AMMB Holdings (Outperform) - Closing the gap

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AMM MK

Outperform

Stock price as of 07 Aug 09	RM	4.15
12-month target	RM	4.89
Upside/downside	%	+17.8
Valuation	RM	4.89-5.33
- Gordon growth model
GICS sector	diversified financials
Market cap	RMm	11,300
30-day avg turnover	RMm	34.2
Market cap	US$m	3,231
Number shares on issue	m	2,723

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Investment fundamentals

Year end 31 Mar		2009A	2010E	2011E	2012E
Net interest inc	m	1,776.3	1,819.3	1,981.0	2,227.8
Non interest inc	m	1,494.7	1,772.8	1,966.2	2,118.2
Underlying profit	m	1,658.8	1,915.1	2,134.5	2,385.2
PBT	m	1,217.6	1,221.1	1,477.5	1,682.2
PBT Growth	%	1.9	0.3	21.0	13.9
Reported profit	m	860.8	887.3	1,088.0	1,232.0
Adjusted profit	m	860.8	887.3	1,088.0	1,232.0
EPS rep	sen	31.6	29.4	36.1	40.9
EPS rep growth	%	14.6	-6.9	22.6	13.2
EPS adj	sen	31.6	29.4	36.1	40.9
EPS adj growth	%	14.2	-6.9	22.6	13.2
PE rep	x	13.1	14.1	11.5	10.2
PE adj	x	13.1	14.1	11.5	10.2
Total DPS	sen	8.0	10.0	12.0	14.0
Total div yield	%	1.9

What the Australian Dollar Is Telling Me ... by Bryan Rich

According to the financial markets, the world has become a very calm and comfortable place again. But has it?

Just a year ago markets were crashing all around us ...

The U.S. housing market had started the snowball rolling far earlier. Then the U.S. stock market finally turned over. Later, other markets, like commodities and currencies, woke up to the realization that a crisis in the U.S. economy had tentacles reaching around the world! And the music stopped ...

Investors went running for the exits, markets collapsed and U.S. Treasuries and the U.S. dollar soared as capital around the world fled to safety. The theory of global diversification crumbled. And the risk gauge for financial markets skyrocketed.

A good pulse of the market's assessment of risk shows up in "implied volatility." Here's a brief explanation of what I'm talking about:

Actual volatility is the dispersion of prices around the mean — simply a market's price volatility. On the other hand, implied volatility is determined by market participants. It's the perception of how volatile the markets will be and how certain (or uncertain) the outcomes will be.

This makes implied volatility a good risk barometer. And that's why it's a key component in pricing options, where market participants typically go for protection when the perception of risk in the financial markets rises.

So what was the market saying about risk this time last year? Here's a look at a chart on implied volatility in the Australian dollar and the S&P 500 ...

Source: Bloomberg

As you can see, the massive surge beginning last September was nearly a five-fold jump in the fear gauge — a clear panic in financial markets.

And the trigger was ...

First, a huge third-quarter loss from Lehman Brothers and a downgraded estimate for Merrill Lynch.

Then, a weekend takeover of Merrill Lynch by Bank of America.

And finally, the announcement of Lehman Brothers' bankruptcy.

But here's the thing ...

Wall Street Has Proven to Be
Lousy At Estimating Risk ...

Just prior to the September 2008 spike in volatility, Wall Street's mood was pretty rosy, despite the trail of disaster that had already been delivered:

• Morgan Stanley lowered expectations for global growth from 5 percent to between "3.5 percent and 4 percent." Global growth went negative.
  
  
• Lehman Brothers said they expected stocks to "climb at least 17 percent by December 31." Eight days later Lehman Brothers was bankrupt.
  
  
• Citibank said they expected 2008 to mark the biggest year-end rally in stocks in a decade.
  
  
• And JP Morgan was looking for an 11 percent rally into the year end.

Stocks never made a tick higher and finished the year down another 29 percent.

This is a good example of how complacency and unwarranted optimism can end abruptly. And I think that's what we're going to see ... again.

Since the middle of last year, financial markets have traded distinctly in one of two camps: Either risky or safe. When volatility was soaring, global investors fled all things risky for a safe place to park their capital. The dollar benefited and so did U.S. Treasury prices.

But since March of this year, triggered by the Fed Chairman's finding of "green shoots" in the economy, this risk aversion trade has reversed. Capital has steadily and aggressively moved out of safety and into riskier, higher-return investments.

Will we see another spike in fear when a negative surprise hits the markets? I think we will. And I think the setback for the global economy will be considerable ...

Investor and consumer confidence, when burned again, will be very difficult to regain. And that creates a scenario for prolonged weakness in economies and prolonged weakness in financial markets.

Market Position Signals
Risk Appetite Is Vulnerable ...

The Australian dollar has been the high-beta trade among major currencies in this run-up in risky assets. In other words, the Australian dollar has gained nearly 2 percent for every 1 percent in the euro or the British pound.

And as you can see in the chart below, it has gained more in percentage terms than it lost at the height of fear in the global economy. Even the optimists have to agree, things aren't that good today!

Source: Bloomberg

Technically speaking, the currency is also running up against an important retracement level.

And more investors have gone "long" the Australian dollar than at any time since July of last year — which by no coincidence was the same time the currency reached its highs and turned sharply lower.

So be very cautious of this run-up in risk appetite. Based on the action in the Australian dollar, and considering the market's vulnerability to another dose of fear, the dollar and the risk aversion trade look more likely to return.

Greed and Fear at play

Stock markets have kept rising every month since March without any significant downward adjustment. At first, the market opinions were still debating whether it was the arrival of the bull market or rebound of the bear market. Of late however, some sceptics who took a negative view have changed their view and become positive, although there are some who do not wish to be seen to have openly changed their view have also soften their tone. Thus, what we hear in the market is the bull has arrived.

The question is: There should be adjustments in a bull market, afterall people like to enter the market during adjustment and buy stocks for less, rather than to chase stocks at high price level only to encounter major or minor market adjustments.

True, there were monthly adjustments for the past months. But how much an adjustment is enough? When a 10% adjustment happens, people hope it was15%, but by then the market would become panicky, and people would expect market to adjust by 20% to 30% or even more.

My impression from what I have gathered from small investors for the past 20 over years is: only few would enter the market at the initial stage of an adjustment; most would not dare to enter the market, thinking the adjustment would go further. In a bull market, rises are often
rapid and declines slow, and in no time a certain turnaround stock prices already back to the
level before adjustment, or even higher. As a result, small investors miss the opportunities to
enter market. Even now, many people I know are without any stock on hand, or still hold on
to stocks bought in 2007 peak.

There are other small investors who might have entered the market at various stages, but still hopeful of a bigger adjustment to come. They only invest a small part of their investible fund, most of it is still on hold. These investors in fact have missed out the many adjustments of the past months. They only invest a small part of their capital because they chased and bought stocks at high prices after adjustments, and hence lack the confidence to invest more.

Stock prices rise step by step in a bull market; small investors cautiously invest their capital sparingly intitally only to invest more at the later stage. When the bull market ends and stock prices fall, small investors then find out that their average cost of their holdings is not low as they had invested to little at the beginging of the bull market. If you believe now is the bull market, why not go for it. If your available fund is for business operations, do not use it for buying stocks. If however your availabe fund is sitting in a bank earning a meagre interest income, then you may consider investing more daringly if you are young. Even if you are unfortunate enough to enter the market at a wrong time in a bull market that adjust 20% or 30%, you need not be too worry as long as it is still a bull market, prices will hit new high after adjustments.

The difference between investing in stock market and horse betting is: if you bet on a wrong horse, your money is gone; if you buy stocks at a wrong time, you still can hold them until the prices of the stocks recover

Malaysia: Gaming (NFO) - BToto's jackpot monopoly challenged

Magnum has obtained approval to start a new 4-digit game incorporating a jackpot element by end-09. Mildly negative to BToto and mildly positive to Tanjong Plc's long-term prospects. BToto is still a BUY at lower prices

Events
. Magnum has obtained approval from all relevant authorities to launch a new 4-digit game incorporating a jackpot element by end-09.

