Volume 3 Issue 35: Intelligent Investing

The Fake News of HP M&A

This is what happens when you listen to tips and rumors. You lose your pants, and more.

Macroeconomists' Playbook

Here's some tips from IMF's chief economist, Olivier Blanchard.

Volume 3 Issue 34: Intelligent Investing

Volatility Is The Name Of The Game

Here is a chart of the S&P500 for the past 6 months:

S&P500

Just look at the plunge in the last few weeks. Then some rebound and then more plunging. Some say it is the credit rating downgrade, some say it is the weak economic conditions in the US and the Eurozone. But then look at the KLCI:

KLCI

The plunge is there too. Once investors started to worry about the US economy, they will start to worry about every other economy. The most frequently asked question would be, will the plunge continue? Have the stock market indices bottomed out?

If you look at the global economic environment, the issues and problems are endless:

1. Weak US economy 
Two years after the financial crisis, the unemployment rate of the US is still stuck at 9.1%. All the other indicators point to weak demand within the economy. There is even talk that the US might become the next Japan. However, I think this is unlikely. But I do believe that a recession is coming. If you have been following Bloomberg closely, you would have noticed that more and more fund managers and strategists are downgrading their outlook. While it is not in my habit to listen to other analysts, but we all know that the markets tend to fulfill itself. If everyone thinks it will go down, then it will.

2. Eurozone debt crisis 
For those of us who have a keener memory will remember that the talk about the debt crisis started all the way back in March 2010. This is a long-standing problem and there are no solutions in sight. What's worse is that it seems to be spreading to the bigger economies like Italy, Spain and France. Many things can go wrong from here as politicians continue to talk, talk and talk but there is no actual doing.

3. China's inflation muddle
As I mentioned in Two-Cent Economics, China's inflation problem is a delicate and difficult issue. It cannot let inflation spiral out of hand, and it cannot slow down its economy too fast. Once again, too many things can go wrong from this. No human can control the weather conditions. The most China can do is to cool down its demand. The supply side is out of their control. So far, Mother Nature has not been kind in 2011. Earthquake in Japan, droughts, floods, cyclones, more earthquakes, ash clouds and most recently, snow in New Zealand. Who would have thought of that?

4. The Middle East and North Africa
The political uprisings began in Tunisia in December 2010 and spread across all the other countries like Egypt,  Libya and Syria. The problems in Libya and Syria doesn't seem to be ending soon as more and more people get killed every day. Things can turn bad in so many different ways.

With so much uncertainly in the political and economic environment globally, all I can say is that, anything can go wrong. Not all of them will go wrong, but all it takes is a few of the things to go wrong and the stock markets will plunge like no other. The best thing to do right now is to do your homework. Look out for good companies, and build up your war chest. Save up your cash. When things go bad, good stocks are going to look cheap. In times of war, prepare for peace. In times of peace, prepare for war. Those are the great words of Sun Tzu.

A Bridge to Somewhere (but in the wrong place)

Read here.

This is a classic case of Malaysia Boleh. Except it is not in Malaysia. The article shows that not only is it more expensive to build a longer bridge (The Tappan Zee Bridge is built across one of the widest points of the Hudson River), it is even more expensive to maintain it. The structure is deteriorating fast as it is carrying more traffic than it was designed to hold. If the bridge had been shorter, the maintenance would not have been so high. This is the kind of lack of long-term planning that Malaysia so glaringly lacks. We just build and build without proper planning and then realize (much too late) that we should have done it in other ways. We can see this in the hundreds of highways around Klang Valley. We have the NPE, NKVE, Sprint, Elite, Guthrie, Maju, LDP, Penchala Link, Seremban Highway, etc. I can't even name them all.

With so many unplanned highways, is it a wonder if we see so many potholes around Klang Valley?

Volume 3 Issue 34: Two-Cent Economics

China's Inflation Muddle

After the most recent inflation data from China which saw the year-on-year CPI growth accelerate to 6.5% is it time to start worrying about inflation? The worry has been there for a long long time and the China bears claim that China is going to hit a hard-landing while the China-bulls have been harping that inflation has peaked time and again after each acceleration in the CPI growth. 

The fact of the matter is, this is a delicate issue. This article pretty much sums it up pretty nicely:

While China’s inflation problem should not be exaggerated, complacency would be dangerous. Current inflation is more broad-based than it appears, regardless of the controversy surrounding the adequacy of China’s CPI basket in reflecting the reality of underlying price movements. In fact, annual increases in non-food prices accelerated to 3% in June, up from 2.9% in May. According to China’s National Bureau of Statistics (NBS), living expenses increased by 6.1% year on year in May. Many worry that non-food prices may rise higher.

Barring unexpected shocks, I believe that China’s inflation may peak soon. From a macroeconomic perspective, China’s current inflation is attributable both to demand-pull and cost-push factors.

...

