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Monday, March 30, 2009

The Psychology of Rights Issues

With the share prices of Maybank and TMI taking a beating after their rights issues were
announced, the weightage of these 2 companies on the KLCI means that their rights issues have
an impact on the market as a whole. As we approach the important milestones for these 2
companies’ rights issues, we will evaluate the previous rights issues by other companies to
better gauge the possible performance of Maybank and TMI based purely on their rights issues.
Based on the experience of larger caps and regional rights issues, Maybank and TMI are likely to
see their share prices appreciating ex-rights and holding throughout the rights trading period.
However, some medium term weakness should emerge as the new rights shares are listed. We
advise investors to trade the market at between 830 and 890 pts for April but look to pare down
their holdings ahead of the May results season.

Rights issues dampen the KLCI. When the rights issues of Malayan Banking (Maybank) and TM
International (TMI) were announced in late February, investors were spooked by the potentially large
dilutive effects as the discounts offered exceeded 30%. Given the weighting of Maybank (4.3%) and
TMI (1.8%) on the KLCI, the benchmark index dropped in tandem when these two companies’ shares
fell more than 20% to their lows in mid-March before recovering recently.

Upcoming rights issue milestones. With Maybank shares going ex-rights on Mar 31 and TMI on Apr
8, we feel it is critical to understand the psychology behind the rights issue and try to ascertain how their
share prices may trend as their movements will affect the broader market. To do this, we will take a look
at a number of companies both in Malaysia and regionally that have recently declared rights issues.

Bigger caps and Regional Players more indicative. Given the low liquidity and free float of the
smaller cap companies, we feel that they may not be indicative of what will be experienced by Maybank
and TMI. Instead, we look at big cap companies such as MAS and KNM as well as regional companies
including HSBC in Hong Kong and DBS as well as Chartered Semiconductor in Singapore. From our
analysis, we saw these companies experiencing the following trends:

1. An initial drop in share price after the rights issue price is announced;
2. A recovery ahead of the ex-date;
3. A further rally after the ex-date;
4. Share price holds up well during the rights trading period; and
5. Price retreats after new rights shares are listed.
KLCI may be in for short term strength but medium term weakness. With Maybank and TMI having
experienced the first 2 of the 5 trends above, we expect their share prices to either hold or recover after
going ex-rights. External factors including the upcoming 3 by-elections on Apr 7 may influence their
share prices aside from the rights issue but generally we expect some recovery in the month of April.
However, as the new rights shares will be listed towards the end of April or early May, broader market
weakness could emerge. We continue to advise investors to Trade the market between 830 and 890 pts
in March and April but pare down their investments in May ahead of the 1Q2009 results season.


Wednesday, March 25, 2009

What causes stock prices to move?

STOCK investing is perhaps the most talked about form of investing. Stocks create hype because they are volatile and sensitive to various factors. With the current economic landscape and dismal performance of bourses worldwide, we can observe that stock prices are affected on a much larger scale than usual. So, if you are wondering what makes stock prices go up or down, read on to find out.

Knowing the answer to this will enable you to buy and sell at the right time. Unfortunately, there is no one definite answer to this simple question. Various factors influence stock price movements. However, certain primary factors have a major impact on the movement and as an investor, you need to pay attention to these factors as guidance in making the right call to "buy" or "sell".

Demand and Supply

This golden rule of economics holds true even when it comes to the stock market. When demand for stocks is greater than supply, stock prices will go up. This happens when everyone starts to chase after stocks but only very few are willing to sell. This in turn, pushes the prices of stocks up further. On the flip side, when supply is greater than demand, everyone rushes to sell off their stocks, but only a few buyers are interested. This results in stock prices being depressed.

Bearing this in mind, you then need to know what causes the demand or supply to go up or down.

* Economic situation

* Economic situation Stock market performance is actually a leading indicator of our economic situation. This means that the stock market will reflect the market expectations of our economy a few months down the line. As such, if the market expects the economy to boom, you will start to see stock prices increasing much earlier than the actual boom and the opposite applies when recession hits. Bearing this in mind, as investors, you need to be sensitive to signs that provide any form of indication on the future direction of the economy.

For example, when inflation rate creeps up; there is a possibility that the interest rate will go up as well to help cool the economy. The stock market in turn, will react negatively given such an expectation. On the other hand, when the economy is at the bottom of its cycle and the interest rate is lowered to stimulate economic activity, you will see that stock market will react positively to it. This positive reaction is attributed to the expectation that the economy is on the road to recovery.

* Company performance

* Company performanceLogically, the stock price of a company should go up if its financial performance is good, and vice versa. However, you will notice that most of the time, when the financial results are announced, as long as they reflect analysts' expectations, regardless of whether the reports bear good or bad news, stock prices will usually not show much movement. It is only when the results come as a surprise to the market that you will see a blip in the price. Basically, this is because the existing stock prices already reflect the current market expectation. This tells you that you need to pay attention to the company's business fundamentals, as this is the critical factor that is going to influence the company's stock price in the long run. As an investor, you should be mindful of the company's business direction and projects that it is involved in, that have the potential of bringing growth to the business. You have keep a watchful eye on its financial performance and management's strength, in order to make a good investment decision.

