Technical Analysis - June 16 2008

S&P500 Chart (1,360, last week 1,361 or -0.00% w.o.w)

The daily charts continues to weakens. For weekly charts, MACD has slowed down on positive cross over. The MACD Hist is positive. The DMI (+ & -) has weakened drastically and now showing negative crossover and the ADX is at 18. The daily charts needs to pull all stops otherwise the Index is destined to fall further. The index is just about 1,360 which is the crucial minimum level to be within the uptrend channel created since March 14 2008. (Note: For the last 5 sessions, the index was below the 1,360 level). The index has a big task and major headwind ahead. The index is expected to trade between 1,330 and 1,400

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KLSE CI (1,229, last week 1,249 or - 1.6% w.ow)

The daily charts continues to weakens. The weekly MACD which nearly crossed over at -23 are now showing downward pressure again. The index needs to quickly form support at 1,210 and 1,220 levels in the next couple of weeks if it intends to start a brand new uptrend channel again but this channel will be at a much slower pace compared to the March uptrend channel earlier. If the index goes below 1,210, hugh selling is anticipated. The index is expected to trade between 1,210 and 1,250

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HangSeng (22,592, last week 24,402 or - 7.4% w.o.w )

The daily charts has worsened tremendously during the week. The weekly DMI (+ & -) is at a negative hook down and the ADX is at 21.The weekly MACD has just a day ago turned negative and as a result MACD Hist has also followed suit. The Index need to stay above 22,333 to avoid falling into the downtrend channel. Immediate support is at 22,333 and 21,600 while resistance is at 23,600.

Nikkei 225 (13,974, last week 14,489 or -3.5% w.ow)

The daily charts deteriorated during the week and the daily MACD and MACD Hist has a negative cross over 4 days ago. For weekly charts, MACD is still in a positive crossover and improved to -185 and the MACD Hist is positive. The DMI (+ & -) however, has a hook down while the ADX has weakened at 23. The index is bunching up closely on the uptrend line and is expected to trade on uptrend between 13,800 to 14,600. If 13,800 is broken, the immediate support is at 13,500.

* UN Chief: Saudi plans to increase oil production by 200,000 barrels per day or increase in production by 2% next month. Do you think it is enough to trigger a sell down on oil? The 300,000 barrels per day increase in May was largely ignored by the market last month.

* The Standard: "Shanghai Composite Index fell 17% or 591 points over 8 consecutive days to close at 2,868 on Friday. Fund flows show money flowed out China and HK Funds last week of USD1.3b. The money leaked out into Japan, Global equities and US funds as reported by data provider EPFR Global".

* HK plans to develop a crude oil futures market aimed at setting a benchmark that would give Asian consumers and importers some bargaining power against Western counterparts. Currently Asian uses mainly Dubai futures as a reference. Note: Gold futures will be launched in the 2nd half of 2008 in HK.

* BNM: Malaysia may use interest rate as a tool to tame inflation if there is a "generalised" increase in prices. BNM's overnight policy rate remains at 3.5% and is up for a review on July 25.

* FinanceAsia.com's recent poll of Malaysia's best managed companies has concluded that Public Bank Bhd is the best company in Malaysia under catergories: management, corporate governance, investors relations and commitment to a strong dividend policy. Amongst the other winners are Maybank, CIMB Group, DiGi, Media Prima, Airasia, Masteel, Deleum, PetGas, IOI and BAT. Mr Gerard Nathan(Tanjong) is named the best CFO in Malaysia.

Smart Investing/Trading for the week ending June 13 2008

US Markets Update and Outlook

U.S. stock market heads into another volatile week

Economic data, stronger dollar and price of oil all factors ahead of FOMC

MarketWatch: U.S. stocks could be in for another temperamental week as market participants track the price of oil and try to gauge the odds of whether the Federal Reserve will resort to interest-rate hikes in coming months to ward off inflation. "Next week is kind of a no-man's land, where we're waiting on the Fed. And, we're still seeing high energy prices, so I expect to see a lot of volatility but probably not a lot of direction," said Jeffrey Kleintop, chief market strategist at LPL Financial. Major U.S. stock indexes closed the books on a turbulent week with solid gains on Friday after government data and a decline in oil prices offset worries about the impact of escalating prices on consumers. "We've got a lot of the key economic data under our belt now," said Kleintop of retail sales data and the Consumer Price Index, both of which helped bolster equities toward the latter part of last week. Friday's action had the Dow Jones Industrial Average gaining 165.77 points, or 1.4%, to end at 12,307.35, up nearly 100 points, or 0.8%, for the week. The S&P 500 climbed 20.16 points, or 1.5%, to settle at 1,360.03, nearly flat, or up 0.05%, from the prior Friday's close. The Nasdaq Composite added 50.15 points, or 2.1%, to end at 2,454.50, giving the technology-laden index a weekly loss of 0.8%. The week also saw a decline in crude-oil prices Read Futures Movers, as the dollar rallied. Treasury prices, which had their worst week since 2001, rebounded after Friday's data, reflecting declining worries about inflation. The consumer price index rose 0.6% in May, slightly higher than the 0.5% gain forecast. But excluding food and energy costs, prices rose 0.2%, in line with expectations.

