big number of margin accounts in its "List of 30 Largest shareholders"

* FT.com: The number of Indian companies listing on the London Stock Exchange is expected to jump by 20% (in which USD1b will be raised) as the Indian economy continued to struggle with inflation and slowing global growth.

* WSJ: General Motors is reducing its salaried head count by 5,000 or 15% of the company's white collar workforce by November as part of the planned cost cuts.

* Reuters: Taiwan's cabinet today approved China's institutional investors to buy into its market in a sign of improving business ties on both sides. "With money, you will gain respect and admiration". How true!

* AP: The US Fed said yesterday it will extend its emergency borrowing program for Wall Street firms by several months and the ECB and the Swiss National Bank will take a similar route. Also to note, the SEC has extended an emergency rule through August 12 to curb abusive short -selling in 19 financial services companies including Fannie and Freddie. Propping up the markets by force??

Better cut losses now!

Maybank is in the news again. The stock surged the most in six months, gaining 7.3 per cent to RM8.10 at 9.08am but closed at RM7.90 today. It has lost 11 per cent since the takeover announcement of an Indonesian bank in late March 2008 (discussed here) which was perceived to be very expensive (bought at 4.6X book value) compared to industry's pricing. The other problem was the anticipated difficulty of raising capital for such hugh amount.

BT: BANK Negara Malaysia has stopped Malayan Banking Bhd's (Maybank) RM8.8 billion purchase of an Indonesian bank on the concern that Maybank may experience substantial losses after Indonesian authorities imposed a new takeover law. Malaysia's biggest lender received a letter from Bank Negara yesterday stating that approval for its purchase of PT Bank Internasional Indonesia TBK (BII) had been revoked. The central bank said Maybank may potentially incur material losses from share selldown and writedown of investment once the new takeover rule by Indonesia's Capital Market and Financial Institution Supervisory Agency (Bapepam) is implemented. Under the new takeover rule, a new controlling shareholder is obliged to divest to public shareholders a minimum of 20 per cent and at least 300 parties within two years after the tender offer is undertaken. Maybank told Bursa Malaysia yesterday that it had attempted to seek a waiver from Bapepam in having to comply with the ruling, but was rejected. "The bank is seeking legal and financial advice on this latest decision from Bank Negara and will further engage with Fullerton Financial Holdings Pte Ltd on the way forward," it said. In March, Maybank had entered into a share sale agreement with Fullerton to buy a 56 per stake in BII for RM4.8 billion, and later make a RM3.8 billion offer to buy the rest of BII from minority shareholders. Maybank was to pay RM4.8 billion to buy all of Sorak Financial Holdings Pte Ltd, which holds 56 per cent of BII. Sorak is owned by Singapore investment arm Temasek (75 per cent) and South Korea's Kookmin Bank (25 per cent). Indonesia's central bank has approved Maybank's acquisition of BII.

MyTake: Bank Negara's revocation of the approval for the proposed purchase came in just 2 days before the last day for the conclusion of the BII deal. The cancellation of deal may results in Maybank losing its deposit paid earlier to Fullerton of RM480m being 10% deposit down payment for BII's buy.(...why are we always in the "receiving" end?). This amount is to be compared with analyst's estimated losses of between RM200m - RM800m if the deal was to go through and the par down was to be carried out. (Note: BII's authorised share capital is about 49b shs, Maybank's purchase price of BII is Rp510, price before suspension Rp460 and recent low Rp360- big sell down tomorrrow in Indonesia?) The effect on Maybank's F/Y ending 30/6/09's net profit of RM3.235m if RM600m is used is almost 19%. Large indeed! What did the brokers in town say? AMMB(SELL TP RM7.55), Affin (ADD TP RM7.80), Alliance(Market Perform TP RM7.30), RHB(Market Perform TP RM7.04), OSK (Neutral TP RM7.80) and Kenanga(Buy TP RM10.10) Wow, with the closing price for Maybank RM7.90, does it mean the consensus TP's range has been reached? However, chart wise, it is pointing north with some resistance at RM8 and RM8.40. It will definitely go up further if the proposal to acquire Pakistani bank MCB -bought at 5.4X Book Value (discussed here) was to be aborted too. How about it Bank Negara?(refer here on Zeti and Khazanah) Also, are you okay with CIMB's foray into Indonesia?

* Going lower by the day. Crude oil is currently USD122 per barrel while CPO closed at RM2,988. However said, it will come up again latter.

* Reuters: Thailand's central bank sold dollars on the currency market today to prevent the baht falling below the 33.50 per dollar level. It seems that the effort for raising interest rate has so far failed to strengthened the baht due to political uncertainties in the country.(even the Thai Finance Minister slams its country's baht management policies) Oh, maybe Bank Negara knew this would happen if it raises interest rate and as such refrained from doing so. Good foresight Zeti!!

* Reuters: Between 2001 and 2007, the US trade deficit with China cost 2-3m American jobs.

* Starbucks admits defeat in Australia as it closes 61 out of 84 stores in the country. A whooping 73% stores!

Real real one

India raised its interest rate again yesterday for the 3rd time in 2 months to fight the persistently high inflation. As such its interest rate now is at 9% from 8.5%. Also on the rise was India's cash reserve ratio which has now gone up from 8.75% to 9%. So far, at least 7 countries in Asia have joined many others around the world in monetary tightening mode. Many agrees it is better to fight inflation now and foregoing growth as a high inflation will be difficult to reduce latter down the road. Raising interest rate will have its negative implications on stock markets, business activities and importantly, employment. Is this the general trend now among central banks around the world in view of the higher inflation? Will there be any winners and losers from the current stance of central banks?

