Tuesday, April 8, 2014

Jamming the keyboard........

I am going to just jamming the keyboard today.......please bear with me if I my writing is drifting going no where.

The economy landscape and business world had changed forever post financial crisis. The growth is very anemic. You feel things kinda of slow but it's not collapsing. Never it has that kinda of momentum that we get used to be. As a result, there are lot of funny things are going on.

You may notice companies doing insane things. They are not doing engineering and not making real stuffs. Let alone talking about solid investment. Capex???? That word is slowing fading into the far far away that nobody recognize. Instead they are playing with financial engineering. They can sell away real business and use the case the do share buyback or paying dividend. They don't care as long as the share prices are up. That is the new definition of shareholder wealth creation.

Beside playing with numbers, they also playing with people's life. Gone are the days when I learnt in business school about a happy employee is a productive employee. If you got a happy employee then your sales will soar because they will make your customer happy. Not anymore. People is our greatest asset will remain as a slogan that exist in 90s management textbook.

Gone are the days that a headhunter will call you on any other weeks hunting for talents.  The working class is definitely feeling the squeeze. The bargaining power is getting weak especially those in the manufacturing sector. The disappointing numbers coming out from the factory of the world - China - is certainly telling you that manufacturing sucks. Those still hanging on their jobs considered themselves lucky even though wages rise has been awfully slow. One man will have to do two men/women jobs.

The financial markets keeping hitting new highs....was wondering who was really benefited from the rising value. Perhaps Warren Buffet is right, those buying an index fund will beat the shit out of active stock picker. You must be crazy when the market doubled yet you are not making money.

I was at first feeling Malaysia would have a chance to turnaround because there are so many caring young people for the longest time really felt for their country. Instead of allowing the society to get more mature, you get intimidation. Even I was timid with my words in the blogsphere. Anything you write can be used against you. At the end of the day, the return of sledgehammer will break the spirit and their bones.......just look at the opposition leaders. Anwar, Karpal Singh, one by one was brought down.

The world is certainly turning upside down now but cheer up..........it's not the end of the world. Ciao!

Saturday, March 29, 2014

Can we believe in China reformation?

There are several signs of real slow down in traditional engine of growth for China:

China's monthly export growth is slowing down awfully.

China's urban fixed-asset investments have also showing very serious slow down from last few years more than 30% to now into mid-teens. They target to maintain around 17.5%

Fast pace China's government debt especially at the local level is certainly something that everybody is concerned but mostly are invested in infrastructure. Some are white elephants but there are also many that worth something and generating revenue sometime in the future.

The best part of all, despite of many traditional indicators of export oriented and infrastructure base growth heading south, the Chinese government did not go back to old habits of loosening up or pump in more infrastructure. They did something very new compared to the past,  step hard on accelerator at full throttle to press ahead with many reform programs:

  • Liberalization of deposit rates
  • Market driven lending rates
  • Fiscal and tax reform to address the local government debts
  • Allow greater daily fluctuation of RMB exchange rates
  • Allow some zombie companies to go under belly as long as it does not pose systemic risks

  • the list goes on 

I really like the price action now. This chart shows a very nice bottoming and first higher high is in the making.

Sunday, March 16, 2014

Four China Reforms to Watch

Four China Reforms to Watch

Investors are still chewing over the implications of the sweeping reform package Chinese leaders laid out at the end of a major Communist Party gathering earlier this month, but one thing is already abundantly clear. The Chinese government wants the world to know it is serious about opening up its economy and liberalizing its financial system. To that end, it unveiled a variety of planned initiatives, from land reforms to a relaxation of the infamous one-child policy, the majority of which are intended to help the country sustain long-term economic growth. And the world was impressed. Dong Tao, Credit Suisse’s Chief Economist for Non-Japan Asia, called the initiatives “the most comprehensive reform package we’ve ever seen in the history of the People’s Republic.”

