I want to "outdo" you...

Most of the major financial markets seemed wanting to outdo each other lately, with large drop. The drop ranging from 4% - 15% were experienced in Singapore to Brazil. Dow Jones and Nikkei themselves trying to outdo each other in reaching their 10,000 mark. Commodities challenging each other for a new yearly/years low. Only today, the markets seem to take a breather. Questions were raised on why our KLCI did not drop much compared to its Asian counterparts. There were plenty of explanations for it, so the market players said. The reasons include sell down on KLCI started much earlier than others due to the March 8 factor, political uncertainty and due to weakening of crude palm oil prices since July this year. The smaller foreign participation (could be lesser than 30% now) was also part of the explanation. Counterwise, could the relatively stable market due to large plantation stocks stabilising and large funds accumulating slowly? Could there be opportunity in plantation stocks in this weak and "dangerous" financial market? Like my learned colleague said, "as the US continues to pour money into the market, and the fact most of the money are borrowed, the USD will bound to weaken further. Since all commodities are in USD, commodities prices will be on the rise then to compensate for the weaker dollar, steady demand and for hedging purposes". He also go on to say that "I will not be surprised if world inflation was to hit a higher rate next year" If our coffee shop talk were to come true and economics are so easily explained, shouldn't we consider plantation stocks for our 2009's portfolio? Do you agree? Food for thought. Below is an interesting article which provide some views on how commodities will perform in the near future.

TheEdge: With global economies faltering on signs that the US is slipping into a recession, analysts’ expectations are high that oil prices will continue to fall due to slowing demand globally and a strengthening dollar though some are still hawkish about the commodity’s strength over the longer term.

RAM Holdings Bhd’s group chief economist Yeah Kim Leng (pic) said the softening in demand for oil had also spread to developed and emerging markets. “The bearish sentiment had spread to fast growing economies of BRICs (Brazil, Russia, India and China), where the energy demand was previously the highest. “In the event that the US financial woes are prolonged despite the US$700 billion (RM2.4 trillion) bailout relief for troubled banks, there would be further weakening in demand for oil from the US and this would impact the price of oil,” Yeah told The Edge Financial Daily. He also said oil prices could tumble to US$90 a barrel and below before the end of the year. “Looking at fundamental factors, oil prices now could be in the range of US$60 to US$80 a barrel. While oil prices may experience short spikes, the upward price pressures would be offset by slowing demand,” he said.

However, he said oil prices could regain its footing on any decline in the greenback. A decline in the US currency often attracts investors to buy commodities as a currency hedge. Crude oil for November delivery fell nine cents to US$93.88 a barrel at 2.45pm on the New York Mercantile Exchange last Friday. Prices have dropped 36% from the record US$147.27 a barrel reached on July 11. Some analysts said oil prices were likely to remain at current levels in the short term, as the market would be focused on reduced demand over supply constraints. “There would not be strengthening in oil prices in the immediate term. The dollar has strengthened and it is likely to be gaining strength,” Jupiter Securities head of research Pong Teng Siew said. While oil prices were likely to recover, Pong said it was unlikely to see a strong bull run as it did in the previous quarters. Merrill Lynch, in a recent report, slashed its oil price forecast to US$90 a barrel from US$107 a barrel. It warned that in the “unlikely” event of a synchronous global recession, oil prices could fall to as low as US$50 a barrel. Nonetheless, the investment bank also said the end was not in sight in the commodity supercycle. It predicted that once economic activity recovered, the demand for oil would strengthen and reassert upward pressures on prices. “Energy and commodity demand growth is a secular investment theme that probably has decades to run. “Barring massive gains in energy efficiency in the Organisation for Economic Co-operation and Development economies over the next few decades, strong emerging market demand growth will likely require a substantial increase in global oil supply growth,” it said.

* RBA going for a 50bps cut today? Current interest rate is at 7.0%.

Letting off some hot air only?

Many analysts have turned bearish on the plantation sector. They are maintaining their underweight call and are keeping their crude palm oil assumptions of between RM2,500 to RM3,000 per tonne. (refer here - analysts' rationale). However, some says the fall is only temporary and the "hot air balloon"(and not bubble) is just letting of some hot air for the onslaught upwards again. Jim Rogers is one of them. (Refer here also for some of his other predictions). I tend to agree with him as historically, commodities bull cycle generally last at least 20 years!

Bloomberg: Jim Rogers, who in April 2006 correctly predicted oil would reach US$100 (HK$780) a barrel and gold US$1,000 an ounce, said the fundamentals for commodities are ``astoundingly'' good.The bull market for commodities "has a long way to go,'' said Rogers at an investor conference in Australia. The bull market may end by 2020 based on historical cycles, he said. The Reuters/Jefferies CRB Index had its biggest monthly decline in 28 years in July reversing course after its best first half in 35 years. "We are going to have plenty of setbacks in commodities but when they happen please keep your heads about you, do some more homework, and if you decide that thing is still OK I would suggest you might think about buying more commodities,'' Rogers said.

* Anwar to be charged tomorrow for Sodomy No 2. We have a government which is very "obsessed" with Anwar and thinks of nothing but how to stop/silence the man himself. This is definitely very wrong.

* Australia central bank signals first rate reduction in 7 years. As noted yesterday, the drop in the commodity prices will put more pressure on the AUD.

* S&P has upgraded Malaysian shares to"Market Weight" (ie Neutral) from "Under Weight". It also targets KLCI to hit 1,400 points from earlier estimate of 1,300 points.

* Bloomberg: More reported losses. BNP Paribas's (France's largest bank) 2Q net profit fell 34% as it wrote down debt backed by bond insurers and increased risky loans provisions. Cathay Pacific reports first half yearly loss in 5 years on record jet fuel costs.

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:-

.

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....