In a simple attempt to answer the above questions, I have listed below are some of the economic figures(hope I remember them correctly) sorted by Country/GDP growth/interest rate/inflation:

US 1.5%/2%/4%

Euro Zone 2.5%/4.25%/4%

India 8%/9%/7%

Malaysia 5%/3.5%/7.7%

China 10%/7.49%/7%

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NZ -0.3%/8%/4%

From the above, I have reworked a simple calculation of the countries real GDP growth(ie nominal GDP- inflation rate) and real interest rate*(Interest rate - inflation rate). The end results are sorted by Country/real GDP/real interest rate/monetary policies.

US -2.5%/-2% -has been reducing interest rate since last year and now paused awaiting real growth

Euro Zone -1.75%/0.25%-raised interest rate recently, may pause as real growth still negative

India -1%/+2%-raised interest rate aggressively lately but may pause as real growth will wosen further

Malaysia 1.5%/-4.2%-did not raised interest rate yet emphasising on real growth

China 2.51%/0.49%-has been on monetary tightening(via capital reserve requirement) but did not raise/reduce interest yet emphasising on real growth and inflation

NZ -8.3%/4%-speeding monetary loosening as real growth simply slows down too much

What does the above mean? In theory, for those with monetary loosening policies, the local currency will see weakness while monetary tightening policies will see stronger currency. For those countries with unbiased policies like Malaysia but having weaker growth and high inflation, we will see the currency weakening further. To counter this effect, the Malaysian central bank can increase the reserve ratio requirements, physical or non physical intervention in the money market to defend its currency etc. In regard to real interest rate, countries with negative rate will be less opportunity for appreciation in the near future. As such, our ringgit will be under pressure unless Bank Negara uses the country's war (foreign currency account) chest to support the local currency. I suspect NZ currency will continue to drop as it continues reducing interest rate but it may be supported as it still gives great interest rate differentials compared to other currency. Looks like most central banks have a "REAL" big task ahead, stay alert! Winners and losers will be decided later!

* Added. This analysis uses borrowing rate instead of 12 mth FD rates. Normally, FD rates are lower than borrowing rates.

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* TheHeraldTribune: White House predicted Bush administration would bequeath a record deficit of USD482b to the next president( it has not accounted for the full cost of military operations in Iraq and Afghanistan and other economic stimulus packages introduced since early this year).

Technical Analysis - July 28 2008

S&P500 (1,258, last week 1,261 or -0.2% w.o.w)

The daily charts; especially the MACD continues to improve during last week. The daily DMI(+ and -) nearly crossed over last week but was separated again due to Thursday's +200 points fall. Short term players are in the market to trade on the early positive trend. The index may find support at 1,232 and 1,1200 while the resistance is at 1,300 and 1,330.

KLSE CI (1,142, last week 1,105 or +3.3% w.ow)

The daily MACD continues to remain on the uptrend although the DMI (+ and -) has not turned positive yet. The index worked extremely hard during last week to maintain the more than 30 points gained and managed to cross above the 200-day ema of 1,115. Short term players are in the market to trade on the early positive uptrend. The index is expected to trade between 1,050 and 1,190.

HangSeng (22,741, last week 21,874 or +3.9% w.o.w )

The daily charts especially the MACD continues to improve while the daily DMI (+ and -) has also shown a positive crossover during last week. The weekly indicators have not turned positive yet but it have since shown a slight hook up and improving. Short term players are in the market to trade on the early positive uptrend. Immediate support lines are at 21,900 and 22,300 while resistance are at 23,500 and 24,000.

Nikkei 225 (13,335, last week 12,804 or +4.1% w.ow)

The daily charts has turned positive during last week as evident by MACD and DMI(+ and -). For weekly charts, the MACD is still in a positive crossover. It was deteriorating on the earlier weeks but has now seems to start improving again. Short term players are in the market to trade on the early positive uptrend. The index is expected to trade between 12,500 to 14,000.

* Bloomberg: ANZ(4th largest Australian bank) says profit may decline 25% on bad debts provisions due to the weak local housing market. Its shares went down 11% to AUD15.74 at mid noon. Provision for bad debts for the current half year was AUD1.2b(last year 1st half: AUD980m). This bad news came after NAB reported higher than expected provisons for bad debts relating to US mortgages.

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* Bloomberg: According to Daiwa Asset Management, AUD rally is coming to an end. It predicted the currency to depreciate by 20% by 2009.

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* Bank Negara kept its OPR unchanged as it seems to be going after growth rather than inflation. Sure, the spike in inflation in June is caused by our own doing and that is why we are not too worried about inflation. Mind you, once inflation rate goes too high, it will be too stuborn to come down. So, our ringgit from now will be under "attack"? (word coined by Top Cat)

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* TheKoreaTimes: South Korea's current account swings to a net surplus in June of USD1.82b (May: deficit USD377.5m). This is the 1st surplus in 7 months as robust exports growth helped offset increased spending on overseas travel and imports. Did the Finance Minister got the figures all wrong as he has recently said that the Current Account figures(one of the few indicators mentioned) has worsened tremendously?