The news comes at the right time. Credit Suisse Head of China Research Vincent Chan said that before the reforms were announced, the Chinese economy lacked clear drivers to even ensure steady long-term growth, let alone the blistering 7.5 percent-plus annual GDP increases it has enjoyed for the last decade. The $585 billion stimulus package approved in 2008 to stave off the effects of the global financial crisis buoyed the economy for two years after it was introduced, but the effects have since worn off. Economists have also become concerned about China’s soaring credit-to-GDP ratio, which has risen from 120 percent to more than 180 percent in the last four years, largely as a result of local government borrowing.

The most immediate beneficiaries of the reforms announced after the Third Plenum meeting will likely be China’s banks, which have an aggregate market capitalization of $850 billion. Though Chinese banks have enjoyed 28 percent compound annual earnings growth since 2009, their forward price-to-book values have dropped from 1.6x in 2009 to 0.9x today, according to Credit Suisse’s China banks analyst Victor Wang, primarily due to growing investor concern about their deteriorating risk profiles. Wang believes the banking sector should be valued 28 percent higher than it is at present, and thinks the announced reforms will be a catalyst for at least some measure of multiple expansion. “There will be a lot of positive spillover from the other reforms into the financial sector,” he says. “Some of the banks are trading at a meaningful discount-to-book value. That will be reduced soon.”

Credit Suisse also expects the insurance, property, transportation, energy, materials and consumer discretionary sectors to outperform as a result of the announced reforms. Though in many cases the government has not laid out a precise road map or timetable for implementing changes, “if even half (of the measures) go through, China will look very different five years from now than it does today,” Tao said on a recent call with investors. The Financialist has distilled the insights of Credit Suisse’s China team to provide an overview of four of the most important reforms.

Fiscal Reform

China’s banks are likely to be the biggest winners from an initiative that will see the central government take over responsibility for major infrastructure projects and social welfare initiatives from local governments. As it stands, local governments are responsible for a disproportionate amount of spending (85 percent), while getting a relatively small piece of tax revenue (52 percent). To this point, provinces and municipalities have borrowed money through specially created “local government financing vehicles” to bridge that gap. In the process, Credit Suisse analysts point out, they have racked up as much as 17 trillion yuan ($2.8 trillion) in debt, a not-insubstantial portion of which has been backed by infrastructure projects that might not have made it through a cost-benefit analysis in the private sector. By taking some of that responsibility for spending away from local governments, the country’s leaders are clearly hoping to slow down the accumulation of debts that have made investors nervous about Chinese banks.

Documents released after the meeting also call for creating an “early warning system” to flag when local debt levels are approaching dangerous levels. In most places, that “early warning system” is known as publicly available financial accounting, but to this point, that’s been a rarity among local Chinese borrowers. But that seems likely to change as well: Municipalities also received a formal go-ahead to raise money by issuing bonds, something that to this point has only existed on a small scale in pilot programs.

Of course, fewer large, local-government-financed construction projects will also reduce annual GDP growth rates from just below 8 percent to the 5-6 percent range over the next five years, Tao says. But for investors nervous about the solvency of Chinese financial institutions, higher-quality and more transparent growth will surely prove preferable to what was threatening to become unsustainably rapid economic expansion.

Reducing the Government’s Role in the Market

One primary message of the plenum was an intention to shift the balance of roles the free market and the government will play in organizing the Chinese economy going forward. The government, for example, is considering allowing markets to set prices on goods such as water, natural gas, power, transportation, telecommunications and oil. Wang points out that the government has also signaled a desire to give banks more latitude in the interest rates they are allowed to pay on deposits, which would force Chinese banks to compete with one another and potentially give households a chance to earn more interest on their savings as a result of that competition.

The reform package also stressed the importance of moving to a market-based exchange rate and full convertibility of the renminbi, China’s currency. That follows already-announced plans to test financial deregulation and relax restrictions on cross-border currency flows in free trade zones in Shanghai and Qianhai, a district of the Hong Kong border city of Shenzen.

