India bans futures trading

The Sun: The Indian government has banned futures trading in four commodities to tame inflation. The finance ministry late Wednesday banned futures trading in chana, soya complex, rubber and potato to check the rising prices of food grain and other essential commodities. Only a day later, a member of an official expert panel has questioned the move, saying it would only hurt farmers. Sharad Joshi, a farmers leader and member of the government's Expert Committee of Futures Market, termed it as an unfortunate move.“The committee has made it clear that the forward markets have nothing to with inflation. Futures trading in in fact helping farmers get better prices for their produce. The ban will affect the farmers,” he said. India's annual rate of inflation has been hovering well over seven percent in recent weeks, putting the government under pressure.

MyTake: Very bold and drastic move by the Indian Forward Markets Commission to stop futures trading. I guess it is easier to do it in a "localised" futures market compared to a "internationalised" futures market. In fact. India has a year ago banned rice and wheat futures. Will all these steps help to lower inflation? Will stopping futures trade or intervening causes commodities shortage as no farmers will plough the land as the prices remains low and unprofitable? To answer this lets look at the broader markets. Firstly, let us analyse the reasons for price increase in a futures market. Price increase are mainly due to a) increased demand(eg China, India, Middle East and other emerging countries' consumption have been increasing rapidly as the population becomes more affluent), b) supply interruption(due to social/political situations), c) weakening of a main trading currency USD(due to US monetary loosening policy), d) increased money supply(ie "printing money" into the economy resulting "too much money chasing too few goods" and e)speculation. There are many suggestions raised to counter the price increase. Some of the main proposals are: 1) slows down growth of emerging countries, 2) "force" the US to appreciate USD, 3) appreciate own country's currency, 4) raised interest rate further, 5) increased banks' reserve ratio further, 6) intervention in the futures market (egs currency and oil) and etc. Nobody exactly know the correlation of the solutions above to lower prices as they are many factors to take into account. Take example of appreciating own currency and raising interest rates. Over the last year or so, currencies and interest rates of China and Australia have gone up substantially but these countries are still having high inflation problems. My solutions to lower futures prices while taking into the account of ever increasing demand would be to 1) pressure the US to start appreciating its dollar again, 2) start tightening and amending the rules and regulations pertaining to futures trading to minimise speculation or manipulation (egs increased deposit amount of futures contract, requiring all buyers/sellers stating their reason for buying/selling with supporting documents and investigate all big programmed buying/selling contracts etc) and 3) sudden concerted intervention by Governments in the futures markets*(but I suspect it will be difficult to be implemented as it would be costly and subject to heavy criticism). I will not recommend stopping futures trading all together. I know it will be difficult to determine who are genuinely buying the product for hedging, trading, speculating or manipulating. Intervention may distort efficient pricing and against the free market spirit but if nothing is done now, how sure are you that the price we are buying now are not distorted and efficient?

* Just to refresh our minds, HK government in August 1998 successfully intervened in the stock market and related futures market from collapsing and managed to chased away speculators and manipulators. The manipulators were having a good time in HK before that as they "double market play" by shorting the markets and its currency at the same time and nearly brings HK to its knees. At that time, the Hang Seng index has fallen over 50% in the preceding year due to the collapse of stock and property markets. Money spent on intervention- HKD120b.

Big Firms Bet on WiMax

AFP/TheSun: In a major bet on WiMax wireless Internet, Sprint Nextel and Clearwire said Wednesday they would combine their networks in a new company with investment from Google, Intel and others. The new company, to be named Clearwire, will deploy a nationwide WiMax network that will "dramatically enhance the speed and manner in which customers access all that the Internet has to offer at home, in the office and on the road," according to a joint statement.The new venture offers a big boost for WiMax, which allows computers to access the Internet wirelessly with a wider reach than the popular Wi-Fi technology. WiMax uses a licensed channel of radio spectrum and can transmit, according to its backers, to an area as much as 50 kilometers (30 miles) with a stronger signal than Wi-Fi and access faster than most current devices.The new firm will have investments from Internet search giant Google, computer chip maker Intel, cable firms Comcast and Time Warner Cable and service provider Bright House Networks. The firms agreed to invest a total of USD3.2 billion dollars in the new company. "The power of the mobile Internet, which offers speed and mobility, home and away, on any device or screen, will fundamentally transform the communications landscape in our country," said Clearwire chairman Craig McCaw, who would become non-executive chairman of the firm to be based in Washington state. "We believe that the new Clearwire will operate one of the fastest and most capable broadband wireless networks ever conceived, giving us the opportunity to return the US to a leadership position in the global wireless industry." Yankee Group, a research firm, estimates that 58 million people worldwide will use WiMax by 2012. Other WiMax projects are being deployed in Europe and Asia.