Smart Investing/Trading for the week ending July 25 2008

Weekly US Market Update and Outlook

U.S. stocks brace for more earnings; jobs on tap
Energy sector may steal show; GM, Verizon, Disney also on earnings deck

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Marketwatch: The market will try to regain some momentum next week, another week heavily loaded with earnings, with investors also awaiting the June jobs report and second-quarter growth figures for an update on the health of the economy. "Next week is another peak weak, with 118 S&P 500 companies reporting earnings," said John Butters, an analyst at Thomson Financial. Overall, year-on-year earnings for S&P 500 companies are now expected to have fallen 17.9%. The rate of decline worsened from 17.1% expected last week as results from companies including Washington Mutual and American Express missed expectations. But the market may have a chance to look past ailing financials. Meanwhile, the employment report on Friday is expected to show that the economy lost another 70,000 jobs in July, with the unemployment rate ticking higher to 5.6% from 5.5%. Ahead of this, investors will also monitor a survey of private-sector employment due Wednesday and weekly jobless numbers on Thursday. Also on Thursday, the GDP report is expected to show the economy still grew 2.1% in the second quarter, with a slumping dollar helping to boost exports.

A week to forget

Investors will also try to look past renewed concerns over ailing financials, which once again took the market for a rough ride this past week, erasing optimism over sliding crude-oil prices and government help for mortgage lenders Fannie Mae "A week that began with such promise ended with a whimper," said Ken Tower, chief market strategist at Covered Bridge Tactical. "As Thursday's 6% decline in the financial sector demonstrates, the market is still trying to navigate this bond market minefield." Ailing financial firms posted more dismal results this week. But their shares still rallied through the first half of the week, partly due to investor belief that financial stocks have fallen too much and that a stream of write-downs linked to bad home loans will eventually end. The market was brought back to reality Thursday after news that sales of existing homes sank to their lowest level in a decade in June. As the Dow industrials slumped more than 280 points Thursday, shares of Washington Mutual fell 13% after the bank posted a quarterly loss of $3.33 billion. Still, stocks finished on a positive note Friday, thanks to a better-than-expected report on sales of new homes in June and a continued slide in crude oil prices, which fell 1.8% on the day and nearly 5% on the week to end slightly above $123 a barrel. The Dow rose 21 points to 11,370 on Friday but still fell 1.1% for the week. The S&P 500 index gained 5.2 points to 1,257 on Friday but lost 0.2% on the week. Meanwhile, the Nasdaq Composite managed to gain 30 points, or 1.3%, to 2,310 on Friday and rose 1.1% on the week. The market's ability to look past news Friday that S&P may downgrade Fannie Mae's and Freddie Mac's credit ratings might again lead investors to believe that for now, the worst has already been priced in for financial stocks. The sector is also nearly done reporting results, which might help investors shift focus. Still, with disappointing results from American Express this week, the market will look for signs of how consumer credit is faring when credit card firm Visa reports Wednesday, followed by MasterCard on Thursday.

Will energy steal the show?

Meanwhile, energy might steal the show next week. The sector has fallen hard in recent weeks as crude-oil prices slid, but it managed to eke out gains Friday. Besides Exxon and Chevron, a slew of energy companies are due to report starting with BP PLC on Tuesday. Wednesday will bring results from Allegheny Energy. On Thursday, Chesapeake Energy.

Weeky KLCI Update and Outlook

I Capital on daily KLCI. After testing the influential support level of 1,090, the KLCI has staged a mild recovery this week following the plunge in the overheated oil price. Coupled with the mild curving up of its MACD and DMI, the RSI has also shown a failure-swing point, suggesting that a potential breakout ahead. On top of this, the technical indicators like the RSI, Demand Index, etc are all flashing BULLISH DIVERGENCES, whether on a daily or weekly basis. Are investors simply too pessimistic? I Capital thinks so.

* "Perdana" Mentri Badawi wants to take this opportunity to "kompressed" the Terengganu MB further? Bad blood. Again tit- for-tat? (Discussed here before)

* Is an Olympic medal so important to Malaysia? Gold -RM1m, Silver -RM300,000 and a Bronze -RM100,000. If the country is going to spend such money during such an economic climate, I rather the sportsmen and sportswomen come back from Beijing empty handed.

* Star: Top Cat says "The country's economy seems to face "attacks" every 10 years". He said these attacks could either coincidental or attempts by "unseen hands" to sabotage the economy. Hey frend, care to elaborate "unseen hand" to sabotage the economy? The economic condition we are facing is not only happening here but worldwide. The main reason we are facing a much slower growth and higher inflation than it should be is "self inflicted" as you raised the gasoline prices by 41% suddenly(not to mentioned electricity tariff). As discussed earlier in my postings, we are the ones that are accelerating or "fast forwarding" the inflation situation and as a result slowing down growth tremendously. I am very surprise our Top officials sounded so "unsubstantiated" in their claims.

Revenge in the making?

No I am not talking about the current tit-for-tat between Anwar and Najib or Najib and RPK. It is about the rumoured revenge that the Chinese Government is going to take on the two giant Aussie miners for practising double standards. To me, China may have lost in this "negotiation"(also discussed here previously), but it has gained something precious in return. It's called "wisdom" which is a valuable lesson that can be useful in the future. One thing for sure, irregardless what happens between the iron ore miners and the Chinese producers, high steel prices are here to stay.

UOBKayHian:China is upset with BHP Billiton and Rio Tinto for their two tracked pricing policy of their overseas iron ore sales – a smaller increase for European mills and a substantially bigger one for Chinese mills. Now, Beijing is reportedly looking at a sharply higher export tax on coke to rein in coke exports, and ultimately, iron ore prices. China accounts for about 60% of the global seaborne trade for coke, so any cut in its exports will have an impact on global supply, and thus steel output, and – China hopes, ultimately on
iron ore prices.