Land Reform

In one of the most clearly articulated reforms, the government announced plans to give Chinese farmers more leeway to sell, rent or mortgage their land. For decades, farmers have “collectively” owned rural land, with the result that they weren’t allowed to sell it on the free market. Instead, local governments have acquired the land then sold it to developers for commercial, residential or industrial use, often at a healthy markup over the price paid to the farmers. (Some of that cash has then been used to invest in the local infrastructure projects mentioned above.)

Changing the system so that farmers can directly sell their land will result in a reduction in revenues for cities and towns. But if farmers stand to profit from appreciating land values, they will also have more money to spend on discretionary items, boosting domestic consumption. With urbanization still occurring at a frenetic pace, rural landowners might also choose to use their cash to buy or rent a home in one of China’s fast-growing cities, bolstering demand for urban housing. To make that easier, Chinese leaders also announced reforms to the hukou household registration system, which has to this point effectively denied the healthcare and education to which city dwellers are entitled to migrants who leave the rural provinces en masse for jobs in the city. As part of the reform, residents will be allowed to move more freely from the country to small and medium-sized cities.

Relaxing the One-Child Policy

China’s contentious one-child policy was first put into effect to keep the country’s enormous population in check. Today, rural couples can have two children if the first is disabled or a girl, but urban couples can only have two children if both partners are themselves only children. The proposed reform will allow urban couples to have two children if just one parent is an only child. Credit Suisse’s Dong Tao estimates that could result in an additional 1 to 2 million births on top of the current 16 million babies born each year.

Eventually – give or take, say, 18 years – today’s relaxation of the one-child policy will have produced more workers and taxpayers to support China’s aging population. In the short term, though, the reform will be of most interest to manufacturers of baby food, toys, and other goods. Tao estimates that if parents who choose to add an extra child to the family spend just $500 more a month as a result, it will increase economic activity between $500 million to $1 billion a year. “This is the most effective stimulus program, in my view,” says Tao.

Photo of Chinese President Xi Jinping courtesy of Kaliva / Shutterstock.com.

P.S. I am sorry for my long absence. Something happened that thrown my professional life off balance. Blogging is still something I love to do -- will try to find time to write whenever I can. Will try to put at least two more entries this month.

Thursday, January 30, 2014

China fear overblown? .................. Part II

The recent piece of op-ed by George Soros I felt was mis-quoted by Bloomberg trying to fit into their self prophecy of hard landing of China. Let me reproduced the entire section of what he wrote regarding China.

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam. 
That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35% of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing. 
There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008. But there is a significant difference, too. In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises. 
Aware of the dangers, the People’s Bank of China took steps starting in 2012 to curb the growth of debt; but when the slowdown started to cause real distress in the economy, the Party asserted its supremacy. In July 2013, the leadership ordered the steel industry to restart the furnaces and the PBOC to ease credit. The economy turned around on a dime. In November, the Third Plenum of the 18th Central Committee announced far-reaching reforms. These developments are largely responsible for the recent improvement in the global outlook. 
The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin. But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years. 
How and when this contradiction will be resolved will have profound consequences for China and the world. A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country’s political leadership, resulting in repression at home and military confrontation abroad.
The other great unresolved problem is the absence of proper global governance. The lack of agreement among the United Nations Security Council’s five permanent members is exacerbating humanitarian catastrophes in countries like Syria – not to mention allowing global warming to proceed largely unhindered. But, in contrast to the Chinese conundrum, which will come to a head in the next few years, the absence of global governance may continue indefinitely.
Read more at http://www.project-syndicate.org/commentary/george-soros-maps-the-terrain-of-a-global-economy-that-is-increasingly-shaped-by-china#WkAO50tdC2JaLSUF.99
What Soros said was the household sector has been subsidizing manufacturing, infrastructure and property. The economic growth was over-reliance on credit growth. The household sector repression had reached to a point of unable to fund the credit growth and subsequently depending on shadow banking. 

It was reported that the shadow banking in China was around USD 4.8 trillion or 55% of China 2012 economic output. There has been some news in the recent weeks that one of wealth products that ICBC marketed can default by 31 January 2014.