To tighten or not to tighten: that was the question. The PBC continued to tighten. But the collapse of Lehman Brothers in September 2008 brought global economic growth to a screeching halt. China’s GDP growth fell dramatically, owing to the collapse of external demand. To offset the negative shock, the Chinese government enacted a four-trillion-renminbi stimulus package, and the PBC shifted its policy stance abruptly. There is no question about the necessity for the turnaround. However, with hindsight, one might ask whether an earlier loosening by the PBC would have been wiser.

With taming inflation its top priority, the PBC has raised banks’ mandatory reserve ratio six times this year. Commercial banks must deposit with the central bank 21.5% of deposits as reserves. Recently, the PBC raised the one-year lending rate and the one-year deposit to 6.56% and 3.5%, respectively.

Currently, China’s inflation is not as bad as it was in 2007-2008. The rise in house prices has begun to stabilize, and the impact of the rise in commodity prices is tapering off.

External demand in the second half of 2011 is unlikely to be strong, owing to the shaky global recovery. The steady increase in production costs, partly attributable to high borrowing costs, is squeezing enterprises’ profit margins of – small and medium-sized enterprises in particular. Declining profits and rising enterprise bankruptcies are posing challenges to China’s monetary authority.

The fact of the matter is, China will have to tighten. With the Western economies running around like a headless chicken with no solutions to their problems in sight, the global economy is headed into another recession. It's time to be prepared. One of a million things can go wrong, and we don't want to be caught in that kind of tsunami.

MAS and AirAsia

Hat tip to Salvatore Dali:

US Learning From Singapore?

Even Scott Sumner thinks its the US can learn from Singapore:

7. The East Asian countries that actually are pretty rich (Singapore, Hong Kong, Taiwan, South Korea and Japan) tend to have tax rates that are well below the average of western countries.

8. Despite taxes that are much lower than in the US, Singapore has lots of nice roads and new infrastructure.

If we want to find an East Asian model to emulate, I’d suggest looking to low tax, rich, efficient Singapore, not poor and inefficient China.

No Roadblock?

While the fact that there will be no roadblocks on the highway during the holidays seems like a welcomed move, the justification given is laughable:

He said the method was first tried last year on a trial basis and many motorists were shocked and embarrassed when shown the photographs of them breaking the law.

“The hassle of having to come to JPJ offices and being interviewed over their offences was a deterrent enough for many of them,” he said when launching JPJ Hari Raya Aidilfitri Ops yesterday.

I like how these people use terms like "many" etc. so freely. I wonder if they ever collect statistics of such things. If they don't, they should. But what is funny is the bolded part. It is definitely true that having to go to the JPJ offices is more than enough to be a deterrent of committing a traffic offence. It is sad, but true. One typically has to spend about 2-3 hours at the JPJ office for an "interview", where they will just show you a picture of your car (yeah, there is no way they can prove where you really are just from the picture), and then they tell you where you committed your offence. The joke is, they would have sent you a letter inviting you in for this "interview" regarding an offence that was committed about 3-4 months ago. We won't even remember if we actually passed by that particular road 3-4 months ago.

I don't know how that proves your guilt, but the fact that you already had to wait 2 hours before the "interview" would make you feel like you should just pay the fine anyway, regardless of whether you truly committed the offence or not. It is just not worth wasting the time over it. But I digress.

The key takeaway from this is that the JPJ is actually PROUD of their inefficiency. They are so proud of it that they actually see it as a deterrent to people committing traffic offences. I don't even know where to begin to explain how wrong this is. But I guess I could begin with:

"Well, I guess they never have to improve their efficiency ever again." 

Volume 3 Issue 33: Two-Cent Economics

Why Malaysia Still Needs Manufacturing

We can all pretend that the services industry will provide the high value-added jobs. Following this, the next logical step is probably to focus on creating a lot of jobs in the high-skilled services sectors. That way, Malaysia will transform into a high income economy.

What is wrong with that argument? Here is the article which explains why every country, not just Malaysia needs jobs in the manufacturing sector:

We may live in a post-industrial age, in which information technologies, biotech, and high-value services have become drivers of economic growth. But countries ignore the health of their manufacturing industries at their peril.

High-tech services demand specialized skills and create few jobs, so their contribution to aggregate employment is bound to remain limited. Manufacturing, on the other hand, can absorb large numbers of workers with moderate skills, providing them with stable jobs and good benefits. For most countries, therefore, it remains a potent source of high-wage employment.

Indeed, the manufacturing sector is also where the world’s middle classes take shape and grow. Without a vibrant manufacturing base, societies tend to divide between rich and poor – those who have access to steady, well-paying jobs, and those whose jobs are less secure and lives more precarious. Manufacturing may ultimately be central to the vigor of a nation’s democracy.

....

