Smart Investing/Trading for the week ending March 07 2008

Weekly US Markets Update and Outlook

U.S. stocks brace for more volatility next week

Dow below 12,000 as recession fear, credit-market woes grip markets

U.S. stocks are poised for more volatility and losses next week, with investors digesting the past week's turbulence, including further evidence suggesting that the U.S. economy is in recession and that the credit crisis shows no signs of abating.

The past week saw an acceleration of the troubles in credit markets, where investors find it increasingly hard to assign value to debt instruments as a result of the bad loans that have surfaced on the balance sheets of financial institutions worldwide.

"We can be sure that this won't go away anytime soon," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. "We'll see more news of banks having trouble raising capital and more news pointing to the fact that we're in a recession."

Stocks took another hit on Friday after news that the U.S. economy lost 63,000 jobs in February, the largest drop since March 2003 and marking the second drop in a row in monthly employment.

The Federal Reserve also intervened to boost liquidity ahead of the jobs report, somewhat cushioning its impact. Credit markets also had become increasingly volatile since earlier in the week, after a default at mortgage lender Thornburg Mortgage Inc. and a litany of other problems at other financial institutions.
Financials stocks ended Friday's session.

Following the jobs report, market odds that the Federal Reserve will cut interest rates by 75 basis points in March jumped to 96%. The move would bring the central bank's key rate to 2.25%.

Investors next week will sift through more data that could point to economic weakness, though the first three trading sessions of the week will be relatively light on indicators.

On Thursday, February retail sales, weekly jobless claims, January business inventories and import prices for last month will be released. Friday will bring a consumer-sentiment survey and the key consumer-price index for February, which will be watched closely for signs of inflation.

Commodities continued their rally over the past week. Crude futures touched a record high of $106.54 Friday. The dollar dropped to a new low against the euro Friday, with the European currency hitting $1.5463. A weaker dollar makes dollar-denominated commodities, such as oil, less expensive for buyers holding other currencies. Among key reasons cited by traders for the continued surge are that investors fleeing dollar-denominated assets are increasingly turning to commodities to seek a safe haven.

Other beneficiaries of market turmoil have been Treasury bonds, which typically serve as a safe haven.

Some analysts believe that the current trends in U.S. markets will continue until the global economy also gets hit, which would force other central banks to also cut interest rates, putting pressure on their currencies. But U.S. stocks could take an even turn for the worst once this happens, according to Joshua Rosner, analyst at Graham Fisher, as current dollar weakness has provided support in making dollar-denominated assets more attractive. "Once foreign central banks start to cut rates and the dollar strengthens relative to those foreign currencies, we are likely to see capital flight from our equity markets," he wrote in a note. (WeeklyWatch)

Weekly KLSE Update and Outlook

" The KLCI has breached its head and shoulders neckline and also its 50-week moving average support. However, there are still views that Malaysia is resilient in the face of the global market turbulence, with growth largely driven by domestic consumption and investment. Considering the steep fall and that the RSI is oversold, would the KLCI be able to engineer a technical rebound?" (I Capital)

Tears in my eyes

The conclusion of the 12th General Election yesterday produced some shocking results that would be considered truely unbelievable and unthinkable in our dad/granddad's era.

In a nutshell, BN wins the federal government by 63% (2004: 91%) but Opposition takes five states in Penang, Kelantan, Kedah, Perak and Selangor.(2004:1) Many ruling political party heavyweights were swept away in what was called "political tsunami" Among those that lost their seats are Samy Vellu, Shahrizat, Zainuddin Maidin, Kayveas, Tan Chai Ho, Lee Hwa Beng and Koh Tsu Koon.

The tremendous support by the Malaysian towards the Opposition this time have given many new found hope that the Malaysia has matured in its 50 years of independence and the future is getting brighter with the hope that there will be more check and balance, transparency and efficiency in the Government, equality in all races with regards to education, working/business opportunities and freedom of religion. It is a major step foward.

What will it be for the Bursa's KLCI tomorrow???