* Market rumours

* Market rumoursThis is a major contributor to the stock market's short term volatility. There is a famous saying in the stock market, 'buy on rumours, sell on facts'. Investors tend to over-react or react hastily to the slightest market rumours. Often times, they will panic and rush to sell on negative rumours, resulting in the drop of the stock price. Investors could take the opportunity to buy at that particular time if they know that the company is fundamentally strong and the likelihood of the negative rumours being accurate is low; or the situation is not as bad as it is made out to be. By carefully scrutinising market rumours, you are able to make sound investment decisions instead of just following the crowd, that could lead to dire consequences.

* Political instability

* Political instabilityNaturally, if a country is experiencing political unrest, the stock market will inevitably have to deal with some setbacks. In cases of instability, foreign investors react by pulling out their funds which may trigger panic selling from all parties. You will need to assess whether the unrest is just a short-term event or carries with it a longer lasting impact. This is crucial in assessing your risk should you choose to continue holding on to your position, as opposed to taking quick action to leave the market.

The above are only a few major drivers that will cause the stock prices to move. However, most of the time, the investor psychology effect of over reacting makes market movement more prominent than it should be. One of Benjamin Graham's investing principles encourages us to look at market fluctuations as our friend rather than our enemy, as market movements sometime create buying opportunities for true investors. Therefore, as an informed and knowledgeable investor, avoid getting into "panic mode". Always remember, understand and evaluate the situation by using your own judgement to ensure that you make intelligent investment decisions.

Friday, March 20, 2009

Foreign Shareholding – Foreign investments in Malaysian companies

20.3.09

We looked at major listed companies (>RM500m market cap) under our coverage
with foreign shareholdings. These stocks comprise 50 out of the 100 stocks
in the benchmark KLCI.

By value, we estimate that foreign holdings have dropped by around 46% yoy
from a combination of lower share prices (-32% based on KLCI decline) and
disposal of shareholdings (around RM25-30bn).

Notwithstanding the lower foreign shareholding levels, we estimate that
foreigners still own RM67bn or around 15% of the KLCI stocks’ total market
cap (excluding strategic holdings). 55% of this foreign-held value is in
the top 10 stocks (by market cap) under our coverage. We note that trading
of just 1% of these foreign-held shares would be equivalent to the average
daily turnover (by value) on Bursa Malaysia for the year to date.

While we remain cautiously optimistic about a recovery for the equity
market starting around end-2009/early-2010, we highlight that foreign
portfolio investors could still influence the direction of the KLCI.
Moreover, Malaysia is currently still outperforming regional equity
markets, but this may reverse if other markets begin to recover.

We highlight that external factors remain dominant and this will likely
continue to lead the equity market in the near term. Our top picks (BCHB,
AMMB, Resorts World, TNB, Tanjong and Top Glove) are unchanged and
represent stocks that are fundamentally strong and undervalued.

Tuesday, March 10, 2009

KLCI stocks to be reduced to 30

KLCI stocks to be reduced to 30


KUALA LUMPUR: Bursa Malaysia Bhd sees little trading disruption over its plan to trim down the KL Composite Index (KLCI) to 30 large and liquid stocks. The new primary index, called the FTSE Bursa Malaysia KLCI, will replace the existing one effective July 6.

The new market benchmark will adopt the outgoing KLCI closing value on July 3. This will ensure the KLCI price continuity since it was first introduced in 1986.

Bursa Malaysia chief executive officer Datuk Yusli Mohamed Yusoff said based on the exchange’s consultation with the industry, most index tracking fund managers were already focused on 25 to 30 counters that made up the KLCI.

“There would probably be some portfolio realigment by fund managers, but overall we see a smooth transition in the broader market,’’ he told a press conference yesterday.

FTSE Group Asia Pacific managing director Paul Hoff said based on the index company’s experience when introducing a new index elsewhere, there “would be some selling on affected stocks,’’ as index tracker funds adjusted their portfolio but the overall impact on the stock market was “minimal.”

Datuk Yusli Mohamed Yusoff (left) talking with and FTSE Group Asia Pacific MD Paul Hoff before the press conference.

The 30 constituents of the soon-to-be introduced FTSE Bursa Malaysia KLCI will be ranked primarily on share capital free float and will be similar to the existing FTSE Bursa Malaysia Large 30 index (FBM30).

It was observed yesterday that the top three companies on the KLCI were Sime Darby Bhd, Tenaga Nasional Bhd and Malayan Banking Bhd, while the top three companies ranked by free float were Public Bank Bhd, Sime Darby and Bumiputra-Commerce Holdings Bhd.

