Japan: Where Capital Goes to Die

Hope I did not bore you again with another write up about the doom and gloom of Japanese stocks.....the author did give some recommended stocks to buy at the end though and a word of advise. "In Japan, just as we've discovered here at home(in the US), the market's best stocks are ignored, obscure, and small".

TheMotleyFool: Ah, Japan: land of the rising sun, homeland of the hot dog-eating champions, and capital-sucking vortex.

"Capital-sucking vortex?" That's a wee bit harsh, no?

No, it's really not Japan is where capital goes to die, and I have the stats to prove it.

Firing up my super-duper stock screener (not sold in stores), I see 2,371 companies with a primary listing on the Tokyo Stock Exchange. That excludes non-Japanese firms that happen to have local listings, like Dow Chemical (NYSE: DOW) and Aflac (NYSE: AFL). Out of all those businesses, how many do you think managed a greater-than -4% return on equity -- a solid but not stunning result -- over each of the years 2005, 2006, and 2007?

Make sure you don't guess too high, or you'll be disqualified. I'll give you a hint: The answer is less than 800.

The price is wrong! In fact, only 35 firms hit that mark! Add in the 925 companies on the Jasdaq exchange, plus the stragglers listed on other local exchanges, and the number climbs to ... 36. In total, fewer than 1% of Japanese equities pass this simple test of Capital Allocation 101.

Why does return on equity (ROE) matter to Foolish investors? Here's a primer, but the simple fact is that the "E" in ROE is shareholders' money. If management is retaining earnings to reinvest in the business, one of its basic requirements is to continuously generate an attractive return on the owners' investment. There are plenty of "profitable" companies in Japan, but those wealth-withering single-digit returns on equity just don't cut the wasabi.

Return on equity isn't the end-all and be-all of performance yardsticks, but it's a very handy one, especially if you remember that managers can juice this figure by taking on more debt. Note that I didn't limit my Japanese search to a maximum level of indebtedness. Some of the companies that passed the test only did so by leveraging to the hilt.

Do we avoid the archipelago entirely? After running this sobering screen, I'll definitely refrain from throwing investment dollars at something like the iShares MSCI Japan Index (NYSE: EWJ), no matter how cheap the broad market looks. However, I'm not going to rule out every single Japanese company. After all, I've got three dozen here that are at least worth a look. Take Komatsu, for example. This equipment heavyweight is the Japanese version of Deere (NYSE: DE). After checking out the numbers, I'm tempted to say that Komatsu is the superior firm.

These two outfits throw off about the same level of revenue, but Komatsu sports slightly fatter margins. In trying to suss out the difference, one statistic really jumped out at me. On its website, Komatsu lists 39,267 employees on a consolidated basis, whereas Deere recently claimed 56,700 full-timers. The resulting revenue-per-employee figure suggests that Komatsu's operations are a good deal more efficient.

I would also note that Komatsu has managed to post good returns on equity without employing nearly as much balance-sheet leverage as Deere.

Another interesting group of firms are the so-called sogo shosha, or general trading companies. Mitsubishi, Mitsui (Nasdaq: MITSY), Itochu, and Marubeni all passed my simple return-on-equity screen.

What do these firms trade, exactly? Well, pretty much everything, from textiles to food products to petroleum. Some of these companies date back centuries; they seem like a natural outgrowth of the nation's limited resource endowment.

I've run across several of these firms in my energy-sector coverage, from Mitsui's profitable Petrobras (NYSE: PBR) partnership to Itochu's dinged deepwater venture. They're interesting businesses, but I find them nearly impossible to analyze. If you're a fan of conglomerates like General Electric (NYSE: GE), then the Japanese trading houses may be right up your alley.

A Foolish final word I'm still parsing this list of Japanese firms, but here's a preliminary observation. Of the 36 firms, only six have a market capitalization north of $10 billion. In other words, the big boys are blowing it. That should make you even more wary of taking an index-based approach to your Japan exposure, unless you pick up one of the small-cap ETFs. In Japan, just as we've discovered here at home, the market's best stocks are ignored, obscure, and small.


* Nissan to post annual operating loss too?

* WSJ: Citigroup ready to shrink itself by a third!