Industrial & Commercial Bank of China Ltd., the world’s most profitable bank, is rejecting entreaties to compensate holders of the financing, which was structured by China Credit Trust Co. to raise funds for a coal miner. New York-based Moody’s Investors Service says it is typical of financial products that have kept debt off banks’ balance sheets. The borrower, Shanxi Zhenfu Energy Group, collapsed in 2012 after leading shareholder Wang Pingyan was arrested for illegal deposit-taking. Payment on the three-year, so-called Credit Equals Gold No. 1 product is due Jan. 31.
Read more :  http://www.bloomberg.com/news/2014-01-23/china-trust-products-gone-awry-evoke-soros-echoes-of-08-crisis.html
It was a talk of town that this was a Lehman minibonds deja vu moment especially credit trust related as a % of GDP is almost doubled within a short span of time. With already nervous markets on the emerging market currencies roils, many people was so nervous that a China credit implosion will bring the world down with them.

ICBC was initially very adamant that they will not bail out the investors who lost their money but they gave in last minute that they will pay back the principal but not the interest. Many speculated that the China government was pulling strings behind the scenes of arranging bailout to prevent market panic and losing faith in the system. Another too big to fail?

Over-reliance on credit growth to generate economic growth has been a big headache. It is a perpetual vicious circle. A slowdown in credit growth will trigger a sharp economic growth. A sharp economy slowdown will cause unemployment to go up that may threaten the social stability. For the fear of social instability, politician will take the path of least resistant. Every time there is a slowdown, China government will go back to old formula to ask state-owned banks to increase credit. If they keep walking on this path, this eventually will cause credit implosion.

The new leadership has announced that they will tolerate slower growth in order to achieve sustainable growth. The question do they have the political will power to carry out the reform successfully?

Wednesday, January 29, 2014

China fear overblown?.........Part 1

The Chinese stock market is one of the cheapest in the world. H Shares listed in HKEX sold for 8X PE with dividend yield well over 3%. Their big cap banking stocks such as ICBC, CCB, ABC or BOC. Frighten with too many Cs???(death in chinese) but sold around 5 times PE I say beh C(cannot die one). Looking at just valuation metrics, all of them are just way below the historical levels.

What prevented me from buying very aggressively are contagion risk and sympathy selling if the US markets were to contract severely i.e. more than 30% drop. The second reason is further selling off in emerging market assets due to on going tapering activities and expected widely to be winding down completely sometime this year.

The emerging markets have attempted to recover their  lost grounds for a few times in the last 2 - 3 years  due to cheap valuations but ever since the Fed signaled their tapering intentions in May 2013, they just put a lid on their advances. See EEM etf which is a proxy to emerging markets. Despite of all the noises in the background(Indonesian Rupiah, Indian Rupee, Turkish Lira, Argentine Peso depreciation), from a technical stand point, they seems to be traded within quite a wide band of trading zone. The bankers in these countries seem to react sensibly by raising interest to stem further depreciation.........This at least getting to a tradeable support.

Coming back to China. The Shanghai Stock Exchange index is at the multi-year low after the bubble burst in 2008. The market is selling very cheap around 7 - 8 time PE since 2012. These kind of pessimism will essentially will come to a pass. From my personal interpretation, the SSE market has a double bottom and last week brief pulled back below 2000 scared off a lot of people. However, it bounced off sharply shows the eager buyers are still there.

The most ideal situation to deploy cash aggressively is to observe how these markets react when the US markets correct violently 20-30%.  I figure since the unwinding of "risky assets" has been on going for the last 8 - 9 months, we might be reaching or approaching to the tail end. If the reverse was to happen, despite of sharp correction of US markets, the Chinese market might continue to advance then I might miss out a lot gains. Since the Shanghai Stock Exchange market actions have been very encouraging and that was the reasons why I decided to put some small sum of money to work. When the stock market begin to go up despite of bad news, those are the good signs. I might continue to put cash to work regularly but will still will keep large sum of cash to average down in case of "sympathy selling" scenario comes true.

Monday, January 27, 2014

Turtle Portfolio bought CIMBC25

Bought 3,000 shares of CIMBC25 @ 0.94/share

Saturday, January 18, 2014

How much do I need for retirement?