It will drop!! Heavy selling is anticipated on many of the GLCs egs MRCB, UEM Group, Sime Darby etc and State owned companies in Kedah(KBinaDarulAman), Selangor(KPS) and Perak(PrkCorp) and politically connected companies eg. MRCB, Scomi, Equine, ECM, Commerz etc. The selling could continue as investors access the impact of the companies' dependence on Government/State projects.Also on scrutiny will be the State Government Funds' investment mandates and objectives. But overall it is a pain all of us (I think) are willing to bear for the goodness of our future and generations to come. Lets us all pray for a better Malaysia!

Asia's Booming Top Billionaire$

Warren Buffett regains his No 1 position in the world's riches billionaires while it is interesting to note that Microsoft's Bill Gates wealth dwindles down to No 3, according to Forbes magazine's annual billionaires list.

The number of billionaires in Asia jumped more than
30 per cent last year, with tycoons from India and China leading the charge.

In total, this year saw 1,125 people around the world making the list, up from 946 last year, representing a total net worth of US$4.4 trillion dollars and a dramatic increase from US$3.5 trillion dollars in 2007.
Asians accounted for 211 people on the list, up from 160 last year, with India counting 53, up from 36 in 2007, and China, which had just 20 billionaires last year, now boasting 42.

Below are some of the top 200 billionaires in the world sorted in their respective countries :-

HongKong (name, world ranking, value)
1) Li Ka-Shing (11) USD26.5B
2) Raymond/Thomas/Walter Kwok (23) USD19.9B
3) Lee Shau Kee (29) USD19.2B
4) Stanley Ho (113) USD8B

Malaysia
1) Robert Kwok (97) USD9B
2) Ananda Krishnan (131) USD7.2B
3) Lee Shin Cheng (173) USD5.7B

Singapore
1) Ng Teng Fong-real estate (132) USD7B

Japan
1) Akira Mori & Family-real estate (124) USD7.5B

China
1) Yang Huiyan-real estate (female, age 26) (125) USD7.5B

Taiwan
1) Tsai Hong-Tu & Family-life insurance (120) USD 7.7B


For a more complete list of billionares, click http://www.forbes.com/2008/03/05/richest-people-billionaires-billionaires08-cx_lk_0305billie_land.html

Fighting Inflation: The Chinese Way

Premier Wen Jiabao yesterday announced in his work report at the opening of China's new Parliament- the National People's Congress nine new measures for China to bust inflation, which he described as ``the biggest concern of the people’’ and Strategy his government’s most pressing priority. Ths measures will be used to bring inflation down to 2007's level of 4.8% while maintaning a GDP growth around 8% yoy in 2008.

Food, which makes up about one-third of the CPI basket was the main driver of inflation. In a nutshell, the measures are intended to expand domestic food supply, control agricultural input costs, and restrict input and food exports.

The measures are to:

1) Give more policy support to raise output of grains, eating oils and meat;

2) Control exports of cereals and grains for consumption, and crops for industrial use, and restricts the use of corns for further processing;

3) Set up comprehensive grain stockpile system, and increase imports of grains facing severe shortage in China;

4) Check the rise in the price of agricultural inputs;

5) Set up a mechanism to monitor the relationship between prices and supply/demand of key food items and primary products;

6) Monitor and control the pace and timing of cost rises of public services;

7) Expedite plans to provide subsidies for the needy hurt by rising prices;

8) Monitor and regulate price increase, in particular those of medical bills and educational fees/ charges; and

9) Make provincial governors responsible for ensuring adequate grain supply, and city mayors for adequate vegetable supply.

My Take: Price increases of goods and services can be triggered by many developments, such as 1) an increase in oil prices; 2) a fall in a major currency eg USD; 3) a nationwide excessive pay hike; or 4) an increase in food prices caused by a drought/severe winter/cathrostophe.

In summary, combating inflation requires the prevention of excessive money supply growth. Only with "too much money chasing too few goods" can the general price level continue to increase. It is worthwhile to note that many countries around the world are having rapid money supply for many years already. Inflation can also be reduced if there are efficiency in the production of goods and services by adopting new technology or skill.

Preventing excessive money supply growth requires the private-sector banks to raise interest rates at levels that are high enough to prevent excessive growth in bank credit extension. To this end, the Reserve Bank sets its repurchase rate at an appropriate level. This whole process of changing interest rates to influence credit, money supply and inflation takes time to work through; this is why monetary policy requires patience! I believe China will be able to contain inflation as there is room to continue having a tightening monetary policy which will strenghtened the yuan further and slows down the growth.