Impact
. Based on an educated guess of Magnum's game variant (no official details yet) and taking into account Tanjong's likelihood to follow suit to launch a similar product next year, these new games would only modestly dent BToto's longer-term earnings. Our assessment assumes the following for the new games jackpot prizes: a) RM2m start up, b) reasonably high prize limits (e.g. RM20m), and c) lesser popularity for BToto's jackpot games, and hence, slower snowballing of prize quantum. The new games would serve to boost the legal number forecasting market size as illegal bookies do not have the sophistication nor the capital to replicate the jackpot games.

. Modest earnings dampener to BToto, <5% to earnings. But, our sensitivity analysis suggests that losing a jackpot revenue which is equivalent to 5% of gross number forecasting receipts could cause BToto's profit to fall by 9%. Nevertheless, the impact is cushioned by BToto's extensive outlet network (681 outlets, the largest among three NFOs) and jackpot game variants (6).

. A significant positive for Multi-Purpose Holdings (MPHB Mk/NOT
RATED), Magnum's holding company. Magnum's new game variant could potentially raise MPHB's earnings by 10-15%, assuming: a) revenue enhancement of 10-15%, b) prize payout ratio of 55% for jackpot games vs 65% for 4D games, and c) Magnum accounts for 80% of PHB's net profit. Modest benefits to Tanjong Plc (TJN MK/NOT RATED) which we expect to eventually launch a new game variant in 2011 (after it undergoes a system upgrade).


Valuation/Recommendation. BToto: Maintain BUY (on weakness) and DCF-based target price of RM4.90/share (cost of equity of 8.9%, terminal growth of 1%) although the stock lacks a near-term re-rating catalyst. Among the other two NFO operators, Tanjong has more compelling valuations - 8.7x FY11F (ending April) consensus earnings vs Magnum's 2010F PE of 12.4x. Even after imputing earnings enhancements from a new game variant for each company, Tanjong still features a more undemanding PE multiple.

J.P. Morgan optimistic about emerging market stocks

By Chloe Shea, | 21 July 2009
The US investment bank believes the worst is over for China, Taiwan and Korea and is bullish on other Asian emerging markets as well.


"Best ever bull" is a phrase that was used by J.P. Morgan's Adrian Mowat in a recent press biefing to describe the economic outlook for emerging markets. In contrast to the skeptics who are questioning the sustainability of the recent stock market rebound, the bank's head of equity strategy for Asia-Pacific views the current improvement in various stock market indices
as the beginning of an ongoing expansion.

In line with its optimism, J.P. Morgan recently revised up several of its growth estimates. Its forecast for third quarter US GDP growth now stands at 2.5%, up from its previous estimate of 1% and significantly higher than the consensus estimates of 0.5%. For 2010, J.P. Morgan's growth forecast is 2.8%, while consensus estimates are at 1.8%. Mowat suggested that the
latest economic indicators are signs that the global economy is getting back on the right track.

Indicators such as the US Institute for Supply Management Index (ISM) and the Purchasing Managers Index (PMI) are encouraging, added Mowat. ISM, which measures manufacturers' activity levels, increased by 17% from November 2008 to May 2009. And J.P. Morgan's global manufacturing PMI, which indicates levels of factory production, rose to 46.7 in June, its highest level since Lehman Brothers declared bankruptcy in September 2008. Mowat believes the improvements are driven by more stable domestic demand and inventory contraction in emerging markets, which are taking the lead when it comes to the global recovery. In China, the government's fiscal stimulus package and monetary policies are having a positive effect and
thus consumer spending and infrastructure investments have started to boom. J.P. Morgan expects equities linked to China's domestic consumer sectors, banks and utilities, as well as construction stocks to continue to lead the stock market rally.

Countries that are net exporters, such as Taiwan and Korea, are also favoured by J.P. Morgan. The bank says the strong rally in the Taiwanese stock market is driven by liquidity flows resulting from tax cuts, government policies and most importantly, improving cross-strait relations. In Korea, positive outlooks for retail and auto businesses are being supported by favourable government policies. Low inventory levels suggest an increase in production that can boost the possibility of a healthy economic recovery. Both countries' currencies also remain weak vis-à-vis the US dollar ,suggesting exporters will benefit from larger export orders,
J.P. Morgan believes.

Looking at the economies of Asian emerging markets, Mowat suggests a decline in risk premiums, lower risk-free rates and trade recovery are the three main drivers for robust rallies. He argues that central banks in the US and China are unlikely to raise interest rates in the short term as businesses are starting to benefit from lower rates. Moreover, central banks have learned "a painful lesson" from Japan, where the Japanese finance ministry raised interest rates sharply in 1989 to tackle the housing bubble, but ended up with a significant crash in the domestic stock market.

But Mowat sees risks ahead as well. Commodity prices have been rising, which could fuel inflation and harm the development of emerging markets which are large consumers of commodities. There are also concerns about commodities overheating and eventually create a bubble similar to what happened in July 2008, when speculators pushed up commodity prices and ultimately led to a correction across asset classes.

In addition, Mowat highlights a concern that the US economy will continue to underperform and result in a drag effect on the rest of the world. In the US, the unemployment rate is soaring - it reached 9.5% in June, which was its highest level in 26 years. Falling real estate prices are
encouraging higher savings and consumer spending is suffering, which could delay a recovery.

Economic indicators in China have already turned positive, Mowat said, and added that Korea, India, Indonesia and Thailand are also showing positive signs. Among other Asian markets, Malaysia's economic outlook remains gloomy with GDP growth declining sharply. J.P. Morgan is conservative about Malaysia's economic recovery and says it remains uncertain whether Prime
Minister Najiib Razak will be able to deliver effective fiscal stimulus to the market. Singapore and Hong Kong are expected to have a slow recovery along with other developed countries. Their large exposure to global trade and unsatisfactory employment numbers will possibly have a negative impact on their markets, J.P. Morgan commented. So, whether the momentum of growth in Asia's emerging markets can spread across borders is still a question
mark.

Sanguine on Tanjong's growth strategy

TANJONG plc's (RM14.40) earnings results for the first quarter of its financial year ending January 2010 showed little signs of pressure from the global economic downturn.

The company reported a net profit of RM191.4 million for the three-month period from February to April 2009 — recovering smartly from the immediate preceding quarter in the absence of one-off items.

Tanjong's results underscore the resilience of its key businesses, which we believe will remain steady for the remainder of the financial year, barring unforeseen events or extraordinary charges.

Growth prospects at cheap valuations
We estimate net profit to grow to RM654.5 million in FY10, equivalent to about 162.3 sen per share. This prices its shares at a forward P/E multiple of only 8.8 times - making Tanjong one of the most attractively valued big cap blue-chip stocks on the local bourse.

Shareholders will also earn higher-than-market average yields. We estimate dividends will rise to RM1 per share in the current financial year, on the back of higher earnings. This will translate into gross yield of 7% at the current share price.

Most importantly, we believe that Tanjong remains committed to pursuing a strategy of growth. The company is actively on the lookout for new investing opportunities, particularly within the power generation sector.

It has a strong foothold in developing countries such as Egypt, Bangladesh and Pakistan where power consumption is expected to grow rapidly. Hence, we are sanguine of Tanjong's future growth prospects.








Power rebounds sans one-off items
Tanjong's three local power plants generated EBIT (operating earnings before interest and tax) of roughly RM118 million in 1QFY10, almost double that in the previous corresponding quarter. This was due to the absence of one-off charges - earnings in 1QFY09 were hurt by about RM35 million in development costs written off as well as losses from unscheduled outage.

Meanwhile, earnings from Tanjong's overseas power generating subsidiaries were broadly in line with expectations, EBIT increasing by about 4% year-on-year (y-o-y) to RM147 million. Pre-tax profit from its power associates was also higher at RM15.4 million.

Going forward, contributions from the power business are not expected to vary significantly from that recorded in 1QFY10. Returns from all the power plants are backed by long-term power purchase agreements.

EBIT for its power subsidiaries are estimated to total some RM1 billion for FY10, up from RM793.7 million in the previous financial year. Meanwhile, profit before tax from its power associates is estimated to hold steady at around RM59 million.