The quickening pace of inflation had reignited the debate over whether the Federal Reserve would reverse course after a series of cuts to its benchmark lending rate, which currently stands at 2%. But the latest economic data and the strengthening dollar bolstered the idea that the Fed could take a more neutral stance as it attempts to protect the weak U.S. economy while contending with rising inflationary pressure.

Fed moves

While many experts said they do not expect any change in policy at the upcoming Federal Open Market Committee meeting June 24 and June 25, some are looking for the Fed to tighten in the months ahead, and economic data in the week ahead could be a factor. "I think they will be raising rates, but I don't know how aggressively -- there are a lot of questions about the strength in the economy, particularly given high gas prices," said Kleintop. On the economic data front, Monday brings a measure of manufacturing activity in the New York region, with the Empire State Index expected to weigh in at -1.0 from -3.2. We expect a similar level in June, that would suggest this region's manufacturing sector continues to perform much better than what would be expected during a typical recession," said Action Economics. The data will help set the stage for forecasts from other surveys, including Thursday's Philadelphia Fed Index. The economic calendar includes the producer price index, or PPI, on Tuesday, which is expected to jump 1.1%, with the core forecasted to rise at 0.2%, along with data on the embattled housing market, with data on May housing starts, building permits and home completions. Also Tuesday, industrial production is likely to rise 0.2% for May, after a decline of 0.7% in April. Wednesday is slated to bring an accounting of crude oil and gasoline supplies from the EIA, with the accounting likely to get more than the usual attention given the impact of rising energy prices on the overall U.S. economy. And the government is scheduled on Thursday to deliver data on those filing for jobless benefits, while the Philadelphia Fed Index and leading indicators will also be disclosed. "The economic outlook may be as murky as ever and risks in the financial system remains high, but it's quite possible that the lion's share of falling expectations will soon be behind us," said Ken Tower, chief market strategist at Covered Bridge Tactical LLC

Weekly KLSE Technical Update and Outlook

I Capital: Chart-wise, the KLCI staged a major breakout while riding on the bullish wave in 2007. However, it seems to have lost its momentum, with its monthly MACD hooking down. Meanwhile, its monthly DMI has also just finished its 5-year bullishness, and has turned down to a critical juncture. Judging from the recent oil price and the still fluid political situation, no improvement in sentiment is in sight yet. Therefore, the shorter-term direction of the KLCI would still remain fluid.

* Happy Father's Day to all the fathers in this world! Although dad is not with me anymore, I wish to thank him over and over again for all his love, guidance and support to me to make me a better person today....... Do you know not all Father's Day are celebrated on the same day of the year throughout the world? In countries like Taiwan, Father's Day is celebrated on August 8 every year. 8 denotes "ba" in Chinese, so Aug 8 or 8/8 is "ba-ba" or papa day. In Thailand, Father's Day is set as the birthday of the King. Dec 5 is the birthday of current King, Bhumibol Adulyadej.

Oil Rally Surpassed Dot-Com Craze

Do you agree that the current oil rally mirrors the dom-com mania's? Many seems to agree and are now predicting the fall of oil to be similar to the dot-com crash too. My comments are in RED.

Bloomberg: The rally that drove oil to a record $139.12 a barrel last week surpassed the gains in Internet stocks that preceded the dot-com crash in 2000. Crude rose 697 percent since trading at $17.45 a barrel on the New York Mercantile Exchange in November 2001, and reached 28 record highs this year. The last time a similar pattern was seen in equities was eight years ago, when Internet-related stocks sent the Nasdaq Composite Index up 640 percent to its highest level ever, according to data compiled by Bloomberg and Bespoke Investment Group LLC.

The Nasdaq tumbled 78 percent from its March 2000 peak, erasing about $6 trillion of market value, as investors concluded that prices weren't supported by profits at companies such as Broadcom Corp. and Amaazon.com Inc. Billionaire investor George Soros and Stephen Schork, president of Schork Group Inc., say oil is ready to tumble because prices aren't justified by supply and demand. ``There's nothing different between this mania, the dot-com mania, the real estate mania, the Dow Jones mania of the 1920s, the South Sea bubble and the Dutch tulip-bulb mania,'' said Schork, whose Villanova, Pennsylvania-based firm advises the Organization of Petroleum Exporting Countries, Wall Street firms and oil companies on the outlook for energy prices.

MyTake: It has never been easy to predict a crash in a market. Predicting the fall for oil commodity may not be same as predicting the fall of stock market even though investors' "irrational exuberance" is mainly the culprit. The Nasdaq reached a record intraday high of 5,132.52 on March 10, 2000, in a rally that started in June 1994 but tumbled down back almost 1,000 in 2003. Do you believe history will repeat itself over and over again? It should be noted the further fall in Nasdaq was compounded by the Sept 11 2001 terrorist attack and US recession. Although I suspect the high crude oil will have some air bubble being let off (ie sell down) soon as it climbs too fast but it may also quickly continue on its uptrend again latter due to commodities bull as stated here previously. One of the major reason why crude oil's bubble could last longer than stock markets is that crude oil has finite supply compared to stocks. Somehow, besides speculation, I must agree that the rise of crude oil is partly supported by real and anticipated demand, limited supply and dwindling of reserves. So what would be the catalyst for the oil bubble to burst? My answer would be the further appreciation of USD, the reduction of money supply, the tightening of regulation for futures trading, the slowing down of economies with the expectation of recession, OPEC suddenly agrees to up production (I really doubt so) and of course "no more scary news of supply disruption".