MyTake: Reading the above set my mind to find out the current situation of companies rolling out WiMax in Malaysia. It has been more than a year since the WiMax 2.3 GHz spectrum licenses were offered to 4 smallish companies, namely Redtone-CNX, Bizsurf -YTLE, AsiaspaceDotcom and Packet One-Green Packet. Are they ready to roll out WiMax soon? I would say NO. As noted in The Star on April 25, Malaysia's WiMax roll out will be delayed till the end of 2009 or even latter because the US themselves are closed to roll out their own WiMax 2.5 GHz spectrum scheduled in June and the certification of standards authority, WiMax Forum has given its priority to certify the equipment and transmission using that frequency. The 2.3 GHz spectrum machines will have to wait. So how are these companies going to roll out WiMax since all their equipments are not certified yet? Why haven't the companies come out to inform the general investing public about this possible delay? Or do they need certification at all? Packet One, the most likely provider to roll out this service first expects to launch their product in June 2008. Will they be going ahead without the needed pre-certification? If the rolling out be delayed, what will be the funding effects be and will 3G companies be able to take advantage to push deeper into the untapped market? Can somebody kind enough to explain?

* On WiMax, it was touted as what "GSM was to the mobile voice world". WiMax was described as the wireless technology providing wireless connectivity to internet over long distances. Wimax is said to be 4X faster than WIFI and 1/10 of the cost as it uses base stations rather than wired connections.

* On 3G space, Digi will now be able to rival Celcom and Maxis after Timedotcom assigns its 3G spectrum to Digi with a fee of RM12.5m each year. Digi is likely to spend RM800 m on infrastructure over next 3 years and will break even and profit after the 3rd year.

can u sms me plz?

TheEdge: Malaysia ranks sixth in the world in terms of total SMS volume, behind China, the Philippines, Japan, Indonesia and India, Maxis head of strategy and new businesses Dr Nikolai Dobberstein said. Malaysia came ahead of countries like the UK and South Korea, he said, quoting data from Gartner research that showed SMS volume growing 20% last year. About 50 billion SMSes were generated in Malaysia last year, behind India’s 70 billion and Indonesia’s 90 billion. China is well ahead in the lead with approximately 560 billion SMSes, followed by the Philippines’ 430 billion and Japan’s 190 billion. Malaysia has 23.3 million registered mobile phone users as at end-2007, translating to an 86% mobile penetration.

MyTake: I am not sure how accurate the data is but here are my quick conclusions based on the above:-

1)Asians luv 2 sms

2)Asians veli clever 2 save $

3)Asians hv many rumours 2 spread

4)Asians losing the personal/human touch?

5)Asians like 2 do things fast

6)Except for Japan, people in advanced countries uses telephone/email/send smoke signal/telepathy more than smses

* Beijing Olympic torch lits atop of Qomolangma (or Mt Everest to the Westerners) today. This mountain is the tallest in the world with a height of 8,844.43 meter peak.

* Oil prices touches almost USD124 per barrel today, another record high. I may be repeating the same mantra like just anybody else. Oil prices goes up due to 1) weakening USD, 2)increased in real demand, 3)supply constraint due to social/political situations (Nigeria, Iran and Iraq), 4)reduced production by OPEC since 2006 and 5)speculation. All the above problems are equally hard to solve but I believe oil price will only go down when there is intervention or the real demand dwindles...despite the slowing down of global growth, I am afraid this may not come so soon..watch out for China, India and the Middle East.