For those of you who frequent my blog would know that I am not a trained personal finance planner. Whatever I write are just my opinions only. As usual, I write with a little bit of common sense, some dry cold hard number analysis and a little bit of personal experience/observations.

I have [been] managing my own money for most of the time. So, I don't talk to [a] financial planner about a topic like how much do I need so that I can retire. What is retirement anyway?

My definition of retirement is

 "accumulated capital" that generate sufficient "passive income" to fund "expenses" till the end of life.

Three key words - "accumulated capital", "passive income" and "expenses".

Mathematically, it can be expressed as follows

accumulated capital x return on investment = passive income

if we do not want to touch on our accumulated capital, then

expense must be lesser or equal of passive income. Just this simple.

To figure out how much is the accumulated capital, there are two questions we must answer

1. what is my expected expenses?

2. what is expected return on investment?

The answer to the first question is very important and the most difficult one. It involves economics  as well as psychological considerations. Psychological aspect however drives the economics decisions. I am afraid that I might have to go to touch on even more abstract stuffs like what is our philosophy of happiness. Do we need a lot stuffs to make us happy? Do we need to flash a lot of stuffs to feed our big bad hungry egos?

I can't comment on rich and famous lifestyle because I never experience one like driving a Ferrari or drinking Lafite or eating a meal of truffle. Things are most familiar to me are like nasi lemak, roti canai, Hokkien me, char koey teow, teh tarik and etc....for most of the time, spending RM 50 by going to wet market is enough stocking up my refrigerator for a week. Occasionally, going over friends house, heating up a charcoal stove and make some "purr err" tea is good enough for us to chat about almost everything under the heaven till wee hours. For most of the time, it's just a little bit of reading, internet surfing and taking care of housework. With this kind of lifestyle plus taking away the child support, parent support, subtract the petrol and toll fees(savings from commuting to works), eating outside, cut off the mobile broadband, etc....I imagine my overhead will be pretty low if I don't work.

For a person who is debt free(no more housing and auto loans), I think RM 1,500 to RM 2,000 will be more than enough for me. This chart is just I would budget my RM 2,000. Please note, I budgeted average almost RM 500/month(RM 6,000/year) for traveling if no surprises coming up to compete for this fund. If something happen, sorry-lah - no traveling that year.

I think a person who occupied mostly with daily mundane routine, RM 24,000 a year will be enough.

Once we get over the "expense" stage, solving the rest of the equation will be easy. The next is deciding "return on investment".

Risk free = 3.5% in fixed deposit
Low risk = 5.5% bond
Medium risk = 7% REIT or dividend stock
High volatility(NOT high risk) = Equity 10%

If a person is very risk adverse, allocate 100% of their "capital" in FD, the required capital will be

RM 24,000 / 3.5% = RM 685, 714

If a person has stronger stomach = 30% FD, 20% bond, 30% REIT or high dividend stocks and 20% equity, the expected return on investment from this combo will be 6.25%. The required capital will be

RM 24,000/6.25 = RM 384,000

The range that we are looking at is somewhere RM 380,000 ~ RM 685,000.

To hit RM 685,000 by the age of 45, at 10% expected rate of return, this workout to be around RM 892/month. Not too far from this portfolio saving of RM 888/month. To save up RM 892/month by assuming saving 20% from his/her salary, a person would need a job of RM 4,500/month roughly. This will leave a person roughly RM 3,105/month to cope with the rest of expenses.

It's very tough but not impossible to be retired by the age of 45 but there will be lots of sacrifices during younger age and work like hell to make at least average of RM 4,500/month for 20 years. Please note that I excluded EPF savings as a margin of safety to fund children education. With average of RM 900/month savings from EPF, at 5% CAGR return, this will leave a person roughly RM 372 k after 20 years. Arithmetically, a person can be a millionaire(685 k + 372 k) by the age of 45. This a very frugal way that I know that can be done. The million ringgit question is do salaried men/women have this kind of will power and stamina to see their goal become reality?