The top 30 companies represent 64% of the total market value, compared with 74% for the existing 100-strong KLCI.

Yusli said the six-month notice would provide adequate time for market players to make the necessary changes for the transition.

The new index nature of giving higher weightage to companies with higher number of shares available for trade as compared with size alone, he added, would also encourage public-listed companies, especially the bigger ones, to focus more on their existing capital structure.

“This will be an incentive for companies to increase their share capital free float,’’ Yusli said.

Exchange-traded products currently tracking the KLCI and FBM30 will move into the FTSE Bursa Malaysia KLCI. All KLCI futures and options contracts would also be subjected to changes in line with the transition of the underlying index, Bursa Malaysia said in a statement.

Bursa Malaysia engaged FTSE Group to develop a new set of Malaysian equity indices two years ago and the first set of modern indices was launched in June 2006.

On his outlook for the market, Yusli said sentiment on the local front was bogged down mainly by external developments.

“The condition remains very challenging, very volatile and I believe this will continue for a while,’’ he said.

Bursa Malaysia derived the bulk of its income from fees collected from trading of shares on the local exchange. The weak market was expected to have a big impact on its financial performance for the year ended Dec 31. The full-year results were expected to be out early next month.

Monday, March 9, 2009

1929 bear market

Everywhere you turn, the current bear market is being compared to the one that started back in 1929. The percentage decline was 89.2% from top to bottom, and it lasted 714 days. Ouch!

2007 Current Bear

Peak Dow = 14,198.10 .......... date peaked =11 oct 2007
Peak S&P500 = 1,576.09 ......date peaked = 11 oct 2007

When will current bear bottom?

If current bear lasts 714 days it will be 26/09/2009 (714 days from 11 oct 2007)

What will be the Dow when it drops 89.2% from 14,198.10?
It will be 1,533.40

Time frame of current bear

11 oct 2007 ==> day 1 11 oct 2008 ====> 365 days

11 oct 2008 to 31 dec 2008 ====> 81 days

1 jan 2009 to 20 Apr 2009 (today) ====>110 days

Number of days into current bear ====> 556 days

Sunday, March 8, 2009

Guinness Anchor Bhd (Rm5.40 as at March 5) TP=RM6.20

Guinness Anchor Bhd (Rm5.40 as at March 5)

Guinness Anchor Bhd recorded sales of RM1.1bil for 2007 and RM1.2bil for 2008 financial year. Pre-tax profit was RM152.8mil and RM168.8mil respectively.

Comment by Maybank Research: The malt liquor market (MLM) registered a double-digit growth in 2008. Guinness Anchor Bhd, being the market leader with an estimated 58% share, benefited from the growth, registering more than 12% increase in volume in 2008.

Its first half year 2009 sales rose 12.8% year-on-year, which is in line with industry volume growth. We understand that cheap retailing prices seen in hypermarkets during the Chinese New Year sale reflects heavier price discounting by its key rival, as well as retailer subsidies.

Nevertheless, we still expect Guinness to deliver 6% to 7% earnings growth in FY09. Our forecast implicitly assumes that 2H09 earnings would flatten out or contract mildly year-on-year as consumers reduce discretionary spending amid a sharp economic slowdown.

Adding an important buffer to our forecast, it appears that the government is in favour of abolishing the security ink ruling, which could provide Guinness an annual savings of RM15mil. Finally, we take the view that the government is unlikely to raise excise duties on beer and stout this year.

Guinness remains one of our favourite high yielding picks, providing a prospective FY09 gross dividend yield of 9.4%, lifting the prospects of a more generous dividend policy.

Recommendation: BUY with a target price of RM6.20.

Saturday, March 7, 2009

When economy bottoms out, how will we know?

When will this wretched economy bottom out? The recession is already in its 15th month, making it longer than all but two downturns since World War II. For now, everything seems to be getting worse: The Dow is in free fall, jobs are vanishing every day, and one in eight American homeowners is in foreclosure or behind on payments.

But the economy always recovers. It runs in cycles, and economists are watching an array of statistics, some of them buried deep beneath the headlines, to spot the turning point. The Associated Press examined three markets — housing, jobs and stocks — and asked experts where things stand and how to know when they've hit bottom.

None of them expects it to come anytime soon.

___

JOBS

HOW BAD IS IT?: The U.S. unemployment rate hit 8.1 percent in February, a 25-year peak. The nation has lost 4.4 million jobs since the recession began in late 2007.

The job cuts began early last year, as the housing and construction industries slowed down. The collapse of the financial industry in the fall battered white-collar workers. Soon, layoffs spread across industries and income levels.

HOW MUCH WORSE COULD IT GET? The darkest days for the job market are almost certainly still ahead. With spending weak and credit markets stalled, experts think the economy will probably shed a total of 2.4 million jobs this year. That would mean an unemployment rate above 9 percent.