* FT.Com: Morgan Stanley: TP for HSBC cut to 455p. It also says the bank needs between USD20-30b of equity and halve its dividend in order to bolster its Balance Sheet. No recovery in its results until 2011.

* China economy grew to 3rd largest in 2007 after beating Germany but still trails behind Japan and the US.
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* Jackie Chan to star in the remake of Karate Kid.

A rare P/BV of 1

Japanese companies, like the rest of its competitors around the world, are struggling with recessionary pressures. The effects of recession has hit sales(local and export) and increased the difficulty in raising funds. Some that are not level footed face the possibility of bankruptcies. In fact according to BBCNews, company bankruptcies in Japan jumped 24.7% in December from a year earlier. For the 2008 year, it rose 11%, the most in 8 years. With regards to operating loss, the latest forecast figures are also grim. Toyota, the world's second largest automaker is expected to lose USD1.7B this coming March, its first loss in 71 years due to slowing demand and a strong yen(yen soared 25% in 2008). Similarly, Sony is also expected to face an operating loss in the coming March of USD1.1B, its first loss in 14 years. Without doubt, such companies are all too ready to axe their workforce.

Would we be seeing opportunity here to buy cheap beaten up "blue chip" Japanese companies? In fact, according to IHT, refer here, the Nikkei which is nearing its 26 years low, and with a rare P/BV(or NTA) ratio of 1 now (October low of 0.87 when the index hits 6,995) indicates that investors are valuing companies at less than what they could theoretically be liquidated for. It added that even during Japan's decade of economic stagnation, deflation and banking troubles, the price-to-book ratio never fell below 1.

However, some will advise you to keep your money first. Sourcing from Bloomberg here, Analyst John Mihaljevic, writing on the Web site Seeking Alpha, looked at corporate Japan’s evolution since the 1990s, and it’s not pretty. “We approached our study of Japanese stocks with the hypothesis that we should be able to find some compelling investments given the cheap valuations of a large subset of Japanese public companies,” wrote Mihaljevic, managing editor of the Manual of Ideas in New York. “So far, however, we have remained unimpressed.” Five specific issues are explored: a lack of business focus, murky corporate governance, little regard for returns on investment, the high cost of production, and clubby boardrooms.

Despite the above, will you forego this golden opportunity to make money in the long run since the average Japanese stocks are at firesale prices? Actually I am not sure. I did try to do a search using the Bloomberg machines to compare the Nikkei's P/BV with the Bursa or HangSeng in general. Apparently, no such average can be calculated from its database. However, there is such information based on individual stocks. To feel how a 1X P/BV is like, look at AirAsia now. Also, for comparison based on Kenanga Research's latest sector coverage, the P/BV of Property is 0.8X, Plantation 1.7X and Oil & Gas 1.9X . So is P/BV of 1 cheap then? I think the Nikkei's P/BV of 1 is cheap but too generalised as we must also look deeper into the individual stocks themselves. In addition, I believe other valuation ratios (p/e, eps growth, roe etc) must also be used to justify our conviction to buy.

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* Happy Ponggal to you! Hope you have the sweetest start for the year and your low is bearable while your high is exceptional!

* Citi which expects a technical recession in 1Q09 for Malaysia, downgrades on Malaysian banks but still a hold AMMB. It also says Singapore property is in a Bear Trap and advises to sell into strength.

* YahooNews: Yahoo names tech veteran Carol Bartz as new CEO.

* US Trade deficit hits 5 year low in November due to fall in oil prices and slower domestic demand.

* Bloomberg: ABN Ambro: China, HK stocks may be the first to bottom amidst slump.

* RTTNews: China's foreign exchange reserves reaches USD1.95T on 31st December. For the year, it was up USD417.8B. However, the 4th quarter increase has slowed down compared with the previous 3 quarters.

Of culture, spirituality, morality and God

Bloomberg: The Dalai Lama, Tibet’s exiled spiritual leader, blamed a lack of spirituality among people today for the global financial crisis. The Buddhist monk, speaking during a weeklong religious seminar in the Indian holy city of Varanasi, told followers that “rampant corruption in the world” is due to a decline in culture and spirituality. “People have become selfish and materialistic, which has led to the economic slowdown,” the 73-year-old Nobel Peace Prize winner said in an address at the Central Institute of Higher Tibetan Studies yesterday, Indian state-run broadcaster Doordarshan reported.