Are We There Yet?

The KLSE Composite Index went down 34 points today to 1,280. The drop of 2.6% was quite suprising as the regional markets were quite stable the whole day. For the records, the year high todate was 1,525 and we started the year 2008 with 1,445.

Market watchers were offering many opinions to the hugh selldown such as:-

1) Foreign Funds were selling ahead of the 12th general election's outcome on March 8

2) Funds taking profit on Plantation stocks in view of frothy valuation of the crude palm oil futures

3) The other overused "market excuses" of weakening US economy, high crude oil price, subprime problem, recession to stagflation, and

4) Technical Correction etc

The question now, is it time to buy?

My Take:-

The KLCI is currently sitting on a support level of 1,280 . The RSI reading is at 47 which is oversold. This level also represent the 38.2% reading of the Fibonacci Retracement. For the traders, I strongly believe there would be a technical rebound at this level and as such, you may buy some stocks which are badly beaten. However any profits on the way up should be taken immediately.

Assuming, further correction is forthcoming, the Fibonacci Retracement of 50% shows support at 1,210. Although we would love to catch stocks that are at its lowest and sell them at the highest, I suggest a BUY at levels between 1,200 to 1,270 subject to further analysis of individual stock's price and fundamentals.

Crude Palm Oil futures hit fresh high

Malaysian crude palm oil futures hit a fresh high on Tuesday, moving closer to the key RM4,500 resistance level on record crude and soyoil.

The benchmark July contract on the Bursa Malaysia Derivatives Exchange rose to a record RM4,491 (US$1,403) a tonne.

Global vegetable oil prices often track energy markets as rapeseed and soybean oils are converted into biodiesel in Europe and America. This puts more pressure on palm oil to satisfy food demand as shipments to Europe, China and other regions rise. Jakarta's plan to hike export tax from 10% to 15% for palm oil and the further strenghtening of ringgit further helps to alleviate the crude palm oil prices to a record level.

The continued upward trend of commodities prices will push the inflation higher and it seems that it will not go down any time soon.

Warren Buffett: US economy is already in recession

Warren Buffett told CNBC today that that by a "common sense definition", the U.S. economy is already in a recession, even if it hasn't met the technical definition of two consecutive quarters of negative growth.

He's been saying for several months that the U.S. could easily fall into a recession. He restated, however, his view that over the long-run the U.S. economy will do fine and that each generation will live better than the one before it. Buffett also said current conditions are "nothing like" the downturn of 1973 and 1974, although he can't rule out the possibility that things will get worse. Buffett noted that Federal Reserve Chairman Ben Bernanke has a tough "balancing act" and risks reigniting inflation with a series of rate cuts by the central bank.

Buffett also told CNBC's Becky Quick that while stocks are "not cheap" now, they're not extreme, either. He says he's waiting for when stocks become "very cheap." He does, however, "find more things to look at now than I did six months or a year ago." The best opportunities he sees right now are in bonds rather than stocks.

Buffett says his offer to guarantee $800 billion dollars in municipal bonds now backed by Ambac Financial Group Inc and FGIC is "not on the table" any longer. "We tossed our hat into the ring, and they tossed it right back."

The big bond insurers soundly rejected the offer Buffett made first made public last month on Squawk Box, saying their prospects would be severly damaged if Buffett took over the relatively solid muni bond guarantees, while not also backing the other very risky investments that threaten the bond insurers' financial footing. Berkshire created its own bond insurance subsidiary late last year.

In his letter to Berkshire shareholders on Friday, Buffett said he had identified four people who could take over making Berkshire's investment decisions, should he reluctantly give up that role.

Today he told Becky that none of those candidates are female, in part because not many women expressed interest in the job. Buffett's current role will be broken apart when he leaves Berkshire. The company had already identified candidates for Buffett's CEO role.to

My Take: Mr Buffett's views are too important to ignore or taken lightly. A very good example was last year when he disposes all his investment in PetroChina, many sceptics were saying he probably missed the China hot air balloon. It is true that he missed the last leg up in the HKSE but looking back now, he has made a correct decision and a handsome profit.