* The above ship is Emma Maersk built in 2006 at a cost of USD145 m. Its country of origin is Denmark. Probably the largest cargo ship in the world, the ship's lenght is 1,302 ft with a width of 207 ft. It has a capacity of over 11,000 containers. The ship's biggest customer is China. It usually carries full load from China to the rest of the world but goes back to China almost empty.

* Prices from transporting commodities such as iron ore, coal and grain by sea had their biggest tumble on record yesterday as per the Baltic Dry Index, which measures the price of transporting bulk commodities. The index slumped 8.7% yesterday.

* Futures TradingBloomberg: Commodity index traders account for about 40 percent of the open interest, or outstanding contracts, in the 12 agricultural commodities for which the Commodity Commission.

* Malaysia Finance Minister: "From 10.5 m working Malaysians, only a million pay tax and only 38,000 of them pay taxes at the highest rate of 28%. Total income collected from income tax is RM10b. Government's revenue this year is expected to be RM147 b". Talking about income tax, please be reminded that all self employed individuals (including myself here) need to submit their income tax by June 30. I will most unwillingly submit them on the last day every year!

* HSBC: "Cut exposure to emerging Asia stocks. Asia is facing the threat of inflation and aggressive monetary tightening and diminishing value of currency. HSBC recommends global equity exposure of 54.5%. Cash holdings is recommended at 11%".

The Hills are alive!

The hills are alive....dun worry...come up and play! This is probably what Lim Goh Tong will be saying if he is still alive today. Genting and Resorts shares were sold down drastically in recent weeks and investors were left scratching their heads wondering what has happened to their beloved stocks? Have the stocks been sold down by big funds because of 1) anticipate slowing down of the economy and the reduction of subsidies resulting lower visitors arrivals and spending, 2) competition from overseas gaming centres, 3) the cost over run of Resort World Sentosa in Singapore, 4) further losses in Stanley UK or 5) Genting Group's financial crunch? etc. AmResearch came out with some valuable insights and perhaps possible unfounded rationale for the selldown with special emphasis on Resorts World Bhd.

AmResearch: Genting Bhd’s share price fell 20 sen yesterday while Resorts World’s (“RWB”) share price declined 9 sen. Year-to-date, Genting Bhd’s and RWB’s share prices have weakened 31% and 28% respectively. We checked with management, who said that there are no negative corporate developments.

We attribute the weak share price performances to a few reasons.

First, fears of an increase in gaming tax or implementation of a windfall tax. Since these were not announced last week, there are fears that they might be announced during the budget. Currently, the gaming tax is 25% on casino wins from non-VIP customers and slot machines.

Second, Genting Group’s share prices have been falling in tandem with the de-rating of global gaming companies. Since the start of the year, share prices of companies like Las Vegas Sands and MGM Mirage have declined 9% to 48%. In fact, share prices of Las Vegas Sands and MGM reached their year-lows yesterday. Ex-Las Vegas Sands, the current simple average PE of the regional gaming companies is 23x for FY08F and 17x for FY09F. We reckon that the de-rating of regional gaming companies is due to a potential slowdown in casino activities resulting from uncertainties in the global economy. Macau gaming companies were also affected by concerns over an industry oversupply.

However, we believe that these concerns are misplaced for RWB as the group’s earnings are relatively resilient and domestic-centric. Even during the period of SARS in 2003, the group’s turnover only shrank 2.6% due to lower average spending/visitor. Visitor growth was still a positive 1.3% in 2003. More importantly, RWB’s cash reserves are expected to be rock-solid, forecast at RM4.4bn for FY08F. Free cash flows are envisaged to rise due to diminishing capex requirements. We estimate RWB’s FCF/share to improve from 17.2 sen in FY08F to 18.8 sen in FY09F. Capex is forecast at RM300m to RM400m annually.

In terms of earnings, we anticipate slower topline growth of 8% for FY08F compared to 14% in FY07. We are also assuming a 4% visitor growth for FY08F against 6% in FY07 and an average spending/visitor increase of 5% versus 8% in FY07. EBITDA margin is estimated to remain stagnant at 37% for FY08F. Our FY08F net profit forecast of RM1.28bn is 3.5% below consensus estimates of RM1.3bn.

We believe that the fall in RWB’s share price presents a good opportunity to Buy.(TP RM4.40) Also, it makes the case for the privatisation of RWB even more attractive for Genting Bhd. Ex-cash, RWB’s FY08F and FY09F PEs are 11x and 10x respectively. RWB’s last share buy-back was from 3 March to 10 March at prices between RM3.36 to RM3.68. As at 14 March, outstanding treasury shares amounted to 129.1m.

Technically, due to the sell down the daily indicators for RWB and Genting are all showing weaknesses. They may stage a technical rebound in the next few trading sessions due to their oversold position but most likely trade sideways in the near term. RWB is supported thinly at RM2.90 but strong support at RM2.50. Resistance are at 3.06 and 3.16. For Genting, it is supported at RM5.25 and at RM4.70 while resistance is at levels RM6.00 and RM6.25.