Steely as it goes

According to UOB KayHian, China may accept the 85% price hike for iron ore(includes a freight premium) from BHP Billiton and Rio Tonto for a 1 year contract. To recap, earlier this year, Asian steel mills and the Brazil-based CVRD agreed on a 65% increase in iron ore price for 2008. This topic was discussed earlier here. The acceptance was widely expected as China seems not to have enough of raw materials(ie iron ore/scrap metals) for its production of crude steel while the demand is ever increasing. As the biggest steel producer in the world with limited reserves, China imported over 383m tonnes of iron ore and concentrate in 2007. Most of the steel mills in China rely at least partially on overseas supply of iron. Steel mills face great pressure from rising raw material costs and but it is likely to pass the cost to the consumers at a much higher percentage of increase. The latest acceptance by China to buy at a higher iron ore price in addition to operating costs (i.e. thermal coal, coke, power tariff, etc.) will increase the millers' cost of production. Unless China's demand for steel reduces due to the slow down of its economy, steel prices would definitely on the rise again. The supply constraint and hugh demand within China and escallating raw material cost forced the Chinese Government to impose export duties on its semi-finished and finished goods (billets, bars, wire rods and pipes) in addition to its removal of the rebate on VAT for these products. China in curbing export and the growing need for steel products by other developing countries augurs well for the steel sector outside China. The strong prospect of steel sector is underpinned by rising international steel and steel product prices and strong steel demand locally and overseas egs Singapore's Intergrated Resorts, India and Middle East Countries. Amongst the steel companies in Malaysia, I would consider Ann Joo Resources Bhd and Kinsteel Bhd(with the spinoff from the listing of Perwaja this year) as the most complete intergrated player which have presence in the upstream, midstream and downstream segments. With efficient and larger production infrastructure already in place, they are ready to ride on this commodity boom. Ann Joo especially has a strong management team that has so far provided an excellent track record in effective inventory management and procurement strategies. Ann Joo has a P/E of 7X FY09 -eps 09 of 50sen while Kinsteel has a P/E of 7X FY09-eps 09 of 19 sen. The expected valuation of these companies may have to be revised again soon with the coming up of good quarter results. As noted, Ann Joo's latest 1Q09 y-o-y growth in net profit was 600% with a revenue of RM838m and net profit of RM96.3m.

* More than 60,000 people are believed to be dead or missing in a devastating cyclone that hit Myanmar on May 2. Interestingly in a study done on insurance claims by Swiss Re, last year itself, there were 149 natural and man made disasters(13,800 people dead/missing) in Asia with an insurance payout for property and business for USD3.5b. On the contrary, in Europe during the summer storm(1,088 people dead/missing) the insurance payout was USD12.43b. Are Asia's businesses and properties under insured? Pretty much so.

China tightens rules on stock incentive schemes

China's Market Authorities, as expected, have been actively "managing" the stock market lately. Today, it has came out with another "market friendly" new rules on stock options plans for executives and major shareholders with the aim to improve corporate governance, curb abuses and reduce market speculation. This new move is the third so far after the Authorities introduced the off market rules and reduction of stamp duty on share transaction weeks ago. So far, the market has reacted positively as it has risen for about 20% from its low of 3,000 points.

Reuters: China's securities regulator has tightened rules on stock incentive plans for executives as it seeks to bolster corporate governance and curb abuses that favoured major shareholders while fanning market speculation. Companies will be barred from making major announcements such as share placements, capital injections or convertible bond issues for 30 days after initiating a stock incentive scheme, the China Securities Regulatory Commission said in rules published in the official China Securities Journal on Wednesday. Similarly, incentive schemes could not be launched within 30 days after a major corporate announcement. Stocks granted as incentives must also not be priced more than 50 percent below the company's average share price during the 20 trading days prior to the announcement of the scheme. China formally endorsed management incentive programmes, which grant executives the right to buy a specified number of shares at a stipulated price, in 2006, but no such schemes have received regulatory approval for nearly a year. "There were many problems in the pilot programme. Some controlling shareholders put together plans that were favourable to themselves, regardless of the interests of smaller shareholders," said Jiang Jianrong, an analyst at Shenyin Wanguo Securities Co. "The new rules are designed to introduce some checks and balances and greater transparency." She expected regulatory approvals of incentive schemes to resume following the adoption of the new rules. The rules require that shareholders with more than 5 percent of a company's shares or a controlling stake get shareholder approval to receive stock incentives. Controlling shareholders are also banned from selling stocks gained through incentive programmes for 36 months. Jiang said the rules would also curb market speculation that had often accompanied the announcement of stock incentive plans, as investors bet that company executives would subsequently make price-boosting announcements for the sake of short-term gains. "With restrictions in place, executives' incentives would be more closely linked with a company's long-term performance," she said.