That would easily surpass the 2001 and 1990-91 recessions but trail the 10.8 percent rate of December 1982. Those expectations could be optimistic: The government's "stress tests" to check the strength of banks' balance sheets assume a 10.3 percent rate.

The job market will probably be weak for years, even if the economy starts to turn around next year. The unemployment rate may not fall back to its pre-recession level of 5 percent until 2013, according to Moody's Economy.com.

WHERE'S THE BOTTOM?: Economist Sophia Koropeckyj, a managing director at Moody's Economy.com, is keeping an eye out for two signs — an inching up in companies hiring temporary workers and a rise in the number of hours worked by those who have managed to keep their part-time and full-time jobs.

When business conditions improve, employers hire temporary workers first, she said, and a pickup in permanent hiring wouldn't be far behind. Koropeckyj estimated that could come in mid-2010.

HOUSING

HOW BAD IS IT?: The median price of a home sold in the United States fell to $170,300 in January, down 26 percent from a year and a half earlier, according to the National Association of Realtors.

But that figure masks the complexity of the market. Price drops have been far steeper around Phoenix and Las Vegas, where new homes sprouted everywhere during the housing boom, than, say, in Detroit, where economic problems predate the recession.

And even within a single metro area, price declines vary sharply. Faraway suburbs, where many buyers stretched to qualify for mortgages, have been hit harder than city centers.

This housing crash has spread pain more widely than any before it. Home prices fell about 30 percent during the Great Depression, according to calculations by Yale University economist Robert Shiller. But the nation was less concentrated in urban centers then. And a much smaller proportion of adults owned homes.

Other housing downturns in recent decades have been regional. This one is truly national. Prices in the fourth quarter of 2008 fell in nearly 90 percent of the top 150 metro areas, according to the Realtors group. And 5.4 million homeowners, about 12 percent, were in foreclosure or behind on mortgage payments at the end of last year.

HOW MUCH WORSE COULD IT GET?: The Federal Reserve estimates home prices could fall 18 to 29 percent more by the end of 2010. Declines will probably be less severe in cities with healthier economies that don't have a glut of unsold homes, like Tulsa, Okla., and Wichita, Kan.

The nation's overall economic health is vital to the health of housing. "History tells us that as long as we're losing jobs, that's not good news for the housing market," said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies.

WHERE'S THE BOTTOM?: Susan Wachter, a professor of real estate at the University of Pennsylvania, is watching the backlog of unsold homes. At January's sales pace, it would take about 9 1/2 months to rid the market of all those properties. A more normal pace would be six months.

Once foreclosures level off and the backlog is cleared, Wachter says, the housing market can begin to recover. But even with the Obama administration directing $75 billion in bailout money to stave off foreclosures, most economists don't expect home prices to bottom out before the first quarter of 2010. And don't expect an explosive rebound: Price increases will probably be modest when they come.

STOCKS

HOW BAD IS IT?: The Dow Jones industrial average and the Standard & Poor's 500 index have lost more than half their value since the stock market peaked in October 2007. It's the worst bear market since the aftermath of the crash of 1929, when the Dow plunged 89 percent and the S&P 500 index tumbled 86 percent.

HOW MUCH WORSE COULD IT GET? Analysts generally think Wall Street has endured the worst of the bear market. But many of those same analysts never thought the market would fall this far.

Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said the Dow could fall to 6,000 if the economy slows much further and unemployment rises well past the current 8.1 percent. He pegs the likelihood of that at about 30 percent. Others are more pessimistic. Bill Strazzullo, chief market strategist for Bell Curve Trading, contends the Dow might fall to 5,000 and the S&P to 500.

WHEN WILL THE BOTTOM COME?: In downturns over the past 60 years, the S&P 500 has hit bottom an average of four months before a recession ended and about nine months before unemployment hit its peak.

Investors will be looking for turnarounds in housing, lending and employment, plus signs that consumer spending has picked up. Then market players would be more likely to move their money from safe havens, such as gold, back into stocks.

Other investors may look to obscure indicators such as the Baltic Dry Index, which tracks the cost of shipping iron ore, grain and other materials. Rising rates can indicate demand for raw materials is increasing, which suggests a strengthening economy.

But most of all, traders are waiting for a sudden spasm of selling known as capitulation. That wrings fearful investors out of the market, and as they rush out, bargain-hunters rush in. Capitulation would trigger a huge plunge in prices and frenzied trading volume.

Many market experts say the bottom of the stock market could come in the second or third quarter of this year. And the recovery, whenever it comes, could be as breathtaking as the fall: Since 1932, the S&P 500 has gained an average of 46 percent in the year after stocks have hit a bottom.

Thursday, March 5, 2009

Martin Weiss

With GM now on its death bed ...

With Bank of America, Citigroup and AIG on life support ...

With General Electric, JPMorgan Chase and Well Fargo in intensive care ...

And with Moody’s now predicting that corporate bond defaults will exceed those witnessed in THE GREAT DEPRESSION ...