* China's inflation rate fell to 7.7% in May amid signs efforts to rein in food prices were finally taking hold. Meanwhile the PPI is still at a stubborn 8.2%. The Shanghai Composite Index however certainly did not take heart at the good CPI figures. It dropped nearly 2.2% today to close at 2,958. So the magic 3,000 number has been broken. Will the Doctor (discussed here previously) come in again to intervene the market for the second time? The failure to successfully intervene the market again will undermined the Doctor's credibility in the future.

* CIMB: The 30% windfall tax on IPP could potentially cut earnings of companies as follows:- YTLPower(TP RM2.50) =6 to 7% and Tanjung(TP RM20.30) =4 to 5% based on total assets rather than fixed assets. So far authorities have not spelt out the exact definition of Return on Assets(ROA). If fixed assets is used, the total impact would be greater.


* According to Forbes.com, the 2008 ranking by OECD countries ranked South Korea as having the longest working hours per year-2,357 hours followed by Greece-2,052 hours while the lowest working hours is in Holland-1,391 hrs.(note: US-1,797 hours). For some short facts. Assuming we calculate working days as follows, take 52 weeks x 5 days =260 days; less 10 days holiday = 250 days of working a year. South Koreans working hours per day 2,357/250 = 9.4 hours per day while Dutch's would be 1,391/250 = 5.56 hours. Did I hear somebody saying "lets go to Holland to work" or "not to work if we are in Holland"?

We need a stronger USD

Lately, Asian central banks have been actively propping up their own currency against the USD to counter inflation effects due to the spiralling of oil prices. The USD in the meantime has been appreciating too, probably due to the speculation that the Reserve Bank will soon intervene in the weak USD. Will it intervene is a USD million dollar question! Currency intervention is an option for the US Federal Reserve as its hands are tight at this moment to start raising interest rate again. Based on current situation, I would say most central bankers would prefer to appreciate their currency rather than raising interest rate.The US economy needs to recover and it is not the right time now to change its stance from monetary loosening to tightening policy so soon. As the economy is still weak, the Federal Reserve is most likely to leave the interest rate unchanged while keeping its fingers crossed for the economy to pick up steam from here on. Although we have to also consider the demand factor, I have always believe a stronger USD is one of the way to counter rising crude oil prices etc besides regulating the futures markets and slowing down money supply.(Have discussed here and here previously). The current oil prices does look like a bubble rather than a hot air balloon to me and if "things" falls into place, we may see a temporary sell down of oil soon. Unfortunately, I believe the stock markets would be drag down by it as well since the losses from commodities trading will probably be settled via selling of shares. I hope to be proven wrong then. Below is an interesting write up which mentioned about the possibility of intervention in the USD and the significance of G7 meetings on the USD.

DailyFx: There has been a lot of speculation about the possibility of currency intervention in the US dollar. In the past year alone, the US dollar has fallen 15 percent in value against the Euro, 18 percent against the Swiss Franc and 13 percent against the Japanese Yen. Over the past 3 years, the decline has been more than 25 percent. Interestingly enough, the prospect of intervention is more real than it was back in April, when the US dollar hit a record low against the Euro. What changed? Inflation. Last week, oil prices climbed to an all time high of $139.12 a barrel, sending inflationary pressures skyrocketing. Central banks around the world turned aggressively hawkish as the threat of higher prices solidified their need to focus on containing price pressures. Even the Bank of Canada has succumbed to higher inflationary pressures – they were widely expected to cut interest rates by 25bp this morning, but they opted to leave interest rates unchanged at 3 percent instead.

Clear and Cohesive Message from the Bush Administration: Stronger Dollar

Over the past week, the Bush Administration has sent a surprisingly clear message to the markets about where they want the dollar to head. The comments from 3 important people represent clear cohesion within the Administration, who has come out with all guns blazing:

Last Tuesday, Federal Reserve Chairman Ben Bernanke broke from tradition and talked about currencies. He drew links between the weaker dollar and higher import costs and consumer price inflation. His cohorts including Fed President Geithner confirmed that the central bank is paying “very close attention” to the value of the dollar. On Monday, US Treasury Secretary Paulson said that he would not rule out any policy tool including currency intervention. Last night, on Airforce One, President Bush told The Times London that “we want the dollar to strengthen.”

Stopping Short of Physical Intervention?

The last time that the Federal Reserve intervened in the currency markets was shortly after the launch of the Euro. At that time, the currency fell to a low of 84 cents, triggering panic for the European Central Bank. In response to the sharp sell-off in the EUR/USD, the ECB convinced the Fed to jointly intervene in the currency markets to buy euros and sell US dollars. Since then there has been no intervention for more than 7 years, which means that stepping into the markets at this time would represent a dramatic policy shift for the US government.

The Alternative: Verbal Intervention at G7/G8?

