Friday, October 31, 2008

How Much For The Wall Street Rescue??

Here's an excellent article posted on Forbes. ( Source: here )

  • Calculating The Cost Of Wall Street's Rescue

    Consider the numbers: $29 billion for the Bear Stearns mess; $700 billion to buy spoiled assets; $200 billion to buy stock in Fannie Mae and Freddie Mac; an $85 billion loan to AIG insurance; another $37.8 billion for AIG; and $250 billion for bank stocks. Hundreds of billions in guarantees to back up money market funds and to guarantee bank deposits. And who knows what expenses are still to come.

    All this financial rescue spending recalls the quote attributed to the late Sen. Everett Dirksen: "A billion here, a billion there, and pretty soon you're talking real money."

    Today, substitute trillion.

    How will the U.S. pay for it all? Answer: by borrowing--raising worries about how the country's ballooning annual budget deficits and aggregating debt will affect the economy and financial markets. Some guidelines, such as interest rates and the ratio of debt and deficits to gross domestic product, suggest the new debt will be digested easily. But some experts think those guidelines are misleading, warning that obligations are piling up like tinder on a forest floor.

    "This kind of accounting that the government does--if they did it in the private sector, they would go to jail," says Kent Smetters, a professor of insurance and risk management at Wharton.

    Like many experts, Smetters is not as concerned about the current deficit and debt as about the long-term obligations that include monumental sums for Social Security, Medicare and Medicaid as baby boomers age. "The problems that we face right now are trivial--they are just an appetizer for the big show," he predicts.

    What will the financial rescues cost? A tally can't be figured by simply adding the sums for each response. Many of the figures, such as the $700 billion Troubled Assets Relief Program to buy illiquid mortgage-backed securities from financial firms, are upper limits set by lawmakers or regulators who hope that less will be spent. Some figures overlap. The $250 billion bank investment is to come out of the TARP fund, for example.

    And much of the spending is to purchase assets that could eventually be sold, offsetting all or part of the cost and perhaps even turning a profit. That includes mortgage-backed securities and derivatives for TARP, as well as ownership stakes in banks and Fannie ) and Freddie. Some funds, like the money for AIG, are for loans the government expects to be repaid, with interest--unless the borrower defaults. Others are guarantees that will be tapped only in an emergency--the $29 billion for Bear Stearns and hundreds of billions to raise confidence in the safety of money markets and bank savings.

    Opening 'Pandora's Box'

    Wharton finance professor Richard Marston notes that more taxpayer-financed rescues are likely to come. General Motors and Chrysler, now in merger talks, are said be running out of cash and in line for early access to a federal loan fund. Like the financial giants already helped, might any or all of the Big Three U.S. automakers be considered too big to fail? The California state budget is in the red, and other states may follow.

    "I don't think we've seen the end of this," Marston predicts. "It's going to be real expensive next year. ... There's no way the federal government is not going to bail out General Motors and Ford. ... We have opened a Pandora's box."

    Though the eventual tally is impossible to pinpoint, some experts suggest the annual deficit--the amount borrowed to make up the differences between spending and revenue--will soar. In an early October television interview, Peter Orszag, director of the Congressional Budget Office, forecast that rescue spending and falling tax revenue from a recession could create a $750 billion deficit in the current fiscal year, up from the $455 billion of the just-ended year. The deficit was about $163 billion in 2007. The Concord Coalition, a non-partisan deficit-fighting organization, says next year's figure could exceed $1 trillion. As it approved rescue packages, Congress last summer and this fall raised the debt ceiling to $11.3 trillion from $9.8 trillion. Currently, the debt stands at just over $10 trillion.

    The debt is the build-up of annual deficits, which run in cycles, says Marston. During recessions, tax revenue falls along with economic activity, causing deficits to rise. Deficits are typically gauged as a percentage of the gross domestic product, and economists generally worry when this figure exceeds 3%. In 2007, it was 1.2%; in 2008, it jumped to 3.2%. A trillion dollars would be 7%--or more if the economy shrinks--the highest since the 6% of the 1980s. Before 2008, deficits had fallen for several years because the relatively strong economy lifted tax revenues. In recent years, the deficit has been relatively low by historical standards. It has averaged just over 4% of GDP since World War II. The budget was in surplus from 1998 through 2001.

    "Even without the bailouts, we would have had a serious deterioration of the deficit," Marston notes. "We always do at the beginning of a recession. Now you have the bailout. ... The big story in terms of deterioration is the cyclical movements. Tax revenues are just plummeting."

    Though the total federal debt stands at about $10 trillion, nearly half is debt one part of government owes another. Economists focus on the "debt held by the public," which is what the government owes to debt holders like Treasury bond owners. That stands at about $5.4 trillion, about 38% of gross domestic product. The percentage has been higher during most of the past 70 years, with the exception being the 1970s. At the end of World War II, the debt exceeded 100% of GDP, and the post-World War II average is around 43%. The low was 24% in 1974. Many developed countries carry much heavier debt loads relative to GDP.

    Seen in the context of GDP, deficits and debt have not been terribly alarming in recent years, and even the expected spike in the deficit would appear to leave the debt in manageable territory. But that's not to say these obligations don't matter. "If the ratio is going up over time, we've got a problem," according to Wharton finance professor Marshall E. Blume. "If it's going down over time, it's not as much of a problem."

    Debt has to be paid off with interest. The bigger the debt-service bill, the harder it is for government to pay other expenses without raising taxes. In fiscal 2008, interest on the debt cost the government about $234 billion, or 8% of total spending. "It seems to me it is going to restrain what the next president is going to be able to do," Blume calculates. "We may be able to handle it, but it will cost us in other areas."

    Moreover, if Treasury sales are soaking up investor dollars, that money is not available for other investments that drive economic growth, such as stocks or corporate bonds. High government debt reduces economic growth. "It's called 'crowding out,' " Blume says. "The government is crowding out the private sector."

    A Deficit of Confidence in the Numbers

    Smetters thinks the debt-related problems are far worse than government numbers indicate. If the government followed the accounting required of corporations, it would include as a liability the present value of future expenses for Social Security, Medicare and Medicaid. That would have made the 2006 deficit $2.4 trillion instead of $248 billion. The current debt would be around $68 trillion, not $10 trillion. "The bottom line is that they just don't have forward-looking measures."

    Marston and Blume, too, argue that these future costs present an immense problem. Dealing with it will require some combination of raising taxes or cutting benefits--or "monetizing" the problem. Essentially, that means printing money to raise inflation, which should push tax revenues up (although higher inflation also could raise Social Security and Medicare expenses, offsetting the benefit). "With the liquidity that's being pumped into the system, and the loose credit that the Treasury and Fed are trying to create, down the line we are going to have to worry about inflation," Marston suggests.

    Nearly all economists agree entitlements are a looming threat, according to Marston. "It doesn't matter what the political persuasion is. We are much more worried about the entitlement issue than we are about the cyclical deficit and interest rates."