China fuming

The Chinese are seriously upset with the giant Australian mining groups, BHP Billiton and Rio Tinto. Key Chinese industry and semi-official representatives in the steel industry are now exploring ways in which they can avenge the ”double standards” of the two mining giants. About 10 days ago, Australian newspapers reported that BHP and Rio Tinto have agreed to a 71% rise in the price of iron ores for European mills, which is significantly lower than the 96.5% they extracted from the Chinese mills for lump ores, and 79.9% for fine ores in June. The different pricing policy is especially galling to the Chinese because each of the two groups sells no more than 3% of their ores to Europe whereas China accounts for nearly 50% of the global seaborne trade in iron ores, and are thus their biggest client. Just three players, BHP, Rio Tinto and CVRD supply 78% of the global seaborne trade in iron ores. Press reports suggested that BHP, planning a hostile takeover of Rio, was eager to show to the European regulators that it was a price taker, hoping to ease fears that any merger with Rio would lead to monopolistic pricing practices. Rio Tinto has also reportedly accepted this range of price increase for its European customers. Two options for China. What can the Chinese do? There are two options:

􀁺 Ban China's exports of coke, or

􀁺 Increase the export tax of coke by 5% to 30%

Option 1: Ban coke exports

This is the more radical of the two options. Coke (coking coal accounts for 93% of the COGS of coke) and iron ore account for about 50-60% of the COGS for a tonne of steel. As the table below shows, China is the world's largest exporter of seaborne coke, accounting for 61% of the global total last year. Any ban in exports would have some impact on the overseas steel
trade and, indirectly, on global iron ore trade. One could argue that retaining coke for domestic mills will encourage domestic steel expansion, and could pick up the slack in iron ore purchases abroad. But, China is currently cracking down on more coke and steel expansion. A tonne of steel uses between 0.5-0.6 tonne of coke. China's 15.3m tonnes of coke exports last year would thus affect about 28m tonnes of world crude steel output. Assuming an average iron content of 0.65 in iron ores, then a mill needs 1.5 tonnes of iron ores to produce a tonne of steel. With 28m tonnes of crude steel output, that will affect 42m tonnes of iron ore sales, which was 5% of global seaborne iron ore sales, or 11% of China's iron ore imports last year. This radical option can thus depress the price of iron ores somewhat and should hurt BHP and Rio Tinto more. The key buyers of China's coke exports are Japan (22% of China's overseas sales), Brazil (15%), Belgium (10%), US (10%), and India (6%). China has just set an export quota of 12.1m tonnes for coke this year, down just about 1% from last year.

Option 2: Raise export tax for coke

This is the more likely scenario. Given that China has been raising the export taxes on resource-based and polluting exports, we see a strong chance of it lifting the export tax on coke from the current 25% to 30%. This would reduce the incentive for coke exporters to sell overseas, which will still have an impact, considering that China is the biggest exporter in the world. But the impact will obviously be smaller than an outright ban.

Conclusion

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Will China again prove to be a paper tiger, allowing major mining giants to turn its great demand into a liability? This is a tempting conclusion as it proved time and again that it failed to get what it wants during the iron ore negotiations in the past few years. However, media reports suggest a simmering real anger at the Australian groups, so we believe that something will be done. Of the two options we outlined above, we believe the more likely short-term scenario is to raise the export duties to 30% for coke, and eventually to ban coke exports in two to three years.

* National Australia Bank, the nation's top lender, book another A830m(USD800m) losses from its exposure to US mortgages. Total provisions made todate is currently A1.01b.



* Reuters: China's securities regulator has ordered fund managers to refrain from making public comments about the Shanghai Stock Exchange Composite Index's loss of more than 50% of its value from its October 2007's peak.



* ChinaDaily: The Chinese government will further enforce the price controls on coal used for power generation, in a move to keep the prices in line and to ensure supplies for thermal power plants.

Do Share Buybacks matter?

Some interesting conclusions by the most bearish broker in town regarding share buyback. It is good to refer back to this report whenever there is a need to refresh our minds about common thoughts of share buybacks by companies and its impact on the underlying conpany's share price.

TheEdge: Analysts frequently argue that share buybacks provide a form of share price support and serve as a leading indicator of value as company share buyback activity is interpreted as ‘insider’ buying and as signs of management’s belief that the stock is undervalued. In this report, we examine the veracity of this thesis within the Malaysian context for the stocks under our coverage. About 36% of the stocks, by market capitalisation, under CLSA Malaysia’s stock universe have a share buyback programme in place. In attempting to answer this question, we examine in detail the individual corporate buyback activity over a one-year period from July 1, 2007 and also on two six-monthly periods, 2H07 and 1H08, as these correspond to different market cycles — in 2H07 the market was in an upward trend while in 1H08 it reversed sharply downwards. We then compare these results against its relative share price performance vs the KLCI.

Bull market buybacks (2H07)

In 2H07, companies collectively bought back 0.7% of outstanding shares. Ann Joo, Resorts and Top Glove bought back the most shares in the upcycle in 2H07, between 1.4%-2.8% of shares outstanding. However, the companies with the best six-month relative performance were those with zero buyback activity — Parkson, IOI and Sunway.

Bear market buybacks (1H08)

In 1H08, as markets fell, companies have been twice as active buying back shares, accumulating 1.2% of share outstanding versus 0.7% in 2H07. The most aggressive buyers were Sunway, IOI and YTL Power which did little in 2H07. But the best performers in the market, Ann Joo, Public and Berjaya Sports Toto, were again not those which were most active. In fact, Sunway was among the worst performing companies in 1H08, despite strong buyback momentum.

And the winners and the losers are…

Aggregating the results for the past 12 months and comparing share price performance with companies’ average purchase price yields some interesting results. Of the 13 companies under CLSA coverage, only Public Bank is currently in the money, while all other companies bought back shares at average prices above current share prices. The worst performing in terms of percentage losses are Sunway Holdings, Top Glove and Resorts (with current share price over 30% down from its average buyback purchase price). Among the big caps, the most active buyback companies are YTL Power, Resorts and IOI Corp, which have bought back between between 2.5%-3% of outstanding shares.