Gaming holds steady
Similarly, earnings from the NFO business should also remain fairly steady for the rest of the year. We estimate about 175 draws in total for FY10, including draws carried forward from the previous financial year, and sales per draw growth of about 1.5%.

Although quarterly earnings would fluctuate depending on the luck factor, prize payout should average out at around 65%-66%. Operating profit is estimated at roughly RM239 million in FY10, similar to that in FY09. On the other hand, the RTO business is expected to remain in the red.

Menara Maxis fully occupied
Tanjong's property earnings, primarily rental income from Menara Maxis, too are not expected to see any material volatility. The building achieved full occupancy over the past few years and is expected to remain so for the foreseeable future. The property arm contributes EBIT of over RM40 million a year to Tanjong's coffers.













Losses narrow for Tropical Islands
The Tropical Islands resorts business should fare better in the current financial year. The resorts achieved positive EBITDA (earnings before interest, tax and depreciation) in FY09 on the back of higher visitor numbers and average spending per visitor. This follows the completion of additional facilities under the second phase of development in July 2007.

We estimate operating losses will narrow to about RM20 million in the current financial year, down from losses of RM33.9 million in FY09. However, a significant turnaround is only likely once the last phase of the project takes shape.

Tanjong is partnering with third parties who will independently finance and develop on-site accommodation facilities. This would expand its target market, which currently consists primarily of day-trippers, beyond the local geographical area. The availability of overnight accommodation will also lengthen the duration of stay and raise the average spending per visitor.

The initial phase of the development is targeted for completion by end-2011. Elsewhere, the company will see full-year contribution from TGV Cinemas for FY10 after completing the acquisition of the remaining 50% equity stake. It plans to increase the total number of screens to 114 in the current year, up from 100 at end-FY09.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

Unemployment, Not the Stock Market, Distinguishes a Recession From a Depression by Claus Vogt

What are the most important and enduring characteristics of the Great Depression? And what should we monitor to determine how severe today's situation really is?

The stock market will give important clues. But the economy, especially unemployment, defines depressions.

That should be obvious. However, after the stock market rallied off its March 2009 low, the media and many pundits seem to be fixated on the financial markets to determine the severity of the crisis and to call its end.

To see if the bulls' hopeful thinking holds water, let's go back to 1929 and have a look at the stock market's behavior during those horrific times ...

The Bear Market Rally of 1929/30

Yes, there was a spectacular stock market crash in 1929. But a stock market crash does not a depression make. Remember 1987? There was a very similar crash ... but no depression. Not even a mild recession.

The crash of 1929 proved to be only the prelude to further heavy losses in 1930-1932. After the initial crash from 381 to 199, a huge rally emerged. Prices rose all the way back to 294 for a 48 percent bear market rally. Hence initial losses were roughly cut in half!
The stock market crash on Black Thursday, October 24, 1929, was just the beginning of the carnage to hit Wall Street.
The stock market crash on Black Thursday, October 24, 1929, was just the beginning of the carnage to hit Wall Street.

Unfortunately, investors didn't recognize this rally as a selling opportunity. Instead, they listened to the bullish advice of Wall Street pundits and the government's declarations that the worst was over and prosperity was right around the corner.

As we all know, this optimism proved to be, well, premature. The huge rally turned out to be just a bear market rally ... soon the market started to tank again.

First, stocks tumbled back to the crash-lows, where a second and shallower rally emerged. Then after this bout of hope had evaporated, the market cascaded lower for another two years. From the high during the summer of 1929, the losses mounted to a staggering 89 percent.

Now, let's fast forward to ...

The Bear Market Rally of 2009

After having lost more than 50 percent off its October 2007 high, a huge stock market rally started in March 2009. This rally amounted to 43 percent and had all the typical characteristics of a counter trend move. Especially noteworthy was the low and diminishing volume, which is typical bear market rally behavior.

Just as in 1929, this rally led Wall Street and official sources to conjure economic optimism. This is not a coincidence ... the stock market and sentiment measures are highly correlated. But rising sentiment does not forecast a betterment of the economy. Instead a rising stock market foregoes rising optimism.
Now it looks like this bear market rally is over ...

There is technical support around 880 in the S&P 500. A break below this mark would ignite another sell signal and confirm the end of the rally. The next support level is around 800. If this line doesn't hold, it's back to the March lows. And if these lows do not stop the slide, a very important message concerning the economy will have been given: "Depression ahead."

I think that the next few weeks and months will not only be very interesting, but also very important. Yet hardly anybody on Wall Street seems to think about the possibility of a new, stock market low.

They should. And so should you. Remember ...

Employment Is Much More Predictive
Of Recessions and Depressions Than the Stock Market ...

Since the start of this crisis, world industrial production and world trade have been following the pattern of the 1930s very closely. But unemployment is the most important indicator to distinguish a recession from a depression.

Year Unemployment Rate
1929 3.2%
1930 8.7%
1931 15.9%
1932 23.6%
1933 24.9%
1934 21.7%
1935 20.1%
1936 16.9%

Take a look at the table on the right to see the unemployment situation during the Great Depression.

Where do we stand now concerning this all important indicator?

The official U.S. unemployment rate rose from the cycle low of 3.4 percent in 2007 to 9.5 percent as of June 2009.

But the Bureau of Labor Statistics computes a second unemployment rate. This broader measure includes all forms of job market slack and is a whopping 16.5 percent. Yes, one in six Americans is unemployed or underemployed right now. That's a horrible number! And it will not go away soon.

If you look at the chart below, showing the civilian employment to population ratio, you can see that the downtrend had already started in 2000. Then the stock market bubble burst. This was just the first act in a much longer drama ...

Civilian Employment Population Ratio

The bursting of the real estate bubble was act two. And more is sure to follow. California's default may be a harbinger of what the third act may look like.

The second chart shows the median duration of unemployment. Here you can see how long it takes Americans to find a job ...

Median Duration of Unemployment

These statistics clearly show the severity of the current situation. Here you can easily see why this is not a garden variety post-WWII recession, but something very different.

The current plunge is structural, not cyclical. Most of the jobs lost will never come back. The real estate bubble severely distorted the economic structure. Now the world economy has a lot of rebalancing to do. And this process will last much, much longer than the "green shoots" crowd deems possible.

My suggestion for you today is to watch the stock market for hints of the beginning of the next stage of this crisis. Watch unemployment and world trade as reliable indicators of the severity of the slump. And then watch California to get a feel for the next important act of this economic and financial drama: The government funding crisis and all its related repercussions.

Three reasons why commodity super cycle is alive and well

With the sharp falls in commodities prices in the second half of 2008,
investors are questioning the concept of the commodity super cycle and the
rationale for investing in that asset class.


Indeed, this year's 15 per cent rally in commodities is being ascribed to
temporary factors, including speculative short covering and stockpiling in
China. Last year's near 40 per cent pullback in commodities, though, should
be viewed as a healthy correction in a secular commodity bull market.
Indeed, there are three reasons for expecting commodities to perform well
over coming years.


First, the structural strength in the global economy resides in the
emerging market economies. Since experiencing significant economic hardship
during the series of EM crises between 1997 and 2001, these economies have
been paying down debt, increasing savings and building reserves. As a
result of that structural economic strength and the stimuli now being
applied to these economies, we expect the EM economies to act as the major
driver of global growth over the coming decade. Most importantly, given the
voracious appetite for commodities in these industrial- ising economies,
demand for major global commodities should rise significantly. Already
China's consumption of copper has risen rapidly in 2009, as the fiscal
stimulus plan and rapid lending growth combine to drive a recovery. Our
long-term demand forecast suggests consumption of key commodities by the
Brics (Brazil, Russia, India and China) alone, especially China, will
account for the majority of global consumption by 2020 as their economic
growth remains rapid and becomes increasingly commodity intensive.