    But if the problem is so serious, why are the financial markets not signaling alarms by raising interest rates? In the traditional view, growing deficits and debt work to drive interest rates upward, because the government, like a desperate gambler turning to a loan shark, must offer higher yields to attract lenders--the investors who buy Treasury bonds. But Treasury yields are not rising substantially. "We're paying no penalty at all for the increase in government spending," Marston notes, arguing that other factors are offsetting the interest-heightening influence of debt.

    He and Blume point to the global savings glut--a mountain of money seeking investments and turning to U.S. Treasuries, considered among the safest holdings in the world. This high demand offsets the growing supply of Treasuries, which include bills, notes and bonds, allowing the government to sell them with low yields. The 30-year Treasury bonds yield a paltry 4.2%

    The worldwide "flight to safety" is underscored by the dollar's recent rise against the euro, which has been a strong competitor to the U.S. currency in recent years, Marston observes. The dollar's rise is caused by heavy demand for Treasuries. "The Treasury, in this crisis, is being viewed as the safest harbor in the world. And that is an eye-opener. I wouldn't have predicted that--particularly against the euro."

    According to Smetters, interest rates should not be seen as the canary in the coal mine, an infallible early warning system. "The common belief that capital markets cannot fail is precisely the reason why they can," Smetters wrote in a 2007 article in Financial Analysts Journal, "Do the Markets Care about the $2.4 Trillion U.S. Deficit?" Smetters and his co-author, Jagadeesh Gokhale, a Cato Institute fellow, wrote that "the United States has never faced anything close to the unbalanced balance sheet it now confronts--not even during World War II." They conclude that fixed-income investors "reveal enormous myopia about the implications of the financial problems facing the federal government."

    Herd instincts cause these investors to reinforce one another's views that nothing is wrong because the low interest rates say so, he and Gokhale wrote. Their article was written before the current financial meltdown--largely caused by the financial markets' failure to identify rising risks by pushing interest rates up. Many experts' faith in the predictive value of interest rates has been shaken over the past two years. Deficits and debt do matter--if not today, someday, Smetters says.

    To economists, the most frightening fact is that the enormous cost of today's financial rescues is just a drop in the bucket.

Thursday, October 30, 2008

Shipping Giant Neptune Orient Lines (NOL) Warns of Losses!

Amidst the plunging global shipping rates (see Baltic Dry Index Closes At 982 And Britannia Holdings Faces Loans Defaults!! and also note the links within), Neptune Orient Lines (NOL) warns that it will likely see operating loss in the current quarter.

Posted on Business Times:
NOL warns of losses as choppy seas loom

  • NOL warns of losses as choppy seas loom

    Q3 net profit falls 82% - but the real trouble starts now


    (SINGAPORE) The global shipping industry is headed for a situation 'never seen before' and the US$35 million profit that Neptune Orient Lines (NOL) still managed to turn in for the third quarter will likely turn into an operating loss in the current quarter, group president and CEO Ron Widdows warned yesterday.

    Net profit fell 82 per cent from US$191 million in the previous corresponding quarter while revenue rose 16 per cent to US$2.35 billion from US$2.03 billion previously.

    'The group continued to generate a profit in the third quarter despite the deterioration of conditions in the container shipping market,' said Mr Widdows. 'Reduced demand in key trade lanes, combined with cost increases and worsening global economic conditions have adversely impacted our profit performance in the third quarter,' he added.

    Mr Widdows warned that more trouble lay ahead. 'Clearly, the pace of trade flows are going to diminish in the not too distant future and some of that has found its way into third-quarter results but it will only be towards the later part of this year and earlier into next year that you will really see the slowdown,' he said.

    For the third quarter, NOL's container shipping business APL saw a 10 per cent rise in volumes to 622,000 forty foot-equivalent units (FEUs) and average revenue per FEU rose 8 per cent to US$3,127. Total revenue rose 22 per cent to US$2.04 billion but lower core freight rates in the Asia-Europe trade took a bite out of profit, with Ebit (earnings before interest and taxation) falling 95 per cent to US$9 million.

    Core Asia-Europe headhaul freight rates (excluding bunker adjustment factors) came under severe downward pressure on softer demand and ahead of expected capacity overhang in 2009/2010, NOL said.

    This trade will likely see negative volume growth on a full-year basis and it is reasonable to assume that it will turn further negative next year, Mr Widdows said.

    Increasingly, the long-leg Intra-Asia trades have also been affected, as they are hit by capacity cascaded from other trades, principally Asia-Europe.

    Average headhaul utilisation had already started to come down to 90 per cent in the third quarter from 99 per cent previously.

    Significantly, headhaul volumes in APL's key TransPacific trade contracted during the quarter and this may be compounded by the global financial crisis and economic slowdown, NOL said. In addition, Japan's No 2 line Mitsui OSK Lines announced that it would resign from the Transpacific Stabilization Agreement.

    'We are acting quickly and decisively to trim capacity and reconfigure our service networks, adjusting port calls and service loops and withdrawing a number of vessels from service. These actions will reduce our costs and better align APL's service networks to the lower demand levels currently being experienced,' said Mr Widdows.

    He said APL's capacity in the Asia-Europe trade would be reduced by close to 25 per cent, with around 20 per cent of the company's TransPacific tonnage also to be removed from service.

    Key changes are also underway in the Intra-Asia trades, he added. Together with APL's alliance partners, this translates into about 40 ships that will be taken out of service, Mr Widdows said.

    APL Logistics delivered a 42 per cent increase in Ebit to US$17 million for the third quarter, although logistics revenues registered a slight one per cent decline to US$315 million. The terminals business saw Ebit rise 5 per cent to US$23 million on one per cent increase in revenue to US$146 million.
    NOL shares closed 7 cents higher at $1.17 yesterday.

Apollo Food's'Investments' In The Share Market

I had posted on local company dabbling in the share markets recently and as posted in the following posting, Listed Companies Investments: Yung Kong Galvanised Steel , I made the following remarks.

  • I have always felt uneasy seeing our local listed companies dabbling with their excess money. Sometimes they invest in the share market and sometimes they just invest! And one of the most disturbing issue is that there is ZERO transparency!
Today, I came across the following announcement from Apollo Food Holdings. Now I would applaud Apollo Food Holdings for being transparent.

See APOLLO FOOD HOLDINGS BERHAD ("APOLLO" or "the Company") - Dealing in quoted shares (Do click on the excel file attached!!! )

However, let me stress again, I am uneasy with Apollo Food's involvement in the share market.

Excess money should be return to the shareholders and I do not think it's right that this company should be dabbling in the stock market.

Wednesday, October 29, 2008

About Hedge Funds And Meltdown In Euroland!

A couple of interesting postings on UK Telegraph.

GLG chief Emmanuel Roman warns thousands of hedge funds on brink of failure

  • 24th October 2008

    Emmanuel Roman, of GLG Partners, said 25pc-30pc of the world’s 8,000 hedge funds would disappear "in a Darwinian process", either going bust or deciding meagre profits are not worth their efforts.

    "This will go down in the history books as one of the greatest fiascos of banking in 100 years," said Mr Roman, who with Noam Gottesman, co-runs GLG, a former division of Lehman Brothers Holdings with assets of $24bn (£14.8bn). "There need to be some scapegoats, and the regulators are going to go hunt people. That will be good in the long run."