There is little doubt that this great bear market will continue to rage as far as the eye can see.

Here’s what I’m doing to help you keep your wealth growing no matter HOW much farther stocks fall from here ...

Dear LEE,

What, to most people, has been a raging tempest may actually be the calm before the real storm:

  • GM IS ON ITS DEATH BED: Two years ago, I warned you that General Motors was headed for bankruptcy. This morning GM’s own auditors revealed an unnamed “material weakness” in the company’s accounting — and warned that there’s serious doubt the automaker will survive.

  • BANK OF AMERICA, CITIGROUP AND AIG ARE ON LIFE SUPPORT: As soon as dire realities force Washington to pull the plug, these giant institutions will be in bankruptcy.

  • GENERAL ELECTRIC IS IN INTENSIVE CARE: S&P has already issued a negative outlook on GE’s debt and, this week, Moody’s is considering slashing the company’s credit rating — a strong signal that the company may soon be fighting for its life.

  • JPMORGAN CHASE NEXT? This morning, Moody’s slashed its outlook to negative. Ditto for Wells Fargo.

To me, JPMorgan Chase is the most worrisome of all. After all — it is America’s largest bank with a market value that’s greater than Wells Fargo, Bank of America and Citigroup combined!

Remember: JPMorgan Chase & Co. holds $91.3 trillion in derivatives — a notional value that’s 40.6 times its total assets — including $9.2 trillion credit default swaps, hands-down the riskiest form of derivatives.

Worse, the U.S. Comptroller of the Currency warns that JPMorgan Chase Bank is also exposed to extremely large credit risk with its derivatives trading partners: For each dollar of capital, the bank has credit exposure of $4.00 — nearly twice the average exposure of Bank of America and Citibank.

BOTTOM LINE: America’s four largest banks — JPMorgan Chase, Citibank, Bank of America and Wells Fargo — are ALL major threats to our nation’s future and to your money!

The broad picture is equally bleak ...

Bloomberg just reported that the AVERAGE S&P company suffered a massive 58% plunge in earnings in the last three months of last year.

Moody’s Investors Service now predicts that corporate bond defaults will more than triple this year — and exceed the levels seen during the great depression!

JPMorgan itself is warning that AT&T Inc. ... DuPont ... Textron and 20 other huge non-financial companies will likely cut or eliminate their dividends in an effort to survive.

The Fed, meanwhile, is only now truly admitting something’s wrong. After first predicting that the crisis “would end in 2008” ... then postponing their recovery forecast until the first half of 2009 ... and then delaying it again until the second half of 2009 ...

Ten of the Fed’s 12 district banks have just warned that they now see no hope of a bottom or recovery until the end of the year or in 2010.

The good news: The investments that rise when stocks fall are already spinning off enormous profits.

And as the Dow, the S&P and the Nasdaq continue to plunge in the weeks ahead, they offer you the opportunity to grab huge profit potential.

Because I’m so serious about helping you grow your wealth through these tricky times — and so committed to helping you to harness the money-making power of this bear market confidently, easily and profitably ...

I’m putting $1 MILLION of my own
money
where my mouth is:

Just last week, I deposited one million dollars in my “Million-Dollar Contrarian Portfolio” at Fidelity.com to demonstrate to you, in real time, how much money my 11 Laws of Bear Market Success can make you in this bear market.

In a few days, I’ll begin making investments designed to generate generous profits in this great bear market — and when the recovery comes, I’ll go for windfall profits with great stocks selling for pennies on the dollar.

Plus ...

  • To help you harness every profit opportunity I find, I’ll give you a 48-HOUR HEADS-UP before I buy or sell anything, and ...

  • To keep it real, I’ll publicly post my actual results — each trading confirmation and monthly brokerage statement Fidelity sends me.

I’ve just updated my full report and posted it online. Just click this link to read it now.

Good luck and God bless!


Martin D. Weiss, Ph.D.



Wednesday, March 4, 2009

11 Laws in a Bear Market

Law 1: Protect your capital

Law 2: Use common sense: Don't let anyone talk you out of selling sinking stocks.

Law 3: Don't count on the government to boost your investments. Use government -inspired
rallies as opportunities to sell.

Law 4: Invest exclusively in liquid easy-to-sell investments.

Law 5: Stay flexible. Expand your horizons beyound traditional investment strategies.

Law 6: Use investment that move independently of stocks and bonds. Examples: currencies and
gold

Law 7: Find special situations that go up DESPITE a bear market. Example: companies that are virtually depression-proof.

Law 8: Use investments that go up BECAUSE of a bear market. Example: Inverse ETF

Law 9: Balance your portfolio: Even in a bear market, don't bet EXCULSIVELY on the downsider.

Law 10: Don't fall in love with your investments: Take profits along the way and roll them into new opportunities. (Timing ?)

Law 11: Be a contrarian! Buck the crowd!