Second, the Federal Reserve is boosting the money supply by creating
commercial bank reserves, the modern day equivalent of printing money. This
year the Fed has announced and embarked upon its version of quantitative
easing, which it prefers to label credit easing. By creating commercial
bank reserves at the Fed and using those reserves to purchase $300bn of US
Treasuries and $1,250bn of mortgage backed securities, the Fed will more
than double the monetary base. If successful in reigniting the economy then
our analysis of the history of quantitative easing over the past 150 years
points to eventual high inflation. Furthermore, given the concerns
expressed by Washington policy makers about the fragility of the recovery
and the structural weaknesses of the US economy, it's likely the stimulus
will be removed too late. Commodities, as a physical asset, are a store of
value and consequently a natural hedge against inflation, and should
perform well in that environment.


Third, the commodity super cycle is alive and well. Last year's pullback in
prices was a typical mid super cycle break in the commodity price upswing.
Both the recent two commodity super cycles experienced major pullbacks
several years into their bull runs. Both times the pullbacks proved
temporary and the upswing resumed. During the last commodity super cycle
(1968 through to 1980) commodities fell by approx 25 per cent from mid 1974
through to the end of 1975. Equally in 1937, during the first half of the
1932 to 1951 super cycle, commodities also suffered a major correction,
falling a cumulative 40 per cent before resuming their upwards trajectory.
Both mid cycle corrections were similar in size to last year's weakness.
Both were also associated with major global recessions.


Indeed, the existence of the commodity super cycle can be shown back to
1750 (ie as the start of our data series) while academic work exists
showing long cycles in prices dating back to the 12th century in Europe.
Since the mid 1700s the average bull cycle has been 20.7 years with average
cumulative gains of 293 per cent and a range of gains of between 135 per
cent (1788 to 1814) and 689 per cent (1932 to 1951). This latest cycle
began in 2001 and is therefore eight years old. To date, cumulative gains
are 76 per cent. If history and long-term demand expectations are any
guide, then several years of significant upside should be expected.


The writer is chief executive of Longview Economics

The Shocking Truth About the Obama Stimulus Plan

The untold story is that Obama’s stimulus plan has crushed the dollar, increased interest rates and triggered another bold new energy run.

The result will …

1. Slow the U.S. economy
   
   
2. Increase U.S. unemployment, AND
   
   
3. Crush U.S. manufacturing jobs as it creates new opportunities in China.

All at a time when China is moving at light speed to boost its internal growth rate.

Most investors don’t realize this, but China’s growth will hit a mind-boggling 7% in 2009.

To be sure, that’s less than the sizzling hot years of 11% annual growth, but compared with the expected U.S. contraction of negative 3% in 2009, you don’t have to be a computer scientist to know where the big money will be made in the next two years.

Macroeconomics

The US economy continues to see light at the end of the tunnel. 1Q GDP registered a 5.5% contraction instead of 5.7% decline estimated earlier (4Q: -6.3%). The smaller contraction was due to upward revision to inventory investment and a downward revision to imports. Initial jobless claims however unsurprisingly increased last week to 627k from 612k a week earlier, reflecting a still sluggish labor market.

· On the contrary, New Zealand’s GDP fell more than expected by 1% in 1Q, exceeds the -0.7% forecast and extending a fifth straight quarter of declines. New Zealand’s economy is unlikely to grow until the final three months of 2009 as the recession curbs exports and damps investment, prompting Reserve Bank Governor Alan Bollard to possibly keep interest rates at record lows until late next year to kick-start spending.

· In Eurozone, companies cut demand for machinery, transport equipment and consumer appliances, pushing industrial orders lower by 1% in Apr. Consumer prices in Japan contracted at the fastest pace on record in May on lower energy prices and rising unemployment.

· Weak global trade continues to depress exports of Asian economies. Hong Kong’s exports dropped 14.5% YOY in May, a seventh consecutive monthly fall as demand for Chinese products shipped through the city eased. Imports fell 19.2% YOY, resulting in a trade deficit of HKD11bn. Exports in Vietnam also decreased at a faster pace of 10.1% in Jun compared to 6.8% in May.

Greed & fear - Gangreen

The only interesting point about this week’s FOMC meeting is that Billyboy seems to be less worried about “deflation”. This is another contrarian reason to be constructive about government bonds. There is zero definitive evidence that housing is about to “bottom” in the US. While the American commercial real estate market continues to deteriorate.

· A stronger oil price continues to be a sign of rising risk tolerance and a falling oil price of rising risk aversion, with the US dollar trading inversely to that. As was the case this time last year, GREED & fear believes the oil price is now being pushed by financial players. While GREED & fear is as bullish as anyone on the structural story for emerging markets, the view here remains that the commodity complex is now vulnerable if there is renewed disappointment about Western growth prospects in coming months.

· “Global warming” maintains its status as the developed world’s new religion. This is why “climate change” seems almost as high on the list of the priorities of the Obama administration as “healthcare reform”.

· The arbitrary nature of “green” investment mandates is obviously irrational from an investment perspective. From a longer term perspective it is almost inevitable that the frenzy for green will attract to the area the usual mob of con men and spivs who jump on every bandwagon. There is also a more fundamental risk that government sponsorship of alternative energy leads to massive over investment in the area.

· Regardless of the fundamental merits or otherwise of the climate change story, alternative energy stocks will, for now, continue to trade as high beta proxies for the oil price. They, therefore, have no diversification merit.

· There is a very strong economic case for growing links between Malaysia and Singapore. Singapore needs land and space to grow into, in the sense that southern Johor could become the equivalent of what the Shenzhen special economic zone became for Hong Kong. Malaysia could also profit from Singapore’s skill sets and capital. Any such development would be a major positive for both stock markets.

· Lee Kuan Yew’s eight day visit to Malaysia is interesting since, in GREED & fear’s view, nothing significant is going to happen in terms of new bilateral agreements between Malaysia and Singapore unless it is approved by the “minister mentor”.

· Najib’s first three months in power since he took over from Badawi have at least seen some dilution of the New Economic Policy (NEP). Any dilution of the NEP should be viewed as a positive, even if investors should also remain fundamentally sceptical about whether UMNO is capable of wholesale reform of this outmoded policy.

· The Malaysia stock market has been relatively unexciting in the Asian equity context reflecting its by now well established low beta status. This means it underperforms the regional index in a rally and outperforms in a correction.

· The presidential election season is approaching in Indonesia with all the evidence suggesting a landslide victory for incumbent president Yudhoyono. The reasons why Yudhoyono looks an overwhelming favourite to win are his appealing acronym, his “clean” image and the relatively stable economy.

· The Indonesia economy has so far shown impressive resilience this year, because of its domestic demand orientation as well as its commodity gearing. This resilience also reflects the economy’s lack of corporate or consumer debt.

· Assuming a “SBY” victory, looking forward a critical issue from a macro economic perspective is domestic infrastructure where there has been a disappointing lack of progress in Yudhoyono’s first term despite an almost ridiculous amount of talk.

· Indonesia still offers a fundamentally exciting long term consumption story with a positive demographic. Another positive point is that Indonesia is now the marginal supplier of coal and palm oil to the resource deficient economies of China and India.

· Having fended off for now calls for the passage of a modern version of the Glass-Steagall Act, the vested interests behind securitisation are emerging from their caves to argue their case. But in GREED & fear’s view securitisation only makes sense in a “market” system where financial entities face the risk of going bust. America clearly does not have such a system.

· Agricultural machinery maker Kubota will be added to the Japanese thematic portfolio this week with an initial weighting of 3%. The investment will be paid for by removing Inpex. As for the Asia Pacific ex-Japan relative-return portfolio, the overweight in China will be increased by 1ppt will the money taken from Hong Kong.

US market this week

Recent economic development and central bank statements added to signs that the worst is over, but the road to a sustainable recovery is still bumpy and long. Equities declined for the week, on the back of uncertainties arising from the US government’s proposed regulatory reform and S&P downgrades on 18 US banks. Worries that the emergence of commodity-price inflation also threatens to stunt economic recovery and constrain corporate-profit growth.

· This week, FOMC rate decision will take place Thursday, as well as the third and final round of US Q1 GDP estimates. A weaker than expected GDP could be market-moving; GDP is forecasted to go unrevised at -5.7% in 1Q (4Q: -6.3%). Other significant indicators to watch out for include home sales, personal spending and Uni of Michigan sentiments. There will only be one economic release for Malaysia this week, namely foreign reserves as at 15 Jun.