    His views were echoed by Professor Nouriel Roubini, a former US Treasury and presidential adviser known for his accurate prediction of financial crises, who estimated that up to 500 hedge funds would fail within months.

    Both men were speaking at the same hedge fund conference in London yesterday, and Prof Roubini said he would not be surprised if the US and other countries soon had to close their stock markets for more than a week to halt descent into "sheer panic".

    The economist warned that the world is heading for a protracted recession that will end the US’s financial dominance.

    "It’s the beginning of the decline of the US financial empire. The Great Depression ended in a massive war. I hope that’s not going to happen but it’s pretty ugly now," Prof Roubini said.

    He added that turmoil over world trade, currency markets and debt is likely to cause geopolitical tensions between the Western world and emerging superpowers such as Russia, China and "a bunch of unstable oil states".

    The conference saw analysts, economists and hedge fund managers discussing the possibility that global recession could now last two years on fears that government bail-outs and nationalisations have failed to stop the markets slumping.

    "We’re now paying the price for the biggest asset and credit bubble in history," Prof Roubini said, advising investors to stay clear of risky assets and keep money in cash. "The bail-outs have not worked because the markets are no longer rallying, and the policy-makers have run out of options."

    The global financial meltdown accelerated this month, with the UK and US governments being forced to take stakes in some of the world’s biggest banks. Stock markets around the world have fallen sharply this month as investors’ concern switches to the impact on the wider economy.

    "It’s like we’re walking blind in a minefield," said Prof Roubini. "Every situation has become risky and no one can trust each other. The banks are too big to be allowed to fail, but they’re also too big to save."

    Research from Hedge Fund Intelligence (HFI) shows that despite one of the worst months on record for credit funds, US hedge funds alone still have $1.7trillion (£1trillion) in assets.

Europe on the brink of currency crisis meltdown

  • 26th October 2008

    The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

    Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

    “This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

    Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

    The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

    They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

    Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.

    Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

    Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

    Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

    Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

    Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.

    The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.

    The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world.

    Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire.

    Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.

    It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon.

    Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.

    Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.

    The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

    Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union.

    The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.

    Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself.

    “The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.

    A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states.

    The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?

Baltic Dry Index Closes At 982 And Britannia Holdings Faces Loans Defaults!!

This was very much expected given the dramatic plunge in the index in recent weeks.

Again note the warnings of the possibility of shipping companies failing and the problems with Britannia Bulk Holdings in the following news report on Bloomberg.

  • Baltic Dry Index Drops Below 1,000 for First Time in Six Years

    By Alistair Holloway

    Oct. 28 (Bloomberg) -- The Baltic Dry Index, the benchmark for commodity shipping costs, fell below 1,000 for the first time in six years as the lack of credit curbed global trade and shipowners threatened to shun orders.

    The index, watched by banks including UBS AG as an economic indicator, fell 66 points, or 6.3 percent, to 982 points, the lowest since Aug. 8, 2002. The gauge has dropped 89 percent this year, driving down the combined market capitalization of the 12- company Bloomberg Dry Ships Index, led by Athens-based Diana Shipping Inc., to $5.5 billion from $32 billion a year ago.

    ``You are getting very, very close to the cost of just crewing and running a ship,'' Richard Haines, a senior director at London-based shipbroker Simpson, Spence & Young Ltd., said in an interview today.
    ``It can't go much lower than this without owners deciding they don't want their ships employed.''

    The International Monetary Fund predicts the world's advanced economies will next year grow at the slowest pace since 1982.
    The Bank of England today estimated losses on asset-backed debt, corporate bonds and other securities in the U.K., U.S. and Europe had more than doubled since April to about $2.8 trillion.

    Zodiac Maritime Agencies Ltd., the shipping line managed by Israel's billionaire Ofer family, said this month it may idle 20 capesize ships, which typically haul coal and iron ore. That's about 5 percent of the fleet operating in the spot market.

    Shipowners are also slowing down vessels to cut fuel costs. The average capesize is sailing at 8.54 knots, down from 10.33 knots in July. Capesizes are attracting rates of $7,340 a day, close to daily operating expenses of about $6,000, according to Henrik With, a shipping analyst at DnB NOR Markets ASA in Oslo. Daily rates for smaller panamaxes fell 8.1 percent to $6,413.

    Failing Shippers

    Fearnley Fonds ASA, an investment bank specialized in shipping, energy and oil services, expects a ``significant'' number of commodity shippers to fail within two years.

    Britannia Bulk Holdings Inc. has ``severe'' financial difficulties and a ``very high risk'' of being in default on a $170 million loan, the London-based commodities shipping line said in a statement distributed by Market Wire today.

    Industrial Carriers Inc., a Ukrainian operator of about 55 vessels, filed for bankruptcy this month.

    The London interbank offered rate, or Libor, fell 4 basis points today to 3.47 percent for three-month loans, the British Bankers' Association said. It was the 12th straight drop.

    The three-month Libor for dollars remains 197 basis points above the Federal Reserve's target rate for overnight loans of 1.5 percent, up from 81 basis points about three months ago. At the start of the year, the spread was 43 basis points.

    Awaiting Recovery

    Credit markets began seizing up after BNP Paribas SA halted withdrawals on three funds in August 2007. They froze after Lehman Brothers Holdings Inc. collapsed on Sept. 15.

    Shipping lines also have to contend with slowing growth in demand for most commodities. The S&P GSCI index of 24 raw materials has dropped 31 percent this month, its worst performance since at least 1970. Any turnaround for shipping markets may not come this year, according to Stuart Rae, joint managing director at M2M Management Ltd. in London.

    ``Towards the early part of next year I think we will have more liquidity and cash in the market, and more trading being done and the market picking itself up from the floor,'' Rae said in an interview today.

    OAO Severstal, Russia's largest steelmaker, and other producers are cutting output, sapping demand for iron ore and coking coal. The two commodities will account for about a third of the 3.2 billion metric tons of dry bulk goods shipped this year, according to Drewry Shipping Consultants Ltd.

See also article on Forbes: The Waves Rule Britannia

  • A falling tide sinks all ships. With global economic growth slowing and international finance grinding to a halt, no industry has been harder hit than the dry-bulk shipping business. As business evaporates, shipping companies are anchoring their boats and hoping to ride out the financial storm.

    The question is, which ones will have strong enough balance sheets to do so.

    On Tuesday we learned that Britannia Bulk Holdings is not one of those tough-as-nails companies.
    The dry-bulk shipping outfit, which had its initial public offering in June at $15.00 per share, announced on Tuesday that it would post a whopping third-quarter loss and that it is considering alternatives including liquidation or bankruptcy protection. Investors weren’t understanding. Britannia’s shares plummeted 86.8%, or $1.65, to 25 cents.

    Britannia said that there was a “very high risk” of default for its loan facility with Lloyds TSB Bank and Nordea Bank Denmark. The company is in discussions with lenders but said there can “be no assurance that a resolution of the issues surrounding the facility will be reached.”

    “The company is considering its alternatives if it is unable to reach an accommodation with the lenders, including liquidation or protection under applicable bankruptcy or insolvency laws,” the company said.