The alternative on the other hand may be verbal intervention at this weekend’s G7/G8 meeting. Given that the weakness of the US dollar has been one of the primary reasons why food and energy prices have skyrocketed, a stronger dollar may be in everyone’s best interest. Or is it? For the US government to support dollar strength, half of the battle for verbal intervention may have already been won. However, it is the European Central Bank that really needs to be convinced. With the ECB on a mission to do all that it takes to lower inflation, they may not be willing to let the Euro weaken. Over the past 30 years, G7/G8 meetings have marked major turning points for the US dollar.According to the following G7 chart, significant tops and bottoms have coincided with a significant change in the foreign exchange language of the G7 communiqué. For example, following the Dubai meeting in 2003, the Group of Seven called for more “flexibility in exchange rates.” Although this criticism was directed at China and Japan, it came on the heels of a strong dollar rally. The decline of the US dollar during the late 1980s was also halted when the Louvre Accord was signed in 1987 at the G7 Minister of Finance meeting.... Bear in mind though that the upcoming meeting will only be attended by Finance Ministers and not central bankers. Therefore it remains to be seen whether changes will be made without the presence of the ECB and the Federal Reserve.

* Petronas pretax profits - RM42.3b(6 mths to 30 Sept 07), RM76.3b (12 mths to 31 March 07). Its full year 31 March 08 results is due out end of this month.

* The savings from the lowering of petrol subsidy of RM13.5b will be used as follows:-RM7.5b(subsidise petrol, diesel, gas and cash rebates), RM4b(improving food security) and RM1.5b(cooking subsidy).

* US Treasury Secretary Henry Paulson does not think speculators were playing a major role in driving up global oil prices. His statement is similar to the one made by the US State Energy Minister earlier.

* June 22 - will the meeting in Jeddah, Saudi Arabia between oil producers, consumers and oil companies yield any desired results? They will discuss amongst others the jump in oil prices, its causes and how to deal with it objectively.

* German Chancellor Angela Merkel says that Continental Europe should take the lead in devising new rules for financial markets because the Anglo-Saxon model of regulation has failed. She particularly mentioned that European credit ratings agencies to counterbalance the dominance of Moody's and S&P's.

A happy roar from Kenya

Something to cheer about although it is not from Malaysia but I think we could use some good news anyway. I am sure many of us have been feeling worried, unhappy and down right angry lately with the latest government's 'policies' to fight spiralling inflation. My comments are in RED.

TheEconomist: It is something for Kenya to cheer, at last. The flotation of a quarter of Safaricom, Kenya's leading mobile-phone company, on Monday June 9th was generally reckoned to be a great success. The initial public offering (IPO) carries much weight in East Africa—although it is tiny by the standards of stockmarkets in more affluent parts of the world—and the 10 billion shares on offer were massively oversubscribed. During the course of the first day's trading they leapt by over 60% above the offer price, giving the firm a value of some $4.5 billion. Safaricom's impact on Kenya’s stockmarket is impressively vast: its shares alone will make up some 40% of Kenya's titchy market.

Safaricom's share was oversubsrcibed by 532%. It was offered to individuals at 5 shillings while corporates were offered at 5.5 shillings. The share price went up to 8 shillings on the IPO date. (1 shilling = rm0.08, so 5 shillings = RM0.40). Correct me if I am wrong. As a rough figure, Kenya's stock market capitalisation is USD11.25b or about 1/28 the size of KLSE's market capitalisation. This Safaricom is not negligible or small if compared to the capitalisation of TMI of USD8b or Digi.com of USD5.8b . It is even bigger than TMI's and Sri Lanka's largest mobile company Dialog whose capitalisation is only USD1b.

This is a gratifying vote of confidence by investors in a country that has suffered a slew of troubles in recent months. Violence after an election at the end of last year claimed 1,200 lives and the country narrowly avoided a calamitous breakdown. Nonetheless the appetite for risk remains strong: many retail investors reportedly took out loans so that they could grab a slice of the action. Such is the excitement among ordinary Kenyans who have managed to snap up an allocation of shares that the company is considering holding its next annual meeting in a pair of Nairobi’s football stadiums to accommodate the expected crowds.

This is great. The shareholders turnout could be even more than Warren Buffett's Berkshire Hathaway Annual General meeting in Omaha, Nebraska. The total number of Safaricom's shareholders amounted to 860,000! I don't think even 10 football stadiums of 80,000 capacity each is enough. A world record?

Kenya's government is happy too. It has raised 52 billion shillings ($818m) from the sale of a 25% stake in Safaricom. Mwai Kibaki, Kenya's president, even turned up at the Nairobi Stock Exchange to ring the bell that signalled the start of trading on Monday. He took the opportunity to praise his policy of privatisation which had resulted in the slice of Safaricom going on sale. The government holds another 35% in the firm, with the remainder in the hands of Vodafone, a British mobile-telecoms giant.

Inevitably some controversy surrounds the IPO. Kenyan opposition politicians want an explanation for the 5% of Safaricom that is indirectly held by Mobitelea, a firm with unknown owners registered in the Channel Islands. Some suspect that the stake somehow enriched people close to the previous government.

Hai ya! This type of issue is nothing new la. It is very common even in developing and emerging countries like Malaysia.

But that lingering doubt has not dampened the IPO’s party atmosphere—hundreds of small investors turned up at the stock exchange to witness the start of trading. The good cheer is not without justification. When Michael Joseph, the chief executive who is largely responsible for the firm's good fortunes, arrived at Safaricom in 2000 the company had 20,000 customers. Vodafone's bosses reckoned that the Kenyan market would top out at 400,000 customers. Now Safaricom has 10.5m and room to grow further. It is the most profitable business in eastern and central Africa, earning profits of $223.7m in the financial year to the end of March, up 16% on the previous year.