Malaysian Stocks Valuation Has Moved 'Too Fast'

By Chan Tien Hin
June 22 (Bloomberg) -- Malaysia's stocks have risen "too
far, too fast" given that corporate earnings will shrink this
year, Maybank Investment Bank Bhd. said in a strategy report.
"The market rally has stretched valuations to levels
unjustified by earnings growth," Andrew Lee, an analyst at
Maybank Investment, wrote in the report. "An economic and
corporate earnings recovery is likely to be anemic."
A "fair valuation" for the market by the end of 2009
would be at a price-to-earnings multiple of 13 to 14 times,
representing an index level of 970 to 1,040, the report said.
The benchmark Kuala Lumpur Composite Index dropped as much as
1.8 percent to 1,040.40 and traded at 1,051.82 as of 12:12 p.m.
local time, set for the lowest close since May 29.
The Malaysian index has risen 23 percent in the past three
months, after Prime Minister Najib Razak, who took office on
April 3, announced stimulus plans valued at 67 billion ringgit
($19 billion) to help resuscitate economic growth.
Malaysia's economy shrank 6.2 percent last quarter and will
probably post a "similar" contraction in the three months
ending June as exports slump amid the global recession, the
central bank said last month.
Corporate profits in the Southeast Asian country will
shrink 8.4 percent this year, pricing the market at 15.6 times
earnings, Lee said in the report. Earnings will grow 9.8 percent
in 2010, he said.
"It is difficult to justify equities trading" at a 15.6
times price-to-earnings multiple "if the prospective growth is
on average less than 1 percent for each of the next two years,"
Lee said. Malaysia is the second-most expensive market in the
region based on both 2009 and 2010 earnings, yet has the second-
lowest prospective growth in 2010, he said.
To be sure, "there is money to be made yet in equities"
as Najib's "new initiatives may inject positive sentiment,"
Lee said. Najib will make "significant announcements" related
to his plans to ease restrictions on foreign investment, the
nation's stock exchange said on June 16.

U.S. Said to Plan Approval Today for 10 Banks to Repay TARP

By Robert Schmidt and Christine Harper
June 9 (Bloomberg) -- The Treasury is preparing to
announce today it will let 10 banks buy back government shares,
people familiar with the matter said, signaling confidence some
of the largest U.S. lenders won't again need a taxpayer rescue.
JPMorgan Chase & Co. is among those cleared to repay
Troubled Asset Relief Program funds, a person said on condition
of anonymity. Goldman Sachs Group Inc., American Express Co.
and State Street Corp. are also among those that have sold
shares and debt unguaranteed by the government, demonstrating
they can raise funds without federal aid.
The approvals may relieve investor concerns about
government ownership after a popular outcry against bailouts
for Wall Street. At the same time, they contrast with warnings
from International Monetary Fund chief Dominique Strauss-Kahn
and others that the financial system remains distressed.
"None of this means that we're out of the woods yet;
there's a lot of work that the banks have to do and the
regulators have to do," said Richard Spillenkothen, a director
at Deloitte & Touche LLP in New York who served as the Federal
Reserve's head of bank supervision from 1991 until 2006.
The Fed yesterday also approved capital-raising plans at
the 10 banks judged to have shortfalls after last month's
stress tests on the 19 biggest U.S. lenders. That list includes
Citigroup Inc. and Bank of America Corp., firms that have had
more than one round of federal rescues.

Compensation Guidelines

On June 10, the Treasury will likely release its
guidelines for executive compensation at banks that retain
government shares, a person familiar with the matter said.
Treasury Secretary Timothy Geithner may be asked about the
TARP repayments, compensation rules and the outlook for
financial markets in a Senate Appropriations Committee hearing
at 10:30 a.m. today in Washington.
Nine of the 19 banks subjected to stress tests by U.S.
regulators were told last month they needed no additional
capital to withstand a deeper economic downturn. Officials
later told some of the banks, including JPMorgan and American
Express, they still needed to boost their common equity.
The number of banks likely to be allowed to retire
government shares indicates the Treasury will receive more than
the $25 billion of repayments that the department anticipated
this year. JPMorgan alone received $25 billion of TARP funds
last year and Goldman Sachs got $10 billion. American Express
has received $3.4 billion, Bank of New York Mellon Corp. has
taken $3 billion and State Street has $2 billion.

Morgan Stanley

Morgan Stanley has raised $6.8 billion in two separate
common equity offerings since May 7, exceeding the $1.8 billion
it was required to raise by the stress tests, as the company
sought to be included in the first round of banks allowed to
repay the TARP money. Morgan Stanley received $10 billion from
program last year.
The repayments come almost eight months after the Treasury,
seeking to quell market panic that followed the Sept. 15
bankruptcy of Lehman Brothers Holdings Inc., provided nine
banks with the first $125 billion of $700 billion in money
allocated to the TARP.
Banks have unveiled plans to raise a total of $100.2
billion since the stress tests found 10 of the 19 biggest
lenders needed $74.6 billion in additional capital buffers.
Financial shares have surged on rising confidence that the
financial crisis is past its worst and that banks are viable
enough to survive the deepest recession in half a century. The
Standard & Poor's 500 Financials Index has gained 49 percent in
the past three months.

Retire Warrants

Even after paying back the preferred shares issued to the
government, banks that took TARP money will still need to
retire warrants given to the government to allow taxpayers a
potential return on their investment.
Herb Allison, the Obama administration's nominee to run
TARP, told lawmakers last week that the Treasury would soon
announce details of its policy handling the warrants. The total
value of the warrants is about $5 billion, according to
Treasury calculations made last month.
Some analysts estimate that banks will still face mounting
losses as defaults on credit cards rise and commercial property
values sink.
Jan Hatzius, chief U.S. economist at Goldman Sachs, said
at a conference in Montreal yesterday that "U.S. banks
probably need to recognize another $500 billion or so in
losses."
Strauss-Kahn, managing director of the IMF, said at the
conference that banks must disclose any losses on their balance
sheets to help restore confidence in the global financial
system.
"If the banking crisis is not resolved, growth will not
come," Strauss-Kahn, speaking in French, told reporters after
his speech. "What strikes me today is that the credit market
is not yet functioning normally."

Bull-Market Story Awaits Goldman Sachs Blessing: Matthew Lynn

une 9 (Bloomberg) -- Plenty of people will dismiss the
recent stock-price recovery as a dead-cat bounce. Even more will
call it a bear-market rally.
Yet as equity prices creep higher, the bears may soon have
to concede defeat. The Standard & Poor’s 500 Index has gained
about 15 percent since early December and most other major
benchmarks have made solid gains in the same period. At some
point, it will become known as the 2009-2013 bull market.
Only one thing is missing: a story. A real bull market
needs a simple narrative that convinces investors that equities
are worth double what they were valued at only a few months ago.
So what could be the story this time around? There are four
plausible candidates: rising savings, accelerating inflation, a
takeover boom, and the scarcity of capital.
Markets need stories as much as any Hollywood scriptwriter
does. Stock prices go up, down and sideways for reasons we will
probably never quite figure out. Human brains find that hard to
handle, so we like an easy explanation that puts things in
order. Chaos and randomness are the scary alternatives.
During the bull market of the 1990s, we had the dot-com,
New Economy story to explain the surge in stock values.
During the 2003-2007 bull market, we had globalization and
the emerging markets of Brazil, Russia, India and China.
And for the next bull market? Here are four “stories”
that could be used to justify it.

Save Money

The Savings Story: People are putting money aside again.
The U.S. savings rate in April jumped to 5.7 percent, the
highest rate for 14 years. Michael Darda, chief economist at MKM
Partners LP in Greenwich, Connecticut, estimates it will reach 9
percent, compared with a low of minus 2.7 percent at the peak of
the housing boom. There’s no mystery about that. Households,
much like banks, are repairing their balance sheets, and they
can only do that by saving more.
The same will probably be true of other heavily indebted
economies such as Britain. All that saved money has to go
somewhere. With interest rates close to zero, there’s no point
keeping it in the bank. Instead, a wall of money is about to
descend on the market, creating huge demand for equities.
The Inflation Story: Central banks around the world are
following the policies of “quantitative easing,” or what used
to be known as printing money. At a certain point, it is bound
to cause high inflation rates, or at the very least an investor
fear of surging prices. It may already have done so.