    Britannia, which transports good in and out of the Baltic region and has 13 dry bulk vessels, blamed its third-quarter loss on the substantial drop in shipping demand and a related decline in chartering rates. Dry-bulk rates on Capesize vessels -- those ships so large that they can't fit in canals -- sank 8.7%, to $7,340 on Tuesday, down from $8,042 on Monday and from $179,887 in the prior year.

    When Britannia arrived on the market in June it looked as if shipping rates could go nowhere but up. Another blow to the company is that it paid more to retain shipping vessels than it received for chartering them to customers. Add to that a misplaced bet on oil prices: fearing they would rise, Britannia hedged at prices substantially above the current level, and now it doesn't need all that much fuel.

    That Britannia's future is dim seems a foregone conclusion. The big question is: who is next? (See “
    High and Dry In Dry Bulk.”).

    Investors seem to have lost faith in DryShips and Navios Maritime Holdings since those two stocks sank significantly in late trading on Tuesday, both falling around 7.0% despite a rally in the overall market.

    Yet if you have a strong stomach, a long-term view, and any reason to believe that the global economy will rebound, now’s the time to buy.

    Meanwhile, the Baltic Dry Index, which measures dry bulk shipping rates on 40 routes across the world, tumbled 6.3%, to 982 on Tuesday--its 17th straight daily decline, down from 1048 on Monday, according to (See “
    Shipping Stocks Sink.”) . This is the first time the index sank below 1,000 since August 2002.

Other recent postings made on the Baltic Dry Index:

1. Views On Current Weakness On Baltic Dry Index
The Collapse of the Baltic Dry Index
Goldman Downgrades Bulk Shippers!
Baltic Dry Index Keeps Falling!
Baltic Dry Index Stages Strong Rebound!
Baltic Dry Index Set For Strong Recovery???
Baltic Dry Index Plunges To Seven Month Lows!
The Baltic Dry Index Keeps On Plunging!
Baltic Dry Index Continues To Plunge
The Plunging Baltic Dry Index And The Dangers Of Using Forward PE!
Baltic Dry Plunges Below 2000!!!
Admist The Plunging Baltic Dry Index, Dr. Marc Faber Warns That Some Shipping Lines Could Go Bankrupt!
Comments Heard Admist The Plunging Baltic Dry Index ( recommended reading!)

Monday, October 27, 2008

Marc Faber: Not Much Incentive To Hold Equities!

Published on CNBC.

  • The wave of stock selloffs sweeping world markets may be partially caused by the fact that many governments increased guarantees for bank deposits, making them a much safer investment, Marc Faber, author of the "Gloom, Doom and Boom Report," told CNBC Monday.

    "Now that deposits are guaranteed, basically I as an investor have no incentive to hold equities so I sell them and put my money in bank deposits," Faber told "Squawk Box Europe" by telephone.

    The other measures taken by various governments to try and prop up ailing markets have had the opposite effect, he added.

    "The interventions, they actually have increased volatility. It’s impossible to forecast market movements when you have interventions," Faber said.

    The next stage of the crisis may be that companies may have to adjust their book value as it happened during the bear markets of the 70s and 80s, when book value was overstated.

    "If the global economy slows down by as much as I think it will… then a lot of book values will have to be adjusted downward quite substantially," he said.

    And central banks cutting rates based on the assumption that the downturn will dampen inflationary effects will have another headache when the worst of the crisis is over, Faber warned.

    "I think first we’ll have a bout of deflation that will actually be quite substantial… but then the budget deficits will go through the roof and the Fed will print even more money … and then later on we'll have very high inflation," he said.

Source: Governments May Have Caused Stocks Selloff: Dr. Doom

Crisis Hit Arab Nations, Sending Stocks Into Tailspin

Posted on VoiceOfAmerica: Stock Markets Across Middle East Fall Again

  • Stock markets in the Gulf and across much of the Middle East experienced another day of dramatic drops Sunday, amid a backdrop of falling oil prices, despite OPEC's decision to cut production. Stock markets in the Asia-Pacific region have opened slightly lower Monday, amid indications governments will take additional measures to prop-up the global financial system. Edward Yeranian reports for VOA from Cairo.

    Stock markets in Abu Dhabi and Dubai lost between four and five percent, Oman and Qatar lost between eight and nine percent, and the Egyptian stock exchange dropped more than six percent.

    Mohammed Burhan, the executive editor of CNBC al Arabiya network, based in Dubai, said in a telephone interview, he thinks that Gulf markets are reflecting the global economic crisis.

    He says, whatever affects global markets affects Gulf Arab markets, as well. He says, "the crisis in the Gulf began a bit ahead of the global crisis, when foreign investment funds began to pull out of the local market," and this affected stock prices.

    The Arab daily Asharqalawsat reports that Gulf Finance Ministers and Central Bank chiefs held a closed door meeting Saturday in the wake of investor fears.

    In Kuwait, the Central Bank intervened Sunday to halt trading in one of the country's largest banks, after it incurred major losses in currency and stock trades.

    A top Gulf economic expert, Wadah el Taha, told Al Arabiya Television that he thinks much of the crisis is the result of widespread investor panic, and that some steps have already been taken, like the insuring of bank deposits in the United Arab Emirates, and the pumping of more liquidity into the system:

    He says it is critically important to restore confidence and take steps to support the banking system.
Posted on ArabNews.Com: Kuwait guarantees deposits

  • JEDDAH: Kuwait moved to prop up one of its banks yesterday as the global financial crisis spread to the Gulf, sending stocks into a tailspin.

    The Kuwaiti central bank was forced to step in to support Gulf Bank, which was hit by losses from trading in currency derivatives after the dollar rose, prompting the government to announce it would guarantee local bank deposits.

    Gulf Bank, Kuwait’s fifth-largest bank by market value, had suffered two straight quarters of falling profit due to bad debt and the impact of weak markets on its investment portfolio.

    Yesterday, the central bank halted trading in Gulf Bank’s shares and appointed a supervisor to oversee its treasury, foreign exchange and financial markets trading operations. The central bank said trading in Gulf Bank stocks would remain suspended until the probe was completed.

    Gulf Bank ran into trouble after some of its clients refused to cover their losses from currency derivatives trades, leaving the bank to foot the costs until a deal was reached.

    Chief Executive of the National Bank of Kuwait, the country’s biggest bank by assets, Ibrahim Dabdoub put the losses at 150 million to 200 million dinars, but Gulf Bank General Manager Fawzy Al-Thunayan dismissed the comments as too early.

    “We don’t know yet. Dabdoub can say what he wants,” Al-Thunayan said, speaking in front of the bank’s headquarters where a crowd gathered, adding that deposits were safe. He said the full extent of losses would not be known until today, when the bank closes its currency positions abroad.

    Kuwaiti traders staged another walkout yesterday and protested outside the stock market. The traders, who deserted the stock market on Thursday, the business week’s final day, left the trading chamber again after the index dived more than 300 points a few minutes after the opening.

    About 30 of the traders marched to the nearby Council of Ministers building where the Cabinet was holding an emergency session to discuss a bill to guarantee bank deposits.