Monday, March 2, 2009

Privatisation not necessarily dirt cheap

KUALA LUMPUR: In the past month, two companies that are in the pro-cess of being privatised upped their offer price at the eleventh hour in order to meet the requirements of their takeover exercises.

Analysts said that this sent a clear signal to major shareholders who are contemplating such exercises to not price their companies too low, despite the current market rout knocking down valuations.

To recap, on Jan 20 the controlling shareholders of DK Leather Corp Bhd — Danny Koek, his spouse Goh Paik Hiah and DK-MY Holdings Sdn Bhd — raised their takeover price from 52 sen to 55 sen.

Then on Feb 17, Japan’s Toyo Ink Manufacturing Co Ltd also revised its offer price for the remaining shares it did not own in Toyochem Corp Bhd from RM2.90 to RM3.20 per share.

In both cases, DK’s major shareholders and Toyo Ink had fallen short of the 90% shareholding requirement for the offer to become unconditional. When both had revised their offers, DK was holding an 86.3% stake while Toyo Ink held 88.64% of Toyochem’s shares.

The difference was, however, that DK’s original offer price was at a 67.7% premium to its net assets per share of 31 sen as at the end of September. Toyo Ink’s first offer in comparison was at a 27.1% discount to Toyochem’s net assets per share as at Sept 30, 2008.

However, while there is no common thread why the minority shareholders for both companies chose to hold out, analysts said it may be a harbinger of things to come.

More recently, IOI Corp Bhd announced that it was taking unit IOI Properties Bhd (IOIP) private at the beginning of February via combination of IOI Corp shares and cash.

Just recently, shipping concern Halim Mazmin Bhd’s controlling shareholders, executive chairman and managing director Tan Sri Halim Mohammad and his wife Puan Sri Mazmin Noordin, proposed to take the company private for 60 sen per share via a selective capital reduction and repayment exercise.

To recap, IOI Corp’s offer for its property arm valued the latter at RM2.598 per share. The sticking point for the minorities was that the offer price was at a huge discount to IOIP’s NAV of RM3.95 per share.

However, most analysts expected IOIP’s minorities to accept the offer, as they would not risk holding shares in an unlisted entity.

In the case of Halim Mazmin, however, industry observers said while the 60 sen offer price was at a premium to its current share price, critics said it did not reflect the true valuation of the company.

Not only is the offer price at a 28.3% discount to Halim Mazmin’s net assets per share of 83.74 sen as at the end of Dec 31, the company itself is cash rich. According to its financial results for FY2008, its cash pile was RM263.43 million as at the end of last year.

Based on that figure, cash per share for Halim Mazmin works out to 82.8 sen per share. Its cash is even higher than that of its market cap, which currently stands at RM184.4 million.

According to Halim, the reason he was taking the company private now was because the outlook for the shipping industry was bleak due to the declining economy. However, given Halim Mazmin’s cash pile and assets in the form of vessels, it may prove a hard sell for the company’s minority shareholders, according to industry observers.

And it is not uncommon for a privatisation deal to fail due to strong opposition from minority shareholders. The most recent example is that of trading house Harrisons Holdings (M) Bhd.

When its major shareholder Bumi Raya International Holding Co Ltd attempted to take the company private for RM1.20 per share, the offer was met with cries from shareholders that it was too low.

Even when Bumi Raya revised the offer to RM1.45, most still refused to take the deal as it was only equivalent to 45% of Harrisons’ book value. The deal eventually lapsed and now Bumi Raya is forced to wait for six months before trying again.

Investment ideas during tough times

The collapse of Lehman Brothers in September 2008 (last year) generated a domino effect and drove more financial institutions into financial distress.

The financial landscape turned ugly immediately since then. Fear of depression resurfaced. Central banks worldwide cut interest rate simultaneously and increased stimulus packages to save the global economy. The sharp plunge in stock prices caused massive losses to some but provided “once-in-a-decade opportunities” for those who have been waiting for bargains. In line with the sharp contraction in imports following fears of reduced consumption, commodity prices also plunged.

While volatility and credit crisis have improved much, the worst may not be over and investment risk could still be high, at least over the immediate term. On the other hand, potential gain could be high for those who hit it right or have the holding power to ride through this crisis.

Possible events & investment options
Under different scenarios, there are different investment options. It is a matter of which event will happen. If it does happen, what will be the appropriate investment strategy to take advantage of the outcome? Some ideas are shown below.

(a) Stock recovers before economy
In line with deteriorating economies and falling corporate earnings, stock prices fell sharply. Part of the fall in price was due to falling fundamentals. The other contributing factors for the 50%-60% drop in stock prices include anticipation of further deterioration in the economy, exodus of foreign funds as well as distressed disposals by highly geared investors/owners and reluctant disposals by funds to meet redemption.

In terms of valuation, stock prices are cheap based on various aspects of measurement. The fear of further losses among investors (as usual in the greed and fear cycle) prevented some who have the capacity to invest from buying.