The conclusion is clear: share buybacks cannot be used with great reliability as an indicator for short-term performance. We estimate only a modest 0.4x correlation between relative outperformance versus KLCI against the percentage of shares bought back over the past year.

As a form of capital management, companies have three options to choose from in dealing with its treasury shares: a) Cancel the shares, b) Share distribution back to shareholders as dividend-in-specie and c) Sell/place shares at a higher price. As buybacks are a relatively new form of capital management in Malaysia (corporate Malaysia has only started actively buying back shares in the past two years), not many companies have a track record of visibility with how it treats treasury shares. We believe that the most value-enhancing action is to cancel shares, thereby boosting EPS or returning stock as dividend-in-specie (as a form of tax-free dividend). However, many corporates have not made decisions on what it will do with its treasury shares. Of the 13 companies under coverage, many have also chosen or are indicating intentions to sell shares at higher prices when prices rebound. It is unclear how this benefits minority shareholders directly, as cash accrues back to the company and any benefits remain one step removed from minorities. Only Bumi-Commerce cancels shares on a regular basis, while YTL Power distributes its treasury shares to shareholders. In the current bear scenario where the average cost of buyback is above current share prices, companies have even fewer options available to maximise value — 1) distributing shares could cause further sell down as minorities perceive these to be ‘free’ shares without capital outlay; 2) Placing shares below cost is a value-destroying move, leaving share cancellation as the only viable option, one that seems to meet with resistance when we speak to companies in Malaysia.

We believe that the lack of visibility in treasury shares treatment by companies is a plausible reason why share buybacks have not had a greater positive impact on share prices, unlike more developed markets such as the US and Europe. For now, share buybacks appear to be a very long-term capital management potential story for Malaysian companies.

* NZ lowers its interest rate by 0.25% to 8% today to fight slowing down of its economy, its first in 5 years.

* Inflation in Malaysia rose to 7.7% in June, more than double May's 3.8%(a 27 year high) due to substantial increase in petrol and diesel prices wef June 5. The July's figure is expected to be higher as the increase in electricity tariff comes in early that month. According to Moody's economy, BNM will raise its overnight policy by 0.25% to 3.75% when the policy makers meet tomorrow.

* The US House of Senate passes bill to aid 400,000 house owners to avoid foreclosure and to prevent Fannie/Freddie from collapsing.

* TheStar: The US House of Senate voted 94-0 on Tuesday to move ahead a legislation to curb speculation in oil markets. This bill would require Commodity Futures Trading Commission to set limits on trading in oil markets by investors and speculators and to close a loophole that allow speculators to trade on the London oil market to escape the scrutiny by US regulators.

Flip Flop Bursa

The commencement of Bursa Trade on July 28 2008 (posted here earlier) has been delayed and postponed to a latter date. No reasons were given for the flip flop decision. Will inform you the latest when further information is available.

Not a false start (I hope)

The KLCI was surprisingly strong throughout the day today and closed at 1,139 with a hefty rise of 30 points or 2.7%. The volume of 656m shares was also considered high since there was minimal participation by the retailers. The current financial crisis in the US, weakening world economy, high inflation and local political uncertainties etc have so far managed to keep retailers away from the market. The rise today was attributable to major gains in the US and Asian markets after a few large drop in the crude oil prices for the past 4 days of trading. The rise of major world markets of late have given an "impression" that the stock markets may have seen a temporary bottom after the Fannie/Freddie's financial crisis reemerged last week. This notion holds true as Chart wise, some of the market's daily indicators as discussed earlier this week are showing a temporary base has been formed and prices are moving up again. Above charts are the daily MACDs of S&P 500, Nikkei 225, Hang Seng and KLCI which show an early sign of positive "crossover" which may lead the indices to head higher in the short term. However, other slower indicators like daily DMI/ADX, MMA etc have yet to confirm the short term uptrend. Their confirmation will come in if the market continues to do well in the next few trading sessions. Having said that, as noted previously, there are bound to have ups and downs even in a "long term downtrend" market that we are experiencing now.
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If the KLCI has started to turn positve for the short term, what is the trend for the stocks in general? To find out, I selected twenty stocks each from today's trading sorted by Top Volume, Top Gainers and Top Losers. Using the selections, I look at their charts basing only on the Daily MACD only. Below are my findings:

Top Volume(12 out of 20)

12 short term uptrend stocks (Airasia, MRCB, Resort, Gamuda, AMMB, PJI, Bornoil, Scomi, Ramunia, Tebrau, IJM & Starreit)

Top Gainers(15 out of 20)

15 short term uptrend stocks (Bursa, Commerz, Tanjong, Genting, LCL, Parkson, JTInter, Maybank, MAS, MISC, PetDag, Litrak, RHBCap, PBB-F & PBB)

Top Losers(9 out of 20)

9 short term uptrend stocks (DLady, MPI, Ipmuda, Sunrise, Atrium, Asiatic, Shang, Jtiasa and SapInd). Interestingly, the volume is very low for these stocks and as such may not be advisable to buy these stocks for trading purposes.

From the above, Chart wise, it seems that the underlying shares have seen their temporary bottom and are looking to rise again in the short term. Traders may come in the market, if not already in for now to profit from the trend. The only hope now is that this current rise is not a "false start" because if it is so, we may have to go back to the starting line or a few steps before the starting line again!