    “We want the government to intervene to rescue the bourse and traders. We want the government to buy stocks. This month, I have already lost half of my investments in the bourse,” one of the protesters, Hussein Tubayekh, said.

    The Kuwaiti government also set up a special task force yesterday headed by the central bank governor to deal with the impact of the financial crisis.

    The actions spooked investors. Gulf markets tumbled to multi-month lows yesterday. The Kuwait Stock Exchange Index shed 3.5 percent to finish at 10,114.30 points, its lowest level since April 2007.

    The Dubai Financial Market Index closed down 4.75 percent at 3,102.65 points.

    The Abu Dhabi Securities Exchange dived 4 percent with the key real estate sector down 6.5 percent and banking 5.5 percent.

    The Doha Securities Market dived a massive 8.93 percent to end the day below the 7,000-point mark at 6,892.95 points. The tiny Muscat Securities Market dropped 8.3 percent to 6,506.03 points, while the Bahrain Stock Exchange lost 3.7 percent.

    Saudi Arabia’s index slipped 1.66 percent after an 8.7 percent slide on Saturday.

    The Tadawul All-Share Index (TASI) closed 93.10 points down at 5,531.57. The stock market turnover was over SR5.56 billion compared to over SR4 billion on Saturday.

    “The market is looking for confidence-building measures. They shouldn’t take actions that damage another country’s deposit base,” said John Sfakianakis, chief economist at SABB bank, referring to Kuwaiti central bank’s action. “As they face this global uncertainty, the central banks need to have a uniform position.”

    Adding to Kuwait’s headaches, a Parliament member said he would submit a request to question the country’s prime minister partly over his handling of the financial crisis.

    In the past, such requests have led to ministerial resignations and brought down the government.

See also article on CNN: Crisis moves to Gulf Arab nations

Here is how Gulf Bank is doing.

1 year..

5 year..

Here is how Kuwait stock has done..

1 year..

5 year..

Here is how Saudi Arabia Stock Exchange (Tadawul) has done..

1 year..

5 year..

Regarding KNM's Sell Down!

Blogged the other day. KNM Comments About BTimes Article

Got one interesting set of comments.

  • Naruto said...
    THE SHARES WERE SOLD BY FINANCIER WHICH IS NOW RESOLVED. How was this resolved? By company Share Buybacks? By Mr Lee's own purchase? Or by Financier's repurchase? And the announcement did not disclose the actual problem of this financier, whether the disposal is purely margin call, financier liquidation due to credit crisis or actual share disposal by shareholder.

Yes, this is also why I am lost here.

Mr. Lee has gone massive length in attempting to made a point over the size of EPF's shareholding stake and the PE yardstick but as pointed out by Naruto..

1. What about the massive 'disposal of shares sold down by financer' on Inter Merger Sdn Bhd the other day?

2. How's this resolved?

3. Why did the sell down happened?

4. And that share buyback.. the timing of the buybacks and the selldown simply arouses suspicion, yes?

5. Shouldn't Mr. Lee directly address these issues, instead?


Anyone got any answers?

Saturday, October 25, 2008

Bill Gross Says Bull Market Is Imminent

Posted on CNBC.

  • A bull run will begin for the stock market once major financial institutions have deleveraged, Bill Gross, head of bond titan Pimco, said on CNBC.

    While warning of the implications of shedding bad debt, Gross said the market may be nearing a point where it comes out of a severe bear market and makes a run higher.

    "Bull run, yes, but to what extent in terms of the total return, I don't think it would be typical of prior cycles, because this is a secular delevering," he said. "It's never occurred before—at least it hasn't occurred since the 1930s—and it will carry with it implications for corporate profits, for margins and for ultimately a significantly delevered system not just in the United States but globally."

    "To the extent that that happens, not only is the financial marketplace not prepared for it but the global economy is not prepared for it," he added. "We will have to see how it all adjusts going forward. But yes, from a certain price point here and we may be close, a bull market is imminent."


Having A Flexible Investing Mindset

Great advice posted by Brian Pretti on his editorial posted on FinancialSense market wrap: Changing the Frequency

  • I could go on and on with the examples of this concept, but you get the point. Remaining flexible here is key. Remember, I said flexible, not cocky. And not contrary just to be contrary. We have some bad economic numbers to come. Consumers are hurting with very little relief in sight. The financial sector remains a mess, and in a number of specific cases, perhaps a few black holes. As I said, real marginal change may be years away for all I know. Personally, I don’t see any yet. But, that doesn’t mean I’m not starting to look. In fact this is exactly what I’m doing. At worst, I’m wasting my time. Quite the inexpensive exercise in monetary terms. But I don’t consider it a waste at all. In my mind, real change at the margin is almost always unseen by the crowd. But importantly, it is seen and discounted by the markets. I just need to remind myself in periods such as this that remaining absolutely rigid and unbending in any one direction is a poor investment stance. Humility and flexibility - don’t forget.

Friday, October 24, 2008

KNM Comments About BTimes Article

Posted on Business Times: SC probes KNM's abnormal intra-day trading

  • SC probes KNM's abnormal intra-day trading
    By Francis Fernandez Published: 2008/10/24

    Dealers say the intra-day trading pattern of KNM shares in recent weeks mirrors that of Iris at its peak a few years ago, with massive swings to the downside followed by upward buying momentum

    THE Securities Commission (SC) has initiated a probe into the abnormal intra-day trading activities of KNM Group Bhd shares.

    "We are examining the announcements made by the company (KNM) on Bursa Malaysia. If there are any indications of wrongdoing or breaches of securities laws, then appropriate regulatory action will be taken," an SC spokesperson told Business Times.

    The company was queried on October 15, following a sharp decrease in price and high volume of its shares. In its reply then, KNM said it was unaware of the cause for the unusual market activity.

    On Bursa Malaysia yesterday, KNM was the second most active stock, with 45.79 million shares traded. It closed RM0.035 lower at RM0.595. Its intra-day high and low were RM0.605 and RM0.580 respectively.

    KNM, which controls three per cent of the world's process equipment market, was the hottest oil and gas stock last year, helped by a growth story and backed by a string of overseas acquisitions.

    That strategy helped KNM, which has an order book of RM4.7 billion, to grow its profit over the past five years to RM188.3 million for the year ended December 31 2007 from RM25.57 million in 2003, as well as raise more than a billion ringgit this year from script issues.

    Nonetheless, long term shareholders such as the Employees Provident Fund and Fidelity International Ltd have been net sellers in recent weeks.

    Dealers say the intra-day trading pattern of KNM shares in recent weeks mirrors the trading pattern of Iris Corp Bhd shares at its peak a few years ago, with massive swings to the downside, followed by upward buying momentum.

    From September 2005 to May 2006, Iris rose from an eight sen a share stock to RM1.36 per share, with an average 200 million shares being traded daily.

    The Iris gravy train eventually left investors teary-eyed after market regulators designated the stock, and filed civil suits against Datuk Tan Mong Sing, Low Thiam Hock and Aeneas Capital Management, a US hedge fund, for market manipulation.