* News have spread lately that the Authorities may introduce share margin financing in China and short selling of shares soon. If the share margin financing proposal is true, China's market will have another catalyst to push it up further. With regards to short selling, I seriously doubt it will be introduced any time soon.

* Bank of China Ltd., the only yuan clearing bank in Hong Kong, said it raised transaction costs for conversions between the city's currency and the yuan more than sevenfold today; ie from 0.10 to 0.75 percentage point. The new ruling is to curb hot money inflows and speculative demand for yuan. It has been a norm for Hong Kong residents to "double play" in yuan account as it gives higher interest rate and potential capital appreciation.

* OREC - formation has been shelved.

Maybank: From Prudent to Imprudent?

Maybank's shares took a dive today closing at RM7.70 (down 30 sen) with heavy volume. The share was suspended for 2 days pending the announcement of a proposed bank acquisition in Pakistan. To date, with a time span of 2 months, Maybank, the usually prudent bank or now known as the "lousy negotiator", has made the following proposed acquisition in a highly risky but highly lucrative markets:

1) An Binh Bank(Vietnam) - 15% stake -USD135m

2) Bank Internasional Indonesia -100%-USD2.7b - 4.6x Book Value (details in previous posting)

3) MCB Ltd(Pakistan)-15% + 5%(1 year latter)- USD686b-5.4X Book Value-payment via part internal cash and part external financing

(note: recent Pakistan banking deals range from 4X-5.6X)

Total proposed acquisition on the above is USD3.521b(over RM11b).

A liitle bit about this MCB Ltd-

Largest in market capitalisation (USD4.1b)

4th Largest in Assets (USD6.7b)

Highly profitable with ROE more than 30%

Highest net interest margin among Pakistan banks of 8%

With such a high price investment made by Maybank, what would the brokers in town think? Below are some comments made and the target price set.

Positive Feedback

RHB (TP 10.70)- calculation based on 15 x CY08eps

CIMB (TP RM9.80)- calculation based on DDM Valuation with 20% discount with assumptions cost of equity 11.3%, dividend growth rates 7.7% - 6%

Kenanga(TP RM10.10)- 2.3X y/e08 P/BV

Negative Feedback

Alliance(TP RM7.50)-2 steps DDM with a terminal ROE of 18% and cost of equity of 12.2%. Expected improvement in eps FY09(0.4%) and FY10(0.8%).

CITI (TP RM7.60)

Merrill Lynch (TP RM7.60)

AmResearch (TP RM7.30)-3X adjusted NTA of RM2.43 (due to large goodwill arising on acquisition, NTA was reduced from RM4.51 to RM2.43)

Morgan Stanley (TP RM8.00)