The U.S. housing slump that began in 2007 has developed into a worldwide crisis that forced central bankers to cut interest rates to near zero to unlock credit markets, pushed governments to bail out their biggest banks amid $1 trillion of writedowns, and sent titans like General Motors Corp. and American International Group Inc. begging for bailouts.

Pope Benedict XVI, reflecting on the crashing stock markets and financial turmoil, said in October that money “is nothing” and the only solid reality is the word of God. “He who builds only visible and tangible things like success, career and money, builds the house of his life on sand,” the 81-year-old pontiff told bishops at an assembly in the Vatican.

Hey it it is time to seriously consider reading the teachings of the Great Confucius in Di Zi Gui.

* Bloomberg: 1) Euro falls to one month low versus Dollar on ECB rate view this Thursday.

2) RBS sees growth in China may slow to 5% this year. 3) Germany has agreed to spend an additional USD66.8b in the next 2 years, its second attempt to stem the worst recession since WWII in Europe's largest economy.

* FT.com: Ireland blames UK for engineering Sterling's slump.

* Aussie and NZ dollars fall on worsening outlook for world economy. As at yesterday, 1 AUD=RM2.44, 1 NZD=RM2.06

Technical Analysis - January 12 2009

S&P500 (890, last week 932 or -4.5% w.o.w )

There are some mixed signals in the short term coming from the index. For example, even though the Daily MACD is still in the positive, the Daily Parabolic SAR and DMIs (+ve and –ve) are showing weakness already. For the weekly readings, the indicators are improving slowly and the MACD had a positive crossover and the weekly Parabolic SAR has also just turned positive. The weekly ADX trend and DMIs (+ve and –ve) are not bullish yet. Support is around 820 and resistance at 950.

KLSE CI (919, last week 894 or +2.8% w.ow)

Unlike the other markets, the daily indicators continued to improve further during the week. The index is still able to sit above the daily 50-day ema. The daily indicators of Parabolic SAR, ADX trend and DMI (+ve and –ve) are still positive. The weekly charts have improved and the MACD and Parabolic SAR are still positive. The uptrend will be enforced further if the weekly ADX trend and DMIs (+ve and –ve) were to turn bullish too, so far still moving towards it only. The index is expected to trade between 850 and 970.

HangSeng (14,377, last week 15,043 or -4.43% w.o.w )

Another volatile situation during the week. Market sentiment for the current term seems to be mixed. While the week before there was a positive turnaround for the index, this week witnessed a negative turn. The index is now below the daily 50-day ema of 14,850 again. Except for the Parabolic SAR, the daily MACD and MACD Histogram are slightly negative. The weekly charts are doing well, especially the MACD and MACD Histogram which are bullish. The weekly Parabolic SAR is also positive. It will be bullish for the market if it can break through the tough weekly 20-day ema of 16,000. Support is seen at 14,000 and resistance at 16,000.

Nikkei 225 (8,837, last week 8,860 or -0.26% w.ow)

The daily indicators also giving some mixed signal during the week as the index falls below the daily 50-day ema of around 8,900 level after a brief success. The daily MACD and DMI indicators which have just turned positive earlier are getting weaker while the Parabolic SAR has just turned bearish. The weekly charts are improving. The Parabolic SAR is positive too. It will be bullish for the market if it can break through the tough weekly 20-day ema of 9,500. The index is expected to trade between 8,500 and 9,500.

* Japan market closed today due to the Coming of Age holiday and will be reopen on Tuesday.

* Bloomberg: Satyam may restate earnings, be broken up following Chairman Raju's arrest.

* The WSJ: Disney is moving ahead on a plan for a USD3.59B theme park in Shanghai- one of the largest foreign investments in China.

* China says it can be the first to "recover" from the current financial crisis.

Smart Investing/Trading for the week ending January 9 2009

Weekly US markets Update and Outlook

Stocks turn to earnings as recovery hopes slip

Marketwatch: Investors will get their first taste next week of what's expected to be a gruesome earnings season, with a double helping of sour 2009 outlooks and even more evidence of the depth of the recession.