    KNM, like Iris, has 10 sen shares, with huge paid up capital base of 3.95 billion and 1.36 billion respectively. However, unlike Iris, big ticker houses such as UBS and JP Morgan are bullish on KNM. Bloomberg records show all major research firms are recommending investors to buy KNM, with a price target of above RM1.

Today KNM posted a reply on Bursa Malaysia:

(click on the image for a much larger view)

Actually I am lost!

Perhaps its my eyes but there seems to be a disconnect between what BTimes published and KNM's reply, for I see no where did BTimes mentioned anything about PE multiples!

Perhaps KNM management was referring to this article:
15-10-2008: Major shareholders exit KNM

  1. Announcements to Bursa Malaysia indicate that the Employees Provident Fund (EPF) disposed of about eight million shares in the company on Oct 8, trimming its shareholding to 272.8 million shares or 6.9% of the share capital.

    EPF had come into KNM with a 5.3% shareholding in mid-June last year and had been trading the company’s shares heavily but had never disposed of such a big block.

    An analyst from a local broking house said that the major sell-down could also be due to KNM’s foreign shareholders dumping their shares in the open market. “They are getting out of emerging markets and pulling back funds to their original country in a bid to support their own economy,” he told The Edge Financial Daily.

    The analyst was referring to Boston-based FMR LLC and Bermuda-incorporated FIL Ltd (Fidelity).

(It would have been nice that the writer named who the analyst is! Yes quote the source!)

Or perhaps KNM was referring to this article: 16-10-2008: KNM comes under selling pressure

Or perhaps KNM was referring to this article: Is the sharp drop in KNM's share price justified?

I really do not know! I am simply so confused!

Anyway what was interesting for me was the following:

What was interesting for me personally was this announcement posted by KNM,
Changes in Sub. S-hldr's Int. (29B) - Inter Merger Sdn Bhd

This is a company in which Mr.Lee has interest in and if you see
Changes in Director's Interest (S135) - Lee Swee Eng

The following was most interesting:

  • Acquired 23/10/2008 11,376,000
    Disposed 16/10/2008 72,271,600

Disposal was massive!

And did you see the point 2? Disposal of 72,271,600 shares - sold down by financier which is now resolved

And more interestingly, the company DID a share buyback during this same period! Notice of Shares Buy Back by a Company pursuant to Form 28A

Look at the details.

Date of buy back from : 16/10/2008
Date of buy back to : 22/10/2008

Total number of shares purchased (units) : 22,190,200
Minimum price paid for each share purchased (RM) : 0.415
Maximum price paid for each share purchased (RM) : 0.690
Total amount paid for shares purchased (RM) : 13,544,216.13

Reading Artice: Take Heart: Why the Malaysian Bear Market is Common

Here is an article for weekend reading: Take Heart: Why the Malaysian Bear Market is Common


Credit Crunch Jokes!

  • A trader: "This is worse than a divorce. I've lost half my net worth and I still have a wife."

    President Bush said clients shouldn't be concerned by all these bank closings. If the bank is closed, you just use the ATM, he said.

    George Bush said that he is saddened to hear about the demise of Lehman brothers. His thoughts at this time is to go out to their mother as losing one son is hard, but losing two is a tragedy.

    The problem with investment bank balance sheets is that on the left side nothing is right and on the right side nothing is left.

    In maths there are 30 billion prime numbers below 700 billion. The rest are all subprime.

    How do you define optimism? A banker who irons 5 shirts on a Sunday.

    What do you call 12 investment bankers at the bottom of the ocean? A good start.

    Why are all MBAs going back to school? To ask for their money back.

    For Geography students: What's the capital of Iceland ? Answer: About Three Pounds Fifty...

    If you want to gamble, go to Las Vegas . If you want to trade in derivatives, God bless you.

    Whats the difference between a guy who just lost everything in Vegas and an investment banker? A tie.

    Whats the difference between a bond and a bond trader? A bond matures.

    Lehman have changed their recommendation on Lehman from hold to sell.

    Forty years ago I sold fifty shares of my company stock and had enough money to purchase a brand-new 1967 Ford pickup. Last week, I checked it out, and if I sold another fifty shares, Id have enough money to buy a 1967 Ford pickup. So, the market has stabilized.

    What have an Icelandic bank and an Icelandic streaker got in common ? They both have frozen assets.

    A Director decided to award a prize of £50 for the best idea of saving the company money during the credit crunch. It was won by a young executive who suggested reducing the prize money to £10.

ps: Chelski play LFC this weekend, m8! How? Comeon United!

Jeremy Grantham Joins The Bullish Camp!

Yes, Jeremy Grantham of GMO has joined the Bullish Camp!

Yes, another of the legendary investors has joined the bullish camp. ( Can you count how many already?)

However, before anyone jumps the gun, perhaps it's best we understand what Jeremy is saying here!

Several interesting issues he has written. Firstly I agree very much with his current assessment on what has happened. Here are his ten points.

  • The time to blame should be past, or at least in abeyance until the crisis is past, but I find it impossible to avoid it completely. Sorry. In any case, just to set the scene, it is necessary to review briefly the poisonous wind that we all sowed.

    1. We had an extended period of excess increase in money supply, loan growth, leverage, and below normal interest rates.

    2. This combined with a remarkably lucky global economic environment that we described as “near perfect” to produce a bubble in asset classes, as such a combination has done without exception according to our research. Since all these factors were global, the combination produced what we have called “the first truly global bubble” in all assets everywhere with only a few modest exceptions.

    3. While these asset bubbles were inflating, facilitated by easy money, the authorities – the Fed, the SEC, the Treasury, and Congress – rather than tightening existing regulations, partially dismantled them. They freed commercial banks while further reducing controls on investment banks, allowing leverage to take wing. More recently they almost gratuitously, without being pressured, removed the uptick rule for shorting. And this is just a sample. Simultaneously, attempts in some quarters to address growing risks were beaten back or diluted by Democrats and Republicans alike. Examples here include early efforts to rein in stock options and the attempt to add controls to Fannie and Freddie. (I’m biting my lip not to name names.) Worse yet, the regulating authorities appeared to encourage the worst excesses by admiring the ingenuity of new financial instruments (okay, that was Greenspan), and by repeating their belief that no bubbles existed (or perhaps could ever exist) and that housing at the peak “merely reflected a strong U.S. economy.” Finally, as the bubbles inevitably began to break, all was said to be contained and the economy was claimed to be strong.

    4. The combination of favorable conditions and irrationally exuberant encouragement from the authorities produced an even more poisonous bubble – that in risk-taking itself. Everybody, and I mean everybody, got the point that risk-taking was asymmetrical and reached to take more risk. The asymmetry here was that if things worked out badly they would help you out (this sounds very familiar!), but if all went well you were on your own, poor thing. Ah, the joys of pure capitalism!