The bulk of new employment has come in “personal and social services,” which is where the economy’s least productive jobs are found. This migration of jobs down the productivity ladder has shaved 0.3 percentage points off US productivity growth every year since 1990 – roughly one-sixth of the actual gain over this period. The growing proportion of low-productivity labor has also contributed to rising inequality in American society.

The loss of US manufacturing jobs accelerated after 2000, with global competition the likely culprit. As Maggie McMillan of the International Food Policy Research Institute has shown, there is an uncanny negative correlation across individual manufacturing industries between employment changes in China and the US. Where China has expanded the most, the US has lost the greatest number of jobs. In the few industries that contracted in China, the US has gained employment.

....

As economies develop and become richer, manufacturing – “making things” – inevitably becomes less important. But if this happens more rapidly than workers can acquire advanced skills, the result can be a dangerous imbalance between an economy’s productive structure and its workforce. We can see the consequences all over the world, in the form of economic underperformance, widening inequality, and divisive politics.

Volume 3 Issue 33: Intelligent Investing

Follow The Herd

This is the current prevailing sentiment in the markets. Nobody knows what the heck to do. So they just listen to what the next guy is saying:

Volume 3 Issue 32: Intelligent Investing

Double Dip?

I think this article by Robert Reich, Professor of Public Policy at UC Berkeley, pretty much describes what is happening in the US:

Imagine your house is burning. You call the fire department but your call isn’t answered because every fire fighter in town is debating whether there will be enough water to fight fires over the next ten years, even though water is plentiful right now. (Yes, there’s a long-term problem.) One faction won’t even allow the fire trucks out of the garage unless everyone agrees to cut water use. An agency that rates fire departments has just issued a downgrade, causing everyone to hoard water.

While all this squabbling continues, your house burns to the ground and the fire has now spread to your neighbors’ homes. But because everyone is preoccupied with the wrong question (the long-term water supply) and the wrong solution (saving water now), there’s no response. In the end, the town comes up with a plan for the water supply over the next decade, but it’s irrelevant because the whole town has been turned to ashes.

Okay, I exaggerate a bit, but you get the point. The American economy is on the verge of another recession. Most Americans haven’t even emerged from the last one. Consumers (70 percent of the economy) won’t or can’t spend because their major asset is worth a third less than it was five years ago, they can’t borrow as before, and they’re justifiably worried about their jobs and wages. And without customers, businesses won’t expand and hire. So we’re trapped in a vicious cycle that’s getting worse.

Surviving Sex With Black Widows

Something to take your mind off the stock markets.

Volume 3 Issue 31: Intelligent Investing

In Times Like These

Today is a public holiday in Singapore. Yet, the Wall Street Journal reports the following:

Singapore Metals Traders Work Through Holiday 

Some Singapore-based metals traders are working on the city-state's National Day holiday because of the extreme volatility in the base and precious metals markets and turbulent trading conditions.

While most Singapore-based market participants are off for the day, one trader says he's "not supposed to be working, but the markets have deigned otherwise." A second Singapore-based trader is off until the afternoon, when he says he will return to trade as London opens for business.

Even those traders who are taking time off say they are checking in on prices to keep up with the fast-moving market, which has been heavily sold the last three days. Three-month copper is down 2.6% at $8,549.75 a metric ton, while gold is up 1.54% at $1,743.70/oz.

This is simply a clear example of time waits for no one. In times like these, in times of crisis, time really waits for no one. Many of us dream of having time off from work etc. but the fact of the matter is, some work just cannot wait for you. The markets are plunging like nobody's business and if you were to take today off from work and not watch the TV or read the newspaper at all today, chances are, you could wake up tomorrow with a 5-10% loss in your investments.

In times like these, it really is time to get to work. Who knows, we may even be out of jobs soon.

Volume 3 Issue 32: Two-Cent Economics

Read China’s Lips

Stephen Roach advises all of us to read China's lips:

But, by raising the consumption share of its GDP, China will also absorb much of its surplus saving. That could bring its current account into balance – or even into slight deficit – by 2015. That will sharply reduce the pace of foreign-exchange accumulation and cut into China’s open-ended demand for dollar-denominated assets. 

So China, the largest foreign buyer of US government paper, will soon say, “enough.” Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits. That raises the biggest question of all: lacking in Chinese demand for Treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates?

The cavalier response heard from Washington insiders is that the Chinese wouldn’t dare spark such an endgame. After all, where else would they place their asset bets? Why would they risk losses in their massive portfolio of dollar-based assets?

China’s answers to those questions are clear: it is no longer willing to risk financial and economic stability on the basis of Washington’s hollow promises and tarnished economic stewardship. The Chinese are finally saying no. Read their lips.

Larry Summers calls Winklevoss twins 'Assholes'

Read here. Love this quote from Larry Summers:

"One of the things you learn as a college president is that if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o'clock, there are two possibilities. One is that they're looking for a job and have an interview; the other is that they are an a**hole. This was the latter case."

Still Don't Believe In The Decoupling?

Look at the chart here.