Safaricom's customers base is very strong and growing indeed. If you look at Kenya's registered mobile phone users of 10.5m and population base of 37b people, the penetration rate is only 28% as compared to matured markets in Malaysia of 86% or 23.3m customers.The customers base for Digi is 6.4m while Celcom is 7.2m. As per the Annual Reports, Digi earning profits is USD303m(RM1b) while Celcom's is USD280m (RM925m). You can see that due to growing in an untapped market, net profit margin for Safaricom is a healthy pink!

Mr Joseph quickly decided to go after “pay as you go” customers, who pay for mobile airtime in advance, and therefore do not pose a credit risk to the operator. He introduced billing by the second—a big deal for those earning pennies. And he revamped the firm's brand, reasoning that the poorest customers are the most price-sensitive, and that a strong brand can help keep them loyal. His most enduring achievement is likely to be M-PESA, a pioneering service that lets Safaricom's customers send money to each other by text message.

Neat. Do we have such package here in Malaysia? No need to rely only on Mayban2U etc anymore?

Safaricom must fend off competition. Not from Celtel, Kenya's second provider, which seems content to earn dividends in Safaricom's shadow, but from France Telecom, which recently bought 51% of Telkom, the state fixed-line monopoly, and Econet, a new Indian-owned network.

The other big telco big players in Africa which are doing well are MTN(market value USD33b) of South Africa and other fixed line operators like MarocTelecom.

Investors, especially Kenyans new to playing the stockmarket, will hope that Safaricom can shrug off such rivals. The hefty premium at which shares traded as soon as markets opened might suggest that the government undervalued the stake that it sold—perhaps to ensure a successful debut for Safaricom. Possibly the exuberance of small investors or stock flippers, who purchase shares in a hot IPO and sell them as soon as they start trading, may be playing a part. But even if Safaricom's shares turn gently back towards earth as profits are taken, they have already shown a winning bet on Africa.

* China's inflation rate is expected to slow down to 7.7% in May according to people familiar to the data. The average estimate by analysts is 8%. Will we be seeing the change of monetary policy stance soon?

* The Shanghai market dropped more than 7% today as investors sold off banking shares in view of the further credit tightening, inflation worries and a weaker US market. China Central bank yesterday proposes the bank's reserve ratio to be increased to 17.5% by June 25.

Watts in for Tenaga?

TheEdge: Tenaga Nasional Bhd expects to rake in an additional RM4.8 billion through its financial year ending Aug 31, 2009 (FY09) from its tariff revision on July 1 but the utility will still see its earnings trimmed. The new tariff would allow the company to recover the increase in gas price and part of coal price, said Tenaga's president and chief executive Datuk Seri Che Khalib Mohamad Noh at a media conference yesterday. “The other increases such as labour, material and independent power producer (IPP) costs are being absorbed by TNB. It is only a fuel cost adjustment,” he said, adding that it was not right to say that Tenaga was passing all the costs to consumers.

On Wednesday, the government announced a 123% increase in the price of gas for power generation to RM14.31 per mmBtu from RM6.40 per mmBTU. The price increase would add approximately RM4.2 billion to Tenaga's gas bill, raising the cost to about RM7.5 billion.
The recent increase in coal prices to about US$130 (RM422.50) per tonne would add a further RM1.4 billion to Tenaga's annual fuel costs, which account for 30% to 40% of the utility's annual operating costs. Gas and coal-fired power plants constitute 68% and 26% of Tenaga's total generation capacity. “There will be a reduction in profits this year compared to last year. For gas, our bottom line will be neutral but for coal, because we have to bear part of the cost, definitely it will have a downward effect on our profits,” said Che Khalib. He said Tenaga anticipated a surge in coal prices in its next financial year and it had neither secured a new supply contract nor catered for the increased price. Tenaga would absorb as much labour and material costs as it could by increasing efficiencies, he added. “We don't want to sacrifice the maintenance. We have to continue investing in new infrastructure to ensure the reliability of power supply in this country remains stable and strong,” said Che Khalib.

Households that consume 201-400kWh per month, which represent 26.7% of total household consumers, are expected to see their electricity bills increase by 1% to 11%, while those consuming less than 200kWh may not see any increase. The electricity bill for commercial and industrial consumers are expected to increase by about 26%, while low-voltage commercial and low-voltage industrial consumers who use up to 200kWh per month could expect an increase of 18%.

Tenaga, however, would maintain the 10% discount for government schools, government institutions of higher learning, welfare homes and places of worship. On whether there would be a revision on the tariff to reflect the change in gas prices, Che Khalib said: “When there is a movement in gas price, whether upward or downward, there would be adjustments to tariffs.” He said he would not guess when a tariff revision could be expected, adding that the newly adjusted gas price was still heavily subsidised. The current market price for gas is between RM35 and RM40 per mmBtu. “Since the government is fixing the gas price, we don't think there would be a need for a three-month revision,” he said. Che Khalib also said Cabinet had directed Tenaga to begin talks with IPPs to find solutions on how to share the burden of high cost in generating power. “We will start talks with IPPs as soon as possible. From the feedbacks that we got, they are ready to discuss and look for the best solutions.”