    5. In this regard, some deadly groundwork had been laid by the concept of rational expectations, or market efficiency. This argued that we were all far too sensible for major bubbles to appear. This is a convenient theory for mathematical treatment, but obviously totally unconnected to the real world of greed and fear. It dangerously encourages the belief that if you take more risk you will automatically receive more reward. That condition might often, even usually, be the case because in normal quiet markets a rough approximation of that relationship is usually priced into the markets. But in wildly-behaving markets where risk is mispriced, it is not true. From June 2006 to June 2007 on our seven-year data, investors lulled by these beliefs and the conditions of the market were actually paying to take risks for the first time in history.

    6. Just as all bubbles have broken, these bubbles did. Far from being a surprise, the bubbles breaking were absolutely not outlier events, contrary to protestations. The bubbles forming in 1998 and 1999 and in 2003 through 2007 were the outlier events. The U.S. housing market, which was a clear bubble with prices at least 30% above a previous very stable trend, is well on its way back to normal, and equities and risk-taking may well have made it all the way back.

    7. The stresses on the financial and economic world of these bubbles breaking was always going to be great. To repeat a comment I made 18 months ago, “If everything goes right (as a bubble breaks) there will always be lots of pain. If anything is done wrong there will be even more. It is increasingly impressive and surprising how much we have done wrong this time!”

    8. By far, the biggest failing of our system has been its unwillingness to deal with important asset bubbles as they form (see last quarter’s Letter). I started a long diatribe on this topic in 1998 and 1999 and reviewed it in Feet of Clay (2002), which is aimed at my arch villain, Alan Greenspan. With the housing bubble even more dangerous to mess with than equities, Bernanke joined my rogues’ gallery. If we change our policy and move gently but early to moderate bubbles, this crisis need never be repeated. There are signs that the previously intractable authorities are reconsidering their bone-headed position on this topic. If they change, all this pain will not have been totally in vain. (See Part 2 of this Letter, titled “Silver Linings,” in two weeks or so.)

    9. The icing on the cake as far as the bust is concerned has been provided by Buffett’s “financial weapons of mass destruction” – the new sliced and diced packages of loan material so complicated that, shall we say, few understood them. The uncertainties and doubts generated by their complexities were impressive. Trust and confidence are the keys to our elaborate financial structure, which is ultimately faith-based. The current hugely increased doubt is a potential lethal blow to the system and must be addressed at any cost as fast as possible. Concern about moral hazard is secondary and must be put into abeyance for the time being. Wall Street leaders are in any case now fully scared and are likely to stay that way for a few years!

    10. To avoid the development of crises, you need a plentiful supply of foresight, imagination, and competence. A few quarters ago I likened our financial system to an elaborate suspension bridge, hopefully built with some good, old-fashioned Victorian over-engineering. Well, it wasn’t over-engineered! It was built to do just fine under favorable conditions. Now with hurricanes blowing, the Corps of Engineers, as it were, are working around the clock to prop up a suspiciously jerry-built edifice. When a crisis occurs, you need competence and courage to deal with it. The bitterest disappointment of this crisis has been how completely the build-up of the bubbles in asset prices and risk-taking was rationalized and ignored by the authorities, especially the formerly esteemed Chairman of the Fed.

And for the investor in you and me, the following two passages are of great read!

And I do think that his 'ask yourself what it is that you really know or think you really know' is absolutely spot on!

  • Basics
    At times like this it is good to ask yourself what it is that you really know or think you really know. For us (in our asset allocation division) it is defi nitely not the ins and outs of the financial system, although we’re trying harder and harder. The financial system is so mind-bogglingly complex that very few, even those with far deeper backgrounds than ours, fully understand it. Puzzlingly, despite our relative ignorance of financial details, we were more accurate than many experts in the last year about the big picture, and we can speculate why. First, as historians, we recognized that when bubbles break they almost invariably cause more pain than expected.

    Second, we are Minsky mavens and believe that, with sadly defective humans making up the markets, Minsky was right to see periodic financial crises as well-nigh inevitable. Thus in the middle of last year when the experts at Goldman Sachs said they expected write-downs of $450 billion, I immediately wrote that we’d be lucky if it wasn’t a trillion. I was playing off their detailed expertise and adding a generalized historical observation as I had done with the prediction that “at least one major bank – broadly defined – would fail,” and that half of the hedge funds would be gone in five years. In previous banking crises, major banks had failed, and this crisis seemed likely, to us semi-pros, to be worse than most. So we studied in broad strokes previous crises and armchaired that we should up the ante. We got lucky in an area in which we were not real experts, and we know we were lucky. We will attempt to keep the luck and hedge our bets by also increasing our skills. The addition of Edward Chancellor, an experienced financial journalist/historian with a focus on credit crises, has been a very helpful start.

    In contrast, what we do know, I believe, is asset class pricing and the behavior of bubbles, which are both derivatives of our single, big truth: mean reversion. for moderately more real growth in recent years. In the six years since October 2002, the trend line has risen to 975 (plus or minus a little – we are constantly fine-tuning a percent here or there). Needless to say, two weeks ago the market crashed through that level, producing Exhibit 1. So now all 28 burst bubbles are present and accounted for. Long live mean reversion!

Yes, nothing absolutely last forever, especially bubbles. Ask yourself, were you too bullish on your stocks, neglecting the fact that the earnings was boosted mainly by the insane bull run in your stock operating environment? And when bubbles burst, it is perhaps best we acknowledge that earnings will contract sharply!

And lastly this passage should be acknowledged by value investors!

  • The Curse of the Value Manager

    We at GMO have a strong value bias, and our curse, therefore, like all value managers, is being too early. In 1998 we saw horribly overpriced stocks that at 21 times earnings equaled the two previous great bubbles of 1929 and 1965. Seeing this new “peak,” we were sellers far, far too early, only to watch it go to 35 times earnings! And as it went up, so many of our clients went with it, reminding us that career risk is really the only other thing that matters. The other side of the coin is that only sleepy value managers buy brilliantly cheap stocks: industrious, wide-awake value managers buy them when they are merely very nicely cheap, and suffer badly when they become – as they sometimes do – spectacularly cheap. I said as far back as 1999, while suffering from selling too soon, that my next big mistake would be buying too soon. This probably sounded ridiculous for someone who was regarded as a perma bear, but I meant it. With 14 years of an overpriced S&P, one feels like a perma bear just as I felt like a perma bull at the end of 13 years of underpriced markets from 1973-86. But that was long ago. Well, surprisingly, here we are again. Finally! On October 10 th we can say that, with the S&P at 900, stocks are cheap in the U.S. and cheaper still overseas. We will therefore be steady buyers at these prices. Not necessarily rapid buyers, in fact probably not, but steady buyers. But we have no illusions. Timing is difficult and is apparently not usually our skill set, although we got desperately and atypically lucky moving rapidly to underweight in emerging equities three months ago. That aside, we play the numbers. And we recognize the real possibilities of severe and typical overruns. We also recognize that the current crisis comes with possibly unique dangers of a global meltdown.
    We recognize, in short, that we are very probably buying too soon. Caveat emptor.

Click here for his newsletter:

Thursday, October 23, 2008

Would You Buy MaeMode?

I made a quiz the other day: Would You Buy This Stock?

And reader
valuelife made the following comments..

  • Based on these data, Definitely NOT a Buy 4 me!!