"There's disappointment about the prospect of the recovery," said Ken Tower, market strategist at Quantitative Analysis Services. "Earnings are now more likely to disappoint, and across the board, [companies] are slashing estimates going forward." Stocks fell on Friday, and posted steep losses for the week, after the government said the U.S. economy lost another 524,000 jobs in December, and the unemployment rate rose to 7.2%, confirming 2007 as the worst for the labor market since World War II.

The current market consensus is for the U.S. recession to bottom out sometime in the middle of this year -- but the latest signs from the labor market suggested to many that these forecasts might be too optimistic.

"I think that people are too optimistic about the recovery," Tower said. "A lot of bad news is already priced in but every time you get worse than expected news, the stock market will have to adjust." On Friday, the Dow Jones Industrial Average finished at 8,599.18, down 143.28 points, or 1.6%, for the session. For the week, the blue-chip average posted a loss of 4.8%. The S&P 500 lost 19.38 points, or 2.1%, to finish at 890.35, with the broad index losing 4.5% for the week. The Nasdaq Composite shed 45.42 points, or 2.8%, to stand at 1,571.59 Friday, leaving it down 3.7% from last Friday's close.

President-elect Barack Obama told a news conference on Capitol Hill the jobs report underlined the need for quick action on his proposed economic stimulus proposal.

"The new Obama Administration has been very quick to market their roughly $750 billion two-year stimulus package in the hopes of speedy implementation after the January 20 inauguration," said Sherry Cooper, chief economist at BMO Capital Markets.

"Even so, it appears that the squabbling on Capitol Hill will stall early passage, at least for a while," she said.

Next week, investors will key in to more economic data, especially the December retail sales numbers due out on Wednesday, and the Federal Reserve's Beige Book of economic conditions, released on the same day.

According to Marc Pado, market strategist at Cantor Fitzgerald, the stocks in the retail sector bear watching as they have shown signs of life over the past week, even after most retailers posted scary same-store sales numbers.

Earnings

In the quarterly reporting season that gets its unofficial start Monday, analysts polled by FactSet anticipate earnings for S&P 500 companies fell 12%, dragged down by double-digit drops in auto, retail and materials companies. Alcoa Inc., which kicks off the unofficial start of reporting season after the close of trading Monday, earlier this week said it planned to cut 13,500 jobs, close plants and chop capital spending by 50%. Intel Corp., another blue-chip stock often used as a barometer for both the tech sector and the economy, will report earnings on Thursday.

Weekly KLSE CI Update and Outlook

ICapital: The KLSE CI is above its 30-day and 50-day but below its 50-week moving averages. Its daily MACD and DMI are bullish. On weekly KLSE CI. The stock market had one of its worst years ever in 2008, with the KLCI falling 39.3%. However, the KLCI has actually been quietly attempting to build a base in the past couple of months from which a bottom may form with the 800-mark acting as support. Would the volume that picked up substantially amidst the New Year rally be a precursor to a new sustained bull market?

* Beware of fake RMB ..esp...RMB100 notes.

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* I am feeling worried....TheStar: Government departments ordered to drop austerity measures.

* Bloomberg: Bank of Korea cuts key interest rate to record low 2.5% as recession looms.

* Bloomberg: Morgan Stanley: Buy Won, Mexican Peso, Yuan as dollar shortage ease.

We are unmoved!

Stumbled into this article by AmResearch this morning. It is titled "Market Strategy : Five high conviction SELL ideas in a counter-cyclical rally." Another conviction to sell is noted below this article. Those who are bullish may not be too happy to read this. Incidently, all markets are in a sea of red today.