Warning! Please access your investment/trade objective before you buy/sell a stock. Always remember to have and entry and exit plan ready. Do your own research for the stocks you wanted to buy/sell. Do not take tips from others unless you are a waiter or waitress!!

* Yahoo Finance: Nouriel Roubini, NYU Professor and Chairman of RGE Monitor says the US government will ultimately need to spend more than USD1T to save Fannie/Freddie as compared to government's estimate of USD25-100b.

* Bloomberg: China's stockpile of unsold new vehicles rose about 50% in the 6 months to June, hitting a four year high, as automakers expanded production and sales growth slowed" An indication that slower growth in China is indeed slowing consumers spending.

Bursa Trade to start July 28 2008

With effect from July 28 2008, Bursa's old trading system "SCORE" will be phased out and replaced by a new system, Bursa Trade.

Among the many new features, I wish to highlight to you some of the important ones especially if you send your orders via internet :

Trading Sessions

1) 8:30-9:00am-pre-opening keyin where at 9am-a final theoretical opening price(TOP*) will be determined
2) 9:00:01am-12:15pm-continuous trading
3)12:15:01-12:20pm-keyin is permitted to determine final theoretical closing price(TCP*) at 12:20pm
4)12:20:01-12:30pm-all orders from now must be done at the TCP
5)2:00-2:30pm-pre-opening keyin where at 2:30pm-a final theoretical opening price(TOP*) will be determined
6) 2:30:01-4:45pm-continuous trading
7)4:45:01-4:50pm-keyin is permitted to determine final theoretical closing price(TCP*) at 4:50pm
8)4:50:01-5:00-all orders from now must be done at the TCP

Others

1) "First to key in, First to get done" basis
2) careful not to key in "market buy or sell" as the mistake could be very costly
3) careful with the selling of odd lots (don't over sell) as there will not be any buyin. Any undelivered shares will be cash settled calculated as follows: 10 bids higher of closing price before delivery + RM100.00
4) odd lots can be partially sold and we can view 5 best quotes for buyers and sellers(similar with normal share prices quotes)
5) odd lot price quotes follow underlying normal share price quotes
6) enhanced surveillance by Bursa-watch out for intentional price fixing during the 5 minutes allowed

* Uses TOP/TCP algorithm and continuous matching mechanism based on price and time priority.

We were told that Bursa will advertise the new trading rules in major newspapers prior to its implementation. If you need further details, please log on to BursaTrade or email me any time.

* Templeton's Mark Mobious sees good bargain after stock markets in China and India declined. The CSI 300 index is valued at 21x reported earnings while the Sensitive Index is at 14x....

* South Korea's Finance Minister warns that the country's economy is going into a serious financial crisis soon although exports are holding firm. Indicators from investment, consumption, job growth and current account are at worrying levels. No wonder Bloomberg reported that Korean won seems to be on the losing streak despite government intervention. The won was last traded at 1,016 to the dollar (please refer here for previous discussion on won).

* BT: UBS(world's 2nd largest currency trader) expects ringgit to decline this week if Bank Negara refrained from raising interest rate amid accelerating inflation. Inflation for June/July are expected to be at the 7% region. So far, Indonesia, Philippines, Vietnam, India and Thailand have raised their interest rate to combat inflation.

* ThomsonFinancial: An unidentified personnel from China Banking Regulatory Commission said "The tight credit policy will not change in the 2nd half". This statement was made following earlier reports of looser credit policy. Also, to note RMB continues to fall for the 3rd day as the Chinese Authorities called for slower appreciation of the currency and thus ending a forgone conclusion that the RMB is on a "one-way bet".(please refer here for previous discussion).

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* The Standard: "Through train to Hong Kong seems to be stucked at the station". The Chinese authorities are not in favour to allow its people to invest in Hong Kong just yet amid ongoing volatility in global financial markets. A dampener for the Hong Kong stock market!!

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* Agencies: India's Finance Minister says economy grew at 9.1% for fiscal period 07/08 while it is estimated to grow 7-8% in the current fiscal period. The Sensex was up 2.5% today at noon time.

Technical Analysis - July 21 2008

S&P500 (1,261, last week 1,239 or -1.7% w.o.w)

The daily charts especially the MACD has improved and has shown a positive cross over during last week. Short term players may move into the market this week if the crossover continues even though the weekly MACD is still weakening. The index may find support at 1,200 and 1,170 while the resistance is at 1,280 and 1,300.

KLSE CI (1,105, last week 1,150 or -3.9% w.ow)

The daily MACD has not crossover yet due to persistent selling last week. Meanwhile, weekly charts continue to weaken. The index has failed to maintain above the 200-day ema of 1,115 and as such facing more selling pressure ahead. The index is expected to trade between 1,050 and 1,150.

HangSeng (21,874, last week 22,185 or -1.4% w.o.w )

The daily charts especially the MACD has improved and has shown a positive cross over during last week. Short term players may move into the market this week if the crossover continues even though weekly MACD is still weakening. Despite going below 21,000 the index managed to stay above the dreadful 21,500 ie the minimum level required to stay within the long term major uptrend support line since 2004. Immediate support is at 21,000 and
21,500 while resistance is at 23,500.

Nikkei 225 (12,804, last week 13,040 or -1.8% w.ow)

The daily charts have weakened further although there are signs of slowing the process. For weekly charts, the MACD is still in a positive crossover but started to hook downwards further to -300(last week -257). The weekly MACD Hist has just turned negative. The index has dropped off from the current short term uptrend line. The weakening of daily/weekly indicators would pressure the index to trade between 12,500 to 13,500. .