Global Trader Impact on Bursa

Below is an article published in TheEdgeDaily today regarding the recent heavy selling on certain Mesdaq, Main Board and Second Board counters:

The fall from grace of UK-registered financial institution, Global Trader Europe Ltd, has had a far-reaching impact on certain Malaysian stocks and sparked off investigations of possible manipulation of these counters, sources said.

It is understood that at least nine companies on Bursa Malaysia have been adversely impacted by “forced selling” of stocks that are pledged to Global Trader in return for a leveraged line of credit.

The heavy selldown of these stocks is said to have caused the authorities to start investigation on possible manipulation. Towards this end, several brokers have been quizzed by the authorities.

“It is not known how many more companies have shares pledged with Global Trader, which had been actively dishing out lines of credit to Malaysian investors last year,” said a source.

Shareholders of the affected companies are said to have pledged their shares to Global Trader’s office in Bangkok. Following the liquidity crunch faced by its parent company in the UK, the administrators scrutinised the accounts of its clients, especially in its Bangkok branch. It sold the pledged shares and other assets of accounts that had a margin shortfall.


This in turn triggered a massive forced selling of the stocks that were pledged. Companies affected are said to have included

H-Displays (MSC) Bhd

Ygl Convergence Bhd

My EG Services Bhd

Reliance Pacific Bhd

Aturmaju Resources Bhd

Liqua Health Corp Bhd

Cymao Holdings Bhd

Axis Incorporation Bhd


All these stocks had seen heavy trading, and tumbled amidst the market volatility in the last few weeks.

The most noticeable casualty is H-Displays, a Mesdaq-listed company which saw some RM270 million of its market capitalisation wiped out in three days. Last Monday, the stock was trading at RM1.57 and had a market capitalisation of RM329.7 million. Last Friday, it closed at 29 sen, with a market capitalisation of RM60.9 million.

H-Displays shares hit limit down on Tuesday, losing 53 sen to close at RM1.04, and continued to tumble till Friday.

A check on H-Displays’ annual report shows that Hitech Ventures Pte Ltd, the controlling shareholder of H-Displays with some 51.2% equity, had pledged about 13 million of its 107.6 million shares.

It is understood that Merrill Lynch, which had been hired to assist Global Trader in its asset recovery process, had been involved with the sell order.

My EG Services meanwhile, tumbled some 22% over the past two weeks, shedding close to RM67 million in market capitalisation.

Yet another Mesdaq-listed company, Ygl Convergence lost 69% in market capitalisation through last week, after its price fell from 57 sen on Monday down to 17.5 sen last Friday.

Several brokers involved in the selldown were said to have been questioned by the authorities, with a view of getting a clearer picture of what went wrong.

“The authorities are investigating if the stocks have been manipulated. The selldown by Global Trader itself would not have caused a big impact on the shares. Obviously, others with some inside information have also sold their position in the companies, exacerbating the situation,” said a source.

The selldown is reminiscent of a similar fall in several speculative stocks in mid-2006. Then, stocks bought by two funds based off the US namely, PB Priam Capital and Aeneas Capital Management, came under heavy selling pressure after their investments in certain stocks deteriorated significantly. Among them were Iris Corp and Farm’s Best Bhd.

There are many financial institutions like Global Trader which offer services to clients trading in derivatives and other sophisticated financial instruments. But unlike Global Trader, the majority only serve institutions and not private investors.

Global Trader was placed under special administrators in mid-February after one of its clients defaulted on a margin call, which resulted in Global Trader having a deficiency in its capital requirements.

A fund manager said that the main concern was if there were other such institutions holding pledged shares and facing similar financial problems, which could lead to more selldowns and adverse impact on the market.