Yo....How?

StarBiz: IOI Corp Bhd expects minimal disruption to its group operations following the resignation of group executive director Datuk Yeo How, which will take effect end-July. A company spokesman said Yeo, had been instrumental in ensuring there was a strong management team and good corporate culture. “Besides, group executive director Datuk Lee Yeow Chor, who oversees the group's operations, is also familiar with the areas covered by Yeo. “Hence there should be minimal impact on group operations as his impending resignation had already been discussed awhile back,” she told StarBiz yesterday. On Tuesday, IOI Corp announced Yeo would be leaving the group to pursue a new career. It was learnt Yeo could have accepted a job offer by a Singapore-based plantation group.


Credit Suisse Research said in a note to clients yesterday IOI Corp's valuation premium was affected on concerns over Yeo's departure.
It said the “delicate balance” between executive chairman Tan Sri Lee Shin Cheng's entrepreneurship and Yeo's good capital management and corporate governance would be affected. It downgraded IOI Corp to underperform from outperform and cut its target price to RM7 from RM10.


I believe CS’s down grading is way too drastic. The research outfit cuts practically 30% of their earlier target price due to the departure of Yo, er sorry, Yeo. Sure, the new person taking over him must be a super efficient and experienced guy but how would you quantify the 30% cut. Is the calculation like this?: IOI is basically helmed by 3 main Executive Directors or "Pillars"(Tan Sri Lee, Yeo and Lee Yeow Chor). So each person’s contribution would be 30%. Could CS’s drastic downgrading due to its earlier wrong call for IOI at RM10.00 and now to save face…..just whack it to RM7.00 without raising investors’ queries?


However, the IOI Corp spokesman described Credit Suisse Research's comment and inference as unfair to the company and Yeo for his efforts in putting systems in place over the years. Other analysts said although there might be a momentary spike in the IOI's share price, it was unlikely to be permanently impacted by this news. RHB Research Institute said any knee-jerk reaction in IOI Corp's share price should be temporary, given that there was no change in substantial share ownership and Tan Sri Lee was still the main driver of the business. “Yeo's personal shareholding in IOI Corp is only 0.01% and less than 0.01% for IOI Properties Bhd, so we don’t expect any potential major selldown of Esos (employee share option scheme) shares,” it said in a report.


Yes. Yeo has approximately 712,500 shares in IOI and 4,000 shares in IOIP, ie roughly over RM5 m in value.


RHB Research said Tan Sri Lee would already have someone in mind to replace Yeo and a likely candidate would be Yeow Chor, his eldest son who has been on the board since 1996. It maintains its outperform call with a fair value of RM9.35 per share.


True. Yeow Chor could be the candidate, but can he takeover all this functions from Yeo who has been overseeing finance, commodity marketing and palm based manufacturing for all these years? Yeow Chor’s plate is already full (involved in 4 core business sectors: 1)oil palm plantations, 2)oleo chemical manufacturing, 3)specialty fats and oils and 4)property development and investment) unless some of his existing job functions are passed over to the other ED which is Tan Sri Lee’s brother. This man’s job function in IOI is not clear as it was not mentioned at all in the 2007 Annual Report???


IOI Corp closed 10 sen down at RM7.10. It was the most active counter with 13.52 million shares done.


There were initially two questions in my mind when I saw the news yesterday. I hurriedly typed IOI’s share and asked myself whether there were any impact on the share price and IOI's management from Yeo's departure. The computer screen at that time shows the share price was down 10 sen only at RM7.10. With regard to management, I would say IOI has lost a very valuable asset of the company which may take a while to be replaced. This Malaysian CFO of the year holds 3 very important positions in the Group. He overseas the Group’s finance, commodity marketing and palm based manufacturing business units. As such, his resignation from the company would definitely be felt in many years to come and hopefully IOI will be able get another replacement as capable as Yeo soon.

I was then curious to know “Why would a 51 years old man who is the top 3 guy in this award winning plantation company and who has served the company for last 24 years think of resigning?" Although the reason given was “pursue a new career in a Singapore-based plantation group”, it give rise to other more bigger questions. Why did he choose another plantation based company? Are there any unresolved internal conflicts or is it because he felt bored with the challenges in IOI that he would love to experience bigger challenges? Or is he not paid enough? I am afraid only Yeo and IOI would be able to answer them. For your information, Yeo gets on average RM120,000 per month for his work. (Tan Sri Dato Lee gets RM1.83 mil per month while his son Yeow Chor gets RM120,000 per month-Fees, Bonuses, BIK, EPF and other benefits. Source: 2007 Annual Report)



* Isn’t it ironic?…Yeo joined IOI in 1983. According to IOI’s Annual Report, IOI Group’s business within a short time span of 24 years since 1983 has grown tremendously. The Group’s operating profit for 1993 was RM500 m and has now turned into RM2.2b in 2007. Does Yeo brings good fortune to the company too? Will IOI’s fortune remains as good as before?

*AFP: Central Banks in Indonesia, Philippines, South Korea and Taiwan have been reported to be selling USD to prop up their own currencies lately in a bid to fight inflation stemming from the surging oil prices. This stance is a direct opposite strategy from before where the countries weakened their currencies to boost export of their goods.

*SET falls biggest in 4 months by 2.64% yesterday to closed at 833 pts as foreign investors fled the market mainly on growing apprehension about the country’s political instability. Will we be considered a risky political destination one day or are we already one now based on the political tension we are currently facing?

*Indonesia will quit OPEC soon as they are now a net importer of oil. Daily production for the country is 927,000 bpd while consumption is 1,250,000 bpd. As a comparison, Malaysia’s production and consumption is 750,000 bpd and 500,000 bpd.

*China may allow foreign investors to buy/sell its commodities futures via the expansion of the QFII program soon.