As a barometer of the economy, stock prices will recover before the economy recovers. If IMF is right, the global economy should recover early next year, stock market could bottom six months ahead or middle of this year. Thus, the opportunities to invest in stocks could be in the next quarter.

(b) Discounted blue chips
The present crisis provides opportunities for investors to acquire some of the blue chips at discounted prices. Well-managed blue chips will eventually recover and the management will implement appropriate measures such as cost cutting, rationalisation to minimise the fall in earnings during the current economic crisis. Some of them may even take advantage of the crisis to expand market share by acquiring rivals.

As blue chips are well supported by institutional investors and they seldom trade at cheap valuation, the present crisis is a blessing for those who intend to buy some blue chips for long-term investment. If not for this crisis, some of the blue chips will not be trading at low teens/single-digit valuation.

Blue chips are also an excellent means to ride the recovery of the stock market as they will most likely be the first to recover when foreign funds return.

(c) Bluest of the blue chips
While Malaysian stocks have fallen, foreign markets have fallen even more. There are many blue chips and well-known brand names in the Far East as well as in Europe and US which are trading at discounted prices. If we ignore banks that have toxic assets and waiting for government rescue, there are many bluest of the blue chips that are on the “cheap sale” list. These stocks have excellent management system, global brand name, established business network and global competitive advantage.

Following the opening of investment door for Malaysians to invest overseas, there are much more opportunities outside the country if we care to do some research. Some of the ideas include PetroChina and China Mobile from China, BHP from Australia, Great Eastern and Wilmar from Singapore, Microsoft and General Electric from US, Tesco from UK, etc.

(d) Bombed-out stocks
With our market down 40%, many stocks fell even more. Some plunged as much as 70%. If the collapse in price is not due to change in fundamentals but due to some desperate investors or funds to meet margin call or fund redemption, there will be opportunities to pick some cheap bargains. There are many penny stocks trading below RM0.50 having fair fundamentals. They could be in Mesdaq, property or construction-related companies. So long as these companies still have positive cashflow and will survive the current financial crisis, they could be bought like warrants but have no expiry date. Some of them could yield double or triple in gain when the market recovers in few years’ time. Since immediate recovery in price could be difficult in view of the still-poor market sentiment, slow accumulation could be more appropriate.

(e) High-yield stocks
During the period of uncertainty, some investors may want to stay cautious. Stocks which pay high dividend will be well supported and hence their share price could stay firm. Companies paying high dividend must be financially strong and the earnings must be “real”. It is because of this that companies that pay consistently high dividend over the years have lower risk relatively.

When choosing this type of stock, it is important to ensure that its business and cash flow are sustainable to support the dividend payment. As such, looking at the historical dividend yield alone is not sufficient to conclude whether a stock is suitable for dividend play. A good example is plantation stocks, which paid high dividend last year due to bumper profit from exceptional high CPO prices, but are unlikely to declare similarly high dividend this year.

(f) Commodity recovery
Jim Rogers is a long-term bull of commodities. The rationale is simple. Over long term, the limited supply of commodities and the gradual growth in demand will only push commodity prices higher. Recent evolution of China and also several emerging countries like Vietnam and India from primary agriculture economy to secondary economy of manufacturing requires substantial amount of basic materials. The pressure on supply will lift commodity prices higher over time.

Although the present economic slowdown will put a brake on demand, it is only temporary. After this global recession, manufacturing powerhouses will revive their production and supply of raw materials will be under stress again to meet the growing demand. As such, the uptrend cycle of commodity prices is likely to continue again after the present setback.

As for soft commodities, the swelling population worldwide as well as the growing affluence in populated economies, especially China and India, will increase the demand for many food items such as wheat, corn and vegetable oils. With limited arable land and limited scope to increase productivity, supply is under pressure to meet growing demand. The tight stock/usage ratio is very sensitive to any short-term narrowing of the supply-demand gap. Due to the limited substitute over short term, the consumer habit of consuming the same commodity normally resulted in inelastic demand. Any disruption to supply due to weather, for example, will lead to a sharp surge in the commodity price.

Another major factor supporting the bullish view for soft commodity is that the affluent generation in emerging economies has started to consume more dairy products and meat. The high grain-to-meat conversion ratio means that much more grains such as corn and soyabean must be produced to feed the cows and poultry to generate the required animal protein for the affluent society.

As such, buying commodity, be it hard or soft, is a compelling investment idea. There are several local unit trust funds offering this exposure.

(g) Weaker US$
US is expected to start printing huge amounts of money to feed the financial system and to fund its stimulus packages. With interest rate having fallen to its floor, US has used up its last card of monetary policy. Since interest rate cannot fall below zero, the only way to prevent a depression is to flood the market with more money. The low interest rate will make fund raising via bond issuance difficult. Bond has been the traditional source of funding to finance growing US trade deficits. With reduced foreign purchase of US bonds, the only way is for US to print more money.