MyTake: Tenaga's share price has during the year dropped to RM6.55 (a 5 1/2 year low) due to heavy downgradings from research analysts who were concerned of its ability to passed on the rising gas and coal prices to consumers due to Tenaga's social obligations. The share price shot up to RM9.10 from RM7.30 on Friday after the tariff announcement. However, the share ended down 75sen today at RM8.25 due to profit taking. Many analysts were of the opinion Tenaga will warrant a relook and rerating if it gets 2 types of tariff revisions 1) Base Tariff Revisions(revisions based on inflationary factors on non-fuel related cost components such as equipment costs, salaries and petrol prices amongst others) and 2) Cost -Pass -Through mechanism for gas and coal. It seems that Tenaga has already be given some sort of "Cost-Pass -Through Revisions" which is subject to revision as the gas prices for the next 15 years will be revised upwards at 5% yoy but no such luck in the coal prices. Tenaga is set to ask but not guaranteed to get a portion of IPP's windfall tax and possibility of enjoying the Base Tariff review in June 09. What are the brokers' view on Tenaga after this "Cost-Pass-Through" tariff revision? Below are some of the brokers recommendations with their Target Price(TP) and a short summary of the basis used for the call.

Positive

Macquire(TP RM13.90) - "across the board price deregulation for energy prices is long-term positive as a move towards proper allocation of resources".

OSK(TP RM10.20) - "the clarification from TNB that it will be able to pass through some of its coal price as future adjustments leads us to revise up our tariff growth from 1.9% in FY10 to 6.6% given our expectation of a coal price of USD120/mth in FY09 as well as a base tariff adjustment in June 2009".

Kenanga (TP RM10.81) - Raising target price by 29% to RM10.81, or a 20% upside to last traded price of RM9.00, based on our DCF valuation (9.2% WACC, 4.8% long-term
growth), as we have some earnings enhancement derived from higher tariffs.

CIMB(TP RM11.90) - Maintain OUTPERFORM with a higher target price. Given the positive feedback from the briefing and the light thrown on future tariff adjustments, we now value Tenaga at a smaller discount of 10% (30% previously) to its historical average P/BV
multiple of 2.0x. This gives us a new target price of RM11.90, up from RM9.10 previously. At our revised target price, the implied forward P/E is 17x, 30% higher than our target market P/E in view of Tenaga's greater earnings upside potential resulting from a possible double tariff review in 2009. We maintain our OUTPERFORM recommendation, with the key share price triggers being i) newsflow on the base tariff review, ii) potential earnings-accretive M&A opportunities, including Genting Sanyen's power plants, iii) higher dividends, iv) positive feedback from Friday's briefing and v) possible upgrades by other brokers. Tenaga is now our top pick in the power sector.

RHB (TP RM9.57) - Clearly, sentiment has improved towards TNB. Policy risk appears to have been reduced but we highlight that political uncertainty may still cause the positive sentiment to unravel. Re-rating may continue in the short term. However, notwithstanding our concerns, we and the market were caught by surprise by the quantum of the tariff hike. Therefore, in the scramble to readjust portfolio weightings, we believe TNB may in the short term continue to trade higher. However, we believe most of TNB's “good news” is already in the price. Keeping in mind our expectations of continued earnings decline for FY09-10 even after this tariff hike, and the political uncertainty, we believe the stock should in the longer term trade in line with our KLCI target of 15x. On this basis, we thus raise our fair value to RM9.57 (based on 15x FY09 PER), and upgrade our call for the stock to Market Perform.

Negative

TA(TP not given) "price pressures would hurt demand for energy"

AmResearch (TP RM7.20) - No clear compensation plan for coal - Sell. We recommend investors to Sell into strength on Tenaga shares. Our target price of RM7.20 values the shares at 12x (at our target market PE) calendarised EPS for 2008. Tenaga currently trades at approximately 20% premium to market valuation. Policy wise, we are encouraged by the higher level of transparency in addressing the gas subsidy and electricity rates in the power sector going forward. However, the fact that the government stop short of fully compensating Tenaga on higher generation cost incurred from rising coal prices in its latest review does raise some uncertainty going forward. In addition, we believe investors should weigh the execution and implementation risks of the government and Tenaga's strategies. Lack of a committed schedule on gas and tariff review does not help. The aggressive removal of energy subsidies (i.e. higher petrol prices, etc) is likely to have a negative impact on the already weaker economic conditions. That could put pressure on demand growth outlook.

Some news on crude oil.

* Goldman Sachs: A full removal of subsidies such as those maintained by Malaysia on gasoline and diesel sales may cut global oil demand by just 20-30%. At least a dozen of countries in Asia (eg China, Indonesia, Sri Lanka, India and Taiwan) still keep fuel prices under some sort of state control.

* BP CEO: World has 42 years of oil reserves and 62 years of natural gas.

* Petronas: Global oil demand is expected to remain stable around 87 mil barrels a day.

* Malaysia's petrol price of RM2.70 is one of the highest among oil producing countries (UAE RM1.19 per litre, Egypt RM1.03, Saudi Arabia RM0.38, Iran RM0.35, Nigeria RM0.32, Venezuela RM0.16, Bahrain RM0.87 and Qatar RM0.68).