My Take: This type of margin financing is unheard of until in recent times. (Not even sure it is allowed by the SC) Generally, investors on margin take their credit facilities from either the brokerage firms or banks that offer margin facilities. These local firms/banks are usually very selective on their clients and the counters to be accepted as collaterals. Mesdaq counters, loss making counters, illiquid counters, suspended counters etc are generally not accepted as collaterals and even if accepted, it will be offered with low cappings. I believe most of the above counters will not be accepted as a collateral if source locally. So, under such circumstances, Global Trader in Bangkok has an offer that is attractive as they are willing to margin such counters. As the selldown comes in, the less liquid counters(Mesdaq counters) under margin call will be at the receiving end as there are not enough buyers to support it, as such there was this hugh drop in the share prices. Although it will be difficult to detect, the authorities clearly have to look into such kind of margin financing which could be hidden in any form of normal trading accounts.

Smart Investing/Trading for the week ending Feb 29 2008

Weekly US Markets Update and Outlook (Source:MarketWatch)

U.S. stocks enter new month on uncertain footing

Down performance in February puts stocks in the red for year-to-date

U.S. stocks will enter March on uncertain footing next week, with a sell-off Friday marking the fourth consecutive month of declines for a market that remains plagued by the credit crisis and an uncertain economic outlook.

"Since early October, the market has been largely declining, signaling one of two things," said Hugh Johnson, chairman of Johnson Illington Advisors. "Either we're in a bear market and entering recession or we're having a correction accompanied by a slowdown." "Either way, the trend as we start March is not good," he said.

February ended Friday with the Dow Jones Industrial sliding 315 points, or 2.5%, to 12,266. Insurance giant AIG led the losses, falling more than 7% after posting its largest loss in almost 90 years of business. With the credit crisis claiming new victims almost daily, investors had placed their hopes on a bail-out plan for ailing bond insurers Ambac, but a deal seemed uncertain by Friday.

The S&P 500 index fell 37 points, or 2.7%, to 1,330 Friday, while the Nasdaq Composite gave up 60 points, or 2.6%, to 2,271. Among tech stocks, Dell led the way lower, as the PC-maker posted a 6% drop in profits. "There was also a report out mentioning that write-downs for financial institutions could total $600 billion, which is adding another layer of uncertainty for money center banks and the market," said Robert Pavlik, chief investment officer at Oaktree Asset Management.

Jobs on the line

Another week full of key economic data awaits investors, with the all-important February jobs report on tap for Friday. The January jobs report had revealed the first contraction in employment in more than four years, seen by many as perhaps the smoking gun revealing the economy has entered a recession. Ahead of this, investors will sift through February data on manufacturing on Monday, the service sector on Tuesday, and productivity and costs on Wednesday.

Inflation

With a continuing stream of bad economic data and promises of lower rates from the Fed last week, the dollar sank to a new low of $1.5239 against the euro, and dropped to a three-year low of 103.66 against the Japanese yen. A weak dollar tends to fuel the price of dollar-denominated commodities, which become more affordable in other currencies. This, along with supply concerns and geopolitical tensions, also helped lead crude-oil prices to a new record above $103 a barrel. At the same time, the price of gold also hit a new record above $978 an ounce, bringing the precious metal within reach of the key $1000 mark.

Economists and investors are concerned that a surge in commodities prices, compounded by the Fed's rate cuts, will boost inflation later this year, raising the specter of stagflation for the economy. But according to Johnson, investors are flocking to commodities for the same reason they are also pouring money into government bonds: to find a safe-haven from all the current market uncertainty.

Weekly KLSE Update and Outlook(Source: I Capital)

The KLSE CI is below its 30-day and 50-day but above its 50-week moving averages. Both its daily DMI and MACD are in bearish territories.

This week's I Capital updates the daily KLSE Composite Index. Its weekly MACD and DMI are also mirroring the bearish signals from the daily indicators that are flashing signs of further correction on the KLCI. Moreover, it has now broken through the neckline of the head and shoulders formation, indicating that the support has turned into resistance. The local situation is fluid, as investors stay cautious ahead of the general election. However, the recently released GDP growth of
7.3% in the fourth quarter last year shows that prospects for the local economy remain favourable. So, an overdue correction rather than a bear is seen.

Over the next few months, the KLSE faces more corrections, irrespective of the election result. The Jan plunge that hit many stock markets bypassed the KLSE. Now it is the turn of the KLSE. At the same time, as crude palm oil price continues to surge, remember this brings it closer to a bubble and an eventual correction or decline. The rise in palm oil price is getting to be parabolic.