Additional supply of greenback will only weaken US$ simply based on the economics of supply and demand. Even the fear of more US$ flooding the market and her inability to raise money through selling more bonds to foreign buyers will exert downward pressure on the greenback.

It is not inconceivable that one day investors will abandon US$ and head for the exit. When that happens, more investors will join the flight as they do not want to be left behind. As such, it is highly probable US$ will weaken soon. When that happens global financial landscape will change again.

Commodity such as crude oil will be the first to take the excuse to move up. Then other currencies will appreciate vis-à-vis US$ — some will gain more, others will gain less. The outflow of US funds has to find a home. Some will go into government bonds and some will end up in equity market.

There are many ways to take advantage of a weaker US$ — buy commodity funds, increase investment in equity funds or hold non-US currencies.

The reversal of flow of money from US will benefit Asian market which is probably the only region which is still financially strong yet without much toxic debts and still has some growth due to improving domestic spending. With stock prices having fallen by 50% or more and currencies by 10%-20%, Asian market has become very attractive to foreign funds. As such, when the US$ starts to weaken, the outflow of US funds will benefit Asian stocks the most. One investment idea is to buy Asian unit trust funds such as Greater China fund, Asia-Pacific emerging market fund and country ETF which are listed in US, Hong Kong and Singapore.

(h) Safe haven gold
When US$ weakens, gold is perceived as the safe haven, at least in the eyes of most people. In a way, gold moves in inverse correlation to US$.

After the collapse of commodities in July 2008 led by the plunge of crude oil price, most commodity prices fell in tandem, except for gold and precious metals which fell less. Gold price has been holding firm despite weaker demand following the weaker global economy and an overhang of supply from the disposal by several central banks over the last few years when gold price was rising. After gold price crossed 1980 high of US$834/troy oz, more people are convinced that gold is a good medium to preserve capital.

Unlike other forms of investment, there is no income for gold investment. The only form of return is capital gain. If gold price does not go up, there is an opportunity cost. Fortunately, with the recent sharp cut in interest rates, the opportunity cost is low. The low interest rate will remain so for the next few years. When interest rates become high again one day, the attractiveness of gold may lose its shine.

Investors wanting to have exposure to gold could buy gold jewellery. But the mark-up in workmanship at the point of purchase as well as the abatement of up to 15% at the point of disposal, make jewellery a bad investment medium. A more efficient way is to invest in gold savings account offered by some local banks. They come in smaller denomination and can be purchased or disposed easily. The transaction cost of 4%-5% is still reasonable for longer term investment. The main advantage of this form of gold investment is convenience and there is no maintenance required to keep the gold in a safe place.

For more serious investors, purchase of Gold ETF (GLD) is much cheaper. GLD is the world’s largest exchange-traded gold fund backed by gold bullion with market capitalisation of about US$15 billion. It is quoted at several major stock exchanges including Singapore, Hong Kong and New York. It is quoted at 1/10th of an ounce. Transaction cost could be as low as 0.4%. The ETF does not invest in gold mining companies whose share price may behave differently from that of gold and they are not suitable to mimic the performance of gold.

(i) Forced-sale properties
In every crisis, there are bound to be opportunities in the property market. Some investors could be forced to sell some properties at distressed price. Unlike during the Asian financial crisis where interest cost was high and banks were pulling back loans, present financial crisis will only affect those who are over-geared or those who are forced to sell their properties to cover losses in other areas. Forced-selling of properties in this crisis will not be substantial except in areas where a bubble has developed over the last few years. The most obvious are properties around KLCC area.

With more cash-rich investors eyeing distressed properties, competition is likely to be keen for those who intend to have a hand in it.

(j) Bearish investment
With the deteriorating economy, increased unemployment, reduced consumer spending and higher defaults by corporations, banks are likely to curb lending. There is also a possibility that the expected recovery of the global economy by early next year may not materialise. Cash could be the safest place to be but with the current low interest rates, one can also look at investing in short-biased hedge funds which profited from forward sales of stocks and financial instruments. Another alternative is to invest in managed futures which returned double-digit gains last year from shorting commodities, currencies and stocks. They are likely to perform well again if the financial markets continue to be volatile this year.

The above investment ideas are just some of the suggestions. Some of them may happen, others may not happen or may be delayed. Each outcome is like a bet as it may or may not happen. Each outcome carries with it a probability. If one believes in an investment idea, then some allocation can be made on the bet. An investor may adopt a number of “bets” to spread out the risk. The amount to allocate to an investment idea will very much depend on the belief that the event will happen. Likewise, no allocation should be made on an investment idea if it is believed to be unlikely to happen.

An allocation to an investment idea should not be made in the form of one bullet investment. Several tranches could be made to spread out the investment in order to mitigate timing risk. For example, if one intends to allocate 10% of asset in gold, the investment could be made in three tranches, say one-third every two months.