We are unmoved by the recent strength in the market, which may be attributable to the ‘January-effect’ and some rotational index-linked buying from portfolio funds looking to raise exposure to equity in the new year. Sure, there are growing calls for a recovery in Asian equities in the second-half of this year. The massive fiscal as well as monetary stimulus on the global front is expected to take hold, albeit with a time lag to lift the regional economies out of recession perhaps in 2010. But for now, we do not think that this extended counter-cyclical rally can be sustained as the near term macro cycles are fast deteriorating: the economic inflexion point will remain a moving target. After the steep and swift run where select big-cap stocks have already risen by more than 20% in the past month alone, valuations may not withstand the onslaught of negative macro news and earnings disappointment as we enter the 1Q earnings reporting season starting from the third week of January 2009. Furthermore, catalytic policy pronouncement to seriously prod the market’s immediate focus beyond upcoming weak earnings season also appears unlikely ahead of the transition in political leadership. We are advocating locking profits in the current counter-cyclical rally. In this report, we highlight five high conviction SELL ideas, namely Bumi-Commerce, SP Setia, IJM, MAS and TMI, where earnings may seriously disappoint.

Similarly, JP Morgan wrote this morning on IOI. " We would take profit after strong outperformance; share price already implying CPO prices above RM2,000/T. TP is RM3.50"

* Satyam's "enron" type scandal will erode confidence in software/outsourcing companies and India in general.

* Bloomberg: BOE is expected to cut interest rates by 50 bp today to 1.5%, an all time record low. Why is the pound rallying mate?

* Bloomberg: Bank of China falls in HK after Li Ka-Shing sells 2 b shares at HKD1.98 (or 7.5% discount of its previous day closing price).

A and H shares near parity

Near parity. Well, I think I have heard of this term being used quite commonly by financial commentators especially in the money markets these days. Remember months ago when the value of Canadian and AUD was close to the USD? Parity or Near parity term was used. Then only before year end, this word was used again. Sterling's drop to near parity with euro! Platinum near parity with gold! And now, near parity was used to compare China's A shares and Hang Seng's H shares which we all know for years having very much differences in price. Well, nothing is impossible as we are living in exciting times!

FT.com: The difference in the share prices of Chinese companies listed in both Shanghai and Hong Kong has narrowed dramatically in recent weeks and may disappear if the Chinese economy proves resilient in the slowdown.

The A shares of companies traded in Shanghai or Shenzhen were on average 16.1 per cent higher than the H shares of the same 56 companies listed in Hong Kong, compared with 44 per cent in early December and a peak of 108.1 per cent on 16 January 2008, according to the Hang Seng China AH Premium Index.

Mainland markets have different dynamics to those in Hong Kong. Shanghai was the world's best-performing market in 2007 thanks to huge demand by domestic investors who could not buy shares overseas.

But mainland retail investors have turned cautious after the Chinese market halved in 2008. The internationally oriented Hong Kong market has recovered from 2008's lows more quickly, narrowing the price gap.

The premium could even turn into a discount if foreign investors become "massively bullish" on Chinese companies and so bid up H shares in Hong Kong, said Khiem Do, head of Asian multi-asset at Baring Asset Management. "If A shares trade at a discount, that means overseas investors are going crazy about China again and they can't access the A share market, therefore they have to buy H shares." That could happen if China grows more than expected or if the US and other developed economies shrink further than feared in 2009, he said. "But there are some very big 'ifs' there."

Hong Kong shares have risen faster than their mainland counterparts, Mr Do said, partly because some investors shorted the Hang Seng and the Hang Seng Chinese Enterprises Index of H shares as proxies to hedge against other emerging markets. As markets recovered, they had to buy back the shares. "That's why the bounce has been so big."

Even now, the shares of some small companies such as Nanjing Panda Electronics and Sinopec Yizheng Chemical trade on mainland markets at about 4½ times their Hong Kong price. In theory there should be negligible differences be­tween shares listed on two or more stock exchanges.

But China has strict capital controls. They prevent arbitrageurs from buying shares of a dual-listed company cheaply in Hong Kong and selling them at a higher price on the mainland – a process that would eventually equalise prices.

"In Hong Kong and in Shanghai and everywhere else the methodology [of valuation] is the same, but prices do vary from the intrinsic value," said Steven Sun, senior China equity strategist for HSBC. "In the long run the difference should narrow."

* BT(Singpore): Toyota to shut plants for 11 days during February and March in order to cut bulging inventories as sales plummet.

* Bloomberg: Alcoa, world's largest aluminium maker, will fire 13,500 employees, 13% of its workforce and reduce production.

* Bloomberg: Obama says federal budget deficit is likely to approach USD1T for years to come as the government grapples with a recession and other spending demands.