Real Assets

You don’t want to be holding cash while inflation makes it
less valuable by the day, and central banks keep creating more
of the stuff. Instead, investors will switch into real assets
that can hold their value, such as stocks, real estate or
commodities. Equities are the simplest to trade, and more demand
equals higher prices.
The Takeover Story: The last rally was all about the
emergence of the BRIC economies. This one will be about them
buying North American and European assets. The rising BRIC
giants are going to need technology and brand names, and they
will want to buy them. That is already happening -- Russian
interests just acquired a big stake in General Motors Corp.’s
European unit Adam Opel GmbH.
Expect a massive takeover boom as the BRIC giants clamor
for the prizes. They will end up paying a premium for trophy
assets, another good reason to push up the value of equities.

Access to Capital

The Shareholder Story: Over the last decade, chief
executive officers loved to talk about shareholder value. Mostly
it was just nonsense. CEOs didn’t need stockholders because
capital was easily accessed from banks or the bond market. If
that didn’t work, they could get a friendly private-equity firm
to buy them out, or pay a crazy price for a unit. Shareholders
were about as influential as the cleaners or the secretaries,
and ranked about as high in corporate priorities.
Now that is about to change. In the coming years, capital
will be in short supply. The only place that companies will be
able to get it will be from their shareholders. In return, they
will have to be rewarded with higher dividends and stock prices.
Now all we need is for Goldman Sachs Group Inc. to pick one
of those stories, put it into every research note, and this bull
market can get some real momentum.
Who knows, investment bankers may be out buying Bentleys
again this year if this rally has legs.

Asian Stocks Have Yet to Reflect Recovery, Mowat Says

By Bloomberg News
June 8 (Bloomberg) -- Asian stocks have yet to reflect
expectations for a “powerful, synchronized” recovery in the
global economy, JPMorgan Chase & Co.’s chief Asia strategist
Adrian Mowat said in a Bloomberg Television interview today.
The global economy will rebound on record fiscal stimulus
by governments worldwide and low interest rates, he said, adding
that airlines and travel industry stocks are among those that
will do “very well.”
The MSCI Asia Pacific Excluding Japan Index is trading 42
percent lower than its peak in October 2007. The gauge has
advanced 34 percent this year.
Asian stocks “have yet to price in a recovery in trade
that’s going to be powerful, synchronized,” said Mowat.
“Markets are still bearish on global growth, on emerging
markets growth.”
MSCI’s Asian ex-Japan index will rise to 400 by the end of
the year, Mowat wrote in a June 1 note. That would be a 21
percent gain from last week’s close and a 62 percent annual
rally, the best since 1993.
The rally this year means the MSCI gauge is now valued at
18.9 times reported earnings, more than its five-year average of
14 times, according to Bloomberg data.
Templeton Asset Management Ltd.’s Mark Mobius said June 4
the money supply is set to “explode” worldwide and boost
emerging-market stocks as central banks pump cash into the
financial system to counter the global recession.

Taiwan, South Korea

Mowat said he’s “still positive” on China stocks. Markets
including Taiwan, South Korea and Mexico may offer “higher
returns,” he added.
The rally in China’s stocks may end as corporate profits
fail to recover, Xue Lan, head of China research at Citigroup
Inc. said in a June 4 Bloomberg Television interview.
The MSCI China Index of mostly Hong Kong-traded Chinese
stocks has rallied 34 percent in the second quarter, compared
with 15 percent for South Korea’s Kospi Index, 27 percent for
the Mexico Bolsa Index and 28 percent by Taiwan’s Taiex Index.
George Soros, chairman and founder of Soros Fund Management
LLC, said China will be the first country to recover from the
global financial crisis, the Shanghai Daily reported today.

Nobel Winner Krugman Sees U.S. Recession Ending Soon

2009-06-08
By Courtney Schlisserman
June 8 (Bloomberg) -- The U.S. economy probably will emerge
from the recession by September, Nobel Prize-winning economist
Paul Krugman said.
"I would not be surprised if the official end of the U.S.
recession ends up being, in retrospect, dated sometime this
summer," he said in a lecture today at the London School of
Economics. "Things seem to be getting worse more slowly.
There's some reason to think that we're stabilizing."
U.S. stocks erased an earlier decline after Krugman made
his comments. The Standard & Poor's 500 Stock Index was little
changed at 939.14 at 4:07 p.m. in New York after slumping as
much as 1.5 percent earlier, and the Dow Jones Industrial
Average gained 1.36 points to 8,764.49.
Krugman, a Princeton University economist, has warned
recently that the U.S. government hasn't done enough to help the
country's economy recover. Last month, at a conference in Abu
Dhabi, he said the fiscal stimulus is "only enough to mitigate
the slump, not induce recovery."
The National Bureau of Economic Research, based in
Cambridge, Massachusetts, is the official arbiter of U.S.
recessions and expansions. Last week, Robert Hall, the head of
the NBER's business-cycle-dating committee, said it's "way too
early" to say the contraction is over.
The U.S. has been in a recession since December 2007, and
the NBER may take months to decide when a trough has been
reached. Recent reports have shown an easing of declines in
industrial production and other measures that the group reviews
when determining whether the economy is in a recession.

Unemployment to Rise

Even with a recovery, "almost surely unemployment will
keep rising for a long time and there's a lot of reason to think
that the world economy is going to stay depressed for an
extended period," Krugman said.
The unemployment rate jumped to 9.4 percent in May, the
highest since 1983, partly reflecting more people joining the
labor force to look for work.
The U.S. Federal Reserve's efforts to stabilize markets --
measures that have swelled the central bank's balance sheet --
have helped, Krugman said. "A lot of the spreads in the markets
have come down" and "the acute financial stuff seems to have
come to a halt," he said.
Fed officials lowered the benchmark interest rate to a
target range of zero to 0.25 percent in December and have
switched to using credit programs and outright purchases of
Treasuries, mortgage-backed securities and housing agency debt
as the main tools of monetary policy.

$2.31 Trillion

The balance sheet's size peaked at $2.31 trillion in
December. It has fluctuated around $2.1 trillion over the past
two months.
The Fed's swollen balance sheet is "a little alarming. In
the long run you really don't want the central banks to be so
involved in the business of lending," Krugman said. "But it's
arguably necessary" even if there are questions about "where
does it stop?"

Tan Teng Boo on Video

http://www.icapital.biz/lib/viewvideo.asp?id=34&lang=en

CIMB raises year-end KLCI target

MALAYSIA'S key stock index may rise to a 12-month high by year-end, said CIMB Investment Bank Bhd, which recommended investors buy “bombed-out cyclical” stocks in construction, building materials and property.

Companies reported better-than-expected earnings in the first quarter, CIMB said in a report today. Earnings will grow a “stronger” 19 per cent in 2010 after shrinking 5.7 per cent this year, it said.

CIMB raised the year-end Kuala Lumpur Composite Index target to 1,220 from 1,060, the highest since June 18. The gauge, up 21 per cent this year, gained 0.2 per cent to 1,063.76 as of 11:53 am local time.

“There is a good chance we are past the worst,” said Terence Wong, an analyst at CIMB. “The gradual reinvestment of institutional funds’ spare cash will sustain the market rebound in the second half” of 2009, it said.
More than RM20 billion (US$5.7 billion) of spending on infrastructure will help spur a recovery in the economy with “pump priming” to intensify in the second half, CIMB said. The government is betting on two stimulus plans totaling RM67 billion to reinvigorate Southeast Asia’s third-largest economy as it heads for its first recession in a decade.

The central bank has said previous interest-rate cuts and the stimulus plans will help revive growth in the second quarter.

“Domestic catalysts” and “huge pools of liquidity not yet deployed by local and foreign funds should keep the medium- term momentum strong, at least” in the second half, it said.

Market Rebound

Property stocks including SP Setia Bhd “should outperform” in this market rebound as they tend to move in tandem with the stock market. Further, they were the worst performers last year, CIMB said.