    Net debt too high, capital intensive stock??

    Receivables showed big jump, helped by loans??

Sometimes if we take OUT the stock name, things can be rather clear. The underlining fundamental weakness in the stock simply stood out like sore thumb.

I will paste what Kenanga Research said about this stock!

  • 1QFY09 in line. Revenue and net profit of RM127.8m and RM5.2m was 23.6% and 20.8% of our forecast respectively. Better results were driven by higher contract values being executed.

    QoQ, 1Q09 revenue rose 7.0% while EBIT margin improved to 10.2% from 8.9%, lifted by various cost efficiency measures taken to counter the rising cost environment. As a result, pre-tax profit was also higher by 19.2% even after accounting for higher financing costs (1Q09: RM4.1m vs 4Q08: RM3.2m).

    YoY, 1Q09 revenue surged 26.2% on the back of higher contribution from bulk material and warehousing logistics division which accounted 41% and 29% of group’s 1Q09 revenue . Both EBIT and pre-tax margin was stable at about 10% and 7% respectively. Net profit was however fl at at RM5.2m, mainly due to one-off expenses amounted to RM4.7m incurred in restructuring of loan facilities and higher tax provision.

    Construction for the Suqian plant in China is on track to meet first phase opening by 1Q2009. The plant when ready by 2011 will double group’s current capacity and lift group’s profile as a global player in the material handling business.

    No slowdown in coal exploration activities despite easing of commodity prices. Supply of coal is expected to remain tight with robust demand underpinned by developing countries especially China and India. Recent RM41.5m contract clinched for the construction of coal handling facility at Asam-Asam port should cement group’s position as the leading supplier in Indonesia. Management is confident that group is well positioned to secure more similar contracts in future.

    We continue to like Maemode for its China expansion and exposure in the higher end products including warehousing logistics and bulk material systems, which will drive a net profit CAGR of 22.7% for the next 3 years. With an order book of RM360m lasting up to 2010, group is still actively bidding for more than RM1b jobs which should further boost its order book given a historical 38% strike rate. Maintain forecasts and reiterate BUY with target price of RM1.58 based on CY09 PER of 6x.

Yes the stock name is MadeMode!

Past postings on MaeMode:

1. A look at MaeMode again

2. Mae, I hope I am not WRONG!

3. Reply to Mae, I hope I am not WRONG!

4. MaeMode Again

5. The Trade Receivables In MaeMode

Here's the full table highlighting MaeMode's recent performance.

Just for the record: MaeMode is at 1.17 and MaeMode warrant is at 17 sen.

Comments Heard Admist The Plunging Baltic Dry Index

Yes, the Baltic Dry Index continued its plunge yet again.

I have collected some of the recent comments heard around...

  • China is expecting a severe downturn in shipping. China Shipping Container Lines, China's second-largest container line, expects a 10% volume shrinkage this year. Bloomberg quoted Zhang Denghui, assistant president, saying that "Traffic will drop at least 10% for the full year. An even much larger drop is possible, as the full impact of the global economic turmoil is yet to come."
  • Khalid Hashim, managing director of Precious Shipping, Thailand's second-largest shipping company, said in Singapore yesterday. "Nothing is moving because the trader doesn't want to take the risk of putting cargo on the boat and finding that nobody can pay."

Source: Crisis Hits World Shipping ( Oct 20 )

  • He says another reason for the big fall in the index has been a number of new ships have arrived on the market just as global trade is slowing down. - David Osler of the Lloyds List shipping journal

Source: Baltic Dry Index actually drying up

  • "The global economic slowdown will push some shipping lines into bankruptcy," Marc Faber, a famed investor and editor of the "Gloom Boom & Doom" report, told AFP.
  • Malaysia's Port Klang said it had been hit by a decline in cargo handling since the start of October, blaming a retail downturn and lower vehicle sales in the United States and Europe.
    Shanghai International Port said that growth in cargo traffic dropped sharply to 9.9 percent in the first half of 2008 on the "increasingly grave global economy and trade situation".
    "Faced with the severe economic situation at home and abroad, the port industry has met with the most complicated operation environment in recent years," it said.
  • "We are seeing a rapid decline in the volume of exports," an official with the Japanese Shipowners' Association said of the decline in demand.
  • "It's a safe statement that no carrier is operating profitably in the eastbound transpacific market today," said Ron Widdows, chairman of the Transpacific Stabilization Agreement -- a forum of major shipping lines.

Source: Asian shipping slows

  • “Shipping is an entrepreneurial game, and there are people losing their shirts at the moment,” executive director of the Australian Shipowners Association, Teresa Hatch, says. “But it might be the bust that we had to have. "Shipyards have been so far behind on meeting demand, people have been waiting up to four years for a ship.”
  • Whole shipping lines have frozen up, according to a Business Spectator report on Tuesday, because shipowners don’t want to take the risk of carting cargo for clients that may not be able to pay because of the credit crisis.
    “Like many of the other clogged arteries of global finance, letters of credit and therefore global shipping could presumably unclog fairly quickly if the interbank credit market got moving again,” wrote the article’s author, Alan Kohler.
    “But a big fall in shipping rates, as measured by the key price indicator, the Baltic Dry Index, is always a harbinger of a downturn in trade and therefore economic activity.”

Source: Lift for exports as shipping prices plunge

  • A trade adviser based in Sydney, Sri Annaswamy, wrote to me last night to correct me, explaining that it’s not that shipping is being affected by the credit crisis – it’s that banks don’t want to open or honour letters of credit “that they know would ultimately be defaulted upon due to the Chinese buyer’s refusal/inability to accept the shipment (that’s the core of the problem)”.

Source: What's really happening in China

  • “Traders who hire ships on spot basis are facing difficulties to secure letters of credit from banks,” said an executive at Chowgule Steamships Ltd, who did not want to be named. Letters of credit assure a shipper of payment for a cargo after it is loaded on a ship, but before the buyer receives it.
    The squeeze on trade credit is also restricting commodities shipments. Around 90% of the world’s $14 trillion (Rs683 trillion) trade is handled via trade credit, the SCI official said.
    “You don’t know the credit worthiness of the guy hiring the ship... The best and the biggest of names are defaulting,” said an executive at Apeejay Shipping Ltd, who too did not want to be named.

Source: Shipowners see business slowing as funds dry up, confidence ebbs

Other recent postings made on the Baltic Dry Index:

1. Views On Current Weakness On Baltic Dry Index

2. The Collapse of the Baltic Dry Index

3. Goldman Downgrades Bulk Shippers!

4. Baltic Dry Index Keeps Falling!

5. Baltic Dry Index Stages Strong Rebound!

6. Baltic Dry Index Set For Strong Recovery???

7. Baltic Dry Index Plunges To Seven Month Lows!

8. The Baltic Dry Index Keeps On Plunging!

9. Baltic Dry Index Continues To Plunge

10.The Plunging Baltic Dry Index And The Dangers Of Using Forward PE!

11. Baltic Dry Plunges Below 2000!!!

12. Admist The Plunging Baltic Dry Index, Dr. Marc Faber Warns That Some Shipping Lines Could Go Bankrupt!