I believe Maybank is paying a hefty price for these acquisitions which may be very risky and with long payback period. Although Maybank has said that in the longer term, the bank has targeted its Tier-1 Capital ratio to be about 7-8% and aims for a total capital ratio of 11-12%, the above acquisitions of USD3.5b would definitely put the ratios in jeopardy with a heavy strain on the Balance Sheet. Further, the previous target dividend payout ratio of 60% for the year end June 08 may be missed due to the acquisitions. Maybank will really need to do well to justify its purchases especially in Indonesia as the results from this controlling stake is crucial for Maybank's earnings growth while the earnings contributions from Pakistan and Vietnam could be small as it can only be equity accounted. Although Maybank's share price is closed to the pessimistic brokers' TP, except for value investors with a longer term horizon, I believe some investors may not be too eager to jump in just yet pending the bank's capital raising plan to be released by June 30. However, it should be noted that Maybank price is very cheap now (egs, P/E of 11.6X based on financial year 09 estimated earnings (below 5 years average of 15X) and P/B value of 1.9X on estimated year end 08 (below 5 years average of 2.5X). I am asking myself whether Maybank's management are seeing the acquisitions' potential in the same light with the general investing public. Is Maybank so desperate to expand overseas, especially in the politically risky markets, that it wants to buy anything that is offered on the shelf? Chartwise, Maybank has been on a down trend since beginning of this year when it hits RM10.60. The weekly stochastics/MACD are all in down trend mode and the RSI is at an oversold position of 33. The support is seen at RM7.50 and RM7.00 while resistance is RM8.50.

* Today, Public Bank Bhd has taken over from Maybank as the largest bank in terms of market capitalisation in Bursa Malaysia. Its market capitalisation is now RM40.9b while Maybank's is RM37.8b. However, Maybank is still the largest financial group in terms of assets and revenue.(Bloomberg)

Orec or Owreck?

TheStar: Thailand, the world’s biggest rice exporter, said yesterday that it wants to form an Opec-style cartel with four South-East Asian neighbours so that together they have more control over international prices of the commodity. (This cartel will be known as OREC- Organisation of Rice Exporting Countries). Thai Commerce Minister Mingkwan Saengsuwan plans to talk with his counterparts in Laos, Myanmar, Cambodia and Vietnam about forming a cartel to gain more influence over prices, said government spokesman Vichienchot Sukchokrat. “Though we are the food centre of the world, we have had little influence on the price,” Vichienchot said. “With the oil price rising so much, we import expensive oil but sell rice very cheaply and that’s unfair to us and hurts our trade balance.” Rice prices have tripled this year, with the regional benchmark hitting US$1,000 a tonne for 100% Grade B white rice. Laos Foreign Ministry spokesman Yong Chanthalansy said yesterday the Laotian government would “seriously consider” the idea of creating a cartel because it would give the five countries “bargaining power. The run-up in rice prices has come amid global food inflation, poor weather in some rice-producing nations and demand that has outstripped supply. Cambodia, which in the past has championed the rice cartel idea, also welcomed the latest proposal and said it was a “necessity” given the current global food crisis. “By forming an association, we can help prevent a price war and exchange information about food security,” Cambodia’s chief government spokesman Khieu Kanharith said. Vichienchot, the Thai government spokesman, confirmed that Prime Minister Samak Sundaravej brought up the idea of a grouping modeled after Opec during his discussions Wednesday with Myanmar’s Prime Minister Lt Gen Thein Sein in Bangkok.

MyTake: Although the formation was considered “opportunistic”, “anti poor”, fanning hunger and "wrecking" poverty, it would enable these countries better pricing and production control. This is especially so when previously higher energy , fertilizer, machinery and labour cost were not being able to be passed on to consumers resulting losses to the industry. Basically, these countries wanted the good times now to go on. The more stable and higher price offered by the Cartel would improved the livelihood of the millers/wholesalers/farmers etc and increased foreign exchange for the benefit of the nation but at the expense of others! However, I believe there are some obstacles needed to overcome first before OREC becomes a reality:-

a) Rice is probably slightly elastic demand in nature, ie if rice is getting more expensive due to OREC’s meddling, consumers will probably eat lesser of it or substitute it with other carbohydrates produce like wheat based food such as noodles and bread, potatoes, tapioca, vegetables, fruits, beans etc. To work well, cartel’s product ideally should be inelastic in demand eg oil (with OPEC) or diamond (with De Beers).

b) Agreement on a common pricing, quality, industry output, market shares, allocation of customers/territories need to be worked out. It will be a headache and I suspect Thailand and Vietnam would have an upper hand in decision making compared with the smaller and poorer partners as both controls more than 40% of worldwide exports(“UN Food & Agriculture Organisation). I understand even in OPEC, members of the group frequently break rank to increase production quotas.

c) Unlike OPEC which makes up of a few countries with a few multinational companies to deal with, the OREC would have to deal with millions of farmers and thousands of wholesalers. Are there going to be acquisitions by rich individuals/companies which resulted the poor farmers to loose out? You bet! Further, it would be time consuming and costly.

d) Due to the differences in economic and financial situation in different countries, the rice cultivation varies in terms of infrastructure, technical knowledge, farm mechanization, selection of seeds, nursery and land preparation, not to mention management of water, fertilizer, pest control and harvesting . Unless the OREC is able to streamline the process among its members, the timing of production and yield will not have the desired result to influence rice pricing.