* RGE: Will the US Treasuries be the next bubble to fall?

* Parkson shares slumped after saying sales growth in China slows. Currently it is trading at RM3.68 or down 60 sen.

* WCT- took in its second limit down at 92.5 sen but now hovering around RM1.13 . Aseanbankers cut WCT’s earnings forecast by 21 per cent for this year and 11 per cent for 2010.

* Refer here for Genting International's latest. Its share prices is currently at 48 SG cents.

* BT: OSK-UOB: KLSE unlikely to hit 1,000 this year.

* BT: Credit Suisse: Buy high beta stocks! eg Commerce, KLK, TMI, Tanjong and Plus.

Confidence trickling in?

After more than a week of hefty rise in major world markets, market commentators have begun to feel "positive" again. Confidence seems to be on the rise amid cautiously due to a "new beginning" factor? It is true that markets do "look much better" now technically speaking despite the gloomy economic numbers being churned out. However, I must say the majority of the market participants are not convinced to go in just yet and only watched at the sideline. Or are you one of the many waiting for profit taking to set in before buying? Below is one of the few early bullish commentators for Bursa stocks. It advises "BUY" bombed-out stocks now despite an expectation of only a bear market rally this year.

Dow Jones Newswire: Malaysia players should move out of cash and into equities in 1Q09, says Macquarie; expects bear market rally this year, reckons investors "would do well to buy bombed-out stocks." Malaysian earnings likely to outshine region in 1Q09 as most of listed companies not exporters; also says "at some point, regional equity markets should respond to an easing in the bad news as fiscal policy stabilizes economic conditions towards mid-2009, leading to a partial recovery in 3Q." Recommends "bombed-out" stocks like AMMB(1015.KU), Genting(3182.KU), TM International(6888.KU), Tenaga(5347.KU). Still, warns market recovery expected to fade in 4Q as fiscal stimulus insufficient "and growth falls again once the money finishes traveling through the system"; reckons more fiscal stimulus would be needed for economy, forecasts "real recovery" through course of 2010.

* Above - Meydan RaceCourse Dubai -a joint venture project between WCT and Arabtec now gone "off course". See below.

* First limit down for the year...WCT Bhd (WCT) hits limit down in early morning trade today before it was suspended at 9.12am by Bursa Malaysia. The suspended price was RM1.29 The contract worth RM4.6b was cancelled “because of non-adherence to the agreed time schedule for construction.” WCT will make a material announcement late today. Meanwhile here are the latest TP for the stock. RHB Research RM1.28, AmResearch RM1.36. According to DJ, it may find support at MYR1.07 (Oct. 28 low), next at 90.5 sen (limit down threshold).

* Dr M: Save Palestine, Boycott US goods! Is it that easy Dr M? "OK, lets start by not using the computer!" Think of Microsoft, www, trades ......

* CNBC: People's Bank of China predicts China 2008 GDP growth seen at 9.3% and CPI at 6%.

* ChinaDaily: PWC: IPOs for China and HK will begin to pick up in the 2nd half of the year as the impact of stimulus package starts to feed into the wider economy.

BT: Palm oil at more than 2 month high. March delivery is now at RM1,894 a MT.

Technical Analysis - January 5 2009

S&P500 (932, last week 873 or +6.8% w.o.w )

The index worked extremely hard during the week with a hefty rise of almost 7%. As a result, the daily indicators continued to be in the positive last week. The index is now above the daily 50-day ema. For the weekly readings, the indicators are improving slowly and the MACD had a positive crossover but the weekly Parabolic SAR is not positive yet. The uptrend will be enforced further if the daily/weekly ADX trend and DMIs (+ve and –ve) were to turn bullish too, so far still moving towards it only. Support is around 890 and resistance at 980.

KLSE CI (894, last week 867 or +3.1% w.ow)

The daily indicators continued to improve further during the week especially during the last day of trading for the week. The index went a step higher and close the week sitting above the daily 50-day ema despite the index under pressure as evident from the high daily stochastic oscillator. The daily indicators of Parabolic SAR, ADX trend and DMI (+ve and –ve) are still positive. The weekly charts have improved and the MACD and Parabolic SAR are still positive. The uptrend will be enforced further if the weekly ADX trend and DMIs (+ve and –ve) were to turn bullish too, so far still moving towards it only. The index is expected to trade between 850 and 930.