* Politics overkill? All major markets are up 2-3% at noon except Malaysia which is down 1.07%.
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* Bloomberg: Aussie dollar could be "on the cusp of a free fall" after reaching a 25 year high and near parity against its US counterparts due to possible rate cut, slower demand for commodities and economy going into recession.
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* Reuters: Vietnam raises gasoline prices by 31% today. The gasoline now retails at 19,000 dong or about RM3.70 per litre. Diesel and fuel oil were also raised by 14.3% and 36.8% respectively. Looks like Vietnam's inflationary problem has gone a few notches higher.
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* SinChew: Sabah's population has gone up by 4-fold from 1970-2005 (35 years) from 650,000 to 3.25m, whereas Sarawak's population has gone up by 1.3 fold from 1m to 2.3m. There are probably more Indonesians/Filipinos(now Malaysian) than Malaysian themselves. Why do we always have to be the "suckers"? We have to "thank" Dr M and the current government for their foresight. Bravo!

Smart Investing/Trading for the week ending July 18 2008

US Market Update and Outlook

Stocks face heavy earnings week with new hope
On tap: Earning from Bank of America, American Express, Apple, Caterpillar

Marketwatch: Investors will start next week -- one of the most loaded of the second-quarter earnings season -- hopeful that a nascent positive tone on Wall Street will continue to lift stocks. Crude oil prices seems to be on a downtrend while earnings so far seem to be not as bad as feared."This was an inflection week," said Alec Young, strategist at Standard & Poor's. "We've switched from never-ending worries about credit, the economy and oil to actually looking at earnings. Although fundamentals still need to improve, stocks precede fundamentals." The past week saw some of the biggest financial institutions, such as Citigroup Inc. post second-quarter results that came in above Wall Street's already lowered expectations. Even Merrill Lynch whose results came in lower than expected, saw its shares rise modestly Friday. According to Thomson Financial, 73% of the 88 S&P 500 firms that posted results last week topped expectations, above the average 60%. "The good thing about bear markets is that they price in such bad news that it becomes easy at some point to surprise positively," said Alec Young, strategist at Standard & Poor's. "This time around, we've seen this happen especially in the financial arena. The results are not good but they're not as bad as people feared." Investors will next week turn to more earnings from the battered financials, with Bank of America and a flurry of regional banks throughout the week. The Dow Jones Industrial Average gained nearly 50 points, or 0.4%, to end at 11,496 on Friday. The S&P 500 ( rose fractionally to 1,260), while the Nasdaq Composite dropped 29 points, or 1.3%, to close at 2,282.

Earnings on tap

Next week, a flood of earnings will greet investors with 158 S&P 500 companies due to report. Overall second-quarter earnings are now expected to have fallen 17.1% from the year earlier level, weighed down by an 81% drop in financial-sector earnings and a 20% drop in the earnings of consumer discretionary firms, according to Thomson Financial. By contrast, the energy sector is expected to post year-over-year earnings growth of 25% and the tech sector of 16%.

Weekly KLCI Update and Outlook

ICap on Weekly KLCI. Given its very bearish MACD and DMI, the KLCI has been falling constantly over the past two months and even the weekly RSI is now oversold. The market sentiment remains fragile even as worries ease over the domestic political concerns. Externally, however, the KLCI is now positioned to benefit from any sort of market rebound. Hence, we would expect KLCI to find strength around present levels unless the monkeys play up again.

* Space tourist/participant also can be a Datuk. What did we benefited from the costly visit? Did I hear years ago that some revolutionary studies will be conducted in space to help mankind? Where are the findings now? We just do not learn!!!

Dun luv you anymore

The KLCI came down 16 points or 1.44% yesterday despite a big gain in the US markets overnight. At the close the index stood at 1,105 well below the support level of 200 day ema which was 1,115. The major reason for the drop yesterday was the sell down of plantation counters. Oh no, remember plantation and oil and gas sectors were the main two sectors actively promoted by research analysts for the last few years? A quick look at the closing figures of the plantation index shows a big drop of 6.6% Out of 42 counters in this sector, 1 was up, 36 were down, 3 were unchanged while 2 were untraded. The plantation related stocks namely Sime(Trading), IOI, KLK, PPBoil(Consumer) and Tradewinds dropped between 2% to 9%. Out of 40 worse performers in Bursa today, 18 counters(or 45%) were from the plantation sectors.

What actually sparked this plantation "bashing"? According to research analysts, it is mainly attributable to the worries of planters' future profits due to:-

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1) expected softening of crude oil and crude palm oil in the coming months

2) continuing build up of crude palm oil stock pile (June 2.03 MT, May 1.9 MT) due to slower demand, change in bio fuel policies and expected increased harvest due to maturing of more newly planted trees and

3) increasing operational cost and windfall tax on profits

Also a worry was the high valuation accorded to plantation stocks as compared to the overall average (average PER 15x as compared to market's average of 11x).

I tend to agree with others that the selling yesterday was mainly sparked off by CIMB's latest research report which call for an UNDERWEIGHT on this sector. Brokerage/research houses which turned bearish recently were HLG, Aseambankers and Standard Chartered. The fact that plantation stocks are widely held by big funds exacerbated the situation further. Below is part of the said CIMB report.

We are turning negative on the plantation sector for the first time in three years. Given the rising regulatory risks and slowing earnings momentum, we can no longer justify the large sector P/E premium and downgrade it from OVERWEIGHT to UNDERWEIGHT. We cut forecasts for all the planters under coverage by 2-20% to account for higher operating costs and changes in windfall tax. We also slash target prices by 12-39% to account for a lower target P/E and weaker earnings prospects. In Malaysia, we downgrade IOI Corp and KLK to UNDERPERFORM while Hap Seng Plantations and Asiatic are cut to NEUTRAL. Sime Darby remains an OUTPERFORM. In Singapore, we have cut Wilmar and Golden Agri to NEUTRAL and Indofood Agri to UNDERPERFORM. In Indonesia, we have cut London Sumatra and Bakrie Sumatra to UNDERPERFORM and reduced Sampoerna Agro to NEUTRAL while maintaining an UNDERPERFORM on Astra Agro.