These days, every producers, wholesalers, distributors and traders keep telling you prices have gone up and there are no profit to be made if they do not follow the rise. However, noticed their proportionate selling price increase is much higher then their increase in the cost price? Are they sincere in what they are saying or are they so greedy in making money for themselves while making a fool out of the consumers?

* Currently, the world’s rice production and consumption is almost the same ie 422 million tonnes. The major exporters are Thailand, Vietnam, India, China and US. Why would Thailand also include Myanmar, Laos and Cambodia as these 3 countries are not even able to produce enough for its population? “Strategic” thinking, I guess.

Technical Analysis - May 5, 2008

S&P500 Chart (1,414)


The daily charts are looking good and trending upwards. For weekly charts, MACD has a positive cross over and it has now improved to -19 and MACD Hist is positive. The DMI (+ & -) needs to hook up first to see a more concrete uptrend but the ADX seems to weakens a little (ie from 27 to 26 a week ago). There is a possibility that the index may have some profit taking soon as weekly stochastic shows a high 97. The daily RSI is 60 while weekly is 50; ie still inexpensive. The index is expected to trade between 1,380 and 1,450.


KLSE CI (1,271)


The daily charts are generally positive and but has deteriorated. The daily MACD is still moving upward albeit slower. The daily DMI (+ & -) has a positive hook up but is weakening while the ADX is getting weaker(now 20). Weekly indicators are still showing downward pressure.To make matters worse, the weekly stochastic shows a reading of 90- ie profit taking setting in. The index has to make sure it stays above the 1,270 to avoid falling out of the uptrend channel created since March this year. The index is expected to trade between 1,230 and 1,314.


HangSeng (26,241)


The daily charts are positive. The weekly DMI (+ & -) has a positive hook up and the ADX is at 21 (ie ranging trend). Any ADX from 25-40 will denote a strong trend. The MACD has crossed positively over at -190 from -400 a week ago and MACD Hist is also positive. However, there may be profit taking as the weekly stochastic oscillators is now at 95. Immediate supports are 25,500 and 25,000 while resistance is at 27,000.


Nikkei 225 (14,049)


The daily charts are looking good and trending upwards. For weekly charts, MACD has just turned positive at -500 and the MACD Hist is positive. The DMI (+ & -) are improving but no cross over yet. The ADX has weakened (ie 30) but still indicating the strong trend is still intact. Weekly stochastic is in an uncomfortable situation of 100- profit taking is imminent. Resistance is seen as 14,400 while immediate supports at 13,450 and 12,900.



* JP Morgan's latest year end market estimates are as follows: KLCI-1,500, HS China Enterprise-18,500, Sensex-22,500, HangSeng-35,000, Philippines 3,400, Kospi-1,970, Jakarta-12,800, Singapore-3,800, Australia-5,900, Taiwan-11,000, Pakistan-16,500 and Thailand-970. For information, Citi's estimates for KLCI is 1,449 and CLSA's is 1,150- please refer to my previous postings Citi here and CLSA here.