HangSeng (15,043, last week 14,184 or +6.06% w.o.w )

What a turnaround by the index again. Despite trending lower the week before, the index jumped 6% and is now above the daily 50-day ema . Despite this, the daily MACD and MACD Histogram and Parabolic SAR are still slightly negative. The weekly charts are doing well, especially the MACD and MACD Histogram which are bullish. The weekly Parabolic SAR is also positive. Support is seen at 14,000 and resistance at 15,800.

Nikkei 225 (8,860, last week 8,740 or +1.37% w.ow)

The daily indicators continued to improve further during the week. The index seems to be heading towards the daily 50-day ema of around 8,900 level. The DMI indicators have just turned positive. However, the daily/weekly stochastic oscillator is at a high level which requires the index to correct soon. The weekly charts are improving. The Parabolic SAR has just turned bullish too. The index is expected to trade between 8,500 and 9,500.

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* World condemns Israel's offensive in Gaza Strip.

* Bloomberg: Fed officials endorse "big stimulus" to pull economy out of recession.

* Bloomberg: Obama said to push for USD300b tax cuts in economic stimulus package.

* The Standard: HK investors of Lehman minibonds may have to pay around 20% of any money they receive to their US lawyers.

Smart Investing/Trading for the week ending January 2 2009

US Markets Update and Outlook

Year-end rally to get put to the test
As volume returns, will recent euphoria depart?

MarketWatch: Like so many New Year's revelers, the U.S. stock market may try to stick to its resolutions -- and fail miserably.

After a dismal 2008, U.S. stocks started out the new year with a splash. The Dow Jones Industrial Average on Friday rose above 9,000 for the first time since early November and finished 6% higher for the week, ending a four-week losing streak. But with many professional money managers home for the Christmas and New Year's holidays, the stock market made its recent moves in very light volume. The return of institutional money next week will determine whether these gains stick. "The real question is, is this going to last when traders come back from vacation?" said Doug Roberts, chief investment strategist at investment research firm ChannelCapitalResearch.com.

Every day next week, traders will get a dose of new corporate and economic news that may give them more insight into the depth of the U.S. recession and credit crunch. Items most likely to move stocks include minutes from the Federal Reserve's last interest-rate setting meeting, two big tech conferences, returning lawmakers' efforts on another stimulus package and Friday's job report.

Autos, Madoff

The trading week starts out with a bout of Detroit dolor, Capitol Hill head-cracking and the end of an era at Apple, Inc. On Monday, U.S. automakers disclose auto sales for December. Industry sales risk dropping below a rate of 10 million on a seasonally-adjusted annual basis, or the lowest for 2008. The Treasury Dept.'s move last week to grant $5 billion in bailout money to GM's financing arm GMAC LLC, which immediately prompted GM and GMAC to ease lending conditions for new auto loans, probably came too late to sway December sales, say analysts. Still, with General Motors Corp., Ford Motor Co. and Chrysler LLC executives making no secret of their problems in hearings last month, the market may shrug off auto sales data unless the expected drop turns into a freefall.

"People are obviously expecting pretty bad numbers," said Bill Stone, chief investment strategist at PNC Wealth Management. "The fear is that you get something far worse."

Also Monday, the House Financial Services Committee will hold a hearing on the $50 billion Ponzi scheme investment manager Bernard Madoff allegedly orchestrated. The panel, led by Barney Frank, D-Mass., says it will interview witnesses with an eye on making "the most substantial rewrite" of financial markets laws since the Great Depression.

TARP, Macworld

Any word from Washington on its efforts to stem the current financial crisis -- and prevent the next one -- is likely to pique investors' interest. President-elect Barack Obama and Democratic lawmakers say they want to pass a second fiscal stimulus package to create jobs and deliver tax cuts to low-wage and middle-income workers. Recent estimates of its size have ranged from $850 million to as much as $1 trillion. Plus, lawmakers are expected to enter a new round of wrangling over the uses of the $700 billion Troubled Asset Relief Program. The Bush Administration's decision to extend the financial system bailout money to automakers pushed total TARP payouts past $350 billion. The Treasury Department must now convince Congress, which is at odds over the best uses of TARP, to release the second half of the $700 billion.