Oil and gas-related stocks will also gain as rising crude oil prices spur more exploration contracts, increasing the demand for service providers such as SapuraCrest Petroleum Bhd, it said.

Malaysian stocks have become cheaper, it added. The “resurgence” of regional markets has lowered Malaysia’s price- to-earnings multiple premium over the region from up to 45 per
cent earlier in the year to as low as 14 per
cent, the report said. -- Bloomberg

Malaysia Stock Rally to Wane as Value ‘Vanishes,

May 26 (Bloomberg) -- Malaysia’s stock rally that pushed
the benchmark index to an eight-month high may falter because
shares reflect “implausible” profit growth expectations, said
Maybank Investment Bank Bhd.
“History tells us the bear market isn’t over,” Andrew Lee,
an analyst at Maybank Investment said in a report today.
Valuations “have reached implausible levels. A profit recession
has just begun.”
He expects the key stock index to fall to 990 by year-end.
The measure slid 0.2 percent to 1,050.62 as of 4:05 p.m. in
Kuala Lumpur, the first drop in three days.
The benchmark Kuala Lumpur Composite Index has surged 20
percent this year, lifted by market gains in Asia amid optimism
the global recession is easing and Prime Minister Najib Razak’s
effort to bolster spending and open up the country’s services
and financial industries will bolster economic growth.
“Market growth expectations seem to be running ahead of
reality,” with shares moving “too far, too fast, Lee said.
“We are at best, halfway through this bear market,” he said.
The market currently trades at 15.2 times 2009 estimated
earnings, up from 12 times earlier this year, Lee said. This is
only 10 percent below the previous cycle’s mid-cycle value, even
as corporate profits are expected to shrink 7.7 percent this
year, he said.

‘Are We There Yet?’

“Four months ago, the question ‘are we there yet’ could
only refer to whether markets had reached the bottom,” Lee said.
“Today, it could equally refer to whether we have reached a top
-- that is the measure of how confused investors are.”
The lesson learnt from the previous bear markets is that
“we are not out of the woods,” he said.
Two previous bear markets, from 1981 to 1985 and 1993 to
1998 lasted 57 and 58 months respectively, he said. It has now
been 17 months from the January 2008 “collapse,” he said.
During those bear markets, the stock index has risen at
least 5 percent by as many as 38 times, he said.
“We have now seen 12 since January 2008,” he said,
suggesting the bear market isn’t over.
Each of the bear markets witnessed one major rally before
continuing its downtrend, said Lee. In the 1981-85 bear market,
a rally retraced 64 percent of its drop before continuing its
decline, he said.

“Be Realistic’

The present bear-market rally has retraced 32 percent of
its drop, he said. “Be realistic, be selective.”
Investors should buy construction companies such as IJM
Corp to ride on the government’s efforts to boost spending to
revive economic growth, Lee said. Najib has unveiled a total of
67 billion ringgit ($19 billion) in public spending, loan
guarantees and other stimulus measures to boost growth.
The central bank has also cut interest rates by 1.5
percentage points since late November.
Investors should also load up on consumer stocks including
KFC Holdings (Malaysia) Bhd., while shares that surge on hopes
of “near-term earnings recovery” should be sold, Lee said.

Stock markets are in for 'very long bull' run, JPMorgan says

Stock markets are in the middle of a "very long bull" run bolstered by a "powerful, synchronised" recovery in global economic growth, JPMorgan Chase & Co.'s chief Asia and emerging-market strategist Adrian Mowat said.

"In the 22 years I have been covering markets, there's been a few years where you make substantial returns," Mowat said in a Bloomberg television interview today. "I think that's going to be the story in 2009 going into 2010."

The MSCI Asia Pacific Index has rallied 11% this year, after plunging 43% in 2008, on optimism stimulus spending in countries from the US to China will revive growth in the global economy.

Economic data will slightly surprise on the upside, which should lift markets, JPMorgan's Mowat said. When "we feel the world is very uncertain, the chances of being positively surprised is quite high."

The Bank of Japan raised today its view of the economy for the first time in almost three years on signs that a record contraction in the first quarter represented the worst of the recession. US President Barack Obama said on May 20 that the world's biggest economy is showing "some return of normalcy".

Still, the UK had the outlook on its AAA debt rating cut by Standard & Poor's yesterday, and Treasury yields rose on speculation the US's rating may also be under threat.

The 11 Laws of Bear Market Success - Martin D. Weiss

I. Protect our capital.

II. Use common sense; avoid things that are most vulnerable in this crisis.

III. Do NOT count on the government to turn the economy around or save sinking investments.

IV. Invest exclusively in LIQUID, heavily traded investments.

V. Stay FLEXIBLE in our thinking and our choice of investments.

VI. Use investments that move INDEPENDENTLY of stocks and bonds.

VII. Seek out investments that rise DESPITE falling stocks.

VIII. Use investments that rise BECAUSE stocks are falling.

IX. Diversify and balance our portfolio for added risk reduction and profit potential.

X. Always be ready to cut a loss or take a profit.

XI. Above all, be fiercely contrarian; seeking to buy what others are selling at a deep discount ... and selling what others are buying at a premium.

Near term STI target raised to 2400, enroute to 2800 over 12 months

Still like early cyclical plays – CapitaLand, UOB, Wilmar,
SGX, SIA Engrg, Swissco, SAR, First Resources, Ho Bee and
FCT

DBS Research believes the worst is over for the Singapore
economy and the market could re-rate to mid cycle PER as the
economy progressively recovers. Our near term target could hit
2400 if we apply a target PER of 16x, which is the historical
average PER on FY09 earnings. Applying a potential earnings
growth of 11% growth for next year, the STI could reach 2,865
without stretching valuations to extreme levels.
We still like early cyclical plays but prefer laggards within these
sectors – our preference for Capitaland over City Development
based on potential upside in the property sector, UOB over
OCBC for Financials. Wilmar is our top pick, as we expect the
potential listing of its China subsidiaries to unlock value for
shareholders. We have picked SGX as a proxy to our positive
stance on the equities market and SIA Engineering, which will
lead the recovery in the aviation sector. Our small/mid cap picks
are resources stock benefiting from the firm oil/coal/commodity
prices,(Swissco, SAR, First Resources) or value buys (Ho Bee and
FCT) trading at a discount to book value.
1Q GDP fell 14.6% from 4Q 08, smaller than the 19.7% drop
reported in the earlier April data, and marked the fourth
straight quarter of economic contraction. On a Y-o-Y basis,
GDP fell 10.1%, also less than expected and a smaller fall than
11.5% reported earlier. The difference was mainly due to
manufacturing data for January and February being revised up.
Singapore maintained its forecast for the economy to shrink by
6 to 9% this year and kept its inflation outlook at between
minus 1% and zero.
Ezra is proposing a private placement of up to 78m new shares
priced at S$1.185 each, raising total gross proceeds of up to
S$92.4m. The issue price of each new share represents a
discount of c. 8.8% to yesterday’s closing price of S$1.30. This
issue represents around 13.3% of Ezra’s outstanding share
capital. Proceeds will be used to pay down debt (lower net
gearing to about 0.22x from 0.47x), funding capex and funding
possible M&As.
Mercator Lines said that it will lift its fleet size by a quarter to
15 by 2010 and sees increased coal demand from India giving a
boost to dry bulk shipping. According to the company, dry bulk
shipping is still likely to see lower freight rates, after the sector
has been hammered by the global slowdown, but it is unlikely
to deteriorate much further as it has sunk to a very low base

Asian Stocks May Decline 4.9%, Deutsche Bank Predicts

May 19 (Bloomberg) -- Asian stocks may halt their rally
this year as a recovery in earnings hasn't caught up with gains
in prices, Deutsche Bank AG said.
The MSCI AC Asia excluding Japan Index may end the year at
351.5, a 4.9 percent decline from yesterday's close, according
to a report by Niklas Olausson, an analyst at Deutsche Bank. The
forecast is still 46 percent higher than its earlier target.
The MSCI regional index rose 2.5 percent to 378.71 as of
8:09 p.m. in Singapore, taking its gains this year to 31 percent
and surpassing the 3 advance in the MSCI World Index. Asia
accounts for half the 10 best-performing markets in the world
this year, led by India and China.
"The rally has been largely fuelled by sentiment and
liquidity drivers, in addition to expectations of a lasting
recovery, rather than hard fundamental profit/return delivery,"
the analyst wrote. "We are not out of the woods yet as far as a
further downside risk to earnings is concerned."
Following the gains this year, the MSCI Asian index is now
valued at 18 times reported earnings, compared with its five-
year average of 14 times. The measure's price-to-book multiple
has also climbed to 1.7 times, up from a low of 1 time set in
October.
Deutsche Bank is predicting a 22 percent increase in
earnings-per-share next year, compared with a gain of 31 percent
estimated by other analysts, the report said.