* Goldman Sachs: Oil price super spike likely to hit USD150 per brrl this summer season.

* Morgan Stanley: Crude oil may reach USD150 per brrl by July 4 2008.

* Lower income South Koreans will benefit from the USD10.2 b in handout over the next year to offset the rocketing price of oil.

* G8's strategy to counter higher oil prices is to invest more in energy efficiency and green technologies(partly to reduce carbon emission) and boost oil producers output.

* Lehman Bros: Oil prices could fall sharply towards the end of this year or early next year as evidence of eroding demand in Asian economies slowly materialised.

Smart Investing/Trading for the week ending June 06 2008

Weekly US markets update and outlook

U.S. stocks face renewed economic uncertainties
Surge in joblessness, oil near $140 fuel recession fears

Marketwatch: Stocks will enter the second week of June with renewed uncertainty about the outlook for the ailing U.S. economy, after shocking news Friday that the U.S. jobless rate jumped to 5.5% while crude prices soared to a record near $140 a barrel. "The U.S. jobs report had recessionary paw prints all over it," said Sherry Cooper, chief economist at BMO Capital Markets. The stock market tanked on the news, only to see losses accelerate as oil continued to surge, fueling fears people paying more at the pump will cut back on consumer spending. "In past times usually when our economy went down, oil prices would go down," said Owen Fitzpatrick, chief U.S. equities strategist at Deutsche Bank. "But we're not in the driver's seat anymore. Supply is coming from Saudi Arabia, and it's China on the demand side. "This time, it's not a sign of our economy overheating," he added. Crude finished the session on a gain of nearly $11 at $138.54 a barrel, after earlier reaching a record high above $139. At the end of Friday, the Dow Jones Industrial Average plunged 394.64 points, or 3.1%, to end 12,209.81, giving it a weekly loss of 3.5%. The S&P 500 Index fell 43.36 points, or 3.1%, to 1,360.69, leaving it down 2.9% for the week. The technology-heavy Nasdaq Composite Index shed 75.38 points, or 3%, to 2,474.56 for a weekly decline of 1.9%.

The surge in crude futures Friday came amid heightened concerns that Israel might attack Iran, one of the world's largest oil producers, while a broker forecast a barrel would top $150 within a month. A slide in the dollar further drove oil's rally, with the U.S. currency getting hit by the weakness of the jobs report and a jump in the euro, following hints that the European Central Bank might soon lift interest rates . A weaker U.S. unit makes dollar-denominated commodities, such as oil, cheaper for holders of other currencies.

Monday will bring pending home-sales data for April and on Tuesday the trade-deficit figure for April will be released. On Wednesday, the Federal Reserve unveils its Beige Book of economic conditions. In addition, the market will key in on the consumer-price index for signs of whether surging energy and food prices are seeping into so-called core prices. "I think [surging commodities] is more of a concern for growth," added Stovall. "It's not wage-based inflation, which leads to higher and higher prices. Our forecast is that inflation will moderate as consumers cut back on spending."


KLSE Technical Update and Outlook

I Capital: Update on the daily KLSE Composite Index. After the KLCI reacted sharply to the government's announcement of the subsidy restructuring for energy products, the economy is now facing extra headwinds with rising prices for food and energy. The pullback below the short-term support level, accompanied by a bearish MACD crossover, suggests that the selling pressure is increasing. I Capital is worried that the recent weakness could continue and probably lead the index to the lower support level of 1,160.

* Sunday Star: "If Malaysians are expected to change their lifestyles to cope with higher prices, the Government must also adopt a more prudent and frugal style of management. The Government can expect Malaysians to be less forgiving from now when they come across extravagant projects and schemes, which see little return for the country". The increase in energy cost was a suprise to me. I actually expected a price increase in fuel only in September as reported by the Government. I am certainly baffled and worried by the sudden and drastic action. [ For our records, Malaysian petrol jumped 41% to RM2.70 from RM1.92 per litre while diesel went up by 63% to 2.58 from RM1.58 per litre. In line with the increase in fuel price, Tenaga will be raising its electricity rates by 20% for homes and 26% for business users]. Can we cope....and it is just the beginning.....?

In Memory of my Grandma (1921-2008)

Dear valued clients, friends and readers,

Thank you for all your prayers and dedication of merits to my beloved Grandma who departed on the 3rd June 2008 at 4.40pm. May she rest in peace and may she attain the bliss of Nirvana.

Please pray for my Grandma

Dear valued clients, friends and readers,



You may have noticed that I have not been posting any jottings since last Thursday. I have not been able to concentrate this few days as my beloved Grandma Loke Ching is very frail and weak and is not responding well to the treatment at hospital. Grandma is 86 years old. With the doctors' consent, my family has decided to bring Grandma back home yesterday night and let her rest in peace at home instead. As we are Buddhist, we are praying with her so that she could go smoothly over to nibanna with the help of Lord Buddha. Nibanna or Nirvana is a state of peace with no suffering. The root of suffering is Greed and ignorance. My family has urged her to be strong and brave and let go whatever cravings in this life and concentrate only in obtaining nibanna. I sincerely hope you could help me say a little prayer for my dear Grandma irregardless of what religion you are in. I deeply thank you in advance for your prayers, compassion and understanding. May God bless you and your family.