Smart Investing/Trading for the week ending May 2 2008

Weekly US Markets Update and Outlook

Stocks will try to avoid wild cards on credit, banks

Lighter week for economy, earnings could still yield some surprises

MarketWatch: The wild card is that a disappointment from some familiar quarters -- housing, financials and the credit markets -- could knock stocks back into the red, investment managers say. "The markets have taken the collective bit in their mouths, embraced the belief that the worst is behind us with the housing situation and that the financial contamination will get better from here," said Jeffrey Saut, chief investment strategist for Raymond James. But Saut, for one, isn't a believer. "I think we're going to get a pullback," he added. The U.S. stock markets, lately rising on investors' newfound willingness to take on risk, will try to cling to their nearly two-month rally during next week's round of economic and corporate news. The trigger to this collapse could come in the form of more big write-downs or losses from banks, signs that the spring home-sales season will fall flat or a new wave of consumer-loan defaults. These could wipe out the recent optimism that the housing-related credit crunch and financial crisis may be over, a sentiment that analysts say has spurred a recent return to stocks. Those concerns, echoed by other investment strategists, haven't yet derailed a market rebound that began the third week of March when the Federal Reserve announced an unprecedented rescue plan to ensure the solvency of Bear Stearns Cos., reassuring investors that the Fed would act to stem any Wall Street collapse that threatened a wider fallout. The S&P 500 Index rose just more than 1% in the week ending May 2 and is up 12% from its 2008 low on March 17. These gains have chipped away at year-to-date losses for the index, now registered at 3.7%. The Dow Jones Industrial Average climbed 1.3% last week. It's up 14% from its 52-week low on Jan. 22. Volatility, as measured by the CBOE's market-volatility index, or VIX, has fallen to its lowest level in more than four months.

'Recession lite'

Last week, stocks got a lift from reports on first-quarter economic growth and April job losses. Both confirmed many economists' projections that the economy has slipped into a recession, but sparked optimism that the downturn is unlikely to be prolonged or severe. "Recent economic indicators have been soft but are definitely not in the deep recession camp," said Stuart Hoffman and Robert Dye, economists at PNC Financial Services, in a report Friday. "So far, this looks more like 'recession lite.'" The Federal Reverse's decision to cut interest rates by a quarter-percentage point, and perhaps more importantly, give tentative signals that it was nearing the end of its rate cuts, also gave a belated lift to stocks. So did its decision Friday to widen its bank-lending program. On Friday, a survey compiled by the CFA Institute found that chief executives, portfolio managers and analysts attending the group's upcoming global-finance conference predicted a difficult environment ahead for equities. More than one-third estimated that the U.S. recovery from the credit crunch will take longer than 18 months.

Econ, earnings next week

For the week ahead, investors face a lighter week of economic news than during the past week. Highlights include the Institute for Supply Management's services index and the Fed's senior loan-officer survey, both out Monday; consumer credit on Wednesday; and jobless claims on Thursday. A handful of large companies tied to the consumer will report earnings next week.

Weekly KLSE Update and Oultook

BT: SHARE prices on Bursa Malaysia ended broadly lower in lacklustre trade yesterday with plantation counters, namely IOI Corp, Asiatic and Sime Darby, leading the decliners list, a dealer said. At the close, the benchmark Kuala Lumpur Composite Index (KLCI) shed 8.38 points to 1,271.48. The counter opened 8.05 points higher at 1,287.91. The Industrial Index shed 25.39 points to 2,669.8, the Finance Index dropped 34.63 points to 9,909.94 and the Plantation Index fell 194.13 points, or 2.5 per cent, to 7,570.06.

True to form, the KLCI unfolded its technical pullbacks in its bid to dilute its overbought market momentum. The KLCI retraced 16.60 points over the last four trading days. With the technical pullback over the last four trading days, the KLCI is on track to stage a re-test of the support of the neckline (1,264) of its double-bottom pattern formation. Next week, the KLCI's overhead resistance zone hovers at 1,275 to 1,309 points while its downside support is at 1,233 to 1,267 points.

* Buffett and Munger. In the weekend AGM of Berkshire, both men have this to say:- possibility of US financial meltdown has declined recently, big gains in the stock markets not expected in the future, banks and brokerages are getting too big/complex to run, derivatives is "finanacial weapons of mass destruction" and current credit crisis worse than Enron's.