'Improved Outlook'

"Equity markets have already factored in most of the
improved outlook," Olausson wrote. "Markets may overshoot in
the near term, but thereafter we anticipate a period of pullback
and consolidation, before markets climb up again."
Allianz SE, Europe's biggest insurer, said it has bought
Asian equities, bonds and real estate in the past two months and
would only add to its existing holdings at cheaper prices.
"Where we are today, we feel the market is toppish,"
Nikhil Srinivasan, who oversees $20 billion as chief investment
officer for Asia and Middle East at Allianz, said in an
interview in Singapore on May 18. "Valuations are about fair,
it's not cheap. The risk-reward ratio is not that attractive and
investors are getting a bit tired chasing the rally."
The Singapore-based fund manager expects Taiwan and India
to outperform other Asian markets, adding it doesn't plan to be
"too aggressive" on stocks.

India

India was upgraded to "overweight" from "neutral" at
Deutsche Bank, which said the election results was a "positive
surprise" for the market. The brokerage yesterday raised its
target for the benchmark Bombay Stock Exchange Sensitive Index
to 14,500 from an earlier estimate of 11,500.
The measure surged a record 17 percent to 14,284.21,
triggering a suspension in trading after breaching its upper
limit set by regulators. The Sensex added 0.1 percent to
14,302.03 today.
Indonesia and the Philippines were also raised to
"overweight" from "neutral" while South Korea was upgraded
to "neutral" from "underweight," the analyst said. He added
that Thailand was cut to "underweight" from "overweight"
while Hong Kong was lowered to "underweight" from "neutral."
Deutsche Bank is also "turning progressively more
cautious" on China as the gains this year lift valuations,
Olausson wrote in the report. The brokerage retained its
"overweight" rating on the market and said it expects China to
outperform the rest of the region by the end of the year.

Bull run ‘breakout’ at year end

SINGAPORE, May 11 — Templeton Asset Management’s veteran fund manager Mark Mobius is so bullish on emerging markets that he thinks the recent dramatic stock market surge is barely the beginning.

He believes the “breakout” for emerging market stocks has not yet happened.

The money manager said the bull run could start in earnest at the end of this year and could even breach the highs that were seen about two years ago. “It could go higher than (in) 2007, as we’re now in a different era. A lot of companies are much stronger, with stronger balance sheets,” he said in a recent interview.

Mobius’ confidence comes as many market analysts are urging investors to be careful as the current rally may be a false dawn. For example, economist Andy Xie has cautioned that this is a bear market bounce that will end in tears.

But why the bearish outlook?

Mobius, who in 2006 was named one of the Top 100 Most Powerful and Influential People by Asiamoney magazine, explained: ‘Because they lost so much money in the downfall, they are very bearish. They said “never again”.

“You’ll find all kinds of doom scenarios out there. Some will say it’ll get worst and that the markets will go down further, while others say that there’ll be a depression greater than (in) the 1930s.”

Mobius, who is bullish on commodities as well as companies that cater to emerging market consumers, thinks this economic downturn is “not as bad” as the Great Depression of the 1930s in the US.

“During the Great Depression, there were no guarantees on bank deposits...People had bank deposits and they didn’t get one cent back. And there was no social security system,” he said.

Mobius said China’s rapid growth would spur demand for consumer goods, and Chinese consumers, in spite of their high propensity to save, would continue to spend.

“Their savings rate is high, but per capita income is going up, so they are able to devote a high proportion to not only saving but also spending,’ he added.

“The Chinese government is also subsidising purchases, giving rebates, and that should drive more consumption.”

Reiterating what he told investors earlier this year, he said: “We’re building a base for the next bull market.”

But Mobius cautions investors not to put all their money into the markets right away, but to dollar cost average (invest regularly with small amounts) over, say, a year.

“You’ll have the jagged movement up and down...and lots of volatility. Until all the bears are out and confidence has returned, then you’ll see a breakout. When that happens, it’s anyone’s guess, but we’re looking at the end of this year, possibly,” he said. — The Straits Times

Stock Strategists Says S&P 500 Could Break Above 1000 This Year

WASHINGTON (MarketWatch) - The annual meeting of the mutual-fund industry's trade group kicked off on a bright note Wednesday, with a pair of notable investment strategists contending that the Standard & Poor's 500 Index will top 1000 by year-end.


Abby Joseph Cohen, senior investment strategist and president of the Global Markets Institute at Goldman, Sachs & Co. and Legg Mason Inc.'s Bill Miller both said
they see the benchmark stock-index gaining at least 20% for 2009.


Cohen said "compelling" valuations, greater investor comfort with the market and improved consumer sentiment will bring cash sitting on the sidelines back into stocks. She said stock moves are starting to reflect company fundamentals rather than momentum -- a telling sign.


"Money has started to come back, but gingerly," Cohen said.


"It's a behavioral fact that money chases returns," added Miller, manager of Legg Mason Value Trust . "As the market goes up, the money comes back."


Better odds


Cohen and Miller spoke at the opening panel session of the Investment Company Institute's General Membership Meeting.


Asked by panel moderator Martin Flanagan, president and chief executive of Invesco Ltd. where they expected the 500-stock index to be at the end of the year, Cohen said Goldman Sachs puts fair value between 1000 and 1050. The market bottomed in early March, she said. Miller predicted the index would hit between 1100 and 1200. The S&P 500 closed Wednesday at 920.


As for their most bullish ideas over the next two years, Miller said he favored the U.S. financials sector, while Cohen said simply U.S. stocks.


"Everything is on sale," in the financial markets, Miller said. [why didn't he say that in early March?]


While seeing stabilization in the housing crises in most cities, Cohen said a recovery in home prices would take some time.


"I think investors will be more comfortable in stocks than in real estate [for investment purposes]," she said.


Miller was more optimistic on the chance of a rebound in house prices, saying that prices will be "modestly higher" in 2010.

Four reasons why the aggressive run-up in the STI during the past several days is not sustainable

1) STI is heavily overbought. Current RSI (relative strength index) reading is even higher during Oct 07 when STI hit an all-time high of 3,906. This suggests a state of divergence, where a new high in the RSI has not coincided with a new high in the underlying security. Elliot Wave Count coupled with fibonacci retracements suggests a minimal price target of 2,050. This level also represents the double daily lows seen on 05 & 06 May 09.

2) Banks are also overbought. Run-up in the index of late has been mainly contributed by the three banks where they are also presently technically overbought. Additionally, gainers within the top active counters among the past few days have included offshore marine and oil & gas plays (Ezra / Swiber / Cosco / AusGroup, etc). Potential fall of the index should also drag down the share prices of these sectors.

3) Impending result of stress tests. While results of the stress test of the US are not officially out, the market is already expecting additional capital to be required by 10 of these 19 banks. Notable ones include GMAC (US$11.5 billion), Bank of America (US$34 billion), Wells Fargo (US$15 billion), and Citigroup (US$5 billion). Should actual results indicate that more capital is needed, equity markets may take a tumble.

4) US non-farm payrolls on 08 May 09. While official market forecasts are gunning for 603k jobs to be lost for the month of April, note that the bar has been raised as the ADP Employment Report within the private sector released on 06 May 09 is forecasting for only 491k jobs to be lost. Therefore, even if the actual number released by the US government manages to meet official market forecasts, global indices may still fall as whisper numbers are now gunning for a better figure than -603k. STI may suffer a relatively bigger fall compared to the other indices as it has outperformed most of these indices for the week so far.



By James Lim