MyTake: Although CIMB's UNDERWEIGHT call has its rationale, the manner and timing it has changed its stance is too sudden. Imagine you are very Bullish all this while and suddenly zapped, the next thing you know, you have turned very Bearish. Imagine, if you are lovingly married for the last 3 years to your sweetheart and suddenly the very next moment you wanted to divorce her and chase her out immediately. There must be a hint whenever a change of heart comes in isn't it, or is it not? Oh you hide it so well then! Can't CIMB "hint" first by going Neutral earlier and then Underweight? This will save a lot of investors who rely on the recommendation from getting into "trouble" unexpectedly. Furthermore, the windfall tax and inflationary effects, parabolic rise of crude oil and crude palm oil etc are not new as it was the issues months back, why only downgrade now when the market has fallen almost 30% from this year's peak? Did market sentiment play a major role here? Anyway, consider this study mentioned previously by Schroders Singapore, over 200 years -average commodities bull cycle lasted 20 years. Energy bull started 6 years ago while agriculture bull just started 2 years ago. So commodities would probably slowed down for a while before continuing its relentless long journey to the north again latter.

* Bursa's CIO Yew Kim Keong has resigned from the stock exchange taking reponsibility for the hardware failure in the trading system of Bursa on July 3. What about the CEO?

* MIER has cut its forecast of Malaysia's economic growth to 4.6% from 5.4% for 2008 due to higher fuel prices, slowing down of global economy and current political situation of the country.

* Bloomberg: Pakistan's investors stormed out of The Karachi Stock Exchange last Thursday and smashed windows and cursed regulators after the benchmark index fell for the 15th day, the worst losing streak in at least 18 years. I thought they are on a holiday there!

* WSJ on selective short selling rules. "By singling out "speculators" policy makers (in the US) reinforce a message that the free market is a wonderful thing as long as it isn't going against you" How true!

* Bloomberg: Qantas, 3rd largest airline in Asia, will cuts 1,500 jobs(4%) and retires 22 planes to combat higher jet fuel price. This decision is similar to other airlines like America Airlines, Delta Airlines and Scandinavian Airlines. Industry wide losses for 2008 is expected to be more than USD6b. However, planes builders have it good. Airbus and Boeing have bulging order books till 2013 due to backlogs and no cancellation of orders.

* Malaysiakini: Please google search "caanan banana" and relate it to Zimbabwe, PM-DPM, Mugabe- Mahathir's good friend, sodomy and Anwar. A coincidence? You be the judge....

Ranked Last

China has always been ranked No1 in many ways, may it be its population, foreign exchange reserves, exports numbers, growth numbers, carbon emission etc. So it was a surprise to find China in one particularly odd occasion where it is ranked last. Yes, the Shanghai Stock Exchange CI was ranked last in the latest year to date world's stock market performance. It has only yesterday overtaken Vietnam's HCM stock market as the worst performer according to Bloomberg's data. Year to date, the market has dropped slightly more than 50% due to slow down of the economy, rising cost and its impact on corporate profits. Its PE which once peaked in October 2007 of almost 50x or 6,000 points has now gone down to less than 21x or 2,800 plus; which is well below its average PE of 36x.(Please refer to chart provided by "seekingalpha" below for further details).

So is it a good time now to enter China? The Chinese Government has been of late sending signals to the market that it may ease its monetary policy after its inflation declined and growth stalled. The latest June's CPI was 7.1% which was far better than the February's data of 8.7%. The growth for the 2Q was slower at 10.1% as compared to last full year of 11.9%. So by easing monetary policy, the corresponding effect besides encouraging growth and increasing corporate profits would be a shot in the arm for stock market. However, we have to be careful here as China's interpretation of monetary easing may have different meaning other than reducing interest rate.(currently at 7.47% which was unchanged since half a year ago) It may also means lowering the minimum reserve requirement ratios, slower currency appreciation by physical intervention and easing existing credit curbs for properties and business. I believe China will take this window of opportunity to reassess and fine tune its monetary policy while monitoring the on going world economic slowdown, spiralling inflation, weakening stock and property markets and probably the second wave of credit crisis from the US. I believe even if Shanghai were to go up from here (as they hate to be ranked LAST), the upside will probably be capped as the easing of monetary policy alone will not spark a major catalyst for the stock market. It may need further Government actions to spur the market on. The fact that there are many investors who are still caught with shares at the high and awaiting for a chance to dispose them higher may limit the upside of the market.

* Anwar was arrested zealously and released quietly within 24 hours...what does that mean??

* Spain's construction group Martinsa-Fedesa Sa, a company with assets of 10.8b Euro files for bankruptcy protection last Tuesday making it the biggest victim so far of Europe's bursting real-estate bubbles.

* Proton blames its foreign adviser CSFB for its opportunity cost 'saga' of selling MV Agusta at 1 Euro. Shame on the 'savvy' Proton's Board, 'wira' Khazanah, 'perdana' Malaysian Government and Malaysians in general!!

* Thailand's central bank raised interest rate by 0.25% to 3.5% yesterday after holding the rate at 3.25% since last August 2007. We will also be raising our interest rate soon probably after Badawi's goodies package tomorrow and June's CPI announcements.