The House Financial Services Committee will hold a hearing Wednesday on uses of the TARP. Separately, Treasury Secretary Henry Paulson is scheduled to speak on the government-sponsored mortgage agencies. For tech investors, the annual Macworld trade show kicks off Tuesday with a keynote speech by a top Apple official -- but not Apple CEO Steve Jobs. The announcement last month that Jobs would forego his traditional opening remarks sent Apple's stock tumbling as worries resurfaced about Jobs' health. This is also the last Macworld Apple plans to attend. The sector gets a doubly whammy of product news next week as Microsoft Corp., Cisco Systems, Inc. and other tech heavyweights head to Las Vegas for the annual International Consumer Electronics Show.

More job losses

Economic data starts to pile up Tuesday with releases on the services sector, pending home sales and minutes from the Federal Open Market Committee's Dec. 16 meeting. That's the meeting when policymakers threw everything they had at getting credit moving in the economy.

To a certain extent, those efforts seem to be working. Mortgage rates dropped, and yields on Treasurys steepened as investors clung less desperately to safe-haven assets. Spreads on corporate debt have narrowed slightly, suggesting investors are feeling a bit more comfortable lending companies money.

"I'm cheered by the fact that spreads have come in and mortgage rates have come down," said Stone. "But we'll see if it follows through when we actually have people trading." Economic indicators early in the week -- plus Wednesday's ADP employment report and jobless claims on Thursday -- are the opening acts for Friday's main show, the December unemployment report.

Economists are looking for more of the same sorry news on the economy. They expect about half a million jobs to have disappeared in December, contributing to a 5% to 6% drop in the fourth quarter's gross domestic product.

"As we turn into the new year, the message from the data flow is as straightforward as it is glum," said J.P. Morgan Chase economist Bruce Kasman in a report Friday. "We are in the midst of a deep global economic contraction, one that is likely to produce the sharpest four-quarter decline in global GDP in the post-World War II era." In corporate news, Constellation Brands Inc., Monsanto Co, Bed Bath & Beyond Inc. and KB Home are scheduled to report earnings. Chevron Corp.will release an interim production update.

KLCI Update and Outlook

BT: The composite index's daily trend continued to stay below its intermediate-term downtrend. It continued to stay below its intermediate-term downside support.

The KLCI ended the year on a rather weak note when it closed at 873.43 on December 31, posting a year-on-year loss of 571.60 points, or 39.56 per cent. The FBM Second Board Index tumbled 2,778.34 points, or 41.27 per cent, to 3,954.01 while the FBM Mesdaq Index plunged 2,863.91 points, or 46.88 per cent, to 3,245.25.

Its daily and weekly fast MACDs (moving average convergence divergence) continued to stay above the support of their respective slow MACDs at the market close yesterday. Its monthly fast MACD continued to stay below its slow MACD.

The index's 14-day RSI stayed at 60.87 per cent level yesterday. Its 14-week and 14-month RSI stayed at 35.39 and 32.02 per cent levels respectively.

The composite index staged an overhead breakout of its 50-day moving averages on December 30 and continued to stay above that at the market close yesterday. This signalled a shift in market momentum.

With the shift in market momentum to the upside, the KLCI is now staging a re-test of its previous resistance high of 926.65 set on November 5 2008. A decisive breach of this resistance is likely to see a major trend reversal.

Next week, the index's envisaged resistance zone hovers at the 897 to 930 levels while its immediate downside support is at the 856 to 890 levels.

* Back to school tomorrow! Happy learning and making new friends!

* RGE: DJIA's stocks performance in 2008 is the worse since 1931.

* AP: Singapore's economy shrinks 12.5% in Q4. Citigroup: " If we are correct, 2009 will mark the most severe recession in Singapore's history.

* RTTNews: Japan PM says the country will be the first to recover from the financial crisis.

* Too much to handle? Bursa experienced its 3rd technical(after the lunch break) glitch since Bursa Trade implemented more than 1 month ago.