HK Banks wary of matching Fed

The Standard: Lenders said they might not match Wednesday's quarter-point interest rate cut by the US Federal Reserve as Hong Kong's prime interest rate is already very low. "It is of very low chance that Hong Kong banks will follow the US Fed and lower the city's interest rate," said Margaret Leung Ko May-yee, HSBC general manager and global co-head for commercial banking. "Three-month HIBOR has been very steady in the past two months. If three-month HIBOR falls below 1 percent after the US rate cut, we may seriously consider if there is a need to lower the [prime] interest rate by that time," she added. Before the Fed's rate cut, three- month HIBOR was 2.079 percent. Given a growing consensus in financial markets that the Fed will keep its key interest rate steady following the latest cut, local banks are not likely to change their prime rates, according to Glenn Maguire, chief Asia economist at Societe Generale. "If they want to gain market share, they potentially could [cut interest rates], but I think banks are probably getting to the point where they can be more forward looking," said Maguire. "There has been a significant repricing of the [US] interest rate outlook in financial markets over the past two weeks. Some people are even speculating on the timing of a Fed rate hike in early 2009. Given this development, I think Hong Kong banks may look through this last rate cut from the Fed and leave rates unchanged in Hong Kong," he added. The Fed has cut interest rates seven times since September last year, by a total of 325 basis points, bringing the Fed funds rate down to 2 percent - its lowest level in four years. Hong Kong banks, in turn, have lowered their best lending rates by 225 basis points and now offer prime rates of 5.25 percent and 5.50 percent. "There is no room for another rate cut. Most banks in Hong Kong are offering virtually zero savings rates," ICBC (Asia) (0349) executive director Stanley Wong Yuen-fai said. "If banks continue to lower prime interest rates, even though they cannot shed savings rates further, this will hurt banks' profitability," said Wong. "Rising inflationary pressure is another hidden danger." "Interest rates in Hong Kong have nearly bottomed out. I believe there is no chance for Hong Kong to follow the move of the Fed," said Wing Hang Bank (0302) chairman and chief executive Patrick Fung Yuk-bun. Maguire said the Fed will pause its rate cut cycle before starting to raise interest rates in the middle of next year as the US subprime-led financial crisis is gradually easing.

MyTake: If the Fed interest rate cut is expected to pause after this cut and the USD is expected to bottomed out, then I would consider the HK Banks very lucky indeed. They were virtually "cornered" in a sense as there is no more room to reduce interest further without jeorpardising their profit margin. Further cuts may force HKMA to reconsider the pegging viability of the HKD/USD ( peg to USD at USD1 : HKD7.80- with a plus & minus 5 cents) as it has weakened further the HKD against other currencies especially Yuan while spoking inflation. With regards to Yuan, the HKD has depreciated substantially now as 1 Yuan: HKD1.114 . It was only on Jan. 11, 2007. where China's currency first surpassed the HKD's official peg rate to the U.S. dollar since the Chinese currency system was overhauled 13 years ago.The rate was USD1:8.30Yuan then. The HKMA needs to really watch the movement of HKD/USD against the Yuan as there is a likelyhood that Yuan may appreciate faster than the HKD due to mounting pressure from G7 countries and as such the issue of repegging, depegging or revaluation of HKD will reemerge again. I believe it is a disadvantage for HK to maintain the peg especially, the two countries (HK and US) economies are increasingly moving away from each other while HK's economy is much closer to China. Nevertheless, the stronger and appreciating HKD as a result of stronger USD is good news to counter inflation and to provide a good reason to go back into the HK stock markets or properties again.

* As we know by now, the Federal Reserve cuts interest rates by 25bp on Wednesday and hinted that they will pause when they meet again in June. In response to this shift, according to dailyfx, the market immediately priced in an 85 percent chance that interest rates will be left at 2 percent at the next two monetary policy meetings in June and August 2008. So far, the shift in policy is exactly what the doctor wanted, ie a much stronger USD and lower gold, agriculture, crude oil and other commodities prices. It also sparks a buying of stocks as evident in the Dow Jones (+1.5%) at 13,010, Nasdaq (+2.81%) at 2,481, S&P (+1.7%) at 1,409, HKEX (+1.9%) at 26,241 and Nikkei (2.05%) at 14,049. KLSE on the other hand buck the trend by droping 0.7% to close at 1,271 due to losses mainly in the plantation sectors. You know la, our Sime and IOI already account for 16% weightage of KLCI.